10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

o	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                to

Commission File Number

000-50080

SI International, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	52-2127278
(State of Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
12012 Sunset Hills Road, Reston, Virginia	20190-5869
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (703) 234-7000

Securities to be registered pursuant to Section 12(b) of the Act:

	Title of Each Class		Name of Each Exchange on Which Registered
None		None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer  o Accelerated filer  x Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo x

The aggregate market value of SI International, Inc. Common Stock held by non-affiliates of the registrant as of June 25, 2005 was $288,381,811.

As of March 1, 2006, there were 11,426,232 shares of SI International, Inc. Common Stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s annual report to stockholders for the fiscal year ended December 31, 2005 will be incorporated by reference into Part II and III of this Form 10-K. Certain portions of the definitive proxy statement to be used in connection with SI International, Inc.’s annual meeting of stockholders, which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2005, will be incorporated by reference into Part III of this Form 10-K.

SI INTERNATIONAL, INC.

FORM 10-K

		Page
PART I
ITEM 1	Business		3
ITEM 1A	Risk Factors.		18
ITEM 1B	Unresolved Staff Comments
ITEM 2	Properties		32
ITEM 3	Legal Proceedings		32
ITEM 4	Submission Of Matters To a Vote of Security Holders		33
PART II
ITEM 5	Market for the Company’s Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities		34
ITEM 6	Selected Financials Data		35
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
ITEM 7A	Quantitative and Qualitative Disclosures about Market Risk		49
ITEM 8	Financial Statements and Supplementary Data		49
ITEM 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		50
ITEM 9A	Controls and Procedures		50
ITEM 9B	Other Information		52
PART III
ITEM 10	Directors and Executive Officers of the Company
ITEM 11	Executive Compensation
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13	Certain Relationships and Related Transactions
ITEM 14	Principal Accountant Fees and Services
PART IV
ITEM 15	Exhibits and Financial Statement Schedules		53
	Signatures		54

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BUSINESS INFORMATION

Throughout this document, we occasionally distinguish between SI International, Inc., as a company separate from its subsidiaries, and SI International, Inc., as a company combined with its subsidiaries.
In order to clarify which entity we are referring to in various discussions, we use the terms
“SI International, Inc.” and “SI International” to refer to SI International, Inc. without its subsidiaries. All other references, including “SI,” “the Company,” “we” and “us” refer to SI International and its subsidiaries.

Some of the statements under Item 1. “Business,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10 K constitute forward looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward looking statements. In some cases, you can identify these statements by forward looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict accurately or control. The factors listed in the section captioned Item 1A. “Risk Factors,” as well as any cautionary language in this Form 10 K, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward looking statements.

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward looking statements, which apply only as of the date of this Form 10 K. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward looking statements at some point in the future, we specifically disclaim any obligation to do so.

PART I

Item 1. BusinessSI International, Inc. was organized as a Delaware corporation under the name of “SI International, Incorporated” on October 14, 1998. SI International conducts operations both in its own name and through subsidiaries, each of which is located in the U.S. but some of which have international operations.

Recent Events

Zen Acquisition.   On February 27, 2006, we closed the acquisition of Zen Technology, Inc, or Zen, a Virginia corporation, pursuant to a Stock Purchase Agreement dated February 8, 2006 (the “Zen Agreement”).  Zen is a provider of critical IT services, specializing in managed network services, information assurance, software development and systems engineering, database and systems administration and IT consulting to various U.S. Government agencies.  Zen’s largest clients include the Missile Defense Agency (MDA), Department of Defense’s Washington Headquarters Services (WHS), Federal Communications Commission (FCC), the Pension Benefit Guaranty Corporation (PBGC), and the Federal Trade Commission (FTC).  As a result of our acquisition of Zen, we gained approximately 275 employees, of which approximately 50% hold security clearances.  The acquisition of Zen provides additional scale with existing customers as well as diversification with new government customers. 

Pursuant to the terms of the Zen Agreement we acquired all of the outstanding capital stock of Zen for $60 million in cash, of which we are withholding $6 million for 15 months in order to secure post-closing indemnity obligations of the sellers.  The purchase price is subject to a two-way adjustment based upon whether the working capital of Zen as of the closing date was above or below the target working capital specified in the Zen Agreement. Each of the parties to the Zen Agreement has made customary representations and warranties and agreed to certain indemnification obligations. The transaction was

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funded through cash-on-hand, a subordinated Seller’s Note in the amount of $6 million, and borrowing from our newly amended credit facility, which is described below. We expect the acquisition to be accretive to earnings. Zen’s trailing twelve months revenue ended November 30, 2005, was approximately $38 million (unaudited).

Amendment to Credit Facility.   On February 27, 2006, contemporaneously with our closing the acquisition of Zen, we entered into a First Amendment to the Amended and Restated Credit Agreement, or First Amendment, with a syndicate of lenders, including Wachovia Bank, National Association, a national banking association, which acted as administrative agent for the lenders.

The First Amendment amended the terms and conditions of the Amended and Restated Credit Agreement entered into on February 9, 2005, or the Credit Agreement, by (i) establishing a new term loan in the principal amount of approximately $129.3 million, which replaced the then existing term loan under the Credit Agreement, (ii) reducing both the base rate margin and the LIBOR margin on the term facility, (iii) increasing the leverage ratio for the financial covenants and (iv) amending certain restrictive covenants.  The principal balance of the new term loan is to be repaid in quarterly installments commencing March 31, 2006, with the balance due upon the expiration of the Credit Agreement, as amended, or the Amended Credit Agreement, on February 9, 2011.  If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the Amended Credit Agreement.

The funds borrowed under the new term loan were used to (i) refinance the approximately $99.3 million in principal outstanding under the then existing term loan under the Credit Agreement and to pay any and all fees and expenses related thereto; (ii) to finance the acquisition of Zen and pay any and all fees and expenses related thereto; and (iii) to provide for working capital expenditures, and other general corporate uses. 

The borrowing capacity under the Amended Credit Agreement totals approximately $189.3 million and is comprised of a $60 million five-year revolving credit facility and approximately $129.3 million term loan facility.  Additionally, a $75 million uncommitted incremental term loan facility will be available upon our request at any time for up to two years from the date of the Credit Agreement from one or more of the lenders.

NVC Contract Award.   On January 31, 2006, in a recompetition for our expiring National Visa Center, or NVC, contract, we were awarded the successor contract for the NVC contract by the Department of State. Under the contract, we anticipate performing over 20 million immigrant visa transactions each year at the NVC in Portsmouth, New Hampshire and at the Kentucky Consular Center in Williamsburg, Kentucky. The prime contract has a one-year base period and four one-year options with an announced value of approximately $84 million, inclusive of the options.

Acceleration of Vesting of Stock Options.   On December 13, 2005, our Board of Directors approved the accelerated vesting of unvested stock options previously awarded to employees, officers and directors as of December 7, 2005 in light of new accounting regulations that were to come into effect January 1, 2006. Based on the Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), the Board took the action to accelerate the unvested stock with the belief that it is in the best interest of stockholders, as it will reduce the Company’s reported compensation expense in future periods.

Overview

We are a provider of mission critical information technology and network solutions primarily to the Federal Government. Our business is guided by our experienced team of eight executive officers and over twenty-five other corporate officers who manage and are responsible for successfully growing our business. As of the end of fiscal year 2005, we employed over 4,000 employees. Approximately 85% of our employees hold Federal Government security clearances or have passed National Agency Checks. Approximately 15% of our employees hold Top Secret security clearances. A significant portion of our

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employees who hold Top Secret security clearances also hold Sensitive Compartmental Information clearances, which permit us to bid on highly classified projects.

Our broad set of contract vehicles gives us extensive reach and enables us to deliver a full range of our services and solutions to the Federal Government. The strength of our service offerings and information technology expertise allows us to maintain substantial relationships with clients, some of whom have been clients of ours, or of one of our acquired businesses, for over 20 years. In fiscal 2005 and fiscal 2004, we derived approximately 75% and 81%, respectively, of our revenue from contracts on which we acted as prime contractor. Acting as a prime contractor provides us with stronger client relationships, as well as the visibility and access to new work that are not available when acting as a subcontractor. Our total backlog as of December 31, 2005 was approximately $854 million, of which approximately $191 million was funded. See “—Backlog” for a discussion of how we calculate backlog.

The Federal Government technology services market

The ongoing transformation of the Federal Government’s information systems and communication networks is creating an increase in its demand for information technology, or IT, services. According to INPUT, an independent market research firm, the federal market demand for vendor-furnished information systems and services is projected to increase by $19.6 billion from $59.2 billion in government fiscal 2005 to $78.8 billion in government fiscal 2010, a compound annual growth rate of approximately 5.9%. In addition, the addressable IT spending, which is the amount that is contracted out, for the U.S. Air Force, our single largest client in terms of revenue for each of the last four completed fiscal years, is projected by INPUT to grow from $4.8 billion in government fiscal 2005 to $7.0 billion in government fiscal 2010, representing a compounded annual growth rate of 7.8%. The Department of Homeland Security addressable portion of the IT budget is projected by INPUT to grow from $4.5 billion in government fiscal 2005 to $6.4 billion in government fiscal 2010, representing a compounded annual growth rate of 7.6%. Spending for federal IT requested by the U.S. Office of Management and Budget (OMB) in government fiscal 2006 shows an increase of 9.0% over the government fiscal 2005 request, according to INPUT.

We expect that the Federal Government’s need for the types of IT services that we provide will continue to grow in the foreseeable future, as a result of the high priority placed by the federal government on the transformation of its IT programs. INPUT forecasts that the percentage of IT spending that is contracted out by the federal government will reach a high of 86% of total IT spending in government fiscal 2010. According to INPUT, the government fiscal 2006 IT budget request of 7% over the enacted government fiscal 2005 budget, at a time when the request for overall federal spending was nearly flat, demonstrated the importance the administration places on IT as an integral part of federal business processes.

We believe the following industry trends will also continue to drive the Federal Government technology services market:

·Continued focus on mission-critical initiatives.Since the events of September 11, 2001, the Federal Government has made the transformation of its IT infrastructure a major priority. According to INPUT, the Federal Government IT services “commercial” segment, which is comprised of outsourcing, professional services, systems integration and processing services, is projected to grow from $25.1 billion in government fiscal 2005 to $34.1 billion in government fiscal 2010, representing a projected compounded annual growth rate of 6.1%. According to INPUT, growth in the commercial segment for the U.S. Air Force is projected to rise from $1.7 billion in government fiscal 2005 to $2.6 billion in government fiscal year 2010, a compounded annual growth rate of 8.9%.

·Increased Federal Government reliance on outsourcing.According to INPUT, outsourcing through the use of outside providers to provide Federal Government services is projected to grow from $12.3 billion in government fiscal 2005 to $17 billion in government fiscal 2010, representing a projected compounded annual growth rate of 6.9%.

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We believe that the Federal Government is increasingly turning to the IT industry to execute support processes and functions that were traditionally performed by Federal Government employees. INPUT expects that Department of Defense (DoD) budgets will continue to grow over the next several governmental fiscal years and anticipates that each of the defense agencies will move toward outsourcing more of the information technology functions that are not core to the war-fighting mission. Business process outsourcing, or BPO, is a relationship in which a contractor is responsible for performing an entire business operations function, including the information systems outsourcing that supports it. INPUT projects that Federal Government BPO spending will grow from $555 million in government fiscal 2005 to $857 million in government fiscal in 2010, which represents a compounded annual growth rate of 9.1%. In addition, during this same period, INPUT projects a compounded annual growth rate for BPO spending by defense agencies of 8.3%. According to INPUT, the size of the Federal Government workforce, which includes only civilian employees and non-uniform military personnel in federal civilian agencies and the DoD, decreased by 1.1 million workers during the period 1990 through 2000, representing a 22% decline.

We believe that homeland security will have the greatest impact on three specific segments of the Federal Government IT market: information security, communications and knowledge management. We believe that the rapid pace of technological innovations and the Federal Government’s increasing reliance on complex IT infrastructure, combined with a decline in the size of the Federal Government workforce, as described above, make it increasingly difficult for many governmental agencies to operate and upgrade their IT systems. We expect that several trends will contribute to the Federal Government’s increased use of service providers to fulfill a larger portion of its iIT responsibilities, and we believe that we will continue to gain new engagements to the extent that the Federal Government increases its reliance on outsourcing for its IT needs. These trends include:

·The aging of the Federal Government’s workforce.According to INPUT, the government has estimated that more than 45% of federal IT workers will be eligible for retirement by 2008, and the average age of Federal Government employees increased from 42 years of age in 1990 to 47 years of age in 2005. In April 2001, the GAO concluded in a report that the Federal Government’s human capital challenges are adversely affecting the ability of many agencies to carry out their missions.

·Increased Federal Government emphasis on competitive sourcing.The current administration has made competitive sourcing a major initiative of its management agenda. According to the President’s Management Agenda, which was issued in 2001 and for which progress reports continue to be issued, including most recently during 2003, nearly half of all Federal Government employees perform tasks that are available in the commercial marketplace. To the extent that the size of the Federal Government workforce decreases, we believe that the Federal Government will have an increased need for entities that offer the technical skills, familiarity with government processes and procedures and skilled personnel that are necessary to meet the diverse IT requirements of the various Federal Government agencies.

Increased spending on homeland security and intelligence.

In the wake of the terrorist attacks on September 11, 2001, there has been an increased emphasis on homeland security, intelligence and national defense, including protecting critical infrastructure. According to INPUT, the total addressable IT budget for the Department of Homeland Security is projected to grow from $4.5 billion in government fiscal 2005 to $6.4 billion in government fiscal 2010, representing a compound annual growth rate of 7.6%.

Although the total amount to be spent for intelligence applications is classified, based on available information, INPUT has forecasted that the addressable Federal Government IT spending in the intelligence community may be as much as $7.8 billion in government fiscal 2005. We believe that there will continue to be increases in spending on federal intelligence activities, which are expected to represent significant additional opportunities for us.

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Increased simplicity of procurement.

Through changes that began with the Federal Acquisition Streamlining Act of 1994, or FASA 94, the federal government has developed a variety of accelerated contracting methods. Federal governmental agencies have increasingly been able to rely on multiple contracting vehicles to procure needed services in an expedient manner. According to INPUT, the average time to procure products and services was approximately 100 days in government fiscal 2004 as compared to 278 days in government fiscal 1995.

Our Core Strengths

We strategically built our business to respond specifically to the federal IT marketplace. We believe that our core strengths position us to respond to the long-term trends and changing demands of our market.

Our Experienced Management Team

On July 15, 2005, our Board of Directors approved a CEO succession plan, pursuant to which the Board appointed S. Bradford Antle, formerly our President and Chief Operating Officer, to be the next President and Chief Executive Officer (CEO) succeeding Ray J. Oleson, and to serve on our Board of Directors. Mr. Antle assumed these positions effective September 24, 2005. Mr. Antle, who joined us in 1999, brings more than 25 years of management experience in our industry to his new position. In addition to his new role as CEO and member of the Board, Mr. Antle retained the position of President. Ray Oleson continues to serve as Executive Chairman of the Board.

Additionally, to further support our growth during 2006 and beyond, our eight business units are now incorporated into the Strategic Programs Group, the IT Solutions Group, and the Mission Services Group. Each of these Business Groups is headed by an Executive Vice President, who reports to Mr. Antle.

Harry Gatanas is the Executive Vice President of the Strategic Programs Group, where he oversees a significant portion of our business with the DoD and the Intelligence community. Mr. Gatanas is a retired U.S. Army general with over 30 years of experience in the military and intelligence community, including serving as Commanding General of the U.S. Army White Sands Missile Range.

Marylynn Stowers is the Executive Vice President of the IT Solutions Group. She oversees a significant portion of business that addresses federal IT modernization. Ms. Stowers has more than 24 years of experience providing IT services to the Federal Government, such as Department of Homeland Security, Department of State, Department of Treasury, Internal Revenue Service, and the Intelligence community.

Mike Becraft is the Executive Vice President of the Mission Services Group. He is responsible for a major portion of work with the Deparment of Homeland Security, Department of State, and U.S. Army. Mr. Becraft has more than 37 years of Federal civilian government and military experience. He joined us in 2003 as Senior Vice President of Homeland Security.

Our Corporate Culture

Our corporate culture is based on respect for clients, personnel, business partners and management. We view our commitment to this culture of respect as a cornerstone of our company. We believe that our culture helps us build the relationships necessary to gain an in-depth understanding of our clients’ needs, business practices and information technology and network systems. In addition, we believe our culture is a factor in helping our employee turnover rate remain low compared to other companies in our industry, helping us to maintain client domain knowledge and provide consistent service to our clients. Further, we believe that our commitment to respect, combined with quality of performance, is an important factor in retaining clients and winning new referrals.

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Focus on Information Technology Services

We deliver a full spectrum of IT services and solutions that address challenges common to many Federal Government agencies and commercial companies. Our capabilities position us to capitalize on the Federal Government’s increasing demand for IT services. We integrate our technical areas of expertise into comprehensive solutions covering IT applications, systems engineering, network and telecommunications engineering and outsourcing. Our focus on end-to-end information technology solutions allows us to leverage our knowledge and experience to provide best practices across many Federal Government agencies and industries. Our key focus areas are:

·Federal IT Modernization.   We define federal IT modernization to include designing, building and deploying solutions that enable our clients to replace legacy applications and databases and allow effective information sharing across agencies. We believe we have a proven track record of delivering true end-to-end solutions in this focus area that encompass application and software development, systems engineering, network solutions, and information security and performance support.

·Defense Transformation.   We define defense transformation to include development of solutions intended to enable the U.S. military to successfully adapt to the requirements of net-centric warfare through our deep capabilities in space systems engineering, enterprise and operational architecture, command and control, logistics, and military satellite communications. In the area of space systems modernization, we are supporting clients such as Air Force Space Command, NORAD, Northern Command and U.S. Strategic Command.

·Homeland Defense.   We define homeland defense as defense of the U.S. homeland, and includes the development of large scale replicated databases, secure optical calls processing and identification systems, managing records, and processing visas. We are working in this focus area to provide advanced information technology to assist in meeting this challenge for clients that include Department of Homeland Security, Department of State, Northern Command, Department of Energy, and Department of Agriculture.

·Mission-Critical Outsourcing.   We define mission-critical outsourcing as assisting the Federal Government with shortages of personnel, including for the purpose of permitting re-assignment to higher priority government assignments, increasing operational efficiency, and improving the overall quality of service. We provide services in this focus area to both civilian agencies and the DoD.

Our skilled employees use their advanced technological training and extensive experience to implement our state-of-the-practice solutions. As of the end of fiscal year 2005, we employed over 4,000 employees, many of whom possess security clearances and National Agency Checks that allow us to bid on and perform classified work for the Federal Government.

Knowledge of Federal Government Contracting and Federal Agencies

We believe that our in-depth knowledge of Federal Government contracting and the governmental agencies we serve and their procurement processes allows us to provide better solutions for our clients’ needs. Our experienced team of executive officers and senior managers brings to us their many years of experience and extensive contacts in the industry. They provide us with an understanding of our clients’ needs and procedures, as well as valuable mission-specific information. We believe that the insight provided by our officers and managers allows us to design solutions that are responsive to our clients’ mission-critical needs.

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Successful Integration of Acquired Businesses

We believe that a critical component of our success is our ability to identify, acquire and integrate companies that build or expand our suite of services to serve our clients’ needs more effectively. Members of our management team have substantial experience acquiring and successfully integrating acquired entities. We believe that this experience provides a basis for our disciplined approach to identifying acquisition candidates and integrating acquired companies. By integrating corporate infrastructures such as marketing and sales, accounting, human resources and internal networks, we can save the expense of redundant functions. In addition, by integrating operations, we establish a corporate-wide mission which can reduce internal competition and promote the cross-selling of newly augmented skill sets to increase our client base.

Within the 15-month period from January 1999 through March 2000, we identified, acquired and integrated four federal IT companies with aggregate revenues of approximately $105 million, measured for the 12 months prior to their respective acquisition dates. In January, 2004, we acquired Matcom International Corporation, or Matcom; in December 2004, we acquired Bridge Technology Corporation, or Bridge; in February 2005, we acquired Shenandoah Electronic Intelligence, Inc., or SEI. We successfully integrated each of these acquisitions into our organization; and, we built and expanded our services and solutions capabilities and our client relationships. We applied our disciplined acquisition processes to integrate the acquired companies and successfully grew these businesses. On February 27, 2006, we acquired Zen, and we have commenced the integration process as we have done with our previous acquisitions.

Our Growth Strategy

We have implemented the following strategies in order to reach our goal of becoming a leading provider of information technology and network solutions to our clients:

·Maintain and expand our existing client relationships.   We maintain relationships with our existing clients by adhering to our culture of respect and providing quality performance. We believe this helps us win renewals of our engagements. In addition, we use our knowledge of our clients’ needs to identify additional opportunities and cross-sell new services to them.

·Leverage our existing client base to win new clients.   We believe satisfied clients are one of our most effective marketing tools. Since FASA 94 went into effect, client referrals have become a crucial component of expedited procurement processes and are key to our winning new contracts. Since we focus on technology infrastructure improvement, we are able to transfer our skills readily from client to client. We plan to continue building a network of clients and leveraging these relationships to gain access to new clients. We have launched a Major Programs initiative through which we intend to compete for large contracts over longer procurement periods. We believe that favorable client referrals are strategically important to our winning these opportunities.

·Pursue strategic acquisitions.   We plan to continue utilizing our disciplined methodology to identify, evaluate and integrate strategic acquisitions. We have acquired and successfully integrated seven businesses since 1999 and we are in the process of integrating our eighth acquisition, Zen, which we acquired in February 2006. This acquisition has positioned us with strategically important technical skills in important client areas.

·Business Capabilities and Sales Integration.   Our business units are now incorporated into the Strategic Programs Group, the IT Solutions Group, and the Mission Services Group. Under our new management structure (see above Our Experienced Management Team for more information about our management), these three business groups will be better able to present integrated solutions through the cross-marketing and delivery of our business capabilities to new and existing customers.

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Our Areas of Practice

We provide IT and network solutions in the following eight practice areas to supplement our clients needs in Defense Transformation, Homeland Defense, Mission Critical Outsourcing and Federal IT Modernization.

·Program Management & Acquisition Support – The program management and acquisition support practice assists clients with initiating, assembling, executing, and managing all sizes of acquisition programs. The practice area provides acquisition strategies, government required documentation (DoD 5000), and solicitation packages, as well as, source selections and contract management support. The practice area manages and oversees high-tech systems development; interprets and synchronizes requirements with system architectures and integrated master plans; and, identifies and tracks technical and programmatic interdependencies and interactions among requirements. The technical staff is skilled in providing systems engineering technical assistance (SETA) support to client programs for cost, schedule, performance, risk management, and contracting activities.

·Integrated Solutions Development – The integrated solutions development practice focuses on
the integration of commercial-off-the-shelf products with custom software engineering. Integrated solutions are deployed using structured Capability Maturity Model Integration (CMMI) practices to deliver services including feasibility studies and systems planning, enterprise architecture design, rapid prototype development, detailed systems design, implementation, independent verification and validation, testing, life-cycle documentation, and operations and maintenance. This practice area specializes in legacy systems migration to enterprise-wide applications, database-driven web applications (internet, extranet, and intranet), work flow systems implementation, enterprise portal development, enterprise-wide IT integrated services, mobile and wireless solutions, business intelligence (data warehouse and mining solutions) and Enterprice Resource Planning systems implementation.

·Information Security – The information security practice delivers analyses, methods and technologies that enable clients to secure their information against unauthorized access and service disruption. The solutions are designed to protect and defend information systems against malicious actions, reduce the threat to system security and proactively manage risk. The practice area provides security policy and procedure development, threat determination and risk assessment, vulnerability analysis, system security engineering, network defense, secure document processing, applications and web security, security evaluation and accreditation and training.

·Records Management – The records management practice specializes in application processing, data entry, case and file management, large scale identification and credentialing systems, call center support, and analytical support services. The practice area services include the management and operation of integrated file tracking systems, electronic records management, large volume file processing, secure identity card production, scanning operations to include documents and biometrics, storing and shipping of documents, quality control audits, secure file destruction, and network installation.

·Learning Solutions – The learning solutions practice focuses on the design, development and delivery of learning and performance interventions to meet the client’s individual and organizational performance needs and manage change. The practice area provides front end analysis, blended solutions, web-based and instructor-led training, electronic performance support systems (EPSS), human performance design, and learning standards and learning infrastructure consulting. Our understanding and experience in the distance learning, e-Learning, and ever changing Learning Management Systems/Learning Content Manangement Systems environments provides our clients rapid design and deployment of solution-based programs to meet today’s requirements and tomorrow’s challenges.

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·Systems Engineering – The systems engineering practice delivers mission and requirements analysis, enterprise/operational architecture modeling and development, system application and development, system design, validation and verification, integrated logistics support, life cycle engineering, and complex simulation. The technical staff is skilled in command, control, communications, computer and intelligence (C4I), engineering, object oriented analysis and design, system testing, requirements traceability and specialty disciplines, including reliability/maintainability/availability engineering and safety and sustaining engineering. Many of these skills are focused on military space applications.

·Network Solutions – The network solutions practice designs, engineers, deploys, and manages a full range of networked communications and infrastructure solutions. The practice area provides IT and network requirements, definition and analysis, detailed systems design, network and technology selection and procurement, global end-to-end installation, and spectrum/bandwidth management. These solutions encompass voice, video, data, narrowband, broadband and wireless technologies. Applications include large scale enterprise networks for government, highly secure networks.

·Mission-critical Outsouring – The mission-critical outsouring practice uses domain expertise to operate clients’ systems and processes vital to their businesses. The practice area offers professional services to perform business process and information technology outsourcing, sustaining engineering, logistics services, and call center operations.

Clients

We provide our services primarily to Federal Government clients such as the U.S. Air Force Space Command, the U.S. Army, U.S. Navy, the Department of State, the Department of Homeland Security, Department of Agriculture, National Institutes of Health, Federal Retirement Thrift Investment Board, and the defense intelligence community. In fiscal 2005, we derived approximately 98% of our total revenue from Federal Governmental agencies and approximately 2% of our total revenue from commercial clients.

Our largest client is the DoD. We derived approximately 47% of our total revenue in fiscal 2005 and approximately 53% of our total revenue in fiscal 2004 from the DoD and the Intelligence community. In fiscal 2005 and fiscal 2004, services we provided to the U.S. Air Force Space Command represented 23% and 26% of our total revenue, respectively. We also derived approximately 12% of our fiscal 2005 and 2004 revenue, respectively, from the Department of State. Each of these entities consists of a substantial number of separate offices, each of which typically exercises independent decision making and funding authority. We believe our contract base among these separate offices is well diversified. In fiscal 2005 and fiscal 2004, we derived approximately 75% and 81%, respectively, of our revenue from contracts on which we acted as prime contractor and derived approximately 25% and 19%, respectively, of our revenue from contracts on which we acted as a subcontractor.

We often subcontract portions of work to be performed under a contract or task order under which we are the prime contractor. Approximately 15% and 16%, respectively, of our total revenue in fiscal 2005 and fiscal 2004, respectively, was generated by work performed by subcontractors. The subcontractors are sometimes responsible for critical portions of the contracted services. Our subcontracting arrangements typically specify that all terms of the primary contract pass down to the subcontractor. We are not dependent upon any one subcontractor or group of subcontractors to provide a substantial degree of work for us. In addition, it is typical that a subcontractor on one engagement may be a competitor or a client in other situations. We believe that cultivating good relationships with our subcontractors is necessary to maintain our competitive position as well as to facilitate meeting performance obligations under our contracts.

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Backlog

Backlog is our estimate of the amount of revenue we expect to realize over the remaining life of awarded contracts and task orders we have in hand as of the measurement date. Our total backlog consists of funded and unfunded backlog. We define funded backlog as estimated future revenue under government contracts and task orders for which funding has been appropriated by Congress and authorized for expenditure by the applicable agency, plus our estimate of the future revenue we expect to realize from our commercial contracts. Unfunded backlog is the difference between total backlog and funded backlog. Unfunded backlog reflects our estimate of future revenue under awarded government contracts and task orders for which either funding has not yet been appropriated or expenditure has not yet been authorized. Our total backlog does not include estimates of revenue from government-wide acquisition contracts, or GWAC contracts, or General Services Administration, or GSA, schedules beyond awarded or funded task orders, but our unfunded backlog does include estimates of revenue beyond awarded or funded task orders for other types of indefinite delivery, indefinite quantity, or ID/IQ, contracts, such as our contract with the U.S. Air Force Space Command.

Our total backlog as of December 31, 2005 was approximately $854 million, of which approximately $191 million was funded. There can be no assurance that we will receive the amounts we have included in our backlog or that we will ultimately recognize the full amount of our funded backlog as of December 31, 2005.

As of December 31, 2005, assuming that the acquisition of Zen had occurred on such date, our backlog was approximately $994 million, of which $233 million was funded.

We believe that backlog is not necessarily indicative of the future revenue that we will actually receive from contract awards that are included in calculating our backlog. We assess the potential value of contracts for purposes of backlog based upon several subjective factors. These subjective factors include our judgments regarding historical trends (i.e., how much revenue we have received from similar contracts in the past), competition (i.e., how likely are we to successfully keep all parts of the work to be performed under the contract) and budget availability (i.e., how likely is it that the entire contract will receive the necessary funding). If we do not accurately assess each of these factors, or if we do not include all of the variables that affect the revenue that we recognize from our contracts, the potential value of our contracts, and accordingly, our backlog, will not reflect the actual revenue received from contracts and task orders. As a result, there can be no assurance that we will receive amounts included in our backlog or that monies will be appropriated by Congress or otherwise made available to finance contracts and task orders included in our backlog. Many factors that affect the scheduling of projects could alter the actual timing of revenue on projects included in backlog. There is always the possibility that the contracts could be adjusted or cancelled. We adjust our backlog on a quarterly basis to reflect modifications to or renewals of existing contracts, awards of new contracts or approvals of expenditures. See Item 1A. “Risk Factors—The calculation of our backlog is subject to numerous uncertainties, and we may not receive the full amounts of revenue estimated under the contracts included in our backlog, which could reduce our revenue in future periods.”

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Employees

As of December 31, 2005, we had over 4,000 employees. Approximately 85% of our employees hold Federal Government security clearances or have passed National Agency Checks. Approximately 15% of our employees hold Top Secret security clearances. A significant portion of our employees who hold Top Secret security clearances also hold Sensitive Compartmental Information clearances, which permit us to bid on highly classified projects. We have no unionized employees and do not have any collective bargaining agreements. However, current contracts or contracts that we may pursue contracts may require us to have unionized employees. Furthermore, with our acquisition of Zen, we have added approximately 275 employees, of which 50% hold security clearances. We believe we have a good relationship with our employees.

In addition to attracting and retaining qualified technical personnel, we believe that our success will depend on the continued employment of our executive and senior management team and its ability to generate new business and execute projects successfully. We believe that the personal reputations of our management team members and the business relationships between individual members of our management team and governmental officials involved in the procurement process and related areas are critical elements of obtaining and maintaining client engagements in our industry, particularly with agencies performing classified operations. To create and maintain these client relationships, identify potential business opportunities and establish our reputation among our current and potential clients, we depend on our senior management team. The loss of any of our senior executives could cause us to lose client relationships or new business opportunities, which could materially adversely affect our business.

Competition

We operate in markets that are highly competitive and include a large number of participants. We compete with many companies, both large and small, for our contracts. We do not have a consistent number of competitors against whom we repeatedly compete. If we anticipate that our combined resources may create a competitive advantage, we may team with other companies to perform work under contracts. These and other companies in our market may compete more effectively than we can because they are larger, have greater financial and other resources, have better or more extensive relationships with governmental officials involved in the procurement process and have greater brand or name recognition.

As a result of the diverse requirements of the Federal Government and our commercial clients, we frequently form teams with the companies in our markets in order to compete for large procurements, while bidding against them in other situations.

In each of our practice areas, we generally bid against companies of varying sizes and specialties, from small businesses to multi-billion dollar corporations. Because of the current industry trend toward consolidation, some of these companies may emerge better able to compete with us. Therefore, it is essential that we differentiate ourselves from these companies. We believe that our technical abilities, client relationships, past performance, cost containment, reputation and ability to provide quality personnel give us a strong presence in the markets we serve. In addition, we believe that our culture of respect for and commitment to our clients and business partners greatly aids our business. While we believe these factors help to set us apart from other companies in our markets, we may not be able to continue to maintain our competitive position, as new companies enter the marketplace and alliances and consolidations among competitors emerge. Some companies in our markets have longer operating histories, greater financial and technological capabilities, greater brand or name recognition and/or larger client bases than we have.

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Government Contracting and Regulatory Processes

For fiscal 2005, approximately 98% of our revenue was derived from work performed under Federal Government contracts. The government contracting process differs in many ways from commercial contracting, and involves a high degree of Federal Government regulation and oversight.

Historically, agencies of the Federal Government wishing to procure services from contractors have been required to prepare a request for proposal, known as an RFP, or some similar form of solicitation. The RFP is typically an extensive document describing the services desired and the terms and conditions that form the final agreement, including the criteria the soliciting agency will use to select the service provider. Interested parties submit proposals in response to the RFP, which the agency evaluate, often requesting additional information and multiple discussions with offerors prior to final award of the contract.

In recent years, the Federal Government has taken steps to streamline the procurement process. For example, in 1994, the enactment of FASA 94 made the procurement process substantially faster and less burdensome for companies that secure certain contracts. FASA 94 was the first of several statutory and regulatory changes in recent years that significantly altered government procurement practices by increasing the number and types of procurement contract “vehicles” available to Federal Government clients to satisfy their requirements. Federal Governmental agencies are now more likely to use flexible contract vehicles that permit a number of firms to compete for specific orders. The General Services Administration Multiple Award Schedule Program, or GSA MAS Program, is an example of a flexible contract vehicle employed by the Federal Government. Under the GSA MAS Program, GSA contracts with multiple vendors to provide goods and services, at predetermined prices, to specified authorized buyers. GSA schedules are listings of services and products, along with their respective prices, offered by approved contractors. The schedules are maintained by the GSA for use by any federal agency or other authorized entity. A contractor must successfully complete a pre-qualification process in order to be selected by the GSA for inclusion of the contractor’s goods or services on a GSA Schedule. When an agency selects services under a GSA schedule contract, the soliciting agency, or the GSA on its behalf, conducts a bidding process, limited to qualified GSA schedule contractors. The process typically involves substantially less time and cost than the historical, non-GSA bidding process.

In addition to the GSA MAS Program, we also hold other ID/IQ contracts with other individual agencies, which are generally known as task order contracts. These are essentially umbrella contracts that set forth the basic terms and conditions under which the agency may order goods and services from one, and in some cases, more than one, contractor. Contractors undergo a competitive pre-selection process to become eligible to perform work under ID/IQ contracts. A procuring agency then issues task orders for goods or services to be performed or provided under a contract. When task orders are issued under multiple award ID/IQ contracts, each awardee typically has an opportunity to be considered for the task order. The agency desiring contract services may conduct a competition among the interested awardees, resulting in the issuance of a task order to a single contractor. These contracts have increased competition and pricing pressure by concentrating work under fewer contracts, and requiring competition both prior to the initial award of the contract and throughout the term of the contract in order to obtain task orders for the services we provide, requiring that we make sustained post-award marketing efforts to realize revenue under each such contract. Moreover, even if we are qualified to work on a particular new contract or a contract subject to renewal, we might not be awarded business because of the Federal Government’s policy and practice of procuring goods and services from multiple contractors in order to maintain a diverse base of contractors. In addition, ID/IQ contracts do not obligate the Federal Government to purchase goods or services above the minimum levels set forth in the contract.

A task order calls for a specific set of services to be delivered by the contractor to a particular client agency. In our experience, the key factors in competing successfully for these task orders are technical

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merit, cost, relevant past performance considerations and client trust. From time to time we are also party to GWACs, which are ID/IQ contracts that permit the aggregation of multiple agencies’ requirements in a single contract, in order to encourage contractors to offer the best possible prices and to reduce the costs associated with multiple acquisitions.

For single-award large scale contracts, such as those targeted by our Major Program initiative, interested contractors submit information indicating their desire to perform the required services. The agency then solicits competitive proposals or bids from qualified contractors by providing them with a formal RFP or similar solicitation. The RFP typically describes the desired services, terms and conditions, and evaluation criteria the agency will use. Offerors then submit proposals in response to the RFP, and the agency evaluates the proposals and makes the award determination. Agencies are encouraged to award contracts on a “best value” basis. This means that the contractor selected for the award should, in the agency’s judgment, provide the greatest overall benefit in response to the requirement, including technical merit, cost and relevant past performance considerations. The entire acquisition process can sometimes take a year or more.

The competitive process presents a number of risks, including the following:

·we expend substantial funds, managerial time and effort to prepare bids and proposals for contracts that we may not win;

·we may be unable to estimate accurately the resources and cost that will be required to service any contract we win, which could result in substantial cost overruns; and

·we may encounter expense and delay if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in a requirement to resubmit proposals on modified specifications or in the termination, reduction or modification of the awarded contract.

·we may be choosen as one of the contractors for a multiple awared GWAC, ID/IQ or GSA Schedule contract, but not be awarded a sufficient number of tasks under the contract to justify our time, effort, and expense in bidding on the contract and subsequent task orders.

·the government may intitially award a GWAC, ID/IQ, or GSA Schedule contract but fail to provide funding for the number of task orders necessary to justify our time, effort, and expense in bidding on the contract and subsequent task orders.

The government contracts for which we compete typically have multiple year terms, and if we are unable to win a particular contract, we generally will be foreclosed from competing again for that contract until its expiration several years later. In addition, upon the expiration of a contract, if the client requires further services of the type provided by the contract, there is frequently a competitive rebidding process.

Laws and Regulations Affecting Our Business

Federal Government contracts are subject to a number of federal laws and regulations, including the Federal Acquisition Regulation, or FAR, and Cost Accounting Standards. These statutes and regulations contain several rules that may affect us significantly.

The Anti-Deficiency Act prohibits Federal Government employees from committing government funds, by contract or otherwise, in excess or in advance of appropriations, unless authorized by a specific statute. Since Congress usually appropriates funds on a fiscal year basis, many of our contracts are funded by the applicable agency annually as Congress makes appropriations for future fiscal years. In addition, since funds are often allocated to agencies by the OMB, many of our contracts are incrementally funded.

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Disappointed bidders and contractors excluded from competing for government contracts and task orders may submit a protest to a contracting officer or the GAO within time limits specified under FAR and GAO bid protest rules. The U.S. Court of Federal Claims also has bid protest jurisdiction. Performance under a contract being protested may be suspended while the protest is pending, and in cases where the contract is found to have been improperly awarded, the contract may be terminated.

Certain FAR clauses, such as the Limitation of Cost and Limitation of Funds clauses, limit the Federal Government’s liability for expenditures or obligations beyond those authorized by the applicable contract. In many cases, contracts are awarded for only one year with a number of successive option years (in many cases, four). Agencies are not obligated to exercise these option years, but in our experience most renewal options under our contracts have been exercised. In addition, certain FAR clauses allow the Federal Government to terminate contracts for convenience (i.e., at will), although the Federal Government is obligated to pay for costs incurred.

Larger contracts may also be subject to the Truth in Negotiations Act and Cost Accounting Standards. The Truth in Negotiations Act requires us to provide current, accurate and complete cost or pricing data in connection with the negotiation of a contract, modification or task order that is not subject to full and open competition or other exceptions to the Act. Cost Accounting Standards are applicable to certain contracts and require the contractor to apply consistent accounting practices and comply with specific cost accounting criteria. The FAR “Contract Cost Principles and Procedures” sets forth the rules regarding the allocability and allowability of costs incurred in connection with Federal Government contracts.

The FAR restricts government contractors from participating in procurements when there is an Organizational Conflict of Interest, or OCI, and establishes rules for avoiding, mitigating and neutralizing conflicts of interest in the issuance of contracts by the Federal Government. Virtually all government contracts, including ours, are subject to the OCI rules. An OCI may arise because the nature of the work to be performed by a contractor has the potential, absent some restriction on future activities, to result in an unfair competitive advantage to the contractor or impair the contractor’s objectivity in performing the contract or providing assistance or advice to the Federal Government. The government contracting officer is responsible for resolving any significant potential OCIs before a contract award is made. Federal Government contractors have an obligation to manage and, if necessary, report an OCI to the contracting officer. We have a company-wide policy regarding care in the acceptance of and compliance with contractual OCI provisions, which includes awareness training programs and coordination and reporting systems. We review new contracts and task orders at the time we receive them for potential OCI issues. Accordingly, we believe that as a result of the systems we have in place, our backlog will not be affected by OCI issues.

Our books and records are subject to audit by the Defense Contract Audit Agency, or DCAA, and other governmental audit agencies to ensure that the costs and hourly rates for which we invoice the Federal Government under cost reimbursable and time and materials contracts are in compliance with the Cost Principles, Cost Accounting Standards and FAR invoicing regulations. Each fiscal year, we must submit final cost data to the Federal Government indicating our actual costs incurred for the prior year, exclusive of certain costs that are not recoverable by Federal Government contractors. This data is audited, and subject to adjustments by the auditing agency based upon established guidance, which may affect our recovery on cost reimbursable contracts for prior fiscal years. These audits may also result in assessment of penalties, interest costs and, in extreme cases, debarment. The Federal Government retains a portion of the fee earned by us under cost reimbursable contracts until contract completion and audit by the DCAA. Audits of our business units by the DCAA have been completed for all fiscal years through 2001 without material adjustments. In the opinion of management, the audits for other fiscal years through fiscal year 2005 will not result in adjustments that would have a material adverse effect on our financial position or results of operations; however, future material adjustments are possible.

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Our conduct and performance is also subject to the False Claims Act. The False Claims Act prohibits contractors from knowingly submitting false or fraudulent claims to the Federal Government. We have established standards of conduct for our employees and a reporting mechanism that any of our employees can use to report inappropriate or illegal activities.

From time to time we may engage in activities that require us to comply with the various, U.S. Government export control laws and regulations administered by the U.S. Department of State, U.S. Department of Commerce, U.S. Treasury Office of Foreign Assets Control, and the Bureau of Customs and Boarder Protection. We have dedicated personal assigned to maintain and coordinate our compliance activities in this area.

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, are available free of charge on the Investor Relations section of our website at www.si-intl.com as soon as reasonably practicable after we electronically file the material with, or furnish the material to, the Securities and Exchange Commission, or SEC.

You may obtain a printed copy of any of the foregoing materials from us by writing to us at SI International, Inc., 12012 Sunset Hills Road, Suite 800, Reston, Virginia 20190, Attention: Investor Relations.

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Item 1A. Risk Factors

Risks Related to Our Industry

We depend on contracts with the Federal Government for most of our revenue, and our business would be seriously harmed if the government ceased doing business with us or significantly decreased the amount of business it does with us.

We derived 98.1% and 96.6% of our total revenue in fiscal 2005 and in fiscal 2004, respectively, from Federal Government contracts, either as a prime contractor or a subcontractor. This includes 46.9% and 52.8% of our total revenue in fiscal 2005 and in fiscal 2004, respectively, that we derived, either as a prime contractor or a subcontractor, from contracts with agencies of the DoD and Intelligence community. We expect that we will continue to derive most of our revenue for the foreseeable future from work performed under Federal Government contracts. If we were suspended or otherwise prohibited from contracting with the Federal Government generally, or with any significant agency of the DoD or the Intelligence community, or if our reputation or relationship with the Federal Government or any significant agency of the DoD or the Intelligence community were impaired, or if any of the foregoing otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected.

The following chart provides certain information regarding our four largest contracts for fiscal year 2005, in terms of revenues:

				Percent of Revenues in
	Contract		Customer	2005	2004	Expiration Date
Command, Control, Communications, Computer, Intelligence, Information, Technology, Surveillance, and Reconnaissance (C4I2TSR)		U.S. Air Force  Space Command		18.8	17.3	2013*
National Visa Center (NVC)		Department of  State		9.1	9.2	2011*

* Includes option periods.

Our business could be adversely affected by changes in budgetary priorities of the Federal Government.

Because we derive a significant portion of our revenue from contracts with the Federal Government, we believe that the success and development of our business will continue to depend on our successful participation in Federal Government contract programs. Changes in Federal Government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that call for the types of services that we provide, or a change in Federal Government contracting policies could cause Federal Governmental agencies to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to extend contracts, or to delay or not enter into new contracts. Any of those actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts with governmental agencies often contemplate that our services will be performed over a period of several years, Congress usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. Significant reductions in these appropriations by Congress could have a material adverse effect on our business. Additional factors that could have a serious adverse effect on our Federal Government contracting business include:

·changes in Federal Government programs or requirements;

·budgetary priorities limiting or delaying Federal Government spending generally, or by specific departments or agencies in particular, and changes in fiscal policies or available funding, including potential governmental shutdowns;

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·reduction in the Federal Government’s use of technology solutions firms; and

·an increase in the number of contracts reserved for small businesses which could result in our inability to compete directly for these prime contracts.

Our contracts with the Federal Government may be terminated or adversely modified prior to completion, which could adversely affect our business.

Federal Government contracts generally contain provisions, and are subject to laws and regulations, that give the Federal Government rights and remedies not typically found in commercial contracts, including provisions permitting the Federal Government to:

·terminate our existing contracts;

·reduce potential future income from our existing contracts;

·modify some of the terms and conditions in our existing contracts;

·suspend or permanently prohibit us from doing business with the Federal Government or with any specific government agency;

·impose fines and penalties;

·subject us to criminal prosecution;

·subject the award of some contracts to protest or challenge by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest or challenge and which may also require the government to solicit new proposals for the contract or result in the termination, reduction or modification of the awarded contract;

·suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress;

·decline to exercise an option to extend an existing multiple year contract; and

·claim rights in technologies and systems invented, developed or produced by us.

The Federal Government may terminate a contract with us either “for convenience” (for instance, due to a change in its perceived needs or its desire to consolidate work under another contract) or if we default by failing to perform under the contract. If the Federal Government terminates a contract with us for convenience, we generally would be entitled to recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination. If the Federal Government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the Federal Government in procuring undelivered items from an alternative source and other damages as authorized by law. As is common with government contractors, we have experienced and continue to experience occasional performance issues under some of our contracts. We may in the future receive show-cause or cure notices under contracts that, if not addressed to the Federal Government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.

Our Federal Government contracts typically have terms of one or more base years and one or more option years. Many of the option periods cover more than half of the contract’s potential term. Federal governmental agencies generally have the right not to exercise options to extend a contract. A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations.

Certain of our Federal Government contracts also contain “organizational conflict of interest” clauses that could limit our ability to compete for certain related follow-on contracts. For example, when we work

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on the design of a particular solution, we may be precluded from competing for the contract to install that solution. While we actively monitor our contracts to avoid these conflicts, we cannot guarantee that we will be able to avoid all organizational conflict of interest issues.

If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business may be adversely affected.

To develop new business opportunities, we primarily rely on establishing and maintaining relationships with various government entities and agencies. We may be unable to successfully maintain our relationships with government entities and agencies, and any failure to do so could materially adversely affect our ability to compete successfully for new business.

We derive significant revenue from contracts and task orders awarded through a competitive acquisition process. If we are unable to win new awards or successfully compete for renewal contracts, our business and prospects may be adversely affected.

A significant number of our contracts and task orders with the Federal Government are awarded through a competitive process. We expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding of new contracts and task orders and contracts subject to renewal. Recently, members of Congress and administration officials have authorized changes to the procurement process intended to increase competition among suppliers to the Federal Government. Budgetary pressures and reforms in the procurement process have caused many Federal Government clients to increasingly purchase goods and services through ID/IQ, contracts, including GSA contracts, and other GWACs. These contracts have increased competition and pricing pressure by concentrating work under fewer contracts, and requiring competition both prior to the initial award of the contract and throughout the term of the contract in order to obtain task orders for the services we provide, requiring that we make sustained post-award marketing efforts to realize revenue under each such contract. These contracts generally approve particular contractors to provide specified goods and services to the applicable governmental agency but generally do not obligate the agency to purchase any particular amount of goods or services. To procure goods or services under the contract, the agency generally awards task orders to perform specified services or to supply specified goods pursuant to competition among approved contractors. Thus, the existence of a contract does not ensure future revenue; rather, the contract merely provides us the opportunity to compete for additional work. An agency may administer an ID/IQ contract in which it procures goods and services for itself. Under the same contract, other federal agencies may also procure goods and services. These contracts are known as GWACs. When multiple prime contractors hold GWACs for the same goods and services, all of them are eligible to supply goods and services under the contract. As a result, qualified contractors often compete with each other to obtain task orders under a GWAC. Similarly, GSA contracts, including contracts commonly known as GSA Schedule contracts, are procurement contracts administered by the GSA on behalf of the entire Federal Government. Like many other ID/IQ contracts, multiple contractors may be awarded GSA contracts for the same goods and services. As a result, an agency may procure goods and services from any contractor awarded the GSA contract at the prices and on the terms stated in the contract. Moreover, even if we are highly qualified to work on a particular new contract or a contract subject to renewal, we might not be awarded business because of the Federal Government’s policy and practice of procuring goods and services from multiple contractors in order to maintain a diverse base of contractors.

The competitive process presents a number of risks, including the following:

·we expend substantial funds, managerial time and effort to prepare bids and proposals for contracts that we may not win;

·we may be unable to estimate accurately the resources and cost that will be required to service any contract we win, which could result in substantial cost overruns; and

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·we may encounter expense and delay if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in a requirement to resubmit proposals on modified specifications or in the termination, reduction or modification of the awarded contract.

The government contracts for which we compete typically have multiple year terms, and if we are unable to win a particular contract, we generally will be foreclosed from competing again for that contract until its expiration several years later. If we are unable to win new contract awards, our business and prospects will be adversely affected. In addition, upon the expiration of a contract, if the client requires further services of the type provided by the contract, there is frequently a competitive rebidding process. Approximately 19.5% of our revenue recognized during fiscal 2005 was derived from contracts that, as of February 28, 2006, are, or are expected to become, subject to recompetition bids prior to the end of government fiscal 2006 (ending September 30, 2006). There can be no assurance that we will win any particular bid or recompetition bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the termination or nonrenewal of any of our significant contracts or a substantial portion of our other contracts could materially adversely affect our operating results.

Our business may suffer if our facilities or our employees are unable to obtain or retain the security clearances or other qualifications needed to perform services for our clients.

Many of our Federal Government contracts require employees and facilities used in specific engagements to hold security clearances and to clear agency checks and Defense Security Service checks. Many of our contracts require us to employ personnel with specified levels of education, work experience and security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If our employees or our facilities lose or are unable to obtain necessary security clearances or successfully clear necessary agency or Defense Security Service checks, we may not be able to win new business and our existing clients could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the security clearances necessary for our facilities or our employees working on a particular contract or to the extent our facilities or our employees do not successfully clear necessary agency checks or Defense Security Service checks, we may not derive the revenue anticipated from the contract, and our operating results could be materially adversely affected.

We must comply with a variety of laws, regulations and procedures and our failure to comply could harm our operating results.

We must observe laws and regulations relating to the formation, administration and performance of Federal Government contracts which affect how we do business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that:

·allow our Federal Government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence;

·require us to disclose and certify cost and pricing data in connection with contract negotiations;

·require us to prevent unauthorized access to classified information; and

·require us to comply with laws and regulations intended to promote various social or economic goals.

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Some of our activities are subject to the export control laws and regulations administered by the Department of State, Department of Commerce, Treasury Office of Foreign Assets Control, and the Bureau of Customs and Boarder Protection Additionally, we are subject to industrial security regulations of the DoD and other federal agencies that are designed to safeguard against foreigners’ access to classified information. If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our Federal Government customers terminating or deciding not to renew our contracts, and could impair our ability to obtain new contracts.

In addition, our employees often must comply with procedures required by the specific agency for which work is being performed, such as time recordation or prohibition on removal of materials from a location.

Our failure to comply with applicable laws, regulations or procedures, including federal procurement regulations and regulations regarding the protection of classified information, could result in contract termination, loss of security clearances, suspension or prohibition from contracting with the Federal Government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business.

The Federal Government may revise its procurement or other practices in a manner adverse to us.

The Federal Government may revise its procurement practices or adopt new contracting rules and regulations, such as cost accounting standards. It could also adopt new contracting methods relating to GSA contracts, GWACs or other government-wide contracts, or adopt new standards for contract awards intended to achieve certain social or other policy objectives, such as establishing new set-aside programs for small or minority-owned businesses. In addition, the Federal Government may face restrictions from new legislation or regulations, as well as pressure from government employees and their unions, on the nature and amount of services the Federal Government may obtain from private contractors. These changes could impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are put up for recompetition bids. Any new contracting methods could be costly or administratively difficult for us to implement, and, as a result, could harm our operating results. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the Federal Government’s ability to use private service contractors. Although this proposal was not enacted, it or similar legislation could be proposed at any time. Any reduction in the Federal Government’s use of private contractors to provide federal information technology services could materially adversely impact our business.

Our contracts and administrative processes and systems are subject to audits and cost adjustments by the Federal Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our results of operations.

Federal governmental agencies, including the DCAA, routinely audit and investigate government contracts and government contractors’ administrative processes and systems. These agencies review our performance on contracts, pricing practices and cost structure. They also review our compliance with applicable laws, government regulations, policies and standards and the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and any such costs already reimbursed must be refunded. Moreover, if any of our administrative processes and systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete for or perform contracts. Therefore, an unfavorable outcome to an audit by the DCAA or another government agency, such as the Defense Security Service, or DSS, which verifies security compliance, could materially adversely affect our

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competitive position and result in a substantial reduction of our revenues. If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the Federal Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

Failure to maintain strong relationships with other government contractors could result in a decline in our revenue.

We derived 24.6% of our total revenue in fiscal 2005 and 19.4% of our total revenue in fiscal 2004 from contracts under which we acted as a subcontractor or from “teaming” arrangements in which we and other contractors bid together on particular contracts or programs. As a subcontractor or team member, we often lack control over fulfillment of a contract, and poor performance on the contract could tarnish our reputation, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could be materially adversely affected if any prime contractor or teammate chooses to offer a client services of the type that we provide or if any prime contractor or teammate teams with other companies to independently provide those services.

The calculation of our backlog is subject to numerous uncertainties, and we may not receive the full amounts of revenue estimated under the contracts included in our backlog, which could reduce our revenue in future periods.

Backlog is our estimate of the amount of revenue we expect to realize over the remaining life of the awarded contracts and task orders we have in hand as of the measurement date. Our total backlog consists of funded and unfunded backlog. We define funded backlog as estimated future revenues under government contracts and task orders for which funding has been appropriated by Congress and authorized for expenditure by the applicable agency under our contracts, plus estimated future revenues we expect to receive under signed purchase orders with commercial clients. Unfunded backlog is the difference between total backlog and funded backlog. Unfunded backlog reflects our estimate of future revenues under awarded government contracts and task orders for which either funding has not been appropriated or expenditures have not been authorized. Our total backlog does not include estimates of revenue from GWAC or GSA schedules beyond contract or task order awards, but our unfunded backlog does include estimates of revenue beyond contract or task order awards for other types of ID/IQ contracts, including our Command, Control, Communications, Computer, Intelligence, Information, Technology, Surveillance, and Reconnaissance (C4I2TSR) contract with the U.S. Air Force Space Command.

The calculation of backlog is highly subjective and is subject to numerous uncertainties and estimates, and there can be no assurance that we will in fact receive the amounts we have included in our backlog. Our assessment of a contract’s potential value is based upon factors such as historical trends, competition and budget availability. In the case of contracts which may be renewed at the option of the applicable agency, we generally calculate backlog by assuming that the agency will exercise all of its renewal options; however, the applicable agency may elect not to exercise its renewal options. In addition, federal contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under a contract may remain unfunded unless and until Congress makes subsequent appropriations and the procuring agency allocates funding to the contract. Our estimate of the portion of backlog from which we expect to recognize revenues in fiscal 2005 or any future period is likely to be inaccurate because the receipt and timing of any of these revenues is dependent upon subsequent appropriation and allocation of funding and is subject to various contingencies, such as timing of task orders, many of which are beyond our control. In addition, we may never receive revenues from some of the engagements that are included in our backlog and this risk is greater with respect to unfunded backlog.

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The actual receipt of revenues on engagements included in backlog may never occur or may change because a program schedule could change, the program could be canceled, the governmental agency could elect not to exercise renewal options under a contract or could select other contractors to perform services, or a contract could be reduced, modified or terminated. We adjust our backlog on a quarterly basis to reflect modifications to or renewals of existing contracts or task orders, awards of new contracts or task orders, or approvals of expenditures. Additionally, the maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenues that we will realize under that contract. We also derive revenues from ID/IQ contracts, which typically do not require the government to purchase a specific amount of goods or services under the contract other than a minimum quantity which is generally very small. If we fail to realize revenue included in our backlog, our revenues and operating results for the then current fiscal year as well as future reporting periods could be materially adversely affected.

Loss of our GSA contracts or GWACs would impair our ability to attract new business.

We are a prime contractor under several GSA contracts and GWAC schedule contracts. We believe that our ability to continue to provide services under these contracts will continue to be important to our business because of the multiple opportunities for new engagements each contract provides. If we were to lose our position as prime contractor on one or more of these contracts, we could lose substantial revenues and our operating results could suffer. GSA contracts and other GWACs typically have a one or two-year initial term with multiple options exercisable at the government client’s discretion to extend the contract for one or more years. We cannot be assured that our government clients will continue to exercise the options remaining on our current contracts, nor can we be assured that our future clients will exercise options on any contracts we may receive in the future.

If subcontractors on our prime contracts are able to secure positions as prime contractors, we may lose revenue.

For each of the past several years, as the GSA schedule contracts and GWACs have increasingly been used as contract vehicles, we have received substantial revenue from government clients relating to work performed by other information technology providers acting as subcontractors to us. In some cases, companies that have not held GSA schedule contracts or secured positions as prime contractors on GWACs have approached us in our capacity as a prime contractor, seeking to perform services as our subcontractor for a government client. Some of these providers that are currently acting as subcontractors to us may in the future secure positions as prime contractors. If one or more of our current subcontractors are awarded prime contractor status in the future, it could reduce or eliminate our revenue for the work they were performing as subcontractors to us. Revenue derived from work performed by our subcontractors represented approximately 15% and 16%, respectively of our revenue for each of fiscal 2005 and 2004.

Risks Associated with International Operations

Our international business exposes us to additional risks including exchange rate fluctuations, foreign tax and legal regulations and political or economic instability that could materially adversely affect our operating results.

In connection providing services to our clients, we are sometimes required to engage in international operations (including international operations under U.S. government contracts). Conducting international business subjects us to risks associated with operating in and selling to foreign countries, including:

·devaluations and fluctuations in currency exchange rates;

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·changes in or interpretations of foreign regulations that may adversely affect our ability to sell all of our products or repatriate profits to the United States;

·imposition of limitations on conversions of foreign currencies into dollars;

·imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

·compliance with U.S. laws and regulations that apply extraterritorially which may conflict, in whole or in part, with local laws and regulations in countries where we operate;

·compliance with the local labor laws of the countries in which we operate;

·hyperinflation or political instability in foreign countries;

·potential personal injury to our personnel who may be exposed to military conflict situations in foreign countries;

·imposition or increase of investment and other restrictions or requirements by foreign governments;

·compliance with U.S. export control laws and regulations, which may effect our ability to provide goods and services abroad.

To the extent that our customers request us to provide services and support outside of the United States, these and other risks associated with international operations are likely to increase. Although such risks have not harmed our operating results in the past, no assurance can be given that such risks will not materially adversely affect our operating results in the future.

Risks Related to Our Business

We may lose money or generate less than anticipated profits if we do not accurately estimate the cost of our performance under fixed price or time and materials contracts.

Some of our contracts require that we perform on a fixed price basis. We derived 26.2% of our total revenue in fiscal 2005 and 22.6% of our total revenue in fiscal 2004 from fixed price contracts. A fixed price contract generally provides that we will receive a specified price for our performance under the contract, regardless of the cost to us of such performance. This requires that we accurately estimate the cost that we will incur to perform our obligations under any contract at the time that we submit our proposal to the applicable government agency. When making proposals for engagements on a fixed price basis, we rely on our estimates of costs and timing for completing the projects. These estimates are subject to numerous variables and uncertainties, and there can be no assurance that the costs of performing under any fixed price contract will not exceed, perhaps substantially, our estimates. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed price contracts, including costs and delays caused by factors outside our control, could make these contracts less profitable than anticipated or could cause us to incur losses, which could be substantial, on these contracts. In the past, we have from time to time incurred losses on some fixed price contracts and our profits on some fixed price contracts have been less than anticipated. Our operating results could be materially adversely affected if the actual costs of performing under these contracts exceed our estimates.

Many of our contracts are performed on a time and materials basis. A time and materials contract typically provides that we are paid a fixed hourly rate for direct labor costs expended and reimbursed for allowable materials, costs and expenses. We derived 43.8% of our total revenues in fiscal 2005 and 46.3% of our total revenues for fiscal 2004 from time and materials contracts. While time and materials contracts are generally subject to less uncertainty than fixed price contracts, to the extent that our actual labor costs are higher than the contract rates, we may lose money on the contract.

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Our margins and operating results may suffer if cost reimbursable contracts increase as a percentage of our total government contracts.

In general, cost reimbursable contracts are the least profitable of our government contracts. Our cost reimbursable contracts generally provide for reimbursement of costs, which are determined to be reasonable, allowable and allocable to the contract, as well as payment of a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based. Our time and materials contracts generally are more profitable than our cost reimbursable contracts. Cost reimbursable contracts contributed 30.0% and 31.1% of our total revenues in fiscal 2005 and fiscal 2004, respectively. To the extent that cost reimbursable contracts represent an increased proportion of our total government contracts, our operating results could be materially adversely affected.

Our markets are highly competitive, and many of the companies we compete against have substantially greater resources.

We operate in highly competitive markets that include a large number of participants and involve intense competition to win contracts. Many of our competitors may compete more effectively than we can because they are larger, have greater financial and other resources, have better or more extensive relationships with government officials involved in the procurement process and have greater brand or name recognition. In order to stay competitive in our industry, we must attract and retain the highly skilled employees necessary to provide our services and keep pace with changing technologies and client preferences. In addition, some of our competitors have established alliances or strategic relationships among themselves or with third parties in order to increase their ability to address client needs. As a result, new competitors or alliances among competitors may emerge and compete more effectively than we can. There is also a significant industry trend towards consolidation which may result in the emergence of larger companies that may be better able to compete with us. If we are unable to compete effectively, our business could be materially adversely affected.

Our failure to attract and retain qualified employees, including our executive and senior management team, may adversely affect our business.

Our continued success depends to a substantial degree on our ability to recruit and retain the technically skilled personnel we need to serve our clients effectively. Our business involves the development of tailored technology solutions for our clients, a process that relies heavily upon the expertise and services of our employees. Competition for skilled personnel in the information technology services industry is intense, and technology service companies often experience high attrition among their skilled employees. Recruiting and training these employees require substantial resources. Our failure to attract and retain technical personnel could increase our costs of performing our contracts, reduce our ability to meet our clients’ needs, limit our ability to win new business and constrain our ability to grow.

Certain types of services are subject to the Service Contract Act and the Davis-Bacon Act. These Acts require that the contractor pay to all personnel assigned to the contract at least the prevailing wage and fringe benefits, as established by and in accordance with the regulations promulgated by the Department of Labor. We have an established policy pursuant to which we evaluate RFP’s that include Service Contract Act and Davis-Bacon Act requirements and, in the event of an award to us, ensure our compliance with these requirements.

We may be affected by intellectual property infringement claims.

Our business operations may rely on intellectual property. Our employees develop some of the software solutions and other forms of intellectual property that we use to provide IT solutions to our customers, but we also may license technology from other entities. Typically, under Federal Government contracts, our customers may claim rights in the intellectual property we develop, making it impossible for

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us to prevent their future use of our intellectual property. We are and may in the future be subject to claims from our employees or third parties who assert that software solutions and other forms of intellectual property that we used in delivering services and solutions to our customers infringe upon intellectual property rights of such employees or third parties. If our vendors, employees or third parties assert claims that we or our customers are infringing on their intellectual property, we could incur substantial costs to defend these claims. In addition, if any of these infringement claims are ultimately successful, we could be required to:

·cease selling or using products or services that incorporate the challenged software or technology;

·obtain a license or additional licenses; or

·redesign our products and services that rely on the challenged software or technology.

A substantial majority of our historical growth has been due to acquisitions and we may have difficulty identifying and executing future acquisitions on favorable terms, which may adversely affect our results of operations and stock price.

A substantial majority of our historical growth was the result of acquisitions, and the selective pursuit of acquisitions remains one of our key growth strategies. We cannot assure you that we will be able to identify and execute suitable acquisitions in the future on terms that are favorable to us, or at all.

We may encounter other risks in executing our acquisition strategy, including:

·increased competition for acquisitions which may increase the price of our acquisitions; and

·our failure to discover material liabilities during the due diligence process, including the failure of prior owners of any acquired businesses or their employees to comply with applicable laws or regulations such as the Federal Acquisition Regulation and health, safety, employment and environmental laws and regulations, or their failure to fulfill their contractual obligations to the Federal Government or other clients.

In connection with any future acquisitions, we may decide to consolidate the operations of any acquired business with our existing operations or to make other changes with respect to the acquired business, which could result in special charges or other expenses. Our results of operations also may be adversely affected by expenses we incur in making acquisitions and, in the event that any goodwill resulting from present or future acquisitions is found to be impaired, by goodwill impairment charges. As of December 31, 2005, assuming that the Zen acquisition had occurred on such date, we had approximately $225.3 million of goodwill resulting from acquisitions on our balance sheet and, to the extent we make future acquisitions, the amount of goodwill could increase, perhaps substantially. Any of the businesses we acquire may also have liabilities or adverse operating issues.

In addition, our ability to make future acquisitions may require us to obtain additional financing and we may be materially adversely affected if we cannot obtain additional financing for any future acquisitions. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions and the issuance of common stock to acquire other businesses could be dilutive to our stockholders. To the extent that we use borrowings to acquire other businesses, our debt service obligations could increase substantially and relevant debt instruments may, among other things, impose additional restrictions on our operations, require us to comply with additional financial covenants or require us to pledge additional assets to secure our borrowings.

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We may have difficulty integrating the operations of any companies we acquire, which may adversely affect our results of operations.

The success of our acquisition strategy will depend upon our ability to successfully integrate any businesses we may acquire in the future. The integration of these businesses into our operations may result in unforeseen events or operating difficulties, absorb significant management attention and require significant financial resources that would otherwise be available for the ongoing development of our business. These integration difficulties could include the integration of personnel with disparate business backgrounds, the transition to new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies and reconciliation of different corporate cultures. For these or other reasons, we may be unable to retain key clients or to retain or renew contracts of acquired companies. Moreover, any acquired business may fail to generate the revenue or net income we expected or produce the efficiencies or cost-savings that we anticipated. Any of these outcomes could materially adversely affect our operating results.

If we are unable to manage our growth, our business may be adversely affected.

Sustaining our growth has placed significant demands on our management, as well as on our administrative, operational and financial resources. If we continue to grow, we must improve our operational, financial and management information systems and expand, motivate and manage our workforce. If we are unable to do so, or if new systems that we implement to assist in managing any future growth do not produce the expected benefits, our business, prospects, financial condition or operating results could be materially adversely affected.

Systems failures may disrupt our business and have an adverse effect on our results of operations.

Any systems failures, including failure of network, software or hardware systems, whether caused by us, a third-party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data and interruptions or delays in our business or that of our clients. In addition, the failure or disruption of mail, communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our business. Our property and business interruption insurance may be inadequate to compensate us for losses that may occur as a result of any system or operational failure or disruption, and insurance to cover these types of risks may not be available in the future on terms that we consider acceptable, if at all.

The systems and networks that we maintain for our clients, although redundant in their design, could also fail. If a system or network we maintain were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination. Our liability insurance may be inadequate to compensate us for damages that we might incur and liability insurance to cover these types of risks may not be available in the future on terms that we consider acceptable, or at all.

If our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business could be materially and adversely impacted.

Approximately 15% and 16%, respectively, of our total revenue in each of fiscal 2005 and fiscal 2004 was generated by work performed by subcontractors who perform a portion of the work we are obligated to deliver to our clients. A failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely affect our ability to perform our obligations as a prime contractor. In extreme cases, a subcontractor’s performance deficiency could result in the Federal Government terminating our contract for default. A default termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders.

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Our indebtedness and debt service obligations may increase substantially and we will be subject to restriction under debt instruments.

As of December 31, 2005, we had approximately $99.3 million of debt outstanding under our Credit Agreement which had a  borrowing capacity of $160 million, comprised of a $60 million five-year revolving credit facility and a $100 million six-year term loan facility. We further amended this Credit Agreement, pursuant to the First Amendment entered into contemporaneously with the closing of our acquisition of Zen on February 27, 2006, which increased the available term loan amount to approximately $129.3 million. We had approximately $129.3 million of debt outstanding under our Amended Credit Agreement on February 27, 2006 following the closing of our acquisition of Zen.

Our leverage may increase as a result of any future acquisitions and, accordingly, the amount of our indebtedness will likely increase, perhaps substantially.

Our indebtedness could have significant negative consequences, including:

·increasing our vulnerability to general adverse economic and industry conditions;

·limiting our ability to obtain additional financing;

·requiring that a substantial portion of our cash flow from operations be applied to pay our debt service obligations, thus reducing cash available for other purposes;

·limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and

·placing us at a possible disadvantage compared to our competitors with less leverage or better access to capital.

Our Amended Credit Agreement bears interest at variable rates based upon prevailing market interest rates, which exposes us to the risk of increased interest rates. Also, our Amended Credit Agreement requires that we comply with various financial covenants and impose restrictions on us, including restrictions on, among other things, our ability to incur additional indebtedness or liens, make acquisitions and pay dividends on our capital stock.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance, our debt will depend primarily on our future performance, which to a certain extent is subject to the economic, financial, competitive and other factors beyond our control. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt or meet our other cash needs. If we are unable to generate this cash flow from our business, we may be required to refinance all or a portion of our existing debt, sell assets or obtain additional financing to meet our debt obligations and other cash needs. We cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms that we would find acceptable.

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If we fail to comply with the financial covenants in our Amended Credit Agreement, our lenders may exercise remedies, including requiring immediate repayment of all outstanding amounts. These financial covenants are calculated according to the definition of terms contained in the Amended Credit Agreement, which may differ from calculations using generally accepted accounting principles, or GAAP. The financial covenants in our credit facility following the acquisition of Zen include the following:

·the First Amendment to Credit Agreement amended the leverage ratio that requires us to maintain a ratio of funded debt to consolidated EBITDA for such period as follows:

Period	Amended Term Loan Maximum Ratio
First Amendment Effective Date through fiscal quarter ending June 30, 2006		3.75 to 1.00
July 1, 2006 through fiscal quarter ending June 29, 2007		3.50 to 1.00
June 30, 2007 through fiscal quarter ending June 27, 2008		3.00 to 1.00
June 28, 2008 and thereafter		2.75 to 1.00

·a fixed charge coverage ratio that requires us to maintain a ratio, on a consolidated basis for the twelve month period ending on the last day of any fiscal quarter, of (i) consolidated EBITDA less consolidated capital expenditures for such period, to (ii) the sum of consolidated interest expense plus scheduled funded debt payments plus cash taxes for such period, of greater than or equal to 1.25 to 1.00; and

·the amount of consolidated capital expenditures made in cash during any fiscal year is limited to 2.00% of consolidated gross revenues plus the unused portion on consolidated capital expenditures that would have been permitted in the previous fiscal year in an amount not to exceed $1,000,000.

The borrowings and other amounts due under our Amended Credit Agreement are secured by substantially all of our current and future tangible and intangible assets, including accounts receivable, inventory and capital stock of our existing or future subsidiaries. Our ability to obtain other debt financing may therefore be adversely affected because the lenders under our Amended Credit Agreement will have a prior lien on our assets to secure amounts we owe to them. In addition, upon the occurrence of specified events of default under the Amended Credit Agreement, the lenders would be entitled to demand immediate repayment of all borrowings and other amounts outstanding under the Amended Credit Agreement and to realize upon the collateral pledged under the Amended Credit Agreement to satisfy our obligations to them.

The Amended Credit Agreement also requires us to comply with certain covenants, including, among others, provisions:

·relating to the maintenance of our assets securing the debt;

·restricting our ability to pledge assets or create other liens;

·restricting our ability to incur additional debt beyond certain levels and in certain circumstances;

·restricting our ability to make certain distributions, investments and restricted payments, including dividend payments on our equity securities;

·restricting our ability to alter the conduct of our business or corporate existence;

·restricting our ability to amend, modify, cancel, terminate or fail to renew material contracts;

·restricting our ability to enter into transactions with affiliates;

·restricting our ability to consolidate, merge, or sell our assets;

·restricting our ability to purchase property or assets other than in the ordinary course of business; and

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·restricting our ability to amend, modify or change our organizational documents, including our charter and bylaws.

Risks Related to Our Common Stock

Provisions of our charter and bylaws and Delaware law make a takeover of our company more difficult.

Our basic corporate documents and Delaware law contain provisions that might enable our management to resist an attempt to take over our company. For example, our Board of Directors can issue shares of common stock and preferred stock without stockholder approval, and the board could issue stock to dilute and adversely affect various rights of a potential acquiror. Other provisions of our charter and bylaws that could deter or prevent a third party from acquiring us include:

·the division of our Board of Directors into three separate classes serving staggered three-year terms;

·the absence of cumulative voting in the election of our directors, which means that the holders of a majority of the voting power of our outstanding capital stock have the power to elect all of our directors;

·limitations on the ability of our stockholders to remove directors and the provisions requiring that vacancies in our board of directors must be filled by the remaining directors;

·prohibitions on our stockholders from acting by written consent or calling special meetings; and

·procedures for advance notification of stockholder nominations.

We are subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, would prohibit us from engaging in any business combination with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder.

The board could use these and other provisions to discourage, delay or prevent a change in the control of our company or a change in our management. These provisions might also discourage, delay or prevent an acquisition of our company at a price that you may find attractive. These provisions could also make it more difficult for you and our other stockholders to elect directors and take other corporate actions and could limit the price that investors might be willing to pay for shares of our common stock.

Future sales of shares of our common stock and the resulting dilution that would occur with such sales could cause the market price of our common stock to decline.

Sales of a substantial number of shares of common stock in the public market in the course of any offering made pursuant to a registration statement, including any subsequent registration statement, or the perception that such sales could occur, could materially adversely affect the market price of our common stock and make it more difficult for us to sell equity securities in the future at a time and price we deem appropriate. As of March 1, 2006, we had 11,426,232 shares of common stock outstanding.

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Item 2. Properties

As of December 31, 2005, we leased 27 offices and 3 warehouse at various U.S. locations for an aggregate of 544,970 square feet in 15 states and the District of Columbia, of which we sublease 47,861 square feet to third parties.

Our corporate offices are located at 12012 Sunset Hills Road, Reston, Virginia in approximately 68,000 square feet of leased space.

Our other major offices are located in Colorado Springs, Colorado, Harrisonburg, Virginia, and in the Washington DC metropolitan area.

·Our Colorado Springs properties consist of approximately 35,000 square feet under a lease that expires in April 2006 and approximately 68,000 square feet under a lease that expires in November 2006. Both of these leased facilities are being replaced by a new 2-building office campus totaling 123,200 square feet. The lease of these campus buildings will begin in May 2006.

·In Harrisonburg, Virginia we occupy an office (15,507 sq ft under a lease that expires in November 2013) and a contract-committed warehouse (120,000 sq ft under a lease that expires August 2007).

·In Fairfax, Virginia we have an office consisting of approximately 37,000 square feet under a lease that expires in December 2009.

·In Arlington, Virginia, our office consists of approximately 14,100 square feet under a lease that expires in December 2012.

·In Rockville, Maryland, we have an office consisting of approximately 24,000 square feet under a lease expiring in November 2011.

·Our Columbia, Maryland office occupies 21,223 square feet under a lease expiring in 2012.

·In Bethesda, Maryland, as a result of acquiring Zen, we have office space of approximately 10,738 square feet under a lease that expires November 30, 2008.

·In addition, we have employees who work on engagements at other smaller operating locations around the United States.

All of our offices are in new, or reasonably modern, well-maintained buildings. The facilities are substantially utilized and are adequate for present operations. We do not own any real estate.

Item 3. Legal Proceedings

From time to time, we are involved in litigation, claims and disputes that arise in the ordinary course of its business. In addition, we are subject to audit, review, and investigation by various agencies of the Federal Government to determine compliance with applicable federal statutes and regulations. As a Federal Government contractor, we are subject to audit by certain federal agencies to determine if our performance and administration of our government contracts are compliant with contractual requirements and applicable federal statutes and regulations. While we cannot predict the ultimate outcome of legal proceedings, government audits, investigations, claims and disputes to which we are or may be subject, we currently believe, based upon information available to us as of the date of this filing, that any ultimate liability arising out of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows.

The SEI acquisition agreement provides for a purchase price adjustment based upon the working capital of SEI as of the closing date. Subsequent to the closing date, we received a payment of $1.6 million in connection with services performed prior to the closing date that SEI had not previously billed, and was

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not authorized to bill, its customer as of the closing date. The SEI selling stockholders have asserted that they are entitled to a credit in connection with the calculation of working capital adjustment in an amount equal to the amount received by us for this post-closing payment. We believe that, in accordance with GAAP, the SEI selling stockholders should not receive the benefit of the post-closing payment. In accordance with the terms of the SEI acquisition agreement, the parties have jointly submitted the issue to an independent accounting firm for resolution. We anticipate that this matter will be resolved before the end of 2006.

Item 4. Submission of Matters To a Vote of Security Holders:The Company had no matters submitted to stockholders for their consideration during the fourth quarter ended December 31, 2005.

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PART II

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities:Since November 12, 2002, SI International’s common stock has been publicly traded on the Nasdaq National Market under the symbol “SINT.” Prior to November 12, 2002, SI International’s common stock was not publicly traded. The high and low sales prices of SI International’s common stock for the time period indicated below, as reported by the Nasdaq National Market, were:

	High		Low
Year ended December 31, 2005:
First Quarter	$	31.29	$	23.03
Second Quarter	$	30.36	$	22.31
Third Quarter	$	33.64	$	26.84
Fourth Quarter	$	31.88	$	24.80
Year ended December 25, 2004:
First Quarter	$	24.70	$	16.25
Second Quarter	$	28.77	$	20.90
Third Quarter	$	24.70	$	16.93
Fourth Quarter	$	32.64	$	20.68

As of March 1, 2006, there were approximately 118 holders of record of our common stock. As of March 1, 2006, the closing price of our common stock was $32.61.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, to support our growth strategy and do not anticipate paying cash dividends in the foreseeable future.

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Item 6. Selected Financial Data:The selected financial data presented below for our 2005, 2004, and 2003 fiscal years are derived from our audited consolidated financial statements included in this Form 10-K. The selected financial data presented below for our 2002 and 2001 fiscal years are derived from our audited consolidated financial statements not included in this Form 10-K. You should read the selected financial data presented below in conjunction with the consolidated financial statements, the notes to the consolidated financial statements and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Our fiscal year is based on the calendar year and ends each year on the Saturday closest to December 31 of that year. All fiscal years shown below, excluding 2005, include 52 weeks. Fiscal 2005 includes 53 weeks.

	Fiscal Year SI International, Inc.
	2005			2004			2003			2002			2001
	(dollars in thousands, except per share data)
Statement of Operations Data:
Revenue	$	397,919		$	262,306		$	168,287		$	149,351		$	146,583
Costs and expenses:
Direct costs	246,481			166,774			101,940			91,240			87,071
Indirect costs	113,015			71,917			51,569			49,404			49,495
Depreciation	2,161			2,231			2,009			1,988			1,653
Amortization	2,292			648			—			—			3,586
Total operating expenses	363,949			241,570			155,518			142,632			141,805
Income from operations	33,970			20,736			12,769			6,719			4,778
Other income (expense)	12			(1		)	—			—			—
Interest expense	(6,103		)	(2,760		)	(606		)	(3,319		)	(3,451		)
Minority interests	—			—			—			(118		)	(144		)
Change in fair value of put warrants	—			—			—			640			(1,255		)
Income (loss) before provision for income taxes	27,879			17,975			12,163			3,922			(72		)
Provision for income taxes	10,942			7,098			4,784			1,439			657
Net income	16,937			10,877			7,379			2,483			(729		)
Dividends on redeemable cumulative preferred stock	—			—			—			1,954			2,052
Net income (loss) attributable to common stockholders	$	16,937		$	10,877		$	7,379		$	529		$	(2,781	)
Earnings (loss) per common share:
Basic earnings (loss) per share	$	1.51		$	1.20		$	0.87		$	0.16		$	(1.06	)
Diluted earnings (loss) per share	1.45			1.14			0.87			(0.03		)	(1.06		)
Balance Sheet Data (at period end):
Cash and cash equivalents	$	26,160		$	3,754		$	12,302		$	10,856		$	470
Working capital	76,023			21,927			39,708			29,937			16,103
Total assets	335,695			212,107			106,627			92,315			80,461
Total debt, including capital lease obligations	99,542			29,291			530			658			40,082
Total stockholders’ equity (deficit)	167,869			145,070			81,547			73,977			(2,431		)
Other Financial Data:
EBITDA(1)	$	38,423		$	23,615		$	14,778		$	8,707		$	10,017
Capital expenditures	2,727			1,225			1,291			1,653			2,577
Net cash provided by (used in) operations	26,599			(1,655		)	16,079			5,680			(1,697		)
Net cash used in investing activities	(74,821		)	(86,665		)	(12,241		)	(1,653		)	(2,577		)
Net cash provided by (used in) financing activities	70,628			79,772			(2,392		)	6,359			1,152

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(1)EBITDA is defined as GAAP net income (loss) plus other expense (income), interest expense, income taxes, depreciation and amortization, change in the value of put warrants and minority interest.

(2)EBITDA as calculated by us may be calculated differently than EBITDA for other companies. We have provided EBITDA because we believe it is a commonly used measure of financial performance in comparable companies and is provided to help investors evaluate companies on a consistent basis, as well as to enhance an understanding of our operating results. EBITDA should not be construed as either:

·an alternative to net income (loss), as an indicator of our operating performance; or

·as an alternative to cash flows as a measure of liquidity.

Reconciliation of Net Income to EBITDA is as follows:

	2005			2004		2003		2002			2001
Net income	$	16,937		$	10,877	$	7,379	$	2,483		$	(729	)
Other expense (income)	(12		)	1		—		—			—
Interest expense	6,103			2,760		606		3,319			3,451
Minority interest	—			—		—		118			144
Change in fair value of put warrants	—			—		—		(640		)	1,255
Provision for income taxes	10,942			7,098		4,784		1,439			657
Depreciation	2,161			2,231		2,009		1,988			1,653
Amortization	2,292			648		—		—			3,586
EBITDA	$	38,423		$	23,615	$	14,778	$	8,707		$	10,017

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:The following discussion and analysis should be read in conjunction with the Item 6. “Selected Consolidated Financial Data,”  the consolidated financial statements and related notes included elsewhere in this Form 10-K, and the forward-looking disclaimer language in italics before Item 1. “Business”.

Our fiscal year is based on a calendar year and ends each year on the Saturday closest to December 31 of that year. As a result, our fiscal year may be comprised of 52 or 53 weeks. Our 2005 fiscal year had 53 weeks. Our 2004 and 2003 fiscal years each had 52 weeks.

Overview

We are, first and foremost, a provider of information technology and network solutions (IT) to the Federal Government. Our clients include the U.S. Air Force, U.S. Army, U.S. Navy, Department of State, Department of Homeland Security, Department of Energy, Department of Agriculture, National Institutes of Health, Federal Retirement Thrift Investment Board, National Guard Bureau, and the Intelligence community. We combine our technology and industry expertise to provide a full spectrum of state-of-the-practice solutions and services, from design and development to implementation and operations, which assist our clients in achieving mission success. We believe that our company is distinguishable from our peers within the federal IT sector in several important respects.

We employ a “Rapid Response • Rapid Deployment™” methodology that enables the rapid standing up of innovative solutions and the incorporation of additional capabilities in rapid succession. This capability allows us to respond to urgent IT imperatives quickly, often in a matter of months, and within a well defined budget. We can, therefore, provide solutions for current IT needs, while establishing a platform for advancing long-term transformational objectives. We possess a proven ability to respond to high priority information technology and network needs through innovation, and an enviable reputation for timely delivery of robust solutions on assignments where failure is not an option. Our Mission Critical, Mission Accomplished solutions enable clients to respond to new mandates, expand the scope of their missions, and reengineer underlying business processes. We have a demonstrated ability of turning troubled IT projects into winning outcomes and realized exceptional growth from high-quality client engagements. We also utilize mature and proven processes to manage and market large-scale ID/IQ contracts, such as C4I2TSR. We employ a diverse, innovative team that effectively utilizes small business partners’ unique skills and expertise for mission critical IT projects.

Fiscal 2005 Review and Fiscal 2006 Outlook

During the past year, we experienced continued growth in our four key focus areas: Defense Transformation, Homeland Defense, Federal IT Modernization, and Mission-Critical Outsourcing. In terms of customer concentration, the DoD continues to grow faster organically than our other customers, which is the result of ongoing defense transformation initiatives that require our specialty in rapidly performing mission-critical work. Virtually all of our engagements with the DoD either directly support, or are closely related to DoD Transformation goals. We will continue aligning our programs and capabilities along our focus areas of Homeland Defense, Federal IT Modernization, Mission-Critical Outsourcing, and Defense Transformation, given these sectors most accurately reflect our customer’s highest priorities. The Federal Government’s increased use of technology as a weapon in the war on terrorism and to enhance operational efficiency among federal agencies drove our growth in 2005. We expect that government initiatives involving information sharing, “net-centric” warfare, and business process transformation will be among our customer base’s key focus areas in 2006.

With the SEI acquisition, our support to civilian agencies increased as a percentage of total revenue. SEI’s largest client was the Department of Homeland Security. The national priority on securing our borders, along with urgent need for information sharing and other critical Department of Homeland

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Security issues, will continue driving the demand for budget increases in homeland defense. With the Bridge acquisition, we expanded our presence in the Intelligence community. We believe that this ongoing need for improved intelligence collection will not diminish. For the foreseeable future, we anticipate that DoD’s, Department of Homeland Security’s, and the Intelligence community’s IT and network requirements will be the largest drivers of our organic growth. Also, strategic acquisitions that add value will continue to impact our future customer mix. Finally, the recent Zen acquisition provides us with greater access to new customers and additional cross-selling opportunities for our portfolio of mission-critical solutions.

The addition of SEI and Bridge allowed us to continue supporting our existing customer base, while strengthening our position with the Deparment of Homeland Security and the Intelligence community. After consummating the SEI and Bridge acquisitions, we realigned our practice areas in 2005 to reflect the additional areas of expertise that we obtained from these two companies. Our eight practice areas now consist of program management & acquisition support, integrated solutions development, information security, records management, learning solutions, systems engineering, network solutions, and mission-critical outsourcing.

In 2005, Congress delayed approving the government fiscal 2006 appropriations bills. For us, this impact was largely confined to new project starts previously forecasted for our fourth quarter fiscal 2005. Even in years where Congress passed appropriations bills in a timely fashion, it is not uncommon for several months to pass before funding was actually issued. With the combination of the GSA’s reorganization and recent contract award delays, we expect that government agencies will continue moving away from using GSA contract vehicles and start utilizing government-wide and agency-specific contract vehicles more frequently in 2006 until the GSA reorganization is complete.

In fiscal 2005 and fiscal 2004, we received 98.1% and 96.6%, respectively, of our revenues from services we provided to various departments and agencies of the Federal Government, both directly and through other prime contractors, and 1.9% and 3.4%, respectively, of our total revenues from work performed for commercial entities. The following table shows our revenues from the client groups listed as a percentage of total revenue. Revenue data for the DoD includes revenue generated from work performed under engagements for both the DoD and the Intelligence community.

	Fiscal Year
	2005		2004		2003
Department of Defense	46.9	%	52.8	%	54.5	%
Federal civilian agencies	51.2	%	43.8	%	39.2	%
Commercial entities	1.9	%	3.4	%	6.3	%
Total revenue	100.0	%	100.0	%	100.0	%

As a result of the Zen acquisition, we believe that the percentage of our revenue attributable to the DoD and federal civilian agencies should increase, and the percentage of our revenue attributable to commercial entities, including international operations, should decrease marginally.

We have derived a substantial majority of our revenues from governmental contracts under which we act as a prime contractor. We also provide services indirectly as a subcontractor. The following table shows our revenues as prime contractor and as subcontractor as a percentage of our total revenue for the following periods:

	Fiscal Year
	2005		2004		2003
Prime contract revenue	75.4	%	80.6	%	84.3	%
Subcontract revenue	24.6	%	19.4	%	15.7	%
Total revenue	100.0	%	100.0	%	100.0	%

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As a result of the Zen acquisition, we believe the percentage of our prime contract revenue may increase marginally.

Our services are provided under three types of contracts: cost reimbursable, time and materials and fixed price contracts. The following table shows our revenues from each of these types of contracts as a percentage of our total revenue for the following periods:

	Fiscal Year
	2005		2004		2003
Cost reimbursable	30.0	%	31.1	%	38.3	%
Time and materials	43.8	%	46.3	%	35.1	%
Fixed price	26.2	%	22.6	%	26.6	%
Total	100.0	%	100.0	%	100.0	%

As a result of the acquisition of Zen, we anticipate that during fiscal year 2006 that the percentage of our revenue attributable to time and materials and fixed price contracts may increase marginally.

Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract, and paid a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based. Under cost reimbursable contracts we recognize revenues and an estimate of applicable fees earned as costs are incurred. We consider fixed fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For performance-based fees under cost reimbursable contracts, we recognize the relevant portion of the expected fee to be awarded by the client at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the client regarding performance. In general, cost reimbursable contracts are the least profitable of our government contracts.

Under time and materials contracts, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses. To the extent that our actual labor costs under a time and materials contract are higher or lower than the billing rates under the contract, our profit under the contract may either be greater or less than we anticipated or we may suffer a loss under the contract. We recognize revenues under time and materials contracts by multiplying the number of direct labor hours expended by the contract billing rates and adding the effect of other billable direct costs. In general, we realize a higher profit margin on work performed under time and materials contracts than cost reimbursable contracts.

Under fixed price contracts, we perform specific tasks for a fixed price. Compared to cost reimbursable and time and materials contracts, fixed price contracts generally offer higher profit margin opportunities but involve greater financial risk because we bear the impact of cost overruns in return for the full benefit of any cost savings. We generally do not undertake complex, high-risk work, such as long-term software development, under fixed price terms. Fixed price contracts may include either a product delivery or specific service performance over a defined period. Revenue on fixed price contracts that provide for the Company to render services throughout a period is recognized as earned according to contract terms as the service is provided on a proportionate performance basis. While a substantial number of these contracts are generally less than six months in duration, we have several multi-year contracts of this type in which the customer has the option to extend the contractual term beyond the current term.

If we anticipate a loss on a contract, we provide for the full amount of anticipated loss at the time of that determination.

Our most significant expense is direct cost, which consists primarily of direct labor costs for program personnel and direct expenses incurred to complete contracts, including cost of materials and subcontract

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efforts. Our ability to predict accurately the number and types of personnel, their salaries, and other costs, can have a significant impact on our direct cost.

The allowability of certain direct and indirect costs in federal contracts is subject to audit by the client, usually through the DCAA. Certain indirect costs are charged to contracts and paid by the client using provisional, or estimated, indirect rates, which are subject to later revision, based on the government audits of those costs.

Approximately 19.5% of our revenue recognized during fiscal 2005 was derived from contracts that, as of February 28, 2006, are, or are expected to become, subject to competitive bids prior to the end of government fiscal 2006. We actively monitor our relationships with our clients during our engagements, as well as the quality of the service we provide, to assist in our efforts to win recompetition bids. In addition, we strive to maintain good relationships with a wide variety of government contractors.

Recent Events

Zen Acqusition.On February 27, 2006, we closed the acquisition of Zen. Zen is a provider of critical IT services, specializing in managed network services, information assurance, software development and systems engineering, database and systems administration and IT consulting to various U.S. Government agencies.  Zen’s largest clients include the Missile Defense Agency (MDA), Department of Defense’s Washington Headquarters Services (WHS), Federal Communications Commission (FCC), the Pension Benefit Guaranty Corporation (PBGC), and the Federal Trade Commission (FTC).  As a result of our acquisition of Zen, we gained approximately 275 employees, of which approximately 50% hold security clearances.  The acquisition of Zen provides additional scale with existing customers as well as diversification with new government customers.

Pursuant to the terms of the Zen Agreement we acquired all of the outstanding capital stock of Zen for $60 million in cash, of which we are withholding $6 million for 15 months in order to secure post-closing indemnity obligations of the sellers.  The purchase price is subject to a two-way adjustment based upon whether the working capital of Zen as of the closing date was above or below the target working capital specified in the Zen Agreement.  Each of the parties to the Zen Agreement has made customary representations and warranties and agreed to certain indemnification obligations.   The transaction was funded through cash-on-hand, a subordinated Seller’s Note in the amount of $6 million, and borrowing from our newly amended credit facility, which is described below. We expect the acquisition to be accretive to earnings.  Zen’s trailing twelve months revenue ended November 30, 2005, was approximately $38 million (unaudited).

Amendment to Credit Facility.   On February 27, 2006, we entered into the First Amendment. The First Amendment provides new terms and conditions with respect to the term loan portion of the Credit Agreement and increased the available term loan amount to approximately $129.3 million from approximately $99.3 million. The funds borrowed under the new term loan were used to (a) refinance the initial term loan; (b) to finance the acquisition of Zen; and (c) to provide for working capital, capital expenditures and other general corporate purposes. The First Amendment amended the leverage ratio that requires us to maintain a ratio of funded debt to consolidated EBITDA for such period as follows:

Period	New Maximum Ratio		Prior Maximum Ratio
First Amendment Effective Date through fiscal quarter ending June 30, 2006		3.75 to 1.00		3.50 to 1.00
July 1, 2006 through fiscal quarter ending June 29, 2007		3.50 to 1.00		3.25 to 1.00
June 30, 2007 through fiscal quarter ending June 27, 2008		3.00 to 1.00		3.00 to 1.00
June 28, 2008 and thereafter		2.75 to 1.00		2.75 to 1.00

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These ratios will be calculated in accordance with the definitions and terms contained in the Amended Credit Agreement, which may be different than calculations pursuant to GAAP.

NVC Contract Award.   On January 31, 2006, in a recompetition for our expiring National Visa Center, or NVC, contract, we were awarded the successor contract for the NVC contract by the Department of State. Under the contract, we anticipate performing over 20 million immigrant visa transactions each year at the NVC in Portsmouth, New Hampshire and at the Kentucky Consular Center in Williamsburg, Kentucky. The prime contract has a one-year base period and four one-year options with a potential value of approximately $84 million, inclusive of the options. The prior NVC contract generated 9.1% of our total revenues in fiscal 2005 and 9.2% of our total revenues in fiscal 2004.

Acceleration of Vesting of Stock Options.   On December 13, 2005, our Board of Directors approved the accelerated vesting of unvested stock options previously awarded to employees, officers and directors as of December 7, 2005 in light of new accounting regulations that were to come into effect January 1, 2006. Based on the Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), the Board took the action to accelerate the unvested stock with the belief that it is in the best interest of stockholders, as it will reduce the Company’s reported compensation expense in future periods.

Liquidity and Capital Resources

General.   Short-term liquidity requirements are created by our use of funds for working capital, capital expenditures, and the need to provide debt service. We expect to meet these requirements through a combination of cash flow from operations and borrowings under our Amended Credit Agreement.

We anticipate that our long-term liquidity requirements, including any further acquisitions, will be funded through a combination of cash flow from operations, borrowings under our Amended Credit Agreement, additional secured or unsecured debt or the issuance of common or preferred stock, each of which may be initially funded through borrowings under our Amended Credit Agreement.

Cash and Cash Equivalents.   We consider cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents, including marketable securities, as of the end of fiscal 2005, fiscal 2004, and fiscal 2003 were $34.0 million, $5.8 million, and $23.3 million, respectively.

Cash Flow.   The following table sets forth our sources and uses of cash for the years ended December 31, 2005, 2004 and 2003.

	Fiscal Year
	2005			2004			2003
	(in thousands)
Net cash provided by (used in) operations	$	26,599		$	(1,655	)	$	16,079
Net cash used in investing activities	(74,821		)	(86,665		)	(12,241		)
Net cash provided by (used in) financing activities	70,628			79,772			(2,392		)
Net (decrease) increase in cash	$	22,406		$	(8,548	)	$	1,446

Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill most of our clients monthly after services are rendered. Cash provided by operations in fiscal 2005 was attributable to net income of $16.9 million, plus depreciation, amortization and other non-cash items of $9.9 million. Cash used in operations in fiscal 2004 was attributable to an increase in working capital of $18.6 million, partially offset by net income of $10.9 million plus depreciation, amortization and other non-cash items of $6.0 million. Cash provided by operations in fiscal 2003 was attributable to net income of $7.4 million plus depreciation, amortization and other non-cash items of $2.6 million and a decrease in working capital of $6.1 million.

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Our cash flow used in investing activities consists primarily of capital expenditures, the purchase and sale of marketable securities, and acquisitions. In fiscal 2005, we paid $74.0 million for SEI, purchased $42.1 million of marketable securities, and purchased capital assets totalling $2.7 million. We partially offset the cash use with $36.2 million of proceeds from the sale of marketable securities. In fiscal 2004, we paid $64.9 million and $29.5 million, respectively, for Matcom and Bridge acquisitions, purchased $2.1 million of marketable securities, and purchased capital assets totalling $1.2 million. We partially offset the cash use with $11.0 million of proceeds from the sale of marketable securities. In fiscal 2003 we purchased $35.6 million of marketable securities and invested $1.3 million in capital assets. We partially offset the cash use with $24.7 million of proceeds from the sale of marketable securities.

Our cash flow provided by financing activities consists primarily of borrowings under and payments on our credit facility. Cash provided by financing activities for fiscal year 2005 was attributable to proceeds of $100.0 million from the term loan portion of our credit facility, and proceeds of $3.7 million from the exercise of stock options. Cash provided by financing activities was partially offset by repayments of borrowings under the line of credit portion of our credit facility of $29.0 million, payment of debt issuance fees of $3.2 million, partial repayment of the term loan portion of our credit facility of $0.8 million, and repayments of capital leases of $0.1 million. Cash provided by financing activities for fiscal year 2004 was attributable to proceeds of $51.2 million from issuance of common stock from our underwritten public common stock offering, proceeds of $30.0 million from the term loan portion of our credit facility, proceeds of $29.0 million from borrowings on the line of credit portion of the credit facility, and proceeds of $0.9 million from the exercise of stock options. Cash provided by financing activities was partially offset by the repayment of $30.0 million for the term loan portion of our credit facility, payment of debt issuance fees of $1.2 million, and repayments of capital lease obligations of $0.1 million. Cash used in financing activities for fiscal year 2003 was attributable to repayments of bank overdrafts of $2.2 million, $0.1 million partial repayment of an outstanding note from the acquisition of Systems Technology Associates, and payments for our capital leases of $0.1million, partially offset by proceeds from the exercise of stock options of $0.1 million.

Results of Operations

The following table sets forth certain items from our consolidated statements of operations as a percentage of revenues for the periods indicated.

	Fiscal Year
	2005		2004		2003
Revenue	100.0	%	100.0	%	100.0	%
Costs and expenses:
Direct costs	61.9		63.6		60.6
Indirect costs	28.4		27.4		30.6
Depreciation	0.5		0.9		1.2
Amortization	0.6		0.2		0.0
Total operating expenses	91.4		92.1		92.4
Income from operations	8.6		7.9		7.6
Interest expense	(1.5	)	(1.1	)	(0.4	)
Income before provision for income taxes	7.1		6.8		7.2
Provision for income taxes	2.8		2.7		2.8
Net income	4.3	%	4.1	%	4.4	%

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Fiscal year 2005 compared with fiscal year 2004

Revenue.Substantially all of our revenue is derived from services and solutions provided to the Federal Government, primarily by our employees and, to a lesser extent, our subcontractors. Revenues from work under Federal Government contracts increased 54.0% to $390.3 million from $253.4 million for the same period in 2004. This increase was attributable to federal business acquired, new contract awards, successful recompetition wins on existing programs and growth within existing programs in our three focus areas: Federal IT Modernization/ Mission-Critical Outsourcing, Defense Transformation, and Homeland Defense. Commercial and other revenues decreased 14.5% to $7.6 million in 2005 from $8.9 million in 2004. This decrease was attributable to our continued focus on opportunities for the Federal Government. We expect revenue growth to continue primarily from Federal Government civilian and defense organizations.

Direct costs.   Direct costs include direct labor and other direct costs, such as materials and subcontracts, incurred to provide our services and solutions to our customers. Generally, changes in direct costs are correlated to changes in revenue as resources are consumed in the production of that revenue. The increase in direct costs from fiscal 2004 to fiscal 2005 was attributable primarily to the increase in revenue. As a percentage of revenue, direct costs were 61.9% for fiscal 2005 as compared to 63.6% for fiscal 2004. Direct costs will continue to increase in conjunction to revenue growth.

Indirect costs.Indirect costs include facilities, selling, bid and proposal, indirect labor, fringe benefits and other discretionary costs. The increase in indirect costs from fiscal 2004 to fiscal 2005 was primarily attributable to the expected growth of support functions necessary to facilitate and administer the growth in direct costs. In fiscal 2005, indirect costs were 28.4% of revenue compared to 27.4% of revenue in fiscal 2004. However, we believe in future years, indirect costs will continue to grow, but should decrease as a percentage of sales.

Depreciation and Amortization.Depreciation and amortization includes the depreciation of computers, furniture and other equipment, the amortization of third party software we use internally, leasehold improvements and intangible assets. As a percentage of revenue, depreciation was 0.5% for fiscal 2005 as compared to 0.9% for the same period in fiscal 2004.

Amortization of Intangible Assets.Amortization of intangible assets includes the amortization of intangible assets acquired in connection with the acquisitions in accordance with SFAS 142, Goodwill and Other Intangible Assets. We discontinued the amortization of goodwill effective December 30, 2001. Identifiable intangible assets are amortized over their estimated useful lives. Non-compete agreements are generally amortized straight-line over the term of the agreement, while contracts and related client relationships are amortized proportionately against the acquired backlog. For the fiscal year ended December 31, 2005, we amortized $2.3 million of intangible assets which we capitalized in connection with the acquisitions of Bridge, SEI, and Matcom. For the fiscal year ended December 25, 2004, we amortized $0.6 million of intangible assets which we capitalized in connection with the acquisition of Matcom.

Income from operations.This increase in income from operations from fiscal 2004 to fiscal 2005 was attributable primarily to the increase in revenue. As a percentage of revenue, income from operations was 8.6% for fiscal 2005 as compared to 7.9% in fiscal 2004. We anticipate continued improvement in our operating margin.

Interest expense.Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings under our credit facility and, going forward, to a lesser extent, our interest rate swap agreement. The increase in interest expense from fiscal 2004 to fiscal 2005 was attributable primarily to the borrowing of debt subsequent to the acquisitions of Bridge, SEI and Matcom. As a percentage of revenue, interest expense was 1.5% for fiscal 2005 as compared to 1.1% for the same period in fiscal 2004. We anticipate an increase in interest expense in fiscal year 2006 due to increased borrowings under our

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Amended Credit Agreement made in connection with the Zen acquisition. Interest expense included $705,000 and $1,000,000 of amortization and write-off of deferred financing costs during fiscal 2005 and fiscal 2004.

Provision for income taxes.Our effective tax rate is typically greater than the federal statutory rate of 34% due primarily to state income tax rates and certain nondeductible expenses. Our fiscal year 2005 tax provision represents an effective tax rate of 39.5%. Our fiscal 2004 tax provision represents an effective tax rate of 39.3%.

Fiscal year 2004 compared with fiscal year 2003

Revenue.Revenues from work under Federal Government contracts increased 60.7% to $253.4 million from $157.7 million for the same period in 2003. This increase was attributable to federal business acquired, new contract awards, successful recompetition wins on existing programs and growth within existing programs in our four focus areas: Federal IT Modernization, Defense Transformation, Homeland Defense, and Mission-Critical Outsourcing. Commercial and other revenues decreased 16.0% to $8.9 million in 2004 from $10.6 million in 2003. This decrease was attributable to our continued focus on opportunities for the Federal Government.

Direct costs.The increase in direct costs from fiscal 2003 to fiscal 2004 was attributable primarily to the increase in revenue. As a percentage of revenue, direct costs were 63.6% for fiscal 2004 as compared to 60.6% for fiscal 2003.

Indirect costs.The increase in indirect costs from fiscal 2003 to fiscal 2004 was primarily attributable to the expected growth of support functions necessary to facilitate and administer the growth in direct costs.

Depreciation and Amortization.The increase in depreciation and amortization from fiscal 2003 to fiscal 2004 was attributed primarily to increased capital expenditures and the acquisition of Matcom. As a percentage of revenue, depreciation was 0.9% for fiscal 2004 as compared to 1.2% for the same period in fiscal 2003.

Amortization of Intangible Assets.For the fiscal year ended December 25, 2004, we amortized $0.6 million of intangible assets which we capitalized in connection with the acquisition of Matcom. There was no amortization of intangible assets for the fiscal year ended December 27, 2003.

Income from operations.The increase in income from operations from fiscal 2003 to fiscal 2004 was attributable primarily to the increase in revenue. As a percentage of revenue, income from operations was 7.9% for fiscal 2004 as compared to 7.6% in fiscal 2003.

Interest expense.The increase in interest expense from fiscal 2003 to fiscal 2004 was attributable primarily to the borrowing of debt subsequent to the acquisition of Matcom. As a percentage of revenue, interest expense was 1.1% for fiscal 2004 as compared to 0.4% for the same period in fiscal 2003. Interest expense included $1,000,000 and $379,000 of amortization and write-off of deferred financing costs during fiscal 2004 and fiscal 2003.

Provision for income taxes.Our fiscal year 2004 tax provision represents an effective tax rate of 39.5%. Our fiscal 2003 tax provision represents an effective tax rate of 39.3%.

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The following table sets forth certain items from our consolidated statements of operations.

	Fiscal Year									Percentage Change
	2005			2004			2003			2005 - 2004			2004 - 2003
Revenue	$	397,919		$	262,306		$	168,287			51.7	%		55.9	%
Direct Costs	246,481			166,774			101,940				47.8	%		63.6	%
Indirect Costs	113,015			71,917			51,569				57.1	%		39.5	%
Depreciation/Amortization	2,161			2,231			2,009				(3.1	%)		11.0	%
Amortization of Intangible Assets	2,292			648			—				253.7	%		100.0	%
Income from Operations	33,970			20,736			12,769				63.8	%		62.4	%
Other Income (Expense)	12			(1)			0				0.0	%		0.0	%
Interest Expense	(6,103		)	(2,760		)	(606		)		121.1	%		355.4	%
Provision for Income Taxes	10,942			7,098			4,784				54.2	%		48.4	%
Net Income	16,937			10,877			7,379				55.7	%		47.4	%

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Supplemental Quarterly Information

The following table sets forth quarterly unaudited consolidated financial data for the fiscal quarters of 2005 and 2004, expressed in dollars and as a percentage of total revenues for the respective periods. We believe that this unaudited financial information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for each period. All of the fiscal quarters reflected in the following table had thirteen weeks, except for the fourth quarter of fiscal 2005, which has fourteen weeks.  Some unevenness of revenue from quarter to quarter exists primarily because of the timing of purchases of materials necessary to perform certain obligations under our C4I2SR contract with U.S. Air Force Space Command.

	Fiscal Year 2005												Fiscal Year 2004
	Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4
	(dollars in thousands)
Revenue	$	83,717		$	95,983		$	101,775		$	116,444		$	55,970		$	63,814		$	72,926		$	69,596
Costs and expenses:
Direct costs	52,603			58,598			62,743			72,537			33,529			38,801			49,106			45,339
Indirect costs	23,580			27,929			28,723			32,783			17,309			19,049			17,615			17,943
Depreciation	551			531			504			575			589			598			516			527
Amortization	457			611			612			612			113			192			171			171
Total operating expenses	77,191			87,669			92,582			106,507			51,540			58,640			67,408			63,980
Income from operations	6,526			8,314			9,193			9,937			4,430			5,174			5,518			5,616
Other income (expense)	(99		)	14			64			33									(62		)	61
Interest expense	(1,097		)	(1,659		)	(1,690		)	(1,657		)	(534		)	(738		)	(693		)	(796		)
Provision for income taxes	2,106			2,633			2,989			3,214			1,539			1,752			1,881			1,926
Net income	$	3,224		$	4,036		$	4,578		$	5,099		$	2,357		$	2,684		$	2,882		$	2,955
Revenue	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%
Costs and expenses:
Direct costs	62.8			61.1			61.6			62.3			59.9			60.8			67.2			65.1
Indirect costs	28.2			29.1			28.2			28.2			30.9			29.9			24.2			25.8
Depreciation	0.7			0.6			0.5			0.5			1.1			0.9			0.7			0.8
Amortization	0.5			0.6			0.6			0.5			0.2			0.3			0.2			0.2
Total operating expenses	92.2			91.4			90.9			91.5			92.1			91.9			92.3			91.9
Income from operations	7.8			8.6			9.1			8.5			7.9			8.1			7.7			8.1
Other income (expense).	(0.1		)	0.0			0.1			0.0									(0.1		)	0.1
Interest expense	(1.3		)	(1.7		)	(1.7		)	(1.4		)	(1.0		)	(1.2		)	(1.0		)	(1.1		)
Provision for income taxes	2.5			2.7			2.9			2.7			2.7			2.7			2.6			2.8
Net income	3.9		%	4.2		%	4.5		%	4.4		%	4.2		%	4.2		%	4.0		%	4.3		%

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Tabular Disclosure of Contractual Obligations

Our contractual obligations as of December 31, 2005 are as follows (in thousands):

	Payment due by period
Contractual Obligations	Total	1 year		2 - 3 years		4 - 5 years		More than 5 years
Capital Lease	324		116		160		48		—
Operating Lease	41,029		8,373		12,387		12,092		8,177
Credit Agreement	99,250		1,000		2,000		2,000		94,250
Total	140,603		9,489		14,547		14,140		102,427

Purchase obligations related to existing contracts are with the Federal Government and, in the event any contracts are terminated, we would have the ability to submit a termination claim for outstanding purchases.

In connection with our acquisition of Zen, we borrowed approximately $129.3 million in long-term debt which will be repaid in consecutive quarterly payments of $323,125 each, starting from March 31, 2006 through December 31, 2010, and a final payment of approximately $122.8 million on February 9, 2011.

Effects of Inflation

We generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years. Under our time and materials contracts, labor rates are usually adjusted annually by predetermined escalation factors. Our cost reimbursable contracts automatically adjust for changes in cost. Under our fixed-price contracts, we include a predetermined escalation factor, but we have generally have not been adversely affected by inflation.

Off-Balance Sheet Arrangements

During fiscal 2005, we were not a party to any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 to our accompanying consolidated financial statements. We consider the accounting policies related to revenue recognition to be critical to the understanding of our results of operations. Our critical accounting policies also include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly impact our financial results under different assumptions and conditions. We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.

Revenue Recognition

We recognize revenue under its contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectibility of the contract price is considered probable and can be reasonably estimated. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.

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Under cost reimbursable contracts, we are reimbursed for allowable costs, and paid a fee, which may be fixed or performance-based. Revenues on cost reimbursable contracts are recognized as costs are incurred plus an estimate of applicable fees earned. We consider fixed fees under cost reimbursable contracts to be earned in proportion of the allowable costs incurred in performance of the contract. For cost reimbursable contracts that include performance based fee incentives, we recognize the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding performance.

Revenue on time and materials contracts are recognized based on direct labor hours expended at contract billing rates and adding other billable direct costs.

Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on unit pricing, we recognize revenue for the number of units delivered in any given fiscal period. For fixed price contracts that are based on the proportionate performance method and involve a specified number of similar acts, we recognize revenue based on the proportion of those acts completed compared to the number of total specified acts required by the contract. For fixed price contracts that are based on the proportionate performance method and involve a specified number of defined but not similar acts, we recognize revenue based on the proportion of the project’s percentage total costs incurred compared to the estimated total costs associated with the entire transaction. For fixed price contracts that provide for the delivery of a specific product with related customer acceptance provisions, revenues and associated contract costs are recognized upon product delivery and customer acceptance.

Our contracts with agencies of the government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectibility of the contract price, we consider our previous experiences with our customers, communications with our customers regarding funding status, and our knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is deemed probable.

Contract revenue recognition inherently involves estimation, including the contemplated level of effort to accomplish the tasks under contract, the cost of the effort, and an ongoing assessment of progress toward completing the contract. From time to time, as part of the normal management processes, facts develop that require revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.

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

Stock Based Compensation

We account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of our stock at the date of the grant over the exercise price of the related option. We have adopted the annual disclosure provisions of SFAS No. 148 in our financial reports for the year ended December 31, 2003. The disclosures determine compensation cost for our stock options based on SFAS No. 123, which reflects the fair value of each option estimated on the date of grant using the Black-Scholes option-pricing model.

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In December 2004, the FASB issued FASB Statement No. 123(R) (revised 2004), Share Based Payment. Statement 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. The revised Statement requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006. All public companies must use either the modified prospective or the modified retrospective transition method. (See “—Recent Events” above for a discussion of changes to our Stock Option programs.)

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates for borrowings under our credit facility. Interest rate fluctuations are monitored by our management as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. As part of this strategy, we may use interest rate swap arrangements to manage or hedge our interest rate risk. We do not use derivative financial instruments for speculative or trading purposes.

As of December 31, 2005, we had $99.25 million outstanding under our Credit Agreement. A 1% change in interest rates would have resulted in our interest expense fluctuating by approximately $250,000 for the three months ended December 31, 2005.

Effective February 14, 2006, an interest swap agreement came into effect which reduced our exposure associated with the market volatility of floating LIBOR interest rates. This agreement has a notional principal amount of $30.0 million and, as of December 31, 2005, had a rate ranging from 4.05% to 4.74%. This agreement is a hedge against term debt, which bears interest at LIBOR plus a margin which has a current overall rate of 5.78%. At stated monthly intervals the difference between the interest on the floating LIBOR-based debt and the interest calculated in the swap agreement are settled in cash.

In addition, historically, our investment positions have been relatively small and short-term in nature. We have typically made investments in a fund with an effective average maturity of fewer than 40 days and a portfolio make-up consisting primarily of commercial paper and notes, variable rate instruments, and, to a lesser degree, overnight securities and bank instruments. Since our initial public offering, the Board of Directors approved an investment policy that requires us to invest in relatively short-term, high quality, and high liquidity obligations.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements of SI International, Inc. are submitted on pages F-1 through F-36 of this report.

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Quarterly Assessment.We carried out an assessment as of December 31, 2005 of the effectiveness of the design and operation of our disclosure controls and procedures and our internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Rules adopted by the SEC require that we present the conclusions of our Chief Executive Officer and Chief Financial Officer about the effectiveness of our disclosure controls and procedures and the conclusions of our management about the effectiveness of our internal control over financial reporting as of the end of the period covered by this Annual Report on Form 10-K.

CEO and CFO Certifications.Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of our Chief Executive Officer and Chief Financial Officer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures and Internal Control over Financial Reporting.Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal control over financial reporting is a process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

·pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management or our Board of Directors; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material adverse effect on our financial statements.

Limitations on the Effectiveness of Controls.Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and

50

the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no assessment of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Assessments.The assessment by our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures and the assessment by our management of our internal control over financial reporting included a review of procedures and discussions with our Disclosure Control Committee and others in the Company. In the course of the assessments, management sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Management used the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess the effectiveness of our internal control over financial reporting.

Our internal control over financial reporting is also assessed on an ongoing basis by management and other personnel in our Accounting and Internal Audit departments. Management’s annual assessment of our internal control over financial reporting is audited by our independent registered public accounting firm. We consider the results of these various assessment activities as we monitor our disclosure controls and procedures and internal control over financial reporting and when deciding to make modifications as necessary. Management’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Among other matters, management sought in its assessment to determine whether there were any “material weaknesses” in the Company’s internal control over financial reporting, or whether management had identified any acts of fraud involving senior management, management, or other personnel who have a significant role in our internal control over financial reporting. This information was important both for the assessment generally and because the Section 302 certifications require that our Chief Executive Officer and Chief Financial Officer disclose that information to the Audit Committee of the Board of Directors and to our independent auditors and to report on related matters in this section of the Annual Report on Form 10-K. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “material weakness” is defined as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is defined as a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identified, management considered what revision, improvement and/or correction was necessary to be made in accordance with our on-going procedures.

Evaluation of Disclosure Controls and Procedures.As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management,

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including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Management’s Report on Internal Control over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report that is included elsewhere herein.

Changes in Internal Control Over Financial Reporting.There were no changes in our internal control over financial reporting for the fiscal year ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control for financial reporting.

Item 9B. Other Information.

None.

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PART III

The information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) and is incorporated herein by reference to the definitive proxy statement of SI International, Inc. for its 2006 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)   Documents filed as part of this Report

1.Financial Statements.

A.	Report of Independent Registered Public Accounting Firm
B.	Report of Independent Registered Public Accounting Firm on Internal Control over Finanacial Reporting
C.	Consolidated Balance Sheets as of December 31, 2005 and December 25, 2004
D.	Consolidated Statements of Operations for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
E.	Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
F.	Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
G.	Notes to Consolidated Financial Statements

2.Financial Statement Schedules.

Schedule II—Valuation and Qualifying Accounts

3.Exhibits.

The exhibits required by this item are set forth on the Index to Exhibits attached hereto.

(b)Exhibits.

See Item 15(a)(3) above.

(c)   Not Applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March, 2006.

SI INTERNATIONAL, INC.
By:	/s/ S. BRADFORD ANTLE
	S. Bradford Antle
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in capacities and on the dates indicated.

	Signatures		Title		Date
/s/ S. BRADFORD ANTLE		President, Chief Executive Officer		March 15, 2006
S. Bradford Antle		and Director (Principal Executive Officer)
/s/ THOMAS E. DUNN		Executive Vice President, Chief		March 15, 2006
Thomas E. Dunn		Financial Officer and Treasurer (Principal Financial and Accounting Officer)
/s/ RAY J. OLESON		Executive Chairman of the Board		March 15, 2006
Ray J. Oleson
/s/ CHARLES A. BOWSHER		Director		March 15, 2006
Charles A. Bowsher
/s/ JAMES E. CRAWFORD, III		Director		March 15, 2006
James E. Crawford, III
/s/ WALTER J. CULVER, JR.		Director		March 15, 2006
Walter J. Culver, Jr.
/s/ WALTER C. FLORENCE		Director		March 15, 2006
Walter C. Florence
/s/ GENERAL R. THOMAS MARSH		Director		March 15, 2006
General R. Thomas Marsh (USAF-Ret.)
/s/ EDWARD H. SPROAT		Director		March 15, 2006
Edward H. Sproat
/s/ JOHN P. STENBIT		Director		March 15, 2006
John P. Stenbit

54

INDEX TO EXHIBITS

EXHIBIT NO.	DESCRIPTION
2.1	Stock Purchase Agreement among the Company, SEI, and the stockholders of SEI dated January 12, 2005 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 1, 2005 and incorporated by reference). (The appendices and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. SI International, Inc., hereby undertakes to furnish supplementally to the Securities and Exchange Commission copies of any omitted appendices and exhibits upon request by the Securities and Exchange Commission).
2.2	Stock Purchase Agreement among the Company, Zen, and the stockholders of Zen dated February 8, 2006(*). (The appendices and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. SI International, Inc., hereby undertakes to furnish supplementally to the Securities and Exchange Commission copies of any omitted appendices and exhibits upon request by the Securities and Exchange Commission).
3.1	Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-87964) filed on October 25, 2002 (the “Third Amendment”) and incorporated herein by reference).
3.2	Amended and Restated Bylaws, as amended (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 11, 2005 and incorporated herein by reference).
4.1	Registration Rights Agreement, as amended (filed as Exhibit 4.1 to the Third Amendment and incorporated herein by reference).
4.2	Specimen Certificate of our common stock (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-87964) filed on November 5, 2002 (the “Fourth Amendment”) and incorporated herein by reference).
4.3	Stock Purchase Agreement, as amended (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-87964) filed on November 8, 2002 (the “Fifth Amendment”), and incorporated herein by reference).
4.4	Amendment to Stock Purchase Agreements (filed as Exhibit 4.4 to the Fourth Amendment and incorporated herein by reference).
10.1	2002 Amended and Restated Omnibus Stock Incentive Plan (filed as Annex B to the Company’s Proxy Statement on Schedule 14A for the 2005 Annual Meeting of Stockholders filed on April 21, 2005 and incorporated herein by reference).
10.2	January 2001 Nonqualified Stock Option Plan (filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-87964) filed on June 24, 2002 (the “First Amendment”) and incorporated herein by reference).
10.3	SI International, Inc. 2001 Service Award Stock Option Plan (filed as Exhibit 10.3 to the First Amendment and incorporated herein by reference).
10.4	1998 Stock Option Plan (filed as Exhibit 10.5 to the First Amendment and incorporated herein by reference).
10.5	Non-Qualified Deferred Compensation Plan, as amended (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004 and incorporated herein by reference).
10.6	Form of SI International, Inc. Stock Option Agreement Evidencing Grant of Stock Options Under the SI International, Inc. 2002 Stock Incentive Plan, Including Notice of Stock Option Grant (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 17, 2006 and incorporated herein by reference).

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10.7	Notice of Stock Option Acceleration of Vesting (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 13, 2005 and incorporated herein by reference).
10.8	Amended and Restated Credit Agreement (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed February 15, 2005 and incorporated herein by reference).
10.9	First Amendment to Amended and Restated Credit Agreement (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 3, 2006 and incorporated herein by reference).
10.10	Executive Employment Agreement with S. Bradford Antle (filed as Exhibit 10.6 to the Third Amendment and incorporated herein by reference).
10.11	Executive Employment Agreement with Thomas E. Dunn (filed as Exhibit 10.8 to the Third Amendment and incorporated herein by reference).
10.12	Executive Employment Agreement with Thomas E. Lloyd (filed as Exhibit 10.9 to the Third Amendment and incorporated herein by reference).
10.13	Executive Employment Agreement with Ray J. Oleson (filed as Exhibit 10.10 to the Third Amendment and incorporated herein by reference).
10.14	Executive Employment Agreement with Paul R. Brubaker (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 22, 2005 and incorporated herein by reference).
10.15	Executive Employment Agreement with Harry D. Gatanas (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on November 14, 2005 and incorporated herein by reference).
10.16	Executive Employment Agreement with Marylynn Stowers (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A on February 2, 2006 and incorporated herein by reference).
10.17	Executive Employment Agreement with P. Michael Becraft (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on February 24, 2006 and incorporated herein by reference).
10.18	Consulting Services Agreement with Walter J. Culver (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004 and incorporated herein by reference).
10.19	Form of Indemnification Agreement (filed as Exhibit 10.11 to the Third Amendment and incorporated herein by reference).
21.1	Subsidiaries of the registrant (*).
23.1	Consent of Ernst & Young LLP (*).
31.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a 14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (*).
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (*).

*Indicates filed herewith.

56

INDEX TO FINANCIAL STATEMENTS

	PAGE
SI INTERNATIONAL, INC.
Report of Independent Registered Public Accounting Firm	F 2
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	F-3
Consolidated Balance Sheets as of December 31, 2005 and December 25, 2004	F-4
Consolidated Statements of Operations for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003	F-5
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003	F-6
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003	F-7
Notes to Consolidated Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of SI International, Inc.

We have audited the accompanying consolidated balance sheets of SI International, Inc. and subsidiaries (as defined in Note 1) (the Company) as of December 31, 2005 and December 25, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SI International, Inc. and subsidiaries at December 31, 2005 and December 25, 2004, and the consolidated results of its operations and its cash flows for the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SI International, Inc. and its subsidiaries internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2006 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
McLean, Virginia
March 3, 2006

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of SI International, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting that SI International, Inc. and subsidiaries (as defined in Note 1) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). SI International’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that SI International, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, SI International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SI International, Inc. and subsidiaries as of December 31, 2005 and December 25, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003 and our report dated March 3, 2006 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
McLean, Virginia
March 3, 2006

F-3

SI International, Inc.
Consolidated balance sheets
As of December 31, 2005 and December 25, 2004
(Amounts in thousands, except share and per share data)

	December 31, 2005			December 25, 2004
Assets
Current assets:
Cash and cash equivalents		$	26,160		$	3,754
Marketable securities		7,850			2,000
Accounts receivable, net		93,633			65,710
Deferred tax asset		422			2,740
Other current assets		6,276			3,503
Total current assets		134,341			77,707
Property and equipment, net		5,908			4,971
Intangible assets, net		16,483			6,575
Other assets		5,655			2,142
Goodwill		173,308			120,712
Total assets		$	335,695		$	212,107
Liabilities and stockholders’ equity
Current liabilities:
Note Payable—Line of Credit		$	—		$	28,954
Current portion of long-term debt		1,000			—
Accounts payable		25,364			11,225
Accrued expenses and other current liabilities		29,674			15,603
Note payable—former owner of acquired business		2,280			—
Total current liabilities		58,318			55,782
Long-term debt, net of current portion		98,250			—
Note payable—former owner of acquired business		—			2,280
Deferred income tax		5,221			5,046
Other long-term liabilities		6,037			3,929
Stockholders’ equity:
Common stock—$0.01 par value per share; 50,000,000 shares authorized; 11,341,222 and 11,047,533 shares issued and outstanding as of December 31, 2005 and December 25, 2004, respectively		114			111
Additional paid-in capital		133,843			128,192
Deferred compensation		—			(208		)
Retained earnings		33,912			16,975
Total stockholders’ equity		167,869			145,070
Total liabilities and stockholders’ equity		$	335,695		$	212,107

The accompanying notes are an integral part of these consolidated balance sheets.

F-4

SI International, Inc.
Consolidated statements of operations
For the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003
(Amounts in thousands, except per share data)

	Fiscal Year
	2005			2004			2003
Revenue	$	397,919		$	262,306		$	168,287
Costs and expenses:
Direct costs	246,481			166,774			101,940
Indirect costs	113,015			71,917			51,569
Depreciation	2,161			2,231			2,009
Amortization	2,292			648			—
Total operating expenses	363,949			241,570			155,518
Income from operations	33,970			20,736			12,769
Other income (expense)	12			(1		)	—
Interest expense	(6,103		)	(2,760		)	(606		)
Income before provision for income taxes	27,879			17,975			12,163
Provision for income taxes	10,942			7,098			4,784
Net income	$	16,937		$	10,877		$	7,379
Earnings per common share:
Basic net income per common share	$	1.51		$	1.20		$	0.87
Diluted net income per common share	$	1.45		$	1.14		$	0.87
Basic weighted-average shares outstanding	11,185			9,041			8,446
Diluted weighted-average shares outstanding	11,690			9,507			8,488

The accompanying notes are an integral part of these consolidated statements.

F-5

SI International, Inc.
Consolidated statements of stockholders’ equity
For the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003
(Amounts in thousands, except share data)

	Stockholders’ equity (deficit)
	Common stock					Additional							Retained earnings
	Shares		Amount			paid-in Capital			Deferred Compensation				(Accumulated deficit)				Total
Balance, December 28, 2002		8,439,741		85		75,682				(509		)		(1,281		)	73,977
Exercise of stock options		11,766		—		67				—				—			67
Compensatory stock option grants/amortization of deferred compensation		—		—		(37		)		169				—			132
Offering costs		—		—		(8		)		—				—			(8		)
Net income		—		—		—				—				7,379			7,379
Balance, December 27, 2003		8,451,507		$	85	$	75,704			$	(340	)		$	6,098		$	81,547
Exercise of stock options		76,026		1		929				—				—			930
Amortization of deferred compensation		—		—		(3		)		132				—			129
Option exercise tax effect		—		—		348				—				—			348
Offering proceeds, net of offering costs		2,520,000		25		51,214				—				—			51,239
Net income		—		—		—				—				10,877			10,877
Balance, December 25, 2004		11,047,533		$	111	$	128,192			$	(208	)		$	16,975		$	145,070
Exercise of stock options		293,689		3		3,735				—				—			3,738
Amortization of deferred compensation		—		—		(12		)		136				—			124
Stock-based compensation		—		—		415				72				—			487
Option exercise tax effect		—		—		1,561				—				—			1,561
Other		—		—		(48		)		—				—			(48		)
Net income		—		—		—				—				16,937			16,937
Balance, December 31, 2005		11,341,222		$	114	$	133,843			$	—			$	33,912		$	167,869

The accompanying notes are an integral part of these consolidated statements.

F-6

SI International, Inc.
Consolidated statements of cash flows
For the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003
(Amounts in thousands)

	Fiscal Year
	2005			2004			2003
Cash flows from operating activities:
Net income	$	16,937		$	10,877		$	7,379
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,161			2,231			2,009
Amortization of intangible assets	2,292			648			—
Loss on disposal of fixed assets	56			14			178
Income tax benefit for stock option exercises	1,561			348			—
Stock-based compensation	611			132			132
Deferred income tax provision	2,493			1,686			(98		)
Amortization of deferred financing costs and debt discount	705			416			379
Non-cash loss due to early repayment of debt	—			584			—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net	(14,629		)	(16,096		)	(2,106		)
Other current assets	(2,684		)	116			(266		)
Other assets	(1,000		)	(668		)	(106		)
Accounts payable and accrued expenses	15,421			143			4,996
Deferred revenue	(275		)	(3,686		)	2,901
Other long term liabilities	2,950			1,600			681
Net cash provided by (used in) operating activities	26,599			(1,655		)	16,079
Cash flows from investing activities:
Purchase of property and equipment, net	(2,727		)	(1,225		)	(1,291		)
Proceeds from sale of marketable securities	36,200			11,000			24,650
Purchase of marketable securities.	(42,050		)	(2,050		)	(35,600		)
Former owner payable.	8,041			—			—
Cash paid for acquisition of MATCOM International Corp.	(82		)	(64,918		)	—
Cash paid for acquisition of Bridge Tech. Corp., net of cash assumed	(197		)	(29,472		)	—
Cash paid for acquisition of Shenandoah Electronic Intelligence, Inc., net of cash assumed	(74,006		)	—			—
Net cash used in investing activities	(74,821		)	(86,665		)	(12,241		)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs	(48		)	51,239			—
Proceeds from exercise of stock options	3,738			927			59
Repayments of bank overdrafts	—			—			(2,201		)
Net (repayments) borrowings under line of credit	(28,954		)	28,954			—
Payments of debt issuance fees	(3,238		)	(1,202		)	—
Repayments of notes payable	—			—			(140		)
Proceeds from long-term debt	100,000			30,000			—
Repayments of long-term debt and borrowings from stockholders	(750		)	(30,000		)	—
Repayments of capital lease obligations	(120		)	(146		)	(110		)
Net cash provided by (used in) financing activities	70,628			79,772			(2,392		)
Net change in cash and cash equivalents	22,406			(8,548		)	1,446
Cash and cash equivalents, beginning of period	3,754			12,302			10,856
Cash and cash equivalents, end of period	$	26,160		$	3,754		$	12,302
Supplemental disclosures of cash flow information:
Cash payments for interest	$	5,059		$	1,857		$	339
Cash payments for income taxes	$	3,593		$	6,181		$	3,920
Supplemental disclosure of noncash activities:
Equipment acquired under capital leases	$	126		$	289		$	122

The accompanying notes are an integral part of these consolidated statements.

F-7

SI International, Inc.
Notes to consolidated financial statements

1. Business:

SI International, Inc. (the Company or SI), was incorporated on October 14, 1998, under the laws of the state of Delaware. The Company is a provider of information technology and network solutions with the Federal Government as a major client. The Company offers a broad spectrum of solutions and services, including design, development, implementation and operations to assist clients in achieving their missions. The Company combines technological and industry experience to provide solutions through service offerings in the areas of information technology applications, systems engineering, network and telecom engineering and outsourcing.

On January 1, 2001, the Company separated its telecommunications operations, which it obtained pursuant to an acquisition in fiscal year 2000, by contributing the net assets of the telecommunications operations to a sister company, SI International Telecom Corporation (SI Telecom), in exchange for 5,000 shares of senior participating preferred stock in SI Telecom (SI Telecom Transaction). Warrant holders and options holders of the Company received warrants and options in SI Telecom, and the existing minority shareholders in SI received a comparable minority ownership in SI Telecom. In addition, SI International, L.L.C. (SI L.L.C.), the majority owner of SI, contributed $1.1 million in cash and received 44,624 shares of SI Telecom junior participating preferred stock (see Note 13). Upon completion of these transactions, the effective ownership structure of SI Telecom on a fully diluted basis was identical with the ownership of SI. Both SI and SI Telecom were owned in majority by SI L.L.C.

In October 2002, SI Telecom was merged back into SI, (the SI Telecom Merger) such that SI Telecom became a wholly owned subsidiary of SI. The SI Telecom junior participating preferred stock and SI Telecom common shares held by minority shareholders were exchanged for SI shares based on a ratio of 0.005 SI common shares for each share of SI Telecom common stock.

Since November 12, 2002, our common stock has been publicly traded on the Nasdaq National Market under the symbol “SINT”. The completion of the initial public offering in November of 2002 raised $47.1 million (after offering costs) in equity capital through the sale of 3,850,000 shares of common stock. On October 6, 2004, the Company completed its secondary offering which raised $51.2 million (after offering costs) cash through the sale of 2,520,000 shares of common stock.

2. Summary of significant accounting policies:

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-8

Reporting periods

The Company’s fiscal year ends on the Saturday nearest December 31. All fiscal years presented, excluding 2005, include 52 weeks. Fiscal 2005 includes 53 weeks. The Company’s quarters end on the Saturday nearest to the applicable quarterly month-end.

Cash and cash equivalents

The Company considers all investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Marketable securities

During fiscal 2004, the Company invested in auction rate securities which are associated with municipal bond offerings, and had final maturity dates ranging from 2004 to 2034. These securities were previously classified as cash and cash equivalents. The accompanying December 25, 2004 Consolidated Balance Sheet has been adjusted to reflect the reclassification of $2.0 million in auction rate securities from cash and cash equivalents to marketable securities. This reclassification had no impact on the Company’s debt covenants or interest expense.

At the end of fiscal 2005, marketable securities consisted primarily of auction rate securities with final maturity dates ranging from 2024 to 2035. All of these securities were sold during February 2006.

The Company’s marketable securities are classified as available for sale and are recorded at quoted market prices that approximate cost. Both realized and unrealized gains and losses were not material in the fiscal years ended 2005, 2004 and 2003.

Revenue recognition

The Company recognizes revenue under its contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectibility of the contract price is considered probable and can be reasonably estimated. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.

Under cost reimbursable contracts, the Company is reimbursed for allowable costs, and paid a fee, which may be fixed or performance-based. Revenues on cost reimbursable contracts are recognized as costs are incurred plus an estimate of applicable fees earned. The Company considers fixed fees under cost reimbursable contracts to be earned in proportion of the allowable costs incurred in performance of the contract. For cost reimbursable contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.

Revenue on time and materials contracts are recognized based on direct labor hours expended at contract billing rates and adding other billable direct costs.

Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on unit pricing, the Company recognizes revenue for the number of units delivered in any given fiscal period. For fixed price contracts that are based on the proportionate performance method and involve a specified number of similar acts, the Company recognizes revenue based on the proportion of those acts completed compared to the number of total specified acts required by the contract. For fixed price contracts that are based on the proportionate performance method and involve a specified number of defined but not similar acts, the Company recognizes revenue based on the proportion of the project’s percentage total costs incurred compared to the estimated total costs associated with the entire transaction. For fixed price contracts that provide for

F-9

the delivery of a specific product with related customer acceptance provisions, revenues and associated contract costs are recognized upon product delivery and customer acceptance.

The Company’s contracts with agencies of the government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectibility of the contract price, the Company considers its previous experiences with its customers, communications with its customers regarding funding status, and the Company’s knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is deemed probable.

Contract revenue recognition inherently involves estimation, including the contemplated level of effort to accomplish the tasks under contract, the cost of the effort, and an ongoing assessment of progress toward completing the contract. From time to time, as part of the normal management processes, facts develop that require revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.

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

Significant customers

Revenue generated from contracts with the Federal Government, both directly and through other prime contractors, accounted for a significant percentage of revenues in the fiscal years 2005, 2004, and 2003.

	% of revenues Fiscal year
	2005		2004		2003
Department of Defense	46.9	%	52.8	%	54.5	%
Federal civilian agencies	51.2		43.8		39.2
Commercial entities	1.9		3.4		6.3
Total revenue	100.0	%	100.0	%	100.0	%

We had only one contract that generated more than 10% of our revenue for fiscal year 2005 and 2004. For the fiscal year ended December 27, 2003 we had two contracts that generated more than 10% of our revenue. For the fiscal year 2005, fiscal 2004, and fiscal 2003, revenue from our C4I2SR contract with the U.S. Air Force Space Command represented approximately 19%, 17%, and 22%, respectively, of total revenue. Our National Visa Center contract with the Department of State represented approximately 14% of total revenue for the fiscal year ended December 27, 2003.

Concentrations of Credit risk

The Company’s assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Accounts receivable consist primarily of billed and unbilled amounts, including indirect cost rate variances, due from various agencies of the Federal Government or prime contractors doing business with the Federal Government, and other commercial customers. The Company historically has not experienced significant losses related to accounts receivable and therefore, believes that credit risk related to accounts receivable is minimal. The Company maintains cash balances that may at times exceed

F-10

federally insured limits. The Company maintains this cash at high-credit quality institutions and, as a result, believes credit risk related to its cash is minimal.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at their face amount less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts at an amount that it estimates to be sufficient to cover the risk of collecting less than full payment on receivables. On a monthly basis the Company reevaluates its receivables, especially receivables that are past due, and reassesses the allowance for doubtful accounts based on specific client collection issues.

Property and equipment

Property and equipment are stated at historical cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed generally using a straight-line method over the estimated useful lives of the related assets, as follows:

Software, computers and equipment	3-5 years
Furniture and fixtures	5-7 years
Leasehold improvements	Shorter of the estimated useful life of the asset or the lease term

Deferred financing costs

Costs incurred in raising debt are deferred and amortized as interest expense over the term of the related debt using the effective interest method. These deferred costs are reflected as a component of other assets in the accompanying consolidated balance sheets. The deferred financing costs consist of the following (in thousands):

	December 31, 2005				December 25, 2004
Deferred loan costs		$	4,975			$	1,737
Accumulated amortization		(1,542		)		(837		)
		$	3,433			$	900

During 2004, the Company wrote off approximately $584,000 of deferred loan costs related to the payoff of its term loan under the 2004 credit facility. Amortization of deferred financing costs was $705,000, $416,000 and $379,000 in fiscal years 2005, 2004 and 2003, respectively.

Impairment of long-lived assets

Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets.” Pursuant to SFAS No. 144, impairment is determined by comparing the carrying value of these long-lived assets to an estimate of the future undiscounted cash flows expected to result from the use of the assets and eventual disposition. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models as appropriate. The Company believes that no such impairment existed in December 31, 2005 and December 25, 2004. In the event that there are changes in the planned use of the Company’s long-term assets or its expected future undiscounted cash flows are reduced significantly, the Company’s assessment of its ability to recover the carrying value of these assets could change.

F-11

Goodwill and other intangible assets

Goodwill represents the excess of cost over net assets acquired resulting from the Company’s acquisitions. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment at least annually and written down and charged to operations only in the periods in which the recorded value of goodwill and certain intangible is more than its fair value. In the year ended December 31, 2005 and December 25, 2004, the Company completed its annual impaired test of goodwill. The analysis indicated that no impairment of goodwill exists; however, future impairment reviews may results in the recognition of such impairment.

Intangible assets from acquisitions, which consist primarily of contractual customer relationships, are amortized utilizing an accelerated method over 6 to 14 years, based on their estimated useful lives. Amortization expense is estimated to be $2.1 million, $1.8 million, $1.6 million, $1.5 million and $1.5 million for the years 2006, 2007, 2008, 2009 and 2010, respectively.

Fair value of financial instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, credit facilities, and long-term debt. In management’s opinion, the carrying amounts of these financial instruments approximate their fair values at December 31, 2005 and December 25, 2004.

Stock-based compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related Interpretations No. 44. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The Company adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2003.

On December 13, 2005, the Company’s Board of Directors approved the accelerated vesting of unvested stock options previously awarded to employees, officers, and directors as of December 7, 2005 in light of new FASB statement No. 123(R) that will take effect on January 1, 2006. The Board took the action with the belief that it is in the best interest of stockholders, as it will reduce the Company’s reported compensation expense in future periods. As a result of the acceleration, the Company expects to eliminate expense relating to outstanding options of approximately $4.2 million in fiscal 2006, $3.4 million in fiscal 2007, and $1.8 million in fiscal 2008 on a pre-tax basis, based upon the Company’s value calculations using the Black-Scholes methodology. The acceleration generated compensation expense of approximately $0.5 million determined under the intrinsic value method.

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Had compensation costs for the Company’s stock options been determined based on SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been as follows (in thousands, except per share amounts):

	Fiscal Year
	2005			2004			2003
Net income—as reported	$	16,937		$	10,877		$	7,379
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of tax	371			80			80
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of tax	(10,137		)	(1,939		)	(945		)
Net income—Pro forma	$	7,171		$	9,018		$	6,514
Basic earnings per share—as reported	$	1.51		$	1.20		$	0.87
Diluted earnings per share—as reported	$	1.45		$	1.14		$	0.87
Basic earnings per share—Pro forma	$	0.64		$	1.00		$	0.77
Diluted earnings per share—Pro forma	$	0.61		$	0.95		$	0.77

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants during the fiscal years ended December 31, 2005, December 25, 2004, and December 27, 2003:

	Fiscal Year
	2005	2004	2003
Risk-free interest rate	3.99-4.39%	4%	4%
Expected life of options	5-7 years	7 years	9 years
Expected stock price volatility	45%-50%	55%-60%	70%
Expected dividend yield	0%	0%	0%

Income taxes

Income taxes are accounted for using an asset and liability approach that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not considered. Net deferred tax assets are reduced, if necessary, by a valuation allowance for the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Earnings (loss) per share

The Company has applied SFAS No. 128, “Earnings Per Share,” for all fiscal years presented in these consolidated financial statements. SFAS No. 128 requires disclosure of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted average number of shares outstanding without consideration of common stock equivalents or other potentially dilutive securities. Diluted EPS gives effect to common stock equivalents and other potentially dilutive securities outstanding during the period.

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The following details the computation of net income (loss) per common share:

	Fiscal Year
	2005		2004		2003
Net income	$	16,937	$	10,877	$	7,379
Weighted average share calculation:
Basic weighted average share outstanding	11,185		9,041		8,446
Treasury stock effect of stock options	505		466		42
Diluted weighted average shares outstanding	11,690		9,507		8,488

Segment reporting

SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Management has concluded that the Company operates in one segment based upon the information used by management in evaluating the performance of its business and allocating resources and capital.

Reclassifications

Certain prior year amounts have been reclassified to conform to the presentation of the current year.

New accounting pronouncements

In December 2004, the FASB issued FASB Statement No. 123(R) (revised 2004), Share Based Payment. Statement 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. The revised Statement requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company for the fiscal year beginning January 1, 2006. All public companies must use either the modified prospective or the modified retrospective transition method..

As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock option grants. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in the Stock-Based Compensation section of this note to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This

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requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

In July 2005, the FASB issued an Exposure Draft of a proposed Interpretation, Accounting for Uncertain Tax Positions—an Interpretation of FASB Statement No. 109. The proposed Interpretation (if adopted in its current form) would apply to all open tax positions accounted for in accordance with FAS 109, Accounting for Income Taxes, including those acquired in business combinations. Under the proposed Interpretation, the recognition of a tax benefit would occur when it is “probable” that the position would be sustained upon audit. The proposed Interpretation refers to FASB Statement No. 5, Accounting for Contingencies, definition of “probable,” which represents a level of assurance that is substantially higher than “more likely than not.”  The Board noted that, in determining if the “probable” threshold has been met, it should be assumed that the taxing authority will examine the tax position. The proposed Interpretation differs from current rules which allow for the recognition of a tax benefit if it is “more likely than not” that the position would be sustained upon audit. The proposed Interpretation, as currently drafted (and if adopted) would be effective for fiscal years ending after December 15, 2005. It is not certain that the Interpretation will be adopted with the current effective date. Management is in the process of determining the effect of this proposal on its financial statements.

3. Acquisitions:

On February 27, 2006, we completed the purchase of Zen and entered into the First Amendment with our lenders as more fully set forth in Note 12, Subsequent Events.

On February 9, 2005, we completed the purchase of Shenandoah Electronic Intelligence, Inc. (SEI). SEI is a provider of critical business process outsourcing primarily for the Department of Homeland Security (DHS). SEI’s services include: data and records management; applications processing; file and mail management; analytical support services; and secure optical card processing at one of the largest facilities of its kind.

As a result of this acquisition, we gained approximately 1,700 additional employees and increased our leased space to 28 offices and 3 warehouses at various U.S. locations for an aggregate of approximately 536,263 square feet in 15 states (including approximately 27,090 square feet that are sub-leased through the remaining terms of our primary leases).

Under the terms of the definitive stock purchase agreement, we acquired SEI for $75 million in cash, subject to certain adjustments totaling approximately $0.6 million. The transaction was funded through cash-on-hand and borrowings from a new $160 million credit facility. The purchase price is subject to adjustment as a result of certain tax elections. The Company, in conjunction with the SEI stockholders, have made a 338(h)(10) tax election. The definitive stock purchase agreement also provides that the SEI stockholders will retain certain non-operating assets and contingent accounts receivable.

Approximately $52.7 million of the purchase consideration has been allocated to goodwill based primarily on the excess of the purchase price over the estimated fair value of net assets acquired, and approximately $12.2 million of the purchase price has been assigned to identifiable intangible assets of contractual customer relationships. The contractual customer relationships are being amortized accelerated over its estimated remaining life of 14 years.

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The total purchase price paid, including transaction costs of $1.2 million, has been preliminarily allocated as follows (in thousands):

Cash	$	2,957
Accounts receivable	12,909
Prepaid expense and other current assets	353
Property and equipment	331
Accounts payable & accrued expenses	(4,665		)
Contractual customer relationships	12,200
Goodwill	52,684
Total consideration	$	76,769

On December 20, 2004, the Company completed the purchase of Bridge Corporation, a provider of information technology and information management. The acquisition supports the company’s strategic growth plan to broaden its customer base into the intelligence agencies, and strengthen its portfolio of mission-critical solutions. Under the terms of the acquisition agreement, the Company acquired Bridge for $30 million, subject to working capital and other adjustments totaling approximately $1.7 million. Of the purchase price, $29.4 million was paid in cash and the $2.3 million was held as note payable to be paid in June, 2006. Approximately $26.2 million of the purchase consideration has been allocated to goodwill, and approximately $2.2 million of the purchase price has been assigned to identifiable intangible assets on the basis of contractual customer relationships. The contractual customer relationships are being amortized using an accelerated method over their estimated remaining life of 6 years.

On January 21, 2004, the Company completed the purchase of MATCOM International Corp., a provider of information technology, systems engineering, logistics, and training. Under the terms of the merger agreement, the Company acquired MATCOM for $65.8 million. Approximately $54.6 million of the purchase consideration has been allocated to goodwill, and approximately $5.0 million of the purchase price has been assigned to identifiable intangible assets on the basis of contractual customer relationships. The contractual customer relationships are being amortized using an accelerated method over their estimated remaining life of 11 years.

The following unaudited proforma combined condensed statements of operations (in thousands, except per share) set forth the consolidated results of operations of the Company for the twelve months ended December 31, 2005 and December 25, 2004 as if the above described acquisitions, not including Zen, had occurred at the beginning of each period presented. This unaudited proforma information does not purport to be indicative of the actual results that would actually have occurred if the combination had been in effect for the twelve months ended December 31, 2005 and December 25, 2004.

	Twelve Months Ended
	December 31, 2005			December 25, 2004
Revenue		$	406,345		$	359,691
Net income		$	16,832		$	9,619
Diluted earnings per share		$	1.44		$	1.01

In accordance with the purchase accounting, the operations of the MATCOM, Bridge and SEI have been included in the Company’s statement of operations since the respective date of acquisition.

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SCOT Settlement

On December 7, 2005, the Company settled a prior dispute with a Federal customer, resulting in the Company receiving payment of $10.8 million on December 27, 2005.   Components of this payment are as follows (in thousands):

Settlement proceeds paid to the former Shenandoah Electronic Intelligence, Inc. (SEI) selling stockholder in accordance with the terms of the February 5, 2005 acquisition agreement	$	8,049
Goodwill in accordance with SFAS 141 which addresses accounting for such pre-acquisition contingencies	881
Incentive payment to employees in accordance with the terms of the contract	533
Revenue associated with post-acquisition services	1,339
Total amount received	$	10,802

4. Accounts receivable:

Accounts receivable consists of the following (in thousands):

	December 31, 2005				December 25, 2004
Billed accounts receivable		$	47,939			$	33,247
Unbilled accounts receivable:
Currently billable		40,094				26,400
Unbilled retainages and milestones payments expected to be billed within the next 12 months		5,546				5,714
Indirect costs incurred and charged to cost-plus contracts in excess of provisional billing rates (see Note 9)		1,563				1,493
Total unbilled accounts receivable		47,203				33,607
Allowance for doubtful accounts		(1,509		)		(1,144		)
Accounts receivable, net		$	93,633			$	65,710

The currently billable amounts included as unbilled accounts receivable as of December 31, 2005 represent amounts which are billed during the first quarter of the subsequent year. They are billings for services rendered prior to year-end, which are billed once necessary billing data has been collected and an invoice produced.

5. Property and equipment:

Property and equipment consist of the following (in thousands):

	December 31, 2005				December 25, 2004
Computers and equipment		$	8,691			$	8,007
Software		2,623				1,904
Furniture and fixtures		2,356				1,576
Leasehold improvements		1,581				1,086
		15,251				12,573
Less—Accumulated depreciation and amortization		(9,343		)		(7,602		)
		$	5,908			$	4,971

Property and equipment includes assets financed under capital lease obligations of approximately

F-17

$273,000 and $332,000, net of accumulated depreciation, as of December 31, 2005 and December 25, 2004, respectively.

Depreciation expense of approximately $2.2 million, $2.2 million, and $2.0 million was recorded in fiscal years 2005, 2004 and 2003, respectively.

6. Accrued expenses:

Accrued expenses consist of the following (in thousands):

	December 31, 2005			December 25, 2004
Accrued vacation		$	6,183		$	4,955
Accrued compensation		9,638			3,550
Accrued bonus		6,755			2,875
Other accrued liabilities		7,098			4,223
Accrued expenses and other current liabilities		$	29,674		$	15,603

7. Income taxes:

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and the tax basis of assets and liabilities using enacted tax rates for the year in which the differences are expected to reverse.

The tax effect of significant temporary differences, which comprise the deferred tax assets and liabilities, are as follows (in thousands):

	December 31, 2005				December 25, 2004
Deferred tax assets (liabilities):
Accounts payable and accrued expenses		$	1,969			$	2,081
Allowance for doubtful accounts		623				476
Net operating loss		796				808
Deferred rent		794				568
Lease payable		312				703
Deferred compensation		861				486
Stock compensation		395				159
Other		—				31
Total deferred tax asset		5,750				5,312
Prepaid expenses		(13		)		(6		)
Intangible assets		(7,646		)		(5,108		)
Unbilled revenue		(2,470		)		(2,394		)
Depreciation and amortization		(420		)		(110		)
Total deferred tax liability		(10,549		)		(7,618		)
Net deferred tax liability		$	(4,799	)		$	(2,306	)

SI Telecom has approximately $2,040,000 in net operating loss carryforwards, which will expire in 2021. These losses can only be used to offset income generated by SI Telecom. Management believes that

F-18

it is more likely than not that these net operating loss carryforwards will be benefited on a future tax return and therefore no valuation allowance was required.

The provision for income taxes consists of the following for the fiscal years (in thousands):

	Fiscal year
	2005		2004		2003
Current provision:
Federal	$	7,100	$	4,472	$	4,301
State	1,349		940		581
Deferred provision (benefit):
Federal	2,269		1,490		(86		)
State	224		196		(12		)
Provision for income taxes	$	10,942	$	7,098	$	4,784

A reconciliation of income taxes at the Federal statutory income tax rate to the provision for income taxes is as follows (in thousands):

	2005		2004		2003
Income taxes at the Federal statutory income tax rate	$	9,757	$	6,291	$	4,257
State income taxes, net of Federal benefit	1,090		738		370
Other, net	95		69		157
Provision for income taxes	$	10,942	$	7,098	$	4,784

8. Debt:

Debt consists of the following (in thousands):

	December 31, 2005			December 25, 2004
Credit facilities:
Line of credit at December 25, 2004, bears interest at LIBOR plus 275 to 350 base points or a specified base rate plus 170 to 250 basis points, interest due monthly, principal due January 21, 2008		$	—		$	28,954
Term loan at December 31, 2005, bears interest at LIBOR plus 225 to 250 basis points or a specified base rate plus 125 to 150 basis points, interest due monthly, twenty-three $250,000 consecutive quarterly principal payments starting on June 30, 2005, and a final $94.25 million principal payment on February 9, 2011		99,250			—
Total debt*		$	99,250		$	28,954

*Excludes $2.3 million note payable in connection with the Bridge acquisition as described below.

The original credit facility (the 2002 credit facility) consisted of a $35.0 million secured revolving credit arrangement with Wachovia Bank, N.A. acting as Administration Agent for a consortium of lenders. With the closing of the acquisition of Matcom, the Company amended the 2002 credit facility in January 2004. The amended credit facility (the 2004 credit facility) consists of a $30.0 million term loan and a $50.0 million secured revolving credit arrangement. The 2004 credit facility was secured by a pledge of substantially all of our current and future tangible and intangible assets, as well as those of our current

F-19

and future subsidiaries, including accounts receivable, inventory and capital stock of our existing and future subsidiaries.

Contemporaneously with the closing of our acquisition of SEI on February 9, 2005, the Company entered into the Credit Agreement which increased its borrowing capacity to $160 million, which is comprised of a $60 million five-year revolving credit facility and a $100 million six-year term loan facility. Borrowings available under the Credit Agreement were used as part of the acquisitions of Bridge and SEI. In addition, the Credit Agreement provides that up to an additional $75 million in uncommitted incremental term loan funds are available to the Company upon its request at any time for up to two years from one or more of the lenders under the Credit Agreement.

The annual maturity of long-term debt is $1.0 million for each of the five fiscal years subsequent to December 31, 2005 and approximately $94.3 million thereafter.

Any borrowings under the Credit Agreement, at the Company’s option, bears interest either at floating rates equal to LIBOR plus a spread ranging from 200 to 270 basis points or an alternate base rate plus a spread ranging from 100 to 175 basis points, with the exact spread determined upon the leverage ratio as defined in the Credit Agreement.

In connection with the Credit Agreement, the Company had incurred approximately $3.2 million financing costs. Such costs were capitalized as deferred financing costs on the balance sheet and amortized over the six year term of the Credit Agreement.

This credit facility was amended contemporaneously with the signing of the definitive Stock Purchase Agreement relating to the acquisition of Zen on February 27, 2006.

The Company had approximately $129.3 million of outstanding debt under our Amended Credit Agreement on February 27, 2006 and following the closing of our acquisition of Zen. The Company is required to repay $323,125 in consecutive quarterly payments starting from March 31, 2006 through December 31, 2010, and a final payment of $122.8 million on February 9, 2011. As with the previous credit facilities, the company is required to maintain compliance with financial and non-financial covenants including, maintaining certain leverage and fixed charge ratios, as certain annual limits on our capital expenditures.

The Company also has outstanding a note payable in the amount of $2.3 million, to be paid in June, 2006 for the acquisition of Bridge.

9. Commitments and contingencies:

Leases

As of December 31, 2005, the Company has noncancelable operating leases, primarily for real estate, that expire over the next seven years. Rental expense during fiscal year 2005, 2004 and 2003 was approximately $8.1 million, $6.6 million and $5.4 million, respectively.

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Future minimum lease payments under noncancelable operating and capital leases as of December 31, 2005 are as follows (in thousands):

Fiscal year	Capital				Operating
2006		$	116			$	8,373
2007		88				6,327
2008		72				6,060
2009		30				6,157
2010		18				5,935
Thereafter		—				8,177
Total minimum lease payments		324				$	41,029
Less—Interest element of payment		(32		)
Present value of future minimum lease payments		292
Current portion		101
Long-term capital lease		$	191

Subsequent to the purchase of SEI and Zen, the Company assumed certain capital and operating leases held at the time of purchase.

Contract cost audits

Payments to the Company on government cost reimbursable contracts are based on provisional, or estimated indirect rates, which are subject to audit on an annual basis by the Defense Contract Audit Agency (DCAA). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company. The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectibility is not reasonably assured. To the extent the indirect rate differential creates a liability for the Company, the differential is recognized as a reduction to revenue when identified.

Litigation and claims

We are a party to litigation and legal proceedings that we believe to be a part of the ordinary course of our business. While we cannot predict the ultimate outcome of these matters, we currently believe that any ultimate liability arising out of these proceedings will not have a material adverse effect on our financial position. We may become involved in other legal and governmental, administrative or contractual proceedings in the future.

The SEI acquisition agreement provides for a purchase price adjustment based upon the working capital of SEI as of the closing date.  Subsequent to the closing date, we received a payment of $1.6 million in connection with services performed prior to the closing date that SEI had not previously billed, and was not authorized to bill, its customer as of the closing date.  The SEI selling stockholders have asserted that they are entitled to a credit in connection with the calculation of working capital adjustment in an amount equal to the amount received by us for this post-closing payment.  We believe that, in accordance with GAAP, the SEI selling stockholders should not receive the benefit of the post-closing payment.  In accordance with the terms of the SEI acquisition agreement, the parties have jointly submitted the issue to an independent accounting firm for resolution.  We anticipate that this matter will be resolved before the end of 2006.

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10. Stockholders’ equity:

Common stock

In November 2002, the Company completed its initial public offering. The Company issued 3,850,000 shares of common stock for total net proceeds of approximately $47.1 million. In October 2004, the Company and affiliates of Frontenac, one of the Company’s investors, sold an aggregate of 3,200,000 shares of the Company’s common stock in an underwritten public offering priced at $21.85 per share. Of the 3,200,000 shares offered, 2,200,000 shares were sold by the Company and 1,000,000 shares were sold by the selling stockholders. The Company did not receive any of the proceeds from the sale of common stock by the selling stockholders. The Company also granted the underwriters an option to purchase up to 320,000 shares solely to cover over-allotments, which the underwriters exercised. In connection with this offering, the Company received approximately $51.2 million in net proceeds, which was primarily used to payoff $27.0 million of term loan borrowings and $16.0 million of borrowings under the revolving line of credit.

Stock option plans

In 2002, the Company adopted the 2002 Stock Incentive Plan, or the Plan, to grant stock options to purchase up to 1,600,000 shares of its common stock to its employees and employees of its affiliates. In March 2004, the Board of Directors increased the number of reserved shares by 160,000, so that the total number of reserved shares totaled 1,760,000. In March 2005, the Board of Directors increased the number of reserved shares by an additional 160,000 so that the total number of reserved shares totals 1,920,000. Further, in March 2005, the Board of Directors authorized the acceleration of vesting of certain stock awards under the Plan upon the occurrence of certain change of control events. With this change, future stock awards may include provisions for acceleration of vesting upon the occurrence of certain change of control events. The Board of Directors also authorized the amendment of certain prior stock option awards issued under the Plan such that the exercise price of each such award was greater than or equal to the closing market price of our common stock on Nasdaq as of March 11, 2005. With respect to such designated prior stock option awards, the Board of Directors authorized an amendment to the stock option award to provide for the acceleration of vesting upon the occurrence of certain change of control events.

In April 2005, the Board of Directors voted to adopt the 2002 Amended and Restated Omnibus Stock Incentive Plan (the “Amended and Restated Plan”) and the Amended and Restated Plan was approved by our stockholders at the annual meeting of stockholders held in June 2005. The Amended and Restated Plan amends and restates the Plan by (i) increasing the number of shares of common stock reserved and available under the Plan by 1,000,000 shares to a total share allocation of 2,920,000, (ii) permitting the grant of deferred shares, performance shares and performance units, (iii) prohibiting repricing of options without prior stockholder approval, (iv) limiting the number of shares of common stock and performance units subject to awards a participant may receive in any calendar year to 300,000 and 500,000, respectively, and adding other administrative provisions to comply with the performance-based compensation exception to the deduction limit of Section 162(m) of the Internal Revenue Code of 1986, as amended; (v) eliminating the provision that previously provided for an automatic increase in the number of shares reserved for issuance under the Amended and Restated Plan each fiscal year by a number equal to the lesser of 160,000 shares and an amount determined by the Board of Directors, (vi) providing that non-qualified stock option grants will be priced at one hundred percent (100%) of fair market value; (vii) providing for minimum vesting periods of stock bonus awards, restricted common stock awards, stock appreciation rights, deferred shares, and other stock awards subject to the possible acceleration of the vesting schedule at the discretion of the administrator; (viii) providing that future amendments to the Amended and Restated Plan that increase the number of shares allocated, modify participation requirements, or materially increase benefits accruing to the participants under the Plan will be subject to stockholder approval; and (ix) making other technical changes to the Plan.

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On December 13, 2005, the Board of Directors approved the accelerated vesting of unvested stock options previously awarded to employees, officers and directors as of December 7, 2005 in light of new accounting regulations that were to come into effect January 1, 2006. Based on the Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), the Board took the action to accelerate the unvested stock with the belief that it is in the best interest of stockholders, as it will reduce the Company’s reported compensation expense in future periods.

The Company’s option activity and price information for the three-year period ended December 31, 2005 is as follows:

	Options		Shares exercisable	Weighted-average exercise price
Balance, December 28, 2002	976,080				$	13.27
Options exercisable at December 28, 2002			342,649		3.40
2003 grants	165,741				12.37
2003 exercise	(11,766	)			(5.68		)
2003 forfeitures	(79,002	)			(13.17		)
Balance, December 27, 2003	1,051,053				$	13.18
Options exercisable at December 27, 2003			275,699		12.47
2004 grants	551,285				18.00
2004 exercise	(76,026	)			(12.24		)
2004 forfeitures	(121,055	)			(15.44		)
Balance, December 25, 2004	1,405,257				$	14.93
Options exercisable at December 25, 2004			546,646		13.40
2005 grants	687,097				28.19
2005 exercise	(293,689	)			(12.73		)
2005 forfeitures	(47,728	)			(18.00		)
Balance, December 31, 2005	1,750,937				$	20.29
Options exercisable at December 31, 2005			1,750,937

The following table shows the number of options, the weighted average remaining life, and the options exercisable for each exercise price of options outstanding at December 31, 2005.

	Number of Options	Range of Exercise Price	Weighted Avg. Exercise Price		Weighted Average Remaining Life		Options Exercisable
	112,199	1.58 –   9.27		8.97		2.6	112,199
	509,101	10.81 – 14.00		13.80		6.9	509,101
	384,283	16.40 – 19.26		16.77		8.0	384,283
	232,945	20.55 – 26.60		25.54		8.9	232,945
	364,948	26.80 – 29.87		28.09		9.1	364,948
	146,900	30.46 – 31.53		30.84		9.8	146,900
	561	556.26		556.26		2.1	561
Total	1,750,937						1,750,937

Each stock option grant establishes the vesting schedule applicable to the grant. The weighted-average remaining contractual life of the stock options outstanding as of December 31, 2005 and December 25, 2004 was 7.8 years and 7.8 years, respectively.

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During its fiscal year ended 2001 and continuing into the fiscal year ended 2002, the Company issued options with exercise prices which were less than the fair value of SI’s common stock at the date of option grant. Total deferred compensation related to these option grants was $518,000 for the fiscal year ended December 28, 2002 and $142,000 for the fiscal year ended December 29, 2001. This deferred compensation were amortized to expense over the related option’s vesting period. Such non-cash stock-based compensation expense totaled $196,000 in fiscal year 2005, $132,000 in fiscal year 2004, and $132,000 in fiscal year 2003.

The weighted-average fair value of stock options granted in fiscal year 2005, 2004, and 2003 was $14.50, $13.28 and $7.80, respectively.

Stock repurchase program

During the company’s Board of Directors meeting on December 6, 2005, the Board authorized the repurchase of up to 300,000 shares of its common stock up to an aggregate maximum dollar amount of $8 million.  The Company has approximately 11.3 million shares outstanding as of December 31, 2005.  Timing and volume of any purchases will be guided by management’s assessment of market conditions, securities law limitations, the number of shares of common stock outstanding, and alternative, potentially higher value uses for cash resources.  The repurchase plan may be suspended or discontinued at any time without prior notice.

11. Retirement plans:

SI has a defined contribution 401(k) Retirement/Savings Plan (the Plan) to provide retirement benefits for all eligible employees of the Company. Employees are eligible to participate in the Plan beginning on the first of the month following the start of employment and attainment of age 21. Under the Plan, eligible employees may contribute from 1% to 15% of pre-tax compensation. The Plan also allows after-tax contribution up to 5% of compensation. At its discretion, the Company may make an annual matching contribution and an annual profit-sharing contribution. For fiscal year 2004, there was no profit-sharing contribution made to the Plan by the Company. A profit-sharing contribution of $1,200,000 and $370,000 was made by the Company for fiscal years 2005 and 2003, respectively. The Company’s matching contribution to the Plan for fiscal years 2005, 2004 and 2003 was approximately $1.8 million, $1.1 million and $0.7 million.

12. Subsequent Events:

On February 27, 2006, we closed the acquisition of Zen. Zen is a provider of critical IT services, specializing in managed network services, information assurance, software development and systems engineering, database and systems administration and IT consulting to various U.S. Government agencies.  Zen’s largest clients include the Missile Defense Agency (MDA), Department of Defense’s Washington Headquarters Services (WHS), Federal Communications Commission (FCC), the Pension Benefit Guaranty Corporation (PBGC), and the Federal Trade Commission (FTC).

Pursuant to the terms of the Zen Agreement we acquired all of the outstanding capital stock of Zen for $60 million in cash, of which we are withholding $6 million for 15 months in order to secure post-closing indemnity obligations of the sellers. The purchase price is subject to a two-way adjustment based upon whether the working capital of Zen as of the closing date was above or below the target working capital specified in the Zen Agreement. Each of the parties to the Zen Agreement has made customary representations and warranties and agreed to certain indemnification obligations. The transaction was funded through cash-on-hand, a subordinated Seller’s Note in the amount of $6 million, and borrowing from our newly amended credit facility, which is described below. The purchase price is also subject to

F-24

adjustment as a result of certain tax elections. Zen’s trailing twelve months revenue ended November 30, 2005, was approximately $38 million (unaudited).

Approximately $52.0 million of the purchase consideration has been allocated to goodwill based primarily on the excess of the purchase price over the estimated fair value of net assets acquired and approximately $7.0 million and $0.2 million of the purchase price has been assigned to identifiable Intangible assets of contractual customer relationships and non-compete agreements, respectively. Each customer relationship, which includes each customer’s contract, is being amortized on an accelerated basis over its useful life. The non-compete agreements are amortized on a straight-line basis over a 3-year period.

The total purchase price paid, including transaction costs of $0.4 million, has been preliminarily allocated as follows (in thousands):

Cash and cash equivalents	3,503
Accounts receivable	11,027
Other current assets	2,885
Property and equipment	466
Other assets	19
Accounts payable and accrued expenses	(13,182	)
Other long term liabilities	(41	)
Notes Payable	(3,400	)
Intangible assets	7,150
Goodwill	51,973
Total consideration	60,400

On February 27, 2006, contemporaneously with our closing the acquisition of Zen, we entered into the First Amendment with a syndicate of lenders, including Wachovia Bank, National Association, a national banking association, which acted as administrative agent for the lenders.

The terms and conditions of the Amended Credit Agreement (i) establish a new term loan in the principal amount of approximately $129.3 million, which replaced the then existing term loan under the Credit Agreement, (ii) reduce both the base rate margin and the LIBOR margin on the term facility, (iii) increase the leverage ratio for the financial covenants and (iv) amend certain restrictive covenants. The principal balance of the new term loan is to be repaid in quarterly installments commencing March 31, 2006, with the balance due upon the expiration of the Amended Credit Agreement on February 9, 2011. If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the Amended Credit Agreement.

The funds borrowed under the new term loan were used to (i) refinance the approximately $99.3 million in principal outstanding under the then existing term loan under the Credit Agreement and to pay any and all fees and expenses related thereto; (ii) to finance the acquisition of Zen and pay any and all fees and expenses related thereto; and (iii) to provide for working capital expenditures, and other general corporate uses.

The borrowing capacity under the Amended Credit Agreement totals approximately $189.3 million and is comprised of a $60 million five-year revolving credit facility and approximately $129.3 million term loan facility. Additionally, a $75 million uncommitted incremental term loan facility will be available upon our request at any time for up to two years from the date of the Credit Agreement from one or more of the lenders.

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Effective February 14, 2006, an interest swap agreement came into effect which reduced  our exposure associated with the market volatility of floating LIBOR interest rates. This agreement has a notional principal amount of $30 million and, as of December 31, 2005, had a rate ranging from 4.05% to 4.74%. This agreement is a hedge against term debt, which bears interest at LIBOR plus a margin which has a current overall rate of 5.78%. At stated monthly intervals the difference between the interest on the floating LIBOR-based debt and the interest calculated in the swap agreement are settled in cash.

On January 31, 2006, we announced that the company had been awarded a contract for Management and Operation of the National Visa Center and Kentucky Consular Center by the Department of State. Under the contract, our work will be performed at the National Visa Center in Portsmouth, New Hampshire and at the Kentucky Consular Center in Williamsburg, Kentucky. The prime contract has a one-year base period and four one-year options periods.

13. Interim financial data (unaudited)

	Fiscal Year 2005								Fiscal Year 2004
	Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4
	(dollars in thousands)
Revenue	$	83,717	$	95,983	$	101,775	$	116,444	$	55,970	$	63,814	$	72,926	$	69,596
Income from operations	6,526		8,314		9,193		9,937		4,430		5,174		5,518		5,616
Net income	$	3,224	$	4,036	$	4,578	$	5,099	$	2,357	$	2,684	$	2,882	$	2,955
Basic net income per share	$	0.29	$	0.36	$	0.41	$	0.45	$	0.28	$	0.32	$	0.34	$	0.27
Diluted net income per share	$	0.28	$	0.35	$	0.39	$	0.43	$	0.27	$	0.30	$	0.33	$	0.26

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SI International, Inc. and Subsidiaries
(See Note 1 to Consolidated Financial Statements)
Schedule II—Valuation and Qualifying Accounts
(In Thousands)

Description	Balance at beginning of period		Charged to costs and expenses		Acquired in business combinations		Deductions		Balance at end of period
For the fiscal year ended December 28, 2002
Deducted from assets accounts:
Allowance for doubtful accounts		630		472		—		6		1,096
For the fiscal year ended December 27, 2003
Deducted from assets accounts:
Allowance for doubtful accounts		1,096		144		—		—		1,240
For the fiscal year ended December 25, 2004
Deducted from assets accounts:
Allowance for doubtful accounts		1,240		—		—		96		1,144
For the fiscal year ended December 31, 2005
Deducted from assets accounts:
Allowance for doubtful accounts		1,144		52		1,106		793		1,509

F-27

EX-2.2

Exhibit 2.2

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is entered into as of this 8th day of February, 2006, by and among (i) SI International, Inc., a Delaware corporation (the “Buyer”), (ii) ZEN TECHNOLOGY, INC., a Virginia corporation (the “Company”), (iii) DONALD E. REED, (iv) LESLIE W. BUTLER, (v) BARBARA M. REED and (vi) CINDY  A. ANDRE. Each Person named in (iii) through (vi) above is referred to herein individually as a “Seller” and collectively as the “Sellers.”  The Buyer, the Company and the Sellers are referred to herein individually as a “Party” and collectively as the “Parties.”  The capitalized terms used herein and not otherwise defined herein have the meanings given to such terms as set forth in Appendix A hereto.

WHEREAS, the Sellers are the record and beneficial owners of all of the issued and outstanding capital stock and other equity securities of the Company (other than the Company Common Stock subject to the Restricted Stock Repurchase Agreements);

WHEREAS, simultaneously herewith, the Company and each Restricted Stock Participant (other than Cindy A. Andre) are entering into Restricted Stock Repurchase Agreements, pursuant to which, immediately prior to the Closing, the Company shall repurchase the shares of Company Common Stock held by such Restricted Stock Participants on the terms and conditions set forth therein; and

WHEREAS, upon the terms and subject to the conditions set forth herein, the Buyer desires to purchase from the Sellers and the Sellers desire to sell to the Buyer all of the then issued and outstanding capital stock and other equity securities of the Company (the “Stock Purchase”).

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows:

ARTICLE I
STOCK PURCHASE

1.1           Stock Purchase. On the terms and subject to the conditions of this Agreement, the Buyer agrees to purchase from each of the Sellers, and each of the Sellers agrees to sell to the Buyer, the Shares owned by such Seller, free and clear of all Encumbrances, which Shares collectively constitute and shall constitute as of the Closing Date all of the issued and outstanding shares of the capital stock of the Company, for the consideration specified in Section 1.2.

1.2           Purchase Price. The aggregate maximum purchase price (the “Purchase Price”) to be paid in exchange for the acquisition by Buyer of all outstanding capital stock of the Company, including without limitation all shares of Restricted Stock to be repurchased by the Company before the Closing pursuant to the Restricted Stock Repurchase Agreements, and all outstanding unexpired and unexercised options, warrants or other rights to acquire or receive any capital stock of the Company, whether vested or unvested, if any, shall be Sixty Million Dollars

($60,000,000), subject to adjustment as set forth in this Agreement. The Purchase Price shall be comprised of (i) an amount to be paid in cash at Closing as per the flow of fund memorandum, plus (ii) post-Closing payments in cash equal to Fifty-Four Million Dollars ($54,000,000), in the aggregate, less any amount paid in cash at Closing, as adjusted pursuant to Section 1.4 hereof and as reduced by the amount of the Aggregate Restricted Stock Repurchase Payments (the “First Post-Closing Payment”), and (iii) post-Closing payments in cash equal to Six Million Dollars ($6,000,000), in the aggregate, as adjusted pursuant to the terms and conditions hereof (the “Second Post-Closing Payment”). Subject to the terms and conditions of this Agreement, at the Closing, each Seller shall have the right to receive, with respect to each of his or her shares of Company Common Stock issued and outstanding immediately prior to the Closing, (i) in accordance with this Section 1.2(a), an amount in cash equal to the First Per Share Post-Closing Amount, plus (ii) in accordance with Section 1.3 hereof, an amount in cash equal to the Second Per Share Post-Closing Amount. Subject to the terms and conditions hereof, the Buyer shall pay the First Per Share Post-Closing Amount to each Seller, with respect to each of his or her shares of Company Common Stock issued and outstanding immediately prior to the Closing, on the next business day following the Closing in cash by the delivery of immediately available funds; provided, however, the Seller Representative may, by written notice delivered at least two (2) business days prior to Closing, direct the Buyer to pay a portion of the Purchase Price to Sellers at the Closing Date in accordance with the flow of funds memorandum, in an aggregate amount to all of the Sellers not greater than Twenty Million Dollars ($20,000,000). The Buyer shall pay the Second Per Share Post-Closing Amount to each Seller, with respect to each of his or her shares of Company Common Stock issued and outstanding immediately prior to the Closing, in accordance with Section 1.3 hereof. “First Per Share Post-Closing Amount” means an amount per share of Company Common Stock equal to (i) the First Post-Closing Payment divided by (ii) the Fully Diluted Share Number. “Second Per Share Post-Closing Amount” means an amount per share of Company Common Stock equal to (i) the Second Post-Closing Payment divided by (ii) the Fully Diluted Share Number. “Fully Diluted Share Number” means the result obtained by adding (A) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Closing, including, without limitation, the aggregate number of shares of Company Common Stock subject to any outstanding Restricted Stock Awards as of immediately prior to the Closing (excluding any shares that have been repurchased pursuant to a Restricted Stock Repurchase Agreement), and (B) the aggregate number of shares of Company Common Stock into which all options, warrants or other convertible securities or other rights to acquire or receive shares of Company Common Stock, whether vested or unvested, outstanding immediately prior to the Closing, if any, could be converted.

1.3           Second Post-Closing Payment.

(a)           Subject to the terms and conditions hereof, including without limitation, offset as set forth in Section 9.3 below, the Buyer shall pay the Second Per Share Post-Closing Amount to each Seller, with respect to each of his or her shares of Company Common Stock issued and outstanding immediately prior to the Closing, on the date that is fifteen (15) months after the Closing Date in cash by the delivery of immediately available funds.

(b)           Notwithstanding anything herein contained to the contrary, as of the Closing, the Buyer’s obligation to pay the Second Per Share Post-Closing Amount to each Seller, with respect to each of his or her shares of Company Common Stock issued and outstanding

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immediately prior to the Closing, shall be subordinate and subject in right of payment to the prior payment in full of all Senior Debt (as defined in the Subordination Agreement in substantially the form attached hereto as Exhibit A, to be entered into as of the Closing Date by and among Buyer, each Seller and Wachovia Bank, National Association (or any assignor, successor or other Person who assumes such Senior Debt or replaces Wachovia Bank, National Association or provides indebtedness for borrowed money to the Buyer) (the “Subordination Agreement”)) as further set forth in the Subordination Agreement, and each Seller, by signing this Agreement, agrees to execute and deliver the Subordination Agreement on or prior to the Closing and agrees to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Subordination Agreement.

1.4           Adjustments to First Post-Closing Payment.

(a)           At least five (5) business days prior to the Closing, the Company and the Buyer shall finalize an Estimated Closing Balance Sheet as of the Closing Date on a post-Closing basis (the “Estimated Closing Balance Sheet”), which shall be prepared in accordance with Modified GAAP.

(b)           The First Post-Closing Payment shall be reduced or increased, as indicated below, without duplication, by the following amounts, if any, as set forth on the Estimated Closing Balance Sheet:  (i) the First Post-Closing Payment shall be reduced by the amount of any indebtedness of the Company for borrowed money as of the Closing Date, including without limitation, the amount of any indebtedness owed by the Company pursuant to the Company’s promissory notes, dated December 30, 2005, to Donald E. Reed and Leslie W. Butler and the amount of any Qualified Accounts Payable as of the Closing Date (“Indebtedness for Borrowed Money”); (ii) the First Post-Closing Payment shall be reduced by the amount of all liabilities not incurred in the ordinary course of business of the Company in existence as of the Closing Date, including, without limitation, (x) any amount paid or payable under the Restricted Stock Plan, any amount paid or payable under the Restricted Stock Repurchase Agreements, any other Liability for severance or other compensation provided or payable to employees or consultants of the Company in connection with the Stock Purchase and any Liability for tenure awards, directed performance awards and severance payments described in Schedule 3.6 (and, in each case, any employee withholding Taxes and any employer payroll Taxes thereon) and (y) any unpaid transaction fees and expenses related to the Stock Purchase and the transactions contemplated hereby incurred by the Company or any Seller, including without limitation financial advisory fees, legal fees and expenses, broker and finder fees and expenses of accountants (collectively, the “Non-Ordinary Course Liabilities”); (iii) the First Post-Closing Payment shall be reduced by the amount of the Estimated Working Capital Deficit, if any; and (iv) the First Post-Closing Payment shall be increased by the amount of the Estimated Working Capital Surplus, if any. Such adjustments shall be referred to herein collectively as the “Estimated Closing Adjustment”. The Estimated Closing Adjustment shall be determined without regard to the limitations set forth in Sections 9.4 and 9.5 hereof.

(c)           At least two (2) business days prior to the Closing, the Parties shall agree upon a flow of funds memorandum which shall set forth all payments required to be made by or on behalf of all Parties at the Closing, including for each such payment an identification of the payor, the payee, the amount and the wire transfer information.

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1.5           Restricted Stock Plan. As of the Closing, the Restricted Stock Plan and all Restricted Stock Awards granted by the Company pursuant to the Restricted Stock Plan or otherwise shall have been terminated and cancelled. The Company shall terminate the Restricted Stock Plan and all other equity-related plans prior to the Closing, and neither Buyer nor the Company shall have any Liability thereunder. The Company agrees that, pursuant to this Section 1.5, (a) the Company and each Restricted Stock Participant (other than Cindy A. Andre) shall consummate the transactions contemplated by the Restricted Stock Repurchase Agreement in accordance with the terms thereof, (b) upon the consummation thereof, the certificates for all issued and outstanding shares of Company Common Stock subject to such Restricted Stock Awards shall be surrendered to the Company by the holder thereof and (c) upon the consummation thereof, the shares of Company Common Stock repurchased pursuant to the Restricted Stock Repurchase Agreements shall cease to be outstanding and shall become authorized and unissued capital stock. The Company shall not amend or terminate any Restricted Stock Repurchase Agreement, or waive any provision thereof, without the Buyer’s prior written consent. The Company shall execute or cause to be executed such further documents, assignments and assurances, and take or cause to be taken such further actions, as may reasonably be requested by the Buyer to consummate the closings under each Restricted Stock Repurchase Agreement and the transactions contemplated thereby with each Restricted Stock Participant (other than Cindy A. Andre). Subject to the terms and conditions hereof, the shares of Company Common Stock subject to the Restricted Stock Award granted to Cindy A. Andre shall be purchased pursuant to Section 1.2 above.

1.6           Post-Closing Adjustment.

(a)           Within seventy-five (75) days following the Closing Date, the Buyer shall furnish the Seller Representative with a balance sheet of the Company as of the Closing Date on a post-Closing basis (the “Closing Balance Sheet”) prepared in accordance with Modified GAAP, which shall set forth the Closing Working Capital of the Company, the Indebtedness for Borrowed Money, the Non-Ordinary Course Liabilities and, as applicable, the Closing Working Capital Deficit or the Closing Working Capital Surplus (collectively, the “Closing Adjustments”). Each Seller shall assist the Buyer in the preparation of the Closing Balance Sheet if reasonably requested by the Buyer.

(b)           The Seller Representative shall have a period of fifteen (15) days after receipt of the Closing Balance Sheet to notify the Buyer of its election to accept or reject the Closing Balance Sheet. In the case of a rejection, such notice must contain the reasons for such rejection in reasonable detail and must set forth the amount of the requested adjustment (or a reasonable estimate thereof). In the event no notice is received by the Buyer during such fifteen (15) day period, the Closing Balance Sheet and any required adjustments resulting therefrom shall be deemed accepted by the Seller Representative and the Sellers and final and binding on the Parties hereto. In the event that the Seller Representative shall timely reject the Closing Balance Sheet, the Buyer and the Seller Representative shall promptly (and in any event within thirty (30) days following the date upon which the Seller Representative shall reject the Closing Balance Sheet), attempt to make a joint determination of the Closing Adjustments and such determination and any required adjustments resulting therefrom shall be final and binding on the Parties hereto solely for purposes of this Section 1.6.

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(c)           In the event the Seller Representative and the Buyer shall be unable to agree upon a joint determination of Closing Adjustments within one hundred twenty (120) days from the Closing Date, then within one hundred thirty (130) days from the Closing Date, the Buyer and the Seller Representative shall submit the dispute to the Accounting Firm. The Buyer and the Seller Representative shall request that the Accounting Firm render its determination prior to the expiration of one hundred sixty (160) days from the Closing Date and such determination and any required adjustments resulting therefrom shall be final and binding on all the Parties hereto solely for purposes of this Section 1.6. The fees and expenses of the Accounting Firm shall be allocated to be paid by the Buyer and/or the Sellers, respectively, based upon the percentage which the portion of the total amount contested and not awarded to such party bears to the total amount contested, as determined by the Accounting Firm. Nothing stated or disclosed in the Closing Balance Sheet or in connection with the determination thereof shall waive or be deemed to waive any inaccuracy or breach of any representation or warranty made by the Company or any Seller or any right to indemnification hereunder and shall be without prejudice to any other right or remedy of the Buyer under this Agreement, at equity or at law.

(d)           If the Closing Working Capital as finally determined in accordance with the provisions of this Section 1.6 is less than the Estimated Working Capital, then the amount of the difference shall be paid by the Sellers to the Buyer, in proportion to their respective First Per Share Post-Closing Amounts, as an adjustment to the Purchase Price by wire transfer in immediately available funds within seven (7) days after such determination. If the Closing Working Capital as finally determined in accordance with the provisions of this Section 1.6 is more than the Estimated Working Capital, then the amount of the difference shall be paid by the Buyer to the Sellers as an adjustment to the Purchase Price by wire transfer in immediately available funds in proportion to their respective First Per Share Post-Closing Amounts within seven (7) days after such determination.

(e)           If the Indebtedness for Borrowed Money and/or the Non-Ordinary Course Liabilities determined pursuant to this Section 1.6 exceed the Indebtedness for Borrowed Money and/or the Non-Ordinary Course Liabilities, respectively, set forth on the Estimated Closing Balance Sheet, such excess shall be paid as an adjustment to the First Post-Closing Payment by the Sellers to the Buyer by wire transfer in immediately available funds within seven (7) days after such determination. If the Indebtedness for Borrowed Money and/or the Non-Ordinary Course Liabilities determined pursuant to this Section 1.6 are less than the Indebtedness for Borrowed Money and/or the Non-Ordinary Course Liabilities, respectively, set forth on the Estimated Closing Balance Sheet, such deficit shall be paid as an adjustment to the First Post-Closing Payment by the Buyer to the Sellers, in proportion to their respective First Per Share Post-Closing Amounts, by wire transfer in immediately available funds within seven (7) days after such determination. The adjustments described in Sections 1.6(d) and (e) shall be referred to collectively as the “Post-Closing Adjustment”. If either Party does not so pay to the other Party by the due date, such amounts shall be deemed Damages under Article IX hereof which shall be paid in full without regard to the limitations set forth in Sections 9.4 and 9.5 hereof.

1.7           Stock Options and Warrants. Prior to the Closing, the Sellers shall cause the Company to terminate and cancel any options to purchase Company Common Stock (“Company Stock Options”) and any warrants to purchase Company Common Stock (“Company Warrants”).

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Buyer shall neither assume any options or warrants nor be required by the terms of this Agreement to replace any options or warrants with comparable options or warrants. The Company shall terminate all stock option plans and other stock or equity-related plans of the Company prior to the Closing, and neither Buyer nor the Company shall have any liability or obligation thereunder. No adjustment shall be made in the Purchase Price paid in the Stock Purchase as a result of any cash proceeds received by the Company from the date hereof to the Closing Date pursuant to the exercise of options, warrants or other rights to acquire or receive Company Common Stock.

1.8           Withholding of Tax. Buyer will be entitled (but not obligated) to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Buyer (or any Affiliate thereof) shall determine in good faith that they are required to deduct and withhold with respect to the making of such payment under the Code or any provision of federal, state, local or foreign Tax Law. To the extent that amounts are so withheld by Buyer, such withheld amounts will be treated for all purposes of this Agreement as having been paid to the holder of the Company Common Stock in respect of whom such deduction and withholding were made by Buyer.

1.9           Lost, Stolen or Destroyed Certificates. In the event any certificates representing outstanding shares of Company Common Stock shall have been lost, stolen or destroyed, Buyer shall pay in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, the applicable Purchase Price; provided, however, that Buyer may, in its discretion and as a condition precedent to the payment thereof, require the holder of such lost, stolen or destroyed certificates to deliver a bond in such sum as Buyer may reasonably direct as indemnity against any claim that may be made against Buyer with respect to the certificates alleged to have been lost, stolen or destroyed.

ARTICLE II
CLOSING

2.1           Time and Place of the Closing. The Closing shall take place at the offices of Morrison & Foerster LLP, 1650 Tysons Boulevard, Suite 300, McLean, Virginia, as soon as practicable following the satisfaction or waiver of the conditions set forth in Articles VII and VIII hereof and in any event within three (3) business days thereafter, or on such other date as the Buyer and the Seller Representative may mutually determine.

2.2           Deliveries. At the time of the Closing, (i) each of the Sellers will deliver to the Buyer stock certificates representing all of the Shares owned by such Seller, endorsed in blank or accompanied by duly executed assignment documents, (ii) the Company, the Seller Representative and each of the Sellers will deliver to the Buyer the various certificates, instruments, and documents referred to in Section 7.8 below, and (iii) the Buyer will deliver to the Seller Representative and the Sellers the certificates, instruments and documents referred to in Section 8.4 below.

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2.3           Seller Representative.

(a)           Each Seller designates Donald E. Reed (the “Seller Representative”) as his or her representative for purposes of this Agreement. The Sellers and their respective successors shall be bound by any and all actions taken by the Seller Representative on their behalf under or otherwise relating to this Agreement and the other documents contemplated hereby and the transactions contemplated hereunder and thereunder as if such actions were expressly ratified and confirmed by each of them in writing. In the event any Seller Representative is unable or unwilling to serve or shall resign, a successor Seller Representative shall be selected by the Sellers holding a majority of the shares of Company Common Stock outstanding immediately prior to the Closing. A Seller Representative may not resign, except upon 30 days prior written notice to Buyer. In the event of a notice of proposed resignation, or any death, disability or other replacement of a Seller Representative, a successor shall be appointed effective immediately thereafter (and, in the case of a death of a Seller Representative, the successor shall be deemed to be the executor or other representative of such Seller Representative’s estate) and Buyer shall be notified promptly of such appointment by the successor Seller Representative. No resignation, nor any other replacement, of any Seller Representative is effective against the Buyer until selection of a successor and prior written notice to the Buyer of such selection (such consent not to be unreasonably withheld). Each successor Seller Representative shall have all the power, rights, authority and privileges hereby conferred upon the original Seller Representative.

(b)           The Buyer shall be entitled to rely upon any actions, communication or writings taken, given or executed by the Seller Representative on behalf of the Sellers. All communications or writings to be sent to the Sellers pursuant to this Agreement may be addressed to the Seller Representative and any communication or writing so sent shall be deemed notice to all of the Sellers hereunder. The Sellers consent and agree that the Seller Representative is authorized to accept deliveries, including any notice, on behalf of each Seller pursuant hereto.

(c)           The Seller Representative is hereby appointed and constituted the true and lawful attorney-in-fact of each Seller, with full power of substitution in such Seller’s name and on such Seller’s behalf to act according to the terms of this Agreement and the other documents contemplated hereby in the absolute discretion of the Seller Representative; and in general to do all things and to perform all acts including, without limitation, executing and delivering all agreements, certificates, receipts, instructions, notices and other instruments contemplated by or deemed advisable in connection with this Agreement and the other documents contemplated hereby, including without limitation Article IX hereof. This power of attorney and all authority hereby conferred is granted subject to the interest of the other Sellers hereunder and in consideration of the mutual covenants and agreements made herein, and shall be irrevocable and shall not be terminated by any act of any Seller, by operation of law, whether by such Seller’s death or disability or by any other event.

(d)           The Seller Representative hereby acknowledges and agrees to serve as the Seller Representative in accordance with the applicable terms hereof and to be bound by such terms. At Buyer’s request, the Seller Representative shall enter into an agreement in form and substance reasonably satisfactory to Buyer and the Seller Representative in which the Seller

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Representative acknowledges and agrees to serve as a Seller Representative and to be bound by the applicable terms of this Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY

As a material inducement to the Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Company and each of the Sellers, jointly and severally, represent and warrant to the Buyer, as of the date hereof and as of the Closing, as follows:

3.1           Organization and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and the Company is qualified to do business and in good standing in the State of Maryland and each other jurisdiction where the character or location of its assets or its properties owned, leased or operated by it, or the nature of its activities makes such qualification necessary, except to the extent that the failure to so qualify or be in good standing has not had and would not reasonably be expected to have a Material Adverse Effect. All such jurisdictions in which the Company is qualified are set forth on Schedule 3.1. The Company has full corporate power and authority necessary to own and operate its properties, to conduct its business as now conducted and to perform its obligations under Contracts to which it is a party or by which it is bound. The stock records and minute books of the Company are accurate, up to date and complete, and have been maintained in accordance with prudent business practices and all applicable Laws. The Company has provided the Buyer with true, correct and complete copies of the stock records and minute books of the Company and such records reflect that every material transaction of the Company has been duly approved or ratified by the Company. The minute books of the Company contain a materially complete and accurate summary of all meetings of directors or shareholders or actions by written consent since the time of incorporation of the Company. The Company has not taken any corporate action without the approval or ratification of the board of directors or shareholders where such action required the approval of the board of directors or shareholders under the Virginia Stock Corporation Act, as amended (the “VSCA”). The stock ledger or stock records of the Company accurately reflect all transactions involving the capital stock of the Company. The Company is not in default under or in violation of any provision of its Articles of Incorporation or Bylaws or any resolution adopted by the Company’s board of directors or shareholders. The Company has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name, other than the names set forth on Schedule 3.1.

3.2           Authority for Agreement. The Company has full power, authority and legal right to enter into and perform its obligations under this Agreement and the other documents contemplated hereby to which the Company is or will be a party and to consummate the transactions contemplated hereby and thereby. The board of directors of the Company and the stockholders of the Company have unanimously approved the Stock Purchase, this Agreement and the other documents contemplated hereby and the transactions contemplated hereby and thereby and authorized the execution, delivery and performance of this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby. No other corporate proceedings on the part of the Company or any shareholder of

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the Company are, or will be, necessary to approve and authorize the execution, delivery and performance of this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby. This Agreement and the other documents contemplated hereby have been duly executed and delivered by the Company and are legal, valid and binding obligations of the Company, enforceable against it in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights in general. As of the date hereof, the holders of the Company Common Stock that are parties to this Agreement and the other Persons listed on Schedule 3.4(a) own (beneficially and of record) and have the right to vote, in the aggregate, 100% of the total issued and outstanding Company Common Stock.

3.3           No Violation to Result. Except as set forth on Schedule 3.3, the execution, delivery and performance by the Company of this Agreement and the other documents contemplated hereby and the consummation by the Company of the transactions contemplated hereby and thereby and the fulfillment by the Company of the terms hereof and thereof, do not and will not, directly or indirectly (with or without notice or lapse of time):  (i) violate, breach, conflict with, constitute a default under, accelerate or permit the acceleration of the performance required by (x) any of the terms of the Articles of Incorporation or Bylaws of the Company or any resolution adopted by the board of directors of the Company or shareholders of the Company, or (y) any Contract or Encumbrance to which the Company is a party or by which it is bound, or (z) any law, judgment, decree, order, rule, regulation, permit, license or other legal requirement of any Government Authority applicable to the Company; (ii) give any Person the right to declare a default, exercise any remedy or accelerate the performance or maturity under any such Contract or cancel, terminate or modify any such Contract; (iii) give any Government Authority or other Person the right to challenge any of the transactions contemplated by this Agreement; (iv) give any Government Authority the right to revoke, withdraw, suspend, cancel, terminate or modify, any permit or license that is held by the Company or that otherwise relates to the Company’s business or to any of the assets owned or used by the Company; or (v) result in the creation or imposition of any Encumbrance, possibility of Encumbrance, or restriction in favor of any Person upon the Shares or any of the properties or assets of the Company, except in the case of (i)(y) and (ii) as would not, individually or in the aggregate, reasonably be expected to result in any Liability to the Company in excess of $25,000. Other than as set forth on Schedule 3.3, no notice to, filing with, or consent of, any Person is necessary in connection with, and no “change of control” provision is triggered by, the approval, adoption, execution, delivery or performance by the Company of this Agreement and the other documents contemplated hereby or the consummation by the Company of the transactions contemplated hereby or thereby. The Company has given all notices, made all filings and obtained all consents set forth on Schedule 3.3 or will have done so prior to the Closing.

3.4           Capitalization.

(a)           The authorized capital stock of the Company consists of One Hundred Thousand (100,000) shares of Company Common Stock, of which (x) Six Hundred Sixty-Six and 67/100 (666.67) shares have been issued, (y) Thirty-Three and 34/100 (33.34) shares shall be repurchased by the Company prior to the Closing pursuant to Section 1.5 hereof and (z) Six Hundred Thirty-Three and 33/100 (633.33) shares shall be outstanding as of the Closing. There

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are no shares of the Company’s capital stock held in the Company’s treasury. Schedule 3.4(a) sets forth the names of the Company’s shareholders, the addresses of the Company’s shareholders in their respective states of legal residence and the number of shares of Company Common Stock owned of record and beneficially by each of such shareholders.

(b)           All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, and are fully paid and non-assessable. Except as set forth on Schedule 3.4(b), no restrictions on transfer, repurchase option, preemptive rights or rights of first refusal exist with respect to any shares of capital stock of the Company, and no such rights arise by virtue of or in connection with the transactions contemplated hereby; and, to the extent permitted by Law, the Sellers have waived (or hereby waive) any and all such rights.

(c)           There is no:  (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire or sell or issue, or otherwise relating to, any shares of the capital stock or other securities of the Company; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of the Company; (iii) Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities; or (iv) condition or circumstance that may give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of the Company. There are no outstanding stock appreciation, phantom stock, profit participation or other similar rights with respect to the Company. Schedule 3.4(c) sets forth (i) the total number of Restricted Stock Awards issued and outstanding and (ii) the following information with respect to each Restricted Stock Award outstanding as of immediately prior to the Closing:  (A) the name and address of the holder of the Restricted Stock Award, (B) the number of Restricted Stock Awards held by such holder and the number of such Restricted Stock Awards that are vested and unvested, (C) the vesting schedule applicable to such Restricted Stock Awards and (D) the date on which such Restricted Stock Award was granted.

(d)           Except as set forth on Schedule 3.4(d), there are no proxies, voting rights, shareholders agreements or other agreements or understandings with respect to the voting or transfer of the capital stock of the Company. All shares of Company Common Stock have been issued in compliance with (i) all applicable federal and state securities laws and other applicable legal requirements, and (ii) any pre-emptive rights, rights of first refusal or other requirements set forth in applicable Contracts. Any shares of capital stock or other securities repurchased, redeemed or otherwise reacquired by the Company were validly reacquired in compliance with (A) the applicable provisions of the corporate law of the Commonwealth of Virginia and all other applicable Laws, and (B) any requirements set forth in applicable Contracts. The Company is not obligated to redeem or otherwise acquire any of its outstanding shares of capital stock.

(e)           The Company has no (i) direct or indirect debt, equity or other investment or interest in any Person or any joint venture or (ii) except for the teaming agreements set forth on Schedule 3.4(e), strategic alliance or teaming agreements with any Person (either pursuant to a written Contract or a Contract in the process of being negotiated). The Company has no commitments to contribute to the capital of, make loans to or share losses of, any Person (either pursuant to a written Contract or a Contract in the process of being negotiated).

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3.5           Financial Statements.

(a)           Schedule 3.5(a) includes true, complete and correct copies of (i) the Year-End Financials and (ii) the Interim Financials. Each of the Financial Statements (including in all cases the notes thereto, if any) is accurate and complete in all material respects, is consistent with the Company’s books and records (which, in turn, are accurate and complete in all material respects), presents fairly the Company’s financial condition and results of operations as of the times and for the periods referred to therein, and has been prepared in accordance with GAAP (subject, in the case of Interim Financials, to normal and recurring adjustments which shall not be material in the aggregate, and the absence of notes). During the periods covered by the Financial Statements and since the Balance Sheet Date, there has been no material change in the Company’s accounting policies. There have been no transactions involving the business of the Company which properly should have been set forth in the Financial Statements and which have not been accurately so set forth. Schedule 3.5(a) sets forth a list of any off-balance sheet financing arrangements of the Company and any non-operating assets, prepaid items and deposits. Since December 31, 2001, the Company’s accounting firm has not informed the Company that it has any material challenges or disagreements regarding or pertaining to the Company’s accounting policies or practices. The Company has made available to the Buyer copies of each management letter or other letter delivered to the Company by its accounting firm in connection with the Financial Statements or relating to any review by such accounting firm of the internal controls of the Company.

(b)           Schedule 3.5(b) provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable and other receivables of the Company as of the Balance Sheet Date. Except as set forth on Schedule 3.5(b), all existing accounts receivable, billed and unbilled, of the Company (including those accounts receivable reflected on the Balance Sheet that have not yet been collected and those accounts receivable that have arisen since the Balance Sheet Date and have not yet been collected) (i) represent valid obligations of customers of the Company arising from bona fide transactions entered into in the ordinary course of business, and (ii) are current and will be collected in full, without any counterclaim or set off, when due (and in no event later than ninety (90) days after the Closing Date). Except as disclosed on Schedule 3.5(b), no Person has any Encumbrance on such receivables or any part thereof, and no agreement for deduction, free goods, discount or other deferred price or quantity adjustment shall have been made with respect to any such receivables.

(c)           Schedule 3.5(c) identifies the revenues received from each customer of the Company and from each other Person from whom the Company generated revenues in the fiscal year ended December 31, 2004 and in the first eleven (11) months of 2005. To the Knowledge of the Company, the relationship of the Company with each of its customers is a reasonably good working relationship, and since the fiscal year ended December 31, 2004, there has not been any material adverse change in the business relationship of the Company with any of its customers. No customer of the Company has terminated or threatened in writing to terminate its relationship with the Company or has during the last twelve (12) months materially decreased, limited or otherwise changed the terms and conditions for the purchase of goods or services from the Company, or threatened in writing to do so. All revenues recognized by the Company have been recognized in accordance with GAAP.

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(d)           The accounts, books and records of the Company have recorded therein in all material respects the results of operations and the assets and liabilities of the Company and each of its Subsidiaries, required to be reflected under GAAP. To the Knowledge of the Company, the Company maintains a system of accounting and internal controls and procedures as are reasonably necessary, in light of the Company’s size and the nature of its business, to provide assurances that (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to permit preparation of the financial statements of the Company and to maintain accountability for the Company’s assets; (iii) access to the Company’s assets is permitted only in accordance with management’s authorization; (iv) the reporting of the Company’s assets is compared with existing assets at regular internals and appropriate action is taken with respect to any differences; (v) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis; and (vi) material information regarding the Company and its financial condition is accumulated and communicated to the Company’s management. There is no fraud that involves management or, to the Knowledge of the Company, other employees who have a significant role in the Company’s internal controls.

3.6           Liabilities. There are no Liabilities of the Company, other than:  (i) Liabilities reflected on the Balance Sheet and not previously paid or discharged; (ii) Liabilities incurred after the Balance Sheet Date arising in the ordinary course of business and consistent with past practice; and (iii) immaterial Liabilities in no case to exceed $50,000 in the aggregate (none of which in the case of (i), (ii) or (iii) results from, arises out of, relates to, is in the nature of or was caused by any breach of contract, breach of warranty, tort, infringement or violation of law). The Company is not a guarantor or otherwise liable for any Liabilities of any other Person other than endorsements for collection in the ordinary course of business. Schedule 3.6 provides an accurate and complete breakdown and aging as of the Balance Sheet Date of all accounts payable of the Company. Except as set forth on Schedule 3.6, all of which shall be repaid at or prior to Closing, the Company has no notes payable nor any indebtedness for borrowed money.

3.7           Adverse Changes. Except as set forth on Schedule 3.7, since December 31, 2004, the Company has operated its business in the ordinary course and consistent with past practice and the Company has not:  (i) suffered a Material Adverse Effect; (ii) suffered any theft, damage, destruction, or casualty loss in excess of $50,000, or suffered any interruption in the use of the Company’s assets or business (other than in the ordinary and usual course of business) (whether or not covered by insurance) or suffered any destruction of its books and records; (iii) declared, set aside or paid any dividend (whether in cash, stock or property) with respect to any capital stock of the Company or repurchased any capital stock of the Company; (iv) granted any current or former director, officer, employee or consultant of the Company any bonus opportunity or increase in compensation or benefits, (v) disclosed any confidential information (other than to legal advisors of the Company or pursuant to agreements requiring the recipient to maintain the confidentiality of, and preserving all rights of the Company in, such confidential information); (vi) made any capital expenditures that aggregate in excess of $200,000; (vii) taken any action, omitted any action or entered into any agreement or understanding which, if taken, omitted or entered into during the period from the date of this Agreement until the Closing Date, would constitute a breach or violation of Section 6.2 hereof; or (viii) committed or agreed to any of the foregoing set forth in (i) through (vii) above.

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3.8           Employee Benefit Plans.

(a)           Schedule 3.8(a) lists:  (i) each plan fund, program, agreement or arrangement for the provision of executive compensation, deferred or incentive compensation, profit sharing, stock bonus, bonus, stock option, restricted stock, phantom stock, stock purchase, termination, salary continuation, employee assistance, supplemental retirement, severance, vacation, sickness, disability, death, fringe benefit, insurance, medical or other benefits (whether provided through insurance, on a funded or unfunded basis, or otherwise) to any current or former employee, director, consultant or independent contractor, or any dependent, survivor or beneficiary with respect to any of the foregoing, which is maintained, administered or contributed to (directly or indirectly through a professional employer organization or otherwise) by the Company or any ERISA Affiliate of the Company, whether or not legally binding; (ii) each Employee Pension Benefit Plan which has been maintained, administered or contributed to (directly or indirectly through a professional employer organization or otherwise) by the Company or any ERISA Affiliate in the past six (6) years (the “Pension Plans”); and (iii) each Employee Welfare Benefit Plan which is currently maintained, administered or contributed to (directly or indirectly through a professional employer organization or otherwise) by the Company or any ERISA Affiliate (such plans, together with Employee Welfare Benefit Plans which were previously maintained, administered or contributed to by the Company or an ERISA Affiliate, collectively, the “Welfare Plans”) (collectively, all arrangements described in this Section 3.8(a) are hereinafter referred to as the “Benefit Plans”).

(b)           Each Pension Plan which is intended to qualify under Section 401(a) of the Code so qualifies (i) with respect to the form of its plan documents and (ii) in operation and each related trust is exempt from taxation under Code Section 501(a). Each Benefit Plan (and each related trust, insurance contract or fund) has been maintained, funded and administered in all material respects in accordance with its governing instruments and all applicable Laws, including but not limited to, ERISA and the Code. No Pension Plan has ever held Company Common Stock or other Company securities. No Pension Plan has ever been merged with or accepted Code Section 414(l) transfers from another Employee Pension Benefit Plan. With respect to any applicable Company Employees, the Company has provided wages and fringe benefits under the Benefit Plans or otherwise in compliance with the Service Contract Act of 1965 and its related regulations at 29 C.F.R. Part 4.

(c)           All contributions, premiums or other payments due under the terms of each Benefit Plan or required by applicable Law have been made within the time due. All unpaid amounts attributable to any such Benefit Plan for any period prior to the Closing Date will be accrued on the Company’s consolidated books and records in accordance with GAAP and, except to the extent of such accruals, the Company has no material Liability arising out of or in connection with the form or operation of the Benefit Plans or benefits accrued thereunder on or prior to the Closing Date.

(d)           There have been no Prohibited Transactions with respect to any Benefit Plan which could result in Liability to the Company, its ERISA Affiliates, or, to the Knowledge of the Company, any of their respective employees. There has been no breach of fiduciary duty (including violations under Part 4 of Title I of ERISA) with respect to any Benefit Plan which could result in Liability to the Company, its ERISA Affiliates or, to the Knowledge of the

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Company, any of their respective employees. No action, suit, proceeding, hearing or investigation relating to any Benefit Plan (other than routine claims for benefits) is pending or, to the Knowledge of the Company, has been threatened, and neither the Company nor any Seller has Knowledge of any fact that would reasonably be expected to form the basis for such action, suit, proceeding, hearing or investigation. No matters are currently pending with respect to any Benefit Plan under the Employee Plans Compliance Resolution System maintained by the IRS or any similar program maintained by any other Government Authority.

(e)           Neither the Company, nor any ERISA Affiliate has ever sponsored, maintained, contributed to, had any obligation to contribute to, or had any other Liability under or with respect to any Employee Pension Benefit Plan covered by Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code. Neither the Company nor any ERISA Affiliate has ever had any Liability under or with respect to any “multiemployer plan” as defined in ERISA Section 3(37) or any “multiple employer welfare arrangement” as defined in Section 3(40)(A) of ERISA.

(f)            Neither the Company, nor any ERISA Affiliate has ever sponsored, maintained, administered, contributed to, had any obligation to contribute to, or had any other Liability under or with respect to any Employee Welfare Benefit Plan which provides health, life or other coverage for former directors, officers or employees (or any spouse or former spouse or other dependent thereof), other than benefits required by COBRA.

(g)           Neither the Company, nor any ERISA Affiliate has ever maintained a “voluntary employees beneficiary association” within the meaning of Section 501(c)(9) of the Code or any other “welfare benefit fund” as defined in Section 419(e) of the Code.

(h)           All reports and information relating to each Benefit Plan required to be filed with a Government Authority have been timely filed and are accurate in all material respects; all reports and information relating to each such Benefit Plan required to be disclosed or provided to participants or their beneficiaries have been timely disclosed or provided, and there are no restrictions on the right of the Company or any ERISA Affiliate to terminate or decrease (prospectively) the level of benefits under any Benefit Plan after the Closing Date without Liability to any participant or beneficiary thereunder.

(i)            There has been delivered to Buyer, with respect to each Benefit Plan, the following:  (i) a copy of the annual report (if required under ERISA) with respect to each such Scheduled Benefit Plan for the last three (3) years (including all schedules and attachments); (ii) a copy of the summary plan description, together with each summary of material modification required under ERISA with respect to such Benefit Plan; (iii) a true and complete copy of each written Benefit Plan and, with respect to Pension Plans, each written plan document and all amendments thereto which have been adopted since the inception of such plan; (iv) all trust agreements, insurance contracts, and similar instruments with respect to each funded or insured Benefit Plan; (v) copies of all nondiscrimination and top-heavy testing reports for the last three (3) plan years with respect to each Benefit Plan that is subject to nondiscrimination and/or top-heavy testing; and (vi) any investment management agreements, administrative services contracts or similar agreements relating to the ongoing administration and investment of any Benefit Plan.

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(j)            Each ERISA Affiliate is identified on Schedule 3.8(j).

(k)           Each Benefit Plan sponsored by the Company is terminable at the discretion of such entity with no more than thirty (30) days advance notice and without cost to such entity. No Employee Pension Benefit Plan, including the assets of such plan, is subject to any charge, market value adjustment, deferred rules charge or other fee that is payable by reason of the termination of such plan or investment. The Company may, without cost, withdraw their employees, directors, officers and consultants from any Benefit Plan which is not sponsored by such entity. No Benefit Plan has any provision which would reasonably be expected to increase or accelerate benefits or any provision which would reasonably be expected to increase Liability to the Company or the Buyer as a result of the transactions contemplated hereby, alone or together with any other event. No Benefit Plan imposes withdrawal charges, redemption fees, contingent deferred sales charges or similar expenses triggered by termination of the plan or cessation of participation or withdrawal of employees thereunder. No officer, director, agent or employee of the Company or any ERISA Affiliate has made any oral or written representation which is inconsistent with the terms of any Benefit Plan which may be binding on such plan, the Company or any ERISA Affiliate.

(l)            Neither the Company nor any ERISA Affiliate sponsors, maintains, or contributes to a nonqualified deferred compensation plan within the meaning of Section 409A of the Code.

3.9           Employee Matters.

(a)           Schedule 3.9(a)(i) contains a complete and correct list of all Company Employees as of November 30, 2005, their respective titles as of the date hereof, the 2004 compensation paid to each such employee, the 2005 compensation paid to each such employee through December 1, 2005, the date and amount of each such employee’s most recent salary increase, the date of employment of each such employee and the accrued vacation time and sick leave or other paid time off of each such employee. The Company has paid all bonuses due to any Company Employee with respect to work performed by such Company Employee in calendar year 2005. Except as set forth on Schedule 3.9(a)(ii), (i) the terms of employment or engagement of all directors, officers, Company Employees, agents, consultants and professional advisers of the Company are such that their employment or engagement may be terminated at will with notice given at any time and without Liability for payment of compensation or damages, (ii) there are no severance payments which are or could become payable by the Company to any such person under the terms of any oral or written agreement or commitment or any Law, custom, trade or practice, (iii) there are no other agreements, contracts or commitments, oral or written, between the Company and any such person, (iv) as of the date hereof, to the Knowledge of the Company, no executive officer or material number of management level or senior technical employees of the Company has any plans to terminate his, her or their employment or relationship with the Company and (v) to the Knowledge of the Company, there are no agreements between any Company Employee and any other Person which would restrict, in any manner, such Person’s ability to perform services for the Company or the Buyer or the right of any of them to compete with any Person or the right of any of them to sell to or purchase from any other Person.

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(b)           The Company has not, nor has it ever been, bound by or subject to (and none of its assets or properties are bound by or subject to) any arrangement with any labor union or other collective bargaining representative. No employee of the Company is or has ever been represented by any labor union or covered by any collective bargaining agreement while employed by the Company and no campaign to establish such representation is in progress. With respect to the Company, there is no pending or, to the Knowledge of the Company, threatened (i) strike, slowdown, picketing, work stoppage or employee grievance process, (ii) material charge, grievance proceeding or other claim against or affecting the Company relating to the alleged violation of any law pertaining to labor relations or employment matters, including any charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission or any comparable Government Authority, (iii) union organizational activity or other labor or employment dispute against or affecting the Company, or (iv) application for certification of a collective bargaining agent.

(c)           Except as set forth on Schedule 3.9(c), the Company is and has been in material compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, including, without limitation, any such laws regarding employment documentation, equal employment opportunities, fair employment practices, plant closings and mass layoffs, sexual harassment, discrimination based on sex, race, disability, health status, pregnancy, religion, national origin, age or other tortious conduct, workers’ compensation, family and medical leave, the Immigration Reform and Control Act, the Service Contract Act of 1965 and occupational safety and health requirements, and the Company has not engaged in any unfair labor practice. The Company is not nor has it been liable for the payment of any compensation, damages, taxes, fines, penalties or other amounts, however designated, for failure to comply with any of the foregoing. All Persons classified by the Company as independent contractors do satisfy and have satisfied the requirements of law to be so classified, and the Company has fully and accurately reported its compensation on IRS Forms 1099 when required to do so. No individual who has performed services for or on behalf of the Company and who has been treated by the Company as an independent contractor, is classifiable as a “leased employee” within the meaning of Section 414(n)(2) of the Code with respect to the Company.

(d)           To the Knowledge of the Company, except as set forth in Schedule 3.9(d), no third party has claimed or has reason to claim that any person employed by or affiliated with the Company has (i) violated any of the terms or conditions of his or her employment, non-competition, non-solicitation or non-disclosure agreement with such third party, (ii) disclosed or utilized any trade secret or proprietary information or documentation of such third party, or (iii) interfered in the employment relationship between such third party and any of its present or former employees. To the Knowledge of the Company, no person employed by or affiliated with the Company has employed or has proposed to employ any trade secret or any information or documentation proprietary to any former employer or violated any confidential relationship which such person may have had with any third party, in connection with the development, manufacture or sale of any Product or proposed Product or the development or sale of any service or proposed service of the Company.

(e)           Schedule 3.9(e) lists all the Company Employees who are currently on leave relating to work-related injuries and/or receiving disability benefits under any Benefit Plan.

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3.10         Taxes.

(a)           The Company has filed (or has had filed on its behalf) on a timely basis all Tax Returns it is required to have filed. All such Tax Returns are materially correct and complete in all respects. Except as set forth on Schedule 3.10(a), all Taxes required to have been paid by the Company (whether or not shown on any Tax Return) have been paid on a timely basis. No claim has ever been made in writing (or to the Knowledge of the Company or any Seller, in any other manner) by a Government Authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. The Company has not commenced activities in any jurisdiction which would reasonably be expected to require the Company to make an initial filing of any Tax Return with respect to Taxes imposed by a Government Authority that it had not previously been required to file in the immediately preceding taxable period. The Company has not requested or obtained any extension of time within which to file any Tax Return, which Tax Return has not since been filed. There are no Encumbrances on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax.

(b)           The Company has complied in all material respects with all applicable Laws, rules and regulations relating to withholding Taxes including, without limitation, the withholding and reporting requirements under Sections 1441 through 1464, 3401 through 3406, and 6041 through 6048 of the Code, as well as any similar provisions under any other laws, and has, within the time and manner prescribed by law, withheld from employee wages and other payments and paid over to the proper Government Authority all amounts required to have been so withheld and paid.

(c)           There are no existing circumstances which reasonably may be expected to result in the assertion of any claim for Taxes against the Company by any Government Authority with respect to any period for which Tax Returns are required to have been filed or Tax is required to have been paid. There is no audit or other proceeding presently pending or threatened with regard to any Tax Liability or Tax Return of (i) the Company or (ii) any Seller relating to the Company. Neither the Company nor any Seller has received a written ruling from or entered into a written agreement with a Government Authority relating to any Tax if such ruling or agreement could have a continuing effect with respect to any taxable period of the Company for which the Company has not filed a Tax Return. No issue has been raised by any Government Authority with respect to Taxes of the Company in any prior examination which, by application of the same or similar principles, would reasonably be expected to result in a proposed deficiency for any other taxable period.

(d)           No agreement, waiver or other document or arrangement extending, or having the effect of extending, the period for assessment or collection of Taxes (including, but not limited to, any applicable statute of limitation), has been executed or filed with any Government Authority by or on behalf of the Company that has continuing effect; and no power of attorney with respect to any Tax matter relating to the Company is currently in force.

(e)           The Company has not filed any consent or entered into any agreement under Section 341(f) of the Code with respect to any of its assets.

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(f)            The Company is not a party to any agreement, contract, arrangement or plan that under certain circumstances could require any payment (within the meaning of Section 280G of the Code) of any employee remuneration after the Closing Date that would be a “parachute payment” within the meaning of Section 280G of the Code.

(g)           The Company has not made or agreed to make, and is not required to make (other that pursuant to Section 448 of the Code by reason of the consummation of the Merger), any change in method of accounting of the Company used by it in any Tax Return filed by the Company which change in method would require the Company to make an adjustment to its income pursuant to Section 481(a) of the Code (or any similar provision) on any Tax Return for any taxable period for which the Company has not yet filed a Tax Return; and neither is there any application pending with any Government Authority requesting permission for the Company to make any change in any accounting method, nor has the Company received any notice that a Government Authority proposes to require a change in method of accounting used in any Tax Return which has been filed by the Company.

(h)           The Company is not and has not been a party to any Tax allocation, Tax sharing or similar agreement or arrangement (other than any such agreement created by the execution of this Agreement). The Company (i) is not and has not been a member of an “affiliated group” (within the meaning of Section 1504 of the Code) or similar group of entities with which the Company joined, or was or may be required to join, for any taxable period in making a consolidated federal income Tax Return or other Tax Return in which Tax Liability was or would be computed on a consolidated, combined, unitary or similar basis, and (ii) does and has not had a relationship to any other Person which would cause it to be liable for Taxes owing by any other Person, including, without limitation (A) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), (B) as a transferee or successor, or (C) by contract.

(i)            The Company has not taken any action not in accordance with past practice that would have the effect of deferring a measure of Tax from a period (or portion thereof) ending on or before the Closing Date to a period (or portion thereof) beginning after the Closing Date. The Company has no deferred income or Tax Liability arising out of any transaction, including without limitation, any (i) intercompany transaction (as defined in Treasury Regulation Section 1.1502-13), (ii) the disposal of any property in a transaction accounted for under the installment method pursuant to Section 453 of the Code (other than any obligations of Buyer to make payments in respect of the Purchase Price pursuant to this Agreement which are deemed to have been received by the Company pursuant to the Section 338(h)(10) Elections), (iii) use of the long-term contract method of accounting, or (iv) receipt of any prepaid amount on or before the Closing Date, except to the extent adequately reserved for on its Balance Sheet.

(j)            Schedule 3.10(j) identifies all Tax Returns that the Company has filed on or after January 1, 2001 and the taxable period covered by each such Tax Return, and identifies all Tax Returns or periods (regardless of when filed) that have been audited or are currently the subject of an audit by a Government Authority. The Company has provided to the Buyer complete and accurate copies of all of the following materials that relate to Tax periods ending after January 1, 2001:  (i) all income Tax Returns filed by or with respect to the Company, (ii) all

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elections relating to Taxes which have continuing effect for taxable years ending after the Closing Date filed by or on behalf of the Company with any Government Authority (other than elections which are included in or apparent from Tax Returns referred to in (i) above), (iii) all examination reports relating to Taxes of the Company issued as a result of audits, examinations or asserted failures to file Tax Returns or pay Taxes, and (iv) all statements of Taxes assessed against the Company that were not shown on Tax Returns filed by the Company before such assessment. To the extent requested, the Company has made available to Buyer complete and accurate copies of all Tax documents.

(k)           The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code at any time during the preceding five (5) years.

(l)            No property owned by the Company is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) “tax-exempt use property” within the meaning of Section 168(h)(1) of the Code or (iii) is “tax-exempt bond financed property” within the meaning of Section 168(g) of the Code.

(m)          The Company has not constituted either a “distributing corporation” or a “controlled corporation” within the meaning of Section 355(a)(1)(A) of the Code in a distribution qualifying (or intended to qualify) under Section 355 of the Code (or so much of Section 356 as relates to Section 355).

(n)           The Company has been a “small business corporation” within the meaning of Section 1361(b) of the Code at all times since January 1, 1995. For all taxable years beginning on or after January 1, 1995, the Company has had in effect a valid election under Section 1362(a) of the Code, and during all such taxable years has validly been treated in a similar manner for purposes of the income tax laws of all states in which it has been subject to taxation where such treatment is legally available. The Company has not at any time made any election or filing to be treated as a Subchapter C corporation for state income Tax purposes in any of those states since its election under Section 1362(a) of the Code became effective.

(o)           The Company has not had at any time any “net unrealized built-in gain” within the meaning of Section 1374(d) of the Code that would give rise to taxation pursuant to Section 1374 of the Code (or comparable provisions of state law) if all of the assets of the Company were disposed of as of the Closing Date at their respective fair market values. The Company has not, in the past 10 years, (i) acquired assets from another corporation in a transaction in which the Company’s Tax basis for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets (or any other property) in the hands of the transferor, (ii) acquired the stock of any corporation which was treated for federal income tax purposes as having transferred its assets to the Company in a transaction to which Section 381 of the Code applied, whether by reason of election of qualified subchapter S subsidiary status (within the meaning of Section 1361(b)(3)(B) of the Code) or otherwise, or (iii) become a successor to any Person by reason of any acquisition of a substantial part of the

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assets of such Person, whether by contract or by operation of Law pursuant to a merger or consolidation or similar transaction.

(p)           Neither the Company nor any Seller knows or has reason to believe, after consultation with tax counsel, that the Buyer’s acquisition of the Company’s capital stock pursuant to this Agreement would not qualify as a “qualified stock purchase” within the meaning of Section 338 of the Code and Treasury Regulations thereunder, as to which an election properly may be made under Section 338(h)(10).

(q)           The Company does not have a “permanent establishment” in any foreign country as such term is defined in any applicable Tax treaty or convention between the United States and such foreign country and has not otherwise taken steps or conducted business operations that have exposed, or will expose it to the taxing jurisdiction of a foreign country. The Company has complied with all applicable tax laws and regulations of each country (including political subdivisions thereof) in which the Company, has performed services, even where such services relate or are provided solely to agencies of the United States government.

(r)            Neither Company nor any of its Subsidiaries is or has been a beneficiary or has otherwise participated in any “reportable transaction” within the meaning of Section 1.6011-4(b)(1) of the Treasury Regulations that was, is or to the Knowledge of the Company will ever be required to be disclosed under Section 1.6011-4 of the Treasury Regulations, and no Tax Return of Company or any of its Subsidiaries has (i) contained a disclosure statement under Section 6662 of the Code (or any predecessor provision or comparable provision of Law), or (ii) been filed with respect to which the Company was advised by its return preparer to consider making disclosure with respect to Section 6662 of the Code, which disclosure was not made.

(s)           The Company has not participated in, or cooperated with, an international boycott within the meaning of Section 999 of the Code.

(t)            The Company (i) is not a party to any joint venture, partnership or other agreement or arrangement which is treated as a partnership for federal income Tax purposes or (ii) does not own any interest in an entity that is treated as an entity disregarded as separate from its owner for federal Tax purposes, or as to which an election pursuant to Treasury Regulation Section 301.7701-3 has been made.

3.11         Property.

(a)           The Company owns no real property and has never owned any real property. Schedule 3.11(a) sets forth an accurate and complete list of all real property leased by the Company or to which the Company may have any leasehold rights (collectively, the “Facilities”). True, complete and correct copies of all leases of real property listed on Schedule 3.11(a) have been delivered to the Buyer. Except as otherwise disclosed on Schedule 3.11(a), to the Knowledge of the Company, no person, firm or corporation, other than the owner of such real property and the Company, has any rights (including rights arising under an installment contract, option to purchase, easement, right-of-way, lease, sublease or otherwise) with respect to the Facilities or any part thereof. All leases set forth on Schedule 3.11(a) are in

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full force and effect and constitute valid and binding agreements of the Company and, to the Knowledge of the Company, the other party or parties thereto in accordance with their respective terms.

(b)           Schedule 3.11(b) sets forth an accurate list of all owned and leased personal property included on the Balance Sheet and all other personal property owned or leased by the Company (i) as of the Balance Sheet Date, or (ii) acquired since the Balance Sheet Date, in the case of (i) and (ii) valued in excess of Ten Thousand Dollars ($10,000). True, complete and correct copies of all leases of personal property and equipment listed on Schedule 3.11(b) have been delivered to the Buyer. All of the personal property listed on Schedule 3.11(b) is in good working order and condition, ordinary wear and tear excepted. All personal property used by the Company is either owned by the Company or leased under an agreement listed on Schedule 3.11(b). All leases set forth on Schedule 3.11(b) are in full force and effect and constitute valid and binding agreements of the Company and, the other party or parties thereto in accordance with their respective terms.

(c)           The Company has good and marketable title to the Company’s assets, free and clear of any and all Encumbrances and defects in title (other than Permitted Encumbrances). To the Knowledge of the Company, the Company’s assets, taken together, are adequate and sufficient for the operation of its business as currently conducted. There are no facts or conditions affecting the Company’s assets which would, individually or in the aggregate, reasonably be expected to interfere in any material respect with the use, occupancy or operation thereof as currently used, occupied or operated, or their adequacy for such use.

3.12         Contracts.

(a)           Schedule 3.12(a) sets forth an accurate and complete list of each Material Contract. To the Knowledge of the Company, no Contract has been breached or cancelled by the other party, and the Company has no Knowledge of any anticipated breach by any other party to any Contract (with or without notice or lapse of time). The Company has performed all the obligations required to be performed by it in connection with the Contracts and is not in default under or in breach of any Contract, and no event has occurred which with the passage of time or the giving of notice or both would reasonably be expected to (i) result in a default or breach thereunder; (ii) give any Person the right to declare a default or exercise any remedy under any Contract, (iii) give any Person the right to accelerate the maturity or performance of any Contract, or (iv) give any Person the right to cancel, terminate or materially modify any Contract. The Company has not waived any of its material rights under any Contract. The Company has no present expectation or intention of not fully performing any obligation pursuant to any Contract. Each Contract is legal, valid, binding, enforceable and in full force and effect, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights in general, and shall continue as such following the consummation of the transactions contemplated hereby. Except as set forth on Schedule 3.12(a), no Contract obligates the Company to process, manufacture or deliver products or perform services that shall result in a loss to the Company upon completion of performance.

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(b)           The Company has provided the Buyer with a true and correct copy of all written Contracts which are required to be disclosed on Schedule 3.12(a), in each case together with all amendments, waivers or any other changes thereto (all of which are disclosed on Schedule 3.12(a)). Schedule 3.12(b) contains an accurate and complete description of all material terms of all oral Material Contracts.

(c)           No Person is currently renegotiating, or has the right to renegotiate, any amount paid or payable to the Company under any Contract or any other term or provision of any Contract.

(d)           Schedule 3.12(d) identifies and provides an accurate and complete description of each proposed Contract as to which any pending bid, offer, written proposal, term sheet or similar document has been submitted or received by the Company.

3.13         Litigation. Except as set forth on Schedule 3.13, there is no litigation, suit, proceeding, action, claim, demand or investigation, at law or in equity or in any administrative or arbitration proceeding, pending or, to the Knowledge of the Company, threatened against or affecting the Company before any court, agency, authority or arbitration tribunal. To the Knowledge of the Company, there are no facts that would be reasonably likely to result in any such litigation, suit, proceeding, action, claim or investigation. The Company is not subject to or in default with respect to any notice, order, writ, injunction or decree of any Government Authority or arbitration tribunal.

3.14         Compliance with Laws. The Company has complied and is currently in compliance in all material respects with all applicable Laws, regulations, rules, orders, permits, judgments, decrees and other requirements and policies imposed by any Government Authority and there are no violations of any other ethical requirement applicable to the Company. Neither the Company, nor any Seller, nor any of the employees, partners, principals, agents or assignees of the Company or any Seller have committed (or taken any action to promote or conceal) any violation of the Foreign Corrupt Practices Act, 15 U.S.C. sections 78dd-1, -2. The Company has all licenses, permits, approvals, qualifications or the like, from any Government, Government Authority or Person necessary for the conduct of its business as conducted all such items are in full force and effect and the Company is and has at all times been in compliance with the terms thereof (other than immaterial licenses, permits, approvals, qualifications or the like required by any state or local Government Authority). Schedule 3.14 sets forth all licenses and permits held by the Company which terminate or become renewable at any time prior to the first anniversary of the date of this Agreement. Except as set forth on Schedule 3.14, to the Knowledge of the Company, there are no facts or circumstances in existence which are reasonably likely to prevent the Company from renewing each such license and permit. The Company has not received any written notice or citation for any actual or potential noncompliance with any of the foregoing in this Section 3.14, and, to the Knowledge of the Company, there exists no condition, situation or circumstance, nor has there existed such a condition, situation or circumstance, which, after notice or lapse of time, or both, would reasonably be expected to constitute noncompliance with or give rise to future Liability with regard to any of the foregoing in this Section 3.14.

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3.15         Government Contracts.

(a)           Schedule 3.15(a) lists all Government Contracts and Government Bids as of November 30, 2005, including the name and number of the Government Contract and the applicable solicitation name and number for the Government Bid; the name of the other contracting party; the name of the Government Authority that is the customer (if different from the contracting party); for task orders and delivery orders, the name and number of the Government Contract (including any blanket purchase agreement) under which the order was issued or the Government Bid was submitted; the date the Government Contract was awarded; and the scheduled end date of the Government Contract. Except as set forth on Schedule 3.15(a), the Company has not entered into any Government Contract that has not been closed out or submitted any outstanding Government Bid that remains outstanding. The Company has made available to the Buyer correct and complete copies of all Government Contracts and outstanding Government Bids. All Government Contracts constitute valid and binding obligations of the Company and, to the Knowledge of the Company, of the other party or parties thereto, and are fully enforceable in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights in general. To the extent required with respect to any of the Government Contracts that have not been closed out, except as set forth on Schedule 3.15(a), the Company has obtained each novation or other consents from any Government Authority for (or has provided notice of) the assignment or transfer to the Company of all right, title and interest in and to such Government Contract.

(b)           Schedule 3.15(b) sets forth, as of November 30, 2005, for each Government Contract, each project with a firm order whereby the contractual value of work not yet performed (funded or unfunded) exceeds $50,000; the contractual value of such work not yet performed thereunder as of such date; and any dollar amounts included that are not yet funded.

(c)           With respect to each Government Contract or Government Bid, (i) the Company has complied in all material respects with all terms and conditions of such Government Contract, including all provisions incorporated by reference or by operation of law therein, (ii) the Company has complied in all material respects with all requirements of all Laws pertaining to such Government Contract, (iii) all representations and certifications executed by the Company pertaining to such Government Contract or Government Bid were complete and correct in all material respects as of their effective date and the Company has complied with all representations and certifications, (iv) the Company has not submitted any materially inaccurate, untruthful or misleading cost or pricing data, certification, bid, proposal, report, invoice, claim, or other information to a Government Authority, prime contractor, subcontractor, vendor or any other Person relating to any Government Contract or Government Bid, (v) neither a Government Authority nor any prime contractor, subcontractor, or any other Person has notified the Company, either in writing or orally, that the Company has breached or violated any law, certification, representation, clause, provision or requirement pertaining to such Government Contract or Government Bid, (vi) no cancellation, termination for convenience, termination for default, suspension, stop work order, cure notice, or show cause notice is currently in effect nor, to the Knowledge of the Company, is any such action being proposed or threatened, pertaining to such Government Contract, (vii) no cost claimed or proposed by the Company pertaining to any Government Contract or Government Bid is the subject of any audit or investigation nor, to the

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Knowledge of the Company, has any such audit or investigation been threatened, (viii) no Seller nor the Company has information that any option with respect to such Government Contract will not be exercised or that any Government Contract will be terminated, cancelled, or will otherwise come to an end prior to the end of its stated term (including all option periods), (ix) there are no pending recommendations by any Government auditor that any cost claimed by the Company is unallowable, and (x) all amounts previously charged to or presently carried as chargeable to any cost-reimbursable Government Contract are allowable pursuant to 48 C.F.R. Part 31. The Company is not in receipt or possession of any competitor or Government Authority’s proprietary or procurement sensitive information under circumstances where there is reason to believe that such receipt or possession is unlawful or unauthorized. The Company has not misused or disclosed any classified information or any records subject to the Privacy Act (5 U.S.C. § 552a).

(d)           (i) Neither the Company nor any of the Company’s directors, officers, employees, or (to the Knowledge of the Company) any consultants or agents is or has, during the past three (3) years, been under administrative, civil or criminal audit, indictment or information by any Government Authority or, to the Knowledge of the Company, subject to any pending internal investigation by the Company with respect to any alleged act or omission arising under or relating to any Government Contract or Government Bid. (ii) During the past three (3) years, the Company has not conducted or initiated any internal investigation or made a voluntary disclosure to any Government Authority with respect to any alleged act or omission arising under or relating to a Government Contract or Government Bid.

(e)           Schedule 3.15(e) lists each draft and final audit report received by the Company during the past five (5) years with respect to the audit by any Government Authority of any Government Contract or of any indirect cost, other cost or cost accounting practice of the Company. The Company has made available to the Buyer correct and complete copies of each such report.

(f)            There exist (i) no outstanding claims against the Company, either by any Government Authority or by any prime contractor, subcontractor, vendor or other Person, arising under or relating to any Government Contract or Government Bid, (ii) no material delivery or performance problems with respect to any Government Contract, (iii) no claims or disputes between the Company and any Government Authority or between the Company and any prime contractor, subcontractor, vendor, or other Person, in each case arising under or relating to any Government Contract or Government Bid, (iv) no circumstances in which the Company or any other party to a Government Contract has terminated, cancelled or waived any material term or condition of any Government Contract, (v) no material projected cost overruns on any of the Government Contracts and (vi) to the Knowledge of the Company, no circumstances in which the Company has an interest in any pending or potential claim against any Government Authority or any prime contractor, subcontractor or vendor arising under or relating to any Government Contract or Government Bid.

(g)           No money due to the Company in an amount in excess of $50,000 pertaining to any Government Contract has been withheld or set off nor has any claim been made to withhold or set off money and the Company is entitled to all progress payments received with

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respect thereto, and the Company has not received nor expects to receive any requests with respect to any Government Contract for equitable adjustment.

(h)           The Company has neither been disqualified, debarred, or suspended from participation in the award of contracts with the Government or any Government Authority (excluding for this purpose ineligibility to bid on certain contracts due to generally applicable bidding requirements) nor, to the Knowledge of the Company, are there facts or circumstances that would reasonably be expected to warrant the institution of disqualification, suspension, or debarment proceedings or the finding of nonresponsibility or ineligibility on the part of the Company or any director, officer, or employee of the Company.

(i)            The Company’s cost accounting, estimating proposal and indirect rate proposal, confidential and classified information access and maintenance, time-keeping and labor charging, wage classification and Fair Labor Standards Act exemption, and procurement systems and the associated entries reflected in the Company’s financial statements with respect to the Government Contracts and Government Bids are in material compliance with all applicable Laws and Government Contract provisions, including, without limitation, applicable cost principles and applicable cost accounting standards.

(j)            Schedule 3.15(j) contains a complete and correct list of all government-owned property at the Company’s facilities provided under, necessary to perform the obligations under, or for which the Company is accountable under the Government Contracts. All such government-owned property is administered, maintained, identified, tracked, used, managed, accounted for and disposed of in accordance with a government-approved property management system and is in the condition described therein.

(k)           The Company has delivered or made available to the Buyer copies of all written negative past performance evaluations, comments or reviews by any Government Authority or any other Person in connection with any Government Contract which copies were received by or made accessible to the Company in the last three (3) years.

(l)            Each employee, agent, consultant, or representative of the Company required to possess a Government security clearance (“Security Clearance”) to engage in the performance of any Government Contract currently possesses a valid Security Clearance, and, to the Knowledge of the Company, has not taken or failed to take any action which would reasonably be expected to result in the termination of such valid Security Clearance, and has possessed such Security Clearance since the date it was required.

(m)          Except as set forth on Schedule 3.15(m), none of the Company’s current Government Contracts between the Company and the U.S. Government or a Governmental Authority was based in part on the Company’s status as a small business (including without limitation, a small disadvantaged business (“SDB”), a woman-owned small business (“WOSB”), or a Small Business Administration (“SBA”) Section 8(a) program participant). The Company is not claiming eligibility as a small business, including eligibility as an SDB, a WOSB or Section 8(a) Program participant, with respect to any pending Government Bid. The Company has never been the subject of an SBA certificate of competency, size determination, size protest, size appeal or a review of eligibility for SDB or 8(a) status after initial entry into such program.

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(n)           Except for those liens listed on Schedule 3.15(n), made in accordance with 31 U.S.C. § 3727 (as amended), otherwise known as the Assignment of Claims Act, and 41 U.S.C. § 15 (as amended), otherwise known as the Assignment of Contracts Act, the Company has not assigned or otherwise conveyed or transferred, or agreed to assign, convey, or transfer to any Person, any right, title or interest in or to any of the Government Contracts or Government Bids, or any account receivable relating thereto, whether as a security interest or otherwise.

(o)           All technical data, computer software and computer software documentation (as those terms are defined under the Federal Acquisition Regulation and its supplemental regulations) developed, delivered, or used under or in connection with the Government Contracts have been properly and sufficiently marked and protected so that no more than the minimum rights or licenses required under applicable regulations and Government Contract terms, if any, have been provided. All disclosures, elections, and notices required by applicable regulations and contract terms to protect ownership of inventions developed, conceived or first actually reduced to practice under Government Contracts have been made and provided.

(p)           Schedule 3.15(p) sets forth all of the Company’s contingent fee agreements relating to its Government sales and marketing efforts. Except as set forth on Schedule 3.15(p), each such arrangement has been properly disclosed to the appropriate Government Authority.

3.16         Environmental and Safety Matters. The Company has conducted its business in compliance in all material respects with all applicable Environmental Laws. None of the properties currently or, to the Knowledge of the Company, formerly owned or operated by the Company contain any Hazardous Substance in amounts exceeding the levels permitted by applicable Environmental Laws. The Company has not received any written notices, demand letters or requests for information from any Government Authority or other Person, which has not heretofore been resolved with such Government Authority or other Person, indicating that the Company may be in violation of, or liable under, any Environmental Law. There are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or, to the Knowledge of the Company, threatened against the Company relating to any violation, or alleged violation, of any Environmental Law. No reports have been filed, or are required to be filed, by the Company concerning the Release of any Hazardous Substance or the threatened or actual violation of any Environmental Law which have not heretofore been resolved. No Hazardous Substance has been disposed of, Released or transported in violation of any applicable Environmental Law from any properties owned by the Company. To the Knowledge of the Company, no remediation or investigation of Hazardous Substances is occurring at any property operated or formerly operated by the Company. To the Knowledge of the Company, the Company and any of its properties are not subject to any liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law.

3.17         Insurance. Schedule 3.17 lists and briefly describes each insurance policy maintained by, on behalf of, for the benefit of or at the expense of the Company and any claims

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made thereunder. The Company has provided copies to the Buyer of all such insurance policies. All of such insurance policies are in full force and effect, and the Company is not nor has it ever been in default with respect to its obligations under any such insurance policies and the Company has never been denied insurance coverage. The Company is current in all of its premiums for its insurance policies. Neither the Company nor any Seller knows of any threatened termination of, or material premium increase in excess of industry norms with respect to, any such policies. The Company has no self-insurance or co-insurance programs.

3.18         Intellectual Property.

(a)           The Company has sole title to and ownership of, or possesses legally enforceable rights to use under valid and subsisting written license agreements, all Company Intellectual Property Rights, and the Company has not misappropriated, is not in conflict with and is not infringing upon the Intellectual Property Rights of any Person. The Company is the sole and exclusive owner of the Company Intellectual Property Rights free and clear of any Encumbrances or other rights or claims of others, except for Third Party Intellectual Property Rights. To the Knowledge of the Company, none of the Company Intellectual Property Rights is being infringed by activities, products or services of, or is being misappropriated by, any other Person.

(b)           Schedule 3.18(b) lists or describes (i) all registered and pending applications for registration of Company Intellectual Property Rights; (ii) all written agreements pursuant to which the Company is permitted to use Third Party Intellectual Property Rights excluding commercial-off-the shelf products that are used pursuant to a shrink wrap or other similar agreements; (iii) all material agreements or other arrangements under which the Company has provided or agreed to provide or make available object or source code to any Product to any Person, including, without limitation, to end-users (other than End-User Licenses); and (iv) each Material Contract, other than a Material Contract entered into by the Company in the ordinary course of business, pursuant to which the Company has granted to any Person any rights with respect to any Company Intellectual Property Rights. The Company has made available to the Buyer correct and complete copies of all registrations and applications and all licenses, sublicenses and agreements (excluding shrink wrap license agreements) relating to the Company Intellectual Property Rights, each as amended to date. The Company is not a party to any oral license, sublicense or other agreement which, if reduced to written form, would be required to be listed in Schedule 3.18(b) under the terms of this Section 3.18(b).

(c)           Except as set forth on Schedule 3.18(c), with respect to each item of Third Party Intellectual Property Rights, there are no royalty, commission or other executory payment agreements, arrangements or understandings relating to such item.

(d)           The Company has made available to the Buyer copies of the Company’s standard forms of end-user license agreements (“End-User Licenses”). Except as set forth on Schedule 3.18(d), to the Knowledge of the Company, there are no material errors, omissions, issues or defects in the Products. Except as set forth on Schedule 3.18(d), the Company has not made any material oral or written representations or warranties with respect to its Products or services.

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(e)           The Company has used reasonable efforts to protect and enforce its trade secrets and otherwise to safeguard and maintain the secrecy and confidentiality of all Company Intellectual Property Rights. Except as set forth on Schedule 3.18(e), all officers, employees and consultants of the Company who have had access to proprietary information or Company Intellectual Property Rights have executed and delivered to the Company agreements (copies of which have been provided to the Buyer) to maintain the confidentiality of the Company Intellectual Property Rights and to assign to the Company all Intellectual Property Rights arising from the services performed for the Company by such persons. No current or prior officers, employees or consultants of the Company have claimed any ownership interest in any Company Intellectual Property Rights as a result of having been involved in the development of such property while employed by or consulting to the Company, or otherwise. To the Knowledge of the Company, there has been no violation of any confidentiality or nondisclosure agreement relating to the Company Intellectual Property Rights. Except as set forth on Schedule 3.18(e) and except for the Third Party Intellectual Property Rights, all Company Intellectual Property Rights have been developed by employees of the Company, within the course and scope of their employment.

(f)            No Federal, state, local or other government funding or university or college facilities were used in the development of the Products and such Products were not developed pursuant to any contract or other agreement with any Person except pursuant to contracts or agreements listed in Schedule 3.18(f).

3.19         Related Party Transactions. Except as set forth on Schedule 3.19, the Company has not, since December 31, 2001, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or officer (or equivalent thereof) of the Company. No officer or director of the Company has received since December 31, 2001, nor is entitled to receive, any material compensation from any Person that has engaged in or is engaging in any material transaction with the Company. The Company is not a party to or bound by any Contract or other commitment or transaction with any Related Party, nor do any Related Parties have any legal or beneficial interest in the assets or property owned or used by the Company, in any Contracts to which the Company is a party, or in any other Person with which the Company is or has been party to a Contract. Except as set forth on Schedule 3.19, there are no outstanding claims, accounts payable or receivable, intercompany loans, indebtedness, or other Liabilities, between the Company and any Seller or any Related Parties, and all such Liabilities have been, or will be prior to Closing, repaid in full.

3.20         Brokers. Except as set forth on Schedule 3.20, no Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or claim against or upon the Buyer, the Company or any Seller for any commission, fee or other compensation payable as a finder or broker because of any act or omission by the Company or any Seller.

3.21         Bank Accounts; Powers of Attorney. Schedule 3.21 sets forth a true, correct and complete list of the names and locations of all banks and other financial institutions at which the Company maintains an account or safe deposit box, the names of all Persons authorized to withdraw therefrom or have access thereto and the names of all Persons holding powers of attorney from the Company as of the date of this Agreement.

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3.22         Disclosure. To the actual knowledge of the Company, no representation or warranty by the Company or any Seller contained in this Agreement, and no representation, warranty or statement contained in any list, certificate, schedule or other instrument, document, agreement or writing furnished or to be furnished to the Buyer pursuant hereto, contains or will contain any untrue statement of a fact or omits or will omit to state any material fact necessary to make any statement herein or therein not misleading.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLERS

As a material inducement to the Buyer to enter into this Agreement, each Seller, jointly and severally, represents and warrants to the Buyer, as of the date hereof and as of the Closing, as follows:

4.1           Authority for Agreement. Each Seller has full power, authority and legal right and capacity to enter into and perform such Seller’s obligations under this Agreement and each other document contemplated hereby to which such Seller is or will be a party and to consummate the transactions contemplated hereby and thereby. This Agreement and the other documents contemplated hereby to which such Seller is a party have been duly executed and delivered by such Seller and are legal, valid and binding obligations of such Seller, enforceable against such Seller in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights in general.

4.2           No Violation to Result. Except as set forth on Schedule 4.2, the execution, delivery and performance by each Seller of this Agreement and the other documents contemplated hereby and the consummation by each Seller of the transactions contemplated hereby and thereby, do not and will not, directly or indirectly (with or without notice or lapse of time):  (i) violate, breach, conflict with, constitute a default under, accelerate or permit the acceleration of the performance required by any (x) contract or Encumbrance to which such Seller is a party or by which it is bound or (y) any Law, judgment, decree, order, rule, regulation, permit, license or other legal requirement of any Government Authority applicable to such Seller; (ii) give any Government Authority or other Person the right to challenge any of the transactions contemplated by this Agreement; or (iii) result in the creation or imposition of any Encumbrance, possibility of Encumbrance, or restriction in favor of any Person upon any Shares or any of the properties or assets of the Company. Other than as set forth on Schedule 3.3 or 4.2, no notice to, filing with, or consent of, any Person is necessary in connection with, nor is any “change of control” provision triggered by, the approval, adoption, execution, delivery or performance by each Seller of this Agreement and the other documents contemplated hereby nor the consummation by such Seller of the transactions contemplated hereby or thereby. Each Seller has given all notices, made all filings and obtained all consents set forth on Schedule 4.2 or will have done so prior to Closing.

4.3           Company Stock. The Sellers and the other Persons listed on Schedule 3.4(a) are the sole holders of the issued and outstanding shares of capital stock of the Company and each Seller and other Person listed on Schedule 3.4(a) holds of record and beneficially the number of

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shares of Company Common Stock as are set forth opposite such Seller’s or other Person’s name on Schedule 3.4(a), free and clear of any Encumbrance (other than restrictions imposed by federal and state securities laws). All other information in Section 3.4(a) and on Schedule 3.4(a) with respect to such Seller or other Person is true, correct and complete. Except as set forth in this Agreement in Section 6.14 or on Schedule 3.4(d), there are no proxies, voting rights, shareholders agreements or other agreements or understandings, to which any Seller is a party or by which any Seller is bound, with respect to the voting or transfer of the capital stock of the Company.

4.4           Brokers. Except as set forth on Schedule 3.20, no Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or claim against or upon the Buyer, the Company or any Seller for any commission, fee or other compensation payable as a finder or broker because of any act or omission by any Seller.

4.5           Disclosure. To the actual knowledge of any Seller, no representation or warranty by any Seller contained in this Agreement, and no representation, warranty or statement contained in any list, certificate, schedule or other instrument, document, agreement or writing furnished or to be furnished to, or made with, the Buyer pursuant hereto, contains or will contain any untrue statement of a fact or omits or will omit to state any material fact necessary to make any statement herein or therein not misleading.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER

The Buyer represents and warrants to the Sellers, as of the date hereof and as of the Closing, as follows:

5.1           Organization. The Buyer is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business and in good standing in each jurisdiction where the character or location of its assets or properties owned, leased or operated by it or the nature of its activities makes such qualification necessary. The Buyer has full corporate power and authority necessary to own and operate its properties and to conduct its business as conducted.

5.2           Authority for Agreement. The Buyer has full power, authority and legal right to enter into and perform its obligations under this Agreement and the other documents contemplated hereby to which the Buyer is or will be a party and to consummate the transactions contemplated hereby and thereby. Upon due approval by the board of directors of the Buyer, the execution, delivery and performance of this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby shall be authorized. Other than due approval by the board of directors of the Buyer, no other corporate proceedings on the part of the Buyer are necessary to approve and authorize the execution, delivery and performance of this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby. Upon due approval by the board of directors of the Buyer, this Agreement and the other documents contemplated hereby to which Buyer is a party shall be legal, valid and binding obligations of the Buyer,

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enforceable against the Buyer in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights in general.

5.3           No Violation to Result. Except as set forth on Schedule 5.3, the execution, delivery and performance by the Buyer of this Agreement and the other documents contemplated hereby and the consummation by the Buyer of the transactions contemplated hereby and thereby, do not and will not, directly or indirectly (with or without notice or lapse of time):  (i) violate, breach, conflict with, constitute a default under, accelerate or permit the acceleration of the performance required by, (x) any of the terms of the Certificate of Incorporation or Bylaws of the Buyer or any resolution adopted by the board of directors of the Buyer or stockholders of the Buyer, or (y) any Contract or Encumbrance to which the Buyer is a party or by which it is bound; or (z) any law, judgment, decree, order, rule, regulation, permit, license or other legal requirement of any Government Authority applicable to the Buyer; (ii) give any Government Authority or other Person the right to challenge any of the transactions contemplated by this Agreement; or (iii) result in the creation or imposition of any Encumbrance, possibility of Encumbrance, or restriction in favor of any Person, upon any of the properties or assets of the Buyer. Other than as set forth on Schedule 5.3 or as otherwise expressly set forth herein, no notice to, filing with, or consent of, any Person is necessary in connection with the execution, delivery or performance by the Buyer of this Agreement and the other documents contemplated hereby nor the consummation by the Buyer of the transactions contemplated hereby or thereby.

5.4           Litigation. As of the date hereof, there is no litigation, suit, proceeding, action, claim, demand or investigation, at law or in equity or in any administrative or arbitration proceeding, pending or, to the Knowledge of the Buyer, threatened against or affecting the Company before any court, agency, authority or arbitration tribunal that questions the validity of this Agreement or seeks to prohibit, enjoin or otherwise challenge the transactions contemplated hereby.

5.5           Investment Intent. The Buyer is acquiring the capital stock of the Company for its own account, for investment purposes, and not with a view to resale or distribution of the capital stock of the Company within the meaning of Section 2(11) of the Securities Act of 1933, as amended.

5.6           No Additional Representations. Buyer acknowledges that, except as expressly set forth in this Agreement or in any certificate, schedule or other instrument or agreement delivered or required to be delivered to the Buyer pursuant hereto (or any other document delivered to the Buyer as a condition to the Closing pursuant to Article VII hereof), none of the Sellers, the Company or any Person acting on their behalf makes, or shall be deemed to have made, any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or documents, financial or otherwise, regarding Sellers or the Company that have been prepared and furnished in good faith and based on reasonable assumptions (including, without limitation, any estimates, projections, forecasts, budgets or other forward-looking information) and have been provided or otherwise made available to Buyer or any Person acting on behalf of Buyer (including, without limitation, in any management presentations, information or offering memorandum, supplemental information or other materials or information with respect to any of the above) on or prior to the date hereof.

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5.7Brokers. No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or claim against or upon any of the Sellers for any commission, fee or other compensation payable as a finder or broker because of any act or omission by the Buyer.

5.8Disclosure. To the actual knowledge of the Buyer, no representation or warranty by the Buyer contained in this Agreement, and no representation, warranty or statement contained in any list, certificate, schedule or other instrument, document, agreement or writing furnished or to be furnished to the Seller pursuant hereto, contains or will contain any untrue statement of a fact or omits or will omit to state any material fact necessary to make any statement herein or therein not misleading.

ARTICLE VI
ADDITIONAL AGREEMENTS

6.1Access to Properties and Records. The Company shall afford to the officers, employees, attorneys, accountants and other authorized representatives of the Buyer reasonable access during regular business hours to all of its assets, properties, books and records and employees in order to afford the Buyer as full an opportunity of review, examination and investigation as it shall reasonably request of the affairs of the Company, and the Buyer and its representatives shall be permitted to make extracts from, or take copies of, such books, records (including the stock record and minute books) or other documentation as may be reasonably necessary; provided that no such access shall unreasonably interfere with the operations or business of the Company. The Company shall furnish or cause to be furnished to the Buyer such reasonable financial and operating data and other information about the Company, its business as presently conducted, as conducted in the past and as proposed to be conducted in the future, and properties and assets which any of the officers, employees, attorneys, accountants or other authorized representatives of the Buyer may reasonably request. No information or knowledge obtained in any investigation pursuant to this Section 6.1 shall affect or be deemed to modify any representation or warranty of any Seller or the Company contained herein or the conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement or any provision hereof.

6.2Interim Covenants of the Company and the Sellers. From the date of this Agreement until the Closing Date, except to the extent expressly permitted by this Agreement or otherwise consented to by an instrument in writing signed by the Buyer or as otherwise set forth on Schedule 6.2, the Company and the Sellers shall (i) use their reasonable best efforts to keep intact the Company and its business, as presently conducted or as conducted in the past, and shall not take or permit to be taken or do or suffer to be done anything other than in the ordinary course of its business as the same is presently being conducted; (ii) use their reasonable best efforts to keep available the services of the directors, officers, employees, independent contractors and agents of the Company and retain and maintain good relationships with its clients and maintain the Company’s assets and the Facilities in good condition; (iii) perform their obligations under the Contracts and Government Contracts; (iv) use their reasonable best efforts to maintain the goodwill and reputation associated with the Company; and (v) on or prior to the Closing Date, to the extent requested by the Buyer, take such actions as may be required to

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terminate, contingent on the Closing, any or all of the Benefit Plans and withdraw Company Employees from participation in any Benefit Plans that it does not sponsor. Without limiting the generality of the foregoing, the Company shall not (and the Sellers shall not cause or permit the Company to), except as permitted in writing by the Buyer or as set forth on Schedule 6.2:

(a)adopt or propose any change to the Company’s Articles of Incorporation, Bylaws or other organizational documents;

(b)merge or consolidate with any other Person or acquire a material amount of stock or assets of any other Person or effect any business combination, recapitalization or similar transaction;

(c)purchase, sell, lease or dispose of or make any contract for the purchase, sale, lease or disposition of or make subject to a security interest or any other Encumbrance (other than a Permitted Encumbrance), any of the Company’s properties or assets, other than in the ordinary and usual course of its business, consistent with the representations and warranties contained herein, and not in breach of any of the provisions of this Section 6.2, in each case for a consideration at least equal to the fair value of such property or asset;

(d)grant any salary increase to, or increase the draw of, any of the officers, directors, or, except in the ordinary and usual course of its business or as set forth on Schedule 6.2(d), employees or agents of the Company, or grant or amend any Restricted Stock Awards, or enter into any new, or amend or alter any existing, employment, bonus, incentive compensation, deferred compensation, profit sharing, retirement, pension, stock option, group insurance, death benefit or other fringe or other Benefit Plan, trust agreement or other similar or dissimilar arrangement, or any employment or consulting agreement;

(e)incur any bank indebtedness or borrowings, whether or not in the ordinary course of its business, or issue any commercial paper;

(f)enter into any leases of real property;

(g)enter into any leases of equipment and machinery except in the ordinary course of business;

(h)enter into any Contract (i) which would be required to be listed on Schedule 3.12 had it been entered into prior to the date hereof (without the Buyer’s prior written consent which shall not be unreasonably withheld) or (ii) in which any Affiliate of the Company or any Seller has any beneficial interest;

(i)amend or prematurely terminate, or waive any material right or remedy under, any Contract (without the Buyer’s prior written consent which shall not be unreasonably withheld);

(j)write-off as uncollectible, or establish any extraordinary reserve with respect to, any account receivable or other receivable (without the Buyer’s prior written consent which shall not be unreasonably withheld);

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(k)authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, convertible or exchangeable securities, commitments, subscriptions, rights to purchase or otherwise) any shares of the Company’s capital stock or any other securities;

(l)redeem, purchase or otherwise acquire, directly or indirectly, any shares of the Company’s capital stock or debt securities or any option, warrant or other right to purchase or acquire any such shares, or declare, accrue, set aside or pay any dividend or other distribution (whether in cash, stock or other property) with respect to such capital stock;

(m)create, incur or assume any liability or indebtedness, except in the ordinary course of business consistent with past practices; or postpone or defer the creation, incurrence, or assumption of any liability or indebtedness that would otherwise be created, incurred or assumed in the ordinary course of business absent the execution of this Agreement;

(n)pay or apply any of the Company’s assets to the direct or indirect payment, discharge, satisfaction or reduction of any amount, directly or indirectly, to or for the benefit of any Seller or any Affiliate thereof;

(o)change any of its methods of accounting or accounting practices in any respect;

(p)commence or settle any legal proceeding, action, demand, or claim involving $10,000 or more;

(q)make, amend or revoke any election with respect to Taxes, amend any Tax Return, or settle or compromise any Tax Liability;

(r)take any action, fail to take any action or enter into any agreement or understanding that causes the Company or any Seller to be in breach or violation of any of the representations or warranties made in this Agreement or commit a breach of or amend or terminate any Material Contract or any permit, license or other right; and

(s)agree or commit to do any of the foregoing.

6.3Publicity and Disclosure. The Buyer and the Company shall agree with each other as to the form and substance of any press release, publicity or other communication related to this Agreement or the transactions contemplated hereby. No Party shall make any disclosure of this Agreement or the existence, terms and conditions hereof (whether or not in response to an inquiry about the existence or subject matter of this Agreement) to any Person unless previously approved by the Buyer. Notwithstanding the foregoing, nothing contained herein shall prohibit the Buyer from making any disclosure which the Buyer in good faith believes is required by, or advisable according to, applicable Laws, regulations or stock market rules, after using reasonable efforts to give notice to the Seller Representative and an opportunity to comment on such disclosure.

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6.4No Solicitation; No Trading.

(a)The Company and each Seller shall not, and shall not authorize or knowingly permit any director, trustee, officer, employee, consultant, agent or any representative thereof, including without limitation, any broker disclosed in Article III or Article IV hereof (collectively, “Representatives”), to, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Closing or the termination of this Agreement in accordance with its terms, directly or indirectly:  (a) solicit, accept, approve, encourage (including by way of furnishing information), initiate, or respond to the submission of proposals or offers from any Person for, (b) participate in any discussions or negotiations pertaining to, or (c) furnish any information to any Person, other than the Buyer, relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination involving the Company. The Company and each Seller shall discontinue any and all negotiations with any Person with whom any of them is currently engaged regarding any of the above. If the Company or any Seller receives any unsolicited offer or proposal relating to any of the above, the Company or such Seller shall promptly notify the Buyer thereof, including the identity of the party making such offer or proposal and the specific terms of such offer or proposal, and provide the Buyer with a copy thereof.

(b)The Company and each of the Sellers acknowledge and agree that each is aware (and that each of their respective Representatives is aware or, upon receipt of any material nonpublic information of Buyer, will be advised) of the restrictions imposed by the United States federal securities laws and other applicable foreign and domestic laws on a Person possessing material nonpublic information about a public company. The Company and each of the Sellers hereby agree that while any of them are in possession of such material nonpublic information, none of such Person or Persons shall purchase or sell any securities of the Buyer, communicate such information to any third parties, take any other action in violation of such laws, or cause or encourage any third party to do any of the foregoing.

6.5Notification of Certain Matters. The Company and the Sellers shall give prompt notice to the Buyer of (a) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the Company or the Seller contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (b) any material failure of the Company or any Seller to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by the Company or any Seller hereunder. The delivery of any notice pursuant to this Section 6.5 shall not, without the express written consent of the Buyer, be deemed to (x) modify the representations or warranties hereunder of the Company or any Seller, (y) modify the conditions set forth in Article VII or (z) limit or otherwise affect the remedies available hereunder to the Buyer.

6.6Tax Matters.

(a)Post-Closing Tax Returns; Tax Indemnity. Buyer shall properly and accurately prepare (or cause to be prepared) and file (or cause to be filed) each Tax Return required to be filed by the Company after the Closing Date for a taxable period beginning before the Closing Date, provided that if requested by Seller Representative, Buyer shall make

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commercially reasonable efforts to engage Watkins, Meegan, Drury & Company, L.L.C. to prepare the income Tax Returns of the Company for any taxable period ending on or before the Closing Date. To the extent any Tax shown as due on such Tax Return is payable by any Seller (taking into account indemnification obligations hereunder), (i) such Tax Return shall be prepared in a manner consistent with the prior practice of the Company, unless otherwise required by applicable Tax Laws; (ii) such Tax Return shall be provided to the Seller Representative at least twenty (20) days prior to the due date for filing such return (or, if required to be filed within twenty (20) days of the Closing or within forty-five (45) days of the end of the taxable period to which such Tax Return relates, as soon as possible following the Closing or the end of the taxable period, respectively); and (iii) the Seller Representative shall have the right to review and comment on such Tax Return and Buyer and Seller Representative shall cooperate to resolve any disagreements regarding reporting positions to be taken in such Tax Returns. In the case of a disagreement concerning a reporting position that is not controlled by clause (i) of Section 6.6(a)(i) above, Seller Representative may select the reporting position with respect to such matter if (w) there is substantial authority for such position within the meaning of Section 6662 of the Code, (x) no reserve for Tax liability would be required to be established in the financial statements relating to the Buyer or the Company as a result of potential Tax liability that is not shown as due on such Tax Return, (y) such reporting position will not be binding on the Buyer or the Company in the preparation of Tax Returns in any taxable period ending after the Closing Date and (z) adequate security (determined within the sole reasonable discretion of Buyer) is provided to the Buyer to secure the indemnification obligations of the Sellers under Section 9.1(a)(vii) for Damages which could result from the failure to sustain such Tax reporting position. Pursuant to Section 9.1(a)(vii), promptly upon request by Buyer, the Sellers shall pay to the applicable Buyer Indemnified Party the amount of any Taxes paid or required to be paid by the Company that are attributable to any taxable period beginning on or before the Closing Date; provided, however, that with respect to a taxable period ending after the Closing Date, such indemnity shall be limited to the Taxes attributable to the portion of such period ending on the Closing Date as described in Section 6.6(b). For avoidance of doubt, all Taxes attributable to the Section 338(h)(10) Elections shall be considered to be allocable to the taxable period or portion thereof ending on the Closing Date, and subject to the foregoing indemnification by the Sellers. To the extent permitted by applicable law, the Sellers shall include any income, gain, loss, deduction or other Tax items for such periods on their Tax Returns in a manner consistent with the Schedule K-1s filed with the Tax Returns of the Company filed pursuant to this Section 6.6. The Buyer shall prepare (or cause to be prepared) and file (or cause to be filed) each Tax Return required to be filed by the Company after the Closing Date for a taxable period beginning after the Closing Date, and pay (or cause to be paid) all Taxes required to be paid by the Company with respect to any taxable period beginning after the Closing Date; provided that the Buyer’s obligations to prepare and file such Tax Returns and pay such Taxes shall not prevent recovery of Damages to which any Indemnified Party is entitled under Section 9.1 in connection therewith.

(b)Allocation of Taxes. The Sellers, the Buyer and the Company shall, to the extent permitted by applicable law, cause the taxable period of the Company to end as of the close of the Closing Date. The Buyer shall not cause the Company to take any actions on the Closing Date after the Closing that are out of the ordinary course of business, except as contemplated by this Agreement. For purposes of this Agreement, Company Taxes incurred with respect to a taxable period that includes but does not end on the Closing Date, shall be

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allocated to the portion of the period ending on the Closing Date (i) except as provided in (ii) and (iii) below, to the extent feasible, on a specific identification basis, according to the date of the event or transaction giving rise to the Tax, and (ii) except as provided in (iii) below, with respect to periodically assessed ad valorem Taxes and Taxes not otherwise feasibly allocable to specific transactions or events, in proportion to the number of days in such period occurring before the Closing Date compared to the total number of days in such period, and (iii) in the case of any Tax based upon or related to income or receipts, in an amount equal to the Tax which would be payable if the relevant taxable period ended on the Closing Date (for the elimination of doubt, Taxes incurred by reason of the transactions contemplated by this Agreement shall be allocated to the portion of the period ending on the Closing Date). Any credits relating to a taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practices of the Company.

(c)Transfer Taxes, Etc. Notwithstanding any provision to the contrary in this Agreement, all Transfer Taxes incurred by Sellers in connection with the transactions contemplated by this Agreement shall be paid by the Sellers when due. The Sellers shall, at their own expense, file all necessary Tax Returns and other documentation with respect to all such Transfer Taxes. If required by applicable law, the Buyer shall, and shall cause its Affiliates to, join in the execution of any such Tax Returns and other documentation.

(d)Tax Elections; Amended Returns. Except in connection with an audit resolved pursuant to Section 6.6(h) of this Agreement, no Party may amend a Tax Return of the Company, or file or amend any Tax election of the Company, in each case, with respect to a taxable period beginning before the Closing Date without the consent of the other Parties, which consent shall not be unreasonably withheld or delayed.

(e)Cooperation, Access to Information, and Record Retention. The Sellers, the Company and the Buyer shall cooperate, and shall cause their representatives to cooperate, as and to the extent reasonably requested by any other Party hereto in connection the preparation and filing of Tax Returns as provided herein and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the provision of records and information which are reasonably relevant to any such Tax Return, audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Sellers, the Buyer and the Company shall (i) retain all books and records with respect to Company Taxes (including Tax Returns) relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations for assessment of Taxes for such respective taxable period and (ii) give the other Parties hereto reasonable written notice prior to transferring, destroying or discarding any such books and records and, if another Party so requests, allow the other Party to take possession of such books and records.

(f)Tax Certificates, Etc. The Parties further agree, upon request, to use reasonable efforts to obtain any certificate or other document from any Government Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed.

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(g)Termination of Tax Sharing Agreements. All Tax sharing agreements or similar agreements with respect to or involving the Company (other than any such agreement created by the execution of this Agreement) shall be terminated as of the Closing Date and, after the Closing Date, the Company shall not be bound thereby or have any Liability thereunder.

(h)Tax Proceedings. Any Party who receives any notice of a pending or threatened Tax audit, assessment, or adjustment against or with respect to the Company which may give rise to Liability of another Party hereto (including pursuant to the indemnification provisions of this Agreement), shall promptly notify such other Party within ten (10) business days of the receipt of such notice. The Parties each agree to consult with and to keep the other Parties hereto informed on a regular basis regarding the status of any Tax audit or proceeding to the extent that such audit or proceeding could affect a Liability of such other Parties which could reasonably be a basis for a claim pursuant to the indemnity obligations hereunder. The Seller Representative shall have the right to represent the Company’s interests in any Tax audit or administrative or judicial proceeding and to employ counsel of its choice, but reasonably satisfactory to Buyer, at the Sellers’ expense, but only to the extent such audit or other proceeding pertains to Tax periods ending on or before the Closing Date. Buyer shall have the right to participate in such proceeding at its own expense, and shall be entitled to control the disposition of any issue involved in such proceeding which does not affect a potential Liability of the Sellers (including any indemnity obligation under this Agreement). Both the Buyer and the Sellers (through the Seller Representative) shall be entitled to represent their respective interests in light of their responsibilities (including indemnity obligations) for the related Taxes, at their own expense, in any audit or administrative or judicial proceedings involving a Tax period that includes but does not end on the Closing Date. Notwithstanding the foregoing provisions of this Section 6.6, the Seller Representative shall not, without the Buyer’s consent, agree to any settlement with respect to any Tax if such settlement could adversely affect any Tax Liability of the Buyer, any Affiliate of the Buyer, or (with respect to any taxable period (or portion thereof) beginning after the Closing Date) the Company. Except as provided in this Section 6.6 the provisions of Article IX including the provisions therein addressing settlement authority, shall govern the manner in which Tax audit or administrative or judicial proceedings are resolved.

(i)Section 338(h)(10) Elections. The Sellers will join with the Buyer in making an election under Section 338(h)(10) of the Code (and any corresponding elections under state or local Tax law) (collectively, the “Section 338(h)(10) Elections”) with respect to the Stock Purchase under this Agreement. The Buyer shall be responsible for the timely and accurate preparation and filing of all forms and documents required in connection with the Section 338(h)(10) Elections and shall provide the Sellers with properly completed copies of Form 8023 (and any corresponding state or local Tax forms) prior to the Closing Date. The Sellers agree to execute and deliver to the Buyer on the Closing Date any such forms that are or have been provided by the Buyer for execution and to promptly execute such other forms as may be reasonably requested by the Buyer thereafter in connection with making or perfecting the Section 338(h)(10) Elections. The Parties shall cooperate fully with each other and make available to each other such Tax data and other information as may be reasonably required by the Buyer or the Sellers in order to timely file the Section 338(h)(10) Elections. The Company and Sellers shall not revoke the Company’s election to be taxed as an S corporation within the meaning of Sections 1361 and 1362 of the Code. The Company and the Sellers shall not take or

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allow any action other than the Stock Purchase pursuant to this Agreement that would result in the termination of the Company’s status as a validly electing S corporation within the meaning of Sections 1361 and 1362 of the Code.

(j)Purchase Price Allocation. The Parties agree that the consideration to be paid pursuant to Article I of this Agreement and other items properly includible in the deemed sales price of the assets of the Company pursuant to the Section 338(h)(10) Elections shall be allocated, for Tax purposes, among the Company’s assets in a manner consistent with the provisions of Section 338 and Section 1060 of the Code and all regulations promulgated thereunder. The Buyer shall prepare IRS Form 8883 for inclusion with the federal income Tax Return of the Company ending on the Closing Date and any similar allocation required under state, local, or foreign law (collectively, “IRS Form 8883”). The Buyer shall permit the Seller Representative to review and comment on IRS Form 8883. The Company, the Sellers and the Buyer agree to report this transaction for federal Tax purposes as a valid election under Section 338(h)(10) of the Code and in accordance with IRS Form 8883 as ultimately filed, and shall not take any position or action inconsistent therewith upon examination of any Tax Return, in any refund claim, in any litigation, investigation or otherwise; provided, however, that if, in any audit of any Tax Return of the Sellers, the Company or the Buyer by a Government Authority, the fair market values are finally determined to be different from IRS Form 8883, as adjusted, the Buyer, the Company and the Sellers may (but shall not be obligated to) take any position or action consistent with the fair market values as finally determined in such audit. Schedule 6.6(j) sets forth the fair market value of the assets of the Company that the Parties agree will be used to allocate such consideration.

(k)Characterization of Indemnity Payments. The Buyer and the Sellers agree to treat any payment made by the Sellers to the Buyer hereunder as an adjustment to the Purchase Price.

6.7Litigation Support. In the event and for so long as any Party actively is contesting or defending against any charge, complaint, action, suit, audit, proceeding, hearing, investigation, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Company, each of the other Parties will cooperate with such Party or its counsel in the contest or defense, make available its personnel, and provide such testimony and access to its books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Article IX below).

6.8Reasonable Efforts. Each Party agrees to use all reasonable efforts promptly to take, or cause to be taken, all actions and do or cause to be done all things necessary, proper or advisable under applicable Laws to (a) obtain all consents, approvals or actions of, make all filings with and give all notices to Government Authorities or any other Person required to consummate the Stock Purchase and the other matters contemplated hereby, (b) provide such other information and communications to such Government Authorities or other public or private Persons as the other Party or such Government Authorities or other public or private Persons may reasonably request in connection therewith, and (c) execute such further documents, deeds,

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bills of sale, assignments and assurances and take such further actions as may reasonably be required to consummate and make effective the transactions contemplated by this Agreement including the satisfaction of all conditions hereto. If applicable, the Parties shall file all notices and other information and documents required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, as promptly as practicable after the date hereof.

6.9Payment of Obligations. Prior to the Closing, each Seller and each of the officers, directors, employees and Affiliates of the Company shall repay in full, in accordance with their terms, all debts and other obligations, if any, owed to the Company (except that, with respect to the promissory note evidencing Cindy A. Andre’s obligation to reimburse the Company for the withholding Tax related to the grant to her of a Restricted Stock Award, Cindy A. Andre shall repay the amounts due under such promissory note in full on the first business day following the Closing by directing Buyer to pay to the Company, out of the First Per Share Post-Closing Payments to be paid to her, an amount equal to the amount payable to the Company under such promissory note).

6.10Company Employees. Each of the Company and the Sellers agrees that promptly after the date hereof it shall allow the Buyer to make a presentation to the Company Employees and to interview such employees for continued employment with the Company after the Closing. Each of the Company and the Sellers will use all reasonable efforts to cause such Company’s employees to make available their employment services to the Company after the Closing.

6.11Further Assurances. Each Seller and the Company will, either prior to or after the Closing, execute such further documents, deeds, bills of sale, assignments and assurances and take such further actions as may reasonably be required by Buyer to consummate the Stock Purchase, to vest the Buyer with full title to all capital stock of the Company and all assets, properties, privileges, rights, approvals, immunities and franchises of the Company and its business or to effect the other purposes of this Agreement.

6.12Benefit Plans. Upon Buyer’s request, the Company shall take action prior to the Closing Date to terminate the Benefit Plans that it sponsors and to withdraw Company Employees from participation in any Benefit Plans that it does not sponsor. The Buyer expects to review the total compensation and benefits that the Company Employees have received as employees of the Company before the Closing. From and after the Closing Date, the Buyer will make available to continuing Company Employees a package of compensation and employee benefits that in the aggregate are substantially similar to that made available to the Buyer’s own similarly-situated employees; provided, however, that the Buyer shall in no event be obligated to provide any particular benefit to such Company Employees and shall retain full discretion to modify, amend, or terminate any of the benefits it makes available. Nothing in this Agreement shall be construed to create a right in any Company Employee to employment with the Company, the Buyer or any of its subsidiaries, and, subject to any written agreement between a Company Employee and the Company, the Buyer or any of its subsidiaries, the employment of each Company Employee who continues employment with the Company, the Buyer or any of its subsidiaries after the Closing Date shall be “at will” employment.

6.13Seller Waiver and Termination. For the benefit of the Buyer, each of the Sellers and the Company hereby waive (and none shall be of any further force or effect) all provisions of

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Section 13.1-651 of the VSCA with respect to this Agreement and the transactions contemplated hereby.

6.14Disclosure Schedules.

(a)The Disclosure Schedules shall be arranged by the Sellers in paragraphs corresponding to the subsections contained herein. Nothing in the Disclosure Schedules shall be deemed to disclose an exception to any representation or warranty made in Article III unless it describes the relevant facts in such reasonable detail as the context requires. A fact or matter disclosed in the Disclosure Schedules with respect to one section or subsection shall be deemed to be disclosed with respect to each other section or subsection where such disclosure is appropriate to the extent it is clear from reading the face of such Disclosure Schedule (and not any other agreement or other document referred to therein or attached thereto) that such disclosure is applicable to such other sections or subsections of the Disclosure Schedules and provided that an agreement or other document which is merely listed or identified in any section or subsection of the Disclosure Schedules shall not be deemed to be disclosure with respect to any other section or subsection of the Disclosure Schedules.

(b)To the extent that any matter arises or comes into existence between the date hereof and the Closing that is required to be described by the Company or Sellers in the Seller Disclosure Schedules in order for such schedules to be true, correct and complete in all material respects at and as of the Closing, it is understood and agreed that, from time to time prior to the Closing, the Seller Representative may propose to amend, supplement or revise the Seller Disclosure Schedules with respect to any such matter. If the Buyer reasonably determines that an amendment, supplement or revision proposed by the Seller Representative satisfies the terms and conditions of this Section 6.14, such amendment, supplement or revision shall be effective for purposes of the indemnification obligations set forth in Section 9.1(a)(i) with respect to representations made at the Closing, but shall in no way be effective for purposes of amending, supplementing or revising any representation made as of the date hereof, or otherwise curing any misrepresentation made as of the date hereof, and shall be disregarded for purposes of Section 7.1 and Section 11.1(a)(iii).

(c)To the extent that any matter arises or comes into existence between the date hereof and the Closing that is required to be described by the Buyer in the Buyer Disclosure Schedules in order for such schedules to be true, correct and complete in all material respects at and as of the Closing, it is understood and agreed that, from time to time prior to the Closing, the Buyer may propose to amend, supplement or revise the Buyer Disclosure Schedules with respect to any such matter. If the Seller Representative reasonably determines that an amendment, supplement or revision proposed by the Buyer satisfies the terms and conditions of this Section 6.14, such amendment, supplement or revision shall be effective for purposes of the indemnification obligations set forth in Section 9.1(b)(i) with respect to representations made at the Closing, but shall in no way be effective for purposes of amending, supplementing or revising any representation made as of the date hereof, or otherwise curing any misrepresentation made as of the date hereof, and shall be disregarded for purposes of Section 8.1 and Section 11.1(a)(i).

6.15Selected AR. If the Buyer actually collects any portion of the Selected AR after the Closing and on or before the first (1st) anniversary of the Closing Date, Buyer shall be

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obligated to pay the Per Share Selected AR Amount to each Seller, with respect to each of his or her shares of Company Common Stock issued and outstanding immediately prior to the Closing. Such payment, if any, shall be made in cash by the delivery of immediately available funds on a quarterly basis ending on the first (1st) anniversary of the Closing Date.

ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE BUYER

All obligations of the Buyer under this Agreement are subject to the fulfillment and satisfaction, prior to or at the time at which the Closing Date is scheduled to occur, of each of the following conditions precedent, any one or more of which may be waived, in part or in full, by the Buyer in writing.

7.1Representations and Warranties True at the Closing Date. All of the representations and warranties of the Company and each of the Sellers contained in this Agreement shall be true, correct and complete in all material respects (except that all representations and warranties in Section 3.4 and all representations and warranties qualified by the words “material” or “in all material respects” or similar words shall be true, correct and complete in all respects), in each case when made on the date hereof and on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (provided that those representations and warranties that are specifically made as of a particular calendar date or as of the date hereof shall be true, correct and complete in all material respects as of such date, except that any such representations and warranties in Section 3.4 and any such representations and warranties qualified by the words “material” or “in all material respects” or similar words shall be true, correct and complete in all respects as of such date) and each Seller and the Company shall have executed and delivered to Buyer a certificate as of the Closing as to the foregoing.

7.2Performance. All of the terms, covenants, agreements and conditions of this Agreement to be complied with, performed or satisfied by the Company or any Seller on or before the Closing Date shall have been duly complied with, performed or satisfied on or before such date and each Seller and the Company shall have executed and delivered to Buyer a certificate as of the Closing as to the foregoing.

7.3No Litigation. No temporary restraining order, preliminary or permanent injunction or other order or judgment issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging the transactions contemplated hereunder or limiting or restricting the conduct or operation of the Company or any Seller following the Closing shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Government Authority or other instrumentality, domestic or foreign, seeking any of the foregoing be pending. There shall be no action, suit, claim or proceeding of any nature pending or threatened, against the Buyer, the Company or any Seller, their respective properties or any of their respective officers or directors, that could have a Material Adverse Effect on the Company or the Buyer.

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7.4No Material Adverse Change. There shall have been (i) no effect, event or change which, individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect on the Company and (ii) no resignations or terminations of, or indications of an intention or plan to resign, employment by an executive officer or any material number of management level or senior technical employees of the Company.

7.5Governmental, Regulatory and Other Consents and Approvals. All consents, approvals, assignments and actions of, filings with and notices to any Government Authority or any other public or private Persons required of any Seller, the Company or the Buyer to consummate the Closing and the other matters contemplated hereby shall have been obtained, including, without limitation, the expiration or termination without the objection of any of the relevant federal authorities of all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, as well as those listed or required to be listed on Schedule 3.3 or Schedule 4.2. The board of directors of the Buyer shall have adopted and approved this Agreement and the transactions contemplated hereby.

7.6Credit Agreement Consent. The Buyer shall have received the Credit Agreement Consent; provided, however, the condition in this Section 7.6 shall expire on the fifteenth (15^th) day after the date hereof.

7.7Restricted Stock Awards, Company Stock Options and Company Warrants. The Restricted Stock Plan and each Restricted Stock Award shall have been terminated and each share of Company Common Stock subject to any Restricted Stock Award (other than shares of Company Common Stock subject to the Restricted Stock Award to Cindy A. Andre) shall have been repurchased by the Company pursuant to a Restricted Stock Repurchase Agreement. Each Company Stock Option, if any, and each Company Warrant, if any, shall have been exercised or terminated. The Company shall have delivered to the Buyer executed copies of all agreements, documents and certificates related to the foregoing.

7.8Closing Deliveries of the Sellers and the Company. At the Closing, the Company, the Seller Representative and each of the Sellers, as appropriate, shall have performed and delivered the following, subject to waiver, in part or in full, by the Buyer:

(a)the Sellers shall have delivered the certificate(s) representing all issued and outstanding shares of capital stock of the Company, all of which shall be free and clear of any Encumbrance, accompanied by stock powers duly endorsed in blank or accompanied by duly executed instruments of transfer;

(b)the Company and the Sellers shall have repaid or satisfied all of the Indebtedness for Borrowed Money and all other Liabilities of the Company set forth or required to be set forth on the Estimated Closing Balance Sheet; and the Company shall have delivered full releases of record, to the reasonable satisfaction of the Buyer, of all Encumbrances securing any such Liabilities of the Company which have been paid in full prior to or at the Closing, and shall deliver termination statements relating to all financing statements covering such Liabilities, if any;

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(c)each Seller shall have executed and delivered a Subordination Agreement in the form attached hereto as Exhibit A;

(d)each of Donald E. Reed, Leslie W. Butler and Cindy A. Andre shall have executed and delivered to the Company a Consulting Agreement with the Company in the forms attached hereto as Exhibits C-1, C-2 and C-3, respectively;

(e)each of the Sellers and all of the officers, directors, employees and Affiliates of the Company shall have delivered to Buyer evidence of repayment in full in accordance with their terms all debts and other obligations, if any, owed by any of them to the Company (except for Cindy A. Andre solely with respect to the promissory note described in Section 6.9);

(f)each director and officer of the Company shall have delivered to the Company his or her respective resignation as a director and officer of the Company, which shall be effective as of the Closing;

(g)the Company and the Sellers shall have delivered to the Buyer the original stock records of the Company, books of account, minute books, minutes and other records of all meetings of the Company, the corporate seal of the Company and such other documents, records, keys and other items as shall be necessary for the operation of the business of the Company;

(h)the Company shall have executed and delivered to the Buyer a certificate of its secretary, setting forth the organizational documents of the Company and the resolutions of its board of directors and shareholders (or other evidence reasonably satisfactory to the Buyer) authorizing the execution, delivery and performance of this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby, and certifying that such organizational documents and resolutions have not been amended or rescinded and are in full force and effect;

(i)the Company shall have delivered to the Buyer a good standing certificate from the jurisdiction of its incorporation and from each state in which it is qualified to do business, and its certified charter documents, each dated as of a date reasonably close to the date hereof;

(j)the Company shall have delivered to the Buyer all consents, licenses, permits and approvals as set forth on Schedule 3.3 and each Seller shall have delivered such consents as set forth on Schedule 4.2, each as required in connection with the execution, delivery, performance, validity and enforceability of this Agreement and the continued conduct of the business of the Company as conducted or proposed to be conducted as of the Closing;

(k)any creditor of the Company shall have delivered to the Company full written releases, to the reasonable satisfaction of Buyer, of all Liabilities and Encumbrances arising from, relating to or securing any indebtedness for borrowed money of the Company, including without limitation duly executed UCC filings, releases of any assignment of payments with respect to any Government Contract and an agreement to forward and otherwise cooperate with respect to any payments received after the Closing Date;

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(l)the Sellers and the Company shall have delivered an opinion of counsel in the form attached hereto as Exhibit D; and

(m)each Seller shall have executed and delivered a FIRPTA Certification, which (i) states that such Seller is not a foreign person, (ii) sets forth such Seller’s name, identifying number and address, and (iii) is signed by such Seller under penalties of perjury, meeting the requirement of Treasury Regulation Section 1.1445-2(b)(2).

ARTICLE VIII
CONDITIONS TO THE COMPANY’S AND THE SELLERS’ OBLIGATIONS

All obligations of the Company and the Sellers under this Agreement are subject to the fulfillment and satisfaction, prior to or at the time at which the Closing Date is scheduled to occur, of each of the following conditions precedent, any one or more of which may be waived, in part or in full, by the Seller Representative in writing.

8.1Representations and Warranties True at the Closing Date. All of the representations and warranties of the Buyer contained in this Agreement shall be true, correct and complete in all material respects (except that all representations and warranties qualified by the words “material” or “in all material respects” or similar words shall be true, correct and complete in all respects), in each case when made on the date hereof and on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (provided that those representations and warranties that are specifically made as of a particular calendar date or as of the date hereof shall be true, correct and complete in all material respects as of such date, except that any such representations and warranties qualified by the words “material” or “in all material respects” or similar words shall be true, correct and complete in all respects as of such date) and the Buyer shall have executed and delivered to each Seller a certificate as of the Closing as to the foregoing.

8.2Performance. All of the terms, covenants, agreements and conditions of this Agreement to be complied with, performed or satisfied by the Buyer on or before the Closing Date shall have been duly complied with, performed or satisfied on or before such date and Buyer shall have executed and delivered to each Seller a certificate as of the Closing as to the foregoing.

8.3No Litigation. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging the transactions contemplated hereunder shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Government Authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending.

8.4Closing Deliveries of the Buyer. At the Closing, the Buyer shall have performed and delivered the following, subject to waiver, in part or in full, by the Seller Representative:

(a)the Buyer shall have executed and delivered a certificate of its secretary, setting forth the organizational documents of the Buyer and the resolutions of its board of

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directors (or other evidence reasonably satisfactory to the Seller Representative) authorizing the execution and delivery of this Agreement and the documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby, and certifying that such organizational documents and resolutions have not been amended or rescinded and are in full force and effect; and

(b)the Buyer shall have executed and delivered to each of Donald E. Reed, Leslie W. Butler and Cindy A. Andre a Consulting Agreement in the forms attached hereto as Exhibit C-1, C-2 and C-3, respectively.

ARTICLE IX
INDEMNITY

9.1General Indemnification.

(a)Each Seller, jointly and severally, covenants and agrees to indemnify, defend, protect and hold harmless the Buyer Indemnified Parties from, against and in respect of all Damages suffered, sustained, incurred or paid by any Buyer Indemnified Party, in each case in connection with, resulting from or arising out of, directly or indirectly (whether or not involving a third party claim):  (i) the inaccuracy or breach of any representation or warranty made by the Company or any Seller set forth in this Agreement or in any other agreement or any certificate delivered or provided in connection with or related to the consummation of the transactions contemplated by this Agreement; (ii) the nonfulfillment of any covenant or agreement on the part of the Company or any Seller set forth in this Agreement or in any agreement or certificate executed and delivered by the Company or any Seller pursuant to this Agreement or in the transactions contemplated hereby; (iii) any Liabilities which arise out of, relate to or are associated with the Restricted Stock Plan, any Restricted Stock Award or any repurchase under any Restricted Stock Repurchase Agreement; (iv) any Liability with respect to any matter or matters described on Appendix C; (v) the Benefit Plans and any and all benefits accrued under the Benefit Plans as of the Closing Date and any and all other Liabilities arising out of, or in connection with the form or operation of the Benefit Plans on or prior to the Closing Date; (vi) any and all Liabilities resulting from any litigation, suit, proceeding, action, claim, demand or investigation pending or threatened against the Company which arises out of the operations of the Company on or prior to the Closing Date including, without limitation, any such matter listed on Schedule 3.13; and (vii) any and all Liabilities for Taxes (x) in connection with or arising out of the Company’s activities or business on or prior to the Closing Date (determined, with respect to Tax periods that begin before and end after the Closing Date, in accordance with the allocation provisions of Section 6.6(b)) in excess of the amount of such Taxes reflected as a current liability in the computation of Closing Working Capital, or (y) owing by any Person other than the Company for which the Company may be liable, including, without limitation (A) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), (B) as a transferee or successor, or (C) by contract.

(b)The Buyer covenants and agrees to indemnify, defend, protect and hold harmless the Seller Indemnified Parties from, against and in respect of all Damages suffered, sustained, incurred or paid by any Seller Indemnified Party, in each case in connection with,

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resulting from or arising out of, directly or indirectly (whether or not involving a third party claim):  (i) the inaccuracy or breach of any representation or warranty made by the Buyer set forth in this Agreement or in any other agreement or any certificate delivered or provided in connection with or related to the consummation of the transactions contemplated by this Agreement; and (ii) the nonfulfillment of any covenant or agreement on the part of the Buyer set forth in this Agreement or in any agreement or certificate executed and delivered by the Buyer pursuant to this Agreement or in the transactions contemplated hereby.

9.2Indemnification Procedures. In the event of the assertion or commencement by any Person of any claim or legal proceeding (whether against Buyer or against any other Person) with respect to which any Indemnified Party may be entitled to indemnification pursuant to this Article  IX, the Indemnified Party shall have the right, at its election, to proceed with the defense (including settlement or compromise) of such claim or legal proceeding on its own; provided, however, that if the Indemnified Party settles or compromises any such claim or legal proceeding without the consent of the Indemnifying Party, such settlement or compromise shall not be conclusive evidence of the amount of Damages incurred by the Indemnified Party in connection with such claim or legal proceeding (it being understood that if the Indemnified Party requests that the Indemnifying Party consent to a settlement or compromise, the Indemnifying Party shall act reasonably in determining whether to provide such consent). The Indemnified Party shall give the Indemnifying Party prompt notice after it becomes aware of the commencement of any such claim or legal proceeding against the Indemnified Party; provided, however, any failure on the part of Indemnified Party to so notify the Indemnifying Party shall not limit any of the obligations of the Indemnifying Party (or the Sellers), or any of the rights of any Indemnified Party, under this Article  IX (except to the extent such failure materially adversely prejudices the defense of such claim or legal proceeding). If the Indemnified Party does not elect to proceed with the defense (including settlement or compromise) of any such claim or legal proceeding, the Indemnifying Party may proceed with the defense of such claim or legal proceeding with counsel reasonably satisfactory to the Indemnified Party; provided, however, that the Indemnifying Party may not settle or compromise any such claim or legal proceeding without the prior written consent of the Indemnified Party (which consent may not be unreasonably withheld). No Buyer Indemnified Party (other than Buyer or any successor thereto or assign thereof) and no Seller Indemnified Party (other than the Seller Representative or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless, in the case of the Buyer Indemnified Parties, Buyer (or any successor thereto or assign thereof) or, in the case of the Seller Indemnified Parties, the Seller Representative (or successor thereto or assign thereof), shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. Nothing herein shall be deemed to prevent the Indemnified Party from making a claim, and an Indemnified Party may make a claim hereunder, for potential or contingent claims or demands; provided that the notice of such claim sets forth the specific basis for any such potential or contingent claim or demand to the extent then reasonably feasible and the Indemnified Party has reasonable grounds to believe that such a claim or demand may be made.

9.3Right of Offset. In the event that any Seller shall have an indemnification obligation for Damages to the Buyer or any Buyer Indemnified Party, the Buyer shall have the right (but not the obligation) to offset the amount of such Damages against any portion of the Purchase Price owed to such Seller, including without limitation, any portion of the Second Post-Closing

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Payment. If the Seller Representative has contested any claim for Damages by any Buyer Indemnified Party in accordance herewith, the Buyer shall have the right (but not the obligation) to offset the amount of such Damages against any portion of the Purchase Price owed to such Seller, including without limitation, any portion of the Second Post-Closing Payment, until the Buyer receives (1) a written settlement agreement entered into by the Buyer and the Seller Representative, (2) an arbitration award issued in accordance with Section 12.9 hereof or (3) a final order or decision issued by a court of competent jurisdiction from which no appeal may be taken or for which the time to appeal has expired, as applicable, in any of which cases the Buyer will release the amount of such Damages offset pursuant hereto, if at all, in accordance therewith. No limitation on the Buyer’s ability to exercise the rights set forth in this Section shall affect such Buyer Indemnified Party’s rights hereunder or otherwise. Such remedy shall be in addition to and not in limitation of any injunctive relief or other rights or remedies to which the Buyer or any Buyer Indemnified Party is or may be entitled at law or equity or in any administrative or arbitration proceeding or under this Agreement (including any exhibits hereto).

9.4Survival of Representations, Warranties and Covenants. Each covenant and agreement contained in this Agreement or in any agreement or other document delivered pursuant hereto shall survive the Closing and be enforceable until such covenant or agreement has been fully performed. All representations and warranties contained in this Agreement or in any agreement or other document delivered pursuant hereto shall survive the Closing until the date that is fifteen (15) months after the Closing Date and shall thereafter expire. The limitations on survivorship set forth in the preceding sentence of this Section 9.4 shall not apply to (i) the representations and warranties set forth in Sections 3.2 (Authority), 3.4 (Capitalization), 3.20 (Brokers), 4.3 (Company Shares), 4.4 (Brokers) and 5.7 (Brokers), all of which shall survive without limitation (and in no event less than six (6) years), (ii) claims based on criminal matters, fraud or intentional misrepresentation, which shall survive without limitation (and in no event less than six (6) years), (iii) the representations and warranties set forth in the Selected Government Contracts Sections, which shall survive for six (6) years after the Closing, or (iv) the representations and warranties set forth in Sections 3.8 (Employee Benefit Plans) and 3.10 (Taxes), which shall survive until the end of the applicable statute of limitations (or any extension thereof) plus ninety (90) days. Notwithstanding the foregoing, any representation or warranty with respect to which a claim has been made for a breach thereon prior to the end of the applicable survival period shall survive past the applicable survival period, if necessary, at least until such claim is resolved.

9.5Limitations on Indemnification.

(a)There shall be no liability for Damages for breaches of representations and warranties unless and until the aggregate amount of all Damages for all claims asserted by the Buyer Indemnified Parties exceeds Five Hundred Thousand Dollars ($500,000); provided, however, after such amount of Damages exceeds Five Hundred Thousand Dollars ($500,000), all Damages, excluding the first Two Hundred Fifty Thousand Dollars ($250,000), shall be recoverable by the Buyer Indemnified Parties. There shall be no liability for Damages for breaches of representations and warranties unless and until the aggregate amount of all Damages for all claims asserted by the Seller Indemnified Parties exceeds Five Hundred Thousand Dollars ($500,000); provided, however, after such amount of Damages exceeds Five Hundred Thousand Dollars ($500,000), all Damages, excluding the first Two Hundred Fifty Thousand Dollars

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($250,000), shall be recoverable by the Seller Indemnified Parties. The limitations set forth in this Section 9.5(a) shall not apply to (i) the representations and warranties set forth in Section 3.2 (Authority), Section 3.4 (Capitalization), Section 3.8 (Employee Benefit Plans), Section 3.10 (Taxes), the Selected Government Contracts Sections, Section 3.20 (Brokers), Section 4.3 (Company Shares), Section 4.4 (Brokers) and Section 5.7 (Brokers), (ii) claims regarding Buyer’s obligation to pay the Second Per Share Post-Closing Amount or (iii) claims based on criminal matters, fraud or intentional misrepresentation, with respect to which, in each case, all Damages shall be recoverable from the first dollar and shall be counted in determining whether the thresholds in this Section 9.5(a) have been exceeded.

(b)The indemnification obligations of the Sellers for breaches of representations and warranties shall be limited to an amount equal to Ten Million Dollars ($10,000,000). The indemnification obligations of the Buyer for breaches of representations and warranties shall be limited to an amount equal to Ten Million Dollars ($10,000,000). The foregoing limitations in this Section 9.5(b) above shall not apply to (i) the representations and warranties set forth in Section 3.2 (Authority), Section 3.4 (Capitalization), Section 3.8 (Employee Benefit Plans), Section 3.10 (Taxes), the Selected Government Contracts Sections, Section 3.20 (Brokers), Section 4.3 (Company Shares), Section 4.4 (Brokers) and Section 5.7 (Brokers), (ii) claims regarding Buyer’s obligation to pay the Second Per Share Post-Closing Amount or (iii) claims based on criminal matters, fraud or intentional misrepresentation, with respect to which, in each case, no Damages shall be counted in determining whether the cap in this Section 9.5(b) has been exceeded.

(c)For purposes of determining any breach of any representation or warranty for purposes of indemnification under this Article IX, all representations and warranties shall be treated as if the words “materially,” “in all material respects” or similar words were omitted from such representations and warranties. The indemnification obligations of the parties hereto and the rights and remedies that may be exercised by an Indemnified Party shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of any of the Indemnified Parties or any of their Representatives.

(d)The amount that may be recovered hereunder by an Indemnified Party shall be reduced by an amount equal to any insurance recovery actually received by the Indemnified Party (except to the extent of any repayment or increase in past, present or future insurance premiums or other similar repayment mechanisms payable following the date of the claim giving rise to such increase, determined on a present value basis) and shall be appropriately adjusted for calculations of the related Tax consequences and for the time value of money. The Buyer shall have the right to determine in its sole discretion whether to pursue any such insurance or Tax recovery.

9.6Waiver, Release and Discharge. Effective upon the Closing, except as expressly set forth in this Agreement, each Seller hereby irrevocably waives, releases and discharges the Company, the Buyer and their respective Affiliates, directors, officers and employees, from any and all Liabilities and obligations to the Seller of any kind or nature whatsoever, whether in his or her capacity as a Seller hereunder, as a shareholder, officer, director or employee of the Company or otherwise (including, without limitation, in respect of rights of contribution or indemnification as a director or officer of the Company under Section 13.1 Chapter 9 of the

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VSCA or under the Articles of Incorporation or Bylaws of the Company or otherwise), in each case whether absolute or contingent, liquidated or unliquidated, known or unknown, and whether arising hereunder or under any other agreement or understanding or otherwise at law or equity or in any administrative or arbitration proceeding, and each Seller shall not seek to recover any amounts in connection therewith or thereunder from the Company. Each Seller waives, and acknowledges and agrees that he or she shall not have and shall not exercise or assert (or attempt to exercise or assert), any right of contribution, right of indemnity or other similar right or remedy against the Company, the Buyer and their respective Affiliates, directors, officers and employees, in connection with any actual or alleged breach by the Company or any Seller of any representation, warranty or obligation set forth in this Agreement.

9.7Exclusive Remedy. The provisions of this Article IX shall constitute the sole and exclusive remedy from and after the Closing with respect to any Damages suffered, sustained, incurred or paid by any Indemnified Party resulting from or arising out of any breach of any representation or warranty made in this Agreement or in any other agreement or any certificate delivered or provided pursuant hereto, except for specific performance and equitable remedies as set forth in Article X and Section 12.3 and except in the case of criminal matters, fraud or intentional misrepresentation.

ARTICLE X
COVENANT NOT TO COMPETE

10.1Prohibited Activities. For the period commencing with Closing and ending on the later of the third (3rd) anniversary of the Closing and two (2) years after the date of termination of any employment or consulting arrangement with the Buyer, the Company or the Buyer’s Affiliates, no Seller shall, for any reason whatsoever, directly or indirectly, for himself or herself, or on behalf of or in conjunction with any other Person:

(a)engage as a stockholder, officer, director, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, in any business selling any products or services in direct or indirect competition with the Buyer, the Company or the Buyer’s Affiliates; provided, however, that no Seller nor any of such Seller’s respective Affiliates shall be precluded from the ownership of securities of corporations that are listed on a national securities exchange or traded in the national over-the-counter market in an amount that shall not exceed one percent (1%) of the outstanding shares of any such corporation;

(b)employ, or call upon for the purpose or with the intent of enticing or soliciting away from or out of the employ of the Buyer, the Company or any of the Buyer’s Affiliates, any person who is at that time, or was within one (1) year prior to that time, an employee of the Buyer, the Company or any of the Buyer’s Affiliates;

(c)sell products or services to, or call upon for the purpose of soliciting or selling products or services to, any Person who is at that time, or has been within one (1) year prior to that time, a customer or prospective customer of the Buyer, the Company or any of the Buyer’s Affiliates; or

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(d)publish any statement or make any statement (under any circumstances reasonably likely to become public) critical of the Buyer, the Company or any of the Buyer’s Affiliates, or in any way adversely affecting or otherwise maligning the reputation of the Buyer, the Company or any of the Buyer’s Affiliates.

The parties intend that the covenants contained in this Section 10.1 shall be deemed to be a series of separate covenants, one for each county in each state of the United States and, except for geographic coverage, each such separate covenant shall be identified in terms to the covenant contained in this Section 10.1.

10.2Confidentiality.

(a)Each Seller and each of their respective Affiliates, (i) shall treat and hold as confidential all information concerning this Agreement (except such information as is necessary to be disclosed to such Seller’s advisors who agree or who have fiduciary obligations to treat such information as confidential) and the business and affairs of the Buyer, the Company and the Buyer’s Affiliates that is not already generally available to the public (the “Confidential Information”), (ii) shall not disclose, transfer, transmit or use any of the Confidential Information except in connection with this Agreement or in connection with their employment duties to the Buyer or the Company as authorized by the Buyer or the Company and (iii) shall deliver promptly to the Buyer, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in his or her possession or under his or her control. Each Seller hereby acknowledges that such Confidential Information constitutes proprietary and trade secret information of the Buyer or the Company, as the case may be.

(b)In the event that any Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, such Seller shall notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 10.2. If, in the absence of a protective order or the receipt of a waiver hereunder, any Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or other Government official or agency, such Seller may disclose the Confidential Information to the tribunal; provided that such Seller shall use his or her best efforts to obtain, at the request and expense of the Buyer, an order or other assurance that confidential treatment shall be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate.

10.3Damages. Because of the difficulty of measuring economic losses to the Buyer and its Affiliates as a result of a breach of the foregoing covenants in this Article X, and because of the immediate and irreparable damage that could be caused to the Buyer and its Affiliates for which it would have no other adequate remedy, each Seller agrees that the foregoing covenant may be enforced by the Buyer in the event of breach by such Seller, in addition to, but not in lieu of, any other available remedies, by injunctions and restraining orders and other equitable remedies.

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10.4Reasonable Restraint. It is agreed by the Parties that the foregoing covenants in this Article X impose a reasonable restraint on the applicable Seller in light of the activities and business of the Buyer and its Affiliates on the date of the execution of this Agreement and the current plans of the Buyer and its Affiliates; but it is also the intent of the Parties, that such covenants be construed and enforced in accordance with the changing activities and business of the Buyer, the Company and the Buyer’s Affiliates throughout the term of this covenant.

10.5Independent Covenant. All of the covenants in this Article X shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Seller against the Buyer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Buyer of such covenants. It is understood by the Parties hereto that the covenants contained in this Article X are essential elements of this Agreement and that, but for the agreement of the Sellers to comply with such covenants, the Buyer would not have agreed to enter into this Agreement. Each Seller and the Buyer have independently consulted with their respective counsel and have been advised concerning the reasonableness and propriety of such covenants with specific regard to the nature of the business conducted by the Buyer. Each Seller hereby agrees that all covenants contained in this Article X are material, reasonable and valid and waive any requirement of the Buyer to post a bond to strictly enforce the terms hereof. The covenants in this Article X are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the Parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. The covenants contained in Article X hereof shall not be affected by any breach of any other provision hereof by any Party hereto but shall have no effect if this Agreement is terminated pursuant to Article XI.

ARTICLE XI
TERMINATION

11.1Termination.

(a)This Agreement may, by notice given on or prior to the Closing Date, in the manner hereinafter provided, be terminated and abandoned at any time prior to the Closing Date:

(i)by the Seller Representative if there has been a material misrepresentation or a material default or breach by the Buyer with respect to its representations in this Agreement or in any ancillary document or the due and timely performance of any of the Buyer’s covenants and agreements contained in this Agreement or in any ancillary document, and such misrepresentation, default or breach shall not have been cured within five (5) days after receipt by the Buyer of notice specifying particularly such misrepresentation, default or breach;

(ii)by the Seller Representative, if there has been an amendment, supplement or revision to the Buyer Disclosure Schedule;

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(iii)by the Buyer if there has been a material misrepresentation or a material default or breach by the Company or any Seller with respect to any of their respective representations in this Agreement or in any ancillary document or the due and timely performance by the Company or any Seller of any of their respective covenants and agreements contained in this Agreement or in any ancillary document, and such misrepresentation, default or breach shall not have been cured within five (5) days after receipt by the Company or any Seller of notice specifying particularly such misrepresentation, default or breach;

(iv)by the Buyer if there has been an amendment, supplement or revision to the Seller Disclosure Schedule;

(v)by mutual agreement of the Company and the Buyer;

(vi)by either the Company or the Buyer if the Closing shall not have occurred on or before the ninety (90) days after the date hereof; provided that the Party seeking to terminate this Agreement shall not because of its (and in the case of the Company, any Seller’s) breach or violation of any representation, warranty or covenant contained herein have caused the Closing not to have occurred;

(vii)by the Buyer if Wachovia Bank, National Association, or other applicable lenders under the Amended and Restated Credit Agreement, refuse to provide the Credit Agreement Consent; provided, however, the Buyer’s rights under this Section 11.1(a)(vii) shall expire on the fifteenth (15^th) day after the date hereof; or

(viii)by the Seller Representative, on the one hand, or by the Buyer, on the other hand, if there shall be a final nonappealable order of a federal or state court in effect preventing the consummation of the transactions contemplated by this Agreement; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the transactions by any Government Authority which would make the consummation of the transactions illegal.

(b)In the event of the termination of this Agreement pursuant to Section 11.1(a), (i) the Stock Purchase shall be abandoned; (ii) the provisions of Article IX, this Article XI and Article XII shall remain in full force and effect and survive any termination of this Agreement; and (iii) each Party shall remain liable for any breach of this Agreement prior to its termination.

ARTICLE XII
MISCELLANEOUS

12.1Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and assigns; provided, however, that neither the Company nor any of the Sellers may make any assignment of this Agreement or any interest herein without the prior written consent of the Buyer and, except in connection with the Credit Agreement Consent or otherwise to Wachovia Bank, National Association (or any assignor, successor or other Person who assumes the Buyer’s Senior Debt or replaces Wachovia Bank, National Association or provides indebtedness for borrowed money to the Buyer), Buyer

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may not make any assignment of this Agreement or any interest herein without the prior written consent of the Seller Representative. Any such purported assignment without such prior written consent shall be void and of no force or effect.

12.2Governing Law. This Agreement shall in all respects be interpreted, construed and governed by and in accordance with the laws of the Commonwealth of Virginia, without regard to its conflicts or choice of laws principles.

12.3Specific Performance. Each Party acknowledges that the other Parties shall be irreparably harmed and that there shall be no adequate remedy at law for any violation by any of them of any of the covenants or agreements contained in this Agreement. It is accordingly agreed that, in addition to, but not in lieu of, any other remedies which may be available upon the breach of any such covenants or agreements, each Party shall have the right to obtain injunctive relief to restrain a breach or threatened breach of, or otherwise to obtain specific performance of, the other Parties’ covenants and agreements contained in this Agreement. All rights and remedies of the Parties under this Agreement shall be cumulative, and the exercise of one or more rights or remedies will not preclude the exercise of any other right or remedy available under this Agreement or applicable Law.

12.4Severability. Each section, subsection and lesser section of this Agreement constitutes a separate and distinct undertaking, covenant and/or provision hereof. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall be deemed severed from this Agreement, but every other provision of this Agreement shall remain in full force and effect; provided, however, if such unlawful clause is so material to the Party for whose benefit the clause was originally included so that such Party would not have entered into this Agreement without such unlawful clause, the severability of such clause shall be arbitrated pursuant to Section 12.9 hereof. The preceding sentence is in addition to and not in place of the severability provisions in Article X.

12.5Amendment. This Agreement may be amended, supplemented or modified only by execution of an instrument in writing signed by the Buyer, the Company and the Seller Representative.

12.6Waiver. Any Party hereto may to the extent permitted by applicable Law (i) extend the time for the performance of any of the obligations or other acts of the other Parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other Parties hereto contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the agreements of the other Parties hereto contained herein. No such extension or waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party extending the time of performance or waiving any such inaccuracy or non-compliance. No waiver by any Party of any term of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term of this Agreement on any future occasion.

12.7Notices. All notices, requests, consents, waivers, and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given (a) if personally delivered, upon delivery or refusal of delivery; (b) if mailed by

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registered or certified United States mail, return receipt requested, postage prepaid, upon delivery or refusal of delivery; or (c) if sent by a nationally recognized overnight delivery service, upon delivery or refusal of delivery. All notices, consents, waivers, or other communications required or permitted to be given hereunder shall be addressed as follows:

(a)If to the Buyer:

SI International, Inc.
12012 Sunset Hills Road, Suite 800
Reston, Virginia  20190
Attention: Thomas E. Dunn

James E. Daniel

Telephone:  (703) 234-7000
Facsimile:   (703) 234-7501

with a copy to:

Morrison & Foerster LLP
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102
Attention:  Lawrence T. Yanowitch
Telephone:  (703) 760-7318
Facsimile:  (703) 760-7777

(b)If to any Seller or the Seller Representative:

Donald E. Reed
830 Randolph Road
Silver Spring, Maryland 20904

with a copy to:

Jenner & Block LLP
601 Thirteenth Street, NW

Suite 1200 South

Washington, DC 20005-3823
Attention:  Leslie H. Lepow
Telephone:  (202) 639-6090
Facsimile:   (202) 639-6066

and a copy to:

Leslie W. Butler
6060 Tower Court, No. 1404
Alexandria, Virginia 22304

or at such other address or addresses as the Party addressed may from time to time designate in writing pursuant to notice given in accordance with this section.

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12.8Expenses. Except as otherwise provided in Article IX, all costs and expenses of the Company and any Seller (including, without limitation, financial advisory fees, legal fees and expenses, broker and finder fees, fees and expenses of accountants) incurred by the Company or any Seller in connection with the transactions contemplated hereby shall be borne by the Sellers and all costs and expenses of the Buyer (including, without limitation, financial advisory fees, legal fees and expenses, broker and finder fees, fees and expenses of accountants) incurred by the Buyer in connection with the transactions contemplated hereby shall be borne by the Buyer. The Seller Representative may direct the Buyer to satisfy any of the Seller’s obligations under this Section 12.8 at the Closing, in which case the First Post-Closing Payment shall be reduced by a corresponding amount.

12.9Arbitration.

(a)Except as set forth in Article X, Section 12.3 and Section 12.9(c) hereof, any dispute, difference, controversy or claim arising in connection with or related or incidental to, or question occurring under, this Agreement or the subject matter hereof shall be finally settled under the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“AAA”), unless otherwise agreed, by an arbitral tribunal composed of three (3) arbitrators, at least one (1) of whom shall be an attorney experienced in corporate transactions, appointed by agreement of the Buyer and the Seller Representative in accordance with said Rules. In the event Buyer and the Seller Representative fail to agree upon a panel of arbitrators from the first list of potential arbitrators proposed by the AAA, the AAA will submit a second list in accordance with such Rules. In the event Buyer and the Seller Representative shall have failed to agree upon a full panel of arbitrators from such second list, any remaining arbitrators to be selected shall be appointed by the AAA in accordance with such Rules. If at the time of the arbitration Buyer and the Seller Representative agree in writing to submit the dispute to a single arbitrator, such single arbitrator shall be appointed by agreement of Buyer and the Seller Representative in connection with the foregoing procedure or failing such agreement by the AAA in accordance with such Rules. All arbitrators shall be neutral arbitrators and subject to Rule 19 of the Rules.

(b)The arbitrators shall not have the authority to add to, detract from, or modify any provision hereof nor to award punitive damages to any injured Party. A decision by a majority of the arbitrators shall be final, conclusive and binding. The arbitrators shall deliver a written and reasoned award with respect to the dispute to each of the parties, who shall promptly act in accordance therewith. Any arbitration proceeding shall be held in Alexandria, Virginia.

(c)The Parties hereby exclude any right of appeal to any court on the merits of the dispute. The provisions of this Section 12.9 may be enforced in any court having jurisdiction over the award or any of the Parties or any of their respective assets, and judgment on the award (including without limitation equitable remedies) granted in any arbitration hereunder may be entered in any such court. Nothing contained in this Section 12.9 shall prevent any Party from seeking injunctive or other equitable relief from any court of competent jurisdiction, without the need to resort to arbitration.

(d)In any arbitration hereunder, the holders of Company Common Stock and their respective successors shall be bound by any and all actions taken by the Seller

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Representative on their behalf pursuant to Section 2.3. All communications or writings sent to the Seller Representative shall be deemed notice to all of the holders of Company Common Stock hereunder.

12.10Complete Agreement. This Agreement, those documents expressly referred to herein, including all exhibits and schedules hereto, and the other documents of even date herewith, together with the Confidentiality and Non-Disclosure Agreement, dated August 29, 2005, between the Company and Buyer (which shall automatically terminate at Closing and be of no further force or effect), embody the complete agreement and understanding among the Parties and supersede and preempt any prior understandings, agreements or representation by or among the Parties, written or oral, which may have related to the subject matter herein.

12.11Absence of Third Party Beneficiary Rights. No provision of this Agreement is intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, Affiliate, stockholder, employee or partner of any Party hereto or any other Person.

12.12Mutual Drafting. This Agreement is the mutual product of the Parties, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the Parties, and shall not be construed for or against any Party hereto.

12.13Further Representations. Each Party to this Agreement acknowledges and represents that it has been represented by its own legal counsel in connection with the transaction contemplated by this Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each Party further represents that it is being independently advised as to the Tax or securities consequences of the transactions contemplated by this Agreement and is not relying on any representation or statements made by any other Party as to such Tax and securities consequences.

12.14Gender. Unless the context clearly indicates otherwise, where appropriate the singular shall include the plural and the masculine shall include the feminine or neuter, and vice versa, to the extent necessary to give the terms defined herein and/or the terms otherwise used in this Agreement the proper meanings.

12.15Headings. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

12.16Counterparts. This Agreement may be executed in two or more counterparts, each of which when executed and delivered shall be deemed an original and all of which, taken together, shall constitute the same agreement. This Agreement and any document or schedule required hereby may be executed by facsimile signature which shall be considered legally binding for all purposes.

[Signatures appear on following page(s).]

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IN WITNESS WHEREOF, each Party hereto has caused this Agreement to be signed as of the date first above written.

SI INTERNATIONAL, INC.
By:	/s/ Thomas E. Dunn
Name: Thomas E. Dunn
Title:		Executive Vice President, Chief
		Financial Officer and Treasurer
ZEN TECHNOLOGY, INC.
By:	/s/ Donald E. Reed
Name: Donald E. Reed
Title: Chief Executive Officer
/s/ Donald E. Reed
DONALD E. REED
/s/ Leslie W. Butler
LESLIE W. BUTLER
/s/ Barbara M. Reed
BARBARA M. REED
/s/ Cindy Andre
CINDY ANDRE

[Signature page of Stock Purchase Agreement]

APPENDICES

Appendix ADefined Terms

Appendix BModified GAAP

Appendix CCertain Matters

EXHIBITS

Exhibit AForm of Subordination Agreement

Exhibit BForm of Restricted Stock Repurchase Agreement

Exhibit C-1Form of Consulting Agreement – Donald E. Reed

Exhibit C-2Form of Consulting Agreement – Leslie W. Butler

Exhibit C-3Form of Consulting Agreement – Cindy A. Andre

Exhibit DForm of Opinion of Counsel

[Appendices and Exhibits Intentionally Omitted]

EX-21.1

Exhibit 21.1

Subsidiaries of SI International, Inc.

SI International Application Development, Inc.

(f/k/a Statistica, Inc.)

SI International Consulting, Inc.

(f/k/a SI Enterprise Consulting Corporation)

SI International Learning, Inc.

(f/k/a WPI, Inc.)

SI International Telecom Corporation

SI International Engineering, Inc.

(f/k/a System Technology Associates, Inc.)

MATCOM International Corporation

SI International Technology Services, Inc.

(f/k/a Materials, Communication and Computers, Inc.

Bridge Technology Corporation

Shenandoah Electronic Intelligence, Inc.

SI International SEIT, Inc.

(f/k/a SEI Technology, Inc.)

Zen Technology, Inc.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-127067) pertaining to the 2002 Amended and Restated Omnibus Stock Incentive Plan, (Form S-8 No. 333-122171) pertaining to the 2002 Stock Incentive Plan, (Form S-8 No. 333-101298) pertaining to the 2002 Stock Incentive Plan, the 2001 Nonqualified Stock Option Plan, the 2001 Service Award Option Plan and the 1998 Stock Option Plan of SI International, Inc., (Form S-8 No. 333-111551) pertaining to the Deferred Compensation Plan of SI International, Inc., and (Form S-3 No. 333-113827) pertaining to $100,000,000 common stock, preferred stock, depository shares, warrants and debt securities offered by SI International, Inc. of our reports dated March 3, 2006, with respect to the consolidated financial statements and schedule of SI International, Inc., SI International, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of SI International, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

	/s/ ERNST & YOUNG LLP
McLean, Virginia
March 10, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, S. Bradford Antle, certify that:

1.I have reviewed this Annual Report on Form 10-K of SI International, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))  and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 15, 2006

By:	/s/ S. BRADFORD ANTLE
	S. Bradford Antle
	President and Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas E. Dunn, certify that:

1.I have reviewed this Annual Report on Form 10-K of SI International, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))  and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 15, 2006

By:	/S/ THOMAS E. DUNN
	Thomas E. Dunn
	Executive Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, S. Bradford Antle, the Chief Executive Officer of SI International, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “Report”). The undersigned hereby certifies that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 15, 2006	/s/ S. BRADFORD ANTLE
	Name:	S. Bradford Antle
	Title:	President and Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Thomas E. Dunn, the Chief Financial Officer of SI International, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “Report”). The undersigned hereby certifies that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 15, 2006	/s/ THOMAS E. DUNN
	Name:	Thomas E. Dunn
	Title:	Executive Vice President, Chief Financial Officer & Treasurer