Deltek (PROJ) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from            to            

Commission File Number 001-33772

DELTEK, INC.

(Exact name of registrant as specified in its charter)

Delaware	54-1252625
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

13880 Dulles Corner Lane Herndon, VA	20171
(Address of principal executive offices)	(Zip Code)

(703) 734-8606

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock, par value $0.001 per share and Class A common stock, par value $0.001, of the registrant outstanding as of November 10, 2008 was 43,175,070 and 100, respectively.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007 (unaudited)	1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2008 and 2007 (unaudited)	2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)	3
Condensed Consolidated Statements of Changes in Stockholders’ Deficit at September 30, 2008 and December  31, 2007 (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Submission of Matters to a Vote of Security Holders	34
Item 5. Other Information	34
Item 6. Exhibits	35
SIGNATURES	36
EXHIBIT INDEX	37

i

PART I

FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DELTEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30 2008			December 31 2007
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	28,160		$	17,091
Accounts receivable, net of allowance of $2,564 and $2,866 at September 30, 2008 and December 31, 2007, respectively		47,803			55,663
Deferred income taxes		4,922			5,027
Prepaid expenses and other current assets		5,477			7,104
Income taxes receivable		2,308			—
TOTAL CURRENT ASSETS		88,670			84,885
PROPERTY AND EQUIPMENT, NET		14,946			13,575
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET		1,685			2,399
LONG-TERM DEFERRED INCOME TAXES		3,794			354
INTANGIBLE ASSETS, NET		18,828			13,132
GOODWILL		57,529			50,082
OTHER ASSETS		2,540			3,253
TOTAL ASSETS	$	187,992		$	167,680
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,991		$	498
Accounts payable and accrued expenses		29,868			33,310
Accrued liability for redemption of stock in recapitalization		569			569
Deferred revenues		22,083			22,046
Income taxes payable		—			729
TOTAL CURRENT LIABILITIES		54,511			57,152
LONG-TERM DEBT		191,322			192,815
OTHER TAX LIABILITIES		925			551
OTHER LONG-TERM LIABILITIES		3,070			3,350
TOTAL LIABILITIES		249,828			253,868
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.001 par value—authorized, 5,000,000 shares; none issued or outstanding at September 30, 2008 and December 31, 2007		—			—
Common stock, $0.001 par value—authorized, 200,000,000 shares; issued and outstanding, 43,175,070 and 43,046,523 shares at September 30, 2008 and December 31, 2007, respectively		43			43
Class A common stock, $0.001 par value—authorized, 100 shares; issued and outstanding, 100 shares at September 30, 2008 and December 31, 2007		—			—
Additional paid-in capital		174,699			167,527
Accumulated deficit		(235,955	)		(253,424	)
Accumulated other comprehensive deficit		(623	)		(334	)
TOTAL STOCKHOLDERS’ DEFICIT		(61,836	)		(86,188	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	187,992		$	167,680

See accompanying notes to condensed consolidated financial statements.

1

DELTEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three Months Ended September 30						Nine Months Ended September 30
	2008			2007			2008			2007
	(unaudited)
REVENUES:
Software license fees	$	18,508		$	21,350		$	57,647		$	59,999
Consulting services		23,060			22,776			69,650			61,046
Maintenance and support services		29,324			26,088			85,675			75,463
Other revenues		58			190			4,697			4,719
Total revenues		70,950			70,404			217,669			201,227
COST OF REVENUES:
Cost of software license fees		1,672			1,773			4,939			6,003
Cost of consulting services		18,277			19,347			57,632			52,763
Cost of maintenance and support services		5,438			4,428			15,864			12,177
Cost of other revenues		39			175			5,146			5,187
Total cost of revenues		25,426			25,723			83,581			76,130
GROSS PROFIT		45,524			44,681			134,088			125,097
OPERATING EXPENSES:
Research and development		11,761			10,960			34,710			31,653
Sales and marketing		13,637			11,604			39,353			32,201
General and administrative		8,753			7,381			24,693			21,724
Restructuring (benefit) charge		(61	)		—			991			—
Total operating expenses		34,090			29,945			99,747			85,578
INCOME FROM OPERATIONS		11,434			14,736			34,341			39,519
Interest income		168			32			618			200
Interest expense		(2,454	)		(4,740	)		(8,408	)		(13,973	)
Other (expense) income, net		(60	)		(30	)		(261	)		5
INCOME BEFORE INCOME TAXES		9,088			9,998			26,290			25,751
Income tax expense		1,063			4,174			8,821			10,357
NET INCOME	$	8,025		$	5,824		$	17,469		$	15,394
EARNINGS PER SHARE
Basic	$	0.19		$	0.15		$	0.41		$	0.39
Diluted	$	0.18		$	0.14		$	0.39		$	0.37
COMMON SHARES AND EQUIVALENTS OUTSTANDING
Basic weighted average shares		43,135			39,450			43,099			39,433
Diluted weighted average shares		44,154			41,102			44,347			41,054

See accompanying notes to condensed consolidated financial statements.

2

DELTEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended September 30
	2008			2007
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	17,469		$	15,394
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		1,000			1,251
Depreciation and amortization		7,143			6,959
Amortization of debt issuance costs		595			657
Write down of acquired in process research and development		290			—
Stock-based compensation expense		5,925			3,876
Employee stock purchase plan expense		234			—
Restructuring charge, net		63			—
Loss on disposal of fixed assets		346			214
Deferred income taxes		(2,455	)		(1,624	)
Changes in assets and liabilities:
Accounts receivable, net		6,907			(5,259	)
Prepaid expenses and other assets		1,555			(1,265	)
Accounts payable and accrued expenses		(2,638	)		(946	)
Income taxes payable/receivable		(3,092	)		(1,577	)
Excess tax benefit from stock option exercises		(71	)		—
Other tax liabilities		374			22
Other long-term liabilities		(456	)		(817	)
Deferred revenues		(166	)		(4,760	)
Net Cash Provided by Operating Activities		33,023			12,125
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(17,424	)		(5,947	)
Purchase of property and equipment		(5,000	)		(6,004	)
Capitalized software development costs		(261	)		(412	)
Net Cash Used in Investing Activities		(22,685	)		(12,363	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock		—			87
Proceeds from exercise of stock options		230			—
Excess tax benefit from stock option exercises		71			—
Proceeds from issuance of stock under employee stock purchase plan		712			—
Offering costs paid for 2007 sale of common stock in initial public offering		(275	)		(2,802	)
Redemption of stock and stockholder payments in recapitalization		—			(4,780	)
Proceeds from the issuance of debt		—			20,000
Repayment of debt		—			(14,612	)
Net Cash Provided by (Used in) Financing Activities		738			(2,107	)
IMPACT OF FOREIGN EXCHANGE RATES ON CASH ANDCASH EQUIVALENTS		(7	)		84
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		11,069			(2,261	)
CASH AND CASH EQUIVALENTS––Beginning of period		17,091			6,667
CASH AND CASH EQUIVALENTS––End of period	$	28,160		$	4,406

See accompanying notes to condensed consolidated financial statements.

3

DELTEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(in thousands)

	Nine Months Ended September 30
	2008		2007
	(unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash activity:
Stock issued for acquisitions	$	—	$	500
Accrued liability for acquisition of business	$	—	$	156
Accrued liability for purchases of property and equipment	$	275	$	303
Accrued liability for public offering transaction costs	$	—	$	2,086
Cash paid during the period for:
Interest	$	9,078	$	13,388
Income taxes	$	13,886	$	13,303

See accompanying notes to condensed consolidated financial statements.

4

DELTEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

	Preferred Stock				Common Stock			Class A Common Stock			Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Deficit			Total Stockholders’ Deficit
	Shares		Amount		Shares	Amount		Shares	Amount
	(unaudited)
Balance at January 1, 2007	100		$	—	39,405,993	$	39	—	$	—	$	112,350	$	(275,943	)	$	(511	)	$	(164,065	)
Net income	—			—	—		—	—		—		—		22,519			—			22,519
Foreign currency translation adjustments	—			—	—		—	—		—		—		—			177			177
Comprehensive income																				22,696
Sale of common stock	—			—	6,115		—	—		—		87		—			—			87
Stock issued for acquisitions	—			—	38,109		—	—		—		500		—			—			500
Sale of common stock in initial public offering	—			—	3,009,475		3	—		—		42,713		—			—			42,716
Stock options exercised	—			—	586,831		1	—		—		3,949		—			—			3,950
Tax benefit on stock options exercised	—			—	—		—	—		—		1,759		—			—			1,759
Stock compensation	—			—	—		—	—		—		6,169		—			—			6,169
Conversion of preferred stock to Class A common stock	(100	)		—	—		—	100		—		—		—			—			—
Balance at December 31, 2007	—		$	—	43,046,523	$	43	100	$	—	$	167,527	$	(253,424	)	$	(334	)	$	(86,188	)
Net income	—			—	—		—	—		—		—		17,469			—			17,469
Foreign currency translation adjustments	—			—	—		—	—		—		—		—			(289	)		(289	)
Comprehensive income																				17,180
Issuance of common stock under the employee stock purchase plan	—			—	82,736		—	—		—		712		—			—			712
Stock options exercised	—			—	45,811		—	—		—		230		—			—			230
Tax benefit on stock options exercised	—			—	—		—	—		—		71		—			—			71
Stock compensation	—			—	—		—	—		—		6,159		—			—			6,159
Balance at September 30, 2008	—		$	—	43,175,070	$	43	100	$	—	$	174,699	$	(235,955	)	$	(623	)	$	(61,836	)

See accompanying notes to condensed consolidated financial statements.

5

DELTEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

September 30, 2008

1. ORGANIZATION

Organization

Deltek, Inc. (“Deltek” or the “Company”) is a leading provider of enterprise applications software and related services designed specifically for project-focused organizations. Project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities. Project-focused organizations typically require specialized software to help them automate their complex business processes around the engagement, execution, and delivery of projects. Deltek’s software applications enable them to significantly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate project-specific financial information, and real-time performance measurements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The December 31, 2007 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s statement of financial position, results of operations, and its cash flows for the nine months ended September 30, 2008 and 2007. The results for the nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008. All references to September 30, 2008 or to the nine months ended September 30, 2008 and 2007 in the notes to the condensed consolidated financial statements are unaudited.

Principles of Consolidation

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include the allowance for doubtful accounts receivable and sales allowances, lives of tangible and intangible assets, impairment of long-lived and other assets, realization of deferred tax assets, accrued liabilities, stock option compensation, revenue recognition, valuation of acquired deferred revenue and intangible assets, and provisions for income taxes. Actual results could differ from those estimates.

6

Revenue Recognition

The Company’s revenues are generated primarily from four sources: licensing of its software products, providing maintenance and support for those products, providing consulting services for those products and hosting the Company’s annual user conference. Deltek’s consulting services consist primarily of implementation services, training and assessment, and design services. New license sales arrangements typically include both software licenses and maintenance and may also include consulting services. Consulting services are also regularly sold separately from other elements generally on a time-and-materials basis. The Company receives fees in connection with the annual user conference. The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2,Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, as well as Technical Practice Aids issued by the American Institute of Certified Public Accountants, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition.

For sales arrangements involving multiple elements, where software licenses are sold together with maintenance and support, consulting, training, or other services, the Company recognizes revenue using the residual method as described in SOP 98-9. Under the residual method, to determine the amount to allocate to and recognize revenue on delivered elements, normally the license element of the arrangement, the Company first allocates and defers revenue for any undelivered elements based upon objective evidence of fair value of those elements. The objective evidence of fair value used is required to be specific to the Company and commonly referred to as vendor-specific objective evidence (“VSOE”). The Company recognizes the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue for the delivered elements.

Sales taxes and other taxes collected from customers and remitted to governmental authorities are presented on a net basis and, as such, are excluded from revenues.

For maintenance and support agreements, VSOE is based upon historical renewal rates and, in some cases, renewal rates stated in the Company’s agreements.

For consulting services and training sold as part of a multiple element sales arrangement, VSOE is based upon the prices charged for those services when sold separately. For sales arrangements that require the Company to deliver future specified products or services in which VSOE of fair value is not available, the entire arrangement is deferred.

Under its standard perpetual software license agreements, the Company recognizes revenue from the license of software upon execution of a signed agreement and delivery of the software, provided that the software license fees are fixed and determinable, collection of the resulting receivable is probable, and VSOE exists to allow the allocation of a portion of the total fee to undelivered elements of the arrangement. If a right of return exists, revenue is recognized upon the expiration of that right.

The Company’s standard software license agreement does not include customer acceptance provisions; if acceptance provisions are provided, delivery is deemed to occur upon acceptance.

License revenues from resellers are recognized using a sell-through model whereby the Company recognizes revenue when these channels complete the sale and the Company delivers the software products.

The Company’s standard payment terms for its software license agreements are within six months. The Company considers the software license fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within six months. Revenue from arrangements with payment terms extending beyond six months is recognized as payments become due and payable.

Implementation, installation, and other consulting services are generally billed based upon hourly rates, plus reimbursable out-of-pocket expenses. Revenue on these arrangements is recognized based on hours actually incurred at the contract billing rates, plus out-of-pocket expenses. Implementation, installation, and other consulting services revenue under fixed-fee arrangements is generally recognized as the services are performed.

The Company generally sells training services at a fixed rate for each specific training session, at a per-attendee price and revenue is recognized upon the customer attending and completing the training. The Company also sells training on a time-and-materials basis. In situations where customers pay for services in advance of the services being rendered, the related prepayment is recorded as deferred revenue and recognized as revenue when the services are performed.

Maintenance and support services include unspecified periodic software upgrades or enhancements, bug fixes, and phone support. Annual maintenance and support initially represent between 15% and 25% of the related software license list price, depending upon the related product, and fees are generally payable quarterly. Customers generally prepay for maintenance, and these prepayments are recorded as deferred revenue and revenue is recognized ratably over the term of the agreement.

7

Other revenue includes fees collected for the Company’s annual user conference, which is typically held in the second quarter. Other revenue also includes the resale and sublicensing of third-party hardware and software products in connection with the software license and installation of the Company’s products, and is generally recognized upon delivery.

Income Taxes

Income taxes are accounted for in accordance with the provisions of Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes (“SFAS 109”) and FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”). Under SFAS 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, in accordance with SFAS 109, a valuation allowance is required to be recognized if it is believed “more likely than not” that a deferred tax asset will not be fully realized. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liabilities.

Stock-Based Compensation

Stock-based compensation is accounted for in accordance with SFAS No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. The provisions of SFAS 123R apply to grants made after the adoption date, awards modified, repurchased or cancelled after the adoption date and existing grants which were partially unvested at that date. Compensation expense for grants outstanding on the date of adoption is recognized over the remaining service period using the grant date fair values and amortization methods determined previously for the pro forma disclosures under SFAS No. 123,Accounting for Stock-Based Compensation (“SFAS 123”).

During the nine months ended September 30, 2008, 1,079,815 new stock options were granted. The aggregate grant date fair value of options issued during the period was $6.8 million, which will be recognized as expense over the requisite service period of the options, which is also the vesting period. Stock options exercised during the nine months ended September 30, 2008, were 45,811. The total intrinsic value of options exercised during the nine months ended September 30, 2008 was approximately $269,000. In addition, the total cash received for options exercised during the same period was approximately $230,000. No stock options were exercised during the nine months ended September 30, 2007.

During the nine months ended September 30, 2008, the Company granted 88,000 shares of restricted stock. The aggregate grant date fair value was $1.1 million, which will be recognized on a straight-line basis as expense over the requisite service period of the awards, which is also the four year vesting period. The Company’s restricted stock grants are accounted for as equity awards. The grant date fair value is based on the price of the Company’s common stock at the date of the grant. The Company did not grant any restricted stock prior to February 2008.

During the nine months ended September 30, 2008, the Company also issued 82,736 shares of common stock under the employee stock purchase plan (the “ESPP”). Total proceeds related to the issuance of these shares was $712,000.

The Company uses the Black-Scholes option-pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. For options and the ESPP shares granted during the nine months ended September 30, 2008, the fair value of the Company stock on the date of grant was determined based upon the closing market value. Expected volatility was calculated based on the Company’s historical volatility and reported data for a peer group of publicly traded companies for which historical information was available. The Company will continue to use peer group volatility information until historical volatility of the Company is relevant to measure expected volatility for future option grants. The average expected life was determined according to the “SEC simplified method” as described in SAB No. 107,Share Based Payments (“SAB 107”), which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures of share-based awards are estimated at the time of grant and revised, if necessary, in subsequent periods if the Company’s estimates change based upon the actual amount of forfeitures.

8

The weighted average assumptions used in the Black-Scholes option-pricing model for stock option awards were as follows:

	Nine Months Ended September 30
	2008		2007
Dividend yield	0.0	%	0.0	%
Expected volatility	54.0	%	50.0	%
Risk-free interest rate	2.8%-3.6	%	4.5%-5.1	%
Expected life (in years)	6.24		6.23

Stock-based compensation expense is allocated to expense categories in the statements of operations. The following table summarizes stock-based compensation for stock options and restricted stock for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
	2008		2007		2008			2007
Included in cost of revenue:
Cost of consulting services	$	352	$	306	$	987		$	652
Cost of maintenance and support services		47		42		(85	)		80
Total included in cost of revenue		399		348		902			732
Included in operating expenses:
Research and development		435		347		1,231			810
Sales and marketing		479		333		1,323			815
General and administrative		919		592		2,469			1,519
Total included in operating expenses		1,833		1,272		5,023			3,144
Total	$	2,232	$	1,620	$	5,925		$	3,876

Included in the above table is $62,000 and $0 of compensation expense related to restricted stock for the three months ended September 30, 2008 and 2007, respectively, and $151,000 and $0 related to the nine months ended September 30, 2008 and 2007, respectively, with the remaining compensation expense related to stock options. During the second quarter of 2008, stock-based compensation expense was reduced by $793,000 for a change in estimate associated with stock option forfeitures that occurred during the second quarter.

The stock-based compensation expense recorded in 2008 related to stock options and restricted stock, and in 2007 related to stock options, accounted for as equity awards. The Company recognized $2.3 million and $1.5 million of tax benefits related to the stock-based compensation expense recognized during the first nine months of 2008 and 2007, respectively.

Compensation expense for the ESPP is recognized in accordance with SFAS 123R. The weighted average assumptions used in the Black-Scholes option-pricing model to determine the weighted average fair value of $3.04 for the nine months ended September 30, 2008 were as follows:

	Nine Months Ended September 30, 2008
Dividend yield	0.0	%
Expected volatility	53.0	%
Risk-free interest rate	2.2	%
Expected life (in years)	0.4

The Company also recorded $105,000 and $0 of compensation expense during the three months ended September 30, 2008 and 2007, respectively, and $234,000 and $0 during the nine months ended September 30, 2008 and 2007, respectively, related to the employee stock purchase program. Tax benefits recognized during the first nine months of 2008 and 2007 for compensation expense related to the ESPP were $20,000 and $0, respectively. Total shares purchased during the three months ended September 30, 2008 were 56,333 for total proceeds of $407,000.

9

Amortization Expense

Amortization expense related to intangible assets acquired in business combinations is allocated to cost of revenue or operating expense on the statements of operations based on the revenue stream to which the asset contributes. The following table summarizes amortization expense for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
	2008		2007		2008		2007
Included in cost of revenue:
Cost of software license fees	$	307	$	429	$	992	$	1,282
Cost of consulting services		20		24		59		40
Total included in cost of revenue		327		453		1,051		1,322
Included in operating expenses:		1,000		677		2,111		2,047
Total	$	1,327	$	1,130	$	3,162	$	3,369

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations (“SFAS 141R”), which replaces SFAS 141. SFAS 141R requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS 141R also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 141R on its consolidated results of operations and financial condition but does not believe there will be a material impact.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any noncontrolling interests.

In February 2008, the FASB issued FASB Staff Position 157-2,Effective Date of FASB Statement No. 157 (“FSP 157-2��). Under the terms of FSP 157-2, the provisions of SFAS No. 157,Fair Value Measurements (“SFAS 157”), which provide guidance for, among other things, the definition of fair value and the methods used to measure fair value, were adopted January 1, 2008 for financial instruments and, when required, will be adopted for nonfinancial assets and nonfinancial liabilities in 2009 (except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis). The provisions adopted in 2008 did not have an impact on the Company’s financial statements, and the Company is in the process of evaluating the impact of provisions to be adopted in 2009.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company does not currently have any derivative instruments.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and provides the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated results of operations and financial position, but does not believe there will be a material impact.

In October 2008, the FASB issued FASB Staff Position 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The guidance emphasizes that determining fair value in an inactive market depends on the facts and circumstances and may require the use of significant judgments. FSP 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued, and therefore is effective for the Company at September 30, 2008. The Company currently does not have any financial assets in a market which is inactive.

10

3. INITIAL PUBLIC OFFERING

In November 2007, the Company completed an initial public offering consisting of 9,000,000 shares of common stock for $18.00 per share. The total shares sold in the offering included 5,990,525 shares sold by selling stockholders and 3,009,475 shares sold by the Company.

After deducting the payment of underwriters’ discounts and commissions and offering expenses, the net proceeds to the Company from the sale of shares in the offering were approximately $42.6 million. The net proceeds from the offering were used to repay a $25.0 million balance on the revolving credit facility and to make a $17.6 million prepayment on the outstanding term loan.

4. BUSINESS ACQUISITIONS

MPM

On August 29, 2008, the Company acquired certain assets and operations of Planview, Inc.’s MPM solutions (“MPM”). The results of MPM have been included in the consolidated financial statements since the acquisition date. MPM is an earned value management (“EVM”) software application used by government contractors and agencies to meet the complex compliance requirements for their programs issued by the U.S. Federal Government.

The aggregate purchase price was $16.4 million and included cash payments through September 30, 2008 of approximately $16.4 million, which consisted of cash consideration and certain acquisition costs.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Accounts receivable	$	48
Fixed assets		7
Deferred tax assets		124
Intangible assets		8,870
Goodwill		7,820
Deferred revenue		(321	)
Deferred tax liability		(124	)
Total purchase price	$	16,424

The purchase price allocation to the assets acquired and liabilities assumed is preliminary and may be adjusted upon completion of the final valuation.

The components and the initial estimated useful lives of the intangible assets listed in the above table as of the acquisition date are as follows (in thousands):

	Amount		Life
In-process technology	$	290	—
Tradenames		300	Indefinite
Developed software		830	4 years
Customer relationships		7,450	7 years
	$	8,870

The acquired tradenames were deemed to have an indefinite life and accordingly, are not being amortized until such time that the useful life is determined to no longer be indefinite in accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS 142”). The tradenames are tested for impairment in accordance with the provisions of SFAS 142. The developed software is being amortized using an accelerated amortization method over four years and the expense is included in “Cost of Software License Fees” expense. The customer relationships are being amortized using an accelerated amortization method over seven years and the expense is included in “Sales and Marketing” expense. The $290,000 of in-process technology was written off as a research and development expense in the third quarter of 2008 as it had no alternative future use. The goodwill recorded in this transaction will be deductible for tax purposes over 15 years.

11

WST Pacific Pty Ltd

On May 25, 2007, the Company acquired 100% of the outstanding common stock of WST Pacific Pty Ltd (“WSTP”), a developer of EVM software and provider of services and support resources in the EVM marketplace. The results of operations of WSTP have been included in the consolidated financial statements since the acquisition date.

The aggregate purchase price, net of $602,000 in cash acquired, was $1.2 million and included cash payments through September 30, 2008 of $1.8 million. The Company has entered into retention arrangements with the two principal WSTP shareholders totaling $450,000 if the individuals are employed on the eighteen-month anniversary of the acquisition. This amount is being expensed as the requisite services are provided.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Accounts receivable	$	586
Fixed assets		79
Deferred tax assets		90
Intangible assets		330
Goodwill		788
Other assets		30
Accounts payable		(416	)
Deferred revenue		(176	)
Deferred tax liability		(99	)
Total purchase price, net of cash	$	1,212

The components and the initial estimated useful lives of the intangible assets listed in the above table as of the acquisition date are as follows (in thousands):

	Amount		Life
Developed software	$	40	3 years
Customer relationships		290	7 years
	$	330

The developed software is being amortized on a straight-line basis over a three-year period and the expense is included in “Cost of Software License Fees.” The customer relationships are being amortized using an accelerated amortization method over seven years and the expense is included in “Sales and Marketing” expense. The goodwill recorded in this transaction is not deductible for tax purposes.

Applied Integration Management Corporation

On April 17, 2007, the Company acquired certain assets and operations of Applied Integration Management Corporation (“AIM”), a provider of consulting services for EVM systems. The results of operations of AIM have been included in the consolidated financial statements since the acquisition date.

The aggregate purchase price was $5.9 million and included cash payments through September 30, 2008 of $5.4 million, common stock valued at $500,000, and direct acquisition costs of $91,000. The value of the 38,109 common shares issued was determined by the Company’s Board of Directors in accordance with the guidance in AICPA Practice Aid“Valuation of Privately-Held-Company Equity Securities Issued as Compensation.”

As part of the acquisition, the Company is required to pay additional cash consideration of up to $1.0 million contingent on AIM consulting services revenue meeting specified levels by April 30, 2008. As of September 30, 2008, the contingency had been satisfied and the additional $1.0 million in consideration was paid. The Company entered into retention arrangements with the two AIM shareholders totaling $500,000 if the individuals are employed on the one-year anniversary of the acquisition. This amount was expensed as the requisite services were provided, and was paid during the second quarter of 2008.

12

The following table summarizes the estimated fair values of the assets acquired (in thousands):

Intangible assets	$	1,090
Goodwill		4,801
Total purchase price, net of cash	$	5,891

The components and the initial estimated useful lives of the intangible assets listed in the above table as of the acquisition date are as follows (in thousands):

	Amount		Life
Customer relationships	$	540	5 years
PMWorks process		390	5 years
In-process technology		160	—
	$	1,090

The PMWorks process, which is a project management methodology, is being amortized on a straight-line basis over a five-year period and the expense is included in “Cost of Consulting Services.” The customer relationships are being amortized using an accelerated amortization method over five years and the expense is included in “Sales and Marketing” expense. The $160,000 of in-process technology was written off as it had no alternative future use. The goodwill recorded in this transaction is deductible for tax purposes.

5. EARNINGS PER SHARE

Net income per share is computed under the provisions of SFAS No. 128,Earnings Per Share (“SFAS 128”). Basic earnings per share is computed using net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the weighted average number of common shares outstanding plus any potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options.

The following table sets forth the computation of basic and diluted net income per share (dollars in thousands, except share and per share data):

	Three Months Ended September 30				Nine Months Ended September 30
	2008		2007		2008		2007
Basic earnings per share computation:
Net income (A)	$	8,025	$	5,824	$	17,469	$	15,394
Weighted average common shares–basic (B)		43,134,988		39,449,574		43,099,061		39,432,683
Basic net income per share (A/B)	$	0.19	$	0.15	$	0.41	$	0.39
Diluted earnings per share computation:
Net income (A)	$	8,025	$	5,824	$	17,469	$	15,394
Shares computation:
Weighted average common shares–basic		43,134,988		39,449,574		43,099,061		39,432,683
Effect of dilutive stock options, restricted stock, and ESPP		1,019,502		1,652,641		1,248,003		1,621,106
Weighted average common shares–diluted (C)		44,154,490		41,102,215		44,347,064		41,053,789
Diluted net income per share (A/C)	$	0.18	$	0.14	$	0.39	$	0.37

The weighted average diluted shares outstanding for the three months ended September 30, 2008 and 2007 excluded 4,169,782 stock options and 0 stock options, respectively, as these stock options have an exercise price in excess of the average market price of the Company’s common stock during the period. The weighted average diluted shares outstanding for the nine months ended September 30, 2008 and 2007 excluded 3,456,106 stock options and 0 stock options, respectively, as these stock options have an exercise price in excess of the average market price of the Company’s common stock during the period.

13

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in thousands):

	September 30 2008		December 31 2007
Prepaid software maintenance and royalties	$	1,705	$	1,314
Prepaid insurance		344		804
Debt placement costs		790		793
Prepaid conferences and events		450		645
Prepaid rent		602		551
Others		1,586		2,997
Total	$	5,477	$	7,104

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table represents the balance and changes in goodwill for the nine months ended September 30, 2008 (in thousands):

Balance as of January 1, 2008	$	50,082
AIM acquisition		450
MPM acquisition		7,820
Welcom tax adjustments		(769	)
Foreign currency translation adjustments		(54	)
Balance as of September 30, 2008	$	57,529

The increase to goodwill associated with the AIM acquisition was due to an accrual in the first quarter of 2008 of an additional $450,000 liability for contingent consideration. In the third quarter, the Company acquired MPM and recorded $7.8 million of goodwill associated with the transaction. See Note 4 for additional information. The decrease in goodwill associated with the Welcom purchase was due to a change in the third quarter in the valuation allowance of the purchased deferred tax asset. See Note 9 for additional information. Due to recent market performance and the Company’s stock price, per the guidelines of SFAS 142, the Company performed an impairment analysis as of September 30, 2008, and determined there was no impairment of goodwill as the Company assessed its fair value and determined the fair value exceeded the carrying value.

14

Other Intangible Assets

The following tables set forth information for intangible assets subject to amortization and for intangible assets not subject to amortization (in thousands):

	As of September 30, 2008							As of December 31, 2007
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortized Intangible Assets
Customer relationships	$	19,756	$	(7,397	)	$	12,359	$	12,323	$	(5,638	)	$	6,685
Developed software		8,652		(6,743	)		1,909		7,535		(5,403	)		2,132
Tradename and non-compete		322		(262	)		60		322		(207	)		115
Total	$	28,730	$	(14,402	)	$	14,328	$	20,180	$	(11,248	)	$	8,932
Unamortized Intangible Assets
Tradename	$	4,500	$	—		$	4,500	$	4,200	$	—		$	4,200
Total	$	33,230	$	(14,402	)	$	18,828	$	24,380	$	(11,248	)	$	13,132

Amortization expense for the nine months ended September 30, 2008 and 2007 was $3.2 million and $3.4 million, respectively. The following table summarizes the estimated future amortization expense for the remaining three months of 2008 and years thereafter (in thousands):

Years Ending December 31
2008–remaining	$	1,399
2009		4,468
2010		3,114
2011		2,340
2012		1,490
Thereafter		1,517
Total	$	14,328

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS 144”), the Company reviews its long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There have been no impairment charges for the nine months ended September 30, 2008.

8. DEBT

The Company maintains a credit agreement with a syndicate of lenders led by Credit Suisse (the “Credit Agreement”). The Credit Agreement provided for a $215.0 million term loan that matures on April 22, 2011, and a $30.0 million revolving credit facility that matures on April 22, 2010. The current outstanding amount of the term loan is $193.3 million. The Credit Agreement accrues interest at 2.00% above the British Banker’s Association Interest Settlement Rates for dollar deposits (the “LIBO Rate”) for the term loan and 2.25% or 1.25% for the revolving credit facility, depending on the type of borrowing. The spread above the LIBO Rate decreases as the Company’s leverage ratio, as defined in the Credit Agreement, decreases. The amended Credit Agreement also continues to provide for mandatory prepayments of principal based on annual cash flow and leverage levels, as well as scheduled principal repayments of $498,000 each quarter through June 30, 2010. At the end of each of the three quarters ending September 30, 2010, December 31, 2010, March 31, 2011, and on April 22, 2011, a principal payment of $47.5 million is due.

The loans are collateralized by substantially all of the Company’s assets and require the maintenance of certain financial and non-financial covenants, with which the Company was in compliance as of September 30, 2008.

At September 30, 2008 and December 31, 2007, there were no borrowings under the revolving credit facility. At September 30, 2008, the Company was contingently liable under open standby letters of credit and bank guarantees issued by the Company’s banks in favor of third parties. These letters of credit and bank guarantees primarily relate to real estate lease obligations and total $1.8 million. These instruments reduce the Company’s available borrowings under the revolving credit facility. No amounts were outstanding under these instruments at September 30, 2008 or December 31, 2007.

15

Costs incurred in connection with securing the Credit Agreement were $7.1 million. The debt issuance costs are being amortized and reflected in “Interest Expense” over the lives of the loans.

At September 30, 2008 and December 31, 2007, the current portion of the unamortized debt issuance costs of $790,373 and $793,400, respectively, is reflected as “Prepaid and Other Current Assets” in the consolidated balance sheets. The noncurrent portion of the unamortized debt issuance costs for those same periods of $1.0 million and $1.6 million, respectively, is reflected as “Other Assets” in the consolidated balance sheets.

Long-term debt consisted of the following (in thousands):

	September 30 2008			December 31 2007
Secured credit agreement
Term loan	$	193,313		$	193,313
Revolver		—			—
Total		193,313			193,313
Current portion of long-term debt		(1,991	)		(498	)
Long-term debt	$	191,322		$	192,815

9. INCOME TAXES

In accordance with SFAS 109, the income tax provision for the nine month period ended September 30, 2008 is based on the estimated annual effective tax rate for fiscal year 2008. The estimated effective tax rate is subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year are increased or decreased. The Company’s annual effective tax rate for the nine months ended September 30, 2008 was 33.6%.

During the third quarter of 2008, the Company revised its estimated annual effective rate to reflect the impact of approximately $1.5 million of reductions to the accrual for prior years’ tax returns for higher research and development tax credits, and certain tax deductions and adjustments. The most significant component of these tax reductions relates to changes in the geographic distribution of the Company’s income and a change in its transfer pricing agreements, which were completed prior to the filing of the Company’s 2007 tax returns. The Company determines the pricing among its associated entities on the basis of detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. Based on the Company’s analysis, it made certain changes to the transfer pricing agreements effective from January 2007. As a result of this change in geographic distribution of income, the Company released approximately $1.4 million of the valuation allowance on net operating loss, carryforwards and other deferred tax assets in the U.K. subsidiary, of which approximately $0.8 million was recorded against goodwill with the remaining $0.6 million included in the $1.5 million reduction to income tax expense recorded in the third quarter of 2008.

Effective January 1, 2007, the Company adopted the provisions of FIN 48 which clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized on the financial statements. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The adoption of FIN 48 resulted in recording a liability of $269,000 for unrecognized tax benefits, $49,000 in accrued interest, and $46,000 for accrued penalties associated with various federal and state income tax matters related to the 2006 acquisition of WST Corporation. Furthermore, during 2007 the Company increased the liability $166,000 associated with certain research and development credits acquired from WST Corporation that did not meet the recognition thresholds as prescribed by FIN 48 and the Company increased the liability by $21,000 for additional interest accrued. These liabilities were recorded as an increase to goodwill in accordance with Emerging Issues Task Force No. 93-7,Uncertainties Related to Income Taxes in a Purchase Business Combination (“EITF 93-7”).

16

During the nine months ended September 30, 2008, the Company established an additional liability under FIN 48 of $347,000 which included a $189,000 increase associated with certain research and development tax credits acquired from WST Corporation. The liability also increased $27,000 for additional interest accrued. Interest and penalties related to uncertain tax positions are recorded as part of the provision for income taxes. At September 30, 2008, the Company has recorded a liability under FIN 48 of $925,000, which includes accrued interest and potential penalties of $97,000 and $46,000, respectively. These liabilities for unrecognized tax benefits are included in “Other Tax Liabilities.” In addition, prior to the effective date of SFAS 141R, any adjustments to the unrecognized tax benefits associated with the acquisition of WST Corporation will affect goodwill and have no impact on the effective tax rate. Subsequent to the adoption of SFAS 141R, all changes will be recorded as part of the income tax expense. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examination for the years before 2005. Currently, the Company is not under audit in any major jurisdictions.

10. STOCKHOLDERS’ DEFICIT

Preferred Stock—The Company’s Board of Directors has the authority, without further action by the stockholders, to issue preferred stock in one or more series and to fix the terms and rights of the preferred stock. Such actions by the Board of Directors could adversely affect the voting power and other rights of the holders of common stock. At the time of the 2005 recapitalization, there were 2,000,000 shares authorized with a par value of $0.001 per share. There were 100 shares issued and outstanding as part of the 2005 recapitalization transaction. In April 2007, in conjunction with the Company’s conversion from a Virginia to a Delaware corporation, the 100 shares of preferred stock were converted into Class A Common Stock. As of September 30, 2008, there were no shares of preferred stock outstanding.

Common Stock—In November 2007, the Company completed an initial public offering consisting of 9,000,000 shares of common stock for $18.00 per share. The total shares sold in the offering included 5,990,525 shares sold by selling stockholders and 3,009,475 shares sold by the Company. After deducting the payment of underwriters’ discounts and commissions and offering expenses, the net proceeds to the Company from the sale of shares in the offering were approximately $42.6 million. The net proceeds from the offering were used to repay a $25.0 million balance on the revolving credit facility and to make a $17.6 million prepayment on the outstanding term loan.

Changes in Capital Stock—In April 2007, in conjunction with the Company’s conversion from a Virginia to a Delaware corporation, the Company authorized additional shares of capital stock to include a total of 200,000,000 shares, par value $0.001 per share of common stock, 100 shares, par value $0.001 per share Class A Common Stock and 5,000,000 shares, par value $0.001 per share of preferred stock. At the effective date of the conversion, each of the 100 shares of Series A Preferred Stock outstanding just prior to the conversion, were converted into 100 shares of Class A Common Stock.

11. STOCK PLANS

Stock Option and Incentive Award Plan—The Company maintained a stock option plan (the “2005 Plan”) pursuant to which the Company could grant options to purchase 6,310,000 shares of common stock to directors and employees.

In April 2007, the Company’s Board of Directors approved a new Stock Incentive and Award Plan (the “2007 Plan”) that provides for the ability of the Company to grant up to 1,840,000 new stock incentive awards or options including Incentive and Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Dividend Equivalent Rights, Performance Units, Performance Shares, Performance-based Restricted Stock, Share Awards, Phantom Stock and Cash Incentive Awards. The aggregate number of shares reserved and available for grant and issuance pursuant to the 2007 Plan shall be increased automatically on January 1 of each year commencing on January 1, 2008, in an amount up to 3% of the total number of shares of the Company issued and outstanding on December 31 of the immediately preceding calendar year unless otherwise reduced by the Board of Directors. Concurrent with the approval of the 2007 Plan, the 2005 Plan was terminated for purposes of future grants. Under the 2007 Plan, executive officers and holders of 100,000 or more shares of common stock, stock incentive awards or options can only, under the terms of the shareholders’ agreement applicable to them, sell in conjunction with an offering by New Mountain Capital until New Mountain Capital owns less than 15% of the Company’s outstanding capital stock. In addition, these individuals may be required by New Mountain Capital to participate in such a sale and to vote in favor of such a transaction if stockholder approval is required.

17

The following table summarizes the activity of all the Company’s stock option plans from January 1, 2008 to September 30, 2008:

	Number of Options		Weighted Average Exercise Price
Options outstanding at January 1, 2008	6,327,424		$	9.44
Options granted	1,079,815			11.71
Options forfeited	(682,866	)		13.69
Options exercised	(45,811	)		5.02
Options outstanding at September 30, 2008	6,678,562		$	9.40

As of September 30, 2008, future compensation cost related to nonvested stock options not yet recognized in the income statement was $22.4 million and is expected to be recognized over an average period of 2.40 years. During the nine months ended September 30, 2008, the Company granted 88,000 shares of restricted stock, with a weighted average grant date fair value of $12.98, of which 77,000 shares are expected to vest. During the nine months ended September 30, 2008, there were 11,000 shares of restricted stock that were forfeited. As of September 30, 2008, future compensation cost related to the nonvested portion of the restricted stock awards not yet recognized in the income statement was $849,000 and is expected to be recognized over a period of 3.39 years.

Stock options are granted at the discretion of the Board of Directors or the Compensation Committee (or its authorized member(s)) and expire 10 years from the date of the grant. Options generally vest over a four-year period based upon required service conditions. No options have performance or market conditions. The Company calculates the pool of additional paid-in capital associated with excess tax benefits using the “simplified method” in accordance with FASB Staff Position No. 123(R)-3 as Amended,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, (“FSP 123(R)-3”). At September 30, 2008 there were 1,210,256 options available for future grant under the 2007 Plan.

Under the 2005 Plan, each option holder was required to execute a shareholder’s agreement, among other conditions, prior to being deemed the holder of, or having rights with respect to, any shares of the Company’s common stock. In accordance with the shareholder’s agreement, stockholders which are party to the agreement are entitled to participate proportionately in an offering of common stock by New Mountain Capital. Stockholders can only sell in conjunction with such an offering by New Mountain Capital and not at any other time. If the number of shares of common stock which the option holder is entitled to sell in the offering exceeds the number of shares of common stock held by the option holder, any options held by the option holder (including unvested options) may be exercised to the extent of the excess. A stockholder may choose a combination of shares and options (if vested) in determining the securities the stockholder will sell in the public or private offering. Any unvested options may only be exercised to the extent there is an amount of securities that such stockholder may sell that has not been covered by shares or vested options. Options not sold in the offering continue to be subject to normal vesting requirements.

Under the 2007 Plan, executive officers and holders of 100,000 or more shares of common stock, stock incentive awards or options can only, under the terms of a shareholders’ agreement applicable to them, sell in conjunction with an offering by New Mountain Capital until New Mountain Capital owns less than 15% of the Company’s outstanding capital stock. In addition, these individuals may be required by New Mountain Capital to participate in such a sale and to vote in favor of such a transaction if stockholder approval is required.

The following table summarizes information regarding stock options exercisable and stock options vested and expected to vest as of September 30, 2008 (dollars in thousands, except share data):

	Stock Options Exercisable		Stock Options Vested and Expected to Vest
Stock options outstanding		2,620,306		6,201,128
Weighted average exercise price	$	6.77	$	9.31
Aggregate intrinsic value	$	3,906	$	5,193
Weighted average remaining contractual life (in years)		7.42		8.01

18

Employee Stock Purchase Program—In April 2007, the Company’s Board of Directors adopted the ESPP to provide eligible employees an opportunity to purchase up to 750,000 shares of the Company’s common stock through accumulated payroll deductions. The ESPP was effective when the Company completed an initial public offering of its common stock. The per share price of common stock purchased pursuant to the ESPP shall be 90% of the fair market value of a share of common stock on (i) the first day of an offering period, or (ii) the date of purchase, whichever is lower. During the nine months ended September 30, 2008, employees purchased 82,736 shares under this plan at a weighted average share price of $8.60. Compensation expense for the three and nine months ended September 30, 2008 was approximately $105,000 and $234,000, respectively. As of September 30, 2008 there were 667,138 shares available under the plan.

12. RELATED-PARTY TRANSACTIONS

Pursuant to the recapitalization agreement, New Mountain Capital is entitled to receive $500,000 annually as an advisory fee for providing ongoing management, financial and investment banking services to the Company. New Mountain Capital agreed to waive advisory fees for the third quarter of 2007 and for subsequent periods upon completion of an initial public offering. The Company therefore did not incur any advisory fees in the three or nine months ended September 30, 2008. In the three and nine months ended September 30, 2007, the Company incurred $125,000 and $250,000 in advisory fees, respectively.

New Mountain Capital is also entitled to receive transaction fees equal to 2% of the transaction value of each significant transaction directly or indirectly involving the Company or any of its controlled affiliates, including, but not limited to, acquisitions, dispositions, mergers, or other similar transactions, debt, equity or other financing transactions, public or private offerings of the Company’s securities and joint ventures, partnerships and minority investments. Transaction fees are payable upon the consummation of a significant transaction. No fee is payable for a transaction with a value of less than $25.0 million. In November 2007, the Company incurred a $1.1 million transaction fee to New Mountain Capital in connection with our initial public offering. In the first nine months of 2008 and 2007, the Company did not incur any transaction fees to New Mountain Capital.

13. RESTRUCTURING CHARGE

Severance and Benefits

During the second quarter of 2008, management implemented a restructuring plan to eliminate certain positions in order to realign the Company’s cost structure. As a result of this plan, the Company recorded a charge of $986,000 for severance and severance-related costs in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). As of September 30, 2008, the Company had a remaining liability of $63,000 as a result of the charge for severance and severance-related costs. This amount is reflected as “Accounts Payable and Accrued Expenses” in the consolidated balance sheet and is expected to be paid over the next three months.

Facilities

During the second quarter of 2008, the Company recorded charges totaling $66,000 relating to the closure of one office location and the reduction of space at a second office location. All amounts related to these facilities charges have been paid as of September 30, 2008.

Restructuring activities for the nine months ended September 30, 2008 were as follows:

	Severance & Benefits			Facilities			Total
Restructuring liability as of January 1, 2008	$	—		$	—		$	—
Restructuring charge
First quarter		—			—			—
Second quarter		986			66			1,052
Third quarter		(61	)		—			(61	)
Total restructuring charge		925			66			991
Cash payments		(862	)		(66	)		(928	)
Restructuring liability as of September 30, 2008	$	63		$	—		$	63

19

14. COMMITMENTS AND CONTINGENCIES

Office Space Leases—The Company leases office space under noncancelable operating leases. Rental expense is recognized on a straight-line basis over the term of the lease, regardless of when payments are due. Rent expense was approximately $6.0 million and $4.8 million for the nine months ended September 30, 2008 and 2007, respectively. The Company does not sublease any of its leased space.

The following table summarizes future minimum operating lease payments for the remaining three months of 2008 and the years thereafter (in thousands):

Years Ending December 31
2008–remaining	$	1,776
2009		7,131
2010		6,895
2011		5,652
2012		1,442
Thereafter		80
Total	$	22,976

Other Matters—The Company was involved in a claim and legal proceeding arising from its normal operations. On March 20, 2008, the parties resolved all issues between them, and on April 8, 2008, the suit was dismissed.

At September 30, 2008, the Company was contingently liable under open standby letters of credit and bank guarantees issued by the Company’s banks in favor of third parties. These letters of credit and bank guarantees primarily relate to real estate lease obligations and total $1.8 million. No amounts were outstanding under these instruments at September 30, 2008 or December 31, 2007.

Guarantees—The Company provides indemnifications to customers against intellectual property infringement claims made by third parties arising from the use of the Company’s software products. Due to the nature of the indemnifications provided, the Company cannot estimate the fair value nor determine the total nominal amount of the indemnifications, if any. Estimated losses for such indemnifications are evaluated under SFAS No. 5,Accounting for Contingencies (“SFAS 5”), as interpreted by FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others(“FIN 45”). The Company has secured copyright registrations for its own software products with the U.S. Patent and Trademark Office, and is provided intellectual property infringement indemnifications from its third-party partners whose technology may be embedded or otherwise bundled with the Company’s software products. Therefore, the Company considers the probability of an unfavorable outcome in an intellectual property infringement case relatively low. The Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications.

Product Warranty—The Company’s standard software license agreement includes a warranty provision for software products. The Company generally warrants for the first 90 days after delivery that the software shall operate substantially as stated in the then current documentation. The Company provides for the estimated cost of product warranties based on specific warranty claims, provided that it is probable that a liability exists and provided the amount can be reasonably estimated. To date, the Company has not had any material costs associated with these warranties.

15. SEGMENT INFORMATION

The Company operates as one reportable segment as the Company’s principal business activity relates to selling project-based software solutions and implementation services. The Company’s chief operating decision maker, the Chief Executive Officer, evaluates the performance of the Company as one consolidated unit based upon software license revenues, consulting services, maintenance revenues, and operating costs.

The Company’s products and services are sold primarily in the United States, but also include sales through direct and indirect sales channels in other countries, primarily in Canada and Europe. Less than 5% of the Company’s revenues were generated from sales outside of the United States for the three and nine months ended September 30, 2008 and 2007. As of September 30, 2008 and December 31, 2007, the Company had $1.7 million and $1.5 million, respectively, of long-lived assets held outside of the United States.

No single customer accounted for more than 10% of the Company’s revenue for the three and nine months ended September 30, 2008 or 2007.

20

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “outlook,” “believes,” “plans,” “intends,” “expects,” “goals,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “estimates,” “anticipates” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including those described in Item 1A of Part II (Risk Factors). The forward-looking statements speak only as of the date of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements contained herein after the date of this Quarterly Report. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.

All dollar amounts expressed as numbers in tables (except per share amounts) in this MD&A are in millions.

Certain tables may not add due to rounding.

Company Overview

Since our founding in 1983, we have established a leading position as a provider of enterprise applications software and related services designed and developed specifically for project-focused organizations. These organizations include architectural and engineering firms, government contractors, aerospace and defense contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others.

These project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities. Project-focused organizations typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software applications enable project-focused companies to significantly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate, project-specific financial information, and real-time performance measurements.

With our software applications, project-focused organizations can better measure business results, optimize performance and streamline operations, and win new business. As of September 30, 2008, we had over 12,000 customers worldwide that spanned numerous project-focused industries and ranged in size from small organizations to large enterprises.

Our revenue is generated from sales of software licenses and related software maintenance and support agreements and professional services to assist customers with the implementation of our products, as well as education and training services. Our continued growth depends, in part, on our ability to generate license revenues from new customers and to continue to expand our presence by selling new products within our existing installed base of customers.

History

We were founded to develop and sell accounting software solutions for firms that contract with the U.S. government. Since our founding, we have continued our focus on providing solutions to government contractors as well as to other project-focused organizations, and at the same time we have broadened our product offerings by developing new software products, selectively acquiring businesses with attractive project-focused applications and services and partnering with third parties.

In April 2005, New Mountain Partners II, L.P., New Mountain Affiliated Investors II, L.P., and Allegheny New Mountain Partners, L.P. (collectively, the “New Mountain Funds”) purchased the majority ownership of our company from the founding deLaski stockholders through a recapitalization transaction. Subsequent to this transaction, we implemented a strategy to recruit additional management talent and significantly improve our competitive position and growth prospects through increased investments in product development, sales and marketing initiatives, complemented by strategic acquisitions aimed at broadening our customer base and our product offerings.

In October 2005, we acquired Wind2, an enterprise software provider serving project-focused architectural and engineering (“A/E”) and other professional services firms. The acquisition of Wind2 enabled us to expand our presence in the A/E market by adding small and medium-sized engineering firms to our existing customer base.

21

In March 2006, we acquired WST, Inc. (“Welcom”), a leading provider of project portfolio management solutions, focused on earned value management, planning and scheduling, portfolio analysis, risk management and project collaboration products. The acquisition of Welcom increased our presence among a number of multinational aerospace, defense and government clients, augmenting our existing installed base of customers. This acquisition complemented our core product offerings and created opportunities for additional sales to our existing customer base.

In July 2006, we acquired C/S Solutions, Inc. (“CSSI”), a leading provider of business intelligence tools for the earned value management marketplace. The acquisition of CSSI built upon our leadership position in the enterprise project management sector by incorporating collaborative earned value management analytics delivered by CSSI’s wInsight software with our own earned value management engine, Cobra, and Costpoint, our enterprise resource planning solution for mid- to large-sized government contractors.

In April 2007, we acquired the business assets of Applied Integration Management Corporation (“AIM”), a provider of project management consulting services. This acquisition supplemented our existing project portfolio management systems implementation expertise and capabilities and allowed us to provide additional project portfolio management consulting, training and implementation services.

In April 2007, we reincorporated in the State of Delaware as Deltek, Inc.

In addition, in May 2007, we completed the acquisition of WST Pacific Pty Ltd. (“WSTP”), a provider of earned value management (“EVM”) solutions based in Australia, and previously a development partner of Welcom. The acquisition complemented our existing EVM development, services and support resources.

In November 2007, the Company completed its initial public offering consisting of 9,000,000 shares of common stock for $18.00 per share. For additional information regarding the initial public offering, see Note 3 in our consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

In August 2008, we acquired the MPM solution (“MPM”) and all related assets from Planview, Inc., an earned value management software application used by government contractors and agencies to meet complex compliance requirements for their programs issued by the U.S. Federal Government. MPM integrates with Deltek wInsight to create a complete earned value solution for government contractors and agencies.

Critical Accounting Policies and Estimates

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates.

For further information on our critical and other significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2007. We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements:

• Revenue Recognition

• Stock-Based Compensation

• Income Taxes

• Allowances for Doubtful Accounts Receivable

• Valuation of Purchased Intangible Assets and Acquired Deferred Revenue

• Impairment of Identifiable Intangible and Other Long-Lived Assets and Goodwill

22

Results of Operations

The following table sets forth our statements of operations including dollar and percentage of change from the prior periods indicated:

	Three Months Ended September 30											Nine Months Ended September 30
	2008			2007			Change			% Change		2008			2007			Change			% Change
	(dollars in millions)											(dollars in millions)
REVENUES:
Software license fees	$	18.5		$	21.4		$	(2.9	)	(14	)	$	57.6		$	60.0		$	(2.4	)	(4	)
Consulting services		23.1			22.8			0.3		1			69.7			61.0			8.7		14
Maintenance and support services		29.3			26.1			3.2		12			85.7			75.5			10.2		14
Other revenues		0.1			0.1			—		—			4.7			4.7			—		—
Total revenues	$	71.0		$	70.4		$	0.6		1		$	217.7		$	201.2		$	16.5		8
COST OF REVENUES:
Cost of software license fees	$	1.7		$	1.8		$	(0.1	)	(6	)	$	4.9		$	6.0		$	(1.1	)	(18	)
Cost of consulting services		18.3			19.3			(1.0	)	(5	)		57.6			52.7			4.9		9
Cost of maintenance and support services		5.4			4.4			1.0		23			15.9			12.2			3.7		30
Cost of other revenues		—			0.2			(0.2	)	(100	)		5.1			5.2			(0.1	)	(2	)
Total cost of revenues	$	25.4		$	25.7		$	(0.3	)	(1	)	$	83.5		$	76.1		$	7.4		10
GROSS PROFIT	$	45.6		$	44.7		$	0.9		2		$	134.2		$	125.1		$	9.1		7
OPERATING EXPENSES:
Research and development	$	11.8		$	11.0		$	0.8		7		$	34.7		$	31.6		$	3.1		10
Sales and marketing		13.6			11.6			2.0		17			39.4			32.2			7.2		22
General and administrative		8.8			7.4			1.4		19			24.7			21.7			3.0		14
Restructuring charge		(0.1	)		—			(0.1	)	100			1.0			—			1.0		100
Total operating expenses	$	34.1		$	30.0		$	4.1		14		$	99.8		$	85.5		$	14.3		17
INCOME FROM OPERATIONS	$	11.5		$	14.7		$	(3.2	)	(22	)	$	34.4		$	39.6		$	(5.2	)	(13	)
Interest income		0.2			—			0.2		100			0.6			0.2			0.4		200
Interest expense		(2.5	)		(4.7	)		2.2		(47	)		(8.4	)		(14.0	)		5.6		(40	)
Other expense, net		(0.1	)		—			(0.1	)	(100	)		(0.3	)		—			(0.3	)	100
INCOME BEFORE INCOME TAXES		9.1			10.0			(0.9	)	(9	)		26.3			25.8			0.5		2
Income tax expense		1.1			4.2			(3.1	)	(74	)		8.8			10.4			(1.6	)	(15	)
NET INCOME	$	8.0		$	5.8		$	2.2		38		$	17.5		$	15.4		$	2.1		14

Revenues

	Three Months Ended September 30									Nine Months Ended September 30
	2008		2007		Change			% Change		2008		2007		Change			% Change
	(dollars in millions)									(dollars in millions)
REVENUES:
Software license fees	$	18.5	$	21.4	$	(2.9	)	(14	)	$	57.6	$	60.0	$	(2.4	)	(4	)
Consulting services		23.1		22.8		0.3		1			69.7		61.0		8.7		14
Maintenance and support services		29.3		26.1		3.2		12			85.7		75.5		10.2		14
Other revenues		0.1		0.1		—		—			4.7		4.7		—		—
Total revenues	$	71.0	$	70.4	$	0.6		1		$	217.7	$	201.2	$	16.5		8

Software License Fees

Our software applications are generally licensed to end-user customers under perpetual license agreements. We sell our software applications to end-user customers mainly through our direct sales force as well as indirectly through our network of alliance partners and resellers. The timing of the sales cycle for our products varies in length based upon a variety of factors, including the size of the customer, the product being sold and whether the customer is a new or existing customer. We primarily compete on product features, functionality and the needs of our customers within our served markets, with price generally a lesser consideration. The pricing for our products has remained stable, requiring infrequent changes in our pricing strategies.

        Software license fee revenues decreased $2.9 million, or 14%, to $18.5 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. During the third quarter of 2008, software license fee revenues from our Costpoint, GCS Premier and EPM products collectively increased $1.5 million in the third quarter of 2008 compared to the third quarter of 2007 due to the continued demand for our products by the government contracting market. During the current quarter software license fee revenues from our Vision product decreased $4.4 million, primarily due to a number of architecture and engineering customers deferring purchase decisions as their focus turned to the escalating financial crisis that occurred in the final two weeks of September 2008.

23

Software license fee revenues decreased $2.4 million, or 4%, to $57.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This decrease in software license fee revenues was the result of a decline in our Vision product of $4.4 million. These decreases were offset by a collective increase in software license fee revenues related to our Costpoint, GCS Premier and EPM products of $2.0 million.

Consulting Services

Our consulting services revenues are generated from software implementation and related project management and data conversion, as well as training, education and other consulting services associated with our software applications and are typically provided on a time-and-materials basis.

Consulting services revenues increased $0.3 million, or 1%, to $23.1 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. This increase was the result of a $0.4 million increase in training and education related services revenue, offset by a $0.1 million decrease in software implementation related services revenue during the third quarter of 2008 compared to the third quarter of 2007. Software implementation related services revenue was $21.1 million of consulting services revenues during the three months ended September 30, 2008 compared to $21.2 million during the three months ended September 30, 2007.

Consulting services revenues increased $8.7 million, or 14%, to $69.7 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This increase was the result of a $7.8 million increase in software implementation related services revenue and a $0.8 million increase in training and education related services revenue during the nine months ended September 30, 2008 compared to the same period in 2007. Software implementation related services revenue was $64.5 million of consulting services revenues during the nine months ended September 30, 2008 compared to $56.7 million during the nine months ended September 30, 2007. This increase in software implementation related services was a result of increased demand for implementation services and more billable services headcount.

Maintenance and Support Services

Our maintenance and support revenues are comprised of fees derived from new maintenance contracts associated with new software license sales and annual renewals of existing maintenance contracts. These contracts typically allow our customers to obtain online, telephone and internet-based support, as well as unspecified periodic upgrades or enhancements to our software on an as available basis. Maintenance services are typically billed on a quarterly basis and generally represent between 15% and 25% of the list price of the underlying software applications at the time of sale. Maintenance fees are generally subject to contractually permitted annual rate increases.

Maintenance revenues increased $3.2 million, or 12%, to $29.3 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Maintenance revenues from our Vision product increased $1.2 million and maintenance revenues from our Costpoint, GCS Premier and EPM products collectively increased by $1.9 million. These increases were driven by our sales of new software licenses and renewals of maintenance agreements in our installed base of customers, plus the annual price escalations for our maintenance services. These increases are reduced by the impact of customer cancellations.

Maintenance revenues increased $10.2 million, or 14%, to $85.7 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This increase is across all of our product families with $4.2 million attributable to our Vision product, and $5.9 million attributable to our Costpoint, GCS Premier and EPM products collectively.

Other Revenues

Our other revenues consist of fees collected for our annual user conference, which is typically held in the second quarter of the year, as well as sales of third-party hardware and software. For the three months ended September 30, 2008, other revenues remained constant at $0.1 million when compared to the three months ended September 30, 2007. For the nine months ended September 30, 2008, other revenues remained constant at $4.7 million when compared to the same period in the prior year.

24

Cost of Revenues

	Three Months Ended September 30									Nine Months Ended September 30
	2008		2007		Change			% Change		2008		2007		Change			% Change
	(dollars in millions)									(dollars in millions)
COST OF REVENUES:
Cost of software license fees	$	1.7	$	1.8	$	(0.1	)	(6	)	$	4.9	$	6.0	$	(1.1	)	(18	)
Cost of consulting services		18.3		19.3		(1.0	)	(5	)		57.6		52.7		4.9		9
Cost of maintenance and support services		5.4		4.4		1.0		23			15.9		12.2		3.7		30
Cost of other revenues		—		0.2		(0.2	)	(100	)		5.1		5.2		(0.1	)	(2	)
Total cost of revenues	$	25.4	$	25.7	$	(0.3	)	(1	)	$	83.5	$	76.1	$	7.4		10

Cost of Software License Fees

Our cost of software license fees consists of third-party software royalties, costs of product fulfillment, amortization of acquired technology and amortization of capitalized software.

Cost of software license fees decreased by $0.1 million, or 6%, to $1.7 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The decrease was primarily the result of a reduction in amortization of purchased intangible software assets and capitalized software costs in the current period.

Cost of software license fees for the nine months ended September 30, 2008 decreased by $1.1 million, or 18%, to $4.9 million compared to the same period in the prior year, primarily as a result of a $0.5 million decrease in the amortization of purchased intangible software assets and amortization of capitalized software. Additionally, there was a decrease of $0.4 million in third-party royalty expense due to lower license sales in the current period.

Cost of Consulting Services

Our cost of consulting services is comprised of the salaries, benefits, incentive compensation and stock-based compensation expense of services-related employees as well as third-party contractor expenses, travel and reimbursable expenses and classroom rentals. Cost of services also includes an allocation of our facilities and other costs incurred for providing implementation, training and other consulting services to our customers.

Cost of consulting services decreased $1.0 million, or 5%, to $18.3 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The primary driver of this decrease was labor, related benefits, travel, subcontractor and third-party labor expenses, which together decreased by $0.9 million.

For the nine months ended September 30, 2008 cost of consulting services was $57.6 million, an increase of $4.9 million, or 9%, when compared to the same period in the prior year. Increases in labor and related benefits, bonus, and stock-based compensation resulted in a $4.3 million increase. Offsetting these costs was a decrease in expenses associated with the use of subcontractors and third-party labor of $0.8 million during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. We reduced our reliance on subcontractors as a result of additional newly-hired headcount that became billable. The balance of the remaining increase is principally the result of increased costs related to expanding our United Kingdom and Australia services organization in the current period.

Cost of Maintenance and Support Services

Our cost of maintenance and support services is primarily comprised of salaries, benefits, stock-based compensation, incentive compensation and third-party contractor expenses, as well as facilities and other expenses incurred in providing support to our customers.

Cost of maintenance services increased $1.0 million, or 23%, to $5.4 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The increase was driven by additional support headcount, required to meet the greater demand for maintenance services, related benefits, and third-party maintenance expense related to maintenance support that we provide on third-party products which are embedded and sold along with our products, which together increased by $1.0 million.

Cost of maintenance services increased $3.7 million, or 30%, to $15.9 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This increase was primarily the result of labor expense, related benefits, and third-party maintenance expense, which together increased by $3.5 million.

25

Cost of Other Revenues

Our cost of other revenues includes the cost of third-party equipment and software purchased for customers as well as the cost associated with our annual user conference. Cost of other revenues decreased $0.2 million for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. Cost of other revenues decreased $0.1 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007.

Operating Expenses

	Three Months Ended September 30									Nine Months Ended September 30
	2008			2007		Change			% Change	2008		2007		Change		% Change
	(dollars in millions)									(dollars in millions)
OPERATING EXPENSES:
Research and development	$	11.8		$	11.0	$	0.8		7	$	34.7	$	31.6	$	3.1	10
Sales and marketing		13.6			11.6		2.0		17		39.4		32.2		7.2	22
General and administrative		8.8			7.4		1.4		19		24.7		21.7		3.0	14
Restructuring charge		(0.1	)		—		(0.1	)	100		1.0		—		1.0	100
Total operating expenses	$	34.1		$	30.0	$	4.1		14	$	99.8	$	85.5	$	14.3	17

Research and Development

Our product development expenses consist primarily of salaries, benefits, stock-based compensation, incentive compensation and related expenses, including third-party contractor expenses, and other expenses associated with the design, development and testing of our software applications.

Research and development expenses increased by $0.8 million, or 7%, to $11.8 million for the three month period ended September 30, 2008 compared to the same period in 2007. The principal driver was an increase of $1.2 million in labor and labor-related benefits to support product development activities. Additionally, a $0.3 million in-process research and development charge was incurred in connection with our acquisition of the MPM solution. Partially offsetting these costs was a decrease of $0.4 million in third-party costs to support new release development.

For the nine months ended September 30, 2008 research and development expenses increased by $3.1 million, or 10%, to $34.7 million when compared to the same period in 2007. The increase is primarily attributable to a $2.8 million increase in labor and labor-related costs, as well as stock-based compensation. Expenses associated with our development organizations in the Philippines and Australia increased $1.2 million. Additionally, a $0.3 million in-process research and development charge was incurred in connection with our acquisition of the MPM solution. Partially offsetting these costs was a decrease of $1.0 million in third-party costs to support new release development.

Sales and Marketing

Our sales and marketing expenses consist primarily of salaries and related costs, plus commissions paid to our sales team and the cost of marketing programs (including our demand generation efforts, advertising, events, marketing and corporate communications, field marketing and product marketing) and other expenses associated with our sales and marketing activities. Sales and marketing expenses also include amortization expense for acquired intangible assets associated with customer relationships.

Sales and marketing expenses increased by $2.0 million, or 17%, to $13.6 million for the three month period ended September 30, 2008 compared to the three month period ended September 30, 2007. The increase was driven by additional labor, related benefits costs, commissions and stock-based compensation expense of $1.6 million, primarily associated with increased headcount in our sales force.

For the nine months ended September 30, 2008 sales and marketing expenses increased by $7.2 million, or 22%, to $39.4 million when compared to the same period in 2007. The increase is attributable to increased sales labor and related costs as we expanded our sales and marketing organizations.

General and Administrative

Our general and administrative expenses consist primarily of salaries and related costs for general corporate functions, including executive, finance, accounting, legal and human resources. General and administrative costs also include New Mountain Capital advisory fees, insurance premiums and third-party legal and other professional services fees, facilities and other expenses associated with our administrative activities.

        General and administrative expenses increased by $1.4 million, or 19%, to $8.8 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Insurance, audit, professional services and third-party costs increased by $0.8 million primarily due to costs associated with being a public company. Increases in labor, labor-related costs and stock compensation expense together grew by $0.6 million.

26

For the nine months ended September 30, 2008, general and administrative expenses increased $3.0 million, or 14%, to $24.7 million when compared to the same period in 2007. The increases reflect additional labor and labor-related benefits, and stock-based compensation expense of $2.2 million. Additionally, insurance, audit, professional services and third-party costs increased by $1.0 million as compared to the third quarter of 2007 primarily driven by the costs associated with being a public company.

Restructuring Charge

During the nine months ended September 30, 2008, management implemented a restructuring plan to eliminate certain positions to realign the Company’s cost structure and for the consolidation of excess office space. The charge included $0.9 million for severance and severance-related costs for approximately 50 employees. The charge also included $0.1 million for facilities related expenses, associated with closure of one office location and a reduction in space at a second location, and offset by a reduction in existing deferred rent liabilities.

Interest Income

Interest income in all periods reflects interest earned on our invested cash balances. Interest income did not fluctuate significantly during the three or nine months ended September 30, 2008 when compared with the three or nine months ended September 30, 2007.

Interest Expense

	Three Months Ended September 30									Nine Months Ended September 30
	2008		2007		Change			% Change		2008		2007		Change			% Change
	(dollars in millions)									(dollars in millions)
Interest expense	$	2.5	$	4.7	$	(2.2	)	(47	)	$	8.4	$	14.0	$	(5.6	)	(40	)

Interest expense decreased by $2.2 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, and by $5.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This decrease resulted from lower debt in the three and nine months ended September 30, 2008, following debt repayments of $42.6 million in the fourth quarter of 2007 using proceeds from the initial public offering, as well as the impact of more favorable interest rates during the same periods in 2008.

Income Taxes

	Three Months Ended September 30				Nine Months Ended September 30
	2008		2007		2008		2007
	(dollars in millions)				(dollars in millions)
Income tax expense	$	1.1	$	4.2	$	8.8	$	10.4

Income tax expense decreased to $1.1 million for the three months ended September 30, 2008 from $4.2 million for the three months ended September 30, 2007. As a percentage of pre-tax income, income tax expense was 11.7% and 41.7% for the three months ended September 30, 2008 and 2007, respectively. The decrease in expense for the third quarter of 2008 compared to the third quarter of 2007 is primarily due to a $1.5 million reduction to the accrual for prior years’ tax returns due to higher research and development tax credits and certain tax deductions and adjustments. The most significant component of these tax reductions relates to changes in the geographic distribution of our income and a change in our transfer pricing agreements which accounted for a $1.4 million release of the valuation allowance on net operating loss, carryforwards, and other deferred tax assets in the U.K. subsidiary. As a result of the changes in these transfer pricing policies, we anticipate that the Company’s effective annual tax rate on a going-forward basis will be approximately 39% as compared to the 45% rate used to compute the tax provision for the first half of 2008. This had the effect of lowering our 2008 income tax expense by approximately $1.0 million, bringing the total reduction of tax expense in the third quarter of 2008 to approximately $2.5 million.

Income tax expense for the nine months ended September 30, 2008 decreased to $8.8 million compared to $10.4 million for the nine months ended September 30, 2007. As a percentage of pre-tax income, income tax expense was 33.6% and 40.2% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in tax expense is primarily due to the $1.5 million of reductions to the accrual for prior years’ tax returns.

27

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the criteria that an individual tax position must satisfy for that position to be recognized in the financial statements. This interpretation also provides guidance on accounting for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company’s adoption of FIN 48 resulted in a $0.4 million liability associated with various federal and state income tax matters related to the acquisition of Welcom during 2006. The liability was recorded as an increase to goodwill. During the year ended December 31, 2007, the liability increased $0.2 million due to the expected utilization of research and development credits acquired from Welcom. During the nine months ended September 30, 2008, the Company established an additional liability of approximately $0.3 million associated with certain research and development tax credits acquired from WST Corporation and other permanent adjustments. For further information, see Note 9, Income Taxes, of our condensed consolidated financial statements contained elsewhere in this Quarterly Report. Prior to the effective date of SFAS No. 141 (revised 2007),Business Combinations (“SFAS 141R”), any adjustments to the unrecognized tax benefits will affect goodwill and have no impact on the effective tax rate. Subsequent to the adoption of SFAS 141R, changes will be recorded as part of the income tax expense. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

Credit Agreement

In connection with the Company’s recapitalization in 2005, we entered into a credit agreement with a syndicate of lenders led by Credit Suisse that provided for a $115 million term loan and a $30 million revolving credit facility (the “Credit Agreement”). In April 2006, we added $100 million to the term loan to repay the outstanding debentures. The term loan matures on April 22, 2011, and the revolving credit facility terminates on April 22, 2010.

Term loans under the Credit Agreement accrue interest at 2.00% above the British Banker’s Association Interest Settlement Rates for dollar deposits (the “LIBO rate”). Amounts outstanding under the revolving credit facility accrue interest at 2.25% above the LIBO rate. The spread above the LIBO rate decreases as our leverage ratio, as defined in the Credit Agreement, decreases and as we achieve specified credit ratings. At our option, the interest rate on loans under the Credit Agreement may be based on an alternative base rate (the “ABR Rate,” which is, in effect, the “prime” rate). Margins over ABR are 1.00% less than the margins over the LIBO rate. Election of the LIBO rate has provided us with the lowest possible effective interest expense. We pay a commitment fee of 0.50% per year on the unused amount of our revolving credit facility.

All the loans under the Credit Agreement are collateralized by substantially all of our assets (including our subsidiaries’ assets) and require us to comply with financial covenants requiring us to maintain defined minimum levels of interest coverage and fixed charges coverage and providing for a limitation on our leverage ratio.

The following table summarizes the significant financial covenants under the Credit Agreement (adjusted EBITDA below is as defined in the Credit Agreement):

Covenant Requirement	Calculation	As of September 30, 2008		Most Restrictive Required Level
		Required Level	Actual Level
Minimum Interest Coverage	Cumulative adjusted EBITDA for the prior four quarters/consolidated interest expense	Greater than 2.50 to 1.00	5.97	Greater than 3.00 to 1.00 effective January 1, 2010
Minimum Fixed Charges Coverage	Cumulative adjusted EBITDA for the prior four quarters/(interest expense + principal payments + capital expenditures + capitalized software costs + cash tax payments)	Greater than 1.10	1.87	Greater than 1.10
Leverage Coverage	Total debt/cumulative adjusted EBITDA for the prior four quarters	Less than 3.75 to 1.00	2.72	Less than 3.25 to 1.00 effective January 1, 2009

The Credit Agreement also requires us to comply with non-financial covenants that restrict certain corporate activities by us and our subsidiaries, including our ability to incur additional indebtedness, guarantee obligations, or create liens on our assets, enter into sale and leaseback transactions, engage in mergers or consolidations, or pay cash dividends.

As of September 30, 2008, we were in compliance with all covenants related to our Credit Agreement.

        Based on our expectations of our future performance we believe that we will continue to satisfy the financial covenants of our Credit Agreement for the foreseeable future.

28

In 2005, debt issuance costs incurred in connection with the Credit Agreement and the debentures were approximately $5.8 million. In 2006, the costs incurred in connection with the addition to the term loan were $1.3 million. We incurred no debt issuance costs in 2007 or in the first nine months of 2008. The debt issuance costs are being amortized and reflected in interest expense over the respective lives of the loans. At September 30, 2008, $0.8 million of unamortized debt issuance costs remained in “prepaid expenses and other current assets” and $1.0 million was reflected in “other assets” on the consolidated balance sheet. During the nine months ended September 30, 2008 and 2007, $0.6 million of costs were amortized and reflected in interest expense for both periods.

The Credit Agreement requires mandatory prepayments of the term loan from our annual excess cash flow, as defined in the Credit Agreement, and from the net proceeds of certain assets sales or equity issuances. For asset sales or equity issuances, the required prepayment is equal to the lesser of 50% of the net proceeds from the sale of securities, or the amount that reduces the leverage ratio (as defined in the agreement) to less than 2.75. Upon the completion of our initial public offering in November of 2007, a prepayment was made in the amount of $17.6 million which included the scheduled principal payments through September 30, 2008. We will begin making the previously scheduled principal repayments of $0.5 million each quarter beginning December 31, 2008 through June 30, 2010. At the end of each of the quarters ending September 30, 2010, December 31, 2010 and March 31, 2011, a scheduled principal payment of $47.5 million will be due, with the balance due on April 22, 2011, the final maturity date.

Liquidity and Capital Resources

Overview of Liquidity

Our primary operating cash requirements include the payment of salaries, incentive compensation and related benefits and other headcount-related costs as well as the costs of office facilities and information technology systems. We fund these requirements through cash collections from our customers for the purchase of our software, consulting services and maintenance services. Amounts due from customers for software license and maintenance services are generally billed at the beginning of the contract terms.

The cost of our acquisitions has been financed with available cash flow and, to the extent necessary, short-term borrowings from our revolving credit facility. These borrowings were repaid in subsequent periods with available cash provided by operating activities as well as with proceeds from our initial public offering. At September 30, 2008, we had no borrowings under our revolving credit facility.

Historically our cash flows have been subject to variability from year-to-year primarily as a result of one-time or infrequent events. We expect that our future growth will continue to require additional working capital. Although such future working capital requirements are difficult to forecast, based on our current estimates of revenues and expenses, we believe that anticipated cash flows from operations and available sources of funds (including available borrowings under our revolving credit facility) will provide sufficient liquidity for us to fund our business and meet our obligations for the next 12 months and the foreseeable future thereafter.

In the fourth quarter of 2007, we completed our initial public offering. The net proceeds to the Company were $42.6 million which were used to repay a $25.0 million balance on our revolving credit facility and to make a $17.6 million prepayment on our term loan.

Analysis of Cash Flows

For the nine months ended September 30, 2008, net cash provided by operating activities was $33.0 million, compared to $12.1 million provided during the comparable period of 2007. The increase of $20.9 million was primarily related to collection of customer payments which were offset by higher cash payments for taxes and other expenses in the first nine months of 2008. During the third quarter of 2008, cash flows from operating activities were impacted by cash payments of $862,000 for severance and other related costs associated with the restructuring charge recorded by the Company during this period. The remaining accrued liability of $63,000 is expected to be paid within the next three months.

Net cash used in investing activities was $22.7 million for the nine months ended September 30, 2008 compared to $12.4 million during the comparable period of 2007. Our use of cash in the first nine months of 2008 was the acquisition of MPM for $16.4 million, AIM contingent consideration of $1.0 million, and $5.0 million to purchase property and equipment, while the comparable period in 2007 included $5.9 million for the acquisitions of AIM and WSTP, as well as $6.0 million for purchase of property and equipment.

Net cash provided by financing activities was $0.7 million for the nine months ended September 30, 2008 compared to net cash used for financing activities of $2.1 million during the comparable period of 2007. Cash from financing activities in the first nine months of 2008 was primarily related to proceeds from issuance of stock under the Company’s employee stock purchase plan as well as stock option exercises. During the first nine months of 2007, the Company’s cash flows from financing were impacted by our net proceeds of $5.4 million from our debt issuance and payment of $4.8 million related to the redemption of stock and shareholder payments related to the Company’s 2005 recapitalization. During the comparable period of 2008, similar transactions did not occur. We also paid $2.8 million for public offering costs during the first nine months of 2007.

29

Impact of Seasonality

Fluctuations in our quarterly license fee revenues reflect in part, seasonal fluctuations driven by our customers’ procurement cycles for enterprise software and other factors. These factors typically yield a peak in license revenue in the fourth quarter due to increased spending by our customers during that time. In 2007, our fourth quarter license revenues were higher than the next highest quarter in 2007 by 27%. Past seasonality may not be indicative of current or future seasonality.

Our consulting services revenues are impacted by software license sales, the availability of our consulting resources to work on customer implementations, and the adequacy of our contracting activity to maintain full utilization of our available resources. As a result, services revenues are less subject to seasonal fluctuations.

Our maintenance revenues are not subject to significant seasonal fluctuations although cash flow from maintenance fees is impacted by the timing of collections of annual maintenance renewals which are usually higher in the first and fourth quarters of the year.

Contractual Obligations and Commitments

We have various contractual obligations and commercial commitments. Our material capital commitments consist of debt obligations and commitments under facilities and operating leases. We generally do not enter into binding purchase commitments. The following table summarizes our existing contractual obligations and contractual commitments as of September 30, 2008:

	Payments Due By December 31,
Contractual Obligations	Total		Remainder of 2008		2009		2010		2011		2012		Thereafter
	(dollars in thousands)
Term loan	$	193,313	$	498	$	1,991	$	95,910	$	94,914	$	—	$	—
Operating leases		22,976		1,776		7,131		6,895		5,652		1,442		80
Liability for redemption of stock in recapitalization		569		569		—		—		—		—		—
Other tax liabilities		925		—		—		—		—		—		925

The table above does not include interest payments with respect to outstanding loans, which are variable and therefore fluctuate with interest rate fluctuations. Based on the variable rate debt outstanding as of September 30, 2008, a hypothetical 1% increase in interest rates would increase interest expense by approximately $1.9 million on an annual basis.

We anticipate that we will experience an increase in our capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel during the remainder of 2008 and 2009.

Off-Balance Sheet Arrangements

As of September 30, 2008, we had no off-balance sheet arrangements.

Indemnification

We provide limited indemnification to our customers against intellectual property infringement claims made by third parties arising from the use of our software products. Due to the established nature of our primary software products and the lack of intellectual property infringement claims in the past, we cannot estimate the fair value nor determine the total nominal amount of the indemnification, if any. Estimated losses for such indemnification are evaluated under SFAS No. 5,Accounting for Contingencies, as interpreted by FIN No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. We have secured copyright and trademark registrations for our software products with the U.S. Patent and Trademark Office, and we have intellectual property infringement indemnification from our third-party partners whose technology may be embedded or otherwise bundled with our software products. Therefore, we generally consider the probability of an unfavorable outcome in an intellectual property infringement case to be relatively low. We have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications.

30

Newly Adopted and Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations (“SFAS 141R”), which replaces SFAS 141. SFAS 141R requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS 141R also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 141R on its consolidated results of operations and financial condition but does not believe there will be a material impact.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any noncontrolling interests.

In February 2008, the FASB issued FASB Staff Position 157-2,Effective Date of FASB Statement No. 157 (“FSP 157-2”). Under the terms of FSP 157-2, the provisions of SFAS No. 157,Fair Value Measurements (“SFAS 157”), which provide guidance for, among other things, the definition of fair value and the methods used to measure fair value, were adopted January 1, 2008 for financial instruments and, when required, will be adopted for nonfinancial assets and nonfinancial liabilities in 2009 (except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis). The provisions adopted in 2008 did not have an impact on the Company’s financial statements, and the Company is in the process of evaluating the impact of provisions to be adopted in 2009.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company does not currently have any derivative instruments.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and provides the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated results of operations and financial position, but does not believe there will be a material impact.

In October 2008, the FASB issued FASB Staff Position 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The guidance emphasizes that determining fair value in an inactive market depends on the facts and circumstances and may require the use of significant judgments. FSP 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued, and therefore is effective for the Company at September 30, 2008. The Company currently does not have any financial assets in a market which is inactive.

31

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt and cash and cash equivalents consisting primarily of funds held in money-market accounts on a short-term basis with no withdrawal restrictions and contains no significant investments in auction rate securities. At September 30, 2008, we had $28.2 million in cash and cash equivalents. Our interest expense associated with our term loan and revolving credit facility will vary with market rates. As of September 30, 2008, we had approximately $193.3 million in variable rate debt outstanding. Based upon the variable rate debt outstanding as of September 30, 2008, a hypothetical 1% increase in interest rates would increase interest expense by approximately $1.9 million on an annual basis, and likewise decrease our earnings and cash flows.

We cannot predict market fluctuations in interest rates and their impact on our variable rate debt, or whether fixed-rate long-term debt will be available to us at favorable rates, if at all. Consequently, future results may differ materially from the hypothetical 1% increase discussed above.

Based on the investment interest rate and our cash and cash equivalents balance as of September 30, 2008, a hypothetical 0.5% decrease in interest rates would decrease interest income by approximately $143,000 on an annual basis, and likewise decrease our earnings and cash flows. We do not use derivative financial instruments in our investment portfolio.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound, the Philippine peso, and the Australian dollar. As our international operations continue to grow, we may choose to use foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we have any such contracts during the nine months ended September 30, 2008 or 2007. To date, exchange rate fluctuations have had little impact on our operating results and cash flows given our limited international presence.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, means controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. As of September 30, 2008, under the supervision of our Chief Financial Officer and with the participation of our Chief Executive Officer, management evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, as of the end of the period covered by this report.

As reported in our Annual Report on Form 10-K filed with the SEC on March 31, 2008, management concluded that material weaknesses existed in our internal controls as of December 31, 2007. While we have made progress towards remediating these weaknesses, we have not yet finalized our remediation activities and the testing of the effectiveness of our remediation activities on our disclosure controls and procedures to provide reasonable assurance that the financial information we are required to disclose in our reports under the Exchange Act were recorded, summarized and reported accurately. As a result of management’s conclusion, we have performed additional substantive procedures with respect to our consolidated financial statements as of and for the nine month period ended September 30, 2008. Accordingly, our management believes that such consolidated financial statements are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States.

Changes in Internal Control over Financial Reporting

As discussed in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2008, we have been engaged in a program to evaluate and improve the effectiveness of our system of internal control over financial reporting. During the quarter ended September 30, 2008, there were no material changes to our internal control over financial reporting.

32

PART II

OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time that are incidental to the ordinary conduct of our business. Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.

Item 1A. RISK FACTORS

Other than with respect to the risk factors updated below, there has been no material change in the information provided under the heading “Risk Factors” in Item 1A to Part I of our Annual Report on Form 10-K filed with the SEC on March 31, 2008. The risk factors updated below were disclosed in our Annual Report on Form 10-K and are being updated in light of the potential effect the current domestic and global economic conditions and financial and credit market challenges may have on our business, financial condition and results of operations.

Our business is exposed to the risk that adverse economic conditions will reduce or defer the demand for project-based enterprise applications software and solutions.

The demand for project-based enterprise applications software and solutions may fluctuate based upon a variety of factors, including the business and financial condition of our customers and on economic and financial conditions, particularly as they affect the key sectors in which our customers operate. For the nine months ended September 30, 2008, approximately 96% of our total revenue was derived from United States customers. Economic downturns, inflationary pressures or unfavorable changes in the financial and credit markets in the United States could have an adverse effect on the operations, budgets and overall financial condition of our customers. As a result, our customers may reduce their overall spending on information technology, purchase fewer of our products or solutions, lengthen sales cycles, or delay, defer or cancel purchases of our products or solutions. Furthermore, our customers may be less able to timely finance or pay for the products which they have purchased.

In addition, the financial and overall condition of resellers of our products and solutions may be affected by adverse conditions in the economy and the financial and credit markets, which may adversely affect the sale of our products or solutions through these resellers. For the nine months ended September 30, 2008, resellers accounted for approximately 13% of our software license revenue.

We cannot predict the impact, timing, strength or duration of any economic slowdown or subsequent economic recovery, generally or in any specific industry, or of any disruptions in the financial and credit markets. If the challenges in the financial and credit markets or the downturn in the economy or the markets in which we operate persist or worsen from present levels, our business, financial condition and results of operations could be materially adversely affected.

Our indebtedness could adversely affect our results of operations and financial condition and prevent us from fulfilling our financial obligations.

As of September 30, 2008, we had approximately $193.3 million of outstanding debt under our credit agreement and term loan at interest rates which are subject to market fluctuation. This indebtedness could have important consequences to us, such as:

• limiting our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service requirements or other cash requirements;

• exposing us to the risk of increased interest costs if the underlying interest rates rise;

• limiting our ability to invest operating cash flow in our business due to debt service requirements;

• limiting our ability to compete with companies that are not as leveraged and that may be better positioned to withstand economic downturns; and

• increasing our vulnerability to economic downturns and changing market conditions.

33

Our ability to meet our debt service obligations or to borrow additional funds will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer demand, the success of product and marketing innovation, pressure from competitors and the state of the economy, including the state of the financial and credit markets. Our ability to borrow additional funds or to refinance our revolving credit facility in 2010 and our term loan in 2011 will be dependent on the future state of the U.S. and global financial and credit markets, and any challenges or uncertainty in the financial and credit markets may restrict or delay our ability to access the capital markets. If we do not have enough cash to satisfy our debt service obligations, we may be required to refinance all or part of our existing debt on terms that are not favorable to us, sell assets or reduce our spending. At any given time, we may not be able to refinance our debt or sell assets on terms acceptable to us or at all.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock

None.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

34

Item 6. EXHIBITS

3.1	Amended and Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws of Deltek, Inc. (2)
4.1	Form of specimen common stock certificate. (1)
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

(1) Incorporated by reference to exhibit of same number filed with the Registrant’s Registration Statement on Form S-1 (No. 333-142737) on May 8, 2007.

(2) Incorporated by reference to exhibit of same number filed on May 15, 2008 with the Registrant’s Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2008.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DELTEK, INC.
Dated: November 14, 2008	By:	/s/ KEVIN T. PARKER
		Kevin T. Parker
		Chairman, President and Chief Executive Officer
	DELTEK, INC.
Dated: November 14, 2008	By:	/s/ MARK WABSCHALL
		Mark Wabschall
		Executive Vice President, Chief Financial Officer and Treasurer

36

EXHIBIT INDEX

3.1	Amended and Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws of Deltek, Inc. (2)
4.1	Form of specimen common stock certificate. (1)
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

(1) Incorporated by reference to exhibit of same number filed with the Registrant’s Registration Statement on Form S-1 (No. 333-142737) on May 8, 2007.

(2) Incorporated by reference to exhibit of same number filed on May 15, 2008 with the Registrant’s Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2008.

37