The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-Q. This discussion and analysis contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level 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. In particular, statements that we make in this section relating to the sufficiency of anticipated sources of capital to meet our cash requirements are forward- looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of some of the factors described below, elsewhere in this Form 10-Q and in the section entitled "Risk Factors" in our Form 10-K for the fiscal year ended December 29, 2007. You should not place undue reliance on these forward-looking statements, which apply only as of the date of the filing of this Form 10-Q.

The Company's fiscal year is based on the calendar year and ends each year on the Saturday nearest, but not falling after, December 31 of that year. Typically, fiscal quarters also end on the Saturday nearest, but not falling after, the end of the calendar quarter. However, we will end future fiscal quarters on the Saturday which provides us with a 13 week quarter to compare with the previous year's quarterly results even if that Saturday falls after the end of the calendar quarter. As a result, our fiscal year may be comprised of 52 or 53 weeks.

References to the "Company," "we," "us," and "our" refer to SI International, Inc. and its subsidiaries.

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 Commerce, Federal Retirement Thrift Investment Board, Office of Personnel Management, 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 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.

For the fiscal quarters ended September 27, 2008 and September 29, 2007, we received 99.3% and 99.1%, 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 0.7% and 0.9%, 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 Department of Defense (DoD) includes revenue generated from work performed under engagements for both the DoD and the Intelligence community.

                             Three Months Ended     Nine Months Ended
                            Sept 27,    Sept 29,   Sept 27,   Sept 29,
                               2008       2007       2008       2007

Department of Defense            44.6 %     47.4 %     43.1 %     45.9 %
Federal civilian agencies        54.7       51.7       56.1       53.0
Commercial entities               0.7        0.9        0.8        1.1
Total revenue                   100.0 %    100.0 %    100.0 %    100.0 %

We 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:

                          Three Months Ended     Nine Months Ended
                         Sept 27,    Sept 29,   Sept 27,   Sept 29,
                            2008       2007       2008       2007

Prime contract revenue        86.4 %     77.4 %     85.4 %     78.5 %
Subcontract revenue           13.6       22.6       14.6       21.5
Total revenue                100.0 %    100.0 %    100.0 %    100.0 %

Our services are provided to clients pursuant to 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:

                      Three Months Ended     Nine Months Ended
                     Sept 27,    Sept 29,   Sept 27,   Sept 29,
                        2008       2007       2008       2007

Cost reimbursable         32.0 %     25.8 %     27.9 %     28.7 %
Time and materials        33.7       36.3       35.5       34.8
Fixed price               34.3       37.9       36.6       36.5
Total                    100.0 %    100.0 %    100.0 %    100.0 %

Our cost reimbursable revenues, as a percentage of total revenues, increased primarily due to higher equipment pass-through revenue on our C4I2TSR program as well as an increase in efforts under a new program with an intelligence agency.

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 certain cost reimbursable contracts that include performance based fee incentives, the Company recognizes 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. Other performance based fees are recognized upon customer approval.

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

For fixed price contracts that provide for the delivery of a specific product with related customer acceptance provisions, revenues are recognized upon product delivery and customer acceptance. However, a significant portion of the Company's fixed price-completion contracts involve the design and development of complex, client systems. For those contracts that are within the scope of the AICPA's Statement of Position 81-1, Accounting for Performance of Construction-Type and certain Production-Type Contracts,revenue is recognized on the percentage-of-completion method using costs incurred in relation to total estimated costs.

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 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 contracts accounted for under SOP 81-1 are recognized in the period in which they become known. Losses on all other contracts are recognized as the services and materials are provided.

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.

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 Second 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 Second 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 Second Amended Credit Agreement.

Under the terms of our Second Amended Credit Agreement, the Company is required to maintain compliance with financial and non-financial covenants. The Company is in compliance with all such covenants as of September 27, 2008.

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 as of September 27, 2008 and December 29, 2007 were $1.2 million and $13.1 million, respectively.

Cash Flow. The following table sets forth our sources and uses of cash and cash equivalents for the nine months ended September 27, 2008 and September 29, 2007:

                                                             Nine Months Ended
                                                           Sept 27,    Sept 29,
                                                              2008        2007
                                                              (in thousands)
     Net cash provided by operations                       $  14,919   $  12,653
     Net cash used in investing activities                    (2,166 )   (71,049 )
     Net cash (used in) provided by financing activities     (24,670 )    45,737
     Net decrease in cash and cash equivalents             $ (11,917 ) $ (12,659 )

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 for the nine months ended September 27, 2008 was attributable to net income of $10.3 million, plus depreciation, amortization and other non-cash items of $8.2 million, and a decrease in working capital and other operation assets and liabilities of $3.6 million. Cash provided by operations in the nine months ended September 29, 2007 was attributable to net income of $14.1 million, plus depreciation, amortization and other non-cash items of $6.9 million, offset by an increase in working capital and other operating assets and liabilities of $8.4 million.

Our cash flow used in investing activities consists primarily of capital expenditures, the purchase and sale of marketable securities, and acquisitions. In the nine months ended September 27, 2008, we purchased capital assets totaling $2.2 million. During the nine months ended September 29, 2007, we paid $60.4 million for the LOGTEC acquisition, net of cash assumed, repaid $6.0 million of note payable to the former owners of Zen, and invested $4.7 million in capital assets. We partially offset the cash use with $7.8 million of proceeds from the sale of marketable securities, net of purchases.

Our cash flow from financing activities consists primarily of borrowings under and payments on our credit facility and proceeds from the issuance and exercise of common stock, and payment for repurchase of common stock under our stock repurchase program. For the nine months ended September 27, 2008, cash flow used in financing activities consists of repayment of the line of credit and term loan portions under our prior and current credit facilities of $129.3 million, repurchase of common stock of $11.9 million, and debt issuance costs of $0.9 million, partially offset by the proceeds of $0.7 million from the exercise of stock options, plus proceeds of our credit facility refinancing of $116.8 million. Cash provided by financing activities for the nine months ended September 29, 2007 consists of borrowings of $25.0 million under the newly amended term loan, borrowings of $25.0 million under the revolving line of credit, and proceeds of $1.6 million from the exercise of stock options. These were partially offset by a $5.0 million repayment of our revolving line of credit and $0.9 million of repayments of the term loan portion of our credit facility and capital leases.

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:



                                             Three Months Ended      Nine Months Ended
                                           Sept 27,     Sept 29,    Sept 27,    Sept 29,
                                              2008         2007       2008        2007

Revenue                                        100.0 %      100.0 %    100.0 %     100.0 %
Operating costs and expenses:
Cost of services                                67.3         65.8       66.4        63.5
Selling, general and administrative             26.7         25.8       26.8        27.4
Depreciation and amortization                    0.7          0.7        0.8         0.7
Amortization of intangible assets                0.7          1.0        0.8         0.8
Total operating costs and expenses              95.4         93.3       94.8        92.4
Income from operations                           4.6          6.7        5.2         7.6
Interest expense, net                           (1.1 )       (1.6 )     (1.2 )      (1.4 )
Income before provision for income taxes         3.5          5.1        4.0         6.2
Provision for income taxes                       1.4          2.0        1.6         2.4
Net income                                       2.1 %        3.1 %      2.4 %       3.8 %

Three months ended September 27, 2008 compared with three months ended September 29, 2007

Revenue. For the three months ended September 27, 2008, our revenues increased 5.5% to $148.9 million from $141.1 million for the three months ended September 29, 2007. Revenues from work under Federal Government contracts increased 5.9% to $148.0 million for the three months ended September 27, 2008 from $139.8 million for the three months ended September 29, 2007. This increase was primarily attributable to new contract awards, successful recompetition wins on existing programs, new contracts from and growth within existing programs in our four focus areas: Federal IT Modernization, Defense Transformation, Homeland Defense, and Mission-Critical Outsourcing. We continue to focus primarily on opportunities for the Federal Government.

Cost of services. Cost of services include direct labor and other direct costs such as materials and subcontractor costs, incurred to provide our services and solutions to our customers. Generally, changes in costs of services are correlated to changes in revenue as resources are consumed in the production of that revenue. For the three months ended September 27, 2008, cost of services increased 8.0% to $100.3 million from $92.9 million for the three months ended September 29, 2007. This increase was attributable primarily to the increase in revenue. As a percentage of revenue, cost of services was 67.3% for the three months ended September 27, 2008 as compared to 65.8% for the three months ended September 29, 2007. The increase in cost of services, as a percentage of revenue, is due primarily to the Company increasing its use of subcontractors on programs for which we are acting as the prime contractor and higher costs during the quarter related to certain fixed price contracts.

Selling, general and administrative expenses. Selling, general and administrative expenses include facilities, selling, bid and proposal, indirect labor, fringe benefits and other discretionary costs. For the three months ended September 27, 2008, indirect costs increased 9.0% to $39.8 million from $36.5 million for the three months ended September 29, 2007. This $3.3 million increase was primarily attributable to the expected growth of support functions necessary to facilitate and administer the growth in direct costs. As a percentage of revenue, selling, general and administrative costs were 26.7% for the three months ended September 27, 2008 as compared to 25.8% for the three months ended September 29, 2007. The increase of 0.9% is primarily due to approximately $1.5 million of costs to outside consultants related to the pending acquisition of the Company.

Depreciation and amortization.Depreciation and amortization includes the depreciation of computers, furniture and other equipment, the amortization of third party software we use internally, and the depreciation of leasehold improvements. For the three months ended September 27, 2008, depreciation and amortization expense was $1.0 million, an increase of 11.1% compared to $0.9 million for the three months ended September 29, 2007. As a percentage of revenue, depreciation and amortization expense was 0.7% for the three months ended September 27, 2008 and September 29, 2007.

Amortization of intangible assets. Amortization of intangible assets includes the amortization of intangible assets acquired in connection with acquisitions. 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 using an accelerated method over their estimated useful lives. For the three months ended September 27, 2008, amortization of intangible assets was $1.1 million, compared to $1.4 million for the three months ended September 29, 2007. As a percentage of revenue, amortization of intangible assets was 0.7% for the three months ended September 27, 2008 compared to 1.0% for the three months ended September 29, 2007.

Income from operations. For the three months ended September 27, 2008, income from operations decreased 27.7% to $6.8 million from $9.4 million for the three months ended September 29, 2007. This decrease was attributable primarily to increased costs of services, as described above. As a percentage of revenue, income from operations was 4.6% for the three months ended September 27, 2008 compared to 6.7% for the three months ended September 29, 2007.

Interest expense, net. Interest expense, net was $1.6 million for the three months ended September 27, 2008, a decrease of 27.3% compared to $2.2 million in the quarter ended September 29, 2007. As a percentage of revenue, interest expense, net was 1.1% for the three months ended September 27, 2008 as compared to 1.6% for the three months ended September 29, 2007. The decrease in interest expense was due to both lower average borrowings along with a lower effective interest rate for the quarter ended September 27, 2008 as compared to the same period a year ago.

Provision for income taxes. The provision for income taxes was $2.1 million in the three months ended September 27, 2008, compared to $2.8 million for the three months ended September 29, 2007. Our third quarters of 2008 and 2007 tax provision, represent an estimated annual effective tax rate of 40.5%, and 39.2%, respectively. Our estimated annual effective tax rate of 40.5% for 2008 is greater than the federal statutory rate of 35% due primarily to state income taxes, the tax impact related to our non-qualified deferred compensation plan and certain non-deductible stock compensation costs. The tax impact of the nonqualified deferred compensation plan is based on an estimated return on the plan's assets. Actual results could differ from these estimates.

Nine months ended September 27, 2008 compared with nine months ended September 29, 2007

Revenue. For the nine months ended September 27, 2008, our revenues increased 14.1% to $426.1 million from $373.6 million for the nine months ended September 29, 2007. Revenues from work under Federal Government contracts increased 14.5% to $422.9 million for the nine months ended September 27, 2008 from $369.3 million for the nine months ended September 29, 2007. This increase was primarily attributable to the acquisition of LOGTEC, Inc., along with new contract awards, successful re-competition wins on existing programs, new contracts from and growth within existing programs in our four focus areas:
Federal IT Modernization, Defense Transformation, Homeland Defense, and Mission-Critical Outsourcing. We continue to focus primarily on opportunities for the Federal Government.

Cost of services. Cost of services include direct labor and other direct costs such as materials and subcontractor costs, incurred to provide our services and solutions to our customers. Generally, changes in costs of services are correlated to changes in revenue as resources are consumed in the production of that revenue. For the nine months ended September 27, 2008, cost of services increased 19.2% to $283.0 million from $237.5 million for the nine months ended September 29, 2007. This increase was attributable primarily to the increase in revenue. As a percentage of revenue, cost of services was 66.4% for the nine months ended September 27, 2008 as compared to 63.5% for the nine months ended September 29, 2007. The increase in cost of services, as a percentage of revenue, is due primarily to the Company increasing its use of subcontractors on programs for which we are acting as the prime contractor and higher costs during the quarter related to certain fixed price contracts.

Selling, general and administrative expenses. Selling, general and administrative expenses include facilities, selling, bid and proposal, indirect labor, fringe benefits and other discretionary costs. For the nine months ended September 27, 2008, indirect costs increased 11.8% to $114.3 million from $102.2 million for the nine months ended September 29, 2007. This $12.1 million increase was primarily attributable to the expected growth of support functions necessary to facilitate and administer the growth in direct costs, as well as the integration of LOGTEC, Inc. As a percentage of revenue, selling, general and administrative costs were 26.8% for the nine months ended September 27, 2008 as compared to 27.4% for the nine months ended September 29, 2007.

Depreciation and amortization.Depreciation and amortization includes the depreciation of computers, furniture and other equipment, the amortization of third party software we use internally, and the depreciation of leasehold improvements. For the nine months ended September 27, 2008, depreciation and amortization expense was $3.2 million, an increase of 28.0% compared to $2.5 million for the nine months ended September 29, 2007. As a percentage of revenue, depreciation and amortization expense was 0.8% for the nine months ended September 27, 2008 as compared to 0.7% for the nine months ended September 29, 2007.

Amortization of intangible assets. Amortization of intangible assets includes the amortization of intangible assets acquired in connection with acquisitions. 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 using an accelerated method over their estimated useful lives. For the nine months ended September 27, 2008, amortization of intangible assets was $3.3 million, compared to $2.9 million for the nine months ended September 29, 2007.
As a percentage of revenue, amortization of intangible assets was 0.8% for the nine months ended September 27, 2008 and September 29, 2007.

Income from operations. For the nine months ended September 27, 2008, income from operations decreased 21.5% to $22.3 million from $28.4 million for the nine . . .