The federal government is the largest purchaser of information technology services and solutions in the United States. Information technology accounts for a significant portion of the federal government\'s spending, and, according to INPUT, an independent federal government market research firm, federal government information technology spending is expected to grow from $75.4 billion in federal fiscal year 2005 to $93.4 billion in federal fiscal year 2011. Of the total information technology spending, INPUT forecasts that the contracted-out portion will grow from $63.3 billion in federal fiscal year 2006 to $80.5 billion in federal fiscal year 2011.

The continuing Global War on Terror and increased focus on U.S. border security have intensified the federal government\\\\\\\\\\\\\\\'s commitment to strengthen U.S. military, intelligence and homeland security capabilities and increased the need for systems integration solutions capable of supporting this commitment. According to INPUT, national defense, intelligence and homeland security spending is projected to continue to grow over the next several years as the Global War on Terror, including the demand for intelligence capabilities and reconstruction efforts in Afghanistan and Iraq, defense transformation and homeland security remain high priorities for the federal government.

According to INPUT, federal information technology outsourcing expenditures will experience the largest growth among the different segments of information technology services and will increase from $13.3 billion in federal fiscal year 2006 to $17.7 billion in federal fiscal year 2011. Contributing to this growth, INPUT estimates that more than 45% of federal information technology workers will be eligible to retire by federal fiscal year 2008, further straining federal government personnel resources and increasing reliance on external providers.

The Company’s systems engineering services apply formal engineering methods and practices to analyze, design, develop, deploy and modernize information systems providing high-end capability for Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance, or C4ISR, functions, operations, logistics and business systems. Systems engineering activities are provided by teams of senior system, software, data and communications engineers who are supported by cleared personnel, infrastructure and facilities.

The Company’s enterprise integration services provide interoperability of data, functionality and information management to business processes, users and other information systems. The Company’s service offerings that support enterprise integration include business process development and workflow automation; COTS software integration; enterprise content management; enterprise application integration; document management; e-government and e-business solutions; and ERP blueprinting, configuration and implementation.

The Company’s operational logistics services provide resource, supply chain, maintenance and sustainment planning, management and support to federal government customers, principally to U.S. military operations. The Company’s operational logistics service offerings include logistics engineering; logistics business systems; system fielding and lifecycle support; training program support; supply management and warehouse operations; maintenance engineering; documentation and e-manual development; and large-scale military deployment planning and embarkation support.

The Company’s business process outsourcing services offer engineers, analysts and subject-matter experts in key business functions, such as requirements analysis, project and program management, operational support, administration and budgeting. The Company’s business process outsourcing service offerings include facility operations; business process improvement; program and project management; functional analysis; and developmental and operational test and evaluation.

The Company’s advanced engineering and technology capabilities deliver expert analysis, design, prototyping and engineering to the U.S. defense and federal civilian government customers implementing state-of-the-art and emergent technologies to enhance information exchange, interoperability, data-sharing capabilities, C4ISR and weapons systems effectiveness. The Company’s primary advanced engineering and technology offerings are sensor integration; service oriented architectures; microsystems design/development; fiber/electro optics; microelectronics; and domain and situational awareness.

Cost of revenues increased $23.5 million, or 41.3%, from $57.0 million for the three months ended June 30, 2005, to $80.5 million for the three months ended June 30, 2006.

Depreciation and amortization expense increased $0.8 million, or 151.7%, from $0.6 million for the three months ended June 30, 2005, to $1.4 million for the three months ended June 30, 2006.

Operating income increased $2.0 million, or 48.5%, from $4.1 million for the three months ended June 30, 2005, to $6.1 million for the three months ended June 30, 2006.

Net interest expense increased $1.8 million from $0.3 million for the three months ended June 30, 2005, to $2.1 million for the three months ended June 30, 2006.