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Article by DailyStocks_admin    (03-10-08 06:01 AM)

The Daily Magic Formula Stock for 03/09/2008 is SAIC Inc. According to the Magic Formula Investing Web Site, the ebit yield is 21% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

The Company

We are a leading provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security (DHS) and other U.S. Government civil agencies, as well as to customers in selected commercial markets. Our customers seek our domain expertise to solve complex technical challenges requiring innovative solutions for mission-critical functions in such areas as national security, intelligence and homeland defense. The increase in demand for our services and solutions has been driven by priorities including the ongoing global war on terror and the transformation of the U.S. military.

Science Applications International Corporation was formed in 1969. On October 16, 2006, in connection with becoming a publicly-traded company, Science Applications International Corporation completed a merger (reorganization merger) in which it became a wholly-owned subsidiary of SAIC, Inc. Pursuant to the reorganization merger, each share of Class A common stock and Class B common stock of Science Applications International Corporation was exchanged for two shares and 40 shares, respectively, of Class A preferred stock of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of its common stock. We use the terms “Company,” “we,” “us,” and “our” to refer to SAIC, Inc. and its majority-owned and wholly-owned subsidiaries, including Science Applications International Corporation.

We have three reportable segments: Government, Commercial, and Corporate and Other. Our operating business units, on which performance is assessed, are aggregated into the Government or Commercial segments, depending on the nature of the customer, the contractual requirements and the regulatory environment governing the business units’ services. The Corporate and Other segment includes the operations of our internal real estate management subsidiary, Campus Point Realty Corporation, various corporate activities, the elimination of intersegment revenues and costs and certain corporate expense items not billable to our Government customers referred to as unallowable expenses. For additional information regarding our reportable segments and geographic areas, see Note 17 of the notes to consolidated financial statements contained within this Annual Report on Form 10-K.

Government Segment

Our Government segment provides a wide array of technical services and solutions in the following areas, primarily to U.S. federal, state and local government agencies and foreign governments.


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Defense . We develop leading-edge concepts, technologies and systems to solve complex challenges facing the U.S. military and its allies.


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Intelligence . We develop solutions to help the U.S. defense, intelligence and homeland security communities build an integrated intelligence picture, allowing them to be more agile and dynamic in challenging environments and produce actionable intelligence.


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Homeland Security and Defense . We develop technical solutions and provide systems integration and mission-critical support services to help federal, state, local and foreign governments and private-sector customers protect the United States and allied homelands.


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Logistics and Product Support . We provide logistics and product support solutions to enhance the readiness and operational capability of U.S. military personnel and weapon and support systems.


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Systems Engineering and Integration . We provide systems engineering and integration solutions to help our customers design, manage and protect complex information technology (IT) networks and infrastructure.

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Research and Development . As one of the largest science and technology contractors to the U.S. Government, we conduct leading-edge research and development of new technologies with applications in areas such as national security, intelligence and life sciences.

Revenues from our Government segment accounted for 93% of our total consolidated revenues in fiscal 2007, 2006 and 2005. Within the Government segment, substantially all of our revenues are derived from contracts with the U.S. Government. We generated 88%, 89% and 86% of our total consolidated revenues from contracts with the U.S. Government (including all branches of the U.S. military) in fiscal 2007, 2006 and 2005, respectively. These revenues include contracts where we serve as the prime or lead contractor, as well as contracts where we serve as a subcontractor to other parties who are engaged directly with various U.S. Government agencies as the prime contractor.

We own 55% of AMSEC LLC, a consolidated joint venture that provides maintenance engineering and technical support services to the U.S. Navy and marine industry customers. The results of operations of AMSEC LLC are reported in our Government segment.

Commercial Segment

Our Commercial segment provides technology-driven consulting, systems integration and outsourcing services and solutions in selected commercial markets, often based on expertise developed in serving our Government segment customers. This currently includes technical consulting and IT support for oil and gas exploration and production, applications and IT infrastructure management for utilities and data lifecycle management for pharmaceuticals. Revenues from our Commercial segment accounted for 7% of our total consolidated revenues in fiscal 2007, 2006 and 2005.

Discontinued Operations

On October 27, 2006, we completed the sale of our majority-owned subsidiary, ANXeBusiness Corp. (ANX). On March 15, 2005, we completed the sale of our subsidiary, Telcordia Technologies, Inc. (Telcordia). The operations of ANX and Telcordia are classified as discontinued operations in the consolidated statements of income and cash flows and the notes to consolidated financial statements. ANX’s results of operations had been previously reported in the Commercial segment while Telcordia’s results of operations had been previously reported as our Non-Regulated Telecommunications segment. Our Non-Regulated Telecommunications segment was eliminated upon the sale of Telcordia. For further discussion related to Telcordia, see “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contingencies—Telkom South Africa” in Part II of this Annual Report on Form 10-K and Note 19 of the notes to consolidated financial statements contained within this Annual Report on Form 10-K.

Other Company Information

Our corporate headquarters are located at 10260 Campus Point Drive, San Diego, California 92121 and our telephone number is (858) 826-6000.

Contracts

We generate revenues under the following types of contracts: (1) cost-reimbursement, (2) time-and-materials (T&M), (3) fixed-price-level-of-effo rt, (4) firm-fixed-price (FFP) and (5) target cost and fee with risk sharing. Cost-reimbursement contracts provide for reimbursement of our direct costs and allocable indirect costs, plus a fee or profit component. T&M contracts typically provide for the payment of negotiated fixed hourly rates for labor hours, which includes allocable indirect costs and fee or profit, plus reimbursement of our other direct costs. Fixed-price-level-of-effo rt contracts are substantially similar to T&M contracts except that the deliverable is the labor hours provided to the customer. FFP contracts provide for payments to us of a fixed price for specified products, systems and/or services. If actual costs vary from the FFP target costs, we can generate more or less than the targeted amount of profit or even incur a loss. Target cost and fee with risk sharing contracts provide for reimbursement of costs, plus a specified or target fee or profit, if our actual costs equal a negotiated target cost. Under these contracts, if our actual costs are less than the target costs, we receive a portion of the cost underrun as an additional fee or profit. If our actual costs exceed the target costs, our target fee and cost reimbursement are reduced by a portion of the cost overrun. We do not use target cost and fee with risk sharing contracts in our Government segment.

Contract Procurement

The U.S. Government technology services procurement environment has evolved in recent years due to statutory and regulatory procurement reform initiatives. U.S. Government agencies traditionally have procured technology services and solutions through agency-specific contracts awarded to a single contractor. However, in recent years the number of procurement contracting methods available to U.S. Government customers for services procurement has increased substantially. Today, there are three predominant contracting methods through which U.S. Government agencies procure technology services: traditional single award contracts, U.S. General Services Administration (GSA) Schedule contracts, and single and multiple award indefinite delivery/indefinite quantity (IDIQ) contracts. Each of these is described below:


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Traditionally, U.S. Government agencies have procured services and solutions through single award contracts which specify the scope of services that will be delivered and identify the contractor that will provide the specified services. When an agency has a requirement, interested contractors are solicited, qualified and then provided with a request for a proposal. The process of qualification, request for proposals and evaluation of bids requires the agency to maintain a large, professional procurement staff and can take a year or more to complete.


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GSA Schedule contracts are listings of services, products and prices of contractors maintained by the GSA for use throughout the U.S. Government. In order for a company to provide services under a GSA Schedule contract, the company must be pre-qualified and awarded a contract by GSA. When an agency uses a GSA Schedule contract to meet its requirements, the agency, or the GSA on behalf of the agency, conducts the procurement. The user agency, or the GSA on its behalf, evaluates the user agency’s services requirements and initiates a competition limited to GSA Schedule qualified contractors. GSA Schedule contracts are designed to provide the user agency with reduced procurement time and lower procurement costs.


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Single and multiple award IDIQ contracts are contract forms used to obtain commitments from contractors to provide certain products or services on pre-established terms and conditions. Under IDIQ contracts, the U.S. Government issues task orders for specific services or products it needs and the contractor supplies products or services in accordance with the previously agreed-upon terms. The competitive process to obtain task orders is limited to the pre-selected contractor(s). If the IDIQ contract has a single prime contractor, the award of task orders is limited to that party. If the contract has multiple prime contractors, the award of the task order is competitively determined. Multiple-contractor IDIQ contracts that are open for any government agency to use for the procurement of services are commonly referred to as government-wide acquisition contracts, or GWACs. Due to the lower cost, reduced procurement time, and increased flexibility of GWACs, there has been greater use of GWACs among many agencies for large-scale procurements of technology services. IDIQ contracts often have multi-year terms and unfunded ceiling amounts, therefore enabling but not committing the U.S. Government to purchase substantial amounts of products and services from one or more contractors.

Backlog

Government segment funded backlog primarily represents the portion of backlog for which funding is appropriated and is payable to us upon completion of a specified portion of work, less revenues previously recognized on these contracts. Government segment funded backlog does not include the full potential value of our contracts because the U.S. Government and our other customers often incrementally appropriate or authorize funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a number of years. Commercial segment funded backlog represents the full value on firm contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts. Negotiated unfunded backlog represents estimated amounts to be earned in the future from (1) firm orders for which funding has not been appropriated or otherwise authorized and (2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders that might be awarded under IDIQ, GWAC, GSA Schedule, or other Master Agreement contract vehicles.

We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract or purchase order at any time. In addition, certain contracts and purchase orders in the Commercial segment may include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees in such cases.

Key Customers

We generated 88%, 89% and 86% of our total consolidated revenues from contracts with the U.S. Government (including all branches of the U.S. military) in fiscal 2007, 2006 and 2005, respectively. Within the U.S. Government, we generated 10% or more of our consolidated revenues during the last three fiscal years from one or more of the U.S. Army, U.S. Navy and U.S. Air Force. Each of these customers has a number of subsidiary agencies which have separate budgets and procurement functions. Our contracts may be with the highest level or with the subsidiary agencies of these customers.

Competition

Competition for U.S. Government contracts is intense. We compete against a large number of established multinational corporations which may have greater financial capabilities than we do. We also compete against smaller, more specialized companies that concentrate their resources on particular areas. As a result of the diverse requirements of the U.S. Government and our commercial customers, we frequently form teams with other companies to compete for large contracts, while bidding against team members in other situations. Because of the current industry trend toward consolidation, we expect major changes in the competitive landscape. We believe that our principal competitors include the following companies:


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Among contractors focused principally on U.S. Government IT and other technical services, we compete primarily with companies such as CACI International Inc, ManTech International Corporation, SRA International, Inc. and L-3 Communications.


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Among the large defense contractors which provide U.S. Government IT services in addition to other hardware systems and products, we compete primarily with engineering and technical services divisions of The Boeing Company, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation and Raytheon Company.


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Among the diversified commercial and U.S. Government IT providers, we compete primarily with companies such as Accenture Ltd, BearingPoint, Inc., Booz Allen Hamilton Inc., Computer Sciences Corporation, Electronic Data Systems Corporation, International Business Machines Corporation and Unisys Corporation.

We compete on factors including, among others, our technical expertise, our ability to deliver cost-effective solutions in a timely manner, our reputation and standing with government and commercial customers, pricing and the size and scale of our company.

Patents and Proprietary Information

Our technical services and products are not generally dependent upon patent protection. We claim a proprietary interest in certain of our products, software programs, methodology and know-how. This proprietary information is protected by copyrights, trade secrets, licenses, contracts and other means.

We actively pursue opportunities to license our technologies to third parties and enforce our patent rights. We also evaluate potential spin-offs of our technologies.

In connection with the performance of services for customers in the Government segment, the U.S. Government has certain rights to data, software codes and related material that we develop under U.S. Government-funded contracts and subcontracts. Generally, the U.S. Government may disclose such information to third parties, including, in some instances, our competitors. In the case of subcontracts, the prime contractor may also have certain rights to the programs and products that we develop under the subcontract.

Research and Development

We conduct research and development activities under customer-funded contracts and with internal research and development (IR&D) funds. IR&D efforts consist of projects involving basic research, applied research, development, and systems and other concept formulation studies. In fiscal 2007, 2006 and 2005, we spent $34 million, $27 million and $25 million, respectively, on IR&D, which was included in selling, general and administrative expenses.

Seasonality

The U.S. Government’s fiscal year ends on September 30 of each year. It is not uncommon for U.S. Government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. As a result of the cyclical nature of the U.S. Government budget process, as well as a greater number of holidays in our fourth fiscal quarter ending January 31, as compared to our third fiscal quarter ending October 31, we have from time to time experienced higher revenues in our third fiscal quarter and lower revenues in our fourth fiscal quarter.

CEO BACKGROUND

Mr. Dahlberg has served as Chairman of the Board since July 2004 and Chief Executive Officer and director since November 2003. Mr. Dahlberg served as President from November 2003 to March 2006. Prior to joining us, Mr. Dahlberg served as Corporate Executive Vice President of General Dynamics Corp. from March 2001 to October 2003. Mr. Dahlberg served as President of Raytheon International from February 2000 to March 2001, and from 1997 to 2000 he served as President and Chief Operating Officer of Raytheon Systems Company. Mr. Dahlberg held various positions with Hughes Aircraft from 1967 to 1997. Mr. Dahlberg is also on the board of directors of Teledyne Technologies, Incorporated.

General Jumper retired from the United States Air Force, effective November 1, 2005. From September 2001 through November 2005, General Jumper was Chief of Staff of the United States Air Force, serving as the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, guard, reserve and civilian forces serving in the United States and overseas. As a member of the Joint Chiefs of Staff, General Jumper functioned as a military advisor to the Secretary of Defense, National Security Council and the President. General Jumper is also a member of the boards of directors of Goodrich Corporation, Jacobs Engineering Group Inc., TechTeam Global, Inc. and Vought Aircraft Industries, Inc.

Mr. Kraemer has been an executive partner of Madison Dearborn Partners, LLC, a private equity investment firm, since April 2005, and has served as a professor at the Kellogg School of Management at Northwestern University since January 2005. Mr. Kraemer previously served as the Chairman of Baxter International, Inc., or Baxter, a health-care products, systems and services company, from January 2000 until April 2004, as Chief Executive Officer of Baxter from January 1999 until April 2004 and as President of Baxter from April 1997 until April 2004. Mr. Kraemer also served as the Senior Vice President and Chief Financial Officer of Baxter from November 1993 to April 1997. Mr. Kraemer is also on the board of directors of Sirona Dental Systems, Inc.

Mr. Young retired from Lockheed Martin Corp. in 1995 after having served as an Executive Vice President from March 1995 to July 1995. Prior to its merger with Lockheed Corporation, Mr. Young served as the President and Chief Operating Officer of Martin Marietta Corp. from 1990 to 1995. Mr. Young is also on the board of directors of Goodrich Corporation.

Dr. Hamre has served as the President and Chief Executive Officer of the Center for Strategic & International Studies, a public policy research institution, since 2000. Dr. Hamre served as U.S. Deputy Secretary of Defense from 1997 to 2000 and Under Secretary of Defense (Comptroller) from 1993 to 1997. Dr. Hamre is also a member of the boards of directors of ChoicePoint, Inc., ITT Industries, Inc. and MITRE Corporation.

Dr. Jones is the Quarles Professor of Engineering at the University of Virginia, where she has taught since 1989. From 1993 to 1997, Dr. Jones was on leave of absence from the University to serve as Director of Defense Research and Engineering in the U.S. Department of Defense. Dr. Jones also served as a director of the Company from 1987 to 1993.

Mr. Sanderson retired from Oracle Corporation in 2002 after having served as an Executive Vice President since 1995. At Oracle, Mr. Sanderson was responsible for Oracle Product Industries, Oracle Consulting, and the Latin American Division. Prior to that he was President of Unisys World-wide Services and partner at both McKinsey & Company and Accenture (formerly Andersen Consulting).


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Science Applications International Corporation was formed in 1969. In October 2006, in connection with becoming a publicly-traded company, Science Applications International Corporation completed a merger (reorganization merger) in which it became a wholly-owned subsidiary of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of its common stock. We use the terms “Company,” “we,” “us,” and “our” to refer to SAIC, Inc. and its majority-owned and wholly-owned subsidiaries, including Science Applications International Corporation.

We are a provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, as well as to customers in selected commercial markets. Demand for our services is driven by priorities such as the ongoing war on terrorism and the transformation of the U.S. military.

Significant events impacting our operations and/or liquidity during the past three fiscal years include:


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Reorganization Merger. Pursuant to the reorganization merger on October 16, 2006, each share of Class A common stock and Class B common stock of Science Applications International Corporation was exchanged for two shares and 40 shares, respectively, of Class A preferred stock of SAIC, Inc. The number and exercise price of stock options outstanding were also adjusted for this exchange, as well as for the declaration and payment of the special dividend discussed below.


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Initial Public Offering. We completed an initial public offering of 86.25 million shares of common stock in October 2006, resulting in net proceeds of $1.24 billion, after deducting underwriting commissions and discounts and other offering-related costs. Although shares of common stock contain the same economic rights as shares of Class A preferred stock, holders of Class A preferred stock are entitled to 10 votes per share while holders of common stock are entitled to one vote per share. The issuance of these shares of common stock adversely impacted earnings per share in fiscal 2007 and will significantly impact earnings per share in fiscal 2008 and future periods due to the resulting increase in the number of weighted average shares outstanding.


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Special Dividend. Prior to the reorganization merger and the initial public offering, the board of directors of Science Applications International Corporation declared a special dividend of $15 per share of Class A common stock and $300 per share of Class B common stock to holders of record as of October 12, 2006. The special dividend of $2.45 billion was paid in November 2006.

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Acquisitions. We completed eight, four and four acquisitions of businesses for aggregate purchase prices of $400 million, $234 million and $236 million in fiscal 2007, 2006 and 2005, each respectively. We acquire businesses in our key markets when opportunities arise and we expect that the use of cash and the possible use of stock to acquire businesses will increase in the future.


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Dispositions. We sold our ANXeBusiness Corp. (ANX) and Telcordia Technologies, Inc. subsidiaries, recognizing gains before income taxes of $19 million and $871 million in fiscal 2007 and 2006, respectively. The operations of these entities are reflected as discontinued operations for all years presented. We may, as part of our ongoing strategic planning, continue to exit certain businesses from time to time in the future.


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Stock-Based Compensation. We adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” on February 1, 2006. This Statement requires that we recognize as compensation expense the fair value of all stock-based awards, including stock options and discounts on purchases of stock made by employees through our employee stock purchase plan (ESPP). We recognized an additional $33 million of stock-based compensation expense in fiscal 2007 compared to fiscal 2006 and 2005 related to the adoption of SFAS No. 123(R).


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Greek Contract. We have recorded $123 million in contract losses since the inception of our contract with the Hellenic Republic of Greece, or the Greek government, including $2 million, $83 million and $34 million in fiscal 2007, 2006 and 2005, respectively. On March 29, 2007, a modification of the Greek contract was executed as described in “Commitments and Contingencies—Firm-Fixed- Price Contract with the Greek Government.”

Reportable Segments

We have three reportable segments: Government, Commercial, and Corporate and Other. Except with respect to “Other Income Statement Items—Discontinued Operations,” all amounts in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are presented for our continuing operations only.

Government Segment. Through our Government segment, we provide systems engineering, systems integration and advanced technical services and solutions primarily to U.S. federal, state and local government agencies and foreign governments. Revenues from our Government segment accounted for 93% of our total consolidated revenues for fiscal 2007, 2006 and 2005. Within the Government segment, substantially all of our revenues are derived from contracts with the U.S. Government. Revenues from contracts with the U.S. Government accounted for 88%, 89% and 86% of our total consolidated revenues in fiscal 2007, 2006 and 2005, respectively. These revenues include contracts where we serve as the prime or lead contractor, as well as contracts where we serve as a subcontractor to other parties who are engaged directly with various U.S. Government agencies as the prime contractor.

Following the September 11, 2001 terrorist attacks, U.S. Government spending has increased in response to the global war on terror and efforts to transform the U.S. military. This increased spending had a favorable impact on our business through fiscal 2005. Our results have also been favorably impacted by increased outsourcing of information technology (IT) and other technical services by the U.S. Government. However, these favorable trends slowed in fiscal 2006 and 2007, in part, as a result of the diversion of funding toward the war efforts in Iraq and Afghanistan. Future levels of spending and authorizations may decrease, remain constant or shift to areas where we do not currently provide services. Additionally, changes in spending authorizations and budgetary priorities could occur due to the significant relief and recovery costs associated with natural disasters, the rapid growth of the federal budget deficit, increasing political pressure to reduce overall levels of government spending or other factors.

Competition for contracts with the U.S. Government is intense. In addition, in recent years, the U.S. Government has increasingly used contracting processes that give it the ability to select multiple winners or pre-qualify certain contractors to provide various products or services at established general terms and conditions. Such processes include purchasing services and solutions using indefinite delivery / indefinite quantity (IDIQ), government-wide acquisition contract (GWAC), and U.S. General Services Administration (GSA) award contract vehicles. This trend has served to increase competition for U.S. Government contracts and increase pressure on the prices we charge for our services.

Commercial Segment. Through our Commercial segment, we primarily target commercial customers worldwide in selected commercial markets, which currently include IT services for oil and gas exploration and production, applications and IT infrastructure management for utilities and data lifecycle management for pharmaceuticals. We provide our Commercial segment customers with systems integration and advanced technical services and solutions that we have developed for the commercial marketplace, often based on expertise developed in serving our Government segment customers. Revenues from our Commercial segment accounted for 7% of our total consolidated revenues in fiscal 2007, 2006 and 2005. Revenues from our Commercial segment are primarily driven by our customers’ desire to reduce their costs related to IT management and other complex technical functions by outsourcing to third-party contractors.

Corporate and Other Segment. Our Corporate and Other segment includes the operations of our internal real estate management subsidiary, Campus Point Realty Corporation (CPRC), various corporate activities, the elimination of intersegment revenues and costs and certain corporate expense items not billable to our Government customers referred to as unallowable expenses. Our Corporate and Other segment does not contract with third parties for the purpose of generating revenues. However, for internal management reporting purposes, we record certain revenue and expense items incurred by the Government and Commercial segments in the Corporate and Other segment in certain circumstances as determined by our chief operating decision-maker (currently our Chief Executive Officer).

Key Financial Metrics

Sources of Revenues

Contracts. We generate revenues under the following types of contracts: (1) cost-reimbursement, (2) time-and-materials (T&M), (3) fixed-price-level-of-effo rt, (4) firm-fixed-price (FFP) and (5) target cost and fee with risk sharing. Cost-reimbursement contracts provide for reimbursement of our direct costs and allocable indirect costs, plus a fee or profit component. T&M contracts typically provide for the payment of negotiated fixed hourly rates, which include allocable indirect costs and fees for labor hours plus reimbursement of other direct costs. Fixed-price-level-of-effo rt contracts are substantially similar to T&M contracts except that the deliverable is the labor hours provided to the customer. FFP contracts provide for payments to us of a fixed price for specified products, systems and/or services. If actual costs vary from the FFP planned costs, we can generate more or less than the planned amount of profit or even incur a loss. Target cost and fee with risk sharing contracts provide for reimbursement of costs plus a specified or target fee or profit if our actual costs equal a negotiated target cost. Under these contracts, if our actual costs are less than the target costs, we receive a portion of the cost underrun as additional fee or profit. If our actual costs exceed the target costs, our target fee and cost reimbursement are reduced by a portion of the cost overrun. We do not use target cost and fee with risk sharing contracts in our Government segment.

Contract Revenues . We generate revenues under our contracts from (1) the efforts of our technical staff, which we refer to as labor-related revenues and (2) the materials used on a contract and efforts of our subcontractors, which we refer to as M&S revenues. M&S revenues are generated primarily from large, multi-year systems integration contracts and contracts in our logistics and product support business area. If M&S revenues grow at a faster rate than our labor-related revenues, our overall profit margin percentage could be impacted negatively because our M&S revenues generally have lower margins than our labor-related revenues.

We recognize revenues under our contracts primarily using the percentage-of-completion method. Under the percentage-of-completion method, revenues are recognized based on progress towards completion, with performance measured by the cost-to-cost method, efforts-expended method or units-of-delivery method, all of which require estimating total costs at completion. The contracting process used for procurement, including IDIQ, GWAC and GSA Schedule, does not determine revenue recognition.

Contract Concentration. The growth of our business is directly related to our ability to successfully compete for contract awards and hire personnel to perform on service contracts and contract performance.

Bookings and Backlog. We booked new business estimated to be worth $9.2 billion during fiscal 2007. Bookings generally represent the estimated amount of revenue to be earned in the future from net receipt of funded and unfunded contract awards during the year. We calculate bookings as the year ending backlog plus the year’s revenues less the prior year ending backlog and backlog obtained in acquisitions.

Total consolidated negotiated backlog consists of funded backlog and negotiated unfunded backlog. Government segment funded backlog primarily represents the portion of backlog for which funding is appropriated and is payable to us upon completion of a specified portion of work, less revenues previously recognized on these contracts. Government segment funded backlog does not include the full potential value of our contracts because the U.S. Government and our other customers often incrementally appropriate or authorize funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a number of years. Commercial segment funded backlog represents the full value on firm contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts. Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from (1) firm orders for which funding has not been appropriated or otherwise authorized and (2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders that might be awarded under IDIQ, GWAC, GSA Schedule, or other Master Agreement contract vehicles.

We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract or purchase order at any time. In addition, certain contracts and purchase orders in the Commercial segment include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees in such cases.

Cost of Revenues and Operating Expenses

Cost of Revenues . Cost of revenues includes direct labor and related fringe benefits and direct expenses incurred to complete contracts and task orders. Cost of revenues also includes subcontract work, consultant fees, materials and overhead. Overhead consists of indirect costs relating to operations, rent/facilities, administration, certain depreciation and management information systems expenses, travel and other expenses.

Selling, General and Administrative Expenses . Selling, general and administrative (SG&A) expenses are primarily for corporate administrative functions, such as management, legal, finance and accounting, contracts and administration, human resources and certain management information systems expenses. SG&A also includes bid-and-proposal and internal research and development expenses.

Reclassifications

Prior to the initial public offering, we measured operating performance based on segment operating income which was defined as operating income before income taxes less losses on impaired intangible assets and goodwill, less gains or losses on sales of business units, subsidiary stock and similar items, plus equity in the income or loss of unconsolidated affiliates, and minority interest in income or loss of consolidated subsidiaries. Following our initial public offering, we converted our measure of operating performance from segment operating income as defined to operating income. The differences between our former measure (segment operating income) and operating income were not material for the periods presented.

During fiscal 2007, certain work previously performed by our Government segment was reassigned to our Commercial segment and amounts related to the deferral of revenues and costs for work performed on contracts prior to contract execution, referred to as pre-contract costs, were reassigned to the Government segment instead of being reflected in the Corporate and Other segment as historically presented. We believe these changes more appropriately present revenues within the segment in which they are earned and the operating results of each operating segment.

Prior year amounts appearing in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been reclassified for consistency with the current year’s presentation.

Results of Operations

Revenues. Our consolidated revenues increased 7% and 8% in fiscal 2007 and 2006, respectively, due to a combination of growth in revenues from our U.S. Government customers as well as growth through the acquisition of new businesses. Increases in consolidated revenues were primarily driven by growth in the Government segment because of the relative size of the Government segment as compared to the Commercial segment. Approximately four and three percentage points of the consolidated growth for fiscal 2007 and 2006, respectively, was internal, or non-acquisition, related growth. We calculate internal growth by comparing our current year reported revenue to prior year revenue adjusted to include the revenue of acquired companies for the comparable prior year. Internal revenue growth in our business is directly related to our ability to obtain new contract awards across a balance of our business areas and the ability to hire personnel to perform on service contracts. The acquisition of new businesses accounted for the remaining three and five percentage points of the consolidated revenue growth for fiscal 2007 and 2006, respectively.

Government revenues grew internally by three percentage points for fiscal 2007 and 2006. Internal revenue growth in the Government segment for fiscal 2007 was positively impacted by growth in the intelligence and homeland security and defense business areas. In addition, fiscal 2006 revenues reflect a reduction for losses recognized in that year on our Greek contract. The fiscal 2007 revenue increase was partially offset by declines in our systems engineering and integration business area primarily due to the completion of a large contract. We also experienced declines in our logistics and product support business area in fiscal 2007 primarily due to the completion of one of our large prime vendor contracts and a reduced volume of orders on other prime vendor contracts caused by non-recurring customer events. The internal revenue growth in our Government segment for fiscal 2006 was the result of growth in our traditional business areas with departments and agencies of the U.S. Government. The acquisitions of new businesses accounted for the remaining four and five percentage points of Government revenue growth for fiscal 2007 and 2006, respectively.

Commercial revenues increased 7% and 3% during fiscal 2007 and 2006, respectively. The growth in our Commercial revenues in fiscal 2007 was driven by internal growth principally attributable to higher revenues from our consulting services and information technology outsourcing business areas.

Corporate and Other revenues include the elimination of intersegment revenues of $3 million and $45 million in fiscal 2006 and 2005, respectively. There were no intersegment revenues in fiscal 2007.

The increase in labor-related revenues in fiscal 2007 was attributable to inflationary increases in employee compensation and increases in the number of technical employees, primarily through acquisitions. The increase in labor-related revenues in fiscal 2006 was attributable to greater employee utilization and a slight overall increase in our technical staff. At the end of fiscal 2007, we had approximately 44,100 full-time and part-time employees compared to 43,600 and 42,400 at the end of fiscal 2006 and 2005, respectively. The increase in M&S revenues in fiscal 2007, which was pronounced in the fourth quarter of fiscal 2007 relative to the first three quarters of fiscal 2007, was related to the delivery of significant materials under certain contracts primarily in the homeland security business area. This increase for the year was partially offset by declines in the systems engineering and integration business area primarily due the completion of a large contract that had a substantial component of materials, declines in our logistics and product support business area primarily due to the completion of one of our large prime vendor contracts and a reduced volume of orders on other prime vendor contracts caused by non-recurring customer events. The increase in M&S revenues in fiscal 2006 was primarily related to the overall growth in our logistics and product support business area.

Total consolidated cost of revenues increased $390 million, or 6%, and $517 million, or 8%, on an absolute basis for fiscal 2007 and 2006, respectively, but declined as a percentage of total consolidated revenues. This improvement as a percentage of revenues in fiscal 2007 was primarily due to a decrease in total losses of $81 million recognized on our Greek contract during fiscal 2006, a slightly higher concentration of labor-related revenues, which typically carry higher margins than M&S revenues, and better management of our overhead expenses in cost of revenues in fiscal 2007 as compared to fiscal 2006. This fiscal 2007 improvement was partially offset by increased stock-based compensation expense related to stock options and discounts on the employee stock purchase plan in fiscal 2007 of $21 million as a result of the required adoption of SFAS No. 123(R). There was no expense recognized for stock options or employee stock purchase plan discounts in fiscal 2006 or 2005. The slight improvement in cost of revenues as a percentage of revenues in fiscal 2006 was primarily due to improved contract margins, greater employee utilization and lower employee fringe benefit expenses in fiscal 2006 as compared to fiscal 2005 offset by the adverse impact of losses of $83 million on our Greek contract. The lower employee fringe benefit expense in cost of revenues in fiscal 2006 was primarily due to a decision to provide a higher portion of fiscal 2006 bonus awards in the form of vesting stock, which is generally expensed over four years, instead of vested stock as reflected in fiscal 2005.

Government cost of revenues increased by $368 million, or 6%, and $467 million, or 8%, on an absolute basis for fiscal 2007 and 2006, respectively, but decreased as a percentage of related revenues during the same periods. The fiscal 2007 improvement as a percentage of revenue was primarily due to decreased losses on our Greek contract partially offset by increased stock-based compensation expense. The fiscal 2006 improvement in Government cost of revenues as a percentage of related revenues was primarily due to improved contract margins, greater employee utilization and lower fringe expenses offset by losses on our Greek contract. All losses on the Greek contract have been recorded in the Government segment.

Commercial cost of revenues increased $20 million, or 5%, and increased $9 million, or 2%, on an absolute basis for fiscal 2007 and 2006, respectively, largely consistent with fluctuations in Commercial revenues for the same periods.

Corporate and Other cost of revenues represents the elimination of intersegment rent expense charged to our Government and Commercial segments on properties owned by CPRC of $18 million, $17 million and $16 million for fiscal 2007, 2006 and 2005, respectively. The remaining balance for fiscal 2006 and 2005 represents the elimination of the cost of revenues associated with intersegment sales, which are recorded at cost.

Total consolidated SG&A increased $34 million, or 7%, in fiscal 2007 as compared with fiscal 2006 primarily due to sustained and increasing IT and other infrastructure expenditures and legal expenses from fiscal 2006 levels as well as increased stock-based compensation, business development, internal research and development (IR&D) and professional services expenses. Significant increases in fiscal 2007 occurred in the following areas:


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Stock-based compensation expense related to stock options and discounts on the employee stock purchase plan reflected within selling, general and administrative expenses increased approximately $12 million during 2007 as a result of the adoption of SFAS No. 123(R). There was no expense recognized for stock options or employee stock purchase plan discounts in fiscal 2006 or 2005.


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Professional services expense increased by $12 million for fiscal 2007 largely attributable to certain systems implementation projects related to our business transformation initiative and our Sarbanes-Oxley compliance efforts.


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Bid and proposal (B&P) expenses increased slightly due to increased B&P activities offset by declines in production costs stemming from government actions to simplify the bidding process and actions taken by us to make our proposal process more efficient which have generally reduced the cost of responding to each B&P opportunity. The level of B&P activities fluctuates depending on the timing of bidding opportunities.

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IR&D expenses increased by $7 million in fiscal 2007 due to increased activity on specific initiatives aimed at the development of new technologies, products and services.

Total consolidated SG&A increased $77 million, or 19%, in fiscal 2006 as compared with fiscal 2005 due to increasing legal, IT, and other infrastructure expenditures in support of anticipated growth, including $9 million in initial public offering related costs which were expensed due to the postponement of our initial public offering. In addition, we incurred a higher amount of amortization expense on intangible assets due to additional acquisitions. During fiscal 2006, we reversed a previously accrued expense of $10 million related to a class action lawsuit that was dismissed by plaintiffs without prejudice in September 2005. SG&A expenses during fiscal 2005 were adversely affected by the accrual of the $10 million related to this lawsuit. The activity related to this lawsuit is reflected in Corporate and Other SG&A expenses.

Government SG&A increased $15 million, or 4%, and $65 million, or 22%, on an absolute basis in fiscal 2007 and 2006, respectively. The fiscal 2007 increase was due to increased stock-based compensation, IR&D and professional services expenses. Government SG&A increased during fiscal 2006 primarily due to increasing legal, IT and other infrastructure expenditures in support of anticipated growth and a higher amount of amortization expense on intangible assets due to an increased volume of acquisitions.

Commercial SG&A expenses increased $1 million, or 1%, and $10 million, or 12%, during fiscal 2007 and 2006, respectively. Increases in fiscal 2007 were primarily due to increased stock-based compensation expense. Increases in fiscal 2006 were primarily due to an increase in the number of employees and other infrastructure expenditures.

Corporate and Other SG&A expenses represent corporate costs unallowable under Cost Accounting Standards and the net effect of various items related to operating business units that are excluded from the evaluation of a business unit’s operating performance in the Government or Commercial segments. The increase during fiscal 2007 was primarily due to increased unallowable stock-based compensation, professional service and legal expenses. Corporate and Other SG&A expenses for fiscal 2005 and 2006 reflect the accrual and reversal of $10 million, respectively, related to a class action lawsuit mentioned above.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Revenues. Our consolidated revenues increased 14% and 10% during the three and nine months ended October 31, 2007, respectively, compared to the same periods of the prior year primarily due to growth in revenues from our U.S. Government customers as well as growth through the acquisition of businesses. Internal, or non-acquisition, related growth was 8% and 6% during the three and nine months ended October 31, 2007, respectively. We calculate internal revenue growth by comparing our current period reported revenue to the prior period revenue adjusted to include the revenue of acquired businesses for the comparable prior period. Revenue growth related to acquisition of businesses was 6% and 4% for the three and nine months ended October 31, 2007, respectively.

Government revenues grew $282 million and $631 million for the three and nine months ended October 31, 2007, respectively, compared to the same periods in the prior year. Internal revenue growth was 9% and 7% for the three and nine months ended October 31, 2007, respectively. Internal revenue growth in the Government segment for the three and nine months ended October 31, 2007 was attributed to growth in a number of our business areas, most notably our intelligence, defense solutions and homeland security business areas. Our intelligence business area had increased activity on a number of new and continuing programs, including certain operational intelligence programs. Our defense solutions business area experienced growth during the three months ended October 31, 2007 in Command, Control and Communication programs with our Navy and Marine Corps customers, as well as increased sales of materials to our Defense Information Systems Agency customer. Increases in revenues in our homeland security business area were driven by increased sales of border, port and mobile security equipment. Partially offsetting this internal revenue growth in the Government segment for the nine months ended October 31, 2007 were reductions in revenues on certain prime vendor logistics contracts due to a delay in funding. Revenue growth related to acquisitions of businesses in the Government segment was 6% and 4% for the three and nine months ended October 31, 2007, respectively.

Commercial revenues increased by $2 million during the three months ended October 31, 2007 as compared to the same period of the prior year primarily due to the acquisition of a new business in India. Commercial revenues decreased by $5 million for the nine months ended October 31, 2007 as compared to the same period in the prior year primarily due to the completion of a product support contract at the end of fiscal 2007 in our security products business area and reductions in IT outsourcing revenues in our U.K. subsidiary offset by revenue growth related to the acquisition in India.

Government cost of revenues decreased as a percentage of revenues for the three months ended October 31, 2007 primarily due to our increased focus on the management of indirect rate performance to improve profitability. Indirect rate overruns expensed to cost of revenues when incurred declined by $10 million during the three months ended October 31, 2007 as compared to same period in the prior year. This improvement was primarily due to continued reductions in costs associated with management infrastructure and increases in our direct labor utilization. The decrease in cost of revenues was also attributable to increased profitability on certain cost reimbursable contracts in the amount of $3 million and $15 million for the three and nine months ended October 31, 2007, respectively, as a result of improved management of prior year indirect rate overruns. Government cost of revenues for the three and nine months ended October 31, 2007 also benefited from increases in contract fee rates, primarily due to a higher volume of sales of more profitable border, port and mobile security equipment.

Commercial cost of revenues decreased as a percentage of revenues for the three months ended October 31, 2007 as compared to the same period of the prior year due to an increase in higher margin IT outsourcing projects. Commercial cost of revenues as a percentage of revenues were relatively unchanged for the nine months ended October 31, 2007 as compared to the same period of the prior year reflecting the improvements in the three months ended October 31, 2007 offset by lower direct labor utilization and higher cost labor used to support a fixed-price IT outsourcing contract in our U.K. subsidiary caused by a temporary lack of available lower cost resources in our India branch during the first half of fiscal 2008.

Corporate and Other cost of revenues for the three and nine months ended October 31, 2007 and 2006 represents the elimination of intersegment facility charges to our Government and Commercial segments for use of company-owned properties.

Total consolidated SG&A increased $19 million and $32 million for the three and nine months ended October 31, 2007, respectively. General and administrative expenses increased $15 million and $20 million during the three and nine months ended October 31, 2007, respectively, as compared to the same periods of the prior year. These increases were primarily due to the acquisition of a new business with a higher general and administrative cost structure during the three months ended October 31, 2007, increased intangible assets amortization, increased business development spending and increased spending associated with our internal enterprise resource planning system implementation project. Internal research and development (IR&D) expenses increased $4 million and $13 million during the three and nine months ended October 31, 2007, respectively, due to increased efforts to develop new products and technologies to support our customers and our long-term growth. Bid and proposal (B&P) expenses remained relatively unchanged during the three and nine months ended October 31, 2007, reflecting increased B&P activities offset by declines in production costs stemming from government actions to simplify the bidding process and actions taken by us to make our proposal process more efficient, both of which have generally reduced the average cost of responding to a given B&P opportunity. The level of bid and proposal activities fluctuates depending on the timing of bidding opportunities.

Government SG&A expenses increased $20 million and $35 million for the three and nine months ended October 31, 2007, respectively, as compared to the same periods in the prior year, primarily due to the acquisition of a new business with a higher general and administrative cost structure during the three months ended October 31, 2007, increased intangible assets amortization, increased business development spending and increased spending associated with our internal enterprise resource planning system implementation project, including the first phase of implementation which occurred during the three months ended October 31, 2007.

Commercial SG&A expenses decreased $1 million and increased $4 million during the three and nine months ended October 31, 2007, respectively, as compared to the same periods in the prior year. The increase for the nine months ended October 31, 2007 reflects an increase in discretionary overhead investment spending in pursuit of new business opportunities.

Corporate and Other SG&A expenses were unchanged and decreased $7 million during the three and nine months ended October 31, 2007, respectively. The decrease in Corporate and Other SG&A expenses for the nine months ended October 31, 2007, as compared to the same period of the prior year, is primarily due to a reduction in legal expenses.

Total operating income increased $45 million and $65 million during the three and nine months ended October 31, 2007, respectively, as compared to the same periods in the prior year, primarily due to increased profitability in the Government segment and reduced losses in the Corporate and Other segment.

Government operating income increased $37 million and $60 million during the three and nine months ended October 31, 2007, respectively, as compared to the same periods in the prior year. For the three months ended October 31, 2007, Government operating income benefited from continued reductions in costs associated with management infrastructure, increased profitability on many cost reimbursable contracts as a result of improved management of indirect rates, increases in sales of more profitable border, port and mobile security equipment, improved fee rates on several large programs, and better labor utilization efficiencies. These benefits were offset by increases in costs associated with the ongoing internal enterprise resource planning system implementation project, including the first phase of implementation which occurred during the three months ended October 31, 2007, and a continued emphasis on increased spending for IR&D initiatives and discretionary overhead spending mostly for business development activities.

Commercial operating income increased $6 million during the three months ended October 31, 2007, primarily due to improved margins on certain contracts, specifically within our consulting business area. Commercial operating income decreased $6 million during the nine months ended October 31, 2007 due to lower direct labor utilization caused by a planned increase in discretionary overhead investment spending in pursuit of new business opportunities and lower business volume than anticipated. Operating margins were further impacted during the nine months ended October 31, 2007 by higher cost labor used to support a fixed-price IT outsourcing contract in our U.K. subsidiary caused by a temporary lack of available lower cost resources in our India branch during the first half of fiscal 2008.

The decrease in Corporate and Other operating loss for the three and nine months ended October 31, 2007 primarily reflects lower legal expenses, including expenses relating to our dispute on the Greek contract.

Other Income Statement Items

Interest Income. Interest income decreased by $21 million, or 60%, and $55 million, or 57%, for the three and nine months ended October 31, 2007, respectively, compared to the same periods of the prior year due to a decrease in our cash and marketable securities balances resulting primarily from the payment of a $2.45 billion special dividend in November 2006.

Interest Expense. Interest expense reflects interest on (1) our outstanding debt securities, (2) a building mortgage, (3) deferred compensation arrangements and (4) notes payable. Interest expense remained consistent for the three and nine months ended October 31, 2007 as compared to the same periods of the prior year, as most of our debt instruments have fixed interest rates and there were no significant changes in the underlying debt balances during those periods.

Provision for Income Taxes. The provision for income taxes as a percentage of income from continuing operations before income taxes was 39% for the three and nine months ended October 31, 2007. This compares with 42% and 39% for the three and nine months ended October 31, 2006, respectively. The higher effective tax rate for the three months ended October 31, 2006 was primarily due to a portion of a special dividend related to unvested shares being treated as non-deductible compensation expense for tax purposes.

We are subject to routine compliance reviews by the Internal Revenue Service (IRS), which is currently auditing fiscal years 2005 and 2006, and other taxing jurisdictions. While we believe we have adequate accruals for uncertain tax positions, there is no assurance that the tax authorities will not assert that we owe taxes in excess of recorded accruals or that recorded accruals will not be in excess of the final settlement amounts agreed to by the tax authorities.

Income from Continuing Operations. Income from continuing operations increased $19 million, or 21%, and $2 million, or 1%, for the three and nine months ended October 31, 2007, respectively, as compared to the same periods in the prior year. The increases in income from continuing operations primarily result from increases in operating income of $45 million and $65 million offset by decreases in interest income of $21 million and $55 million for the three and nine months ended October 31, 2007, respectively.

Earnings per Share (EPS) from Continuing Operations. Diluted EPS from continuing operations was unchanged for the three months ended October 31, 2007 as compared to the same period in the prior year reflecting an increase in income from continuing operations of $19 million offset by an increase in the number of weighted average shares outstanding of 67 million. Diluted EPS from continuing operations decreased $0.13 per share, or 16%, for the nine months ended October 31, 2007 as compared to the same period of the prior year primarily due an increase in the number of weighted average shares outstanding of 72 million. The increase in the weighted average shares outstanding for the three and nine months ended October 31, 2007 is primarily due to the sale of 86 million shares of common stock in connection with our October 2006 initial public offering.

Discontinued Operations . During the nine months ended October 31, 2007, we completed a reorganization transaction resulting in the disposition of our 55% interest in our consolidated majority-owned subsidiary, AMSEC LLC, in exchange for the acquisition by us of certain divisions of AMSEC LLC. We recorded a pre-tax gain on sale of $33 million in discontinued operations on the portion of the business retained by the other party that owned 45% of AMSEC LLC. We recorded a pre-tax gain of $19 million in discontinued operations during the three and nine months ended October 31, 2006 related to the sale of ANX, a majority-owned subsidiary, on October 27, 2006.

The results of operations and the financial position of ANX and the divisions of AMSEC LLC retained by the other party have been reported as discontinued operations for all periods presented.

Net Income and Earnings per Share. Net income increased $7 million and $9 million during the three and nine months ended October 31, 2007, respectively, compared to the same periods of the prior year. This reflects increases in income from continuing operations of $19 million and $2 million for the three and nine months ended October 31, 2007, respectively, offset by a decrease in income from discontinued operations of $12 million for the three months of October 31, 2007 and an increase in income from discontinued operations of $7 million for the nine months ended October 31, 2007. Diluted EPS decreased $0.03 per share, or 11%, and $0.13 per share, or 15%, for the three and nine months ended October 31, 2007, respectively. The decline in EPS for the three and nine months ended October 31, 2007 compared to the same period of the prior year is primarily due to the sale of 86 million shares of common stock in connection with our October 2006 initial public offering partially offset by increased net income.

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