**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**x  QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended****December31, 2006**

**OR**

**o  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**CommissionFile No.****001-33083**

**STANLEY, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                              | ** **                            | **11-3658790**       |   |
|-------------------------------------------|---------------------------------------|----------------------|--------|
| (State or other  jurisdiction of          |                                  | (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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x  No  o

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

o  Largeaccelerated filer  o  Acceleratedfiler  x  Non-acceleratedfiler

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

  Yes  o  No  x

As of January 31,2007, there were 21,437,015 shares of our Common Stock, par value $0.01 pershare, outstanding.

 

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**STANLEY, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**FOR THE QUARTER ENDED****DECEMBER 31, 2006**

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

 

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**PART 1:  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Income**

**(unaudited)**

**(in thousands,except per share amounts)**
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                  | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                              |       | $                                                   | 68,936     |                                               | $          | 102,023 |   | $ | 200,622 |   | $ | 292,769 |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Operating costs  and expenses:        |       |                                                |       |                                               |       |   |   |   |   |
| Cost of revenues                      |       | 59,580                                              |       | 88,838                                             |       | 174,162 |   | 254,125 |   |
| Selling, general and administrative   |       | 3,018                                               |       | 4,388                                              |       | 9,246 |   | 13,600 |   |
| Amortization of deferred compensation |       | 232                                                 |       | 4,361                                              |       | 572 |   | 4,964 |   |
| Depreciation and amortization         |       | 724                                                 |       | 1,353                                              |       | 1,839 |   | 4,047 |   |
| Total operating costs and expenses    |       | 63,554                                              |       | 98,940                                             |       | 185,819 |   | 276,736 |   |
| Operating income                      |       | 5,382                                               |       | 3,083                                              |       | 14,803 |   | 16,033 |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Other income  (expense):              |       |                                                |       |                                               |       |   |   |   |   |
| Other income (expense)                |       | 29                                                  |       | 95                                                 |       | 29 |   | (450 | ) |
| Interest expense - net                |       | (467                                                | )          | (1,040                                             | )          | (1,166 | ) | (5,219 | ) |
| Total other expenses                  |       | (438                                                | )          | (945                                               | )          | (1,137 | ) | (5,669 | ) |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Income before taxes                   |       | 4,944                                               |       | 2,138                                              |       | 13,666 |   | 10,364 |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Provision for  income taxes           |       | (1,987                                              | )          | (878                                               | )          | (5,435 | ) | (4,198 | ) |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Net income                            |       | $                                                   | 2,957      |                                               | $          | 1,260 |   | $ | 8,231 |   | $ | 6,166 |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Earnings per  share:                  |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                 |       | $                                                   | 0.21       |                                               | $          | 0.06 |   | $ | 0.58 |   | $ | 0.38 |   |
| Diluted                               |       | $                                                   | 0.19       |                                               | $          | 0.06 |   | $ | 0.51 |   | $ | 0.34 |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| Weighted average  shares:             |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                 |       | 14,007                                              |       | 19,637                                             |       | 14,227 |   | 16,238 |   |
| Diluted                               |       | 15,767                                              |       | 21,676                                             |       | 16,177 |   | 18,216 |   |

 

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

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

**(in thousands)**
| ** **                                                                                       | ** ** | **March 31, 2006** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | ** **                   | ** ** | **(unaudited)**                 | ** ** |
| **Assets**                                                                                       | ** ** | ** **                   | ** ** | ** **                      | ** ** |
|                                                                                             | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current Assets:                                                                                  |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                       |       | $                            | —     |                            | $          | 13,621 |   |
| Accounts receivable -  net                                                                       |       | 81,732                       |       | 89,698                          |       |
| Prepaid and other  current assets                                                                |       | 2,196                        |       | 5,556                           |       |
| Total current assets                                                                             |       | 83,928                       |       | 108,875                         |       |
|                                                                                             |       |                         |       |                            |       |
| Property and equipment  - net                                                                    |       | 10,083                       |       | 10,317                          |       |
| Goodwill                                                                                         |       | 87,832                       |       | 88,249                          |       |
| Intangible assets - net                                                                          |       | 12,616                       |       | 10,208                          |       |
| Other assets                                                                                     |       | 5,444                        |       | 2,098                           |       |
| Total assets                                                                                     |       | $                            | 199,903    |                            | $          | 219,747 |   |
|                                                                                             |       |                         |       |                            |       |
| **Liabilities and Stockholders’ Equity**                                                    |       |                         |       |                            |       |
|                                                                                             |       |                         |       |                            |       |
| Current liabilities                                                                              |       |                         |       |                            |       |
| Line of credit                                                                                   |       | $                            | 10,409     |                            | $          | — |   |
| Accounts payable                                                                                 |       | 17,193                       |       | 14,647                          |       |
| Accrued expenses and  other liabilities                                                          |       | 24,091                       |       | 33,502                          |       |
| Current portion of  long-term debt                                                               |       | 1,000                        |       | 1,000                           |       |
| Deferred income taxes                                                                            |       | 1,225                        |       | 1,516                           |       |
| Income taxes payable                                                                             |       | 711                          |       | —                          |       |
| Total current liabilities                                                                        |       | 54,629                       |       | 50,665                          |       |
|                                                                                             |       |                         |       |                            |       |
| Long-term debt - net of  current portion                                                         |       | 99,000                       |       | 37,000                          |       |
| Other long-term  liabilities                                                                     |       | 3,514                        |       | 3,365                           |       |
| Deferred taxes                                                                                   |       | 371                          |       | 432                             |       |
| Total liabilities                                                                                |       | 157,514                      |       | 91,462                          |       |
|                                                                                             |       |                         |       |                            |       |
| Commitments and contingencies:                                                                   |       |                         |       |                            |       |
| Stockholders’ equity                                                                        |       |                         |       |                            |       |
| Common stock, $0.01 par  value – 200,000 authorized; 14,967 and 21,409 issued, respectively |       | 150                          |       | 214                             |       |
| Additional paid-in  capital                                                                      |       | 3,858                        |       | 75,639                          |       |
| Retained earnings                                                                                |       | 47,640                       |       | 53,806                          |       |
| Accumulated other  comprehensive income                                                          |       | —                       |       | (115                            | )          |
| Less: Treasury stock:  735 and 0 at cost, respectively                                           |       | (4,791                       | )          | —                          |       |
| Deferred compensation                                                                            |       | (4,392                       | )          | (1,211                          | )          |
| Shareholder notes  receivable                                                                    |       | (76                          | )          | (48                             | )          |
| Total stockholders’ equity                                                                  |       | 42,389                       |       | 128,285                         |       |
|                                                                                             |       |                         |       |                            |       |
| Total  Liabilities and Stockholders’ Equity                                                 |       | $                            | 199,903    |                            | $          | 219,747 |   |

 

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

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**
| ** **                                                                         | ** ** | **Nine Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                           | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          |       |                                               |       |   |   |
| Net income                                                                         |       | $                                                  | 8,231      |   | $ | 6,166 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                               |       |   |   |
| Depreciation and  amortization                                                     |       | 1,839                                              |       | 4,047 |   |
| Amortization of  deferred compensation                                             |       | 572                                                |       | 4,964 |   |
| Loss on disposal of  property and equipment                                        |       | 85                                                 |       | 189 |   |
| Deferred taxes                                                                     |       | 537                                                |       | 351 |   |
| Stock contributed to  employee stock ownership plan                                |       | 1,562                                              |       | — |   |
| Income tax benefit from  stock compensation                                        |       | —                                             |       | 1,592 |   |
| Other                                                                              |       | —                                             |       | 415 |   |
| Changes in assets and  liabilities - net of acquisition effects:                   |       |                                               |       |   |   |
| Increase in accounts  receivable                                                   |       | (6,909                                             | )          | (7,966 | ) |
| Increase in prepaid  income tax                                                    |       | (570                                               | )          | (573 | ) |
| Increase in prepaid  expenses and other current assets                             |       | (273                                               | )          | (137 | ) |
| (Increase) decrease in  other assets                                               |       | (415                                               | )          | 696 |   |
| Decrease in accounts  payable                                                      |       | (3,326                                             | )          | (2,546 | ) |
| Increase in accrued  expenses                                                      |       | 6,801                                              |       | 8,265 |   |
| Increase in other  liabilities                                                     |       | 809                                                |       | 878 |   |
| Decrease in income  taxes payable                                                  |       | (1,270                                             | )          | (711 | ) |
| Net cash provided by operating activities                                          |       | 7,673                                              |       | 15,630 |   |
|                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                                               |       |   |   |
| Purchase of CCI - net  of cash required                                            |       | (557                                               | )          | — |   |
| Purchase of Morgan -  net of cash required                                         |       | —                                             |       | (417 | ) |
| Acquisition of property  and equipment                                             |       | (3,913                                             | )          | (2,040 | ) |
| Net cash used in investing activities                                              |       | (4,470                                             | )          | (2,457 | ) |
|                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                                               |       |   |   |
| Net borrowings  (repayments) under line-of-credit agreements                       |       | 1,695                                              |       | (10,409 | ) |
| Repayments on long-term  debt                                                      |       | (750                                               | )          | (62,000 | ) |
| Payments under capital  lease obligations                                          |       | (4                                                 | )          | (17 | ) |
| Purchase of treasury  stock                                                        |       | (4,405                                             | )          | (259 | ) |
| Proceeds from exercise  of stock options                                           |       | 37                                                 |       | 1,110 |   |
| Cash repayments from  shareholders                                                 |       | —                                             |       | 28 |   |
| Net proceeds from sale of  stock in initial public offering                        |       | —                                             |       | 71,798 |   |
| Proceeds from sale of  treasury stock                                              |       | 224                                                |       | 197 |   |
| Net cash (used in) provided by financing activities                                |       | (3,203                                             | )          | 448 |   |
|                                                                               |       |                                               |       |   |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                      |       | —                                             |       | 13,621 |   |
| **CASH AND CASH EQUIVALENTS - Beginning of year**                                  |       | —                                             |       | — |   |
|                                                                               |       |                                               |       |   |   |
| **CASH AND CASH EQUIVALENTS - End of year**                                        |       | $                                                  | —     |   | $ | 13,621 |   |
|                                                                               |       |                                               |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                            |       |                                               |       |   |   |
| Cash paid during the year for:                                                     |       |                                               |       |   |   |
| Income taxes                                                                       |       | $                                                  | 6,071      |   | $ | 6,067 |   |
| Interest                                                                           |       | $                                                  | 1,166      |   | $ | 5,492 |   |
|                                                                               |       |                                               |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING  ACTIVITIES:**                     |       |                                               |       |   |   |
| Assets purchased  under a capital lease agreement                                  |       | $                                                  | 14         |   | $ | 22 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**STANLEY, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

**(in thousands, except share and per share data, oras otherwise noted)**

**1.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Description of Business***—Stanley, Inc.,together with its subsidiaries (“Stanley” or the “Company”), is a provider ofinformation technology services and solutions to U.S. defense and federalcivilian government agencies.  Stanleyoffers its customers solutions to support any stage of program, productdevelopment or business lifecycle through five service areas: systemsengineering, enterprise integration, operational logistics, business processoutsourcing and advanced engineering and technology.  The Company has derived substantially all ofits revenue from U.S. federal government agencies.

***Basis of Presentation***—Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles in theUnited States and pursuant to the rules and regulations of the Securities andExchange Commission.  In the opinion ofmanagement, these statements reflect all adjustments, which include only normalrecurring adjustments, necessary to present fairly the Company’s financialposition as of December 31, 2006, its results of operations for the threemonths and nine months ended December 31, 2005 and 2006, and its cash flows forthe nine months ended December 31, 2005 and 2006.  The results of operations for the interimperiod are not necessarily indicative of the results for the full year.  For further information, refer to thefinancial statements and notes presented in the Company’s registrationstatement on Form S-1 as amended.

***Principles of Consolidation***—Theaccompanying consolidated financial statements include the accounts of Stanley’swholly-owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

***Fair Value of Financial Instruments***—Thefair value of accounts receivable, accounts payable, accrued expenses, notepayable, and swap contract approximates 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 earnedunder cost-plus-fee, fixed-price and time-and-materials contracts.  The Company uses a standard management processto determine whether all required criteria for revenue recognition have beenmet, which includes regular reviews of the Company’s contract performance.  This review covers, among other matters,progress against a schedule, outstanding action items, effort and staffing,quality, risks and issues, subcontract management, costs incurred, commitments,and client satisfaction.  During thisreview, the Company determines whether the overall progress on a contract isconsistent with the effort expended.

Undercost-plus-fee contracts, revenues are recognized as costs are incurred andinclude an estimate of applicable fees earned.  The Company considers fixed fees undercost-plus-fee contracts to be earned in proportion to the allowable costsactually incurred in performance of the contract for level of effort contracts. For completion type cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of workcompleted.  For time-and-materialscontracts, revenues are computed by multiplying the number of direct labor-hoursexpended in performance of the contract by the contractual billing rates andadding other billable direct and indirect costs.  For fixed-price contracts, revenues arerecognized as services are performed, using the percentage-of-completionmethod, applying the cost-to-cost or units of delivery method, in accordancewith Accounting Research Bulletin No. 45 and American Institute ofCertified Public Accountants (AICPA) Statement of Position 81-1 “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” (SOP81-1).

Contractrevenue recognition inherently involves the use of estimates.  Examples of estimates include the contemplatedlevel of effort to accomplish the tasks under contract, the cost of the effort,and an ongoing assessment of the Company’s progress toward completing thecontract.  From time to time, as part ofthe Company’s standard management process, facts develop that require theCompany to revise its estimated total costs and revenues.  To the extent that a revised estimate affectscontract profit or revenue previously recognized, the Company records thecumulative effect of the revision in the period in which the facts requiringthe revision become known.  The fullamount of an anticipated loss on any type of contract is recognized in theperiod in which it becomes probable and can be reasonably estimated.

Forcost-plus-award fee type contracts, the Company recognizes the expected fee tobe awarded by the customer at the time such fee can be reasonably estimated,based on factors such as prior award experience and communications with thecustomer regarding performance, including any interim performance evaluationsrendered by the customer.  For cost-plus-incentivefee type contracts, the method of calculating incentive fee is specified in thecontract and it is typically based on measuring actual

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coststo perform the contract against a target cost to perform the contract.  The Company prepares periodic estimates tocomplete and adjusts the incentive fee as required based on the contractincentive fee formula.

TheCompany’s contracts with agencies of the government are subject to periodicfunding 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.  Fromtime to time, the Company may proceed with work based on client direction priorto the completion and signing of formal contract documents.  The Company has a formal review process forapproving any such work.  Revenueassociated with such work is recognized only when it can be reliably estimatedand realization is probable.  The Companybases its estimates on previous experiences with the client, communicationswith the client regarding funding status, and its knowledge of availablefunding for the contract or program.  Pre-contractcosts related to unsuccessful contract bids are expensed in the period in whichthe Company is notified that the contract will not be issued.

Disputesoccasionally arise in the normal course of the Company’s business due to eventssuch as delays, changes in contract specifications, and questions of costallowability or collectibility.  Suchmatters, whether claims or unapproved change orders in the process ofnegotiation, are recorded at the lesser of their estimated net realizable valueor actual costs incurred, and only when realization is probable and can bereliably estimated.  Claims against theCompany are recognized where a loss is considered probable and can bereasonably estimated in amount.

Theallowability of certain costs under government contracts is subject to audit bythe government.  Certain indirect costsare charged to contracts using provisional or estimated indirect rates, whichare subject to later revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

***Concentration of Risk***—Contracts fundedby federal government agencies account for substantially all of ourrevenues.  For the three months ended December31, 2005 and 2006, we derived approximately 62% and 68% of our revenues,respectively, from the Department of Defense, including agencies within theintelligence community, and approximately 38% and 32% of our revenues,respectively, from federal civilian government agencies.  The Company’s contract with the Department ofState for the provision of passport processing and support services, which isour largest revenue-generating contract, accounted for approximately 18% and14% of our revenues for the three months ended December 31, 2005 and 2006,respectively.

Forthe nine months ended December 31, 2005 and 2006, we derived approximately 60%and 67% of our revenues, respectively, from the Department of Defense,including agencies within the intelligence community, and approximately 40% and33% of our revenues, respectively, from federal civilian governmentagencies.  The Company’s contract withthe Department of State for the provision of passport processing and supportservices, which is our largest revenue-generating contract, accounted forapproximately 20% and 14% of our revenues for the nine months ended December31, 2005 and 2006, respectively.

***Property and Equipment***—Propertyand equipment are carried at cost, less accumulated depreciation.  Depreciation of property and equipment iscalculated using the straight-line method over the useful lives, ranging fromthree to ten years.  Leaseholdimprovements are amortized over the lesser of the useful life or the term ofthe lease.  Repairs and maintenance areexpensed as incurred.  Depreciationexpense related to property and equipment was $0.4 million and $0.6million for the three months ended December 31, 2005 and 2006,respectively.  Depreciation expenserelated to property and equipment was $0.9 million and $1.6 million forthe nine months ended December 31, 2005 and 2006, respectively.

***Goodwill and Intangible Assets****—*Goodwill represents the excess of costover the fair value of net tangible and identifiable intangible assets ofacquired companies.  During the quarterended December 31, 2006, the Company continued its evaluation of the purchaseprice allocation related to the acquisition of Morgan Research Corporation, orMorgan, in February 2006.  In connection with this evaluation, the Companydetermined that certain contracts required adjustment in order to reflect thefair value of the contracts acquired.  Accordingly, an adjustment was recordedduring the quarter ended December 31, 2006 which resulted in an increase togoodwill of $0.6 million.

Inaccordance with SFAS No. 142, *Goodwilland Other Intangible Assets,* the Company does not amortize goodwill;rather it tests goodwill for impairment at least on an annual basis.  Testing for impairment is a two-step processas prescribed by SFAS No. 142. The first step is a test for potentialimpairment, while the second step measures the amount of impairment, if any.  Under the guidelines of SFAS No. 142, theCompany is required to perform an impairment test at least on an annual basisat any time during the fiscal year provided the test is performed at the sametime every year.  An impairment losswould be recognized when the assets’ fair value is below their carrying value.  Stanley has elected December 31 as itstesting date.  Based on the testingperformed as of December 31, 2006, the Company determined that no impairmentsexisted as of December 31, 2006. Based on the testing performed as ofDecember 31, 2005, the Company believed that no impairments existed as ofDecember 31, 2005; however, in the quarter ended March 31, 2006, the Companyrecorded an aggregate charge of $3.6 million relating to the impairment of theCCI and FSC trade names.  The impairmentarose as a result of the Company having completed substantially all of theactivities in connection with novating the contracts previously legally held byCCI and FSC.  As such, the Company no

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longerascribed any value to the CCI and FSC trade names and that portion of theidentified intangibles was written off. Customer relationships and other intangibles are amortized on astraight-line basis over periods ranging from one to seven years.

***Impairment of Long-Lived Assets***—Wheneverevents or changes in circumstances indicate that the carrying amount oflong-lived assets may not be fully recoverable, Stanley evaluates theprobability that future undiscounted net cash flows, without interest charges,will be less than the carrying amount of the assets.  If any impairment were indicated as a resultof this review, Stanley would recognize a loss based on the amount by which thecarrying amount exceeds the estimated fair value.  Stanley believes that no impairments exist asof December 31, 2006.

***Stock***-***Based Compensation***—Aspermitted under SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”), Stanleyaccounted for its stock-based compensation plans using the intrinsic valuemethod under the recognition and measurement principles of APB OpinionNo. 25, *Accounting for Stock Issued toEmployees* (“APB No. 25”), and related Interpretations.  Stanley has adopted the provisions of SFASNo. 123(R), *Share-based Payments*, on a prospectivebasis.

***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.  Sharesissued during the period and shares reacquired during the period are weightedfor the portion of the period that they were outstanding.  Diluted earnings per share considers thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.  The weighted average number of common shares outstandingis computed as follows:

Alloptions to purchase common stock are included in the computation of dilutedearnings per share because the average fair value per common share was greaterthan the options’ exercise prices.
| ** **                                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                             | ** ** |
| Basic weighted  average common shares outstanding             |       | 14,007                                              |       | 19,637                                             |       | 14,227 |   | 16,238 |   |
| Effect of stock  options and unvested restricted stock grants |       | 1,760                                               |       | 2,039                                              |       | 1,950 |   | 1,978 |   |
| Diluted weighted  average common shares outstanding           |       | 15,767                                              |       | 21,676                                             |       | 16,177 |   | 18,216 |   |

 

***Derivative Instruments and HedgingActivities***— Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFASNo. 133”), as amended by SFAS No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities, an Amendment of SFAS 133* and SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities,* the fair value of the hedge arrangement isrecorded as an asset or a liability in the accompanying consolidated balancesheets at December 31, 2005 and 2006. For qualifying cash flow hedges, SFASNo. 133, as amended, holds that the effective portion of derivative gainsand losses be recorded as a component of other comprehensive income and bereclassified into earnings in the same period in which the hedged transactionaffects such earnings.  Anyineffectiveness is reported currently in earnings.

OnMarch 15, 2004, Stanley entered into a swap agreement to reduce exposureto interest rate fluctuations on its floating rate debt commitments.  Under this interest rate swap agreement, theinterest rate is fixed with respect to specified amounts of notional principal. Stanley’s exposure under this agreementwas limited to the impact of variable interest rate fluctuations and theperiodic settlement of amounts due.  OnMarch 27, 2006, Stanley entered into three additional swap commitments.  Under these swap agreements, which becameeffective April 1, 2006, the interest rate was fixed with respect to specifiedamounts of notional principal.  Stanley’sexposure under these agreements was limited to the impact of variable interestrate fluctuations and the periodic settlement of amounts due.  The interest rate swap agreement entered intoon March 15, 2004 had a maturity date of December 13, 2013, a fixed rateof 3.49% and a notional amount of $7.3 million prior to its terminationeffective October 25, 2006. The interest rate swap agreements entered into onMarch 27, 2006 with maturity dates of April 2, 2012, April 1, 2008 and April 1,2007, fixed interest rates of 4.92%, 5.29%, and 5.27%, and notional amounts of$30.0 million, $10.0 million and $10.0 million, respectively were terminatedeffective October 25, 2006 resulting in a combined net realized gain of $0.1million.

Asrequired by its senior credit facility, Stanley entered into an interest rateswap agreement on October 27, 2006 with a maturity date of January 31, 2012, anannual fixed rate of 5.28% and a notional amount of $19.0 million.  The Company designated this swap agreement, atits inception, as a qualifying cash flow hedge.  The fair value of the swap at December 31,2006 of $0.2 million has been reported in “Accrued expenses and other liabilities”with an offset, net of tax, included in “Accumulated other comprehensive income”in the Condensed Consolidated Balance Sheet.  None of the $0.2 million unrealized loss wasrecognized in earnings during the quarter ended December 31, 2006 based onhedge ineffectiveness and none of the swap’s unrealized loss was excluded fromthe assessment of hedge effectiveness.  Amountsin accumulated other comprehensive

8

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incomewill be reclassified into earnings in the period in which variable interestpayments (the hedged transaction) are made under the senior credit facility.  The estimated net amount of existing losses asof December 31, 2006 expected to be reclassified into earnings within the next12 months is $0.0 million.

***Use of Estimates***—Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Significant items subject tosuch estimates and assumptions include revenue recognition, carrying amount anduseful lives of long-lived assets, valuation allowances for accounts receivableand deferred tax assets, software development costs and loss contingencies,such as litigation, claims and assessments.

***Recently IssuedAccounting Standards***— In July 2006, the FASBissued Interpretation No. 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes*, *an interpretation of FASBStatement No. 109*, Accounting for Income Taxes.  FIN 48 clarifies the accounting for incometaxes recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company is in the process of determining whateffect, if any, the adoption of this proposal will have on our financialposition or results of operations.

In September 2006, the FASB issued Statement of Financial AccountingStandards No. 157 (SFAS 157), *Fair Value Measurements*.  SFAS 157 provides guidance for measuring thefair value of assets and liabilities.  Itrequires additional disclosures related to the extent to which companiesmeasure assets and liabilities at fair value, the information used to measurefair value, and the effect of fair value measurements on earnings.  SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007. The Company is in the process of determiningwhat effect, if any, the adoption of SFAS 157 will have on our financialposition, results of operations, or cash flows.

***Reclassifications***—Certainreclassifications have been made to prior year presentations to conform to thecurrent presentation.

***Stock Split and Amendment of Articles ofIncorporation***— On August 28, 2006, the Company increasedthe number of authorized shares of common stock to 200,000,000 shares and onSeptember 12, 2006, the Company completed a thirty-for-one stock split of itsoutstanding common stock.  The accompanyingfinancial statements include the effects of the stock split and the resultingincrease in the number of authorized shares of common stock.  All share and per share amounts included inthe accompanying financial statements for periods prior to the stock split havebeen restated to reflect the stock split.

**2.  ACCOUNTS RECEIVABLE**

Accountsreceivable consists of the following:
|                                        | ** ** | **As of**               | ** ** | **As of**                  | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **March 31, 2006** | ** ** | **December 31, 2006** | ** ** |
| Billed  receivables                    |       | $                            | 58,593     |                            | $          | 57,380 |   |
| Unbilled  receivables                  |       | 24,058                       |       | 33,362                          |       |
| Less: Allowance  for doubtful accounts |       | (919                         | )          | (1,044                          | )          |
| Total                                  |       | $                            | 81,732     |                            | $          | 89,698 |   |

 

Consistentwith industry practice, certain receivables related to long term contracts areclassified as current, although a portion of these amounts is not expected tobe billed and collected within one year. Unbilled accounts receivable are expected to be billed and collectedwithin one year except for $0.5 million at December 31, 2006.

**3.  PROPERTY ANDEQUIPMENT**

Propertyand equipment consists of the following:

9

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|                                                                                          | ** ** | **As of**               | ** ** | **As of**                  | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **March 31, 2006** | ** ** | **December 31, 2006** | ** ** |
| Computers and  peripherals                                                               |       | $                            | 3,379      |                            | $          | 4,032 |   |
| Software                                                                                 |       | 1,184                        |       | 1,655                           |       |
| Furniture and  equipment                                                                 |       | 3,671                        |       | 3,720                           |       |
| Leasehold  improvements                                                                  |       | 4,814                        |       | 5,109                           |       |
|                                                                                     |       | 13,048                       |       | 14,516                          |       |
|                                                                                     |       |                         |       |                            |       |
| Less: Accumulated  depreciation and amortization                                         |       | (2,965                       | )          | (4,199                          | )          |
| Property and  equipment - net                                                            |       | $                            | 10,083     |                            | $          | 10,317 |   |
|                                                                                     |       |                         |       |                            |       |
| Property and  equipment included above that are under capital lease obligations include: |       |                         |       |                            |       |
| Software                                                                                 |       | $                            | 225        |                            | $          | 225 |   |
| Furniture and equipment                                                                  |       | 58                           |       | 80                              |       |
| Less: Accumulated depreciation                                                           |       | (70                          | )          | (123                            | )          |
| Total                                                                                    |       | $                            | 213        |                            | $          | 182 |   |

 

**4.  ACCRUED EXPENSESAND OTHER CURRENT LIABILITIES**

Accruedexpenses consist of the following:
|                         | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **2006**                           | ** ** | **2006**                              | ** ** |
| Accrued payroll  costs  |       | $                                  | 8,776      |                                  | $          | 6,138 |   |
| Accrued contract  costs |       | 11,305                             |       | 22,465                                |       |
| Accrued indirect  costs |       | 2,731                              |       | 2,465                                 |       |
| Other payables          |       | 1,279                              |       | 2,434                                 |       |
| Total accrued expenses  |       | $                                  | 24,091     |                                  | $          | 33,502 |   |

 

**5.  DEBT**
|                                                               | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                           | ** ** | **2006**                              | ** ** |
| Borrowings under  the term loan and revolving line of credit: |       |                               |       |                                  |       |
| Revolving line of credit                                      |       | $                                  | 10,409     |                                  | $          | — |   |
| Term loan                                                     |       | 100,000                            |       | 38,000                                |       |
| Total debt                                                    |       | 110,409                            |       | 38,000                                |       |
| Less: Current portion                                         |       | (11,409                            | )          | (1,000                                | )          |
| Debt - net of  current portion                                |       | $                                  | 99,000     |                                  | $          | 37,000 |   |

 

On February 16,2006, in order to finance the acquisition of Morgan and to refinance itsthen-outstanding indebtedness, Stanley entered into a new senior creditfacility that included a $50.0 million revolving credit facility.  As of December 31, 2006, Stanley had $38.0million of term loan indebtedness outstanding under its senior credit facilitywith a weighted average interest rate of 7.94% and 7.72% for the three monthsand nine months ended   December 31, 2006,respectively.  As of December 31, 2006,Stanley’s borrowing availability under its revolving credit facility was $49.9million (including outstanding letters of credit).  At December 31, 2006, the Company was incompliance with all covenants under its senior credit facility.

**6. STOCKHOLDERS’ EQUITY**

***Common Stock***

Holders of common stockvote as a single class, with each share of common stock having one vote pershare.  Holders of common stock shareequally in any dividends declared by the board of directors.

Stanley purchased 33,000shares of treasury stock from one of its shareholders for $0.3 million duringthe nine months ended

10

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December 31, 2006. Theshares were recorded at cost.

***Initial PublicOffering***

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

***Deferred Compensation and Stock Options***

Under the 2006 OmnibusIncentive Compensation Plan (the “Omnibus Plan”), Stanley is authorized toprovide awards for a maximum of 4,000,000 shares of common stock to anydirector, officer, employee or consultant. The Omnibus Plan allows for cash awards, restricted stock awards,restricted stock units, stock appreciation rights, performance units, fullyvested shares, option awards and other equity-related awards.  Vesting periods of these awards vary.  Except as otherwise determined by the boardof directors, the option awards may not have an exercise price less than thefair market value of the common stock on the date the option is granted.  No cash awards have been awarded for theperiods presented.

Prior to July 2006, underthe Executive Deferred Compensation and Equity Incentive Plan (the “ExecutivePlan”), Stanley was authorized to provide awards for a maximum of 15,000,000shares of common stock to key employees and non-employee directors.  The Executive Plan allowed for cash awards,restricted stock awards, restricted stock trust awards and option awards.  Vesting periods of these awards vary.  Holders of restricted stock awards havevoting rights with respect to the awards. The Trustees of the restricted stock trust awards have voting rightswith respect to the trust awards.  Theoption awards may have an exercise price that ranges from 85% to 110% of thefair market value of the common stock on the date the option is granted.  No cash awards have been awarded for theperiods presented.

Effective April 1, 2006,the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, ‘‘Statement 123(R)’’ using the prospective-transitionmethod.  Under that transition method,compensation cost recognized in the quarter and nine months ended December 31,2006 includes compensation cost for all share-based payments granted on orafter April 1, 2006 based on the grant-date fair value estimated in accordancewith the provisions of Statement 123(R). The Company is required to account forany portion of awards outstanding at the date of adoption of Statement 123(R)using the accounting principles originally applied to those awards.

As a result of adoptingStatement 123(R) on April 1, 2006, the Company’s income before income taxes andnet income for the quarter ending December 31, 2006, are $0.2 million and $0.1million lower, respectively, than if it had continued to account forshare-based compensation under APB Opinion No. 25, ‘‘Accounting for StockIssued to Employees’’ (‘‘Opinion 25’’). Basic and diluted earnings per sharefor the quarter ended December 31, 2006 are $0.06 and $0.06, respectively,under Statement 123(R). Basic and diluted earnings per share for the quarterended December 31, 2006 would have been $0.07 and $0.06, respectively, underOpinion 25.

The Company will continueto present all tax benefits of deductions resulting from stock basedcompensation as operating cash flows in the Statement of Cash Flows forshare-based payment arrangements in effect prior to the adoption of Statement123(R). The tax benefits associated with share-based payment arrangements ineffect prior to the adoption of Statement 123(R) was $1.5 million for thequarter ended December 31, 2006. For share-based payment arrangements awardedsubsequent to the adoption of Statement 123(R), Statement 123(R) requires thecash flows resulting from the tax benefits resulting from tax deductions inexcess of the compensation cost recognized for those share-based paymentarrangements (excess tax benefits) to be classified as financing cash flows.  There were no excess tax benefits associatedwith share-based payment arrangements accounted for under Statement 123(R).

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes-Mertonclosed-form option-pricing model that uses the assumptions noted in thefollowing table.  Expected volatility isbased on a weighted-average of the historical volatilities of similar publicentities.  The valuation model includesan assumed forfeiture rate of 7.5 percent. The expected term of options granted is derived using the simplifiedmethod and represents the period of time that options granted are expected tobe outstanding.  Options granted meet thecriteria of “plain vanilla” for purposes of applying the simplified method.  The risk-free rate for periods within thecontractual life of the option is based on U.S. Treasury yield curve in effectat the time of grant.

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|                              | ** ** | **As of  December 31, 2006** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| Expected volatility          |       | 35.8                              | %          |
| Weighted-average  volatility |       | 35.8                              | %          |
| Expected dividends           |       | 0.0                               | %          |
| Expected term (in  years)    |       | 3.3-6.5                           |       |
| Risk-free rate               |       | 4.6%-5.1                          | %          |

 

A summary of optionactivity as of December 31, 2006, and changes during the quarter then ended,are presented below:
| Options                                              | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value  ($000)** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at October 1, 2006                       |       | 2,976,060  |       | $                                      | 3.79       |                                                    |       |                                        |       |   |
| Granted                                              |       | 7,500      |       | $                                      | 7.86       |                                                    |       |                                        |       |   |
| Exercised                                            |       | (502,355   | )          | $                                      | 1.38       |                                                    |       |                                        |       |   |
| Forfeited                                            |       | (4,500     | )          | $                                      | 6.56       |                                                    |       |                                        |       |   |
| Outstanding at December 31, 2006                     |       | 2,476,705  |       | $                                      | 4.29       |                                                    | 6.2        |                                        | $          | 31,260 |   |
| Vested or expected to be vested at December 31, 2006 |       | 1,700,455  |       | $                                      | 2.60       |                                                    | 5.1        |                                        | $          | 24,335 |   |
| Exercisable at  December 31, 2006                    |       | 1,700,455  |       | $                                      | 2.60       |                                                    | 5.1        |                                        | $          | 24,335 |   |

 

Thetotal intrinsic value of options exercised and share based liabilities paidduring the quarter ended December 31, 2006 was $7.0 million and zero,respectively.

During the quarter andnine months ended December 31, 2006, the Company recognized $0.2 million and$0.4 million of share-based employee compensation costs related to stock optionawards granted in fiscal 2007 under Statement 123(R).  No share-based employee compensation cost,related to stock option awards, is reflected in net income for the quarter ornine months ended December 31, 2005.  Asof December 31, 2006, there was $2.2 million of total unrecognized compensationcost related to nonvested share-based compensation arrangements granted underthe Plan during the nine months ended December 31, 2006. That cost is expectedto be recognized over a weighted-average period of 4.4 years.

The following tableillustrates, in accordance with the provisions of Statement 123(R), theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provision of Statement 123(R) to stock-based employeecompensation for stock option awards granted prior to April 1, 2006.

|                                                                                                                                                | ** ** | **Nine Months   Ended  December 31,   2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | ** **                                                       | ** ** |
| Net income, as reported                                                                                                                        |       | $                                                                | 6,166      |   |
| Add: stock-based compensation,  included in net income as reported, net of related tax effects                                                 |       | —                                                           |       |
| Deduct: Total  stock-based employee compensation expense as determined under the fair value  method for all awards, net of related tax effects |       | (96                                                              | )          |
| Pro forma net income                                                                                                                           |       | $                                                                | 6,070      |   |
| Basic earnings per  share:                                                                                                                     |       |                                                             |       |
| As reported                                                                                                                                    |       | $                                                                | 0.38       |   |
| Pro forma                                                                                                                                      |       | $                                                                | 0.37       |   |
| Diluted earnings per  share:                                                                                                                   |       |                                                             |       |
| As reported                                                                                                                                    |       | $                                                                | 0.34       |   |
| Pro forma                                                                                                                                      |       | $                                                                | 0.33       |   |

 

During the nine monthsended December 31, 2006, there were nomodifications to share-based payment arrangements.

During the nine monthsended December 31, 2006, the Companygranted 11,250 restricted stock awards and 15,000 restricted stock trust awardsat an estimated fair value of $7.54 per share with a vesting period of twoyears.  Additionally, during the ninemonths ended December 31, 2006, the Company granted 21,600 restricted stockawards at an estimated fair value of $10.28 per share with a vesting period ofone year.  The assumed forfeiture rateapplicable to the restricted shares granted in the nine months ended December31, 2006 was zero percent.

Prior to the adoption ofStatement 123(R), the fair market value of each issuance and grant wasdetermined by the Company on a contemporaneous basis.  The Company recorded stock-based deferredcompensation of approximately $1.4 million in connection with compensatorygrants of stock options and shares of restricted stock awarded during fiscal2006 and 2007.  Approximately, $0.3million of compensation expense, which includes the $0.1 million below, wasrecognized during the nine months ended December 31, 2006.  The remaining deferred compensation will beamortized over the remaining four year vesting period of the awards.

In connection with thecompletion of the Company’s initial public offering in the quarter endedDecember 31, 2006, 1,377,210 shares of restricted stock grants and 640,050employee stock options became fully-vested.  Accordingly, the Companyrecorded a charge of $4.1 million and $0.1 million, respectively, relatedto the vesting of the restricted shares and certain of the employee stockoptions which had been granted at less than fair market value within one yearof the completion of the offering.  This charge has beenreflected in the accompanying statement of income as amortization of deferredcompensation during the three and nine months ended December 31, 2006.

**7.  COMMITMENTS AND CONTINGENCIES**

***Contract Cost Audits***—Substantiallyall payments to Stanley under cost-reimbursable contracts and subcontracts withthe U.S. Government are provisional payments, which are subject to potentialadjustments upon audit by the Defense Contract Audit Agency.  Audits through December 31, 2002 have beencompleted.  In the opinion of management,adjustments resulting from the audits of all subsequent years are not expectedto have a material effect on the Company’s financial position or results ofoperations.

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

*You should read the following discussion inconjunction with the audited and unaudited consolidated financial statementsand the accompanying notes included in this Form 10-Q.  This discussion contains forward-lookingstatements that involve risks and uncertainties.  Our actual results may differ materially fromthose discussed in or implied by any of the forward-looking statements as aresult of various factors, including but not limited to those listed elsewherein this Form 10-Q and those listed in other documents we have filed with theSecurities and Exchange Commission.*

**Overview**

We provide information technology services and solutions to U.S.defense and federal civilian government agencies.  We offer our customers solutions andexpertise to support their mission-essential needs at any stage of program,product development or business lifecycle through five service areas: systemsengineering, enterprise integration, operational logistics, business processoutsourcing and advanced engineering and technology.  As a systems integrator, we apply these fiveservice areas to enable our customers to achieve interoperability betweendifferent business processes and information technology systems.

Contracts funded by federal government agencies account forsubstantially all of our revenues.  As ofDecember 31, 2006, we had more than 200 active contractualengagements across 44 federal government agencies.  Our customers include the Department ofDefense (including all major agencies within the Department of Defense), theDepartment of Health and Human Services, the Department of Homeland Security,the Department of Justice, the Department of State, the Department of Transportation,the Department of the Treasury and NASA. We have served customers that provided over 90% of our revenues for thefiscal year ended March 31, 2006, or fiscal 2006, for an average ofapproximately twelve years.

**Key MetricsEvaluated 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 arediscussed below.

***Revenue Growth***

We closely monitor revenue growth in order to assess the performance ofour business.  In monitoring our revenuegrowth, we focus on both internal revenue growth and revenue growth throughacquisitions.  Our internal revenuegrowth is driven primarily by two factors.  First, internal revenue growth is driven byadding new customers and by obtaining new task orders and contracts with ourexisting customers.  For example, overthe past several years we have added the Department of the Treasury’s Office ofthe Comptroller of the Currency, the National Guard Bureau, the Department ofTransportation and agencies in the intelligence community as newcustomers.  Second, internal revenuegrowth is driven by increasing revenues under existing contracts and taskorders with customers.  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 thefollowing four acquisitions since 2000: our acquisition of GCI InformationServices, Inc. in January 2000, our acquisition of CCI, Incorporated, or CCI,in September 2002, our acquisition of Fuentez Systems Concepts, Inc., or FSC,in December 2003 and our acquisition of Morgan in February 2006.

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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 summarizes our backlog asof the dates indicated:
|               | ** ** | **As of March 31,** | ** ** | **As of December 31,** | ** ** |
|---------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2004**                           | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **(in millions)**             | ** ** |
| Backlog:      |       |                               |       |                                  |       |   |   |   |   |   |   |
| Funded        |       | $                                  | 147.4      |                                  | $          | 124.1 |   | $ | 160.9 |   | $ | 138.2 |   | $ | 219.0 |   |
| Unfunded      |       | 363.4                              |       | 395.6                                 |       | 684.4 |   | 442.0 |   | 841.6 |   |
| Total Backlog |       | $                                  | 510.8      |                                  | $          | 519.7 |   | $ | 845.3 |   | $ | 580.2 |   | $ | 1,060.6 |   |

 

Each year, a significant portion of our revenues is derived from ourbacklog, and a significant portion of our backlog represents work related tothe continuation of services and solutions under contracts or projects where weare the incumbent provider.

We define backlog as the amount of revenues we expect to realize (i)over the 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 measurementdate.  We do not include contract ceilingvalues, which represent the maximum amount of contract awards that could beawarded to all contractors under GWAC or ID/IQ contracts, in our backlogcalculation.

We also do not include in backlog (i) the expected amount of revenuesthat would be realized if, and when, we were successful in the re-compete ofsigned contracts 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 funded backlog does not include the fullpotential value of our contracts, because Congress often appropriates funds tobe used by an agency for a particular program or contract on a yearly orquarterly basis, even though the contract may call for performance over anumber of years.  As a result, 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 thefederal government under contracts employing one of three types of pricestructures: cost-plus-fee, time-and-materials and fixed-price.  Cost-plus-fee contracts are typically lowerrisk arrangements and thus yield lower profit margins than time-and-materialsand fixed-price arrangements.  Becausethe customer usually specifies the type of contract for a particularcontractual engagement, we generally do not influence the choice of contracttype.  However, where we do have theopportunity to influence the contract type, and where customer requirements areclear, we prefer time-and-materials and fixed-price arrangements rather thancost-plus-fee arrangements because time-and-materials and fixed-pricecontracts, as compared with cost-plus-fee contracts, generally provide greateropportunity for the customer to save money and for us to generate highermargins.  Our acquisition of Morgan inFebruary 2006 has resulted in a shift in our contract mix toward a greaterpercentage of time-and-materials contracts. The following table summarizes our historical contract mix, measured asa percentage of total revenues, for the periods indicated: 
| ** **         | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| Cost-plus-fee      |       | 64                                                  | %          | 52                                                 | %          | 64 | % | 53 | % |
| Time-and-materials |       | 18                                                  | %          | 33                                                 | %          | 18 | % | 32 | % |
| Fixed-price        |       | 18                                                  | %          | 15                                                 | %          | 18 | % | 15 | % |

 

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***Headcount and Labor Utilization***

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 to hire and deploy additionalqualified employees is a key driver of our ability to generate additionalrevenues, and our successful deployment of existing employees ondirect-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 for customers.  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 rate variance.  Increased indirect rate variance canadversely affect our ability to achieve attractive contract pricing, ourprofitability and our competitive position, by resulting in unexpectedincreased costs to our customers.

***Days Sales Outstanding***

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 31, 2006, we reportedDSO of 75 days, an increase from 72 days we reported for the three months endedSeptember 30, 2006.

***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 unbilled receivables is contingent on thoseevents, changes in the relative amount of unbilled receivables have an impacton 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 subject to governmentfunding.  We provide a reserve againstour receivables for estimated losses that may result from rate negotiations,audit adjustments and/or government funding availability.  To the extent that actual adjustments due torate negotiations, audit adjustments or government funding availability differfrom our estimates, our revenue may be impacted.  Due to the fact that substantially all of ourreceivables come from contracts funded by the federal government, thelikelihood of a material loss on an uncollectible account from this activity islow.

**CriticalAccounting Policies**

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements, which have beenprepared in accordance with GAAP.  Thepreparation of these consolidated financial statements requires management tomake estimates and assumptions that affect reported amounts, and actual resultsmay differ from the estimates.  Oursignificant accounting policies are described in Note 1 to our unauditedconsolidated financial statements included in this filing.  We consider the following accounting policiesto be critical to the understanding of our financial condition and results ofoperations because these policies require the most difficult, subjective orcomplex judgments on the part of our management in their application, often asa result of the need to make estimates about the effect of matters that are inherentlyuncertain, and are the most important to our financial condition and operatingresults.

***Revenue Recognition***

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

Under cost-plus-fee contracts, revenues are recognized as costs areincurred and include an estimate of applicable fees earned.  We consider fixed fees under cost-plus-feecontracts to be earned in proportion to the allowable costs actually incurredin performance of the contract for level of effort contracts.  For completion type cost-plus-fee contracts,fixed fees are earned in proportion to the percentage of work completed.  For time-and-materials contracts, revenuesare computed by

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multiplying the number of direct labor-hoursexpended in performance of the contract by the contractual billing rates andadding other billable direct and indirect costs.  For fixed-price contracts, revenues arerecognized as services are performed, using the percentage-of-completionmethod, applying the cost-to-cost or units of delivery method, in accordancewith Accounting Research Bulletin No. 45 and American Institute of CertifiedPublic Accountants (AICPA) Statement of Position 81-1 “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” (SOP81-1).

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

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.  Forcost-plus-incentive fee type contracts, the method of calculating incentive feeis specified in the contract and it is typically based on measuring actualcosts to perform the contract against a target cost to perform thecontract.  We prepare periodic estimatesto complete 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 be provided in full at inception of thecontract or ratably throughout the contract as the services are provided.  From time to time, we may proceed with workbased on customer direction prior to the completion and signing of formalcontract documents.  Such situationsrequire completion of a formal internal review process and management approvalprior to commencement of work. Additionally, revenue associated with such work is recognized withoutprofit and only when it can be reliably estimated and realization isprobable.  We base our estimates onnotices to proceed from our customers, previous experience with customers,communications with customers regarding funding status, and our knowledge ofavailable funding for the contract or program. Pre-contract costs related to unsuccessful contract bids are expensed inthe period in which we are notified that the contract will not be issued.

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 unapproved change orders in the processof negotiation, are recorded at the lesser of their estimated net realizablevalue or actual costs incurred, and only when the realization is probable andcan be reliably estimated.  Claimsagainst us are recognized where a loss is considered probable and can bereasonably estimated in amount.

***Contract Cost Accounting***

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 thosecosts that are identified with specific contracts.  These costs include labor, subcontractor andconsultant services, third party materials we purchase under a contract andother non-labor costs incurred in support of a contract.  Indirect costs are those costs not identifiedwith specific contracts.  Rather,indirect costs are allocated to contracts in accordance with federal governmentrules and regulations.  These coststypically include certain of our selling, general and administrative expenses,fringe benefit expenses and depreciation 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 identifythese costs to ensure we comply with these requirements.  Our unallowable costs include a portion ofour executive compensation, certain employee morale activities, certain typesof legal and consulting costs and the amortization of identified intangibleassets, among others.  A key element toour historical success has been our ability to manage indirect cost growth andunallowable costs in connection with integration of acquired businesses.

***Goodwill and Intangible Assets***

Goodwill represents the excess of cost over the fair value of nettangible and identifiable intangible assets of acquired companies.  In accordance with Statement of FinancialAccounting Standards, or SFAS, No. 142, *Goodwill and OtherIntangible Assets*, or SFAS No. 142, we do not amortize goodwill.  Rather, we test goodwill for impairment atleast on an annual basis.  Testing for impairmentis a two-step process as prescribed by SFAS No. 142. The first step is a testfor potential impairment, while the second step measures the amount ofimpairment, if any.  Under the guidelinesof SFAS No. 142, we are required to perform an impairment test at least on anannual basis at any time during the fiscal year, provided that

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the test is performed at the same time everyyear.  An impairment loss would berecognized when the assets’ fair value is below their carrying value.  Based onthe testing performed as of December 31, 2006, the Company determined that noimpairments existed as of December 31, 2006. Based on the testingperformed as of December 31, 2005 theCompany believed that no impairments existed as of December 31, 2005;however, in the quarter ended March 31, 2006, we recorded an aggregate chargeof $3.6 million relating to the impairment of the CCI and FSC trade names.  The impairment arose as a result of ourcompletion of substantially all of the activities in connection with novatingthe contracts previously legally held by CCI and FSC.  As such, we no longer ascribe any value to theCCI and FSC trade names and that portion of the identified intangibles waswritten-off as impairment of intangible assets in the year ended March 31, 2006.Customer relationships, noncompete agreements and backlog and contracts areamortized on a straight-line basis over periods ranging from one to sevenyears.

**Results ofOperations**

Our historical financialstatements reflect the operating results of our acquisitions from the date ofacquisition.  The following tables setforth the results of operations expressed in dollars (in thousands) and as apercentage of revenues, for the periods below:
| ** **                                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Consolidated Statement of Income Data** | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)**                                    | ** ** |
| Revenues                                                      |       | $                                                   | 68,936     |                                               | $          | 102,023 |   | $ | 200,622 |   | $ | 292,769 |   |
| Operating costs  and expenses:                                |       |                                                |       |                                               |       |   |   |   |   |
| Cost of revenues                                              |       | 59,580                                              |       | 88,838                                             |       | 174,162 |   | 254,125 |   |
| Selling, general and administrative                           |       | 3,018                                               |       | 4,388                                              |       | 9,246 |   | 13,600 |   |
| Amortization of deferred compensation                         |       | 232                                                 |       | 4,361                                              |       | 572 |   | 4,964 |   |
| Depreciation and amortization                                 |       | 724                                                 |       | 1,353                                              |       | 1,839 |   | 4,047 |   |
| Total operating costs and expenses                            |       | 63,554                                              |       | 98,940                                             |       | 185,819 |   | 276,736 |   |
| Operating income                                              |       | 5,382                                               |       | 3,083                                              |       | 14,803 |   | 16,033 |   |
| Other income  (expense):                                      |       |                                                |       |                                               |       |   |   |   |   |
| Other income (expense)                                        |       | 29                                                  |       | 95                                                 |       | 29 |   | (450 | ) |
| Interest expense - net                                        |       | (467                                                | )          | (1,040                                             | )          | (1,166 | ) | (5,219 | ) |
| Total other expenses                                          |       | (438                                                | )          | (945                                               | )          | (1,137 | ) | (5,669 | ) |
| Income before taxes                                           |       | 4,944                                               |       | 2,138                                              |       | 13,666 |   | 10,364 |   |
| Provision for  income taxes                                   |       | (1,987                                              | )          | (878                                               | )          | (5,435 | ) | (4,198 | ) |
| Net income                                                    |       | $                                                   | 2,957      |                                               | $          | 1,260 |   | $ | 8,231 |   | $ | 6,166 |   |

 
| ** **                                          | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| **As a Percentage of Revenues** | ** ** | **2005**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)**                                    | ** ** |
| Revenues                                            |       | 100.0                                               | %          | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:                      |       |                                                |       |                                               |       |   |   |   |   |
| Cost of revenues                                    |       | 86.4                                                |       | 87.1                                               |       | 86.8 |   | 86.8 |   |
| Selling, general and administrative                 |       | 4.4                                                 |       | 4.3                                                |       | 4.6 |   | 4.6 |   |
| Amortization of deferred compensation               |       | 0.3                                                 |       | 4.3                                                |       | 0.3 |   | 1.7 |   |
| Depreciation and amortization                       |       | 1.1                                                 |       | 1.3                                                |       | 0.9 |   | 1.4 |   |
| Total operating costs and expenses                  |       | 92.2                                                |       | 97.0                                               |       | 92.6 |   | 94.5 |   |
| Operating income                                    |       | 7.8                                                 |       | 3.0                                                |       | 7.4 |   | 5.5 |   |
| Other income  (expense):                            |       |                                                |       |                                               |       |   |   |   |   |
| Other income (expense)                              |       | 0.0                                                 |       | 0.1                                                |       | 0.0 |   | (0.2 | ) |
| Interest expense - net                              |       | (0.7                                                | )          | (1.0                                               | )          | (0.6 | ) | (1.8 | ) |
| Total other expenses                                |       | (0.6                                                | )          | (0.9                                               | )          | (0.6 | ) | (1.9 | ) |
| Income before taxes                                 |       | 7.2                                                 |       | 2.1                                                |       | 6.8 |   | 3.5 |   |
| Provision for  income taxes                         |       | (2.9                                                | )          | (0.9                                               | )          | (2.7 | ) | (1.4 | ) |
| Net income                                          |       | 4.3                                                 | %          | 1.2                                                | %          | 4.1 | % | 2.1 | % |

 

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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 lesser degree, we earn revenues throughreimbursable travel and other reimbursable direct and indirect costs to supportthe contractual effort and third-party hardware and software that we purchaseand integrate for customers as part of the solutions we provide.

Our most significant expense is cost of revenues, which includes thecosts of direct labor, subcontractors, materials, equipment, travel and anallocation of indirect costs (other than selling, general and administrativeexpenses and depreciation).  Indirectcosts consist primarily of fringe benefits, human resources, recruiting,training, other overhead and certain other non-direct costs that are necessaryto support direct labor.  The number andtypes of personnel, their salaries and other costs, can have a significantimpact on our cost of revenues.

Our selling, general and administrative expenses include costs notdirectly associated with performing work for our customers.  These costs include wages plus associatedfringe benefits, stock-based compensation charges, rent, travel andinsurance.  Among the functions coveredby these expenses are sales, business development, contracts, purchasing,legal, finance, accounting, human resources, information technology and generalmanagement.  Most of these costs areallowable costs under the cost accounting standards for contracting with thefederal government and are recoverable under cost-plus-fee contracts.

Our depreciation and amortization expenses include the amortization ofpurchased intangibles in connection with acquisitions and the amortization ofleasehold improvements and the depreciation of property and equipment purchasedin the ordinary course of our business.

Certain revenues and payments we receive are based on provisionalbillings and payments that are subject to adjustment after audit.  Federal government agencies have the right tochallenge our cost estimates and allocation methodologies with respect togovernment contracts.  In addition,contracts with these agencies are subject to audit and possible adjustment togive effect to unallowable costs under cost-plus-fee contracts or to otherregulatory requirements affecting both cost-plus-fee and fixed-price contracts.

***Comparison of Results of Operations for theThree Months Ended December 31,2005and***2006

***Revenues.***  Our consolidated revenues increased $33.1 million, or 48.0%from $68.9 million for the threemonths ended December 31, 2005,to $102.0 million for the threemonths ended December 31, 2006. The increase was primarily due to $23.4 million of increased revenuesattributable to the acquisition of Morgan, and $9.7 million of increasedrevenues related to continued growth providing enterprise integration andoperational support services for the Department of Defense, expanding demandfor passport services for the Department of State’s Bureau of Consular Affairsand ongoing logistics support for the Army’s equipment reset effort in theUnited States and abroad.

***Cost of Revenues.***  Our cost of revenues increased $29.2 million, or 49.1%, from $59.6 million for the three months ended December 31, 2005, to $88.8 million for the three monthsended December 31, 2006.  This increase was primarily the result ofadditional costs attributable to revenues generated by Morgan operations, inaddition to the cost of revenues associated with the increased servicesprovided under the contracts referred to above.

***Selling, General and Administrative.***  Our selling, general and administrativeexpense increased $1.4million, or 45.4%, from $3.0 million for the three monthsended December 31, 2005, to $4.4 million for the three monthsended December 31, 2006. This increase was primarily due to selling, general and administrativeexpenses attributable to Morgan operations, an increase in business developmentcosts associated with several significant procurements and additional costsassociated with being a public company.

***Amortization of Deferred Compensation***. Our amortization of deferredcompensation expense increased $4.2 million, from $0.2 million forthe three months ended December 31, 2005, to $4.4 million for thethree months ended December 31, 2006. This increase was primarily due tothe acceleration of the vesting periods of certain restricted stock grantsrelated to our initial public offering.

***Depreciation and Amortization.***  Our depreciation and amortization expense increased $0.7million, or 86.9%, from $0.7 million for the three monthsended December 31, 2005, to $1.4 million for the three monthsended December 31, 2006. The increase in depreciation and amortization was primarily due to theamortization of intangible assets associated with the Morgan acquisition aswell as additional depreciation expense associated with increased capitalexpenditures during fiscal 2006.

***Other Expense.***  Ourother expense was less than $0.1 million for the three months ended December31, 2006, due to the cancellation of ourinterest rate swap agreements.

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***InterestExpense, Net****.*  Our net interest expense increased $0.5million from $0.5 million for the three months ended December 31, 2005, to $1.0million for the three months ended December 31, 2006.  The increase in net interest expense was dueto the term loan borrowings incurred to finance the acquisition of Morgan.

***NetIncome.***  Our netincome decreased $1.7 million from $3.0 million for the three months endedDecember 31, 2005, to $1.3 million for the three months ended December 31, 2006.  The primary reason for the decline in netincome was the increased amortization of deferred compensation associated withthe acceleration of the vesting periods of certain restricted stock grantsrelated to our initial public offering.

***Comparison of Results of Operations for the NineMonths EndedDecember 31,***2005 and 2006

***Revenues.***  Our consolidated revenues increased $92.2million, or 45.9%, from $200.6 million for the nine months ended December 31, 2005,to $292.8 million for the nine months ended December 31, 2006.  The increase was primarily due to $64.4million of increased revenues attributable to the acquisition of Morgan, and$27.8 million of increased revenues related to continued growth providingenterprise integration and operational support services for the Department ofDefense, expanding demand for passport services for the Department of State’sBureau of Consular Affairs and ongoing logistics support for the Army’sequipment reset effort in the United States and abroad.

***Costof Revenues.***  Ourcost of revenues increased $79.9 million, or 45.9%, from $174.2 million for thenine months ended December 31, 2005, to $254.1 million for the nine monthsended December 31, 2006.  This increasewas primarily the result of additional costs attributable to revenues generatedby Morgan operations, in addition to the cost of revenues associated with theincreased services provided under the contracts referred to above

***Selling,General and Administrative.***  Our selling, general and administrativeexpense increased $4.4 million, or 47.1%, from $9.2 million for the nine monthsended December 31, 2005, to $13.6 million for the nine months ended December31, 2006. This increase was primarily due to selling, general andadministrative expenses attributable to Morgan operations, an increase inbusiness development costs associated with several significant procurements andadditional costs associated with being a public company.

***Amortizationof Deferred Compensation***. Our amortization of deferred compensation expense increased$4.4 million, from $0.6 million for the nine months endedDecember 31, 2005, to $5.0 million for the nine months endedDecember 31, 2006. This increase was primarily due to the acceleration ofthe vesting periods of certain restricted stock grants related to our initialpublic offering.

***Depreciationand Amortization***. Our depreciation and amortization expense increased $2.2 million, or120.0%, from $1.8 million for the nine months ended December 31, 2005, to $4.0million for the nine months ended December 31, 2006.  The increase in depreciation and amortizationwas primarily due to the amortization of intangible assets associated with theMorgan acquisition as well as additional depreciation expense associated withincreased capital expenditures during fiscal 2006.

***OtherExpense***.  Our otherexpense was $0.5 million for the nine months ended December 31, 2006, resultingfrom a net unrealized loss in the fair value of our interest rate swapagreements.

***InterestExpense, Net***.  Ournet interest expense increased $4.0 million from $1.2 million for the ninemonths ended December 31, 2005, to $5.2 million for the nine months endedDecember 31, 2006.  The increase in netinterest expense was due to the term loan borrowings incurred to finance theacquisition of Morgan.

***NetIncome***.  Our netincome decreased $2.0 million from $8.2 million for the nine months endedDecember 31, 2005, to $6.2 million for nine months ended December 31,2006.  The primary reason for the declinein net income was the increased amortization of deferred compensationassociated with the acceleration of the vesting periods of certain restrictedstock grants related to our initial public offering.

**Seasonality**

Our revenues andoperating income have typically been positively affected in the quarter endingMarch 31 due to an increase in the volume of revenues generated under ourcontract with the Department of State for the provision of passport services,as the demand for processing and delivery of U.S. passports typically increasesduring this quarter.

**Inflation**

We do not believethat inflation has had a material effect on our business for the three yearsended December 31, 2006.

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**Liquidity andCapital Resources**

Our primary liquidity needs are to finance the costs of operationspending the billing and collection of accounts receivable, to service our debt,to make capital expenditures and to make selective strategic acquisitions.  Based upon our current operations, we expectthat our cash flow from operations, together with amounts we are able to borrowunder our senior credit facility, will be adequate to meet our anticipatedneeds for the foreseeable future.  Inaddition, we expect that our cash flow from operations will be adequate to meetall contractual obligations under the credit facility and our operatingleases.  Although we have no specificplans to do so, to the extent we decide to pursue one or more significantstrategic acquisitions, we will likely need to incur additional debt or selladditional equity.

***Cash Flows***

Accounts receivable represents our largest working capitalrequirement.  We bill most of ourcustomers monthly after services are rendered. Our operating cash flow is primarily affected by the overallprofitability of our contracts, our ability to invoice and collect from ourcustomers in a timely manner, and our ability to manage our vendor payments.
|                                                      | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **December 31,**           | ** ** |
| ** **                                           | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in millions)**          | ** ** |
| Net cash  provided by operating activities           |       | $                               | 7.7        |   | $ | 15.6 |   |
| Net cash used in  investing activities               |       | $                               | (4.5       | ) | $ | (2.5 | ) |
| Net cash (used in)  provided by financing activities |       | $                               | (3.2       | ) | $ | 0.4 |   |

 

Net cash provided by operating activities of $15.6million for the nine monthsended December31, 2006, primarily reflected our net income plus depreciation andamortization expenses for that period, a $8.0 million increase in accountsreceivable, a $2.5 million decrease in accounts payable, offset by a $8.3million increase in accrued expenses. For the nine months ended December 31, 2005, net cash providedby operating activities of $7.7million consisted primarily of net income and a $6.8 million increase inaccrued expenses, offset by a $3.3 million decrease in accounts payable and a$6.9 million increase in accounts receivable.

Net cash used in investing activities of $2.5 million forthe nine months ended December 31, 2006, consisted primarilyof the purchase of equipment in the ordinary course of business.  Net cash used in investing activities of $4.5 million in the nine months ended December 31, 2005,consisted of a $0.6 million earnout payment in connection with our acquisitionof CCI and $3.9 million to purchase equipment in the ordinary course ofbusiness.

Net cash provided by financing activities of $0.4 millionfor the nine months ended December 31, 2006, consisted primarilyof $10.4 million of net repayments of our line of credit and $62.0 million ofrepayments on our long-term debt, offset by $71.8 million in net proceedsreceived from the sale of stock in our initial public offering.  Net cash used in financing activities of $3.2 million for the nine months ended December 31, 2005,consisted primarily of $1.7 million of net borrowings under our line of credit,offset by a $4.4 million payment for the repurchase of treasury stock.

***Credit Facility and Borrowing Capacity***

On February 16, 2006, in order to finance our acquisition of Morgan andto refinance our then-outstanding indebtedness, we entered into a new seniorcredit facility that included a $50.0 million revolving credit facility.  As of December 31, 2006, we had$38.0 million of termloan indebtedness outstanding under our senior credit facility.  As of December31, 2006, our borrowing availability under the revolving portion of oursenior credit facility was $49.9million (including outstanding letters of credit).  The obligations under our senior creditfacility are unconditionally guaranteed by each of our existing andsubsequently acquired or organized subsidiaries and secured on a first-prioritybasis by security interests (subject to permitted liens) in substantially allassets owned by us and each of our subsidiaries, including the shares ofcapital stock of our subsidiaries, subject to certain exceptions.

Under the terms of the credit facility, we are entitled to request anincrease in the size of the credit facility by an amount not greater than $75million in the aggregate.  If any lenderelects not to increase its commitment under the credit facility, we maydesignate another bank or other financial institution to become a party to thecredit facility.

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The 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 credit agreement provides that we are required to meetthe following financial covenants:

· a fixed charge coverage ratio as of the endof any fiscal quarter of not less than 1.50 to 1.00, based upon the ratio of(i) consolidated EBITDA (as defined in the credit agreement) less the actualamount paid by us and our subsidiaries in cash on account of capitalexpenditures and taxes over the period consisting of the four consecutivefiscal quarters ending on or immediately prior to the determination date to(ii) consolidated cash interest expense for such period, scheduled principalpayments required to be made on consolidated total debt during such period andcertain restricted payments paid during such period;

· a maximum leverage ratio based upon theratio of (i) consolidated total debt to (ii) consolidated EBITDA (as defined inthe credit agreement), which required us to maintain a ratio of 4.25 to 1.00for each fiscal quarter ending on or prior to December 31, 2006, and willrequire us to maintain a ratio of 3.50 to 1.00 for each fiscal quarter endingafter December 31, 2006 and on or prior to December 31, 2007, and a ratio of3.00 to 1.00 for each fiscal quarter ending after December 31, 2007; and

· a minimum consolidated net worth equal tothe sum of (i) 85% of our consolidated net worth as at December 31, 2005, (ii)50% of consolidated net income on a cumulative basis for all preceding fiscalquarters, commencing with the fiscal quarter ended March 31, 2006, and (iii)100% of the amount by which our total stockholders’ equity is increased asresult of any public or private offering of our common stock after the closingdate of our credit agreement.

As of December 31, 2006, we were in compliance with allcovenants under our senior credit facility.

**CapitalExpenditures**

We have relatively low capital expenditure requirements.  Our capital expenditures were $3.9 millionand $2.0 million for the nine months ended December 31, 2005 and 2006, respectively.  Substantially all of these expendituresconsisted of leasehold improvements and purchases of office equipment due toinvestments made in connection with our relocation to a new headquartersfacility in fiscal 2006.

**Off-Balance SheetArrangements**

We do not have any off-balance sheet arrangements.

**RecentAccounting Pronouncements**

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes*, *an interpretation of FASB Statement No. 109*, Accounting forIncome Taxes.  FIN 48 clarifies theaccounting for income taxes recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginningafter December 15, 2006. We are in the process of determining what effect, ifany, the adoption of this proposal will have on our financial position, resultsof operations or cash flows.

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 157 (SFAS 157), *Fair ValueMeasurements*.  SFAS 157provides guidance for measuring the fair value of assets and liabilities.  It requires additional disclosures related tothe extent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007. We are in theprocess of determining what effect, if any, the adoption of SFAS 157 will haveon our financial position, results of operations, or cash flows.

Several other new accounting standards becameeffective during the periods presented or will be effective subsequent toDecember 31, 2006. None of these new standards had or is expected to have asignificant impact on our financial position, results of operation or cashflows.

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCUSSION ABOUT MARKET RISK**

Our principalexposure to market risk relates to changes in interest rates.  From time to time, we enter into interestrate swap agreements to effectively limit exposure to interest rate movementswithin the parameters of our interest rate hedging policy. As of December 31,2006, all of the outstanding debt under our senior credit facility was subjectto floating interest rate risk. In October 2006, we entered into an interestrate swap agreement covering $19.0 million of our term indebtedness under whichthe swap and term debt maturities match. Even after giving effect to thisagreement, we are exposed to risks due to fluctuations in the market value ofthis agreement and changes in interest rates with respect to the portion of oursenior credit facility that is not covered by this agreement. A hypotheticalchange in the interest rate of 100 basis points would have changed quarterlycash interest expense by $0.1 million.

**ITEM4.  CONTROLS AND PROCEDURES**

As of December31, 2006, under the supervision and with the participation of ourmanagement, including our chief executive officer and our chief financialofficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act. Based on this evaluation, our chief executive officer and ourchief financial officer have concluded that our disclosure controls andprocedures are effective.

There were no changesin the Company’s internal control over financial reporting during the threemonths endedDecember31, 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.  

**PART 2: OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

From time to time, we areinvolved in various legal matters and proceedings concerning matters arising inthe ordinary course of business. We currently believe that any ultimateliability arising out of these matters and proceedings will not have a materialadverse effect on our financial position, results of operations or cash flows.

**ITEM 1A.RISK FACTORS**

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

**Risks Related to Our Business**

***Wedepend on contracts with federal government agencies for substantially all ofour revenues.  If our relationships withthese agencies were harmed, our revenues and operating results could decline.***

Revenues fromfederal government contracts, either as a prime contractor or as asubcontractor, accounted for 99.9% of our revenues for the nine months endedDecember 31, 2006. We believe that federal government contracts will continueto be the source of substantially all of our revenues for the foreseeablefuture.  For this reason, any issue thatcompromises our relationship with agencies of the federal government ingeneral, or with the Department of Defense or Department of State inparticular, would cause serious harm to our business.  Among the key factors in maintaining ourrelationships with federal government agency customers are our performance onindividual contracts and task orders, the strength of our professional reputationand the relationships of our key executives with customer personnel.  To the extent that our performance does notmeet customer expectations, or our reputation or relationships with one or morekey customers are impaired, our revenues and operating results could decline asa result.

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***Changesin the spending policies or budget priorities of the federal government, andthe Department of Defense in particular, could cause us to lose revenues.***

Changes in federal government fiscal or spending policies, or in theDepartment of Defense budget allocation, could directly affect our financialperformance.  Among the factors thatcould harm our business are:

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

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

·                  reductions infederal government programs or requirements;

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

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

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

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

·                  general economicand political conditions, including any event that reduces federal tax receiptsor results in a change in spending priorities of the federal government.

These or other factors could cause federal government agencies anddepartments to reduce their purchases under contracts, to exercise their rightto terminate contracts or not to exercise options to renew contracts, any ofwhich could cause us to lose revenues.

In particular, revenues earned from contracts with the Department ofDefense, including from subcontracts having the Department of Defense as theultimate purchaser, represented approximately 67% of our revenuesfor the nine months ended December31, 2006.  In the past, the U.S.defense budget has declined from time to time, resulting in a slowing of newprogram starts, program delays and program cancellations.  These reductions may cause defense-relatedgovernment contractors to experience declining revenues, increased pressure onoperating margins and, in some cases, net losses.  Current federal government spending levels ondefense-related programs are in part related to the U.S. military operations inAfghanistan and Iraq and may not be sustainable, including as a result ofchanges in government leadership, policies or priorities.  Future levels of expenditures andauthorizations for defense-related programs may decrease or shift to programsin areas where we do not provide services. Any such decline or shift in defense-related expenditures could harm ourrevenues and operating results.

In addition, any limitations imposed on spending by other federalgovernment agencies that result from efforts to reduce the federal deficit maylimit both the continued funding of our existing contracts and our ability toobtain additional contracts.  Our backlogconsists exclusively of contracts with federal departments and agencies, andthe continuation of these contracts, or award of additional contracts fromthese agencies, could be materially harmed by federal government spendingreductions or budget cutbacks at these departments or agencies.

***Ourrevenues may decline materially if we are unable to obtain a new award of ourpassport processing services contract with the Department of State in September2007 or if we are unable to renew any of our other significant contracts.***

We earn a significant portion of our revenues from the provision ofpassport processing and support services to the Department of State.  Revenues from these services wereapproximately 14% of our revenues for the nine months ended December 31, 2006.  The fixed initial term of our contract withthe Department of State for the provision of passport processing and supportservices has expired, and we are currently performing these services pursuantto the Department of State’s exercise of a one-year renewal option that expiresin September 2007.  The Department of Statemay not award us a new contract upon the expiration of the current contract inSeptember 2007.  We currently expect theDepartment of State to subject this contract to recompetition before awarding anew contract.  Our revenues may declinematerially if we are unable to obtain a renewal of this contract or any of ourother significant contracts.  Thiscontract is related but separate from the recently awarded ten year contractworth $164 million with the State Department to conduct passport book personalizationservices in up to two contractor-supplied and operated turnkey facilities.

***Wemay not realize the full value of our backlog, which may result in lower thanexpected revenues.***

Our total backlog represents the amount of revenues we expect to realizeover the remaining base contract performance period and from the exercise ofall option periods that we reasonably believe will be exercised, in each casefrom signed contracts in existence as of the measurement date.  We do not include contract ceilings forgovernment-wide

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acquisition contracts, or GWACs, or agency-specific indefinitedelivery/indefinite quantity, or ID/IQ, contracts in our backlogcalculation.  Congress typicallyappropriates funds for our federal government customers on an annual basis,even though their contracts with us may call for performance that is expectedto take a number of years.  As a result,contracts typically are only partially funded at any point during their term,and all or some of the work to be performed under the contracts may remainunfunded unless and until Congress makes subsequent appropriations and theprocuring agency allocates funding to the contract.

We may neverrealize some of the revenues that are included in our total backlog, and thereis a higher degree of risk in this regard with respect to unfundedbacklog.  As of December 31, 2006,our total backlog was approximately $1,060.6 million, of which onlyapproximately $219.0 million was funded. In addition, there can be no assurance that our backlog will result inactual revenues in any particular period. This is because the actual receipt, timing and amount of revenues undercontracts included in backlog are subject to various contingencies, many ofwhich are beyond our control.  Forexample, the actual receipt of revenues from contracts included in backlog maynever occur or may be delayed because a program schedule could change or theprogram could be cancelled, or a contract could be reduced, modified orterminated early, including as a result of a lack of appropriated funds.  In addition, the fact that our backlog maytranslate into revenue does not guarantee that the contracts will beprofitable.

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

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

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

***Mostof our revenues are earned from contracts with limited initial terms.  We may expend significant resources inconnection with these contracts that we may not recover if our customers do notexercise their contract extension options.***

Our contractstypically have a one or two year initial term, with multiple options that areexercisable by our government customers to extend the contract for one or moreadditional years.  Our customers may notexercise any of their extension options. Moreover, because we believe that our contracts with limited initialterms represent the early portion of longer customer programs, we expendsignificant financial and personnel resources and expand our operations to beable to fulfill these programs beyond the initial contract term.  If a significant number of our contracts arenot extended beyond their initial terms, we may be unable to recover the costswe incurred, we may not recognize anticipated revenues and our operatingresults may be harmed.

***Theloss of one or more members of our senior management team could impair ourrelationships with government customers and our ability to compete and coulddisrupt the management of our business.***

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

***If wefail to attract and retain skilled employees, we might not be able to performunder our contracts and our ability to maintain and grow our business could belimited.***

The growth ofour business and revenues depends in large part upon our ability to attract andretain sufficient numbers of highly qualified individuals who have advancedinformation technology skills and appropriate security clearances, and who workwell with our defense and federal civilian government customers.  Competition for such personnel

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is intense, and recruiting, training and retention costs placesignificant demands on our resources.  Ifwe are unable to recruit and retain a sufficient number of qualified employees,our ability to maintain and grow our business could be limited.  Furthermore, we could be required to engagelarger numbers of contracted personnel, which could reduce our profitmargins.  In addition, many of ourprofessional personnel may have specific knowledge of and experience with ourfederal government customers’ operations, and we obtain some of our contractsbased on that knowledge and experience. The loss of services of key personnel could impair our ability toperform required services under some of our contracts and to retain suchcontracts, as well as our ability to win new business.

***Weface intense competition from many competitors that have greater resources thanwe do, which could result in price reductions, reduced profitability and lossof market share.***

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

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

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

·                  harm ourrelationships; and

·                  seek to hire ouremployees.

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

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

***Wederive substantially all of our revenues from contracts awarded throughcompetitive procurement processes, which can impose substantial costs upon usand negatively impact our operating results.***

We derivesubstantially all of our revenues from federal government contracts that are awardedthrough competitive procurement processes. Competitive procurement imposes substantial costs and presents a numberof risks to us, including:

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

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

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

·                  the opportunitycost of not bidding on and winning other contracts we might have otherwisepursued.

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

***Wemay lose money on some contracts if we miscalculate the resources we need toperform under the contract.***

We provideservices to the federal government under contracts with three basic types ofprice structure: cost-plus-fee, time-and-materials and fixed-price.  For the nine months ended December 31,2005, we derived approximately 64%, 18% and 18% of revenues from cost-plus-fee,time-and-materials and fixed-price contracts, respectively.  For the ninemonths

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endedDecember 31, 2006, we derived approximately 53%, 32% and 15% ofrevenues from cost-plus-fee, time-and-materials and fixed-price contracts,respectively.  Each of these types ofcontracts, to varying degrees, involves the risk that we underestimate our costof fulfilling the contract, and we occasionally have suffered in the past, andmay suffer in the future, reduced profits or financial losses on our contracts,thereby causing our operating results to decline as a result.  This risk is greater for fixed-pricecontracts, where we bear the full impact of cost overruns, and an increase offixed-price contracts in our contract mix would increase our exposure to thisrisk.

***Ourmargins and operating results may suffer if we experience unfavorable changesin the proportion of cost-plus-fee or fixed-price contracts in our totalcontract mix.***

Althoughfixed-price contracts entail a greater risk of a reduced profit or financialloss on a contract compared to other types of contracts we enter into,fixed-price contracts typically provide higher profit opportunities because wereceive the benefit of cost savings.  Incontrast, cost-plus-fee contracts are subject to statutory limits on profitmargins, and generally are the least profitable of our contract types.  Our federal government customers typicallydetermine what type of contract we enter into. Cost-plus-fee and fixed-price contracts accounted for approximately 64%and 18%, respectively, ofour revenues for the nine months ended December31, 2005, and approximately 53%and 15%, respectively, of ourrevenues for the nine months ended December31, 2006.  To the extent that weenter into more cost-plus-fee or less fixed-price contracts in proportion toour total contract mix in the future, our margins and operating results maysuffer.

***Ourcash flow and profitability could be reduced if expenditures are incurred priorto the final receipt of a contract.***

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

***Failureto maintain strong relationships with other contractors could result in adecline in our revenues.***

We estimatethat revenues derived from contracts in which we acted as a subcontractor toother companies represented approximately 20% of our revenues forthe nine months ended December31, 2006.  As a subcontractor, weoften lack control over fulfillment of a contract, and poor performance on thecontract could tarnish our reputation, even when we perform as required.  As a prime contractor, we often rely on othercompanies to perform some of the work under a contract.  We expect to continue to depend onrelationships with other contractors for portions of our delivery of servicesand revenues in the foreseeable future. Our business, prospects, financial condition and operating results couldbe harmed if other contractors eliminate or reduce their subcontractrelationships with us, whether because they choose to establish relationshipswith our competitors or because they choose to directly offer services thatcompete with our business, or if the government terminates or reduces otherprime contractors’ programs or does not award them new contracts.

***Ifour subcontractors fail to perform their contractual obligations, ourperformance and reputation as a prime contractor and our ability to obtainfuture business could suffer.***

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

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

The federalgovernment audits and reviews our performance on contracts, pricing practices,cost structure and compliance with applicable laws, regulations andstandards.  Like most large governmentcontractors, our contracts are

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audited and reviewed on a continual basis by federal agencies,including the Defense Contract Audit Agency, or the DCAA.  An unfavorable audit of us, including anycompanies we have acquired or may acquire, or any of our subcontractors couldhave a substantial adverse effect on our operating results.  For example, any costs that were previouslyreimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded andfuture operating margins may be reduced.

Our incurredcost submissions have been audited by the DCAA through December 31, 2004, forMorgan, through March 31, 2004, for Stanley, CCI, and GCI, and through December31, 2002, for FSC.  Costs for whichMorgan was reimbursed after December 31, 2004, costs for which Stanley, CCI andGCI were reimbursed after March 31, 2004, and costs for which FSC wasreimbursed after December 31, 2002, may be subsequently disallowed upon thecompletion of future audits.  Inaddition, non-audit reviews by the U.S. government may still be conducted onall of our government contracts.

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

***If weexperience systems or services failures, our reputation could be harmed and ourcustomers could assert claims against us for damages or refunds.***

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

·                  lose revenuesdue to adverse customer reactions;

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

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

·                  suffer claimsfor substantial damages.

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

***Securitybreaches in sensitive government systems could result in the loss of customersand negative publicity.***

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

***Ourfailure to obtain and maintain necessary security clearances may limit ourability to perform classified work for government customers, which could causeus to lose business.***

Somegovernment contracts require us to maintain facility security clearances andrequire some of our employees to maintain individual security clearances.  Obtaining and maintaining security clearancesfor employees involves a lengthy process, and it is difficult to identify,recruit and retain employees who already hold security clearances.  If our employees lose or are unable to timelyobtain security clearances or we lose a facility clearance, the governmentcustomer may terminate the contract or decide not to renew it upon itsexpiration.  As a result, to the extentwe cannot obtain or maintain the required security clearances for a particularcontract, or we fail to obtain them on a timely basis, we may not derive therevenues anticipated from the contract, which could harm our operatingresults.  To the extent we are not ableto obtain facility security clearances or engage employees with the requiredsecurity clearances for a particular contract, we will be unable to performthat contract and we may not be able to compete for or win new awards forsimilar work.

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***Ourquarterly operating results may fluctuate significantly as a result of factorsoutside of our control, which could cause the market price of our common stockto decline.***

Our revenues and operating results will vary from quarter to quarterand, as a result, our operating results may fall below the expectations ofsecurities analysts and investors, which could cause the price of our commonstock to decline.  Factors that mayaffect our operating results include those listed in this “Risk Factors”section and others that are specific to our industry such as:

·                  fluctuations inrevenues earned on government contracts;

·                  seasonalfluctuations in our staff utilization rates;

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

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

·                  changes incontract requirements by our government agency customers;

·                  changes in theextent to which we use subcontractors; and

·                  changes inpresidential administrations and senior federal government officials thataffect the timing of technology procurement.

Reductions in revenues in a particular quarter could lead to lowerprofitability in that quarter because a relatively large amount of our expensesare fixed in the short-term.  We mayincur significant operating expenses during the start-up and early stages oflarge contracts and may not receive corresponding payments in the samequarter.  We may also incur additionalexpenses when contracts expire or are terminated or not renewed.  In addition, payments due to us fromgovernment agencies may be delayed due to billing cycles or as a result offailures of governmental budgets to gain Congressional and administrationapproval in a timely manner.

***Wemay be harmed by intellectual property infringement claims.***

Many of the services and solutions that we provide to our customersinvolve extensive use of software and other intellectual property.  As a result, we could become subject toclaims of third parties who assert that software and other forms ofintellectual property that we use in delivering services and solutions infringeupon intellectual property rights of those third parties, and we could incursubstantial costs to defend those claims. In addition, if any of these infringement claims are ultimatelysuccessful, in addition to paying damages, we could be required to take any ofthe following actions, each of which could entail significant expenses orresult in a significant reduction in revenues:

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

·                  obtain a licenseor additional licenses from third parties; or

·                  redesign ourservices and solutions that rely on the challenged software or technology.

***Wemay incur substantial costs and liabilities in connection with acquisitions.***

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

·                  issue stock thatwould dilute your stock ownership;

·                  incur debt thatwould restrict our cash flow;

·                  assumeliabilities;

·                  incur large andimmediate write-offs;

·                  incurunanticipated costs;

·                  incurunanticipated liabilities under purchase and sale agreements with targetcompanies;

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

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

·                  lose key employeesfrom the acquired operations.

In connection with any acquisition we make, there may be liabilitiesthat we fail to discover or that we inadequately assess.  In addition, acquired operations may notperform according to the forecasts that we used to determine the purchaseprice.  If the acquired entity fails toachieve these forecasts, or if we are not successful in offering our servicesto the customer base of the acquired entity or otherwise do not achieve the anticipatedbenefits of the acquisition, our financial condition and operating results maydecline as a result.  In addition, if weincur a substantial amount of indebtedness in order to finance one or moreacquisitions, our increased leverage may restrict our business and operations,reduce our cash flows or restrict our future access to sufficient funding tofinance desired growth.

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***Wemay not successfully integrate companies we may acquire in the future.***

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

***Apreference for minority-owned, small and small disadvantaged businesses couldimpact our ability to be a prime contractor on certain governmentalprocurements.***

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

***Ouremployees may engage in misconduct or other improper activities, which couldharm our business.***

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

***Ourbusiness commitments require our employees to travel to potentially dangerousplaces, which may result in injury to our employees.***

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

**Risks Related to Our Industry**

***Federalgovernment contracts contain provisions giving government customers a varietyof rights that are unfavorable to us, including the ability to terminate acontract at any time for convenience.***

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

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

·                  reduce ordersunder or otherwise modify contracts;

·                  for contractssubject to the Truth in Negotiations Act, reduce the contract price or costwhere it was increased because a contractor or subcontractor duringnegotiations furnished cost or pricing data that was not complete, accurate andcurrent;

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

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contained in suchdocuments and the granting of certain special discounts to certain customers;

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

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

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

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

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

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

·                  suspend or debarus from doing business with the federal government.

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

***Ourfailure to comply with complex procurement laws and regulations could cause usto lose business and subject us to a variety of penalties.***

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

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

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

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

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

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

·                  compliance withantitrust laws.

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

***Thefailure by Congress to timely approve budgets for the federal agencies wecontract with could delay or reduce spending and cause us to lose revenues.***

On an annualbasis, Congress must approve budgets that govern spending by each of thefederal agencies we contract with.  WhenCongress is unable to agree on budget priorities, and thus is unable to passthe annual budget on a timely basis, Congress typically enacts a continuingresolution that allows federal government agencies to operate at

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spending levels approved in the previous budget cycle.  Operation by government agencies on the basisof a continuing resolution may delay or cancel funding we expect to receivefrom customers on work we are already performing and is likely to result in newinitiatives being delayed, and in some cases being cancelled.

***Theadoption of new procurement laws or regulations could reduce the amount ofservices that are outsourced by the federal government and could cause us tolose future revenues.***

Newlegislation or procurement regulations could cause federal agencies to adoptrestrictive procurement practices regarding the use of outside serviceproviders.  For example, the AmericanFederation of Government Employees, the largest federal employee union,strongly endorses legislation that may restrict the procedure by which servicesare outsourced to government contractors. If such legislation were to be enacted, it would likely reduce theamount of information technology services that could be outsourced by thefederal government, which could materially reduce our future expected revenues.

***TheOffice of Management and Budget process for ensuring government agenciesproperly support capital planning initiatives, including information technologyinvestments, could reduce or delay federal information technology spending andcause us to lose revenue.***

The Office ofManagement and Budget, or OMB, supervises spending by federal agencies andenforces the Government Performance Results Act.  This Act requires, among other things, thatfederal agencies make an adequate business justification to support capital planninginitiatives, including all information technology investments.  The factors considered by the OMB include,among others, whether the proposed information technology investment isexpected to achieve an appropriate return on investment, whether relatedprocesses are contemporaneously reviewed, whether interoperability withexisting systems and the capacity for these systems to share data acrossgovernment agencies has been considered and whether existing commercialoff-the-shelf products are being utilized to the extent possible.  If our customers do not adequately justifyproposed information technology investments to the OMB, the OMB may refusefunding for their new or continuing information technology investments, and wemay lose revenue as a result.

**Risks Related to Our Common Stock**

***Our executiveofficers and directors as a group and our Employee Stock Ownership Plan, orESOP, own a significant percentage of our common stock, and as a result havesignificant influence over our affairs and policies.***

After givingeffect to our initial public offering, our executive officers and directorsbeneficially owned approximately 29% of our outstanding common stock.  For so long as our executive officers anddirectors continue to own a significant portion of our outstanding commonstock, they will have significant influence over matters submitted to ourstockholders for approval and exercise significant control over our businesspolicies and affairs, including the election of directors, amendments to ourcertificate of incorporation and determinations with respect to mergers andother business combinations, including those that may result in a change ofcontrol.  In addition, after givingeffect to our initial public offering, the ESOP beneficially owned approximately35% of our outstanding common stock. Substantially all of the participants in the ESOP are ouremployees.  If these participants acttogether, they will also be able to exert influence over matters submitted toour stockholders for approval, and if they act together with our executiveofficers and directors, they will be able to determine the outcome of matterssubmitted for stockholder approval.  Theinterests of our executive officers and directors and the ESOP participants mayconflict with your interests as a stockholder.

***Provisionsof our charter documents may inhibit potential acquisition bids that you andother stockholders may consider favorable, and the market price of our commonstock may be lower as a result.***

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

·                  limitations onwho may call special meetings of stockholders;

·                  the absence ofcumulative voting in the election of directors;

·                  the inability ofstockholders to act by written consent;

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

·                  the authority ofour board of directors to issue, without stockholder approval, up to 500,000shares of preferred stock with such terms as the board of directors maydetermine and to issue additional shares of our common stock.

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

***Asubstantial number of shares will be eligible for sale in the near future,which could cause our common stock price to decline.***

Prior to ourinitial public offering in October 2006, substantially all of our common stockwas held by our employees, including through our ESOP.  If our existing stockholders sell, or themarket perceives that our stockholders intend to sell, substantial amounts ofour common stock in the public market, the market price of our common stockcould decline significantly.  These salesalso might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and price that we deem appropriate.  In connection with our initial publicoffering, our executive officers, directors, the selling shareholders (otherthan the ESOP), and certain other stockholders entered into lock-upagreements.  In accordance with theselock-up agreements, 589,656 shares of common stock will be available for salein the public market 180 days after October 17, 2006, and an additional5,306,904 shares of common stock will be available for sale in the publicmarket 360 days after October 17, 2006. These lock-up agreements are subject to a number of exceptions andCitigroup Global Markets Inc., on behalf of the underwriters in the initialpublic offering, may release these stockholders from their lock-up agreementswith the underwriters at any time and without notice, which would allow forearlier sale of shares in the public market. As restrictions on resale end, the market price of our common stockcould drop significantly if the holders of restricted shares sell them or areperceived by the market as intending to sell them.  In addition, after completion of the initialpublic offering, our ESOP held 7,326,660 shares of our common stock, all ofwhich was allocated to employee accounts. Under certain circumstances, such as the termination of an employee’semployment with us, the ESOP may distribute shares to ESOP participants (orsell shares in the market), depending on the elections of ESOPparticipants.  In addition, pursuant tocertain diversification rights that will be available to ESOP participantspursuant to instructions given during the 90-day period beginning March 31,2007, up to an additional 1,831,665 shares held by the ESOP may be sold in thepublic market at that time.

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

None.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

None.

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

None.

**ITEM 5.OTHER INFORMATION**

None.

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

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned.
|        |       |                                                                                |
|--------|------------|-------------------------------------------------------------------------------------|
|   | ** ** | **STANLEY, INC.**                                                                   |
|   |       |                                                                                |
|   |       |                                                                                |
|   |       |                                                                                |
|   | ** ** | **/s/  PHILIP O. NOLAN**                                                            |   |
|   |       | Philip O. Nolan  Chairman, President and Chief Executive Officer  February 12, 2007 |
|   |       |                                                                                |
|   |       |                                                                                |
|   | ** ** | **/s/  BRIAN J. CLARK**                                                             | ** ** |
|   |       | Brian J. Clark  Chief Financial Officer  February 12, 2007                          |

 

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