UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2008
OR
   
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 0-23585.
(SM & A LOGO)
When You Must Win(SM&A LOGO)
SM&A
(Exact name of registrant as specified in its charter)
   
Delaware33-0080929

(State or other jurisdiction of incorporation or organization)		 33-0080929
(I.R.S. Employer Identification No.)
   
4695 MacArthur Court, 8th Floor, Newport Beach, California92660

(Address of principal executive offices)		 92660
(Zip Code)
(949) 975-1550
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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.
Yesþ     Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero               Accelerated filerþ                         Non-accelerated filero                         Smaller reporting companyo
                                        (Do not check if a smaller reporting company)
Large accelerated filer oAccelerated filer þNon-accelerated filer o
(Do not check if a smaller reporting company)		Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso     Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.0001 par value—18,813,82118,400,785 shares outstanding as of AprilJune 30, 2008
 
 

 

 

SM&A
INDEX
       
    Page 
PART I. FINANCIAL INFORMATION    
       
Cautionary Statement Related to Forward Looking StatementsItem 1.
Financial Statements:
Condensed Consolidated Balance Sheets  3 
  
How to Obtain SM&A SEC Filings3
Item 1.
Financial Statements:
Condensed Consolidated Balance SheetsStatements of Income
  4 
  
Condensed Consolidated Statements of IncomeCash Flows
  5 
  
Notes to Condensed Consolidated Financial Statements of Cash Flows
  6 
Notes to Condensed Consolidated Financial StatementsItem 2.
 7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  1210 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
  1413 
Item 4.
 
Controls and Procedures
  1413 
       
PART II. OTHER INFORMATION    
       
Item 1.
 
Legal Proceedings
  15 
Item 1A.
 
Risk Factors
  15 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
  15 
Item 3.
 
Defaults Upon Senior Securities
  15 
Item 4.
 
Submission of Matters to a Vote of Security Holders
15
Item 5.
Other Information  16 
Item 5.6.
 
Other InformationExhibits
  16
Item 6.
Exhibits
17 
       
Signatures  1918 
EXHIBIT 2.4
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32

2

CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, earnings, projected plans, performance, contract procurement, demand trends, future expense levels, trends in average headcount and gross margins, and the level of expected capital expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to SM&A (the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including without limitation statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of SM&A may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” at pages 12-14. Because of these and other factors that may affect SM&A’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that SM&A files from time to time with the Securities and Exchange Commission (“SEC”), including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
HOW TO OBTAIN SM&A SEC FILINGS
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.smawins.com as soon as reasonably practicable after filing such material with the SEC.

3

PART I –— FINANCIAL INFORMATION
Item 1. Financial Statements
SM&A
SM&A
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
                
 March 31, December 31,  June 30, December 31, 
 2008 2007  2008 2007 
 (unaudited)  (unaudited) 
ASSETS
 
Assets:
 
Current assets:  
Cash and cash equivalents $3,251 $5,422  $3,315 $5,422 
Investments 7,455 10,610  5,653 10,610 
Accounts receivable, net 22,373 18,171  24,056 18,171 
Prepaid expenses and other current assets 2,772 2,011  1,526 2,011 
          
Total current assets 35,851 36,214  34,550 36,214 
Fixed assets, net 3,306 3,399  3,318 3,399 
Goodwill 8,374 8,278  8,374 8,278 
Intangibles, net 1,781 1,892  1,670 1,892 
Other assets 1,369 895  1,890 895 
          
 $50,681 $50,678  $49,802 $50,678 
          
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Liabilities and Stockholders’ Equity:
 
Current liabilities:  
Accounts payable $2,156 $1,925  $2,331 $1,925 
Accrued compensation and related benefits 4,992 3,508  4,470 3,508 
Accrued contingent consideration — 1,750  — 1,750 
Other current liabilities 138 127  148 127 
          
Total current liabilities 7,286 7,310  6,949 7,310 
Other liabilities 748 785  711 785 
          
Total liabilities 8,034 8,095  7,660 8,095 
  
Commitments and contingencies  
  
Stockholders’ equity:  
Preferred stock — —  — — 
Common stock 2 2  2 2 
Additional paid-in capital 46,048 45,450  46,586 45,450 
Treasury stock  (2,540)  (1,506)  (4,595)  (1,506)
Accumulated deficit  (863)  (1,363)
Retained earnings (accumulated deficit) 149  (1,363)
          
Total stockholders’ equity 42,647 42,583  42,142 42,583 
          
 $50,681 $50,678  $49,802 $50,678 
          
See accompanying notes to condensed consolidated financial statements.

3

SM&A
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2008  2007  2008  2007 
Revenue $26,009  $25,568  $51,432  $49,192 
Cost of revenue  15,728   15,663   31,413   30,080 
             
Gross margin  10,281   9,905   20,019   19,112 
                 
Selling, general and administrative expenses  8,553   6,631   17,510   13,525 
             
Operating income  1,728   3,274   2,509   5,587 
                 
Interest income, net  22   78   117   221 
             
Income before income taxes  1,750   3,352   2,626   5,808 
                 
Income tax expense  738   1,349   1,114   2,354 
             
                 
Net income $1,012  $2,003  $1,512  $3,454 
             
                 
Earnings per share:                
Basic $0.05  $0.11  $0.08  $0.18 
Diluted $0.05  $0.11  $0.08  $0.18 
                 
Shares used in calculating earnings per share:                
Basic  18,603   18,787   18,797   18,698 
Diluted  18,698   18,964   18,901   18,882 
See accompanying notes to condensed consolidated financial statements.

4

SM&A
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS
(in thousands, except per share amounts)thousands)
(UNAUDITED)
         
  Three Months Ended 
  March 31, 
  2008  2007 
Revenue $25,423  $23,624 
Cost of revenue  15,685   14,417 
       
Gross margin  9,738   9,207 
         
Selling, general and administrative expenses  8,957   6,894 
       
Operating income  781   2,313 
         
Interest income, net  95   143 
       
Income before income taxes  876   2,456 
         
Income tax expense  376   1,005 
       
         
Net income $500  $1,451 
       
         
Net income per share:        
Basic $0.03  $0.08 
Diluted $0.03  $0.08 
         
Shares used in calculating net income per share:        
Basic  18,990   18,609 
Diluted  19,100   18,800 
         
  Six Months Ended 
  June 30, 
  2008  2007 
Cash flows from operating activities:        
Net income $1,512  $3,454 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  611   589 
Loss on disposal of assets  32   — 
Stock-based compensation expense  855   898 
Excess tax benefits from stock-based compensation  —   (118)
Deferred income taxes  (1,067)  (199)
Changes in operating assets and liabilities, net of business acquisitions:        
Accounts receivable  (5,885)  (7,096)
Prepaid expenses and other assets  557   46 
Accounts payable  406   238 
Accrued compensation and related benefits  962   784 
Other liabilities  (1,803)  (2)
       
Net cash used in operating activities  (3,820)  (1,406)
       
         
Cash flows from investing activities:        
Purchases of fixed assets  (340)  (729)
Purchases of marketable securities  (7,771)  (12,500)
Proceeds from sale of marketable securities  12,728   6,000 
Cost of acquisitions, net of cash acquired  (96)  (4,465)
       
Net cash provided by (used in) investing activities  4,521   (11,694)
       
         
Cash flows from financing activities:        
Proceeds from issuance of common stock  281   460 
Excess tax benefits from stock-based compensation  —   118 
Payment for repurchase of shares  (3,089)  (842)
       
Net cash used in financing activities  (2,808)  (264)
       
         
Net decrease in cash and cash equivalents from continued operations  (2,107)  (13,364)
Net cash used in discontinued operations by operating activities  —   (42)
       
Net decrease in cash and cash equivalents  (2,107)  (13,406)
Cash and cash equivalents at beginning of period  5,422   15,143 
       
Cash and cash equivalents at end of period $3,315  $1,737 
       
         
Supplemental information—cash paid for:        
Income taxes $1,696  $2,135 
         
Supplemental disclosure of non-cash transactions:        
Common stock issued for an acquisition $—  $2,213 
Common stock issued to an employee $—  $50 
Common stock issued to non-employee directors $39  $— 
See accompanying notes to condensed consolidated financial statements.

5

SM&A
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
         
  Three Months Ended 
  March 31, 
  2008  2007 
CASH FLOWS FROM OPERATING ACTIVITIES:
        
Net income $500  $1,451 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  289   274 
Loss on disposal of assets  32   — 
Stock-based compensation expense  421   400 
Deferred income taxes  (489)  (49)
Changes in operating assets and liabilities, net of business acquisitions:        
Accounts receivable  (4,202)  (7,877)
Prepaid expenses and other assets  (746)  (64)
Accounts payable  231   432 
Accrued compensation and related benefits  1,484   2,749 
Other liabilities  (1,776)  (2)
       
Net cash used in operating activities  (4,256)  (2,686)
       
         
CASH FLOWS FROM INVESTING ACTIVITIES:
        
Purchases of fixed assets  (117)  (402)
Purchases of marketable securities  (3,355)  (6,000)
Proceeds from sale of marketable securities  6,510   2,000 
Cost of acquisitions, net of cash acquired  (96)  (2,674)
       
Net cash provided by (used in) investing activities  2,942   (7,076)
       
         
CASH FLOWS FROM FINANCING ACTIVITIES:
        
Proceeds from issuance of common stock  177   148 
Payment for repurchase of shares  (1,034)  (842)
       
Net cash used in financing activities  (857)  (694)
       
 
Net decrease in cash and cash equivalents from continued operations  (2,171)  (10,456)
Net cash used in discontinued operations by operating activities  —   (42)
       
Net decrease in cash and cash equivalents  (2,171)  (10,498)
Cash and cash equivalents at beginning of period  5,422   15,143 
       
Cash and cash equivalents at end of period $3,251  $4,645 
       
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
        
Common stock issued for an acquisition $—  $2,213 
Common stock issued to non-employee directors $39  $— 
See accompanying notes to condensed consolidated financial statements.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended March 31,June 30, 2008 and 2007
(UNAUDITED)
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited; such financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of SM&A at March 31,June 30, 2008, the consolidated results of operations for the three and six months ended March 31,June 30, 2008 and 2007, and cash flows for the threesix months ended March 31,June 30, 2008 and 2007, respectively. Comprehensive income is equivalent to net income for the three and six month periods ended March 31,June 30, 2008 and 2007, respectively.
Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended March 31,June 30, 2008 are not necessarily indicative of the results to be expected for the full fiscal year.
The accompanying unaudited condensed consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2007, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2008.
Recent Accounting Pronouncements
In MarchMay 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161,162, “Disclosures about Derivative Instruments and Hedging Activities, an amendmentThe Hierarchy of FASB Statement No. 133,Generally Accepted Accounting Principles.” which requires additional disclosures about the objectivesThe purpose of the derivative instruments and hedging activites,new standard is to provide a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. Previous guidance did not properly rank the method of accounting for such instruments under SFAS 133 and its related interpretations, and a tabular disclosureliterature. The new standard is effective 60 days following the SEC’s approval of the effectsPublic Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective for us beginning January 1, 2009. Present Fairly in Conformity With Generally Accepted Accounting Principles.”The adoption of SFAS 161162 is not expected to have a material impact on our financial position, results of operations or cash flows.
          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued proposed FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB Statement No. 157,” which defers the effective date for adoption of fair value measurements for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as noted in proposed FSP No. 157-2.  The adoption of SFAS No. 157 did not have a material impacteffect on the Company’s financial position, results of operations or cash flows.statements.
Note 2. Net IncomeEarnings Per Share
The following table illustrates the number of shares used in the computation of basic and diluted net incomeearnings per share (in thousands)(“EPS”):
         
  Three Months Ended
  March 31,
  2008 2007
Denominator for basic income per common share:        
Weighted-average shares outstanding during the period  18,990   18,609 
Incremental shares attributable to dilutive outstanding stock options  110   191 
         
Denominator for diluted income per share  19,100   18,800 
         
Anti-dilutive shares excluded from the foregoing reconciliation  2,136   1,329 
         
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(in thousands, except per share amounts) 2008  2007  2008  2007 
Numerator:                
Net income $1,012  $2,003  $1,512  $3,454 
Denominator:                
Weighted average shares outstanding  18,603   18,787   18,797   18,698 
Effect of dilutive outstanding stock options  95   177   104   184 
             
Denominator for diluted income per share  18,698   18,964   18,901   18,882 
             
Basic earnings per share $0.05  $0.11  $0.08  $0.18 
             
Dilutive earnings per share $0.05  $0.11  $0.08  $0.18 
             
                 
Anti-dilutive shares excluded from the foregoing reconciliation  2,303   1,149   2,289   1,493 
             

7

Note 3. Investments in Marketable Securities
During the threesix months ended March 31,June 30, 2008, the Company purchased additional short-term state issued variable rate demand note securities for $3.4$7.8 million and sold $6.5$12.7 million of its marketable securities for investmentoperating activities. There were no unrealized gains or losses at March 31,June 30, 2008. For the three and six months ended March 31,June 30, 2008 and 2007, our interest income on these investments was approximately $64,000$24,000, $88,000, $32,000 and $32,000,$74,000, respectively.

6

Note 4. Stock-Based Compensation
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and six months ended March 31,June 30, 2008 and 2007:
                        
 Three Months Ended Three Months Ended Six Months Ended
 March 31, June 30, June 30,
 2008 2007 2008 2007 2008 2007
Expected life (in years) 2.6 3.8 
Stock price volatility  34.0%  78.6%  39.1%  42.0%  35.1%  67.2%
Risk-free interest rate  2.5%  4.9%  2.8%  4.5%  2.6%  4.8%
Expected life (in years) 4.8 3.7 3.1 3.8 
Forfeiture rate  10.6%  9.8%  10.0%  9.1%  10.5%  9.5%
Stock dividend yield N/A N/A  N/A N/A N/A N/A 
Weighted-average fair value per option granted $1.36 $3.67  $1.58 $2.68 $1.41 $3.36 
The following table summarizes stock option activity for the threesix months ended March 31,June 30, 2008:
                                
     Weighted-    Weighted- Weighted-Average Aggregate 
   Weighted- Average Aggregate  Average Fair Value of Intrinsic 
 Average Fair Value of Intrinsic 
 Shares Exercise Price Options Granted Value 
  
Activity Shares Exercise Price Options Granted Value 
Outstanding at December 31, 2007 2,272,448 $7.43  2,272,448 $7.43 
Granted 450,428 5.58 $1.36  572,428 5.37 $1.41 
Exercised — —  — — 
Cancelled, Forfeited or Expired  (135,750) 8.19   (204,050) 7.65 
            
Outstanding at March 31, 2008 2,587,126 7.07 $361,000 
Outstanding at June 30, 2008 2,640,826 6.97 $489,000 
              
Exercisable at March 31, 2008 1,298,676 $7.70 $361,000 
Exercisable at June 30, 2008 1,358,926 $7.67 $465,000 
              
The total intrinsic value of options exercised during the threesix months ended March 31,June 30, 2008 and 2007 was $0 and $18,000,$439,000, respectively.
The Company recorded $421,000$434,000, $855,000, $448,000 and $400,000$848,000 in stock-based compensation expense before income tax benefit for stock options in its results of operations for the three and six months ended March 31,June 30, 2008 and 2007, respectively. As of March 31,June 30, 2008, there was $3.1$2.8 million of total unrecognized compensation cost related to unvested awards which willnon-vested stock options is expected to be amortized to expenserecognized over thea weighted-average period of 2.5approximately 2.4 years.
The Company received $0 and $30,000$236,000 in cash from option exercises during the threesix months ended March 31,June 30, 2008 and 2007, respectively. The Company received $138,000$241,000 and $118,000$223,000 from the purchase of shares under the employee stock purchase plan (“ESPP”) during the threesix months ended March 31,June 30, 2008 and 2007, respectively. Upon the exercise of options and stock purchase shares granted under the ESPP, the Company issues new common stock from its authorized shares.
Note 5. Acquisitions
Project Planning, Incorporated.
On February 9, 2007, the Company completed an acquisition of Project Planning, Incorporated.Incorporated (“PPI”) pursuant to a Stock Purchase Agreement, as amended. As part of the agreement, as amended, the Company could pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals. As of March 31,June 30, 2008, the selling shareholder of PPI earned approximately $3.7$4.3 million of the remaining cash portion of the purchase price, of which $876,000$733,000 and $1.6 million was recorded as a selling, general and administrative expense during the three and six months ended March 31, 2008.

8

Performance Management Associates, Inc.June 30, 2008, respectively.
On September 14, 2007, the Company completed an acquisition of Performance Management Associates, Inc. (“PMA”) pursuant to a Stock Purchase Agreement, as amended. As part of the agreement, as amended, the Company could pay up to an additional $1.3 million over a three year period upon satisfaction of certain revenue goals. If earned, the additional payment will be allocated to goodwill. No amount was earned as of March 31,June 30, 2008.
Unaudited Pro Forma Financial Information
The pro forma combined results set forth below are not necessarily indicative of the results that actually would have occurred if the acquisitions had been completed as of the beginning of 2007, nor are they necessarily indicative of future consolidated results.

7

The following presents the unaudited pro forma combined results of operations of the Company with the acquisitions.acquisitions:
            
 Three Months
Ended		 Three Months Ended Six Months Ended
(in thousands, except for share information) March 31, 2007
(in thousands, except per share amounts) June 30, 2007 June 30, 2007
Revenue $25,509  $27,097 $52,606 
Net income $1,445  $1,986 $3,431 
Pro forma net income per common share: 
Pro forma earnings per share: 
Basic $0.08  $0.11 $0.18 
Diluted $0.08  $0.10 $0.18 
Note 6. Intangible Assets and Goodwill
Intangible Assets
The Company recorded amortization expense related to the acquired amortizable intangibles of $111,000, $222,000, $50,000 and $27,000$77,000 during the three and six months ended March 31,June 30, 2008 and 2007, respectively.
Goodwill
The Company recorded $96,000 of additional goodwill related to the PPI earn-out provision during the threesix months ended March 31,June 30, 2008.
Note 7. Income Taxes
Our effective income tax rates for the three and six months ended March 31,June 30, 2008 and 2007 were 42.9%42.2%, 42.4%, 40.2% and 40.9%40.5%, respectively. The increase in the income tax rate for the three and six months ended March 31,June 30, 2008 was related toincreased over the costsame periods of the prior year as the Company could not recognize the full benefit of stock-based compensation andexpense until the related options are exersied with a disqualifying disposition. The corresponding increase in deferred taxes is primarily due to the timing of recognizing the related tax benefits.
Note 8. Credit Facility
The Company has a revolving credit agreement which allows for unsecured borrowings up to $10.0 million at the Company’s option of prime rate minus one half of one percent (-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) per annum. The revolving credit agreement is renewable annually on May 1st of each year. Borrowings under the revolving credit agreement are unsecured. The agreement requires the Company to comply with certain financial covenants pertaining to its tangible net worth, ratio of total liabilities to tangible net worth, and ratio of current assets to current liabilitiesnegative covenants (as defined in the agreement). The agreement also contains certain negative covenants which, among other things, restrict the Company’s ability to incur additional indebtedness of more than $1.0 million in excess of the $10.0 million limit set forth in the credit agreement and make capital expenditures in excess of $3.0 million without the prior written approval of the lender. On May 1, 2008 the credit line was renewed and the financial institution required the following provision; in the event of default whereby the individuals who, as the date of the agreement, constitute the Company’s Board of Directors; (the incumbent Board) cease for any reason to constitute at least 75 percent of the Board of Directors; provided, however, that any individual who becomes a director subsequent to the date of this agreement whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board.on May 1, 2008. At March 31,June 30, 2008, the Company was in compliance with its covenants and had no outstanding borrowings under the line of credit and $10.0 million was available.

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Note 9. Stockholders’ Equity
The Company’s Board of Directors (“Board”) has previously authorized a plan to repurchase up to $30.0 million of the Company’s common stock. For the threesix months ended March 31,June 30, 2008 and 2007, the Company repurchased 241,200654,236 shares at a total cost of $1.0$3.1 million and 139,417 shares at a total cost of $842,000, respectively. Since the inception of the share repurchase plan, the Company has repurchased 3,596,0604,009,096 shares at a total cost of $25.2$27.3 million. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The share repurchase plan may be suspended or discontinued at any time. The Company currently has approximately $4.8$2.7 million remaining in share repurchase authorization.
The Company’s stockholders equity activity for the threesix months ended March 31,June 30, 2008 is presented below:
                    
 Common       
 Stock and                           
 Additional        Common Stock and Retained Earnings   
 Common Paid-In Treasury Accumulated Stockholders’  Common Additional Paid-In Treasury (Accumulated Stockholders’ 
(in thousands, except share data) Shares Capital Stock Deficit Equity  Shares Capital Stock Deficit) Equity 
Balances at December 31, 2007 18,998,110 $45,452 $(1,506) $(1,363) $42,583  18,998,110 $45,452 $(1,506) $(1,363) $42,583 
Proceeds from the issuance of common stock 31,911 177 — — 177  56,911 281 — — 281 
Stock-based compensation expense — 421 — — 421 
Stock-based compensation expense. — 855 — — 855 
Repurchased treasury shares  (241,200) —  (1,034) —  (1,034)  (654,236) —  (3,089) —  (3,089)
Net income — — — 500 500  — — — 1,512 1,512 
                      
Balances at March 31, 2008 18,788,821 $46,050 $(2,540) $(863) $42,647 
Balances at June 30, 2008 18,400,785 $46,588 $(4,595) $149 $42,142 
                      
In 2007, the Company’s Compensation Committee approved the Executive Incentive Plan (the “Plan”) which includes a long-term incentive based compensation component titled Long Term Incentive Plan (“LTIP”). This Plan is designed to drive behavior to reach revenue, net income, and earnings per share targets established by the Compensation Committee. The LTIP will reward sustained performance over a three-year period that substantially increases shareholder value and will cover the calendar period 2008 through 2010. The Compensation Committee intends to issue performance stock on an annual basis with successive three-year performance

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periods. The criteria in the LTIP will be the achievement of $0.79 earnings per share (“EPS”),EPS, over a twelve month period, on or before December 31, 2010. If the $0.79 EPS is met prior to December 31, 2010, the performance stock will be issued within 30 days of reaching the maximum target. Determination that the EPS target has been achieved will be by Audit Committee of the Board. If the criteria are not met by December 31, 2010, the number of shares granted will be determined in accordance with a predetermined sliding scale. EPS performance below $0.54 a share will receive no award. There was no expense recorded as of March 31,June 30, 2008.
Note 10. CommitmentCommitments and Contingencies
From time to time, the Company may be involved in legal proceedings and claims that arise in the ordinary course of business. The Company is currently unaware of any legal proceedings or claims against it that management believes will have, individually or in the aggregate, a materially adverse effect on its business, financial condition or operating results.
The Company has entered into employment agreements with its President and Chief Executive Officer and its Chief Financial Officer and into benefit agreements with other executives of the Company (collectively “Agreements”). Under the terms of each of the Agreements, the Company may be obligated to pay a severance payment ranging from three months to one year of the respective employee’s base salary, depending on the date of termination, if the employment is terminated by the Company without cause. In addition, the Agreements have change of control provisions that may require the Company to pay up to eighteen months of current annual base salary, target bonus and health and life insurance benefits.
The Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of March 31,June 30, 2008.
          The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is recommending to replace four independent incumbent directors.  The Board of Directors of SM&A are opposed to the slate of directors presented by Mr. Myers.

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This on-going proxy contest has demanded management time and corporate resources diverting focus from core business activities.  In addition, SM&A has retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fee not to exceed $200,000, plus reimbursement of out-of-pocket expenses. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election are estimated to be approximately $500,000, of which approximately $60,000 has been spent as of March 31, 2008. The cost of the Company’s solicitation of proxies will be borne by the Company.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this report and the documents incorporated by reference herein. Any statements (including without limitation statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of SM&A may vary materially from those expected or anticipated in these forward-looking statements. The information incorporated by reference under the heading “Risk Factors” in this report provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Because of these and other factors that may affect SM&A’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that SM&A files from time to time with the Securities and Exchange Commission, or SEC, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
How to Obtain SM&A SEC Filings
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.smawins.com as soon as reasonably practicable after filing such material with the SEC.
Our Company
We support our clients by providing a full array of services that adds to our clients’ top line revenue through the more effective management of their proposals and/or improves their bottom line earnings by applying technical and management leadership to their awarded programs. While the Company operates in one business segment, our business strategy is to classify the world’s leading provider of services we offer under the following two categories:
Competition Management (business captureconsulting services that provide project leadership to help our clients strategically position themselves, identify business opportunities, and proposal development)formulate and prepare competitive bids; and
Program Servicesconsulting services that assist our clients in keeping their programs on schedule and a leading providerunder budget while increasing their probability of Program Services (post-award risk mitigation and profit maximizing) services. successful program delivery.
Under these two service lines, our approximately 400 employees and consultants provide strategy, proposal management, program management, systems engineering, program planning, and other high-value technical support to major industrial customers in the defense, healthcare, homeland security, aerospace, systems integration/information technology, healthcare and engineering sectors.

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Results of Operations
Three and Six Months Ended March 31,June 30, 2008 Compared to Three Months Ended March 31,and 2007
The following table sets forth certain historicalsummarizes operating results (in millions):results:
                                                
 Three Months Ended March 31, Three Months Ended Six Months Ended 
 2008 2007 Change June 30, June 30, 
 $ % $ % $ %
(in millions) 2008 2007 Change 2008 2007 Change 
Revenue 25.4 100.0 23.6 100.0 1.8 7.6  $26.0 $25.6  1.6% $51.4 $49.2  4.5%
Cost of revenue 15.7 61.7 14.4 61.0 1.3 9.0  15.7 15.7 0.0 31.4 30.1 4.3 
                
Gross margin 9.7 38.3 9.2 39.0 0.5 5.4  10.3 9.9 4.0 20.0 19.1 4.7 
Selling, general and administrative expenses 9.0 35.4 6.9 29.2 2.1 30.4  8.6 6.6 30.3 17.5 13.5 29.6 
                
Operating income 0.8 3.1 2.3 9.7  (1.5)  (65.2) 1.7 3.3  (48.5) 2.5 5.6  (55.4)
Interest income, net 0.1 0.4 0.1 0.4 — 0.0  0.0 0.1  (100.0) 0.1 0.2  (50.0)
Income tax expense 0.4 1.6 1.0 4.2  (0.6)  (60.0) 0.7 1.3  (46.2) 1.1 2.4  (54.2)
                
Net income 0.5 2.0 1.4 5.9  (0.9)  (64.3) $1.0 $2.0  (50.0)% $1.5 $3.5  (57.1)%
                
Revenue.RevenueRevenue increased $1.8 million, or 7.6%, to $25.4 million for the three months ended March 31, 2008 compared to $23.6 million for the same period of the prior year. The acquisitions completed in fiscal 2007 contributed approximately $3.8 million or 15% of total revenue for the three months ended March 31, 2008.
The following table is provided to display our revenue resultspresents selected financial information compared to the same period of the prior year.year:
                                    
 Three Months Ended March 31,  Three Months Ended June 30, Six Months Ended June 30, 
(in millions) 2008 2007 % Growth  2008 2007 Change 2008 2007 Change 
Revenues by Market Vertical
  
Aerospace and Defense (A&D) $19.5 $19.9  (2%)
Non Aerospace and Defense (SIIT) 5.9 3.7 60 
Aerospace and defense $21.0 $20.1  4.5% $40.5 $40.0  1.3%
Non-aerospace and defense 5.0 5.5  (9.1) 10.9 9.2 18.5 
                
Total $25.4 $23.6  8% $26.0 $25.6  1.6% $51.4 $49.2  4.5%
                
  
Revenues by Service Line
  
Competition Management $13.3 $14.4  (8%) $10.8 $14.9  (27.5)% $24.1 $29.3  (17.7)%
Program Services 12.1 9.2 32  15.2 10.7 42.1 27.3 19.9 37.2 
                
Total $25.4 $23.6  8% $26.0 $25.6  1.6% $51.4 $49.2  4.5%
                
          Total aerospace and defense client revenue was slightly downRevenue increased 1.6% or $0.4 million to $19.5$26.0 million for the three months ended March 31,June 30, 2008 compared to the same period of the prior year, and increased 4.5% or $2.2 million to $51.4 million for the six months ended June 30, 2008 compared to the same period of the prior year. We attribute these revenue trends to the execution on our corporate strategy to diversify our services and solutions across our clients’ program life cycle.
Total aerospace and defense (“A&D”) client revenue was up slightly to $21.0 million and $40.5 million for the three and six months ended June 30, 2008 as compared to $19.9$20.1 million and $40.0 million compared to the same periods in 2007. A&D revenues in the prior year. Non-aerospace and defensesecond quarter of 2008 were the highest in the history of the company. Non-A&D client revenues increased 60%decreased 9.1% to $5.9$5.0 million from $3.7$5.5 million for the three months ended March 31,June 30, 2008 and 2007, respectively. The Company is building momentumrespectively, but increased 18.5% to $10.9 million for the six months ended June 30, 2008 compared to $9.2 million for the same period in the Program Services business in the non-A&D market, as well as in its Competition Management business. The further diversification of revenues is attributable to the Company’s ongoing efforts to more fully implement its strategic business plan.2007.
Revenues from our Competition Management and Program Services service lines were 52.4%41.5% and 47.6%,58.5% of total revenues, respectively, for the three months ended March 31,June 30, 2008 as compared to 61.0%58.2% and 39.0%41.8% in 2007. While the level of activity within Competition Management was solid inDuring the first quarter, there were fewer large Federalhalf of 2008, the competitive procurement opportunities that were released were generally smaller in the first quarter of 2008 assize compared to the first quarterhalf of 2007. LargeThis attribute is generally expected in election years when a change of administration is expected. Larger Federal procurement opportunities have the tendency to drive higher revenue levels due to the larger and more complex proposals that are required. Large Federal procurement opportunities trends have been variable and have traditionally contributed to inconsistent Competition Management revenue within SM&A. We recorded successSuccess fees of $226,000 and $0 for the three and six months ended March 31,June 30, 2008 were $0 and 2007,$226,000 compared to $118,000 and $118,000 for the same periods of the prior year, respectively.
           During 2008, ourThe Company has continued its Program Services revenue has been positively impactedmomentum by the acquisitionsaddition of Project Planning, Inc. (“PPI”)acquired planning and Performance Management Associates, Inc. (“PMA”) in 2007.scheduling and earned-value management systems service revenues. These acquisitions, along with our solution offerings, have generated consistent sequential quarterly Program Services revenue growth. Our growth has also been generated by

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Gross Margin
The following table presents our Account Executives’ abilitygross margin results compared to build valued long term relationships with our clients. Our clients repeatedly engage us for our services as they understand how valuable we are in helping them pursue, win and profitably perform on their competitive procurement projects.the same period of the prior year:
Gross Margin.
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
(in millions) 2008  2007  2008  2007 
Revenue $26.0  $25.6  $51.4  $49.2 
Cost of revenue  15.7   15.7   31.4   30.1 
             
Gross margin $10.3  $9.9  $20.0  $19.1 
             
Gross margin percentage  39.6%  38.7%  38.9%  38.9%
             
Gross margin increased $0.5$0.4 million, or 5.4%4.0%, to $9.7$10.3 million for the three months ended March 31,June 30, 2008 compared to $9.2$9.9 million for the same period of the prior year. The increaseyear, and increased $0.9 million, or 4.7%, to $20.0 million for the six months ended June 30, 2008 compared to $19.1 million for the same period in gross margin dollars is due to the increase in sales as discussed above offset by a decrease in gross margin as a percentage of revenue.2007. As a percentage of revenue, gross margin decreasedincreased to 38.3%39.6% and 38.9% for the three and six months ended March 31, 2007June 30, 2008 compared to 39.0%38.7% and 38.9% for the same

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period of the prior year.2007. The declineCompany’s continuous efforts to improve margins, was due to revenue mix andoffset by pricing structures offered to some of our largest customers,clients, which included $66,000 and $189,000 for the three and six months ended June 30, 2008, respectively, of financial investments on key client investments of $122,000proposals to secure futurefollow-on services. We recorded success fees of $226,000 and $118,000 for the six months ended June 30, 2008 and 2007, respectively. We expect the gross margins to be approximatelyapproximate 39.5% for fiscal year 2008.
Selling, General and Administrative Expenses.Selling, general and administrative expensesExpenses (“SG&A”)
SG&A consist principally of salary and benefit costs for executive, sales and administrative personnel, stock-based compensation, depreciation and amortization, training and recruiting, professional services and other general corporate activities. SG&A expenditures increased $2.1$2.0 million or 30.4%30.3% and $4.0 million or 29.6%, to $9.0 millionrespectively, for the three and six months ended March 31,June 30, 2008 compared to $6.9 million for the same period of the prior year. Included inThese increases are due primarily to higher stock-based compensation expense, the SG&A increase was an earn-out amount earned byCompany’s expansion thru acquisitions and the principal of PPI of $876,000, $1.1 million attributable torelated earn-outs, the Company’s offsite training conference held in March 2008 and approximately $60,000 of legalprofessional fees related to the recent proxy contest, as of March 31, 2008. Stock-based compensation includedoffset by the expenditures related to the changes in SG&A was $421,000management incurred in 2007 including the retirement payment to the Company’s former Chairman and $400,000 for the three months ended March 31, 2008 and 2007, respectively.Chief Executive Officer.
          On March 31, 2007, the Company’sThe former Chairman and Chief Executive Officer Steven S. Myers, retiredof SM&A solicited stockholders to vote for a dissident slate of four directors he recommended replacing four independent incumbent directors. We settled the contest in May 2008, prior to our annual meeting of stockholders. This contest demanded management’s time and on April 1, 2007,corporate resources diverting focus from core business activities. SM&A retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fixed fee. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election were approximately $880,000, of which $820,000 and $880,000 was replaced by Cynthia Davis as Chief Executive Officer, who resigned in July 2007 and was replaced by Cathy McCarthy as President and Chief Executive Officer. The expense associated with Mr. Myers transition to Ms. Davis, which includes a retirement payment of $500,000 and legal and professional fees of approximately $200,000, are included in SG&A forexpensed during the three and six months ended March 31, 2007.June 30, 2008, respectively.
The following table is provided to displaypresents our SG&A results segregating these areas of cost for comparison purposes:
                                    
For the three months ended March 31,       
 Three Months Ended June 30, Six Months Ended June 30, 
(in millions) 2008 2007 % Growth  2008 2007 Change 2008 2007 Change 
SG&A before the segregated expenses below $5.7 $5.5  4% $5.5 $5.7  (3.5)% $10.5 $11.2  (6.2)%
Stock-based compensation 0.4 0.4 0  0.4 0.4 0.0 0.9 0.8 12.5 
PPI and PMA SG&A 0.9 0.3 200  1.1 0.4 175.0 2.0 0.7 185.7 
Strategic Advisors SG&A 0.1 — 100.0 0.5 — 100.0 
Earn-out amount earned by the principal of PPI 0.9 — 100  0.7 — 100.0 1.6 — 100.0 
Company-wide offsite training conference fees 1.1 — 100 
Management transition expenses — 0.7  (100)
Proxy contest expenses 0.8 — 100.0 0.9 — 100.0 
Company-wide offsite training conference fees. — — N/A 1.1 — 100.0 
Management transition related expenses — 0.1  (100.0) — 0.8  (100.0)
                
Total SG&A $9.0 $6.9  30% $8.6 $6.6  30.3% $17.5 $13.5  29.6%
                
Excluding the anticipated expenses including, stock-based compensation, acquisitionsitems detailed above, SG&A earn-out expenses, fees associated with our Company-wide offsite training conference, and management transition expenses; SG&A was held primarily constant by slightly increasing $0.2 million or 4% over the prior year and as a percentage of revenue decreased to 22%21.2% and 20.4% for the three and six months ended March 31,June 30, 2008, asrespectively, over the comparable period of 2007.

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Operating Income
Operating income decreased $1.6 million or 48.5% to $1.7 million and $3.1 million or 55.4% to $2.5 million for the three and six months ended June 30, 2008 compared to 23% for the same period of the prior year.
Operating Income. Operating income decreased $1.5 million, or 65.2% to $0.8 million for the three months ended March 31, 2008, compared to $2.3 million for the same period of the prior year.2007. As a percentage of revenue, operating income decreased to 3.1%6.5% and 4.9% for the three and six months ended March 31,June 30, 2008 as compared to 9.7% for the same period of the prior year. Operating income primarily decreased due to the increase in SG&A offset by an increase in sales and gross profit, asexpenditures discussed above.
Income Tax Expense.
Our effective income tax rates for the three and six months ended March 31,June 30, 2008 and 2007 were 42.9%42.2%, 42.4%, 40.2% and 40.9%40.5%, respectively. The increase in the income tax rate for the three and six months ended March 31,June 30, 2008 was related toincreased over the costsame periods of the prior year as the Company could not recognize the full benefit of stock-based compensation andexpense until the related options are exercised with a disqualifying disposition. The corresponding increase in deferred taxes is primarily due to the timing of recognizing the related tax benefits. We estimate the tax rate for the full year 2008 will be approximately 42 percent.
Liquidity and Capital Resources
The following table presents selected financial information and Liquidity
statistics for each of the periods ended presented:
          Our working capital decreased to $28.6
         
(in thousands) June 30, 2008 December 31, 2007
Cash, cash equivalents, and short-term investments  8,968   16,032 
Accounts receivable, net  24,056   18,171 
Prepaid expenses and other current assets  1,526   2,011 
Working capital  27,601   28,904 
As of June 30, 2008, the Company had $9.0 million at March 31, 2008 from $28.9 million at December 31, 2007. Cash andin cash, cash equivalents, plusand short-term investments, decreased to $10.7 million at March 31, 2008,a decrease from $16.0 million at December 31, 2007. The principal components of this net decrease were cash used in cashoperating activities of $3.8 million, including the increase in the number of day’s sales outstanding (“DSO”) to 84 days from 69 days at June 30, 2008 and cash equivalents plus investments was primarily due toDecember 31, 2007, respectively, the $3.6 million payment on the earn-out amount earned by the principal of PPI the share buyback activity in which the Company repurchased $1.0 million of common shares during the three months ended March 31, 2008, which approximated the daily maximum volume limit under SEC rules during the quarter, and approximately $500,000$900,000 of expenses paid on the total $1.1 million of fees related to the Company’s offsite training event, and the cash used in financing activities for the share buyback activity in which the Company repurchased $3.1 million of common shares during the six months ended June 30, 2008, which approximated the daily maximum volume limit under SEC rules during the quarter. The cash used for these expenditures was partially offset by the increase inproceeds from the numbersale of day’s sales outstanding (“DSO”) to 80 days from 69 days at March 31, 2008 and December 31, 2007, respectively.marketable securities. The increase in DSO’s at March 31,June 30, 2008, was primarilyattributed to the $2.8 million increase in unbilled revenues at June 30, 2008 from December 31, 2007 due to approximately $2.0 millionthe cut-off of the $4.5 millionbilling cycle at period end. Excluding the unbilled portion of unbilled revenue, included in net accounts receivable, related to accrued

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revenue on fixed price agreements, where the clients will be invoiced upon the passing of time, and other isolated projects. Excluding these accruals, our DSO’s are at our historical average of 74 days. We expect to reduce our DSO’s to a level at or below our historical average of 74 days before the end of this fiscal year.
We plan to use approximately $400,000 of cash on hand to implement additional modules and functionality to our existing Enterprise Resource Planning Software during the balance of fiscal year 2008.
We believe we have sufficient working capital available under the line of credit and that cash generated by continuing operations will be sufficient to fund operations for at least the next twelve months.
          The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is recommending to replace four independent incumbent directors.  The Board of Directors of SM&A are opposed to the slate of directors presented by Mr. Myers.  This on-going proxy contest has demanded management time and corporate resources diverting focus from core business activities.  In addition, SM&A has retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fee not to exceed $200,000, plus reimbursement of out-of-pocket expenses. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election are estimated to be approximately $500,000, of which approximately $60,000 has been spent as of March 31, 2008. The cost of the Company’s solicitation of proxies will be borne by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently has no instruments that are sensitive to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the requisite time periods.

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While the Company’s disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well designed and administered.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II –— OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in ordinary routine litigation incidental to the conduct of our business. There are currently no material pending legal proceedings to which we are a party or of which any of our property is the subject.
Item 1A. Risk Factors
Principal stockholder has significant control and has initiated a proxy contest forThere have been no material changes to the election of directors.
          As of April 30, 2008, Steven S. Myers, our former Chief Executive Officer and Chairman of the Board, beneficially owned or controlled approximately 16%risk factors disclosed in Item 1A. to Part I of our outstanding common stock and will have the ability to control or significantly influence the election of directors and the results of other matters submitted to a vote of stockholders. This concentration of ownership may have the effect of delaying or preventing a change in control and may adversely affect the ability of other holders of our common stock to pass stockholder resolutions and control our actions.
          As previously announced by Mr. Myers and by the Company, Mr. Myers has provided notice that he intends to nominate his own slate of four nominees for election as directors at our annual meeting of our stockholders. Mr. Myers has solicited proxies for this purpose for use at our annual meeting of our stockholders.
          Mr. Myers’ actions in this regard have resulted in the Company incurring significant legal and other advisory expenses. Mr. Myers’ continued actions, and the Company’s responses to those actions, may:
•further divert the attention of our Board of Directors and management from the conduct of the Company’s business and enhancing stockholder value,
•cause competitors to negatively use his filings against us in sales proposals,
•cause employees to seek other employment outside the Company,
•cause current customers to look for alternative vendors,
•disrupt any strategic initiatives or transactions in which the Company is involved,
•expose the Company to litigation, and
•cause the Company to incur additional significant legal, advisory and other expenses.
          Accordingly, the continuation of Mr. Myers’ activities could materially and adversely affect our business, operating results and financial condition.2007 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
          InformationThe following table provides information about securities purchased during the three months ended June 30, 2008 under the Company’s share repurchase program is incorporated by reference to Note 9 to the condensed consolidated financial statements.program.
                 
              (d) Approximate
          (c) Total number dollar value of
  (a) Total (b) of shares shares that may
  number of Average purchased as part yet be purchased
  shares price paid of a publicly under the plan
Period purchased per share announced plan (in thousands)
 
Beginning balance at January 1, 2008  3,354,860  $7.21   3,354,860  $5,797 
January 2008  —   —   —   — 
February 2008  —   —   —   — 
March 2008  241,200   4.29   3,596,060   4,763 
   
Total as of March 31, 2008  3,596,060  $7.02   3,596,060  $4,763 
   
                 
              Approximate Dollar 
              Value of Shares 
          Total Number of  That May Yet Be 
          Shares Purchased as  Purchased Under the 
  Total Number of  Average Price Paid  Part of a Publicly  Plan (in thousands) 
Period Shares Purchased  Per Share  Announced Plan (1)  (2) 
April 2008  —   —   —  $4,763 
May 2008  413,036  $4.97   413,036   2,709 
June 2008.  —   —   —   2,709 
             
Total
  413,036  $4.97   413,036  $2,709 
             
(1)We repurchased a total of 413,036 shares of our common stock during the quarter ended June 30, 2008 under a share repurchase program that we announced in May 2004.
(2)Our Board of Directors has approved a share repurchase program for the repurchase of up to $30 million of our common stock from time-to-time. Under the program, management has discretion to determine the number and price of the shares to be repurchased, and the timing of any repurchases in compliance with applicable law and regulation.
Item 3. Defaults Upon Senior Securities
Not Applicable.

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Item 4. Submission of Matters to a Vote of Security Holders
          Not Applicable.
(a)Our Annual Meeting of Shareholders was held on May 23, 2008.
(b)In the election, nine nominees of the Board of Directors were elected for one-year terms expiring on the date of the annual meeting in 2009. The votes were as follows:
         
  For  Abstain 
William C. Bowes  14,564,300   18,118 
Dwight L. Hanger  14,563,952   18,466 
J. Christopher Lewis  14,563,750   18,668 
Cathy McCarthy  14,563,952   18,466 
Peter Pace  14,563,902   18,516 
Joseph B. Reagan  14,564,300   18,118 
Robert Rodin  14,563,952   18,466 
John P. Stenbit  14,564,102   18,316 
Robert J. Untracht  14,564,102   18,316 

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(c)The results of voting on Proposals 2 through 3 (as numbered in the 2008 Proxy Statement) were as follows:
2.Approval of Amendment to the Amended and Restated Employee Stock Purchase Plan was as follows:
Number of Votes
For13,839,083
Against724,447
Abstain18,888
Broker non-votes0
3.Approval of the ratification of the appointment of BDO Seidman, LLP to serve as the independent registered public accounting firm for the fiscal year ending December 31, 2008 was as follows:
Number of Votes
For14,562,463
Against8,440
Abstain11,715
Broker non-votes0
(d)In May 2008, prior to SM&A’s annual stockholder meeting, SM&A and its former Chairman of the Board and CEO entered into an agreement to settle their then pending proxy contest. See the proxy soliciting material contained in SM&A’s Schedule 14A Definitive Revised Proxy filed with the SEC on May 22, 2008, for a description of the terms of the settlement and the anticipated cost to SM&A in connection therewith.
Item 5. Other Information
Not Applicable.

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Item 6. Exhibits
INDEX TO EXHIBITS
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
2.1 Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A&A..

Filed on February 12, 2007 as Exhibit 99.2 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
2.2 Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A.

Filed on September 19, 2007 as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
2.3 Amendment to Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A.

Filed on March 7, 2008 as Exhibit 2.3 to the registrant’s Annual Report on Form 8-K and incorporated herein by reference.
 
2.4 Amendment to Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A.

Filed herewith.on May 9, 2008 as Exhibit 2.4 to the registrant’s report on Form 10-Q and incorporated herein by reference.
 
3.1 Certificate of Incorporation of SM&A, a Delaware corporationcorporation..

Filed on December 6, 2006 as Exhibit 3.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
3.2 Bylaws of SM&A, a Delaware corporationcorporation..

Filed on December 6, 2006 as Exhibit 3.3 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
3.3 Agreement and Plan of Merger, between SM&A, a California corporation, and SM&A, a Delaware corporationcorporation..

Filed on December 6, 2006 as Exhibit 2.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
10.2810.1 Amendment No. 1 to Employment Agreement of Cathy L. McCarthy.

Filed on January 17, 2008 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.

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10.2910.2 Employment Agreement of Peter PacePace..

Filed on January 24, 2008 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
 
10.4010.3 Indemnification AgreementsAgreement entered into as of May 21, 2008 by and between Steven S. Myers and SM&A, a Delaware corporation..

Filed on March 10,May 23, 2008 as Exhibit 10.1 to the registrant’s current report on Form 8-K and incorporated herein by reference.
 
10.4110.4 Renewal of Revolving NoteCredit Agreement dated April 24, 2006, executed by SM&A, in favor ofMay 1, 2008 between City National Bank and SM&A, a Delaware corporation.

Filed on May 6, 2008 as Exhibit 10.1 to the registrant’s current report on Form 8-K and incorporated herein by reference.
 
31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002..

Filed herewith.
 
31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002..
Filed herewith.
 
Filed herewith.

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32 Certification 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.

Filed herewith.

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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.
     
 SM&A
(Registrant)
(Registrant)
 
Dated: May 9,August 8, 2008By:  /s/ JAMES R. ECKSTAEDT   
 James R. Eckstaedt  
 Executive Vice President, Finance
and Chief Financial Officer 		 
 
   
Dated: May 9,August 8, 2008By:  /s/ CATHY MCCARTHY   
 Cathy McCarthy  
 President and Chief Executive Officer  

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