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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  December 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, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “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 January 26, 2009, there were 23,535,925 shares of our CommonStock, par value $0.01 per share, outstanding.

 

 

 

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**STANLEY, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED DECEMBER 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                                                                     |       | 25       |
| **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                                                                           |       | 26       |
| ITEM 6.                                      | EXHIBITS                                                                                    |       | 26       |

 

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**FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Qcontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such statements include, inparticular, statements about our plans, strategies and prospects.Forward-looking statements are generally identifiable by use of forward-lookingterminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,”“endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,”“believe,” “could,” “project,” “predict,” “continue” or other similar words orexpressions. References to “we,” “our” and the “Company” refer to Stanley, Inc.,together in each case with our consolidated subsidiaries unless the contextsuggests otherwise.

 

The forward-lookingstatements contained in this Quarterly Report on Form 10-Q are based oncurrent expectations, estimates, forecasts and projections about the industryin which we operate and management’s beliefs and assumptions. These statementsare not guarantees of future performance and involve risks, uncertainties andassumptions that are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed or forecasted in suchforward-looking statements, including as a result of risks discussed in “Part I,Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscalyear ended March 31, 2008 and in “Part II, Item 1A. Risk Factors” inour Quarterly Report on Form 10-Q for the fiscal quarter ended September 26,2008. These forward-looking statements include, but are 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 sectionsentitled “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and in any other documents we file withthe Securities and Exchange Commission.

 

We do not assume anyobligation to update any of the forward-looking statements after the date ofthis Quarterly Report on Form 10-Q to conform these statements to actualresults.

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Income**

**(unaudited)**

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

** **
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **December 26, 2008**  | ** ** | **December 31, 2007** | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| Revenues                              |       | $                                | 203,597    |                            | $          | 147,083 |   | $ | 567,242 |   | $ | 430,803 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Operating costs and expenses:         |       |                             |       |                            |       |   |   |   |   |
| Cost of revenues                      |       | 170,091                          |       | 123,660                         |       | 475,775 |   | 363,538 |   |
| Selling, general and administrative   |       | 13,220                           |       | 9,431                           |       | 36,103 |   | 28,181 |   |
| Amortization of deferred compensation |       | 62                               |       | 62                              |       | 187 |   | 205 |   |
| Depreciation and amortization         |       | 2,741                            |       | 1,694                           |       | 7,044 |   | 5,005 |   |
| Total operating costs and expenses    |       | 186,114                          |       | 134,847                         |       | 519,109 |   | 396,929 |   |
| Operating income                      |       | 17,483                           |       | 12,236                          |       | 48,133 |   | 33,874 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):               |       |                             |       |                            |       |   |   |   |   |
| Other income                          |       | 17                               |       | 10                              |       | 20 |   | 16 |   |
| Interest expense – net           |       | (1,970                           | )          | (919                            | )          | (4,141 | ) | (3,120 | ) |
| Total other expenses                  |       | (1,953                           | )          | (909                            | )          | (4,121 | ) | (3,104 | ) |
| Income before taxes                   |       | 15,530                           |       | 11,327                          |       | 44,012 |   | 30,770 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Provision for income taxes            |       | (5,852                           | )          | (4,576                          | )          | (17,289 | ) | (12,320 | ) |
| Net income                            |       | $                                | 9,678      |                            | $          | 6,751 |   | $ | 26,723 |   | $ | 18,450 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Earnings per share:                   |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | $                                | 0.42       |                            | $          | 0.31 |   | $ | 1.17 |   | $ | 0.84 |   |
| Diluted                               |       | $                                | 0.41       |                            | $          | 0.29 |   | $ | 1.12 |   | $ | 0.79 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Weighted-average shares:              |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | 22,832                           |       | 22,129                          |       | 22,785 |   | 22,021 |   |
| Diluted                               |       | 23,818                           |       | 23,552                          |       | 23,798 |   | 23,340 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share and per share data)**

** **
| ** **                                                                                                          | ** ** | **December 26, 2008** | ** ** | **March 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **                      | ** ** | ** **                   | ** ** |
|                                                                                                                |       |                            |       |                         |       |
| Current assets:                                                                                                     |       |                            |       |                         |       |
| Cash                                                                                                                |       | $                               | 5,542      |                         | $          | 271 |   |
| Accounts receivable - net                                                                                           |       | 183,181                         |       | 160,928                      |       |
| Prepaid and other current assets                                                                                    |       | 6,463                           |       | 4,644                        |       |
| Total current assets                                                                                                |       | 195,186                         |       | 165,843                      |       |
|                                                                                                                |       |                            |       |                         |       |
| Property and equipment - net                                                                                        |       | 18,147                          |       | 12,894                       |       |
| Goodwill                                                                                                            |       | 262,692                         |       | 113,615                      |       |
| Intangible assets - net                                                                                             |       | 17,135                          |       | 8,088                        |       |
| Deferred taxes                                                                                                      |       | —                          |       | 3,343                        |       |
| Other assets                                                                                                        |       | 2,558                           |       | 2,272                        |       |
| Total assets                                                                                                        |       | $                               | 495,718    |                         | $          | 306,055 |   |
|                                                                                                                |       |                            |       |                         |       |
| **Liabilities and Stockholders’ Equity**                                                                       | ** ** | ** **                      | ** ** | ** **                   | ** ** |
|                                                                                                                |       |                            |       |                         |       |
| Current liabilities:                                                                                                |       |                            |       |                         |       |
| Line of credit                                                                                                      |       | $                               | 142,869    |                         | $          | — |   |
| Accounts payable                                                                                                    |       | 26,591                          |       | 29,628                       |       |
| Accrued expenses and other liabilities                                                                              |       | 77,291                          |       | 62,649                       |       |
| Current portion of long-term debt                                                                                   |       | 1,000                           |       | 1,000                        |       |
| Income taxes payable                                                                                                |       | —                          |       | 5,836                        |       |
| Total current liabilities                                                                                           |       | 247,751                         |       | 99,113                       |       |
|                                                                                                                |       |                            |       |                         |       |
| Long-term debt — net of current portion                                                                        |       | 35,000                          |       | 35,500                       |       |
| Other long-term liabilities                                                                                         |       | 11,041                          |       | 4,738                        |       |
| Total liabilities                                                                                                   |       | 293,792                         |       | 139,351                      |       |
|                                                                                                                |       |                            |       |                         |       |
| Commitments and contingencies:                                                                                      |       |                            |       |                         |       |
| Stockholders’ equity                                                                                           |       |                            |       |                         |       |
| Common stock, $0.01 par value — 200,000,000  shares authorized; 23,513,718 and 22,822,697 issued, respectively |       | 235                             |       | 228                          |       |
| Additional paid-in capital                                                                                          |       | 92,346                          |       | 83,970                       |       |
| Retained earnings                                                                                                   |       | 110,927                         |       | 84,204                       |       |
| Accumulated other comprehensive loss                                                                                |       | (1,000                          | )          | (929                         | )          |
| Deferred compensation                                                                                               |       | (582                            | )          | (769                         | )          |
| Total stockholders’ equity                                                                                     |       | 201,926                         |       | 166,704                      |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                               | 495,718    |                         | $          | 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)**

** **
| ** **                                                                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                               | 26,723     |   | $ | 18,450 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 7,044                           |       | 5,005 |   |
| Amortization of deferred compensation                                              |       | 187                             |       | 205 |   |
| Loss on disposal of property and equipment                                         |       | 151                             |       | 46 |   |
| Deferred taxes                                                                     |       | 1,555                           |       | (38 | ) |
| Income tax benefit from stock-based  compensation                                  |       | 2,438                           |       | 2,134 |   |
| Stock compensation expense                                                         |       | 4,555                           |       | 1,508 |   |
| Changes in assets and liabilities – net of  acquisition effects:              |       |                            |       |   |   |
| Increase in accounts receivable                                                    |       | (667                            | )          | (31,679 | ) |
| Decrease (increase) in prepaid income tax                                          |       | 271                             |       | (1,538 | ) |
| Increase in prepaid expenses and other  current assets                             |       | (362                            | )          | (576 | ) |
| Increase in other assets                                                           |       | (187                            | )          | (108 | ) |
| Decrease in accounts payable                                                       |       | (4,852                          | )          | (5,050 | ) |
| Increase in accrued expenses                                                       |       | 5,229                           |       | 15,840 |   |
| Increase (decrease) in other liabilities                                           |       | 4,297                           |       | (117 | ) |
| Decrease in income taxes payable                                                   |       | (7,835                          | )          | (817 | ) |
| Net cash provided by operating activities                                          |       | 38,547                          |       | 3,265 |   |
|                                                                               |       |                            |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchase of Techrizon – net of cash  acquired                                 |       | —                          |       | (30,559 | ) |
| Purchase of Oberon – net of cash acquired                                     |       | (170,795                        | )          | — |   |
| Acquisition of property and equipment                                              |       | (6,036                          | )          | (2,406 | ) |
| Net cash used in investing activities                                              |       | (176,831                        | )          | (32,965 | ) |
|                                                                               |       |                            |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net borrowings under line-of-credit  agreements                                    |       | 142,869                         |       | 16,816 |   |
| Repayments on long-term debt                                                       |       | (500                            | )          | (1,000 | ) |
| Payments under capital lease obligations                                           |       | (203                            | )          | (112 | ) |
| Purchase of treasury stock                                                         |       | (196                            | )          | (260 | ) |
| Proceeds from exercise of stock options                                            |       | 996                             |       | 1,424 |   |
| Proceeds from sale of stock                                                        |       | 143                             |       | — |   |
| Excess tax benefit from share-based  compensation                                  |       | 446                             |       | 96 |   |
| Net cash provided by financing activities                                          |       | 143,555                         |       | 16,964 |   |
|                                                                               |       |                            |       |   |   |
| **NET INCREASE (DECREASE) IN CASH**                                                |       | 5,271                           |       | (12,736 | ) |
| **CASH — Beginning of period**                                                |       | 271                             |       | 12,736 |   |
| **CASH — End of period**                                                      |       | $                               | 5,542      |   | $ | — |   |
|                                                                               |       |                            |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                            | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                   |       |                            |       |   |   |
| Income taxes                                                                       |       | $                               | 19,364     |   | $ | 12,403 |   |
| Interest                                                                           |       | $                               | 3,880      |   | $ | 2,853 |   |
| ** **                                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **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** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **December 26, 2008**  | ** ** | **December 31, 2007** | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| Net income                                    |       | $                                | 9,678      |                            | $          | 6,751 |   | $ | 26,723 |   | $ | 18,450 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Other comprehensive income:                   |       |                             |       |                            |       |   |   |   |   |
| Unrealized (loss) gain on interest rate  swap |       | (518                             | )          | (807                            | )          | (166 | ) | 325 |   |
| Translation adjustments                       |       | (5                               | )          | —                          |       | 95 |   | — |   |
| Total other comprehensive income              |       | (523                             | )          | (807                            | )          | (71 | ) | 325 |   |
| Comprehensive income                          |       | $                                | 9,155      |                            | $          | 5,944 |   | $ | 26,652 |   | $ | 18,775 |   |

 

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 customers solutionsto support any stage of program, product development or business lifecyclethrough five service areas: systems engineering, enterprise integration,operational logistics, business process outsourcing and advanced engineeringand technology. The Company derives substantially all of its revenue 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 December 26,2008, and its results of operations for the three and nine months ended December 26,2008 and December 31, 2007, and its cash flows for the nine months ended December 26,2008 and December 31, 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 third quarterof fiscal year 2009 ended on December 26, 2008. The Company does notbelieve 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 beenexecuted, the contract price is fixed and determinable, delivery of services orproducts has occurred, and collectibility is considered probable and can bereasonably estimated. 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 prepares periodicestimates to complete the contract and adjusts the incentive fee as requiredbased 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 and signingof formal contract documents. The Company has a formal internal review processand management approval prior to commencement of work. Revenue associated withsuch work is recognized without profit and only when it can be reliablyestimated and realization is probable. The Company bases its estimates onnotices to proceed from its customers, previous experiences with the customer,communications with the customer regarding funding status, and its knowledge ofavailable funding for the contract or program. Pre-contract costs related tounsuccessful contract bids are expensed in the period in which we are notifiedthat the contract will not be issued.

 

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. Claimsagainst us are recognized where a loss is considered probable and can bereasonably estimated in amount

 

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 December 26, 2008 and December 31, 2007, we derivedapproximately 76% and 68% of our revenues, respectively, from the Department ofDefense, including agencies within the intelligence community, andapproximately 24% and 32% of our revenues, respectively, from federal civiliangovernment agencies. The Company’s contracts with the Department of State forthe provision of passport processing and support services, and with theDepartment of the Navy for production engineering and integration servicesunder various Space and Naval Warfare Systems Center (SPAWAR) programsaccounted for approximately 8% and 10%, respectively, of our revenues for thethree months ended December 26, 2008.

 

For the nine months ended December 26, 2008 and December 31,2007, we derived approximately 70% and 68% of our revenues, respectively, fromthe Department of Defense, including agencies within the intelligencecommunity, and approximately 30% 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 and with the Department of the Navy for production engineering andintegration services under various SPAWAR programs, accounted for approximately12% and 10%, respectively, of our revenues for the nine months ended December 26,2008.

 

***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 estimated usefullives of computers, peripherals and software typically range from three to fiveyears. The estimated useful lives of furniture and equipment typically rangefrom five to ten years. Leasehold improvements are amortized over the lesser ofthe useful life or the term of the lease. Repairs and maintenance are expensedas incurred. Depreciation expense related to property and equipment was$1.1 million and $0.7 million for the three months ended December 26,2008 and December 31, 2007, respectively and $3.0 million and $2.1 millionfor the nine months ended December 26, 2008 and December 31, 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.

 

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Testing for impairment is a two-step process as prescribed by SFAS No. 142.The first step is a test for potential impairment, while the second step measuresthe amount of impairment, if any. Under the guidelines of SFAS No. 142,the Company is required to perform an impairment test at least on an annualbasis at any time during the fiscal year provided the test is performed at thesame time every year. An impairment loss would be recognized when the assets’fair value is below their carrying value. Stanley has elected the last day ofits third fiscal quarter as its testing date. Based on thetesting performed as of December 26, 2008, the Company determined that noimpairments existed as of December 26, 2008. 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 December 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** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **December 26,  2008**      | ** ** | **December 31,  2007**     | ** ** | **December 26,  2008** | ** ** | **December 31,  2007** | ** ** |
|                                                          |       | **(in thousands)**          |       |
| Basic weighted-average common shares  outstanding             |       | 22,832                           |       | 22,129                          |       | 22,785 |   | 22,021 |   |
| Effect of stock options and unvested  restricted stock grants |       | 986                              |       | 1,423                           |       | 1,013 |   | 1,319 |   |
| Diluted weighted-average common shares  outstanding           |       | 23,818                           |       | 23,552                          |       | 23,798 |   | 23,340 |   |

 

***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 December 26, 2008. For qualifying cash flow hedges, SFAS No. 133,as amended, states that the effective portion of derivative gains and losses berecorded as a component of other comprehensive income and be reclassified intoearnings in the same period in which the hedged transaction affects suchearnings. Any ineffectiveness is reported currently in earnings.

 

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 thisswap agreement, at its inception, as a qualifying cash flow hedge. The fairvalue of the swap at December 26, 2008 of $1.7 million has been reportedin “Accrued expenses and other liabilities” with an offset, net of tax,included in “Accumulated other comprehensive loss” in the accompanyingunaudited condensed consolidated balance sheets. None of the $1.7 millionunrealized loss was recognized in earnings during the nine months ended December 26,2008 based on hedge ineffectiveness and none of the swap’s unrealized loss wasexcluded from the assessment of hedge effectiveness. Amounts in accumulatedother comprehensive loss will be reclassified into earnings in the period inwhich variable interest payments (the hedged transaction) are made under theSenior Credit Facility (defined below). As of December 26, 2008, theestimated net amount of existing losses expected to be reclassified into earningswithin the next 12 months is zero.

 

***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 corebusiness of 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.

 

***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

 

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liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant items subject to such estimatesand assumptions include revenue recognition, carrying amount and useful livesof long-lived assets, valuation allowances for accounts receivable and deferredtax assets, software development costs and loss contingencies such aslitigation, claims and assessments.

 

***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 and liabilitiesand expands related disclosures. SFAS 157 defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability (exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants at the measurement date. SFAS157 establishes market or observable inputs as the preferred source of values,followed by assumptions based on hypothetical transactions in the absence ofmarket 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 December 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 December 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** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)** | ** ** | **December 26, 2008** | ** ** |
| Liabilities:       |       |                                                                                |       |                                               |       |   |   |   |   |
| Interest rate swap |       | $                                                                                   | —     |                                               | $          | 1,704 |   | $ | — |   | $ | 1,704 |   |
|                    |            |                                                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

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, in a business combination, to measure all assetsacquired and all liabilities assumed at their respective fair values at thedate of acquisition, including the measurement of noncontrolling interests atfair value. SFAS 141R also establishes principles and requirements as to howthe acquirer recognizes and measures goodwill acquired in a business combinationor a gain from a bargain purchase and determines what information to discloseto enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. In addition, SFAS 141Rsignificantly changes the accounting for business combinations in a number ofareas, including the treatment of contingent consideration, preacquisitioncontingencies, in-process research and development, restructuring costs, andrequires the expensing of acquisition-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. The Company does not currently expect the adoption of SFAS 160 to have amaterial impact on its consolidated financial statements.

 

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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**               | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **December 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Billed receivables                               |       | $                               | 113,486    |                         | $          | 120,504 |   |
| Unbilled receivables:                            |       |                            |       |                         |       |
| Amounts billable                                 |       | 62,462                          |       | 35,259                       |       |
| Revenues recorded in excess of contract  funding |       | 7,755                           |       | 5,410                        |       |
| Retainage and contract fee withholding           |       | 447                             |       | 415                          |       |
| Allowance for doubtful accounts                  |       | (969                            | )          | (660                         | )          |
| Total                                            |       | $                               | 183,181    |                         | $          | 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 December 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**               | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                                                               | ** ** | **December 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Computers and peripherals                                                                |       | $                               | 5,270      |                         | $          | 4,554 |   |
| Software                                                                                 |       | 4,080                           |       | 2,429                        |       |
| Furniture and equipment                                                                  |       | 5,527                           |       | 4,390                        |       |
| Leasehold improvements                                                                   |       | 12,559                          |       | 8,270                        |       |
|                                                                                     |       | 27,436                          |       | 19,643                       |       |
|                                                                                     |       |                            |       |                         |       |
| Less: Accumulated depreciation and  amortization                                         |       | (9,289                          | )          | (6,749                       | )          |
| Property and equipment — net                                                        |       | $                               | 18,147     |                         | $          | 12,894 |   |
|                                                                                     |       |                            |       |                         |       |
| Property and equipment included above that  are under capital lease obligations include: |       |                            |       |                         |       |
| Software                                                                                 |       | $                               | 637        |                         | $          | 637 |   |
| Furniture and equipment                                                                  |       | 198                             |       | 176                          |       |
| Less: Accumulated depreciation                                                           |       | (462                            | )          | (328                         | )          |
| Total                                                                                    |       | $                               | 373        |                         | $          | 485 |   |

 

**5.  ACCRUED EXPENSES AND OTHERLIABILITIES**

 

Accrued expenses and other liabilities consist of the following:

 
| ** **                    | ** ** | **As of**                  | ** ** | **As of**               | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **December 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Accrued payroll-related costs |       | $                               | 28,185     |                         | $          | 20,534 |   |
| Accrued contract costs        |       | 35,545                          |       | 34,759                       |       |
| Accrued indirect costs        |       | 6,940                           |       | 3,923                        |       |
| Other payables                |       | 6,621                           |       | 3,433                        |       |
| Total accrued expenses        |       | $                               | 77,291     |                         | $          | 62,649 |   |

 

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**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,which includes a $150.0 million revolving credit facility (“Revolver”) anda $37.0 million term loan (“Term Loan”). The Term Loan matures on January 31,2012 and the Revolver matures on October 31, 2012. The Amended CreditAgreement also increased the letter of credit commitment from $5.0 millionto $10.0 million and increased the swing line facility from $5.0 millionto $20.0 million, both of which are part of the Revolver and have the samematurity date as the Revolver.  TheAmended Credit Agreement also eliminated the requirement to hedge a portion ofthe Company’s outstanding indebtedness under the Senior Credit Facility. Inconnection with the Amended Credit Agreement, Stanley paid fees ofapproximately $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 $69.1 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, whichis comprised of a $219.1 million Revolver and a $36.5 million TermLoan.  Stanley paid aggregate lender feesequal to $0.6 million in connection with the exercise of the accordionfeature.

 

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 December 26, 2008, Stanley had $36.0 million of TermLoan indebtedness and $142.9 million of Revolver indebtedness outstandingunder its Senior Credit Facility, with a weighted-average interest rate ofapproximately 3.81% and 7.00% for the nine months ended December 26, 2008and December 31, 2007, respectively. As of December 26, 2008, Stanley’sborrowing availability under its $219.1 million Revolver was $76.1 million(including outstanding letters of credit). At December 26, 2008, theCompany was in compliance with all covenants under its Senior Credit Facility.The obligations under the Senior Credit Facility are unconditionally guaranteedby each of Stanley’s existing and subsequently acquired or organizedsubsidiaries and are secured on a first-priority basis by security interests(subject to permitted liens) in substantially all assets owned by the Companyand each of its subsidiaries, including the shares of capital stock of itssubsidiaries, subject to certain exceptions.

 

**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,plus an additional $3.0 million in post closing net working capital andother purchase price adjustments. Stanley financed the acquisition withborrowings under 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’scustomers, bringing to Stanley biometric applications experts, functionalexperts within the intelligence community, and expertise in communications andinformation management 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, $149.1 million hasbeen allocated to goodwill, based upon the excess of the purchase price overthe $8.6 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.

 

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Included in identifiable intangibles arising from the Oberonacquisition are $10.5 million, $1.9 million and $0.7 millionrelated to customer contracts and relationships, order backlog and non-competeagreements, respectively. The amortization period for customer contracts andrelationships, order backlog and non-compete agreements is five years, twoyears and three years, respectively. No residual value has been assumed at theend of their useful lives.

 

The following unaudited pro forma financial information presentsconsolidated results of operations data for the three and nine months ended December 26,2008 and December 31, 2007, respectively, as if the acquisition of Oberonhad occurred on April 1, 2007. The pro forma information is provided basedon historical data that does not necessarily reflect the actual results thatwould have occurred, nor is it necessarily indicative of the future results ofoperations of the combined entity.

* *
| ** **                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **December 26, 2008**  | ** ** | **December 31, 2007** | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| Revenue                    |       | $                                | 203,597    |                            | $          | 164,827 |   | $ | 597,906 |   | $ | 478,315 |   |
| Net Income                 |       | $                                | 9,678      |                            | $          | 8,299 |   | $ | 28,636 |   | $ | 23,109 |   |
| Basic earnings per share   |       | $                                | 0.42       |                            | $          | 0.38 |   | $ | 1.26 |   | $ | 1.05 |   |
| Diluted earnings per share |       | $                                | 0.41       |                            | $          | 0.35 |   | $ | 1.20 |   | $ | 0.99 |   |

 

***Techrizon, LLC***

 

On April 1, 2007, Stanley acquired Techrizon, LLC (“Techrizon”), aprovider of software, training, simulation and information security solutions,for $30.3 million, net of cash acquired. Stanley financed the acquisition with a combination of existing cash andborrowings under the Senior Credit Facility. Additionally, acquisition relatedcosts of $0.3 million were incurred.

 

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 beenassigned to other identifiable intangible assets. The entire amount allocatedto goodwill 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 millionrelated to customer contracts and relationships, order backlog and non-competeagreements, respectively. The amortization period for customer contracts andrelationships, order backlog and non-compete agreements is five years, twoyears and three years, respectively. No residual value has been assumed at theend of their useful 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 $0.2 millionduring the nine months ended December 26, 2008. The repurchases were madeto satisfy certain employees’ tax obligations upon the vesting of restrictedstock on May 3, 2008. The shares were recorded at market price using thecost method of accounting.

 

Stanley sold 4,084 shares of common stock to its employees for $0.1 millionunder the Employee Stock Purchase Plan during the nine months ended December 26,2008.

 

***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

 

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for cash awards, restricted stock awards, restricted stock units, stockappreciation rights, performance units, fully vested shares, option awards andother equity-related awards. Vesting periods of these awards vary. Except asotherwise determined by the board of directors, the option awards may not havean exercise price less than the fair market value of the common stock on thedate 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 awardshas voting rights with respect to the trust awards. The option awards grantedunder the Executive Plan have exercise prices that range from 85% to 110% ofthe fair market value of the common stock on the date the option was granted.No further grants under the Executive Plan will 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 nine months ended December26, 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 tothose awards.

 

The Company has presented all tax benefits resulting from stock-basedcompensation awarded prior to the adoption of SFAS No. 123(R) asoperating cash flows in the accompanying unaudited condensed consolidatedstatements of cash flows. The tax benefits associated with share-basedcompensation in effect prior to the adoption of SFAS No. 123(R) were$2.4 million and $2.1 million for the nine months ended December 26, 2008and December 31, 2007, respectively. For share-based payment transactionsawarded subsequent to the adoption of SFAS No. 123(R), the tax benefits inexcess of the compensation cost recognized are classified as financing cashflows. The excess tax benefits associated with share-based payment transactionsaccounted for after the adoption of SFAS No. 123(R) were $0.4 millionand $0.1million for the nine months ended December 26, 2008 and December 31,2007, respectively, and are disclosed within 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 and representsthe period of time that options granted are expected to be outstanding. Optionsgranted meet the criteria of “plain vanilla” for purposes of applying thesimplified method. The risk-free rate for periods within the contractual lifeof the option is based on the U.S. Treasury yield curve in effect at the timeof grant. The Company has not issued dividends in the past nor does itcurrently intend to issue dividends in the near future.

 

A summary of the weighted average assumptions is presented below.

 
| ** **                | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **December 26, 2008** | ** ** | **December 31, 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 nine months ended December 26, 2008, the Company granted 445,210stock option awards at a weighted-average exercise price of $26.43, whichreflects the fair value of the shares on the date of grant. These options vestratably over three years and have a contractual term of five years. The optionshave a weighted-average fair value of $7.22 per share. The weighted-averagefair value of stock option awards granted during the nine months ended December26, 2008 and December 31, 2007, as determined by the Black-Scholes-Mertonclosed-form option-pricing model, was $7.22 and $5.03, respectively. The stockoption awards that vested during the nine months ended December 26, 2008 and December31, 2007 had a combined fair value of $1.3 million and $0.5 million,respectively.

 

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A summary of option activity for the yearended March 31, 2008, and the nine months ended December 26, 2008 ispresented 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                           |       | 445,210                                          |       | $                                               | 26.43      |                                                               |       |   |
| Exercised                         |       | (105,385                                         | )          | $                                               | 9.45       |                                                               | $          | 2,327 |   |
| Forfeited                         |       | (74,624                                          | )          | $                                               | 14.49      |                                                               |       |   |
| Outstanding at December 26, 2008  |       | 1,874,676                                        |       | $                                               | 13.02      |                                                               | $          | 33,255 |   |

 

A summary of nonvested stock option activity for the nine months ended December26, 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                                |       | 445,210                                          |       | $                                           | 7.22       |   |
| Vested                                 |       | (292,726                                         | )          | $                                           | 4.38       |   |
| Forfeited                              |       | (72,674                                          | )          | $                                           | 4.82       |   |
| Outstanding at December 26,  2008 |       | 1,090,435                                        |       | $                                           | 5.44       |   |

 

A summary of vested stock options at December 26, 2008, and stockoptions expected to vest in future periods is presented below.

 
| **Options**                      | ** ** | **Number of   Underlying   Shares** | ** ** | **Weighted-   Average   Exercise   Price** | ** ** | **Weighted-Average   Remaining   Contractual Term   (years)** | ** ** | **Aggregate   Intrinsic   Value (in   thousands)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Exercisable                      |       | 784,241                                            |       | $                                                         | 6.34       |                                                                              | 4.3        |                                                                   | $          | 19,148 |   |
| Expected to vest                 |       | 1,008,652                                          |       | $                                                         | 17.82      |                                                                              | 4.6        |                                                                   | $          | 13,049 |   |
| Exercisable and expected to vest |       | 1,792,893                                          |       |                                                      |       |                                                                              |       |                                                                   |       |

 

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 nine monthsended December 26, 2008, the Company granted 543,714 of such performance-based restrictedstock awards at $25.12 per share with a vesting period of four years subject tothe Company meeting the revenue and earnings targets. Additionally, during the ninemonths ended December 26, 2008, the Company granted 54,186 restricted stockawards at a weighted-average fair value of $28.01 per share that vest ratablyover periods of one to three years. The weighted-average fair value ofrestricted stock awards granted during the nine months ended December 26, 2008and December 31, 2007 was $25.38 and $15.81, respectively. The restrictedstock awards that vested during the nine months ended December 26, 2008 and December 31,2007 had a combined fair value of $1.0 million and $0.2 million, respectively.

 

A summary of restricted stock activity for the nine months ended December26, 2008 is presented below.

 
| **Restricted Stock**         | ** ** | **Number of Shares** | ** ** | **Weighted-Average   Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| Outstanding at April 1, 2008 |       | 149,967                        |       | $                                           | 16.17      |   |
| Granted                           |       | 597,900                        |       | $                                           | 25.38      |   |
| Vested                            |       | (57,690                        | )          | $                                           | 16.50      |   |
| Forfeited                         |       | (8,633                         | )          | $                                           | 16.52      |   |
| Outstanding at December 26, 2008  |       | 681,544                        |       | $                                           | 24.22      |   |

 

During the nine months ended December 26, 2008 and December 31,2007, the Company recognized $4.6 million and $1.5 million of share-basedcompensation costs, respectively. As of December 26, 2008, there was $17.7million of total

 

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unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the Omnibus Plan. That cost is expectedto be recognized over a weighted-average period of 2.9 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 $0.2 million of compensation expense was recognized during the ninemonths ended December 26, 2008. The remaining deferred compensation of $0.6million will be amortized over the final two years of the vesting period of theawards.

 

**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 statementsand the accompanying notes included in this Form 10-Q and our Annual Reporton Form 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 fiscal 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 December 26, 2008, we had morethan 300 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 National Guard Bureau, the Department of Transportation and agencies in theintelligence community as new customers. Second, internal revenue growthis driven by increasing revenues with existing customers by adding newcontracts or expanding existing contracts.For example,since the initial award of our contract with the Department of State for theprovision of passport processing and support services, the scope of servicesprovided by us, and the revenues generated by those services, have grownsignificantly.

 

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**                  | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| ** **    | ** ** | **(in millions)**          | ** ** |
| Backlog:      |       |                            |       |   |   |
| Funded        |       | $                               | 359.1      |   | $ | 326.6 |   |
| Unfunded      |       | 1,775.5                         |       | 970.6 |   |
| Total Backlog |       | $                               | 2,134.6    |   | $ | 1,297.2 |   |

 

Each year, a significant portion of our revenues is derived from ourbacklog, and a substantial portion of our backlog represents work related tothe continuation 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-pricearrangements. Because the customer usually specifies the type of contract for aparticular contractual engagement, we generally do not influence the choice ofcontract type. However, where we do have the opportunity to influence thecontract type, and where customer requirements are clear, we prefertime-and-materials and fixed-price arrangements rather than cost-plus-feearrangements because time-and-materials and fixed-price contracts, as comparedwith cost-plus-fee contracts, generally provides us with a greater opportunityto generate higher margins and provides the customer with a fixed value forservices provided.

 

Our acquisition of Oberon in July 2008 and our successful recompete winin March 2008 of the contract with the Department of State to support passportproduction and services have resulted in an increase to our percentage oftime-and-materials contracts and a corresponding reduction in the percentage ofcost-plus-fee contracts. The following table summarizes our historical contractmix, measured as a percentage of total revenues, for the periods indicated:

 
| ** **         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **December 26, 2008**  | ** ** | **December 31, 2007** | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| Cost-plus-fee      |       | 30                               | %          | 47                              | %          | 31 | % | 48 | % |
| Time-and-materials |       | 51                               | %          | 38                              | %          | 51 | % | 36 | % |
| Fixed-price        |       | 19                               | %          | 15                              | %          | 18 | % | 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

 

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deploy additional qualified employees is a key driver of our ability togenerate additional revenues, and our successful deployment of existingemployees on direct-billable jobs is a key driver of our profitability.

 

***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 December 26,2008, we reported DSO of 78 days, a decrease from 80 days for the three months endedSeptember 26, 2008. The decrease in DSO was primarily the result of strongercash collections 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 ofunbilled receivables 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, we believe that the likelihoodof a material loss 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 condensed consolidated financial statements, whichhave been prepared in accordance with GAAP. The preparation of our 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 onthe part of our management in their application, often as a result of the needto make estimates about the effect of matters that are inherently uncertain,and are the most important to our financial condition and operating results.

 

***Revenue Recognition***

 

We recognize revenue under ourcontracts when a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred and collectibilityis considered probable and can be reasonably estimated. Revenue is earned undercost-plus-fee, fixed-price and time-and-materials contracts. We use a standardmanagement process to determine whether all required criteria for revenuerecognition have been met, which includes regular reviews of our contractperformance. This review covers, among other matters, progress against aschedule, outstanding action items, effort and staffing, quality, risks andissues, subcontract management, costs incurred, commitments and customersatisfaction. During this review, we determine whether the overall progress ona 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.

 

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Under cost-plus-fee contracts, revenues arerecognized as costs are incurred and include an estimate of applicable feesearned. For level of effort or term cost-plus-fee contracts, fixed fees areearned in proportion to the percentage of required effort delivered. Weconsider fixed fees under cost-plus-fee contracts to be earned in proportion tothe allowable costs actually incurred in performance of the contract for levelof effort contracts. For completion type cost-plus-fee contracts, fixed feesare earned in proportion to the percentage of work completed. Fortime-and-materials contracts, revenues are computed by multiplying the number ofdirect labor-hours expended in performance of the contract by the contractualbilling rates and adding other billable direct and indirect costs. Forfixed-price contracts, revenues are recognized as services are performed, usingthe percentage-of-completion method, applying the cost-to-cost or units ofdelivery method, 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.

 

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

 

***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 an

 

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annual basis at any time during the fiscal year, providedthat 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 the last day of its third fiscal quarter as its testingdate. Based on the testing performed as of December 26, 2008, wedetermined that no impairments existed as of December 26, 2008. Customerrelationships are amortized on a straight-line basis over periods ranging fromfive to seven years. Non-competition agreements are amortized on astraight-line basis over periods ranging from one to five years. Backlog andcontracts are amortized on a straight-line basis over periods ranging from twoto 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). Thefollowing unaudited tables set forth the results of operations expressed indollars (in thousands) and as a percentage of revenues, for the periods below:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **December 26,**            | ** ** | **December 31,**           | ** ** | **December 26,** | ** ** | **December 31,** | ** ** |
| **Consolidated Statements of Income Data** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                       |       | $                                | 203,597    |                            | $          | 147,083 |   | $ | 567,242 |   | $ | 430,803 |   |
| Operating costs and expenses:                                  |       |                             |       |                            |       |   |   |   |   |
| Cost of revenues                                               |       | 170,091                          |       | 123,660                         |       | 475,775 |   | 363,538 |   |
| Selling, general and administrative                            |       | 13,220                           |       | 9,431                           |       | 36,103 |   | 28,181 |   |
| Amortization of deferred  compensation                         |       | 62                               |       | 62                              |       | 187 |   | 205 |   |
| Depreciation and amortization                                  |       | 2,741                            |       | 1,694                           |       | 7,044 |   | 5,005 |   |
| Total operating costs and expenses                             |       | 186,114                          |       | 134,847                         |       | 519,109 |   | 396,929 |   |
| Operating income                                               |       | 17,483                           |       | 12,236                          |       | 48,133 |   | 33,874 |   |
| Other income (expense):                                        |       |                             |       |                            |       |   |   |   |   |
| Other income                                                   |       | 17                               |       | 10                              |       | 20 |   | 16 |   |
| Interest expense—net                                      |       | (1,970                           | )          | (919                            | )          | (4,141 | ) | (3,120 | ) |
| Total other expenses                                           |       | (1,953                           | )          | (909                            | )          | (4,121 | ) | (3,104 | ) |
| Income before taxes                                            |       | 15,530                           |       | 11,327                          |       | 44,012 |   | 30,770 |   |
| Provision for income taxes                                     |       | (5,852                           | )          | (4,576                          | )          | (17,289 | ) | (12,320 | ) |
| Net income                                                     |       | $                                | 9,678      |                            | $          | 6,751 |   | $ | 26,723 |   | $ | 18,450 |   |

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **December 26,**            | ** ** | **December 31,**           | ** ** | **December 26,** | ** ** | **December 31,** | ** ** |
| **As a Percentage of Revenues** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                            |       | 100.0                            | %          | 100.0                           | %          | 100 | % | 100.0 | % |
| Operating costs and expenses:                       |       |                             |       |                            |       |   |   |   |   |
| Cost of revenues                                    |       | 83.5                             |       | 84.1                            |       | 83.9 |   | 84.4 |   |
| Selling, general and administrative                 |       | 6.5                              |       | 6.4                             |       | 6.4 |   | 6.5 |   |
| Amortization of deferred  compensation              |       | —                           |       | —                          |       | — |   | — |   |
| Depreciation and amortization                       |       | 1.3                              |       | 1.2                             |       | 1.2 |   | 1.2 |   |
| Total operating costs and expenses                  |       | 91.4                             |       | 91.7                            |       | 91.5 |   | 92.1 |   |
| Operating income                                    |       | 8.6                              |       | 8.3                             |       | 8.5 |   | 7.9 |   |
| Other income (expense):                             |       |                             |       |                            |       |   |   |   |   |
| Other income                                        |       | —                           |       | —                          |       | — |   | — |   |
| Interest expense—net                           |       | (1.0                             | )          | (0.6                            | )          | (0.7 | ) | (0.7 | ) |
| Total other expenses                                |       | (1.0                             | )          | (0.6                            | )          | (0.7 | ) | (0.7 | ) |
| Income before taxes                                 |       | 7.6                              |       | 7.7                             |       | 7.8 |   | 7.2 |   |
| Provision for income taxes                          |       | (2.9                             | )          | (3.1                            | )          | (3.0 | ) | (2.9 | ) |
| Net income                                          |       | 4.8                              | %          | 4.6                             | %          | 4.7 | % | 4.3 | % |

 

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

 

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overhead and certain other non-direct costs that are necessary tosupport direct labor. The number and types of personnel, their salaries andother costs, can have a significant 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,travel, insurance and professional fees. Among the functions covered by theseexpenses are sales, business development, contract administration, legal,finance, accounting, human resources, information technology and generalmanagement. Most of these costs are allowable costs under the cost accountingstandards for contracting with the federal government and are recoverable undercost-plus-fee contracts.

 

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 withrespect to government contracts. In addition, contracts with these agencies aresubject to audit and possible adjustment to give effect to unallowable costsunder cost-plus-fee contracts or to other regulatory requirements affectingboth cost-plus-fee and fixed-price contracts.

 

***Comparison of Results of Operationsfor the Three Months Ended December 26, 2008 and December 31, 2007***

 

***Revenues.***  Our consolidated revenues increased$56.5 million, or 38.4%, from $147.1 million for the three months ended December 31,2007, to $203.6 million for the three months ended December 26, 2008. Theincrease was primarily due to $9.2 million of increased revenues attributableto engineering and technical support services for the U.S. Air Force and theDefense Information Systems Agency (“DISA”), $6.0 million of increased revenuesattributable to information technology life cycle support and logisticsmanagement services for the U.S. Army, $8.1 million of increased revenuesattributable to operational intelligence services, $8.0 million of increasedrevenues attributable to biometric software development, training and support, $7.8million of increased revenues attributable to military intelligence trainingand operations support for the U.S. Army, $6.2 million of increased revenuesattributable to immigration and naturalization services for the Department ofHomeland Security, and $5.0 million of increased revenues attributable tosystems and software engineering services for the U.S. Army’sCommunications-Electronics Life Cycle Management Command and Fires Center ofExcellence (“Army CELCMC & FCE”).

 

***Cost of Revenues.***  Our cost of revenues increased $46.4million, or 37.5%, from $123.7 million for the three months ended December 31,2007, to $170.1 million for the three months ended December 26, 2008. Thisincrease was primarily the result of additional costs attributable to revenuesassociated with the increased services provided under the contracts referred toabove. Cost of revenues represented 83.5% of revenues for the three monthsended December 26, 2008, as compared to 84.1% of revenues for the threemonths ended December 31, 2007. This decrease was primarily the result ofa greater percentage of more profitable time-and-material and fixed pricecontracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $3.8 million, or 40.2%, from $9.4 million forthe three months ended December 31, 2007, to $13.2 million for the threemonths ended December 26, 2008. This increase was primarily due to higherselling, general and administrative expenses attributable to our Oberon acquisitionand to higher SFAS 123(R) share-based payment expenses. Selling,general and administrative expense represented 6.5% of revenues for the threemonths ended December 26, 2008, as compared to 6.4% of revenues for thethree months ended December 31, 2007. This increase was primarily a resultof Oberon’s higher selling, general and administrative expense as a percentageof revenues.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $1.0 million, or 61.8%, from $1.7 million for the threemonths ended December 31, 2007, to $2.7 million for the three months endedDecember 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.

 

***Interest Expense, Net.***  Our net interest expense increased$1.1 million from $0.9 million for the three months ended December 31,2007, to $2.0 million for the three months ended December 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.

 

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***Provision for Income Taxes. ***Our effective tax rate decreased by 2.7% from 40.4% for the threemonths ended December 31, 2007, to 37.7% for the three months ended December 26,2008. The decrease was primarily attributable to a lower consolidated effectivestate income tax rate and the realization of federal and state tax credits.

 

***Net Income.***  Our net income increased $2.9 millionfrom $6.8 million for the three months ended December 31, 2007, to $9.7million for the three months ended December 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 and fixed-price contracts.

 

***Comparison of Results of Operationsfor the Nine Months Ended December 26, 2008 and December 31, 2007***

 

***Revenues.***  Our consolidated revenues increased $136.4million, or 31.7%, from $430.8 million for the nine months ended December 31,2007, to $567.2 million for the nine months ended December 26, 2008. Theincrease was primarily due to $22.3 million of increased revenues attributableto information technology lifecycle support and logistics services under our primecontract with the U.S. Army, $29.1 million of increased revenues attributableto immigration and naturalization services provided to the Department ofHomeland Security, $17.3 million of increased revenues attributable toengineering and technical support services for the U.S. Air Force and DISA,$14.9 million of increased revenues attributable to systems and softwareengineering services for the Army CELCMC & FCE, $14.5 million ofincreased revenues attributable to biometric software development, training andsupport, $13.6 million of increased revenues attributable to militaryintelligence training and operations support for the U.S. Army, $11.5 millionof increased revenues attributable to operational intelligence services, $4.8million of increased revenues attributable to contracts that includespecialized engineering and technology services provided to the U.S. ArmyProgram Office Executive Office for Simulation, Training and Instrumentation,and $4.3 million of increased revenues attributable to information systemssupport provided to the U.S. Marine Corps.

 

***Cost of Revenues.***  Our cost of revenues increased $112.3million, or 30.9%, from $363.5 million for the nine months ended December 31,2007, to $475.8 million for the nine months ended December 26, 2008. Thisincrease was primarily the result of additional costs attributable to revenuesassociated with the increased services provided under the contracts referred toabove. Cost of revenues represented 83.9% of revenues for the nine months endedDecember 26, 2008, as compared to 84.4% of revenues for the nine monthsended December 31, 2007. This decrease was primarily the result of agreater percentage of more profitable time-and-material contracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $7.9 million, or 28.1%, from $28.2 million forthe nine months ended December 31, 2007, to $36.1 million for the ninemonths ended December 26, 2008. This increase was primarily due to higherselling, general and administrative expenses attributable to our Oberonacquisition, higher SFAS 123(R) share-based payment expenses and increasedrecruiting costs to expand our workforce. Selling, general and administrativeexpenses represented 6.4% of revenues for the nine months ended December 26,2008, as compared to 6.5% of revenues for the nine months ended December 31,2007. This decrease was primarily the result of continued realization ofefficiencies in our corporate infrastructure.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $2.0 million, or 40.7%, from $5.0 million for the nine monthsended December 31, 2007, to $7.0 million for the nine months ended December 26,2008. The increase in depreciation and amortization was primarily due to theamortization of intangible assets associated with the acquisition of Oberon aswell as depreciation expense associated with capital expenditures and leaseholdimprovements.

 

***Interest Expense, Net.***  Our net interest expense increased$1.0 million from $3.1 million for the nine months ended December 31,2007, to $4.1 million for the nine months ended December 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 decreased by 0.7% from 40.0% for the nine monthsended December 31, 2007, to 39.3% for the nine months ended December 26,2008. The decrease is attributable to a lower consolidated effective stateincome tax rate and the realization of federal and state tax credits.

 

***Net Income.***  Our net income increased $8.2 millionfrom $18.5 million for the nine months ended December 31, 2007, to $26.7million for the nine months ended December 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.

 

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**Liquidity and Capital Resources**

 

Asof December 26, 2008, we had approximately $5.5 million in available cash.On July 15, 2008, we exercised, in part, the accordion option featureunder the Senior Credit Facility to increase the aggregate commitment under theRevolver by $69.1 million. The exercise of the accordion feature increased theamount of the lenders’ current aggregate commitment under the Senior CreditFacility from $186.5 million to $255.6 million, which includes a $219.1 millionRevolver and a $36.5 million Term Loan. Immediately following the exercise ofthe accordion feature, we borrowed under the Revolver to fund the purchase ofOberon and aggregate lender fees of $0.6 million. All other terms of the SeniorCredit Facility remained unchanged. We have both short-term and long-termliquidity requirements as described in more detail 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 withacquisitions that we may pursue. Historically, we have satisfied our long-termliquidity requirements through various sources of capital, including cashprovided by operations, equity offerings and borrowings under our Senior CreditFacility.

 

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.

 
| ** **                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **December 26, 2008** | ** ** | **December 31, 2007** | ** ** |
| ** **                                | ** ** | **(in millions)**          | ** ** |
| Net cash provided by operating activities |       | $                               | 38.5       |   | $ | 3.3 |   |
| Net cash used in investing activities     |       | $                               | (176.8     | ) | $ | (33.0 | ) |
| Net cash provided by financing activities |       | $                               | 143.6      |   | $ | 17.0 |   |

 

Net cash provided by operating activities of $38.5 million for the ninemonths ended December 26, 2008 primarily reflected our net income plusdepreciation and amortization expenses, $4.6 million of share-based paymentexpense and $2.4 million of income tax benefits from stock compensation,partially offset by a $7.8 million decrease in income tax payable. For the ninemonths ended December 31, 2007, net cash provided by operating activitiesof $3.3 million consisted primarily of net income plus depreciation andamortization expenses and a $15.8 million increase in accrued expenses,partially offset by a $31.7 million increase in accounts receivable and a $5.1million decrease in accounts payable.

 

Net cash used in investing activities of $176.8 million for the ninemonths ended December 26, 2008 consisted primarily of $170.8 million forthe purchase of Oberon and $6.0 million for office equipment and leaseholdimprovements for new facility leases. Net cash used in investing activities of$33.0 million for the nine months ended December 30, 2007 consistedprimarily of $30.6 million for the purchase of Techrizon.

 

Net cash provided by financing activities of $143.6 million for thenine months ended December 26, 2008 consisted primarily of $142.9 millionin borrowings under the revolving portion of our Senior Credit Facility tosupport the acquisition of Oberon and $1.0 million in proceeds from theexercise of stock options. Net cash provided by financing activities of $17.0million for the nine months ended December 31, 2007 consisted primarily of$16.8 million in borrowings under the revolving portion of our Senior CreditFacility to support the acquisition of Techrizon.

 

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***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 the 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 accordion featureincreased the amount of the lenders’ current aggregate commitment under theSenior Credit Facility from $186.5 million to $255.6 million, which iscomprised of a $219.1 million Revolver and a $36.5 million Term Loan. We paidaggregate lender fees of $0.6 million in connection with the exercise of theaccordion 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 December 26, 2008, we had $36.0 million of Term Loanindebtedness and $142.9 million of Revolver indebtedness outstanding under ourSenior Credit Facility. As of December 26, 2008, our borrowingavailability under our $219.1 million Revolver was $76.1 million, after areduction of $0.1 million for outstanding letters of credit. As of December 26,2008, wewere in compliance with all covenants under our Senior Credit Facility. The obligations under our SeniorCredit Facility are unconditionally guaranteed by each of our existing andsubsequently acquired or organized subsidiaries and are secured on afirst-priority basis by security interests (subject to permitted liens) insubstantially all assets owned by us and each of our subsidiaries, includingthe shares of capital stock of our subsidiaries, subject to certain exceptions.

 

**Capital Expenditures**

 

Our capital expenditures were $6.0 million and $2.4 million for thenine months ended December 26, 2008 and December 31, 2007,respectively. Substantially all of these expenditures consisted of leaseholdimprovements and purchases of office equipment.

 

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**Off-Balance Sheet Arrangements**

 

As of December 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 and liabilitiesat fair value and the information used to measure fair value. A fair valuehierarchy was established to classify the inputs used in measuring fair value.In February 2008, the FASB issued FASB Staff Position (FSP) FAS157-2 deferring the effective date of SFAS 157 to fiscal years beginning after November 15,2008 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Effective April 1, 2008 wecategorized our financial assets and liabilities measured at fair value bylevel 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.

 

**Recently Issued Accounting Standards**

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141 (revised 2007), *Business Combinations*(“SFAS 141R”). SFAS 141R moves closer to a fair value model by requiring theacquirer, in a business combination, 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. SFAS 141Ralso establishes principles and requirements as to how the acquirer recognizesand measures goodwill acquired in a business combination or a gain from abargain purchase and determines what information to disclose to enable users ofthe financial 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.

 

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 disclosure requirement for derivativeinstruments 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 to effectivelylimit exposure to interest rate movements within the parameters of our interestrate hedging policy. As of December 26, 2008, all of the outstanding debtunder our Senior Credit Facility, with the exception of that portion covered byan interest rate swap, was subject to floating interest rate risk. In October 2006,we entered into an interest rate swap agreement covering fifty percent of ourterm indebtedness under which the swap and term debt maturities match. Evenafter giving effect to this agreement, we are exposed to risks due tofluctuations in the market value of this agreement and changes in interestrates with respect to the portion of our Senior Credit Facility that is notcovered by this agreement. A hypothetical increase in the interest rate of 100basis points would have increased our nine month interest expense on thatportion of our outstanding debt not covered by the interest rate swap by $0.8million.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof December 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 inInternal 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 theExchange Act during the quarter ended December 26, 2008 that hasmaterially affected, or is reasonably likely to materially affect, thosecontrols.

 

**Limitationson 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 December 26, 2008. Further, the design ofa control system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, with the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people or by management override of the controls.

 

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 in conditionsor the degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,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, Item 1A. RiskFactors” in our Form 10-K for the fiscal year ended March 31, 2008and “Part II, Item 1A. Risk Factors” in our Form 10-Q for the fiscalquarter ended September 26, 2008. These risks and uncertainties have thepotential to affect materially our business, financial condition, results ofoperation, cash flows and future prospects.

 

Wedo not believe that there have been any material changes to the risk factorspreviously disclosed in our Form 10-K for the fiscal year ended March 31,2008 and in our Form 10-Q for the fiscal quarter ended September 26,2008.

 

**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**

 

None.

 

**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)                         |
|       | January 29, 2009                                 |
|       |                                                  |
|       |                                                  |
| ** ** | **/s/ BRIAN J. CLARK**                                |
| ** ** | Brian J. Clark                                        |
| ** ** | Executive Vice President, Chief Financial Officer and |
| ** ** | Treasurer                                             |
|       | (Principal Financial Officer)                         |
|       | January 29, 2009                                 |

 

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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 No. 3 to the 2006 Omnibus Incentive Compensation Plan,  dated November 6, 2008*†                                                                                                    |
|                 |       |                                                                                                                                                                                                         |
| 10.2                 |       | Amendment No. 2 to the Executive Deferred Compensation and  Equity Incentive Plan, dated November 6, 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

†      Denotes management contract or compensation plan or arrangement

 

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