Washington, D.C.  20549

FORM 10-Q

(Mark One)

CIBER, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (303) 220-0100

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.

ý Yes    o No

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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

o Yes    ý No

As of March 31, 2006, there were 62,005,306 shares of the Registrant’s common stock ($0.01 par value) outstanding.

CIBER, Inc. and Subsidiaries

Form 10-Q

Table of Contents

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statement of Shareholders’ Equity

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1)  Organization and Basis of Presentation

The accompanying unaudited interim consolidated financial statements of CIBER, Inc. and subsidiaries (together, “CIBER,” “the Company,” “we,” “our,” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements.  These consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.  The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include all adjustments of a normal, recurring nature that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  Interim results of operations for the three month period ended March 31, 2006 are not necessarily indicative of operating results to be expected for the fiscal year ending December 31, 2006.

Significant Accounting Policies.  For a description of the Company’s significant accounting policies, see Footnote 2 (Summary of Significant Accounting Policies) to the Company’s Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December, 31, 2005.

(2) Earnings Per Share

Pursuant to the terms of our Convertible Senior Subordinated Debentures (“Debentures”), the Debentures may be converted to shares of CIBER common stock under certain conditions.  In accordance with Emerging Issues Task Force Issue 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“EITF 04-8”), the dilutive effect of our Debentures has been included in our diluted earnings per share calculations as further described below.  When assuming conversion of the Debentures for purposes of calculating diluted earnings per share, we also adjust net income to exclude the net of tax cost of interest expense on the Debentures.

Full conversion of the Debentures into shares would require us to issue approximately 12,830,000 shares of our common stock.  On January 4, 2005, we made an irrevocable election to settle not less than 30% of the principal amount of the Debentures surrendered for conversion in cash and not in shares.  As a result, our calculations of diluted earnings per share thereafter assumed conversion of only 70% of the Debentures, which would require us to issue approximately 8,981,000 shares of our common stock.  On July 20, 2005, we increased our irrevocable election to settle 100% of the principal amount of the Debentures surrendered for conversion in cash and not in shares.  As a result, our calculations of diluted earnings per share thereafter assumed conversion of none of the Debentures.  Due to the irrevocable elections mentioned above, our calculation of diluted earnings per share for the three months ended March 31, 2005 includes approximately 8,981,000 shares related to the potential conversion of the Debentures and our calculation of diluted earnings per share for the three months ended March 31, 2006 does not include any shares related to the potential conversion of the Debentures.

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Our computation of earnings per share – basic and diluted is as follows:

Dilutive securities are excluded from the computation in periods in which they have an antidilutive effect.  The average number of antidilutive stock options (options whose exercise price is greater than the average CIBER stock price during the period) omitted from the computation of diluted weighted average shares outstanding was 3,527,000 and 6,291,000 for the three months ended March 31, 2005 and 2006, respectively.

(3) Comprehensive Income

The components of comprehensive income are as follows:

(4) Share-Based Compensation

Prior to January 1, 2006, we accounted for our share-based compensation plans using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”  Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment.”  The adoption of SFAS No. 123(R) resulted in the recording of compensation expense for employee stock options and employee stock purchase rights in our financial statements.  Such compensation expense is recognized over the requisite service period based on the fair value on the date of grant.

Using the modified-prospective transition method, the compensation cost recognized in the three months ended March 31, 2006, included (i) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).  Share-based compensation cost is recognized in either Cost of Consulting Services or in Selling, General and Administrative Expenses, as appropriate, in accordance with SFAS No. 123(R).  Results for prior periods have not been restated.

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As a result of adopting SFAS No. 123(R) on January 1, 2006, our income before income taxes and net income for the three months ended March 31, 2006 were respectively approximately $274,000 and $232,000 lower than if we had continued to account for share-based compensation under APB Opinion No. 25.  Basic and diluted earnings per share for the three months ended March 31, 2006 would have been $0.08 and $0.07, respectively, if we had not adopted SFAS No. 123 (R), compared to reported basic and diluted earnings per share of $0.07 and $0.07, respectively.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value provisions of SFAS No. 123 to share-based compensation for the periods prior to the adoption of SFAS No. 123(R) (in thousands, except per share data):

Our pro forma share-based compensation cost for the three months ended March 31, 2005 was considerably higher than our share-based compensation cost for the three months ended March 31, 2006.  This was primarily related to our acceleration of the vesting on approximately 914,000 employee stock options during the three months ended March 31, 2005.  In addition, at December 31, 2005, primarily all of our outstanding stock options were fully vested and as such, they have little impact on our stock-based compensation expense recognized under SFAS No. 123(R).

Share-Based Plans

CIBER, Inc. 2004 Incentive Plan (the “2004 Plan”) – On April 27, 2004, our shareholders approved the adoption of the CIBER, Inc. 2004 Incentive Plan.  As part of this adoption, 5,000,000 shares of CIBER, Inc. common stock were authorized for issuance under the 2004 Plan.  The plan administrators may grant restricted stock, stock options, performance bonuses or any combination thereof, to officers, employees and consultants.  The Compensation Committee of the Board of Directors determines the number, nature and vesting of such awards.  As of March 31, 2006, there are approximately 1,887,000 shares available for future grants under the 2004 Plan.  We issue shares from treasury for shares delivered under the 2004 Plan.

The 2004 Plan also implements a formula stock option plan for non-employee directors.  Under the formula plan, each non-employee director will receive a non-statutory option to purchase 20,000 shares of common stock upon election to the Board of Directors, and an option to purchase 5,000 shares of common stock on each anniversary of election to the Board of Directors.  The 2004 Plan further provides that non-employee directors receive shares of CIBER common stock valued at approximately $2,500 for each Board and Annual Meeting attended.  Effective July 1, 2005, each non-employee director is also paid a $12,500 semi-annual retainer, of which between 50%-100% must be paid in stock, with the percentage to be set by the individual director.  Included in our total share-based compensation costs disclosed below, $23,000 and $74,000 for the three months ended March 31, 2005 and 2006, respectively, represented compensation expense for grants of common stock to non-employee directors.

A summary of information with respect to our recorded share-based compensation follows:

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Options granted under the 2004 Plan generally have an exercise price that is at least equal to the market value of our common stock on the date of issuance.  Options currently being granted under the 2004 Plan are subject to cliff or graded vesting, generally ranging from one to four years, as determined at the date of grant by the Board of Directors, with the exception of some options granted to employees of our European Operations segment, which may be fully vested on the grant date.  Additionally, options granted under the 2004 Plan generally have a contractual term ranging from four to 10 years; all 2004 Plan options must expire no later than 10 years from the date of grant.  Compensation costs related to options with graded vesting are recognized on a straight-line basis over the vesting period.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing method.  The expected life of the option is derived from historical data pertaining to option exercises and employee terminations.  Expected volatilities are based on historical volatility of our common stock.  The risk-free interest rate is derived from the U.S. Treasury yields in effect at the time of grant and the dividend yield is based on historical experiences and expected future changes.   A summary of the assumptions used for options granted during the three months ended March 31, 2006 follows:

A summary of stock option activity for the three months ended March 31, 2006 is presented below:

The weighted average grant-date fair value of options granted during the three months ended March 31, 2006 was $2.31.  The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the three months ended March 31, 2006 was approximately $133,000.  The grant date fair value of stock options which vested during the three months ended March 31, 2006 was approximately $127,000.

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For the three months ended March 31, 2006, cash received from the exercise of stock options was approximately $495,000 and the income tax benefit realized from the exercise of stock options was approximately $28,000.  As of March 31, 2006, there was approximately $733,000 of total unrecognized compensation cost related to unvested stock options.  That cost is expected to be recognized over a weighted average period of 3.0 years.

Employee Stock Purchase Plan (“ESPP”) – Under our ESPP, which is a nonqualified plan, eligible employees are allowed to purchase shares of our common stock through after-tax payroll deductions at a price equal to 85% of the lesser of the fair market value on the first day of the applicable offering period or on the last day of the respective purchase period.  Each offering period is equal to three months.  Under this plan, substantially all employees may elect to contribute up to $4,000 of their compensation during one calendar year.  A total of 8,750,000 shares of common stock have been authorized for issuance under the ESPP, of which, approximately 1,626,000 shares are available at March 31, 2006 for future issuances.  A summary of the assumptions used to estimate compensation expense related to our ESPP using the Black-Scholes option pricing method during the three months ended March 31, 2006 follows:

For the three months ended March 31, 2006, the compensation cost related to the ESPP was approximately $170,000.  For the three months ended March 31, 2006 we issued 121,773 shares under our ESPP with a grant date fair value of $1.46.

(5) Accrued Lease Costs

We have a lease costs reserve for certain office space that is vacant or has been subleased at a loss.  The activity in this reserve during the three months ended March 31, 2006, consists of the following (in thousands):

(6) Convertible Senior Subordinated Debentures

On December 2, 2003, in a private placement, we issued $175 million of 2.875% Convertible Senior Subordinated Debentures (“Debentures”) due to mature in December 2023.  The Debentures are general unsecured obligations and are subordinated in right of payment to all of our indebtedness and other liabilities.  The Debentures accrue interest at a rate of 2.875% per year.  Interest is payable semi-annually in arrears on June 15 and December 15 of each year.

The Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 73.3138 shares per $1,000 principal amount of Debentures, which is equivalent to an initial conversion price of approximately $13.64 per share, subject to adjustments, prior to the close of business on the final maturity date only under the following circumstances: (1) during any fiscal quarter if the closing sale price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (2) during the five business days after any ten consecutive trading day period in which the trading price per $1,000 principal amount of Debentures for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the Debentures; (3) if the Debentures have been called for redemption; or (4) upon the occurrence of certain specified corporate transactions.   The conversion price is subject to adjustment in certain circumstances.  On January 4, 2005, we made an irrevocable election to settle in cash and not in shares, not less than 30% of the principal amount of the Debentures surrendered for conversion.  On July 20, 2005, we increased our irrevocable election to settle in cash and not in shares 100% of the principal amount of the Debentures surrendered for conversion.  As a result, upon conversion we will deliver cash in lieu of our common stock.   Debenture holders may require us to repurchase their Debentures on December 15, 2008, 2010, 2013 and 2018, or at any time prior to their maturity in the case of certain events, at a repurchase price of 100% of their

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principal amount plus accrued interest.  From December 20, 2008, to, but not including December 15, 2010, we may redeem any of the Debentures if the closing price of our common stock exceeds 130% of the conversion price for at least 20 trading days in any 30 consecutive trading day period.  Beginning December 15, 2010, we may, by providing at least 30-days’ notice to the holders, redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued interest.

(7) Bank Line of Credit

Bank Line of Credit – We have a $60 million revolving line of credit with Wells Fargo Bank, N.A that expires on September 30, 2007.  The line of credit will remain unsecured, unless borrowings exceed $40 million for two consecutive fiscal quarters, or, if certain financial covenant thresholds are exceeded, in which case, substantially all of CIBER’s assets would secure the line of credit.  The interest rate charged on borrowings under the agreement ranges from the prime rate of interest (“prime”) less 1.00% to prime less 0.30%, depending on CIBER’s Pricing Ratio and changes, as required, on the first day of each quarter.  CIBER’s Pricing Ratio is defined as the ratio of CIBER’s Senior Funded Indebtedness at the end of each quarter, divided by CIBER’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the prior four fiscal quarters then ended.  Senior Funded Indebtedness means the sum of our liabilities for borrowed money, excluding our Debentures and any liabilities under any swap contract.  On March 31, 2006, the bank’s prime rate was 7.75% and our rate for borrowing was 6.95%.  We are also required to pay a fee per annum on the unused portion of the line of credit.  This fee ranges from 0.25% to 0.50%, depending on CIBER’s Pricing Ratio and changes, as required, on the first day of each quarter.  The line of credit agreement contains certain financial covenants including: a maximum senior leverage ratio, a minimum fixed charge coverage ratio, a maximum leverage ratio and a maximum asset coverage ratio.  We were in compliance with these financial covenants as of March 31, 2006.  The terms of the credit agreement also contain, among other provisions, specific limitations on additional indebtedness, liens and acquisitions, purchases of treasury stock, investment activity and prohibit the payment of any dividends.  The line of credit provides for the issuance of up to $15 million in letters of credit.  Any outstanding letters of credit reduce the maximum available borrowings under the line of credit.  At March 31, 2006, we had $6.2 million of outstanding letters of credit securing certain financial performance obligations, leaving approximately $17.5 million of remaining borrowing availability under the line of credit.

(8) Financial Instruments

We have numerous investments in foreign subsidiaries, and the net assets of those subsidiaries are exposed to foreign currency exchange rate volatility.  In December 2005, we entered into a one year cross-currency swap arrangement to partially hedge the foreign currency exposure associated with our net investment in certain Euro-based foreign operations (“net investment hedge”).  The notional amount of the swap is €42.0 million/$50.0 million.  During the term of this transaction, we will remit to and receive from the counterparty interest payments equal to three-month EURIBOR plus 0.11% and three-month U.S. LIBOR rates, respectively.  At April 1, 2006, CIBER pays interest at a rate of 2.88% and receives interest at a rate of 4.96% on the notional amount, and such rates are reset quarterly.  These payments will be recorded as an adjustment to our reported interest expense during the periods.  Gains and losses in the net investment in the Company’s subsidiaries due to foreign exchange volatility will be partially offset by foreign exchange losses and gains related to this net investment hedge, both of which will be recorded within “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheet.  The cross-currency swap was recorded at its fair value of approximately $(905,000) at March 31, 2006.  The amount recorded within accumulated other comprehensive income (loss) during the three months ended March 31, 2006 related to this swap decreased shareholders’ equity by $543,000.

From time to time, we enter into foreign exchange forward contracts for investment purposes.  These derivative financial instruments generally have maturities of less than one year and are subject to fluctuations in foreign exchange rates, as well as credit risk.  These foreign exchange forward contracts do not qualify as hedges and, accordingly, gains and losses from settlement of such contracts, as well as changes in fair value of any open contracts are included in “other income, net” in the consolidated statement of operations.  A net gain of $829,000 was recorded in the three months ended March 31, 2005.  There were no open forward contracts during the three months ended March 31, 2006.

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(9) Shareholder’s Equity

Repurchase Program – In December 2005, the Board of Directors revised the Company’s share repurchase program to authorize the Company’s management to repurchase up to $7.5 million of either our common shares or our Debentures, whichever is determined to be more advantageous.  During the three months ended March 31, 2006, we repurchased 375,000 common shares under this program at a cost of approximately $2.3 million.  We did not repurchase any of our Debentures during this period.  At March 31, 2006, there was approximately $4.6 million remaining for future repurchases under this program.

(10) Segment Information

Our operating segments are organized internally primarily by the nature of their services, client base and geography, and they consist of Commercial Solutions, Federal Government Solutions, State & Local Government Solutions, Package Solutions and European Operations.  Our Commercial Solutions, Federal Government Solutions and State & Local Government Solutions segments comprise our U.S. based CIBER branch offices that provide IT services and products in custom-developed software environments.  These offices report to a segment based on their primary client focus category (Commercial, Federal or State & Local); however, they also may have clients that fall into another category.  For example, a Commercial office may also provide services to a government client.  Our India operations are considered part of our Commercial Solutions segment.  Our Package Solutions segment is comprised of our CIBER Enterprise Solutions division that primarily provides enterprise software implementation services, including ERP and supply chain management software from software vendors such as Oracle, SAP and Lawson.  Our European Operations segment represents our offices in Europe, Eastern Asia and Australia that provide a broad range of IT consulting services, including package software implementation, application development, systems integration and support services.

We evaluate our segments’ results of operations based on operating income before amortization of intangible assets.  We exclude the costs of our share-based compensation programs from segment operating income as these expenses are significantly impacted by external factors, including stock market volatility and other valuation assumptions.  Instead share-based compensation costs are recorded as part of our corporate expenses.  Additionally, we do not account for, or report to, our chief executive officer any information on assets or capital expenditures by segment as such information is only prepared on a consolidated basis.  The accounting policies of our reportable segments are the same as those disclosed in the Summary of Significant Accounting Policies found in Footnote 2 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.

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The following presents financial information about our reportable segments:

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2005, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2005.  In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP” financial measures under Securities and Exchange Commission rules.  These rules require supplemental explanation and reconciliation, which is provided in Exhibit 99.1 to this Quarterly Report on Form 10-Q, and is incorporated by reference herein.

Disclosure Regarding Forward-Looking Statements

Included in this Quarterly Report on Form 10-Q and elsewhere from time to time in other written and oral statements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about our Company, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements that are not historical facts.  Words, such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” and “will” and similar expressions are intended to identify forward-looking statements and convey uncertainty of future events or outcomes.  These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict.  Actual outcomes and results may differ materially from such forward-looking statements due to a number of factors, including without limitation, the factors set forth in this Quarterly Report and/or in our Annual Report on Form 10-K  under the caption “Item 1A. Risk Factors.”  As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance.  Additionally, we caution investors not to place undue reliance on any forward-looking statement as these statements speak only as of the date when made.  We undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise.

Results of Operations

Consolidated

The following table sets forth certain consolidated statement of operations data, expressed as a percentage of revenue:

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Adoption of Statement of Financial Accounting Standards No. 123(R)

Prior to January 1, 2006, we accounted for our share-based compensation plans using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”  Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment.”  The adoption of SFAS No. 123(R) resulted in the recording of compensation expense for employee stock options and employee stock purchase rights in our financial statements.  Such compensation expense is recognized over the requisite service period based on the fair value on the date of grant.

The estimated annual increase in share-based compensation expense for 2006 relating to the adoption of SFAS No. 123(R) is expected to be approximately $1.5 million, or approximately $1.1 million, net of related taxes.  The incremental share-based compensation expense recognized due to the adoption of SFAS No. 123(R) for the three months ended March 31, 2006, was approximately $274,000, or approximately $232,000, net of related taxes.  As of March 31, 2006, there was approximately $733,000 of total unrecognized compensation cost related to unvested stock options.  That cost is expected to be recognized over a weighted average period of 3.0 years.

On January 1, 2006, primarily all of our outstanding stock options were fully vested due to vesting accelerations that occurred prior to January 1, 2006 and as such, they have little impact on our stock-based compensation expense recognized under SFAS No. 123(R).

We exclude the costs of our share-based compensation programs from segment operating income as these expenses are significantly impacted by external factors, including stock market volatility and other valuation assumptions.  Share-based compensation cost is recognized in either Cost of Consulting Services or in Selling, General and Administrative Expenses, as appropriate, in accordance with SFAS No. 123(R).

Segments

The following table sets forth certain operating data for our reportable segments:

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Three Months Ended March 31, 2006 as compared to Three Months Ended March 31, 2005

Total revenue for the three months ended March 31, 2006 increased approximately 1% to $241.7 million from $239.6 million for the three months ended March 31, 2005.  Adding back revenue associated with the 2005 sale of our IBM staffing business, revenue grew organically by approximately 3% quarter over quarter, and further adjusting for foreign currency effects, revenue grew organically by approximately 4%.  Organic revenue growth was strongest in our Package Solutions segment which grew approximately 15%, as well as our European segment which, adjusting for foreign currency effects, grew approximately 12%, both compared to the first quarter of 2005.  Our average number of billable consultants working during the quarter decreased 2% to approximately 7,050 for the three months ended March 31, 2006 from approximately 7,175 for the three months ended March 31, 2005.  The decrease in billable consultants was offset by higher billing rates which, overall, increased approximately $3 per hour from $75 per hour for the three months ended March 31, 2005, to $78 per hour for the three months ended March 31, 2006.  Higher billing rates in our Commercial segment, which divested its low billing rate IBM staffing business in August of 2005, accounted for the majority of the increase.  Other revenues increased approximately 30% to $11.1 million for the three months ended March 31, 2006 from $8.5 million for the three months ended March 31, 2005 due to comparatively strong product sales in our Commercial and Package Solutions segments.

In total, our gross profit percentage decreased to 25.9% of revenue for the three months ended March 31, 2006 from 27.9% of revenue for the same period of 2005.  Gross profit on services revenue was the primary catalyst for the quarter over quarter gross profit percentage decrease, declining by approximately 210 basis points.  The decrease in gross profit percentage reflects the service margin decline that occurred during the last nine months of 2005, which was primarily the result of our reliance on higher cost subcontractors.  In addition, the services gross margin percentage in the first quarter of 2005 was helped by having one less company paid holiday in the quarter as the New Year’s day paid holiday fell on the last calendar day of 2004.

As a percentage of sales, selling, general and administrative expenses (“SG&A”) were flat at 21.3% for both the three months ended March 31, 2006 and 2005.

Amortization of intangible assets was comparable at $1.4 million for the three months ended March 31, 2006 compared to $1.6 million for the same period last year.

Interest income and expense fluctuates based on our average cash balance invested or amounts borrowed.  Net interest expense totaled approximately $1.9 million for both the three months ended March 31, 2006 and 2005.  Our average line of credit balance was approximately $38 million for the three months ended March 31, 2006 compared to approximately $48 million for the three months ended March 31, 2005.  A higher interest rate on our line of credit in 2006 offset the decrease in our average balance outstanding.  Interest income is primarily from cash held in our European subsidiaries.

Other expense, net was $388,000 during the three months ended March 31, 2006 compared to other income, net of $468,000 during the three months ended March 31, 2005.  Other expense in 2006 consisted primarily of foreign currency losses of $196,000 and minority interest expense of $193,000.  Other income in 2005 consisted primarily of gains on foreign currency forward contracts totaling $830,000, partially offset by foreign currency losses of $120,000, investment losses of $150,000 and minority interest expense of $62,000.

Our effective tax rates were 39.7% and 39.0% for the three months ended March 31, 2006 and 2005, respectively.

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Segments

Commercial Solutions

Commercial Solutions (“Commercial”) total revenue increased less than 1% for the three months ended March 31, 2006 compared to the same period in the prior year.  Commercial revenue increased despite the August 2005 sale of our IBM staffing operation which contributed revenue of approximately $4.0 million in the three months ended March 31, 2005.  Absent the sale, organic growth was approximately 5% during the first quarter of 2006 due primarily to an improved demand environment.  An increase in the average hourly billing rate, due mainly to the absence of our IBM staffing operation, which carried a lower average billing rate, was offset by lower utilization resulting from one less company paid holiday in the first quarter of 2005.  Other revenue in the Commercial segment doubled in the first three months of 2006 compared to the same period of 2005 due to an increase in lower margin hardware sales.

Gross profit percentage on services revenue decreased by 100 basis points to 25.8% for the three months ended March 31, 2006 compared to 26.8% for the three months ended March 31, 2005.  Higher labor costs for both employees and subcontractors accounted for approximately 60 basis points of the decrease, while higher non-billable expenses and project-related depreciation expense accounted for the remainder of the margin decline.  Our gross profit percentage on other revenue, which represents resale of third-party hardware and software products, decreased by 480 basis points for the three months ended March 31, 2006 compared to the same period in 2005.  The 2005 gross profit percentage on other revenue was unusually high due to gross profit associated with a single product sale, and, as a result, the 2006 gross profit percentage on other revenue is comparable to our expectations.

The Commercial segment’s operating income percentage declined to 5.9% for the three months ended March 31, 2006 compared to 8.0% for the three months ended March 31, 2005 due to the previously discussed gross profit declines combined with higher SG&A costs.  The higher SG&A costs are due to the investment we are making in CIBERsites, our low-cost application development and support centers, and to a lesser extent, an investment we have made in a newly formed national sales team focused on selling large outsourcing engagements.

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Federal Government Solutions

Federal Government Solutions (“Federal”) revenue decreased approximately 13% during the three months ended March 31, 2006 compared to the same period of 2005.  The decrease is due primarily to the loss of an outsourcing contract in the second half of 2005 where CIBER was a subcontractor to a larger prime vendor.  Loss of this contract resulted in a revenue decrease of approximately $4.1 million for the three months ended March 31, 2006 compared to the same period of 2005.  Additionally, the Federal segment recognized revenue of approximately $1.0 million in the first three months of 2005 on harbor management-related projects and, due to funding delays, recognized no revenue from this vertical during the first three months of 2006.

Gross profit percentage in the Federal segment decreased by 220 basis points for the three months ended March 31, 2006 to 21.7% compared to 23.9% for the three months ended March 31, 2005.  A decrease in the average billing rate to approximately $49 per hour for the first quarter of 2006, compared to an average billing rate of $51 per hour for the same period in 2005 accounted for the majority of the gross profit percentage decrease.

The Federal segment’s operating income percentage declined to 9.8% for the three months ended March 31, 2006 compared to 13.6% for the three months ended March 31, 2005 due to the previously discussed gross profit decline combined with higher SG&A costs as a percentage of revenue.  SG&A costs totaled approximately $4.4 million for both three-month periods, but as a percentage of revenue, SG&A costs increased to 12.0% for the three months ended March 31, 2006, compared to 10.4% for the same period in 2005.

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State & Local Government Solutions

State & Local Government Solutions (“State & Local”) revenue increased by approximately 6% for the three months ended March 31, 2006 compared to the same period in 2005. Incremental revenue associated with project revenue from the City of New Orleans that began in June 2005, accounted for the majority of the revenue increase.

The consulting services gross profit percentage in our State & Local segment for the three months ended March 31, 2006 decreased to 22.4% from 27.7% for the three months ended March 31, 2005.  Continued dependence on high-priced subcontractors accounted for the majority of the gross profit percentage decline, while higher non-labor-related expenses and project-related depreciation expense also contributed to the decline.

Operating income as a percentage of revenue decreased by 150 basis points to 5.9% for the three months ended March 31, 2006 compared to 7.4% for the three months ended March 31, 2005.  The 500 basis point decrease in overall gross profit percentage, explained above, was partially offset by an improvement of 360 basis points in SG&A costs as a percentage of revenue, the result of cost cutting efforts within the segment.   SG&A expense decreased to $5.3 million in the current quarter, from $6.1 million for the same period in 2005 and as a percentage of revenue decreased to 16.1% from 19.7%.

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Package Solutions