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Article by DailyStocks_admin    (07-01-08 08:11 AM)

The Daily Magic Formula Stock for 07/01/2008 is SM&A. According to the Magic Formula Investing Web Site, the ebit yield is 17% 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

Overview—Development of Business

SM&A is the world's leading provider of Competition Management (business capture and proposal development) services, and a leading provider of Program Services (post-award risk mitigation and profit maximizing) services. 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, homeland security, aerospace, systems integration/information technology, and engineering sectors.

We were founded as a California corporation in 1982 and reincorporated in the state of Delaware in 2006. After sixteen years we completed an initial public offering in January 1998.

Business Strategy

We support our clients by providing a full array of high-value 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 high value technical and management leadership to their awarded programs. While the Company operates in one business segment, our business strategy is to classify the services we offer under the following two categories:

Competition Management. Represents consulting services which provide project leadership to help our clients strategically position themselves, identify business opportunities, and formulate and prepare competitive bids. We are the largest provider of Competition Management services in the world; and

Program Services. Represents consulting services that assist our clients in keeping their programs on schedule and under budget while increasing their probability of successful program delivery.

Competition Management

We provide Competition Management services through proprietary proposal management strategies and processes. In conjunction with these processes, we typically assume a leadership role and place dedicated teams at client facilities to manage all aspects of the competitive proposal development effort. Since 1982, we have managed more than 1,200 proposals worth more than $340 billion for our clients and have achieved an 85% win rate on awarded contracts. The combination of our high win rate and reputation has contributed to our dominant market share of Competition Management services outsourced by government contractors, while also leading to an increase in the amount of business from firms interested in winning commercial projects. The phases of our Competition Management services include:

The Pursuit Phase. Our team assists the client in the creation of a winning strategy that leads to the selection of sub-contractors, an investment plan, a technical baseline, and a program implementation plan. We typically deliver this support in the form of a small, very high-value team.

The Proposal Phase. Our team manages a client team, typically 10 to 200 engineers, information technology specialists and managers, providing full time, hands-on execution of the process from strategy formulation, through all phases of proposal preparation and review, to post-submittal responses to the government's questions. The proposal process typically requires three to twelve months of intense activity at the client's site.

The Evaluation Phase. After the proposal is submitted, the proposal team's interaction with the U.S. Government is a critical part of our winning process. We support our clients with a small core team to answer formal questions from the government and prepare the best and final offer. Another area of our action during the government's proposal evaluation period is working with the client's team in preparation for winning the award. Many proposals include a very aggressive start-up phase that requires the delivery of significant products within the first 30 to 60 days after the contract award. We provide management support, program planners and schedulers, systems engineers, and other specialists to assist the client's team to meet early post-award commitments. This support leads naturally into the provision of Program Support services.

Proposal Management Functions and Skills. We provide our clients with the full range of skills and functions they need to prepare winning proposals. As we have grown, we have provided a greater selection of services to our clients as they have concurrently grown more accustomed to outsourcing various proposal management functions.

The following provides some description of the types of services we deliver in support of Competition Management

Win Strategist. Early in the competitive process, we help our clients position themselves to win. Win Strategists are typically senior SM&A associates with high-level executive backgrounds.

Proposal Manager. The proposal manager is responsible for the timely execution of a client's proposal. All SM&A and client personnel working on the proposal report to the SM&A proposal manager. SM&A proposal managers have strong technical and programmatic backgrounds and generally have had senior level responsibilities, such as vice presidents, general managers, program managers, or chief engineers before coming to work for us. SM&A only assigns individuals as proposal managers who have had significant prior experience with SM&A and our processes.

Executive Summary Author. When the proposal requires an executive summary, we often supply our clients with an author capable of fusing a wide array of topics into a compelling short story that explains "why us?" to the customer. These authors often have exceptional presentation expertise, and domain knowledge of the client's industry.

Technical Volume/Book Leader. The technical volume can be the most difficult part of a proposal because it forms the foundation of the client's offering, and usually involves the greatest number of client personnel. SM&A technical volume leaders have similar experience profiles to those of proposal managers.

Management Volume/Book Leader. Management volumes usually have fewer authors than technical volumes, but are of critical importance as they describe how the client will be organized to accomplish what has been proposed and who will actually lead the effort, and will determine the use of facilities, tools and processes, etc. As a result, SM&A management volume leaders may write more of this volume themselves. Management volume leaders are usually experienced industry senior managers.

Cost Volume/Book Leader. The cost volume leader often works with a large group of client accounting and cost estimating personnel. This task is challenging because the cost volume leader must understand both cost accounting and engineering principles.

Price-to-Win Support. This function often supports Win Strategy formulation as well as competitive pricing. Skills used include derivative pricing, parametric pricing, and competitive analysis.

Integrated Master Plan/Integrated Master Schedule Specialist. This specialist integrates the entire program: engineering, management, risk, schedule, and staffing. This skill is also in high demand in the program support services side of the business.

Orals Coach. If the proposal submittal has an oral presentation component, we will often support our client with intensive training and preparation. Orals coaches are highly experienced communications experts.

Production Leader. The production leader coordinates the physical creation of the proposal product, either in hard copy and/or in electronic format. The production leader is an experienced graphics artist with exceptional organizational and leadership skills.

Production Support. During times of intense proposal activity, clients are often understaffed in the area of graphics and word processing personnel. SM&A has a cadre of very experienced and high-quality production support personnel capable of working more quickly and to a higher level than can be obtained through temporary employment agencies or often the clients' own staff.

Red Team Leader. Proposals will typically undergo one or more major reviews to ensure quality and consistency. Red Team leaders are senior level managers capable of organizing a very intense two- to three-day review process.

Program Services

Program Services comprise all aspects of successful program delivery. Since past performance (i.e., a company's contract performance) is a large part of the graded score in competitive federal procurements, our clients especially value our support in this area. Some notable programs for which we provided our services in 2007 include Accenture LTD's U.S. Visit, The Boeing Company's Future Combat Systems and Ground-based Midcourse Defense, and The Raytheon Company's Exo-atmospheric Kill Vehicle. The types of services we provide fall into two basic categories, Program Management Consulting and High Value Program Management Solutions. These two categories include:

Program Management Consulting

Leadership and Technical Services. Our Leadership and Technical Services provide program management and systems engineering leadership to enhance our clients' program performance. SM&A supports the needs of clients' program teams that range from surge support when on-boarding a program, to mentoring inexperienced teams of more junior personnel. SM&A can provide the needed personnel for short periods or for the duration of the program.

Integrated Staffing™. Integrated Staffing is uniquely positioned to serve our clients' program support needs. As a division of SM&A, we bring industry knowledge and experience to the execution of complex, technically challenging programs. Our experience across all program phases from planning through execution, coupled with our client-focus and commitment, provide a strong foundation for success. Integrated Staffing offers program support skills critical to the startup, re-plan, or ongoing execution of programs: Systems Engineering, Project Management, Scheduling/Planning, and Business Specialists. Our Associates bring hands-on experience and integrate into client teams to contribute to program success starting from day one. We combine our experience with client processes and tools to accomplish program activities, at your direction and under your management.

High Value Program Management Solutions

AwardFee™. Award fee is a contractual approach used by the buyer to motivate the contractor's performance areas deemed critical to the program's success (e.g. technical, logistics support, cost, and schedule) and is subjectively and quantitatively measured and evaluated. Our solution focuses resources according to the categories, weightings and criteria identified in the contract. Our approach is adapted from our Competition Management process to develop a winning strategy for each award fee evaluation period, improve program implementation, and ensure that every meeting, deliverable and customer communication reinforces the case for maximal award fee.

Milestone Success™. The Milestone Success solution helps clients to properly complete Program Reviews and ensure that the program performs on-schedule, remains on-cost and operates at optimum levels. In addition, Milestone Success is designed to increase customer satisfaction through the clear communication of the program's expectations and successes. Our solution provides a strategy-driven process implemented by highly skilled associates with extensive systems engineering and Technical Review experience.

Markets for Competition Management Services

We assist companies seeking to identify, win and implement new business. Since 1982, we have helped clients win contracts, a service that generated about 56% and 63% of our revenue in 2007 and 2006, respectively. Our major clients' core businesses are in providing various defense and aerospace goods and services to the federal government and represented about 76% and 75% of our proposal management activity in 2007 and 2006, respectively. Our reputation in the market is based on our ability to help our clients win consistently. This reputation for winning provides us with an opportunity to provide new and existing clients with services beyond Competition Management.

We provide our clients with a full service strategic consulting and proposal management capability. The need for this specialized capability can be found wherever companies have a requirement to produce a competitive proposal in response to a request for proposal from a corporate, federal, state, local or international entity. We have also been marketing with increasing success to companies pursuing non-federal business. The largest single portion of our business is derived from supporting companies engaged in the pursuit of competitively awarded federal contracts, mainly from the Department of Defense (DoD).

Supporting Proposals in Response to Federal Procurements. According to the Government Electronics and Information Technology Association (GEIA), the federal government will obligate approximately $151 billion in fiscal year 2008 to acquire goods and services from large prime contractors, of which approximately two-thirds to three-quarters will be obligated by the DoD. Federal spending of this nature is expected to remain level in 2008 and may continue at this rate for another two to three years due to resources constrained by the global war on terror, current operations in Iraq and Afghanistan, increased percentage of supplementals allocated to procurement, and current federal deficit pressures. A significant portion of these funds will be spent on information technology goods and services. Much of this procurement spending will be awarded competitively. Companies generally spend from $500,000 to $2 million to prepare a proposal for a must-win program. Federal law and policy encourages this spending and allows companies to seek reimbursement for about 50% of these expenses. Some portion of the money spent to bid on a program is often outsourced and it is this outsourcing for proposal services that represents the majority of our traditional source of revenue. Furthermore, the spending cited above is happening during a time of extreme demographic pressures in the defense and aerospace industry. The defense contractor workforce is retiring in record numbers—by 2010, it is projected that approximately 70,000 defense engineers within the aerospace workforce will become eligible for retirement (Source: Aviation Week & Space Technology, February 2007). If current trends hold, the industry will be able to replace only about half the number expected to retire. For this reason alone we can expect continued outsourcing demand from our clients. Finally, as part of our support to clients in leading the development of a competitive proposal, we often provide competitive strategy services and management consulting services.

Supporting Proposals in Response to State and Local Procurements. According to the National Associate of State Budget Officers (December 2007), state and local governments will spend approximately $686 billion on goods and services in 2008. State and local service-based projects are generally smaller and less complex than federal projects, thus making the potential market for our services smaller in the state and local market than in the federal market. As with non-DoD federal procurements, the larger and more complex state and local procurements often involve information technology and we have provided significant support to our clients in assisting the creation of their proposals for state and local government contracts.

Supporting Proposals in Response to International Government Procurements. Large international competitions, especially for defense goods among America's allies, are, in many ways, structured similarly to procurements managed by the DoD. We have enjoyed a significant degree of success and involvement with these overseas competitions over the years, especially with our established client base.

Supporting Proposals in Response to Corporate Procurements. We believe that large and technically complex corporate procurements have increasingly used a formal request for proposal rather than relationship selling to aid in determining the winning bidder. The processes and tools we developed for helping clients win government contracts are largely applicable in this market as well.

We project that the U.S. market for our proposal services is at least $1 billion annually for governmental services and substantially larger within the outsourced commercial markets. This assessment is derived from our ongoing analysis of several recognized industry source documents and includes revenues we expect to be generated from DoD, civil, state and local government procurement awards for U.S. based large business concerns (excludes dollars set aside for small business firms).

Factors Driving Growth in Competition Management Services

We believe the growth of the market for outsourced proposal management is dependent on a number of factors, including but not limited to:

An Increase in the Defense Spending Budget. The defense budget is growing in some areas as the need for modernization of aging equipment becomes more pressing, and America's war on terrorism continues. The latter factor will drive defense spending for the foreseeable future. Furthermore, while defense spending appears likely to increase for the next few years, it is important to understand the distinction between spending on ongoing operations and spending on new systems and research and development—the former type of spending is not as beneficial to us as it does not generally result in new competitive procurements.

The ongoing expansion of Department and Homeland Security responsibilities and its role in the Global War on Terror (GWOT) should also continue to drive increasing need for proposal management services on Federal procurement opportunities.

An Increase in the Importance of Proposal Management Services. We believe that various factors in the aerospace and defense industries are contributing to an increased need to win projects. The ongoing consolidation activity in these industries has resulted in fewer, larger firms as well as an increased disparity between the resources of these larger firms and the remaining relatively smaller firms. The large consolidated firms are more motivated to win programs to support their operations and the smaller firms have an even greater need to access the resources necessary to compete with larger firms for programs. The U.S. Government has also conducted a number of "winner-take-all" competitions in which the government chose a single winner from two or more large aerospace suppliers that had historically supplied the products or services. The winners received multi-billion dollar contracts while the losers were either allocated a program subcontract or required to shut down their production facilities and re-assign or lay off several thousand workers. Consequently, proposal management services and a winning outcome have become increasingly crucial to all competitors.

A Decrease in Internal Competitive Proposal Capabilities of Client Community. We believe that the internal proposal capabilities of the clients we have targeted for selling services to have decreased over the last several years due to fiscal pressures exerted on these companies. This trend is expected to accelerate as the pace of retirements within our client community peaks in the next five years creating additional opportunities for proposal related services.

Markets for Program Services

The access to key industry decision makers provided by the successful conclusion of a proposal often gives us the ability to provide Program Services to our clients. The early stages of a large or complex program are often the most critical. Our familiarity with the program, developed during the proposal phase, can compel our clients to hire us to ensure a rapid and successful program start. Services provided include systems engineering, program management, and project integration.

We offer our Program Services as a direct result of client requests to provide such services beginning in the mid-1990s. This service generated about 44% and 37% of our revenue in 2007 and 2006, respectively. The size of this market is in the billions of dollars annually, much of it in support of DoD prime contractors executing research, development, test and evaluation (RDT&E) contracts. According to DoD, in fiscal year 2007, $73 billion was in support of RDT&E programs (see: http://www.defenselink.mil/comptroller/defbudget /f... ). Typically, prime contractors subcontract between 40-70% of the work share on such efforts. NASA, the Department of Energy and large federal and state information technology programs provided added value to this market numbering in the billions of dollars annually.

One prime entry point into these markets is through established clients with whom we have built a solid relationship based on winning important programs and trust. Several times a year we help our clients win new business. This often provides us with an opportunity to grow a successful business relationship from delivering proposal support services to delivering a wider range of services for our clients.

Factors Driving Growth in Program Services

Strong client relations developed and maintained through program support, management consulting, and competitive strategy services also enhance our ability to provide proposal management services to our clients. We believe we can successfully compete in these markets by using our reputation for winning to access potential clients, and then provide those clients with a wide range of services based on our experienced workforce, disciplined processes, and understanding of complex systems.

As previously mentioned, our client base is under demographic pressures. Increased demand for goods and services for defense and homeland security purposes factored in with the accelerating pace of retirements in the industry indicates a shortfall of some 255,000 knowledge workers from 2003 through 2007. About half of this shortfall is due to retirements and half is due to increased demand. We primarily recruit new workers from the ranks of the best and brightest of the newly retired aerospace and information technology community. We believe the industry's experienced personnel challenge is our opportunity. Further analysis can be found in the February 2007 issue of Aviation Week & Space Technology. The article Vanishing Act states, in part, "If current trends hold, the industry will be able to replace only about half of the military engineers that are expected to retire by 2010. And that doesn't take into account the additional engineers that will be needed to accommodate even modest growth in U.S military spending. The bottom line: a potential shortfall of up to 90,000 defense engineers by 2010." This issue is further exacerbated by the difficulty experienced by foreign nations in obtaining the required security clearances to work in the defense and homeland security industries.

MANAGEMENT DISCUSSION FROM LATEST 10K

SM&A's discussion and analysis of its financial condition and results of operations are based upon SM&A's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note that preparation of this Annual Report on Form 10-K requires SM&A to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of its financial statements, and the reported amounts of revenue and expenses during the reporting period. SM&A bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily derived from other sources. There can be no assurance that actual amounts will not materially differ from those estimates.

SM&A has identified the policies below as critical to its business operations and the understanding of its results of operations.

Revenue Recognition. We recognize revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collection is reasonably assured. The majority of our services are provided under "time and expenses" billing arrangements and revenue is recognized on the basis of hours worked plus other reimbursable contract costs incurred during the period. Revenue is directly related to the total number of hours billed to clients and the associated hourly billing rates. A limited amount of revenue is also derived from success fees, offered to clients as a pricing option, and recorded as revenue only upon attainment of the specified incentive criteria. Success fees are not billable and revenue is not recorded until the client wins a contract.

Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Estimates made in preparing the financial statements include the allowance for doubtful accounts, reserves for discontinued operations, and income tax valuation allowances.

Goodwill. Goodwill represents the excess of purchase consideration over the fair value of assets acquired less liabilities assumed in a business acquisition. The Company accounts for its goodwill in accordance with the provisions of Statement of Financial Accounting Standards No. 142, " Goodwill and Other Intangible Assets ." Under these rules, goodwill and other intangible assets deemed to have indefinite useful lives are not amortized but are subject to impairment tests at least annually, or more frequently if circumstances occur that indicate impairment may have occurred.

Stock-Based Compensation. We recognize stock-based compensation expense in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123(R), " Share-Based Payment. " Prior to 2006, we accounted for stock awards under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, " Accounting for Stock Issued to Employees " and related interpretations. In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107, " Share-Based Payment " relating to SFAS 123(R). We did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123(R) unless options granted had an exercise price greater than the market value of the underlying common stock on the date of grant. The fair value for each option granted is estimated at the date of grant using a Black-Scholes option pricing model. We estimate the expected life, expected volatility and expected forfeitures of the stock options based upon historical data.

Expected Life. The expected life of options granted represents the period of time for which the options are expected to be outstanding.

Expected Volatility. The estimated expected volatility is measured on historical realized volatility. Beginning April 1, 2007, volatility is estimated over the expected life of the option.

Risk-Free Interest Rate. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the date of grant.

Dividends. The Company does not currently anticipate paying any cash dividends on its common stock. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

Forfeitures. SFAS 123(R) requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. To determine an expected forfeiture rate, the Company examined the historical employee turnover rate since inception. Forfeitures are based on historical data specific to employee characteristics. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.

Overview

SM&A is the world's leading provider of Competition Management (business capture and proposal development) services, and a leading provider of Program Services (post-award risk mitigation and profit maximizing) services. 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, homeland security, aerospace, information technology, healthcare and engineering sectors.

One of our initiatives over the past three years has been to reduce our customer concentration risk by penetrating new markets and providing our services to new customers within our existing markets. As the table below reveals, our strategy of mitigating our customer concentration risk has worked as our concentration on our top clients has been declining. It should still be noted that a loss of one or more of these major clients, a decrease in orders by one or more of these clients or a change in the combination of services purchased by one or more these clients could adversely affect our revenues, net income and margins.

Customer concentration risk is defined as having a significant amount of the Company's revenue being generated on a single project. For example a Program Services project, which we staffed with more than 35 of our associates, generated approximately 15% of our total revenue in 2005. While we continue to provide our services to this program, our client unexpectedly reduced our services over a three month period which led to a reduction in our services by approximately $7.8 million in fiscal 2006 compared to fiscal 2005. While this risk is not evident today, the possibility to provide a significant volume of our solutions and services on any one given program has a high probability to occur.

Our effort to expand into new markets over the past few years has also improved. As the "Revenues by Market Vertical" table below reveals, our revenues in our less mature non-aerospace and defense vertical realized an increase during 2007 coming off a decline in 2006 revenues. This decline was due to concentration risk at our largest client in this vertical. This one client, for which we provide our Competition Management services through a business process outsourcing arrangement, reduced our services by approximately $5.1 million due to their internal budget pressures. We continue working on diversifying our customer concentration risk at our significant by providing our services across multiple divisions so that no one division can have a significant impact on the total services being provided.

We also realize that our heritage, brand name awareness, and value proposition has historically been tied to our Competition Management services. We have helped our clients win over 1,200 proposals worth more than $340 billion with an 85% win rate on dollars awarded. We are executing towards a strategy that will establish our reputation as not only providing valuable Competition Management services, but also our ability to provide a broad range of high value solutions and leadership on those programs which our clients have been awarded. We feel that we are uniquely positioned to provide our senior leadership and solutions throughout the entire lifecycle of a program; from the initial strategy development to the delivery of the product by our client to their customer. Our end-to-end solutions and senior leadership and experience will help our clients not only win more business, but increase their profitability on their programs through the efficient and effective execution of their program.

Starting in 2006, our focus on expanding our Program Services offerings led to two acquisitions in fiscal 2007. These acquisitions, along with our latest solution offerings, have generated consistent sequential quarterly revenue growth. Our growth has also been generated by our Account Executives' ability 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 both win and execute on their competitively awarded programs. The following table summarizes our Program Services revenue breakdown.

We have spent the last few years building our infrastructure to support our expected growth. We invested in marketing and new solutions and services collateral; we invested in the creation of numerous training courses and quality initiatives to make sure we were delivering a consistent quality service or solution; we invested in the implementation of an Oracle enterprise resource planning software system and a knowledge management software system; we invested in our recruiting capabilities in order to source quality candidates to provide our broad array of services; and we invested in the development of our new solutions and service offerings. We now believe that we have invested in what is required to manage our expected growth.

On February 9, 2007, the Company completed an acquisition of Project Planning, Inc. ("PPI"). At closing, SM&A paid total consideration valued at approximately $6.7 million, including $4.5 million in cash, and could pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals for SM&A's Project Planning division. See Note 4 to the Consolidated Financial Statements.

On September 14, 2007, the Company completed an acquisition of Performance Management Associates, Inc. ("PMA"). At closing, SM&A paid total consideration valued at approximately $2.8 million, including $2.3 million in cash, and could pay up to an additional $1.3 million over a three year period upon satisfaction of certain revenue goals for SM&A's Performance Management division. See Note 4 to the Consolidated Financial Statements.

We feel confident that our strategy of providing end-to-end high value solutions and services to our customers across the program lifecycle is the correct growth strategy. We believe that our planned fiscal year 2008 growth should lead to increasing shareholder value.

Results of Operations

We present the table below to show how the operating results have changed over the past three years. Next to each year's results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.

Comparison of Fiscal Years Ended December 31, 2007, 2006 and 2005

Revenue. Revenue increased $26.5 million or 36.9% to $98.3 million in fiscal 2007, compared to $71.8 million for 2006. The acquisitions completed in fiscal 2007 contributed $9.8 million or 10.0% of total revenue in fiscal 2007. The increase in our revenue was realized across all of our service lines and market verticals. Total non-aerospace and defense revenue increased $4.9 million, or 26.8% to $23.2 million as compared to $18.3 million in the prior year. Total aerospace and defense revenue increased 40.4% to $75.1 million compared to $53.5 million for fiscal 2007 and 2006, respectively. During 2007, revenues from our Competition Management and Program Services service lines were 56.3% and 43.7%, respectively, as compared to 63.0% and 37.0% in 2006. We added 32 and 22 new customers in fiscal 2007 and 2006, respectively. These new customers accounted for 10% and 6% of our total revenues in 2007 and 2006, respectively. Revenue from success fees were $780,000 and $900,000 in 2007 and 2006, respectively.

Starting in 2006, our focus on expanding our Program Services offerings led to two acquisitions in fiscal 2007. These acquisitions, along with our latest solution offerings, have generated consistent sequential quarterly revenue growth. Our growth has also been generated by our account executives' ability 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 both win and execute on their competitively awarded programs.

Revenue decreased $4.9 million or 6.4% to $71.8 million in fiscal 2006, compared to $76.7 million for 2005. The decrease in our revenue was realized in our non-aerospace and defense business and due primarily to one client who reduced our service levels due to their internal budget pressures. We increased our service levels with this client at the end of the third quarter of 2006 as the customer entered its new fiscal year. This reduction accounted for a decrease of $5.1 million, or 32.3% compared to the prior year. Total non-aerospace and defense revenue declined $4.3 million, or 19% to $18.3 million as compared to $22.6 million in the prior year. Total aerospace and defense revenue declined 1.2% to $53.5 million compared to $54.1 million for fiscal 2006 and 2005, respectively. During 2006, revenues from our Competition Management and Program Services service lines were 63.0% and 37.0%, respectively, as compared to 57.6% and 42.4% in 2005. During the second half of 2005 we experienced a significant reduction in services on a Program Services project. The reduction resulted from a client who is experiencing budget pressure on one of their programs. This budget pressure continued throughout 2006 which impacted our ability to continue to service the client at the levels maintained during the first nine months of fiscal 2005. This reduction was offset by an increase in new solution and offering revenue of $1.2 million.

Gross Margin. Gross margin increased $10.1 million, or 35.1% to $38.9 million for fiscal 2007 compared to $28.8 million for 2006. As a percentage of revenue, fiscal 2007 gross margin declined to 39.6% as compared to 40.1% in 2006. The decrease in gross margin as a percentage of revenue was due to our mix of services, increased benefit costs, and some moderate increases in some labor rates paid to our associates. We expect that our future gross margins will be consistent with current year.

Gross margin decreased $3.2 million, or 10.0% to $28.8 million for fiscal 2006 compared to $32.0 million for 2005. As a percentage of revenue, fiscal 2006 gross margin declined to 40.1% as compared to 41.7% in 2005. The decrease in gross margin as a percentage of revenue was due to our mix of services, increased benefit costs, and some moderate increases in some labor rates paid to our associates.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("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.

On March 31, 2007, the Company's Chairman and Chief Executive Officer, Steven S. Myers, retired and on April 1, 2007, was replaced by Cynthia Davis as Chief Executive Officer. Ms. Davis was also elected to the Board of Directors. A current board member, Dwight Hanger, replaced Mr. Myers as Chairman of the Board. The expense associated with this transition, which includes a retirement payment of $500,000 and legal and professional fees of approximately $200,000, are included in SG&A for the year ended December 31, 2007.

Subsequently, effective July 18, 2007, the Board of Directors accepted the resignation of Cynthia A. Davis as Chief Executive Officer and as a Director, and the Company and Ms. Davis entered into a separation agreement including a mutual release of claims and a payment of $475,000 by the Company. Cathy L. McCarthy was elected as President and Chief Executive Officer following the resignation of Ms. Davis and entered into an employment agreement with the Company, and was granted 200,000 stock options vesting quarterly over four years. The expense associated with this transition, which includes a payment of $475,000 to Ms. Davis and legal and professional fees of approximately $125,000, are included in SG&A for the year ended December 31, 2007.

SG&A in fiscal 2007 increased $5.3 million, or 22.7%, to $28.6 million, as compared to $23.3 million for the same period of the prior year. As a percentage of revenue, our SG&A decreased to 29.1% for fiscal 2007, compared to 32.5% for 2006. Excluding stock based compensation, acquisitions SG&A and earn-out expenses, and management transition related expenses, SG&A as a percentage of revenue decreased to 23.0% for the year ended December 31, 2007, as compared to 30.6% for the prior year. The current year increase of approximately $600,000, excluding the items noted in the table above, was due to increased recruiting and training expenses associated with our strong revenue growth and our strategic planning efforts.

SG&A expenses in fiscal 2006 increased $1.7 million, or 7.9%, to $23.3 million, as compared to $21.6 million for the same period of the prior year. As a percentage of revenue, our selling, general and administrative expenses increased to 32.5% for fiscal 2006, compared to 28.1% for 2005. The $1.7 million increase was due to a $1.2 million planned expense related to the development of new solutions for our Program Services business. In addition, we completed the implementation of our Oracle ERP system which included expenses of approximately $600,000 in 2006.

Operating Income. Operating income increased $4.8 million, or 87.3%, to $10.3 million in fiscal 2007, compared to $5.5 million for the prior year. As a percentage of revenue, operating income increased to 10.5% for the year ended December 31, 2007, as compared to 7.7% for the prior year. Operating income primarily increased due to the increase in sales offset by a decrease in gross profit as a percentage of sales and an increase in SG&A, as discussed above.

For fiscal 2006, operating income decreased by $4.9 million, or 47.1%, to $5.5 million compared to $10.4 million for 2005. As a percentage of revenue for fiscal 2006, operating income decreased to 7.7% compared to 13.6% for 2005. The decrease in amount and as a percentage of revenue in fiscal 2006 was due to the increase in SG&A as described above, offset by the increase in gross margin dollars.

Interest Income, net. Interest income net, decreased by $370,000, or 47.9%, to $403,000 for 2007 compared to interest income, net of $773,000 for the same period of the prior year. This decrease is attributable to cash consideration paid for acquisitions completed during 2007 and the results of lower interest rates earned on cash investments.

Income Tax Expense. Our effective income tax rate for fiscal 2007 was 41.5% compared to 42.0% in 2006. Our effective income tax rate for fiscal 2006 was 42.0% compared to 35.8% in 2005. During 2006, the Company recorded an increase to income tax expense of approximately $40,000, which related to an increase in tax expense from an income tax examination.

Net increase in net cash provided by operating activities in fiscal 2007 as compared to 2006 and 2005 was due to an increase in other current liabilities of $2.1 million and the change in accounts receivable of $406,000 inflow, $5.3 million outflow and $2.8 million inflow in fiscal 2007, 2006 and 2005, respectively. In 2007 we improved on our timing of our collection cycle which generated $406,000 compared to a cash outflow of $5.3 million in fiscal 2005. The increase in fiscal 2007 was offset by decreases in prepaid expenses and other current assets of $1.1 million and an increase of accounts payable of $788,000.

Net cash used in investing activities was $19.5 million in 2007, down from the cash provided of $3.2 million from 2006 and up from the cash used of $6.8 million from 2005. The increase in cash used in investing activities was a result of $10.6 million net cash outflows from the purchases of short term investments in marketable securities and $8.1 million cash outflows of cost of acquisitions, net of cash acquired.

Net cash provided by financing activities was $234,000 in fiscal 2007 compared to cash usages of $8.2 million and $8.1 million in fiscal 2006 and 2005, respectively. In addition, we received cash proceeds from the issuance of common stock of $862,000, $519,000 and $2.0 million in fiscal 2007, 2006 and 2005, respectively. This increase was offset by cash outflows of $842,000, $8.7 million and $10.1 million in fiscal 2007, 2006 and 2005 related to the Company's share repurchase program.

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 years ended December 31, 2007 and 2006, the Company repurchased 139,417 shares at a total cost of $842,000 and 1,402,277 shares at a total cost of $8.7 million, respectively. Since the inception of the share repurchase plan, the Company has repurchased 3,354,860 shares at a total cost of $24.2 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. Shares repurchased under the plan prior to our reincorporation in the state of Delaware were cancelled. After the date of reincorporation (November 30, 2006), the shares are included in treasury shares. The Company currently has approximately $5.8 million remaining in share repurchase authorization.

Cash and cash equivalents decreased $9.7 million during the year to $5.4 million at the end of 2007, due to cash used for acquisitions.

The Company has a revolving credit agreement which allows for borrowings up to $10.0 million at the 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 April 30 th 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 liabilities (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. At December 31, 2007, the Company was in compliance with its covenants and had no outstanding borrowings under the line of credit. At December 31, 2007, $10.0 million was available.

On February 9, 2007, the Company completed an acquisition of Project Planning, Inc. ("PPI"). At closing, SM&A paid total consideration valued at approximately $6.7 million, including $4.5 million in cash, and could pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals for SM&A's Project Planning division. See Note 4 to the Consolidated Financial Statements.

On September 14, 2007, the Company completed an acquisition of Performance Management Associates, Inc. ("PMA"). At closing, SM&A paid total consideration valued at approximately $2.8 million, including $2.3 million in cash, and could pay up to an additional $1.3 million over a three year period upon satisfaction of certain revenue goals for SM&A's Performance Management division. See Note 4 to the Consolidated Financial Statements.

We believe we have sufficient working capital available under the line of credit and cash generated by continuing operations will be sufficient to fund operations for at least the next twelve months.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Total aerospace and defense client revenue was slightly down to $19.5 million for the three months ended March 31, 2008 as compared to $19.9 million in the prior year. Non-aerospace and defense client revenues increased 60% to $5.9 million from $3.7 million for the three months ended March 31, 2008 and 2007, respectively. The Company is building momentum 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.
Revenues from our Competition Management and Program Services lines were 52.4% and 47.6%, respectively, for the three months ended March 31, 2008 as compared to 61.0% and 39.0% in 2007. While the level of activity within Competition Management was solid in the first quarter, there were fewer large Federal procurement opportunities in the first quarter of 2008 as compared to the first quarter of 2007. Large 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 success fees of $226,000 and $0 for the three months ended March 31, 2008 and 2007, respectively.
During 2008, our Program Services revenue has been positively impacted by the acquisitions of Project Planning, Inc. (“PPI”) and Performance Management Associates, Inc. (“PMA”) in 2007. These acquisitions, along with our solution offerings, have generated consistent sequential quarterly revenue growth. Our growth has also been generated by our Account Executives’ ability 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.
Gross Margin. Gross margin increased $0.5 million, or 5.4%, to $9.7 million for the three months ended March 31, 2008 compared to $9.2 million for the same period of the prior year. The increase 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. As a percentage of revenue, gross margin decreased to 38.3% for the three months ended March 31, 2007 compared to 39.0% for the same period of the prior year. The decline was due to revenue mix and pricing structures offered to some of our largest customers, which included client investments of $122,000 to secure future services. We expect the gross margins to be approximately 39.5% for fiscal year 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“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 increased $2.1 million, or 30.4%, to $9.0 million for the three months ended March 31, 2008 compared to $6.9 million for the same period of the prior year. Included in the SG&A increase was an earn-out amount earned by the principal of PPI of $876,000, $1.1 million attributable to the Company’s offsite training conference held in March 2008 and approximately $60,000 of legal fees related to the proxy contest as of March 31, 2008. Stock-based compensation included in SG&A was $421,000 and $400,000 for the three months ended March 31, 2008 and 2007, respectively.
On March 31, 2007, the Company’s Chairman and Chief Executive Officer, Steven S. Myers, retired and on April 1, 2007, 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 for the three months ended March 31, 2007.

Excluding the anticipated expenses including, stock-based compensation, acquisitions 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% for the three months ended March 31, 2008, as 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. As a percentage of revenue, operating income decreased to 3.1% for the three months ended March 31, 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, as discussed above.
Income Tax Expense . Our effective income tax rates for the three months ended March 31, 2008 and 2007 were 42.9% and 40.9%, respectively. The increase in the income tax rate for the three months ended March 31, 2008 was related to the cost of stock-based compensation and the timing of recognizing the related tax benefits. We estimate the tax rate for the full year 2008 will be approximately 42 percent.
Capital Resources and Liquidity

Our working capital decreased to $28.6 million at March 31, 2008 from $28.9 million at December 31, 2007. Cash and cash equivalents plus investments decreased to $10.7 million at March 31, 2008, from $16.0 million at December 31, 2007. The decrease in cash and cash equivalents plus investments was primarily due to 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 of expenses paid on the total $1.1 million of fees related to the Company’s offsite training event, offset by the increase in the number of day’s sales outstanding (“DSO”) to 80 days from 69 days at March 31, 2008 and December 31, 2007, respectively. The increase in DSO’s at March 31, 2008, was primarily due to approximately $2.0 million of the $4.5 million of unbilled revenue, included in net accounts receivable, related to accrued 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 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.

CONF CALL

Doug Sherk

Well thank you, operator, and good afternoon everyone. Thank you for joining us this afternoon for the SM&A conference call with webcast to review the financial results for the fourth quarter ending December 31, 2007. If you haven't received a copy of the results and release that was issued at market close this afternoon and would like one, please call our office at 415-896-6820 and we'll get one to you immediately. We have arranged for a tape replay of this call which may be accessed by phone. The replay will be available approximately one hour after the call's conclusion and will remain in effect for seven days.

The number to access the replay is 800-405-2236 and the international number is 303-590-3000. The pass code for both replay numbers is 11109556 followed by the "#" sign. In addition, this call is being webcast live, is available as an archive at SM&A's website at www.smawins.com.

Before we get started, during the course of this conference call the company will make projections or other forward-looking statements regarding future events and the company's beliefs about its financial metrics and results for the full year ending December 31, 2008. We wish to caution you such statements or predictions that involve risks and uncertainties, actual results may differ materially. Factors that may affect the actual results are detailed in the company's filings with Securities and Exchange Commission including the company's most recent filings of Form 10-K. Additional factors underlying the company's forecast are dynamic and subject to change, therefore, this forecast speaks only for the date as given.

Now, I would like to turn the call over to Cathy McCarthy, President and Chief Executive Officer of SM&A.

Cathy McCarthy

Thanks Doug, and good afternoon, everyone. Thank you for joining us. With me today is Jim Eckstaedt, our new CFO, who joined us in January and we are very pleased to have him here onboard at SM&A. Today, Jim will begin with a review of our fourth quarter and full year financial results. Then, I will provide an update on our market strategy and current business initiatives. Jim will offer our early views of 2008 outlook, and then will open the call for questions. Jim?

Jim Eckstaedt

Thank you, Cathy, and good afternoon everyone. As Cathy mentioned, I'd like to start with a review of financial performance for the fourth quarter and full year 2007. We reported revenue of $24.1 million during the fourth quarter, an increase of 28% from 2006. Our acquisitions of Project Planning Incorporated or PPI and Performance Management Associates or PMA along with our legacy product offerings contributed approximately $9.8 million or roughly 10% of total revenue. Included in the $9.8 million is SM&A's scheduling product, offering revenue of about $1.3 million.

Fourth quarter net income increased 30% to $983,000, or $0.05 per diluted share, compared with $754,000 or $0.04 per diluted share in the prior year. Included in net income was $958,000 in expense, reflecting the amount earned by the principal of PPI as part of the acquisition. I'd like to walk you through this accounting transaction in some detail.

As part of our acquisition of PPI in February 2007, we agreed to an earn-out provision with the Principal of PPI. Under the agreement, he may receive earn-out payments payable over three years upon the successfully achieving certain revenue target in each 12-month period following the acquisition date. As part of the agreement, he is required to continue his employment with SM&A, in order for these payments to be earned. As part of acquisition due diligence, we always seek the input from legal and accounting professionals, with our intention that the earn-out would be included in purchase accounting and be recognized as part of goodwill on the balance sheet; because of the continuing employment provision in the agreement, however, we are required to report this earn-out as an expense item to our income statement for the fourth quarter. This accounting treatment had no impact on prior quarters. Excluding this adjustment on a tax effective basis, net income was $1.6 million for the fourth quarter.

Additionally, the earn-out represented $0.03 per share. Without the earn-out, earnings per share for the fourth quarter were $0.08, on par with analysts' consensus estimates.

I would like to quickly reiterate that PPI has been a very good acquisition for the company. It has allowed us to augment the range of program services that we offer to our clients. We are pleased with the growth and the acquisition was accretive in 2007.

Now turning to our revenue growth; revenue from aerospace and defense clients was $17.1 million for the quarter, an 18% increase for the same quarter of 2006. Revenue from non-aerospace and defense clients totaled $7 million, or a 63% increase from non-A&D revenue in the fourth quarter of last year. Non-A&D revenue represented 29% of the total fourth quarter revenue, compared to 23% a year ago. During the quarter, our top five customers accounted for 71% of our total revenue, compared with 67% a year ago.

Competition Management revenue increased slightly to $12.5 million, compared with $12.2 million in the fourth quarter of 2006. Competition Management represented 52% of total quarterly revenue in the recent fourth quarter, compared with 65% a year ago.

Program Services revenue during the fourth quarter increased 75% to $11.5 million, the same record level set in the third quarter. Program Services are a stable, predictable, incremental component of our revenue growth.

Our gross margin was 40.2%, a nice improvement from last year's 38.7%, and reflected a higher level of success fees earned, as well as revenue mix. SG&A expenses were $8 million for the quarter. This includes $958,000 in PPI expense. Stock-based compensation expense was $430,000 in the fourth quarter of 2007, compared with $319,000 in the fourth quarter of 2006.

Excluding stock-based compensation, and other acquisition expenses not related to PPI expense, SG&A for the quarter was approximately $5.7 million, unchanged from the prior year.

For the full year 2007 revenue grew 28% to a record $98.3 million. Net income was $6.3 million, a 73% increase over 2006 net income of $3.6 million. Earnings per diluted share were $0.33, compared to $0.19 per diluted share in the prior year.

Excluding the PPI expense taken in the fourth quarter, and the expenses associated with management transition in 2007, earnings per share would have been $0.40 per diluted share. We ended the year with $16 million in cash and investments.

Now I would like to turn the call back to Cathy.

Cathy McCarthy

Thank you, Jim. 2007 was a remarkable year for the company. We made significant progress in diversifying our client base and increase the number of solutions we offer to our clients.

Most importantly, we are executing on our strategy. Our strategy for lifecycle success is a powerful combination of our offering, over the client's lifecycle, of pursuing, winning and performing. This lifecycle extends from an inception of client's strategy, through competition and the win, and execution of the resulting program for project, resulting in winning strategy, winning competition and winning execution through lifecycle success.

Other companies may be positioned to assist clients with a portion of this vision, but only SM&A is positioned to deliver winning solution across the entire lifecycle.

Also in 2007, we completed and successfully integrated two acquisitions allowing us to expand our Program Services offering to our client. We navigated through a difficult management transition, and we accomplished these important steps by generating record revenue and record net income.

Most importantly, we continued to demonstrate to our clients that SM&A is a partner of choice, with a historical 85% win rate which continued through 2007. Our company has supported our clients in winning more than $340 billion in initial contract awards.

We have supported over 1200 proposals and 160 programs. Our success in 2007 demonstrates that outstanding bases of client clearly understand the value proposition that SM&A provide. Clients hire SM&A because of our reputation for winning, the outstanding quality of our growing team of associates, and our highly developed solutions.

Our team is widely recognized for its industry expertise, and its knowledge of our client markets and capability. We have demonstrated that we can bring real solutions to the table that address our clients' critical needs and help them with winning proposals and winning programs and projects. The result is that SM&A clients consistently outperformed their competition.

Our lifecycle support includes upfront strategy. As we announced in January, we established SM&A Strategic Advisors under the leadership of recently retired General Peter Pace. We are delighted to have General Pace, the former Chairman of the Joint Chiefs of Staff, as an integral member of our management team.

As the CEO of the Strategic Advisors subsidiary, he will be responsible for building our thought leadership and business intelligence capability for both our DoD clients and our outstanding new market. In addition, General Pace has joined our Board of Directors and his experience and insight will provide a valuable perspective to SM&A's strategic direction.

During the year, we acquired two best of breed providers of specialized Program Services. In February, we completed the acquisition of Project Planning Inc. or PPI and in September we acquired Performance Management Associates. Both of these acquisitions went extremely smoothly and they are already making a significant contribution to our revenue, our bottom line and our strategy. We are also very pleased with the growth in two service offerings that were introduced a little over a year ago, Integrated Staffing and Milestone Success. Overall, Program Services revenues grew 62% in 2007, to a record of $43 million.

During the past several months, we have been adding associates to support our continuing momentum in revenue growth. As we expand our solutions, it is critical that we expand our associates's knowledge of these solutions; so that we have a more expanded and diversified pool of talent. To ensure their success, we are making significant investments in training to achieve this goal. We are confident that this investment will have a substantial future payback as we continue to execute on our strategy.

Along with our hiring and training efforts, we are currently upgrading several IT systems that are designed to help us with our internal planning and resource allocation. We are enhancing our Enterprise Resource Planning software system and we are installing a Knowledge Management System. The projects are expected to be fully completed by early part of this fall.

For 2008, we intend to continue to implement our strategic plan, our strategy of providing full project and program lifecycle services to our client. We will look to expand our service offerings through internal development and acquisitions. We have only scratched the surface in terms of building our presence in industries outside of aerospace and defense, where there is a growing awareness of the need for SM&A's capability.

We have an account executive team that is second to none in the business, a highly talented team of associates in the field supporting our clients, and the financial resources to support our growth. We look forward to another year of progress in 2008.

Before I turn the call over to Jim, I would like to thank the SM&A employees for their part in producing these results. Our record results are a tribute to their talents and dedication and I sincerely thank them.

I'd like to turn the call back to Jim to provide a preliminary thought on our expected financial results for 2008.

Jim Eckstaedt

Thank you, Cathy. Looking into 2008, we see continued growing demand for our services. As a result, we currently expect organic revenue growth from our core operations of approximately 10%. Gross margin is expected to be similar to 2007, between 39% and 40%.

Excluding the impact of the earn-out expense from PPI, we expect SG&A expenses to decline as a percent of revenue. We expect to incur an additional earn-out expense associated with PPI during the year, the range of expense, based on achieving certain revenue targets, is between $850,000 and $2 million, or $0.06 a share. Some of this expense will occur in the first quarter of 2008, it could as high as $0.03 per share. Also included in first quarter expenses will be several items including management recruiting, an offsite sales meeting, and implementation of a major system enhancement, as well as a companywide offsite. These expenses are expected to total $1.4 million in the first quarter.

Ongoing recruiting and training of new account associates, and the further system investments that Cathy mentioned during her comments, will constrain our net income growth during the first half of the year. In addition, SG&A includes amortization of intangibles of $445,000 from the two acquisitions completed in 2007. We anticipate earnings per share for 2008 to be approximately $0.34 per share.

And now I'd like to turn the call back to Cathy.

Cathy McCarthy

Thank you, Jim. I would just like to reiterate that 2007 was very much a year of transition for SM&A, and through it all we made amazing progress. The first half of 2008 will continue to reflect some necessary investments that we are making to ensure a strong future for the company.

In the back half of the year, however, we expect that we will be in a very good position to show the leverage capability of this business model, and drive much more to the bottom line.

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