ACQUISITIONS

The Company has completed more than fifteen acquisitions since it began operations in August 2008. The acquisitions were made to increase the Company’s skill sets and to create sufficient critical mass to be able to serve as prime contractor on significant contracts. All of the acquisitions resulted in the Company recording goodwill and other intangibles. The goodwill was a result of the acquisitions focusing on acquiring cleared personnel to expand our presence with our main customer. The value of having that personnel generated the majority of the goodwill from the transactions and drove much of the purchase price. Several of the acquisitions involved issuance of Company common stock. The stock price for acquisition accounting was determined by the fair value on the acquisition date.

Details of the acquisitions completed since January 1, 2012 are outlined below:

Poole and Associates, Inc.

On October 1, 2012, the Company acquired Poole and Associates, Inc. ("Poole") for $116.0 million in cash and 794,913 shares of KEYW common stock valued at $12.58 per share for a total purchase price of $126.0 million adjusted for working capital targets as defined in the purchase agreement. The goodwill and intangible assets associated with this acquisition are not deductible for tax purposes, however the identified intangible assets are amortized under US GAAP. The Company has recorded $21.7 million of intangible assets related to acquired contracts, contract based rights and trade name. These assets will be amortized over periods from 2 - 5 years.

Poole was founded in 1999 and is headquartered in Annapolis Junction, MD. Poole provides systems engineering, software development, program management, and technical support to the intelligence community as well as bringing several prime contracts to the Company. Poole had approximately 152 employees at the time of acquisition, of whom 124 had security clearances at the highest level.

Sensage, Inc

On October 12, 2012, the Company acquired Sensage, Inc. and its wholly owned subsidiary Sensage International, Inc. ("Sensage") for $15.0 million in cash and 713,151 shares of KEYW stock valued at $12.62 for a total initial purchase price of $24.0 million as adjusted for working capital targets as defined in the purchase agreement. There was additional consideration consisting of up to $7.5 million of KEYW common stock and $3.0 million of the cash contingent upon Sensage meeting certain revenue targets for the second half of 2012. Based on the actual performance during the earn-out period, an additional $78,000 of cash was paid to Sensage shareholders from the earn-out. The goodwill and intangibles are not deductible for tax purposes, however the identified intangible assets are amortized under US GAAP. The Company has recorded $8.5 million of intangible assets related to acquired customer relationships, intellectual property and trade name. These assets will be amortized over periods ranging from 1 year - 5 years.

Sensage was founded in 2001 and is headquartered in Redwood City, CA. Sensage provides system incident event management software through its proprietary solution and brings commercial software experience to the Company. Sensage had approximately 35 employees at the time of acquisition most of whom were not cleared at any level.

Other 2012 Acquisitions

During the fourth quarter of 2012, subsequent to the above acquisitions, the Company acquired the assets of Rsignia, Inc. ("Rsignia") and Dilijent Solutions, LLC ("Dilijent") in two separate asset transactions. The total consideration paid for these two purchases was $7.0 million and equity, valued at $4.8 million, consisting of 316,231 shares of KEYW common stock and warrants to purchase another 158,116 shares at $12.65. Neither of these acquisitions are considered material to the financial results of KEYW and are not included in the pro forma tables below for that reason.

IDEAL Technology Corporation

On January 31, 2013 the Company acquired IDEAL Technology Corporation ("IDEAL") for $7.0 million in cash and 157,655 shares of KEYW stock valued at $12.69 for a total purchase price of $9.1 million. IDEAL is not considered material to the financial results of KEYW and is not included in the pro forma tables below for that reason.

The total purchase price paid for the acquisitions described above have been allocated as follows (in thousands):



	Poole		Sensage		Rsignia/Dilijent			IDEAL

Cash	$	4,412	$	1,948	$	(6	)	$	301
Current assets, net of cash acquired	7,278		8,995		801			894
Fixed assets	755		61		123			70
Intangibles	21,709		8,498		6,001			2,056
Goodwill	110,928		9,630		5,837			6,623
Other assets	29		54		—			—
Total Assets Acquired	145,111		29,186		12,756			9,944
Current liabilities	8,045		6,700		1,333			865
Long-term obligations	9,140		—		—			—
Total Liabilities Assumed	17,185		6,700		1,333			865
Net Assets Acquired	$	127,926	$	22,486	$	11,423		$	9,079
Net Cash Paid	$	113,545	$	11,246	$	6,601		$	6,751
Equity Issued	9,969		9,292		4,828			2,027
Actual Cash Paid	$	117,957	$	13,194	$	6,595		$	7,052

All acquisitions were accounted for using the acquisition method of accounting. Results of operations for each acquired entity are included in the consolidated financial statements from the date of each acquisition. Each of the acquisitions outlined above complements the Company's strategic plan to expand its classified intelligence offerings into the national security marketplace. These acquisitions provide the Company with access to key customers, security clearances and technical expertise. The Sensage, Rsignia, and Dilijent acquisitions also provided expertise and product offerings in the commercial software market. As a result of these factors, the Company was willing to pay a purchase price that resulted in recording goodwill as part of the purchase price allocation.

The tables below summarize the unaudited pro forma statement of operations for the three and six months ended June 30, 2012, assuming the Poole and Sensage acquisitions had been completed on the first day of the year. Pro forma income statements are not presented for 2013 as there have been no material acquisitions during the six months ended June 30, 2013. These pro forma statements do not include any adjustments that may have resulted from synergies between the acquisitions, eliminations of intercompany transactions or from amortization of intangibles other than during the period the acquired entities were part of the Company. The 2012 activity for Poole and Sensage represents the financial activity in 2012 prior to acquisition. Activity for the Rsignia, Dilijent and IDEAL acquisitions are not included for any period presented due to their immateriality individually and in aggregate.



	For the Three Months Ended June 30, 2012 (In thousands)
	Poole		Sensage			KEYW		Total

Revenues
Services	$	12,313	$	—		$	39,076	$	51,389
Integrated Solutions	—		2,312			17,079		19,391
Total	12,313		2,312			56,155		70,780
Cost of Revenues
Services	9,269		—			28,113		37,382
Integrated Solutions	—		708			9,109		9,817
Total	9,269		708			37,222		47,199
Gross Profit
Services	3,044		—			10,963		14,007
Integrated Solutions	—		1,604			7,970		9,574
Total	3,044		1,604			18,933		23,581
Operating Expenses	2,532		1,892			17,958		22,382
Operating Income (Loss)	512		(288		)	975		1,199
Non-operating Expense	—		105			450		555
Income (Loss) before Taxes	512		(393		)	525		644
Tax Expense	210		—			200		410
Net Income (Loss)	$	302	$	(393	)	$	325	$	234



	For the Six Months Ended June 30, 2012 (In thousands)
	Poole		Sensage			KEYW		Total

Revenues
Services	$	24,271	$	—		$	78,931	$	103,202
Integrated Solutions	—		4,369			33,000		37,369
Total	24,271		4,369			111,931		140,571
Cost of Revenues
Services	17,839		—			56,990		74,829
Integrated Solutions	—		1,413			17,079		18,492
Total	17,839		1,413			74,069		93,321
Gross Profit
Services	6,432		—			21,941		28,373
Integrated Solutions	—		2,956			15,921		18,877
Total	6,432		2,956			37,862		47,250
Operating Expenses	5,441		4,400			36,239		46,080
Operating Income (Loss)	991		(1,444		)	1,623		1,170
Non-operating Expense	—		205			864		1,069
Income (Loss) before Taxes	991		(1,649		)	759		101
Tax Expense	411		—			266		677
Net Income (Loss)	$	580	$	(1,649	)	$	493	$	(576	)