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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

** **

**For the quarterly period ended December 25, 2009**

** **

**OR**

** **

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File No. 001-33083**

 

**STANLEY,INC.**

(Exact name of registrant 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o No o

 

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

 

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

 

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

 

Asof January 22, 2010, there were 24,078,924 shares of our Common Stock, parvalue $0.01 per share, outstanding.

 

 

 

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**STANLEY, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED DECEMBER 25, 2009**

**INDEX**

** **
| ** **                                   | ** ** | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I — FINANCIAL INFORMATION** | ** ** | **1**                                                                                       |
| ITEM  1.                                     |       | FINANCIAL STATEMENTS                                                                        |       | 1        |
| ITEM 2.                                      |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 14       |
| ITEM 3.                                      |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       | 23       |
| ITEM 4.                                      |       | CONTROLS AND  PROCEDURES                                                                    |       | 23       |
| **PART II — OTHER  INFORMATION**   |       | **24**                                                                                      |
| ITEM 1.                                      |       | LEGAL PROCEEDINGS                                                                           |       | 24       |
| ITEM 1A.                                     |       | RISK FACTORS                                                                                |       | 24       |
| ITEM 2.                                      |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       | 24       |
| ITEM 3.                                      |       | DEFAULTS  UPON SENIOR SECURITIES                                                            |       | 24       |
| ITEM 4.                                      |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |       | 24       |
| ITEM 5.                                      |       | OTHER INFORMATION                                                                           |       | 24       |
| ITEM  6.                                     |       | EXHIBITS                                                                                    |       | 24       |

 

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**FORWARD-LOOKING STATEMENTS**

 

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

 

Theforward-looking statements contained in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections aboutthe industry in which we operate and management’s beliefs and assumptions.These statements are not guarantees of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Therefore, actualoutcomes and results may differ materially from what is expressed or forecastedin such forward-looking statements, including as a result of risks discussed in“Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K forthe fiscal year ended March 31, 2009. These forward-looking statementsinclude, but are not limited to, statements relating to:

 

·                        our ability toretain customers and contracts, as well as our ability to win new customers andengagements;

 

·                        our backlog;

 

·                        risksassociated with the acquisition and integration of new companies;

 

·                        our beliefsabout trends in our market, available government contracts and outsourcing tocompanies like ours;

 

·                        expectedspending on information technology and other professional services by federalgovernment agencies, including the Department of Defense; and

 

·                        other risksdiscussed in our Annual Report on Form 10-K for the fiscal year ended March 31,2009, in the sections entitled “Risk Factors” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” and in any otherdocuments we file with the Securities and Exchange Commission.

 

Weare under no duty to update any of the forward-looking statements after thedate of this Quarterly Report on Form 10-Q to conform these statements toactual results, except as required by law.

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Income**

**(unaudited)**

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

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **December 25,  2009**      | ** ** | **December 26,  2008**     | ** ** | **December 25,  2009** | ** ** | **December 26,  2008** | ** ** |
| Revenues                            |       | $                                | 227,022    |                            | $          | 203,597 |   | $ | 652,857 |   | $ | 567,242 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Operating costs and expenses:       |       |                             |       |                            |       |   |   |   |   |
| Cost of revenues                    |       | 190,320                          |       | 170,091                         |       | 543,928 |   | 475,775 |   |
| Selling, general and administrative |       | 13,794                           |       | 13,220                          |       | 41,286 |   | 36,103 |   |
| Depreciation and amortization       |       | 2,895                            |       | 2,803                           |       | 8,576 |   | 7,231 |   |
| Total operating costs and expenses  |       | 207,009                          |       | 186,114                         |       | 593,790 |   | 519,109 |   |
| Operating income                    |       | 20,013                           |       | 17,483                          |       | 59,067 |   | 48,133 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):             |       |                             |       |                            |       |   |   |   |   |
| Other income                        |       | —                           |       | 17                              |       | 3 |   | 20 |   |
| Interest income                     |       | 23                               |       | 77                              |       | 82 |   | 272 |   |
| Interest expense                    |       | (906                             | )          | (2,047                          | )          | (2,951 | ) | (4,413 | ) |
| Total other expenses                |       | (883                             | )          | (1,953                          | )          | (2,866 | ) | (4,121 | ) |
| Income before taxes                 |       | 19,130                           |       | 15,530                          |       | 56,201 |   | 44,012 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Provision for income taxes          |       | (7,294                           | )          | (5,852                          | )          | (21,948 | ) | (17,289 | ) |
| Net income                          |       | $                                | 11,836     |                            | $          | 9,678 |   | $ | 34,253 |   | $ | 26,723 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Earnings per share:                 |       |                             |       |                            |       |   |   |   |   |
| Basic                               |       | 0.50                             |       | $                               | 0.42       |   | $ | 1.46 |   | $ | 1.17 |   |
| Diluted                             |       | $                                | 0.49       |                            | $          | 0.41 |   | $ | 1.42 |   | $ | 1.12 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Weighted-average shares:            |       |                             |       |                            |       |   |   |   |   |
| Basic                               |       | 23,488                           |       | 22,832                          |       | 23,406 |   | 22,785 |   |
| Diluted                             |       | 24,086                           |       | 23,818                          |       | 24,058 |   | 23,798 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

**(unaudited)**

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

** **
| ** **                                                                                                          | ** ** | **December 25,  2009** | ** ** | **March 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **                  | ** ** | ** **               | ** ** |
|                                                                                                                |       |                        |       |                     |       |
| Current assets:                                                                                                     |       |                        |       |                     |       |
| Cash                                                                                                                |       | $                           | 2,260      |                     | $          | 1,811 |   |
| Accounts receivable - net                                                                                           |       | 198,500                     |       | 187,680                  |       |
| Prepaid and other current assets                                                                                    |       | 9,271                       |       | 6,766                    |       |
| Total current assets                                                                                                |       | 210,031                     |       | 196,257                  |       |
|                                                                                                                |       |                        |       |                     |       |
| Property and equipment - net                                                                                        |       | 18,871                      |       | 19,552                   |       |
| Goodwill                                                                                                            |       | 262,705                     |       | 262,705                  |       |
| Intangible assets - net                                                                                             |       | 11,121                      |       | 15,557                   |       |
| Deferred taxes                                                                                                      |       | 5,115                       |       | 4,212                    |       |
| Other assets                                                                                                        |       | 4,155                       |       | 3,269                    |       |
| Total assets                                                                                                        |       | $                           | 511,998    |                     | $          | 501,552 |   |
|                                                                                                                |       |                        |       |                     |       |
| **Liabilities and Stockholders’  Equity**                                                                      | ** ** | ** **                  | ** ** | ** **               | ** ** |
|                                                                                                                |       |                        |       |                     |       |
| Current liabilities:                                                                                                |       |                        |       |                     |       |
| Accounts payable                                                                                                    |       | $                           | 15,058     |                     | $          | 21,528 |   |
| Accrued expenses and other liabilities                                                                              |       | 87,668                      |       | 79,841                   |       |
| Current portion of long-term debt                                                                                   |       | 1,000                       |       | 1,000                    |       |
| Income taxes payable                                                                                                |       | —                      |       | 2,034                    |       |
| Total current liabilities                                                                                           |       | 103,726                     |       | 104,403                  |       |
|                                                                                                                |       |                        |       |                     |       |
| Line of credit                                                                                                      |       | 102,500                     |       | 135,030                  |       |
| Long-term debt — net of current portion                                                                        |       | 34,000                      |       | 34,500                   |       |
| Other long-term liabilities                                                                                         |       | 8,928                       |       | 10,396                   |       |
| Total liabilities                                                                                                   |       | 249,154                     |       | 284,329                  |       |
|                                                                                                                |       |                        |       |                     |       |
| Commitments and contingencies                                                                                       |       |                        |       |                     |       |
| Stockholders’ equity:                                                                                          |       |                        |       |                     |       |
| Common stock, $0.01 par value — 200,000,000 shares  authorized; 24,065,955 and 23,813,334 issued, respectively |       | 241                         |       | 238                      |       |
| Additional paid-in capital                                                                                          |       | 108,086                     |       | 96,957                   |       |
| Retained earnings                                                                                                   |       | 155,687                     |       | 121,434                  |       |
| Accumulated other comprehensive loss                                                                                |       | (838                        | )          | (886                     | )          |
| Deferred compensation                                                                                               |       | (332                        | )          | (520                     | )          |
| Total stockholders’ equity                                                                                     |       | 262,844                     |       | 217,223                  |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                           | 511,998    |                     | $          | 501,552 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **December 25,  2009**     | ** ** | **December 26,  2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                               | 34,253     |   | $ | 26,723 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 8,576                           |       | 7,231 |   |
| Loss on disposal of property and equipment                                         |       | 104                             |       | 151 |   |
| Deferred taxes                                                                     |       | (81                             | )          | 1,555 |   |
| Stock contributed to employee stock ownership plan                                 |       | 812                             |       | — |   |
| Income tax benefit from stock-based compensation                                   |       | 2,062                           |       | 2,438 |   |
| Stock compensation expense                                                         |       | 5,455                           |       | 4,555 |   |
| Changes in assets and liabilities — net of  acquisition effects:              |       |                            |       |   |   |
| Accounts receivable                                                                |       | (10,820                         | )          | (667 | ) |
| Prepaid expenses and other current assets                                          |       | (3,455                          | )          | 271 |   |
| Other assets                                                                       |       | (886                            | )          | (549 | ) |
| Accounts payable                                                                   |       | (6,470                          | )          | (4,852 | ) |
| Accrued expenses                                                                   |       | 8,140                           |       | 5,229 |   |
| Other liabilities                                                                  |       | (1,399                          | )          | 4,297 |   |
| Income taxes payable                                                               |       | (2,034                          | )          | (7,835 | ) |
| Net cash provided by operating activities                                          |       | 34,257                          |       | 38,547 |   |
|                                                                               |       |                            |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchase of Oberon — net of cash acquired                                     |       | —                          |       | (170,795 | ) |
| Acquisition of property and equipment                                              |       | (3,357                          | )          | (6,036 | ) |
| Net cash used in investing activities                                              |       | (3,357                          | )          | (176,831 | ) |
|                                                                               |       |                            |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net (repayments) borrowings under line-of-credit  agreements                       |       | (32,530                         | )          | 142,869 |   |
| Repayment of long term debt                                                        |       | (500                            | )          | (500 | ) |
| Payments under capital lease obligations                                           |       | (223                            | )          | (203 | ) |
| Purchase of treasury stock                                                         |       | (84                             | )          | (196 | ) |
| Proceeds from exercise of stock options                                            |       | 1,802                           |       | 996 |   |
| Excess tax benefit from share-based compensation                                   |       | 454                             |       | 446 |   |
| Proceeds from the sale of stock                                                    |       | 630                             |       | 143 |   |
| Net cash (used in) provided by financing  activities                               |       | (30,451                         | )          | 143,555 |   |
|                                                                               |       |                            |       |   |   |
| **NET INCREASE IN CASH**                                                           |       | 449                             |       | 5,271 |   |
| **CASH — Beginning of period**                                                |       | 1,811                           |       | 271 |   |
| **CASH — End of period**                                                      |       | $                               | 2,260      |   | $ | 5,542 |   |
|                                                                               |       |                            |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH  FLOW INFORMATION:**                            | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                   |       |                            |       |   |   |
| Income taxes                                                                       |       | $                               | 26,100     |   | $ | 19,364 |   |
| Interest                                                                           |       | $                               | 2,385      |   | $ | 3,880 |   |
| ** **                                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF  NONCASH INVESTING ACTIVITIES:**                      | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Lease incentive                                                                    |       | $                               | —     |   | $ | 942 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of ComprehensiveIncome**

**(unaudited)**

**(in thousands)**

** **
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **December 25,**            | ** ** | **December 26,**           | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
| ** **                                   | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                   |       | $                                | 11,836     |                            | $          | 9,678 |   | $ | 34,253 |   | $ | 26,723 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Other comprehensive income:                  |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss) on interest rate swap |       | 49                               |       | (518                            | )          | 169 |   | (166 | ) |
| Translation adjustments                      |       | 19                               |       | (5                              | )          | (121 | ) | 95 |   |
| Total other comprehensive income             |       | 68                               |       | (523                            | )          | 48 |   | (71 | ) |
| Comprehensive income                         |       | $                                | 11,904     |                            | $          | 9,155 |   | $ | 34,301 |   | $ | 26,652 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated Financial Statements**

**(unaudited)**

**(in thousands, except share and per share data, or asotherwise noted)**

 

**1.  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, intelligence andfederal civilian government agencies. Stanley offers its customers solutions tosupport any stage of program, product development or business lifecycle throughfive service areas: systems engineering, enterprise integration, operationallogistics, business process outsourcing and advanced engineering andtechnology. The Company derives substantially all of its revenue from U.S.federal government agencies.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation***—Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles (“GAAP”)in the United States and pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). In the opinion of management, thesestatements reflect all adjustments necessary to fairly present the Company’sfinancial position as of December 25, 2009, and its results of operationsand its cash flows for the nine months ended December 25, 2009 and December 26,2008, respectively. Certain information and note disclosures normally includedin the annual financial statements have been condensed or omitted. The resultsof operations for the interim periods are not necessarily indicative of theresults for the full year. For further information, refer to the financialstatements and footnotes presented in the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009.

 

***Reporting Periods***—The Company’sfiscal year begins on April 1 and ends on March 31. The Company’sfirst three fiscal quarters end on the 13th Friday after the first day of thequarter and the fourth quarter ends on March 31. Fiscal quarters willtypically be 13 weeks. The third quarter of fiscal year 2010 ended on December 25,2009. The Company does not believe that there is a material impact to thecomparability of the periods presented.

 

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

 

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

 

Contractrevenue recognition inherently involves the use of estimates. Examples ofestimates include the contemplated level of effort to accomplish the tasksunder the contract, the cost of the effort, and an ongoing assessment of theCompany’s progress toward completing the contract. From time to time, as partof the Company’s standard management process, facts develop that require theCompany to revise its estimated total costs and revenues. To the extent that arevised estimate affects contract profit or revenue previously recognized, theCompany records the cumulative effect of the revision in the period in whichthe facts requiring the revision become known. The full amount of ananticipated loss on any type of contract is recognized in the period in whichit becomes probable and can be reasonably estimated.

 

Undercost-plus-fee contracts, revenues are recognized as costs are incurred andinclude an estimate of applicable fees earned. For cost-plus-fee contracts thatinvolve a level of effort, fixed fees are earned in proportion to thepercentage of required effort delivered. For cost-plus-fee contracts which donot involve a level of effort requirement, fixed fees are earned in proportionto the percentage of work completed. For time-and-materials contracts, revenuesare computed by multiplying the number of direct labor-hours expended inperformance of the contract by the contractual billing rates and adding otherbillable 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.

 

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-incentive fee type contracts, themethod of calculating the incentive fee is specified in the contract and it istypically based on measuring actual costs to 

 

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performthe contract against a target cost to perform the contract. The Companyprepares periodic estimates to complete the contract and adjusts the incentivefee as required based on the contract incentive fee formula.

 

TheCompany’s contracts with agencies of the government are subject to periodicfunding by the respective contracting agency. Funding for a contract may beprovided in full at inception of the contract or ratably throughout thecontract as the services are provided. From time to time, the Company mayproceed with work based on customer direction prior to the completion andsigning of formal contract documents. The Company uses a formal internal reviewand management approval process prior to commencement of work. Revenueassociated with such work is recognized without profit and only when it can bereliably estimated and realization is probable. The Company bases its estimateson notices to proceed from its customers, previous experiences with thecustomer, communications with the customer regarding funding status, and itsknowledge of available funding for the contract or program. Pre-contract costsrelated to unsuccessful contract bids are expensed in the period in which weare 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 collectability. Such matters, whether claims or unapprovedchange orders in the process of being negotiated, are recorded at the lesser oftheir estimated net realizable value or actual costs incurred, and only whenrealization is probable and can be reliably estimated. Claims against us arerecognized where a loss is considered probable and can be reasonably estimatedin amount.

 

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

 

***Concentration of Risk***—Contractsfunded by federal government agencies account for substantially all of theCompany’s revenues. For the three months ended December 25, 2009 and December 26,2008, the Company derived approximately 79% and 76% of its revenues, respectively,from the Department of Defense, including agencies within the intelligencecommunity, and approximately 21% and 24% of its revenues, respectively, fromfederal civilian government agencies. The Company’s contract with theDepartment of the Navy for production engineering and integration servicesunder various Space and Naval Warfare Systems Command (SPAWAR) programs, whichis its largest revenue-generating contract, accounted for approximately 12% and10% of its revenues for the three months ended December 25, 2009 and December 26,2008, respectively.

 

Forthe nine months ended December 25, 2009 and December 26, 2008, theCompany derived approximately 77% and 70% of its revenues, respectively, fromthe Department of Defense, including agencies within the intelligencecommunity, and approximately 23% and 30% of its revenues, respectively, fromfederal civilian government agencies. The Company’s contract with theDepartment of the Navy for production engineering and integration servicesunder various Space and Naval Warfare Systems Command (SPAWAR) programs, whichis the largest revenue-generating contract, accounted for approximately 11% and10% of its revenues for the nine months ended December 25, 2009 and December 26,2008, respectively.

 

***Property and Equipment***—Property andequipment are carried at cost, less accumulated depreciation. Depreciation ofproperty and equipment is calculated using the straight-line method over theuseful lives. The estimated useful lives of computers, peripherals and softwaretypically range from three to five years. The estimated useful lives offurniture and equipment typically range from five to ten years. Leaseholdimprovements are amortized over the lesser of the useful life or the term ofthe lease. Repairs and maintenance are expensed as incurred. Depreciationexpense related to property and equipment was $1.4 million and$1.1 million for the three months ended December 25, 2009 and December 26,2008, respectively and $4.0 million and 3.0 million for the nine months ended December 25,2009 and December 26, 2008, respectively.

 

***Goodwill and Intangible Assets****—*Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. The Company does notamortize goodwill; rather it tests goodwill for impairment at least on anannual basis. Testing for impairment is a two-step process. The first step is atest for potential impairment, while the second step measures the amount ofimpairment, if any. The Company is required to perform an impairment test atleast on an annual basis at any time during the fiscal year provided the testis performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Stanleyhas elected the last day of its third fiscal quarter as its testing date. Basedon the testing performed as of December 25, 2009, the Company determinedthat no impairments existed. Intangible assets are amortized over theirestimated useful lives. Customer relationships are amortized on a straight-linebasis over periods ranging from five to seven years. Non-competition agreementsare amortized on a straight-line basis over three years. Backlog and contractsare amortized on a straight-line basis over periods ranging from two to fiveyears.

 

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***Impairment of Long-Lived Assets***—When events orchanges in circumstances indicate that the carrying amount of long-lived assetsmay not be fully recoverable, Stanley evaluates the probability that futureundiscounted net cash flows, without interest charges, will be less than thecarrying amount of the assets. If any impairment were indicated as a result ofthis review, Stanley would recognize a loss based on the amount by which thecarrying amount exceeds the estimated fair value. Management believes that noimpairments existed as of December 25, 2009.

 

***Earnings per share***—Basic earningsper share has been computed by dividing net income available to commonstockholders by the weighted-average number of shares of common stockoutstanding during each period. Restricted shares of common stock that vestbased on the satisfaction of certain conditions are treated as contingentlyissuable shares until the conditions are satisfied. These shares are includedin the computation of basic earnings per share only after the shares vest.Shares issued during the period and shares reacquired during the period areweighted for the portion of the period that they were outstanding. Dilutedearnings per share consider the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. Shares that are anti-dilutive are not included in thecomputation of diluted earnings per share. The diluted weighted-average commonshares outstanding for the three and nine months ended December 25, 2009,exclude stock options to purchase approximately 0.1 million and 0.1 millionshares, respectively, because such options have exercise prices in excess ofthe average market price of the Company’s stock for that period. Theweighted-average number of common shares outstanding is computed as follows:

 
| ** **

** **                                        | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **December 25, 2009** | ** ** | **December 26, 2008** | ** ** | **December 25, 2009** | ** ** | **December 26,  2008** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**    | ** ** |
| Basic weighted-average common shares outstanding              |       | 23,488                     |       | 22,832                     |       | 23,406 |   | 22,785 |   |
| Effect of stock options and unvested restricted  stock grants |       | 598                        |       | 986                        |       | 652 |   | 1,013 |   |
| Diluted weighted-average common shares outstanding            |       | 24,086                     |       | 23,818                     |       | 24,058 |   | 23,798 |   |

 

***Derivative Instruments and HedgingActivities***—Stanley entered into an interest rate swapagreement on October 27, 2006 with a maturity date of January 31,2012, an annual fixed rate of 5.28% and a notional amount of$19.0 million. The Company designated this swap agreement, at itsinception, as a qualifying cash flow hedge. For qualifying cash flow hedges,the effective portion of derivative gains and losses are recorded as acomponent of other comprehensive income and are reclassified into earnings inthe same period in which the hedged transaction affects such earnings. Anyineffectiveness is reported currently in earnings. The fair value of the hedgearrangement is recorded as an asset or a liability in the accompanyingunaudited condensed consolidated balance sheets. The fair value of the swap at December 25,2009 of $1.4 million has been reported in “Accrued expenses and otherliabilities” with an offset, net of tax, included in “Accumulated othercomprehensive loss” in the accompanying unaudited condensed consolidatedbalance sheet. None of the $1.4 million unrealized loss was recognized inearnings during the nine months ended December 25, 2009 based on hedgeineffectiveness and none of the swap’s unrealized loss was excluded from theassessment of hedge effectiveness. Amounts in accumulated other comprehensiveloss will be reclassified into earnings in the period in which variableinterest payments (the hedged transaction) are made under the Senior CreditFacility (defined in Note 6). Amounts paid or received on the swap are recordedas interest expense in the period incurred.

 

***Segment Reporting***—Operating segmentsare defined as components of an enterprise for which separate financialinformation is available and evaluated regularly by the chief operatingdecision maker, or decision making group, in deciding how to allocate resourcesand assess performance. The Company currently has one reportable segment forfinancial reporting purposes, which represents the Company’s core business ofproviding information technology solutions and services for federal governmentcustomers. The Company does not report revenue by product or service or groupsof products or services because it is impracticable to do so.

 

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

 

***Reclassifications***—Certainreclassifications have been made to prior period balances to conform to thecurrent presentation.

 

***Subsequent Events***— The Companyhas evaluated material events and transactions that have occurred after thebalance sheet date and concluded that no subsequent events have occurredthrough January 28, 2010 that require adjustment to or disclosure in this Form 10-Q.

 

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***Fair Value of Financial Instruments***—The fair valueof accounts receivable, accounts payable, accrued expenses, debt, and the swapcontract approximates their respective carrying amounts.

 

Thethree level fair value hierarchy to classify the inputs used in measuring fairvalue as follows:

 

Level1: Quoted prices for identical instruments in active markets.

 

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

 

Level3: Significant inputs to the valuation model are unobservable.

 

Asof December 25, 2009, the financial liability measured at fair valueconsisted of an interest rate swap agreement. The value is based onmodel-driven valuations whose inputs are observable. The following tablesummarizes the financial liability measured at fair value on a recurring basisas of December 25, 2009 and the level it falls within the fair valuehierarchy:

 
| ** **         | ** ** | **Fair Value Measurement Using:**                                                | ** ** | ** **                                               | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **Quoted Prices in********Active Markets for********Identical Assets** | ** ** | **Significant Other********Observable Inputs** | ** ** | **Significant********Unobservable********Inputs** | ** ** | **Total** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                              | ** ** | **(Level 2)**                                       | ** ** | **(Level 3)** | ** ** | **December 25,  2009** | ** ** |
| Liabilities:       |       |                                                                                            |       |                                                     |       |   |   |   |   |
| Interest rate swap |       | $                                                                                               | —     |                                                     | $          | 1,405 |   | $ | — |   | $ | 1,405 |   |
|                    |            |                                                                                                 |            |                                                          |            |  |  |  |  |  |  |  |  |

 

***Accounting Standards Updates***—In October 2009,the FASB issued an update to*“Revenue Recognition —Multiple Deliverable Revenue Arrangements.”* This update removes theobjective-and-reliable-evidence-of-fair-value criterion from the separationcriteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementsrequired under the “*Fair Value Measurementsand Disclosures”* guidance, provides a hierarchy that entities mustuse to estimate the selling price, eliminates the use of the residual methodfor allocation, and expands the ongoing disclosure requirements. This update iseffective for fiscal years beginning on or after June 15, 2010, and can beapplied prospectively or retrospectively. The Company does not expect that theadoption of this update will have a material impact on its consolidatedfinancial position or results of operations.

 

**3. ACCOUNTS RECEIVABLE**

 

Accountsreceivable consists of the following:

 
| ** **                                      | ** ** | **As of**              | ** ** | **As of**           | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **December 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Billed receivables                              |       | $                           | 139,159    |                     | $          | 122,322 |   |
| Unbilled receivables:                           |       |                        |       |                     |       |
| Amounts billable                                |       | 52,218                      |       | 57,912                   |       |
| Revenues recorded in excess of contract funding |       | 8,031                       |       | 8,132                    |       |
| Retainage and contract fee withholding          |       | 373                         |       | 451                      |       |
| Allowance for doubtful accounts                 |       | (1,281                      | )          | (1,137                   | )          |
| Total                                           |       | $                           | 198,500    |                     | $          | 187,680 |   |

 

Amountsbillable consist primarily of amounts to be billed within a month. Revenuesrecorded in excess of contract funding are billable upon receipt of contractualamendments or modifications adding additional funding. The retainage and feewithholding is billable upon completion of the contract performance andapproval of final indirect expense rates by the government. Consistent withindustry practice, certain receivables related to long-term contracts areclassified as current, although a portion of 

 

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theseamounts is not expected to be billed and collected within one year. Unbilledaccounts receivable at December 25, 2009 are expected to be billed andcollected within one year except for approximately $0.4 million.

 

**4.  PROPERTY AND EQUIPMENT**

 

Propertyand equipment consists of the following:

 
| ** **                                                                               | ** ** | **As of**              | ** ** | **As of**           | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                               | ** ** | **December 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Computers and peripherals                                                                |       | $                           | 6,578      |                     | $          | 5,684 |   |
| Software                                                                                 |       | 4,668                       |       | 4,265                    |       |
| Furniture and equipment                                                                  |       | 6,358                       |       | 5,669                    |       |
| Leasehold improvements                                                                   |       | 15,431                      |       | 14,323                   |       |
|                                                                                     |       | 33,035                      |       | 29,941                   |       |
|                                                                                     |       |                        |       |                     |       |
| Less: Accumulated depreciation and amortization                                          |       | (14,164                     | )          | (10,389                  | )          |
| Property and equipment — net                                                        |       | $                           | 18,871     |                     | $          | 19,552 |   |
| Property and equipment included above that are  under capital lease obligations include: |       |                        |       |                     |       |
| Software                                                                                 |       | $                           | 947        |                     | $          | 947 |   |
| Furniture and equipment                                                                  |       | 143                         |       | 161                      |       |
| Less: Accumulated depreciation and amortization                                          |       | (940                        | )          | (766                     | )          |
| Total                                                                                    |       | $                           | 150        |                     | $          | 342 |   |

 

**5.  ACCRUED EXPENSES AND OTHER LIABILITIES**

 

Accruedexpenses and other liabilities consist of the following:

 
| ** **                    | ** ** | **As of**              | ** ** | **As of**           | ** ** |
|-------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **December 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Accrued payroll-related costs |       | $                           | 31,629     |                     | $          | 28,089 |   |
| Accrued contract costs        |       | 37,416                      |       | 34,848                   |       |
| Accrued indirect costs        |       | 7,429                       |       | 7,405                    |       |
| Other payables                |       | 11,194                      |       | 9,499                    |       |
| Total accrued expenses        |       | $                           | 87,668     |                     | $          | 79,841 |   |

 

**6.  DEBT**

 

TheCompany is party to credit agreement (“Senior Credit Facility” or “AmendedCredit Agreement”) with a group of lenders for which SunTrust Robinson Humphrey, Inc.acted as sole book manager and lead arranger, SunTrust Bank acted asadministrative agent and M&T Bank and BB&T Bank acted asco-documentation agents.

 

AtDecember 25, 2009, the lenders’ aggregate commitment under the SeniorCredit Facility was $276.6 million, which consisted of a $241.6 millionrevolving line of credit (“Revolver”) and a $35.0 million term loan (“Term Loan”),and the Company had outstanding indebtedness of $35.0 million on the TermLoan and $102.5 million on the Revolver, with a weighted-average interestrate of approximately 1.59% and 3.81% for the nine months ended December 25,2009 and December 26, 2008, respectively.  At December 25, 2009,the Company’s borrowing availability under the Senior Credit Facility was$139.0 million, including outstanding letters of credit.

 

Underthe terms of the Amended Credit Agreement, the Company may request an increasein the size of the Revolver by an aggregate amount not greater than $33.4million. If any lender elects not to increase its commitment, the Company maydesignate another bank or other financial institution to become a party to theAmended Credit Agreement.

 

TheAmended Credit Agreement also contains a number of affirmative and restrictivecovenants, including limitations on mergers, consolidations and dissolutions;sales of assets; investments and acquisitions; indebtedness and liens;repurchases of shares of capital stock and options to purchase shares ofcapital stock; transactions with affiliates; sale and leaseback transactions;and restricted payments.

 

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Inaddition, the Amended Credit Agreement requires the Company to meet thefollowing financial covenants:

 

·   a fixed charge coverageratio as of the end of any fiscal quarter of not less than 1.35 to 1.00, basedupon the ratio of (i) consolidated EBITDA (as defined in the Amended CreditAgreement) less the actual amount paid by the Company and its subsidiaries incash on account of capital expenditures and taxes to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period, in each case measured for the fourconsecutive fiscal quarters ending on or immediately prior to such date; and

 

·   a maximum leverage rationot greater than 3.75 to 1.00, based upon the ratio of (i) consolidatedtotal debt to (ii) consolidated EBITDA (as defined in the Amended CreditAgreement).

 

AtDecember 25, 2009, the Company was in compliance with all covenants underits Senior Credit Facility. The obligations under the Senior Credit Facilityare unconditionally guaranteed by each of Stanley’s existing and subsequentlyacquired or organized subsidiaries and are secured on a first-priority basis bysecurity interests (subject to permitted liens) in substantially all assetsowned by the Company and each of its subsidiaries, including the shares ofcapital stock of its subsidiaries, subject to certain exceptions.

 

**7.  ACQUISITIONS**

 

***Oberon Associates, Inc.***

 

OnJuly 15, 2008, Stanley acquired Oberon Associates, Inc. (“Oberon”),an engineering, intelligence operations and information technology servicescompany for approximately $167.8 million at closing, net of cash acquired,plus an additional $3.0 million in post closing net working capital andother purchase price adjustments. Stanley financed the acquisition withborrowings under its Senior Credit Facility.

 

Oberonprovides engineering, operational intelligence and information technologysupport to multiple elements of the U.S. Army, in addition to the U.S. AirForce, Defense Information Systems Agency, Transportation SecurityAdministration and several agencies throughout the intelligence community.Oberon’s areas of expertise include biometrics systems engineering, integrationand operational deployment; intelligence community support; communicationsengineering; and information technology and enterprise data management. Theacquisition of Oberon expands the range of solutions offered to the Company’scustomers, bringing to Stanley biometric applications experts, functionalexperts within the intelligence community, and expertise in communications andinformation management systems.

 

Theresults of Oberon have been included in the accompanying condensed consolidatedfinancial statements since the date of acquisition. The purchase price has beenallocated to the assets acquired and liabilities assumed based upon theirestimated fair values. Of the purchase consideration, $149.1 million hasbeen allocated to goodwill, based upon the excess of the purchase price overthe $8.6 million estimated fair value of net tangible assets and$13.1 million has been assigned to other identifiable intangible assets.The Company completed its evaluation of the fair value of the assets andliabilities of Oberon and purchase accounting entries relating to theacquisition in the three months ended September 25, 2009. None of theamount allocated to goodwill is expected to be deductible for tax purposes.Included in identifiable intangibles arising from the Oberon acquisition are$10.5 million, $1.9 million and $0.7 million related to customercontracts and relationships, order backlog and non-compete agreements,respectively. The amortization period for customer contracts and relationships,order backlog and non-compete agreements is five years, two years and threeyears, respectively. No residual value has been assumed at the end of theiruseful lives.

 

**8. STOCKHOLDERS’ EQUITY**

 

***Common Stock***

 

Stanleyhas one class of common stock, with each share of common stock having one voteper share. Holders of common stock share in dividends declared, if any, by theboard of directors.

 

Stanleyrepurchased 3,254 shares of stock from its employees for $0.1 millionduring the nine months ended December 25, 2009. The repurchases were madeto satisfy certain employees’ tax obligations upon the vesting of restrictedstock. The shares were recorded at market price using the cost method ofaccounting. Employees purchased 23,292 shares of common stock for $0.6 millionduring the nine months ended December 25, 2009, as permitted under theCompany’s Employee Stock Purchase Plan.

 

***Equity Compensation***

 

Underthe Amended and Restated 2006 Omnibus Incentive Compensation Plan (the “OmnibusPlan”), Stanley is authorized to provide awards for a maximum of 4,500,000shares of common stock to directors, officers, employees or consultants. TheOmnibus Plan allows for cash awards, restricted stock awards, restricted stockunits, stock appreciation rights, performance units, fully vested shares,option awards and other equity-related awards. Vesting periods of these awardsvary. Except as otherwise 

 

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determinedby the board of directors, the option awards may not have an exercise priceless than the fair market value of the common stock on the date the option isgranted.

 

Priorto July 2006, under the Executive Deferred Compensation and EquityIncentive Plan (the “Executive Plan”), Stanley was authorized to provide awardsfor a maximum of 15,000,000 shares of common stock to key employees andnon-employee directors. The Executive Plan allowed for cash awards, restrictedstock awards, restricted stock trust awards and option awards.  Vesting periods of these awards varied.Holders of restricted stock awards have voting rights with respect to theawards. The trustee of restricted stock trust awards has voting rights withrespect to the trust awards. The option awards granted under the Executive Planhave exercise prices that range from 85% to 110% of the fair market value ofthe common stock on the date the option was granted. No further grants underthe Executive Plan will be made.

 

EffectiveApril 1, 2006, the Company adopted the provisions of “*Compensation— Stock Compensation*” using the prospective-transition method.Under that transition method, compensation cost recognized in the nine monthsended December 25, 2009 includes compensation cost for all share-basedpayments granted on or after April 1, 2006, based on the grant-date fairvalue. The Company is required to account for any portion of awards outstandingat the date of adoption of “*Compensation — StockCompensation*” using the accounting principles originallyapplied to those awards.

 

TheCompany has presented all tax benefits resulting from stock-based compensationawarded prior to the adoption of “*Compensation — StockCompensation*” as operating cash flows in the accompanyingunaudited condensed consolidated statements of cash flows. The tax benefitsassociated with share-based compensation in effect prior to the adoption of “*Compensation — Stock Compensation*” were $2.1 millionand $2.4 million for the nine months ended December 25, 2009 and December 26,2008, respectively. For share-based payment transactions awarded subsequent tothe adoption of “*Compensation — Stock Compensation*”the tax benefits in excess of the compensation cost recognized are classifiedas financing cash flows. The excess tax benefits associated with share-basedpayment transactions accounted for after the adoption of “*Compensation— Stock Compensation*” were $0.5 million and $0.4 million forthe nine months ended December 25, 2009 and December 26, 2008, respectively,and are disclosed within financing activities in the accompanying CondensedConsolidated Statements of Cash Flows.

 

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes-Merton closed-form option-pricing model that uses the assumptionsnoted in the following table. Expected volatility for the nine months ended December 25,2009 was based on historical volatility of the Company’s stock price. Expectedvolatility for the nine months ended December 26, 2008 was based on aweighted-average of the historical volatilities of similar public entities. Theexpected term of options granted is derived using the simplified method andrepresents the period of time that options granted are expected to beoutstanding. Options granted meet the criteria of “plain vanilla” for purposesof applying the simplified method. This method was used as the Company did nothave sufficient historical exercise data to provide a reasonable basis uponwhich to estimate expected term due to the limited period of time the shareshave been publicly traded. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. The Company has not issued dividends in the pastnor does it currently intend to issue dividends in the near future.

 

Asummary of the weighted average assumptions is presented below.

 
| ** **               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **December 25,  2009**     | ** ** | **December 26,  2008** | ** ** |
| Expected volatility      |       | 38.8                            | %          | 32.3 | % |
| Expected dividends       |       | 0.0                             | %          | 0.0 | % |
| Expected term (in years) |       | 3.5                             |       | 3.5 |   |
| Risk-free rate           |       | 1.6                             | %          | 2.6 | % |

 

Duringthe nine months ended December 25, 2009, the Company granted 457,976 stockoption awards at a weighted-average exercise price of $25.23, which reflectsthe fair value of the shares on the date of grant. These options vest ratablyover three years and have a contractual term of five years. Theweighted-average fair value of stock option awards granted during the ninemonths ended December 25, 2009 and December 26, 2008, as determinedby the Black-Scholes-Merton closed-form option-pricing model, was $7.66 and$7.22, respectively. The stock option awards that vested during the nine monthsended December 25, 2009 and December 26, 2008 had a combined fairvalue of $2.2 million and $1.3 million, respectively.

 

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Asummary of option activity for the year ended March 31, 2009, and the ninemonths ended December 25, 2009 is presented below.

 
| **Options**                           | ** ** | **Number of********Underlying Shares** | ** ** | **Weighted-Average******** Exercise Price** | ** ** | **Aggregate Intrinsic********Value (in thousands)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Outstanding at April 1, 2008     |       | 1,609,475                                        |       | $                                                     | 9.15       |                                                               |       |   |
| Granted                               |       | 445,210                                          |       | $                                                     | 26.43      |                                                               |       |   |
| Exercised                             |       | (338,834                                         | )          | $                                                     | 5.17       |                                                               | $          | 7,762 |   |
| Forfeited                             |       | (111,452                                         | )          | $                                                     | 14.90      |                                                               |       |   |
| Outstanding at April 1, 2009     |       | 1,604,399                                        |       | $                                                     | 14.38      |                                                               |       |   |
| Granted                               |       | 457,976                                          |       | $                                                     | 25.23      |                                                               |       |   |
| Exercised                             |       | (198,676                                         | )          | $                                                     | 9.07       |                                                               | $          | 3,978 |   |
| Forfeited                             |       | (58,556                                          | )          | $                                                     | 16.72      |                                                               |       |   |
| Outstanding at December 25, 2009 |       | 1,805,143                                        |       | $                                                     | 17.64      |                                                               | $          | 17,848 |   |

 

Asummary of nonvested stock option activity for the nine months ended December 25,2009 is presented below.

 
| **Nonvested Options**            | ** ** | **Number of********Underlying Shares** | ** ** | **Weighted-Average********Fair Value** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at April 1, 2009     |       | 1,051,141                                        |       | $                                           | 5.46       |   |
| Granted                               |       | 457,976                                          |       | $                                           | 7.66       |   |
| Vested                                |       | (400,975                                         | )          | $                                           | 5.40       |   |
| Forfeited                             |       | (58,326                                          | )          | $                                           | 5.36       |   |
| Outstanding at December 25, 2009 |       | 1,049,816                                        |       | $                                           | 6.45       |   |

 

Asummary of vested stock options at December 25, 2009, and stock optionsexpected to vest in future periods is presented below.

 
| **Options**                      | ** ** | **Number of********Underlying********Shares** | ** ** | **Weighted-********Average********Exercise********Price** | ** ** | **Weighted-Average  Remaining********Contractual Term********(years)** | ** ** | **Aggregate********Intrinsic********Value (in********thousands)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Exercisable                      |       | 755,327                                            |       | $                                                         | 12.64      |                                                                        | 3.7        |                                                                   | $          | 11,248 |   |
| Expected to vest                 |       | 968,536                                            |       | $                                                         | 21.23      |                                                                        | 4.0        |                                                                   | $          | 6,104 |   |
| Exercisable and expected to vest |       | 1,723,863                                          |       |                                                      |       |                                                                        |       |                                                                   |       |

 

Duringthe nine months ended December 25, 2009, the Company granted 61,121restricted stock awards at a weighted-average fair value of $26.01 per sharethat vest ratably over a period of three years. The weighted-average fair valueof restricted stock awards granted during the nine months ended December 25,2009 and December 26, 2008 was $26.01 and $25.38, respectively. Therestricted stock awards that vested during the nine months ended December 25,2009 and December 26, 2008 had a combined fair value of $1.3 million and$1.0 million, respectively.

 

Asummary of restricted stock activity for the nine months ended December 25,2009 is presented below.

 
| **Restricted Stock**             | ** ** | **Number of Shares** | ** ** | **Weighted-Average********Fair Value** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| Outstanding at April 1, 2009     |       | 676,437                        |       | $                                           | 24.25      |   |
| Granted                               |       | 61,121                         |       | $                                           | 26.01      |   |
| Vested                                |       | (63,169                        | )          | $                                           | 21.09      |   |
| Forfeited                             |       | (57,214                        | )          | $                                           | 24.53      |   |
| Outstanding at December 25, 2009 |       | 617,175                        |       | $                                           | 24.72      |   |

 

Duringthe nine months ended December 25, 2009 and December 26, 2008, theCompany recognized $5.5 million and $4.6 million of share-based compensationcosts, respectively. As of December 25, 2009, there was $14.0 million oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the Omnibus Plan. That cost is expectedto be recognized over a weighted-average period of 2 years.

 

Priorto the adoption of “*Compensation — StockCompensation*”, the fair market value of each issuance and grant wasdetermined by the Company on a contemporaneous basis. The Company recordedstock-based deferred compensation in aggregate of approximately $1.4 million inconnection with compensatory grants of stock options and shares of restrictedstock awarded during fiscal 2006 and 2007. Approximately $0.2 million ofcompensation expense was recognized during the nine months ended

 

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December 25,2009. The remaining deferred compensation of $0.3 million will be amortizedover the final 16 months of the vesting period of the awards.

 

**9.  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 (“DCAA”). Auditsthrough March 31, 2006 have been completed. In the opinion ofmanagement, adjustments resulting from the audits of all subsequent years arenot expected to have a material effect on the Company’s financial position, resultsof operations, or cash flows.

 

****Litigation—****

 

****S.C. Diamond Litigation, Virginia BeachCircuit****************Court***** —* On April 2,2009, SC Diamond Associates, L.P. (“S.C. Diamond”) filed a lawsuit in VirginiaBeach Circuit Court against the Company and Allied Technology Group, Inc.(“Allied”). S.C. Diamond is the owner of a warehouse property in VirginiaBeach, Virginia in which the Company subleased a portion of the facility. In March 2008,the warehouse caught fire, allegedly as a result of an exploded high-intensitymetal halide bulb, which is alleged to have been manufactured by PhilipsElectronics N.A. Corporation, d/b/a Philips Lighting Company (“Philips”). S.C.Diamond has sued Allied, as its tenant, and the Company, as sub-lessee,alleging breach of contract and negligence against Allied, and negligence,negligence *per se* and nuisance against the Company.S.C. Diamond seeks to recover approximately $12 million in damages from Alliedand the Company. Travelers Indemnity Company, which insured S.C. Diamond,intervened in the lawsuit on September 15, 2009, making subrogation claimsagainst Stanley and Philips, seeking to recover approximately $8 million ininsurance proceeds previously paid to S.C. Diamond.

 

TheCompany disputes all the allegations against it, and have joined Allied andTravelers in a third-party action against Philips, alleging that Philips isliable for the warehouse fire. The Company is being defended in this action byits general liability insurer, which has issued a reservation of rights. Trial isscheduled to commence on July 6, 2010. In management’s opinion, thedisposition of this litigation is not expected to have a material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

****Other Litigation**** — Otherthan as set forth above, neither the Company, nor any of its subsidiaries, arecurrently subject to any material legal proceedings, nor, to its knowledge, isany material legal proceeding currently threatened against the Company.

 

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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 unaudited and audited consolidated financial statementsand the accompanying notes included in this Form 10-Q and in our AnnualReport on Form 10-K for the fiscal year ended March 31, 2009, filedby us with the Securities and Exchange Commission on May 21, 2009. Thisdiscussion contains forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those discussed inor implied by any of the forward-looking statements as a result of variousfactors, including but not limited to, those listed in the “Risk Factors”section of this Report, as well as in our Annual Report on Form 10-K forthe fiscal year ended March 31, 2009. We caution readers not to placeundue reliance on any such forward-looking statements, which speak only as ofthe date made. We are under no duty to update any of the forward-lookingstatements after the date of this Quarterly Report on Form 10-Q to conformthese statements to actual results, except as required by law.*

 

**Overview**

 

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

 

Contractsfunded by federal government agencies account for substantially all of ourrevenues. As of December 25, 2009, we had active contractual engagementsacross more than 50 federal government agencies. Our customers include allmajor agencies of he Department of Defense, the Department of State, theDepartment of Homeland Security, the Department of Transportation, the Departmentof the Treasury, NASA, the Department of Justice and the Department of Healthand Human Services.

 

**Key Metrics Evaluated By Management**

 

Wemanage and assess the performance of our business by evaluating a variety offinancial and non-financial metrics derived from and in addition to our UnitedStates generally accepted accounting principles, or GAAP, results. The mostsignificant of these metrics are discussed below.

 

***Revenue Growth***

 

Weclosely monitor revenue growth in order to assess the performance of ourbusiness. In monitoring this growth, we focus on both internal revenue growthand revenue growth through acquisitions. Our internal revenue growth is drivenprimarily by two factors. First, internal revenue growth is driven by addingnew customers. For example, over the past several years we have added theDepartment of Homeland Security’s Citizenship and Immigration Services, theDefense Information Systems Agency, the National Guard Bureau, the Office ofPersonnel Management, the Marine Corps Systems Command and agencies in theintelligence community as new customers. Second, internal revenue growth isdriven by increasing revenues with existing customers by adding new contractsor expanding existing contracts. For example, since the initial award of ourcontract with the Department of State for the provision of passport processingand support services, the scope of services provided by us, and the revenuesgenerated by those services, have grown significantly.

 

Ourrevenue growth strategy also includes the pursuit of strategic acquisitions. Wehave completed the following six acquisitions since 2000:

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

 

Forfurther information on our acquisition of Oberon Associates, Inc. (“Oberon”),please see Note 7 to the Condensed Consolidated Financial Statements, includedelsewhere in this report.

 

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***Backlog***

 

Wemonitor backlog, which provides us with visibility of our future revenues, as areflection of our competitive success in our target markets and our ability toretain existing contracts and win new contracts. The following table summarizesour backlog as of the dates indicated:

 
| ** **    | ** ** | **As  of**                  | ** ** |
|---------------|------------|-----------------------------|------------|
| ** **    | ** ** | **December 25,  2009** | ** ** | **December 26,  2008** | ** ** |
| ** **    | ** ** | **(in  millions)**          | ** ** |
| Backlog:      |       |                        |       |   |   |
| Funded        |       | $                           | 389.8      |   | $ | 359.1 |   |
| Unfunded      |       | 1,727.1                     |       | 1,775.5 |   |
| Total Backlog |       | $                           | 2,116.9    |   | $ | 2,134.6 |   |

 

Eachyear, a significant portion of our revenues is derived from our backlog, and asignificant portion of our backlog represents work related to the continuationof services and solutions under contracts or projects where we are theincumbent provider.

 

Wedefine backlog as the amount of revenues we expect to realize (i) over theremaining base contract performance period and (ii) from the exercise bythe customer of option periods that we reasonably believe will be exercised, ineach case from signed contracts in existence as of the measurement date. We donot include contract ceiling values, which represent the maximum amount ofcontract awards that could be awarded to all contractors under government-wideacquisition contracts or agency-specific indefinite delivery/indefinitequantity contracts in our backlog calculation.

 

Wealso do not include in backlog (i) the expected amount of revenues thatwould be realized if, and when, we were successful in the re-compete of signedcontracts in existence as of the measurement date, or (ii) the expectedamount of revenues that would be realized from future unidentified growth onsigned contracts and task orders in existence as of the measurement date.

 

Wedefine funded backlog as the portion of our backlog for which funding currentlyis appropriated and obligated to us under a signed contract or task order bythe purchasing agency, or otherwise authorized for payment to us by a customerupon completion of a specified portion of work, less the amount of revenue wehave previously recognized under the contract. Our funded backlog does notinclude the full potential value of our contracts because Congress oftenappropriates funds to be used by an agency for a particular program or contracton a yearly or quarterly basis, even though the contract may call forperformance over a number of years. As a result, contracts typically are onlypartially funded at any point during their term, and all or some of the work tobe performed under the contracts may remain unfunded unless and until Congressmakes subsequent appropriations and the procuring agency allocates funding tothe contract.

 

***Contract Mix***

 

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

 

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

 
| ** **         | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|--------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **December 25, 2009** | ** ** | **December 26, 2008** | ** ** | **December 25 , 2009** | ** ** | **December 26,2008** | ** ** |
| Cost-plus-fee      |       | 33                         | %          | 30                         | %          | 30 | % | 31 | % |
| Time-and-materials |       | 47                         | %          | 51                         | %          | 49 | % | 51 | % |
| Fixed-price        |       | 20                         | %          | 19                         | %          | 21 | % | 18 | % |

 

Our contract mix as apercentage of total revenues may fluctuate from period to period depending onthe amount of work we are performing under our contracts. This means that ourmargins may also fluctuate from period to period. For example, in anygiven period our margins may increase due to a larger percentage of moreprofitable fixed-price contracts or decrease due to a larger percentage of lessprofitable cost-plus-fee or time-and-materials contracts. 

 

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***Headcount and Labor Utilization***

 

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

 

***Indirect Costs***

 

Indirectcosts constitute a substantial portion of the costs associated with ourperformance of contracts. We carefully monitor the amount by which our actualindirect costs under our contracts vary from those expected to be incurred,which we refer to as indirect expense variance. Increased indirect rates 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***

 

Dayssales outstanding, or DSO, is a measure of how efficiently we manage thebilling and collection of our accounts receivable, our most significant workingcapital requirement. For the three months ended December 25, 2009, wereported DSO of 76 days, a decrease from 79 days for the three months ended September 25,2009. The decrease in DSO was primarily the result of the timing of receiptsfrom customers during the quarter.

 

***Unbilled Receivables***

 

Unbilledreceivables are comprised of work-in-process that will be billed in accordancewith contract terms and delivery schedules, as well as amounts billable uponfinal execution of contracts, contract completion, milestones or completion ofrate negotiations. Because the billing of unbilled receivables is contingent onthose events, changes in the relative amount of unbilled receivables have animpact on our working capital and liquidity.

 

Paymentsto us for performance on certain of our federal government contracts aresubject to audit by the DCAA and are also subject to government funding. Weprovide a reserve against our receivables for estimated losses that may resultfrom rate negotiations, audit adjustments and/or government fundingavailability. To the extent that actual adjustments due to rate negotiations,audit adjustments or government funding availability differ from our estimates,our revenue may be impacted. Because substantially all of our receivables comefrom contracts funded by the federal government, we believe that the likelihoodof a material loss on an uncollectible account from this activity is low.

 

**Critical Accounting Policies**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our condensed consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of our condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect reported amounts, and actual results may differ from the estimates. Oursignificant accounting policies are described in Note 2 to our unauditedcondensed consolidated financial statements included elsewhere in this report.

 

Weconsider the following accounting policies to be critical to the understandingof our financial condition and results of operations because these policiesrequire the most difficult, subjective or complex judgments on the part of ourmanagement in their application, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain, and arethe most important to our financial condition and operating results.

 

***Revenue Recognition***

 

Werecognize revenue under our contracts when a contract has been executed, thecontract price is fixed and determinable, delivery of services or products hasoccurred and collectability is considered probable and can be reasonablyestimated. Revenue is earned under cost-plus-fee, fixed-price andtime-and-materials contracts. We use a standard management process to determinewhether all required criteria for revenue recognition have been met, whichincludes regular reviews of our contract performance. This review covers, amongother matters, progress against a schedule, outstanding action items, effortand staffing, quality, risks and issues, subcontract management, costsincurred, commitments and customer satisfaction. During this review, wedetermine whether the overall progress on a contract is consistent with theeffort expended.

 

Contractrevenue recognition inherently involves the use of estimates. Examples ofestimates include the contemplated level of

 

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

 

Undercost-plus-fee contracts, revenues are recognized as costs are incurred andinclude an estimate of applicable fees earned. For cost-plus-fee contracts thatinvolve a level of effort, fixed fees are earned in proportion to thepercentage of required effort delivered. For cost-plus-fee contracts which donot involve a level of effort requirement, fixed fees are earned in proportionto the percentage of work completed. For time-and-materials contracts, revenuesare computed by multiplying the number of direct labor-hours expended inperformance of the contract by the contractual billing rates and adding otherbillable 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.

 

Forcost-plus-award fee type contracts, we recognize the expected fee to be awardedby the customer at the time such fee can be reasonably estimated, based onfactors such as prior award experience and communication with the customerregarding performance, including any interim performance evaluations renderedby the customer. For cost-plus-incentive fee type contracts, the method ofcalculating the incentive fee is specified in the contract and it is typicallybased on measuring actual costs to perform the contract against a target costto perform the contract. We prepare periodic estimates to complete the contractand adjust the incentive fee as required based on the contract incentive feeformula.

 

Ourcontracts with agencies of the government are subject to periodic funding bythe respective contracting agency. Funding for a contract may be provided infull at inception of the contract or ratably throughout the contract as theservices are provided. From time to time, we may proceed with work based oncustomer direction prior to the completion and signing of formal contractdocuments. Such situations require completion of a formal internal reviewprocess and management approval prior to commencement of work. Additionally,revenue associated with such work is recognized without profit and only when itcan be reliably estimated and realization is probable. 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 tounsuccessful contract bids are expensed in the period in which we are notifiedthat the contract will not be issued.

 

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

 

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

 

***Contract Cost Accounting***

 

Asa contractor providing services primarily to the federal government, we mustcategorize our costs as either direct or indirect and allowable or unallowable.Direct costs are those costs that are identified with specific contracts. Thesecosts include labor, travel, subcontractor and consultant services, third partymaterials we purchase under a contract and other non-labor costs incurred insupport of a contract. Indirect costs are those costs not identified withspecific contracts. Rather, indirect costs are allocated to contracts inaccordance with federal government rules and regulations. These coststypically include certain of our selling, general and administrative expenses,fringe benefit expenses, overhead expenses and depreciation and amortizationcosts. Direct and indirect costs that are not allowable under the FederalAcquisition Regulation or specific contract provisions cannot be considered forreimbursement under our federal government contracts. We must specificallyidentify these costs to ensure we comply with these requirements. Ourunallowable costs include a portion of our executive compensation, certainemployee morale activities, certain types of legal and consulting costs,interest expense and the amortization of identified intangible assets, amongothers.

 

***Goodwill and Intangible Assets***

 

Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. We do not amortizegoodwill. We test goodwill for impairment at least on an annual basis. Testingfor impairment is a

 

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two-stepprocess. The first step is a test for potential impairment, while the secondstep measures the amount of impairment, if any. We are required to perform animpairment test at least on an annual basis at any time during the fiscal year,provided that the test is performed at the same time every year. An impairmentloss would be recognized when the asset’s fair value is below its carryingvalue. We have elected the last day of our third fiscal quarter as our testingdate. Based on the testing performed as of December 25, 2009, wedetermined that no impairments existed. Customer relationships are amortized ona straight-line basis over periods ranging from five to seven years.Non-competition agreements are amortized on a straight-line basis over threeyears. Backlog and contracts are amortized on a straight-line basis overperiods ranging from two to five years.

 

**Results of Operations**

 

Ourhistorical financial statements reflect the operating results of Oberon from July 15,2008, the date of acquisition. The following unaudited tables set forth theresults of operations expressed in thousands of dollars and as a percentage ofrevenues, for the periods below:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **December 25,**            | ** ** | **December 26,**           | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
| **Consolidated Statements of Income Data** | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                       |       | $                                | 227,022    |                            | $          | 203,597 |   | $ | 652,857 |   | $ | 567,242 |   |
| Operating costs and expenses:                                  |       |                             |       |                            |       |   |   |   |   |
| Cost of revenues                                               |       | 190,320                          |       | 170,091                         |       | 543,928 |   | 475,775 |   |
| Selling, general and administrative                            |       | 13,794                           |       | 13,220                          |       | 41,286 |   | 36,103 |   |
| Depreciation and amortization                                  |       | 2,895                            |       | 2,803                           |       | 8,576 |   | 7,231 |   |
| Total operating costs and expenses                             |       | 207,009                          |       | 186,114                         |       | 593,790 |   | 519,109 |   |
| Operating income                                               |       | 20,013                           |       | 17,483                          |       | 59,067 |   | 48,133 |   |
| Other income (expense):                                        |       |                             |       |                            |       |   |   |   |   |
| Other income                                                   |       | —                           |       | 17                              |       | 3 |   | 20 |   |
| Interest income                                                |       | 23                               |       | 77                              |       | 82 |   | 272 |   |
| Interest expense                                               |       | (906                             | )          | (2,047                          | )          | (2,951 | ) | (4,413 | ) |
| Total other expenses                                           |       | (883                             | )          | (1,953                          | )          | (2,866 | ) | (4,121 | ) |
| Income before taxes                                            |       | 19,130                           |       | 15,530                          |       | 56,201 |   | 44,012 |   |
| Provision for income taxes                                     |       | (7,294                           | )          | (5,852                          | )          | (21,948 | ) | (17,289 | ) |
| Net income                                                     |       | $                                | 11,836     |                            | $          | 9,678 |   | $ | 34,253 |   | $ | 26,723 |   |

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **December 25,**  | ** ** | **December 26,**           | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
| **As a Percentage of Revenues** | ** ** | **2009**               | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                            |       | 100.0                  | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Operating costs and expenses:                       |       |                   |       |                            |       |   |   |   |   |
| Cost of revenues                                    |       | 83.8                   |       | 83.5                            |       | 83.3 |   | 83.9 |   |
| Selling, general and administrative                 |       | 6.1                    |       | 6.5                             |       | 6.3 |   | 6.4 |   |
| Depreciation and amortization                       |       | 1.3                    |       | 1.4                             |       | 1.3 |   | 1.3 |   |
| Total operating costs and expenses                  |       | 91.2                   |       | 91.4                            |       | 91.0 |   | 91.5 |   |
| Operating income                                    |       | 8.8                    |       | 8.6                             |       | 9.0 |   | 8.5 |   |
| Other income (expense):                             |       |                   |       |                            |       |   |   |   |   |
| Other income                                        |       | —                 |       | —                          |       | — |   | — |   |
| Interest income                                     |       | —                 |       | —                          |       | — |   | — |   |
| Interest expense—net                           |       | (0.4                   | )          | (1.0                            | )          | (0.4 | ) | (0.8 | ) |
| Total other expenses                                |       | (0.4                   | )          | (1.0                            | )          | (0.4 | ) | (0.8 | ) |
| Income before taxes                                 |       | 8.4                    |       | 7.6                             |       | 8.6 |   | 7.8 |   |
| Provision for income taxes                          |       | (3.2                   | )          | (2.9                            | )          | (3.4 | ) | (3.0 | ) |
| Net income                                          |       | 5.2                    | %          | 4.8                             | %          | 5.2 | % | 4.7 | % |

 

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

 

Ourmost significant expense is cost of revenues, which includes the costs ofdirect labor, subcontractors, materials, equipment, non-reimbursable travel andan allocation of indirect costs (other than selling, general and administrativeexpenses and depreciation). Indirect costs consist primarily of fringebenefits, human resources, recruiting, training, other overhead and certainother non-direct costs that are necessary to support direct labor. The numberand types of personnel, their salaries and other costs, can have a significantimpact on our cost of revenues.

 

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

 

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

 

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

 

***Comparison of Results of Operationsfor the Three Months Ended December 25, 2009 and December 26, 2008***

 

***Revenues.***  Ourconsolidated revenues increased $23.4 million, or 11.5%, from $203.6 millionfor the three months ended December 26, 2008, to $227.0 million for thethree months ended December 25, 2009. The increase was primarily due to$7.0 million of increased revenues attributable to military intelligencetraining and operations support for the U.S. Army, $6.9 million of increasedrevenues attributable to procurement, production and engineering services undervarious SPAWAR contracts, $3.1 million of increased revenues attributable tobiometric software development, training and support for certain agencies in theDepartment of Defense, $1.8 million of increased revenues attributable toinformation technology and systems support for the U.S. Marine Corps, and $1.8million of increased revenues attributable to engineering, technical, andprogram management services to provide full life cycle engineering services forthe Naval Sea Logistics Center, offset by $1.6 million of decreased revenuesdue to reduced demand for passport services for the Department of State. Thebalance of increased revenues was primarily a result of engineering andtechnical support services for the U.S. Air Force and the Defense InformationSystems Agency and information technology life cycle support and logisticsmanagement services for the U.S. Army.

 

***Cost of Revenues.***  Our costof revenues increased $20.2 million, or 11.9%, from $170.1 million for thethree months ended December 26, 2008, to $190.3 million for the threemonths ended December 25, 2009. This increase was primarily the result ofadditional costs attributable to revenues associated with the increasedservices referred to above. Cost of revenues represented 83.8% of revenues forthe three months ended December 25, 2009, as compared to 83.5% of revenuesfor the three months ended December 26, 2008. This increase was primarilythe result of increased material and subcontractor costs associated withcost-plus-fee contracts.

 

***Selling, General and Administrative.***  Ourselling, general and administrative expense increased $0.6 million, or 4.3%,from $13.2 million for the three months ended December 26, 2008, to $13.8million for the three months ended December 25, 2009. This increase wasprimarily due to an increase in share-based payment expenses and higherselling, general and administrative expenses to support our growth. Selling,general and administrative expense represented 6.1% of revenues for the threemonths ended December 25, 2009, as compared to 6.5% of revenues for thethree months ended December 26, 2008. This decrease was primarily a resultof efficiencies realized in our corporate infrastructure on a larger revenuebase.

 

***Depreciation and Amortization.***  Ourdepreciation and amortization expense increased $0.1 million, or 3.3%, from$2.8 million for the three months ended December 26, 2008, to $2.9 millionfor the three months ended December 25, 2009. The increase in depreciationand amortization was primarily due to depreciation expense associated withadditional property and equipment to support our growth.

 

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***Interest Expense.***  Our interest expense decreased $1.1 million, or55.7%, from $2.0 million for the three months ended December 26, 2008, to$0.9 million for the three months ended December 25, 2009. The decrease ininterest expense was primarily due to a lower overall borrowing rate, coupledwith a lower overall outstanding debt balance.

 

***Provision for Income Taxes.  ***Our effectivetax rate increased by 0.4% from 37.7% for the three months ended December 26,2008, to 38.1% for the three months ended December 25, 2009. The increasewas primarily attributable to state tax expense.

 

***Net Income.***  Our netincome increased $2.1 million, or 22.3%, from $9.7 million for the three monthsended December 26, 2008, to $11.8 million for the three months ended December 25,2009. The primary reasons for the increase in net income were higher revenues,increased operating margin and lower interest expense.

 

***Comparison of Results of Operationsfor the Nine Months Ended December 25, 2009 and December 26, 2008***

 

***Revenues.***  Ourconsolidated revenues increased $85.7 million, or 15.1%, from $567.2 millionfor the nine months ended December 26, 2008, to $652.9 million for thenine months ended December 25, 2009. The increase was primarily due to$33.3 million of increased revenues attributable to military intelligencetraining and operations support for the U.S. Army, $14.1 million of increasedrevenues attributable to biometric software development, training and supportfor certain agencies in the Department of Defense, $14.0 million of increasedrevenues attributable to procurement, production and engineering services undervarious SPAWAR programs, $14.8 million of increased revenues attributable toengineering and technical support services, primarily for the U.S. Air Forceand the Defense Information Systems Agency, $10.3 million of increased revenuesattributable to information technology and systems support for the U.S. MarineCorps, and $6.1 million of increased revenues attributable to engineering,technical, and program management services to provide full life cycleengineering services for the Naval Sea Logistics Center, offset by $17.5million of decreased revenues due to reduced demand for passport services forthe Department of State. The balance of increased revenues was primarily aresult of information technology life cycle support and logistics managementservices for the U.S. Army. A significant portion of this growth was due to theimpact of the contracts obtained as part of the Oberon acquisition.

 

***Cost of Revenues.***  Our costof revenues increased $68.1 million, or 14.3%, from $475.8 million for the ninemonths ended December 26, 2008, to $543.9 million for the nine monthsended December 25, 2009. This increase was primarily the result ofadditional costs attributable to revenues associated with the increasedservices referred to above. Cost of revenues represented 83.3% of revenues forthe nine months ended December 25, 2009, as compared to 83.9% of revenuesfor the nine months ended December 26, 2008. This decrease was primarilythe result of a greater percentage of more profitable fixed price contracts.

 

***Selling, General and Administrative.***  Ourselling, general and administrative expense increased $5.2 million, or 14.4%,from $36.1 million for the nine months ended December 26, 2008, to $41.3million for the nine months ended December 25, 2009. This increase wasprimarily due to higher share-based payment expenses, an increase in businessdevelopment costs and higher selling, general and administrative expenses tosupport our growth. Selling, general and administrative expense represented6.3% of revenues for the nine months ended December 25, 2009, as comparedto 6.4% of revenues for the nine months ended December 26, 2008. Thisdecrease was primarily a result of efficiencies realized in our corporateinfrastructure on a larger revenue base.

 

***Depreciation and Amortization.***  Ourdepreciation and amortization expense increased $1.4 million, or 18.6%, from$7.2 million for the nine months ended December 26, 2008, to $8.6 millionfor the nine months ended December 25, 2009. The increase in depreciationand amortization was primarily due to depreciation expense associated withcapital expenditures and leasehold improvements as well as the amortization ofintangible assets associated with the acquisition of Oberon.

 

***Interest Income.***  Ourinterest income decreased $0.2 million from $0.3 million for the nine monthsended December 26, 2008, to $0.1 million for the nine months ended December 25,2009. The decrease in interest income was primarily due to a decrease in thenumber of delayed payments received from customers.

 

***Interest Expense.***  Our interest expense decreased $1.4 million, or33.1%, from $4.4 million for the nine months ended December 26, 2008, to$3.0 million for the nine months ended December 25, 2009. The decrease ininterest expense was primarily due to a lower overall borrowing rate, partiallyoffset by borrowings under our Senior Credit Facility relating to theacquisition of Oberon.

 

***Provision for Income Taxes.  ***Our effectivetax rate decreased by 0.2% from 39.3% for the nine months ended December 26,2008, to 39.1% for the nine months ended December 25, 2009. The decreasewas primarily attributable to a lower consolidated effective state income taxrate.

 

***Net Income.***  Our netincome increased $7.6 million, or 28.2%, from $26.7 million for the nine monthsended December 26, 2008, to $34.3 million for the nine months ended December 25,2009. The primary reasons for the increase in net income were higher revenues,increased operating income and lower interest expense, as well as improvedmargins primarily due to a larger percentage of more profitable fixed pricecontracts.

 

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**Liquidity and Capital Resources**

 

***Short-Term Liquidity Requirements.***  Wegenerally consider our short-term liquidity requirements to consist primarilyof funds necessary to finance the costs of operations pending the billing andcollection of accounts receivable. We expect to meet our short-term liquidityneeds through existing cash balances and cash provided by our operations and, ifnecessary, from borrowings under our Senior Credit Facility (defined below).

 

***Long-Term Liquidity Requirements.***  Wegenerally consider our long-term liquidity requirements to consist primarily offunds necessary to pay scheduled debt maturities, non-recurring capitalexpenditures and the costs associated with acquisitions that we may pursue.Historically, we have satisfied our long-term liquidity requirements throughvarious sources of capital, including cash provided by operations, equityofferings and borrowings under our Senior Credit Facility.

 

Webelieve that these sources of capital will continue to be available to us inthe future to fund our long-term liquidity requirements. However, our abilityto incur additional debt is dependent upon a number of factors, including ourdegree of leverage, the value of our unencumbered assets, borrowingrestrictions imposed by existing lenders and general market conditions. Inaddition, our ability to raise funds through the issuance of equity securitiesis dependent upon, among other things, general market conditions and marketperceptions about us. We will continue to analyze which source of capital ismost advantageous to us at any particular point in time, but the equity marketsmay not be consistently available on terms that are attractive, or at all.

 

Weexpect we will require additional borrowings, including borrowings under ourSenior Credit Facility, to satisfy our long-term liquidity requirements. Otherpotential sources of liquidity include the sale of common or preferred stock orthe issuance of debt securities.

 

***Cash Flows***

 

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

 
| ** **                                           | ** ** | **Nine  Months Ended**      | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **December 25,  2009** | ** ** | **December 26,  2008** | ** ** |
| ** **                                           | ** ** | **(in  millions)**          | ** ** |
| Net cash provided by operating activities            |       | $                           | 34.3       |   | $ | 38.5 |   |
| Net cash used in investing activities                |       | $                           | (3.4       | ) | $ | (176.8 | ) |
| Net cash (used in) provided by financing  activities |       | $                           | (30.5      | ) | $ | 143.6 |   |

 

Netcash provided by operating activities of $34.3 million for the nine monthsended December 25, 2009 primarily reflected the increased earnings as aresult of the improved profitability of our contracts, $5.5 million ofshare-based payment expense and $2.1 million of income tax benefits from stockcompensation, offset by an increase in our accounts receivables due to thetiming of several significant material procurements. Net cash provided byoperating activities of $38.5 million for the nine months ended December 26,2008 primarily reflected our net income plus depreciation and amortizationexpenses, $4.6 million of share-based payment expenses for that period, $2.4million of income tax benefits from stock compensation and a significantdecrease in billed receivable due to the receipt of delayed payments fromseveral key customers.

 

Netcash used in investing activities of $3.4 million for the nine months ended December 25,2009 consisted primarily of purchases of office equipment and leaseholdimprovements to support our operations.  Net cash used in investing activities of$176.8 million for the nine months ended December 26, 2008 consistedprimarily of $170.8 million for the purchase of Oberon and $6.0 million foroffice equipment and leasehold improvements for new facility leases.

 

Netcash used in financing activities of $30.5 million for the nine months ended December 25,2009 consisted primarily of $32.5 million in payments on our revolving portionof our Senior Credit Facility, partially offset by $1.8 million in proceedsfrom the exercise of stock options. Net cash provided by financing activities of $143.6million for the nine months ended December 26, 2008 consisted primarily of$142.9 million in borrowings under the revolving portion of our Senior CreditFacility to support the acquisition of Oberon and $1.0 million in proceeds fromthe exercise of stock options.

 

Asof December 25, 2009, we had $2.3 million in available cash.

 

***Credit Facilityand Borrowing Capacity***

 

Weare party to a credit agreement (“Senior Credit Facility” or “Amended CreditAgreement”) with a group of lenders for which SunTrust Robinson Humphrey, Inc.acted as sole book manager and lead arranger, SunTrust Bank acted asadministrative agent and M&T Bank and BB&T Bank acted asco-documentation agents.

 

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AtDecember 25, 2009, the lenders’ aggregate commitment under the SeniorCredit Facility was $276.6 million, which consisted of a $241.6 million revolvingline of credit (“Revolver”) and a $35.0 million term loan (“Term Loan”), and wehad outstanding indebtedness of $35.0 million on the Term Loan and $102.5million on the Revolver, with a weighted-average interest rate of approximately1.59% and 3.81% for the nine months ended December 25, 2009 and December 26,2008, respectively.  At December 25, 2009, our borrowing availabilityunder the Senior Credit Facility was $139.0 million, including outstandingletters of credit.  Under the terms of the Amended Credit Agreement, wemay request an increase in the size of the Revolver by an aggregate amount notgreater than $33.4 million. If any lender elects not to increase itscommitment, we may designate another bank or other financial institution tobecome a party to the Amended Credit Agreement.

 

TheAmended Credit Agreement also contains a number of affirmative and restrictivecovenants, including limitations on mergers, consolidations and dissolutions;sales of assets; investments and acquisitions; indebtedness and liens;repurchases of shares of capital stock and options to purchase shares ofcapital stock; transactions with affiliates; sale and leaseback transactions;and restricted payments.

 

Inaddition, the Amended Credit Agreement requires us to meet the followingfinancial covenants:

 

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

 

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

 

AtDecember 25, 2009, we were in compliance with all covenants under ourSenior Credit Facility. The obligations under the Senior Credit Facility areunconditionally guaranteed by each of our existing and subsequently acquired ororganized subsidiaries and are secured on a first-priority basis by securityinterests (subject to permitted liens) in substantially all assets owned by usand each of our subsidiaries, including the shares of capital stock of oursubsidiaries, subject to certain exceptions.

 

**Capital Expenditures**

 

Ourcapital expenditures were $3.4 million and $6.0 million for the nine monthsended December 25, 2009 and December 26, 2008, respectively.Substantially all of these expenditures consisted of leasehold improvements andpurchases of office equipment.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K as of December 25, 2009.

 

**Accounting Standards Updates**

 

InOctober 2009, the FASB issued an update to*“Revenue Recognition — Multiple Deliverable Revenue Arrangements.”* This update removes theobjective-and-reliable-evidence-of-fair-value criterion from the separationcriteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementsrequired under the “*Fair Value Measurementsand Disclosures”* guidance, provides a hierarchy that entities mustuse to estimate the selling price, eliminates the use of the residual method forallocation, and expands the ongoing disclosure requirements. This update iseffective for fiscal years beginning on or after June 15, 2010, and can beapplied prospectively or retrospectively. We do not expect that the adoption ofthis update will have a material impact on our consolidated financial positionor results of operations.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Ourprincipal exposure to market risk relates to changes in interest rates. Fromtime to time, we enter into interest rate swap agreements to limit exposure tointerest rate movements within the parameters of our interest rate hedgingpolicy. As of December 25, 2009, all of the outstanding debt under ourSenior Credit Facility, with the exception of the portion covered by aninterest rate swap, was subject to interest rate risk. In October 2006, weentered into an interest rate swap agreement covering fifty percent of our termindebtedness under which the swap and term debt maturities match. Even aftergiving effect to this agreement, we remain exposed to risks due to fluctuationsin the market value of this agreement and changes in interest rates withrespect to the portion of our Senior Credit Facility that is not covered bythis swap agreement. A hypothetical increase in the interest rate of 100 basispoints would have increased our interest expense for the nine months ended December 25,2009 on that portion of our outstanding debt not covered by the interest rateswap by $1.0 million.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof December 25, 2009, under the supervision and with the participation of ourmanagement, including our chief executive officer and our chief financialofficer, we have evaluated the effectiveness of our disclosure controls andprocedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of1934, as amended. Based on this evaluation, our chief executive officer and ourchief financial officer have concluded that our disclosure controls andprocedures were effective, as of December 25, 2009, such that the information that is required to bedisclosed in our reports filed with the SEC (i) is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms and (ii) is accumulated and communicated to management, includingour chief executive officer and our chief financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

**Changes in Internal Control over Financial Reporting**

 

Therehas not been any change in our internal control over financial reporting (asdefined in Rule 13a-15(f) of the Exchange Act) identified inconnection with the evaluation required by Rule 13a-15(d) under theExchange Act during the quarter ended December 25, 2009 that hasmaterially affected, or is reasonably likely to materially affect, thosecontrols.

 

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**PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

**S.C. Diamond Litigation — Virginia Beach Circuit Court**

 

OnApril 2, 2009, SC Diamond Associates, L.P. filed a lawsuit in VirginiaBeach Circuit Court against us and Allied Technology Group, Inc., orAllied.  S.C. Diamond is the owner of awarehouse property in Virginia Beach, Virginia in which we subleased a portionof the facility. In March 2008, the warehouse caught fire, allegedly as aresult of an exploded high-intensity metal halide bulb, which is alleged tohave been manufactured by Philips Electronics N.A. Corporation, d/b/a PhilipsLighting Company, or Philips.  S.C.Diamond has sued Allied, as its tenant, and us, as sub-lessee, alleging breachof contract and negligence against Allied, and negligence, negligence *per se* and nuisance against us.  S.C. Diamond seeks to recover approximately$12 million in damages from Allied and us. Travelers Indemnity Company, which insured S.C. Diamond, intervened inthe lawsuit on September 15, 2009, making subrogation claims against usand Philips, seeking to recover approximately $8 million in insurance proceedspreviously paid to S.C. Diamond.

 

Wedispute all the allegations against us, and have joined Allied and Travelers ina third-party action against Philips, alleging that Philips is liable for thewarehouse fire.  We are being defended inthis action by our general liability insurer, which has issued a reservation ofrights.  Trial is scheduled to commenceon July 6, 2010.  In management’s opinion,the disposition of this litigation is not expected to have a material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

**Other Litigation**

 

Otherthan as set forth above, neither we, nor any of our subsidiaries, are currentlysubject to any material legal proceedings, nor, to our knowledge, is anymaterial legal proceeding currently threatened against us.

 

**ITEM 1A. RISK FACTORS**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the risks discussed in “Part I, Item 1A. Risk Factors”in our Form 10-K for the fiscal year ended March 31, 2009. Theserisks and uncertainties have the potential to affect materially our business,financial condition, results of operation, cash flows and future prospects.

 

Wedo not believe that there have been any material changes to the risk factorspreviously disclosed in our Form 10-K for the fiscal year ended March 31,2009.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

 None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

Seethe exhibit index.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused 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                 |
|       | (Principal  Executive Officer)                                   |
|       | January 28,  2010                                           |
|       |                                                             |
| ** ** | **/s/ BRIAN J. CLARK**                                           |
|       | Brian  J. Clark                                                  |
|       | Executive  Vice President, Chief Financial Officer and Treasurer |
|       | (Principal  Financial and Accounting Officer)                    |
|       | January 28,  2010                                           |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                    |
| 3.1                  |       | Amended  and Restated Certificate of Incorporation of Stanley, Inc. (incorporated  by reference to Exhibit 3.1 to the Company’s Form 10-K for the  fiscal year ended March 31, 2008) |
|                 |       |                                                                                                                                                                                                          |
| 3.2                  |       | Amended  and Restated Bylaws of Stanley, Inc. (incorporated by reference to  Exhibit 3.2 to the Company’s Form 10-K for the fiscal year ended  March 31, 2008)                       |
|                 |       |                                                                                                                                                                                                          |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                                                                    |
|                 |       |                                                                                                                                                                                                          |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                                                                    |
|                 |       |                                                                                                                                                                                                          |
| 32.1                 |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of The Sarbanes-Oxley Act of 2002*                                                                        |

 

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*      Filed herewith

 

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