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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 28, 2003

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from  to

Commission file number 0-21682

SPARTA, Inc.




(Exact name of registrant as specified in its charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Delaware                        |  | 63-0775889                          
|                                |  |                                     
|(State or other jurisdiction of |  | (I.R.S. Employer Identification No.)
|incorporation or organization)  |  |                                     

25531 Commercentre Drive, Suite 120, Lake Forest, CA 92630-8873

(Address of principal executive offices)       (Zip Code)


(949) 768-8161




(Registrants telephone number, including area code)


Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act or
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[X]  No  [   ]

As of September 28, 2003, the registrant had 5,095,890 shares of common stock,
$.01 par value per share, issued and outstanding.





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TABLE OF CONTENTS



|                          |                                                                                              |  |  |  |  |  |  | 
|------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                   
|                          | Item 1 Financial Statements                                                                 
|                          | Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
|                          | Item 3 Quantitative and Qualitative Disclosures about Market Risk                           
|                          | Item 4 Controls and Procedures                                                              
|Part II OTHER INFORMATION
|                          | Item 1 Legal Proceedings                                                                    
|                          | Item 2 Changes in Securities and Use of Proceeds                                            
|                          | Item 3 Defaults Upon Senior Securities                                                      
|                          | Item 4 Submission of Matters to a Vote of Security Holders                                  
|                          | Item 5 Other Information                                                                    
|                          | Item 6 Exhibits and Reports on Form 8-K                                                     
|Signature                
|Exhibit Index            
|EXHIBIT 10.30            
|EXHIBIT 10.31            
|EXHIBIT 31.1             
|EXHIBIT 31.2             
|EXHIBIT 32.1             
|EXHIBIT 32.2             



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##### Table of Contents



SPARTA, Inc.

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 28, 2003

INDEX

|          |  |                                                                                      
|--------- |  | -------------------------------------------------------------------------------------
|PART I    |  | FINANCIAL INFORMATION                                                                
|Item 1    |  | Financial Statements                                                                 
|Item 2    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 3    |  | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4    |  | Controls and Procedures                                                              
|PART II   |  | OTHER INFORMATION                                                                    
|Item 1    |  | Legal Proceedings                                                                    
|Item 2    |  | Changes in Securities and Use of Proceeds                                            
|Item 3    |  | Defaults Upon Senior Securities                                                      
|Item 4    |  | Submission of Matters to a Vote of Security Holders                                  
|Item 5    |  | Other Information                                                                    
|Item 6    |  | Exhibits and Reports on Form 8-K                                                     
|Signature |  |                                                                                      
|Exhibits  |  |                                                                                      

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PART I




Item 1  Financial Statements

- 2 -



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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)

|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |            | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ------------- | ---------- | ------------ | ---------- | ----------- | ---------- | 
|                                           |                                                                                                                                               |                            |            | September 30, |            | December 31,
|                                           |                                                                                                                                               |                            |            | 2003          |            | 2002        
|                                           |                                                                                                                                               |                            |            |               |            |             
|ASSETS                                     |                                                                                                                                               |                            |            |               |            |              |            |            
|Current Assets                             |                                                                                                                                               |                            |            |               |            |              |            |            
|                                           | Cash and cash equivalents                                                                                                                     |                            | $          | 28,791,000    |            |              | $          | 17,780,000  |           
|                                           | Receivables, net                                                                                                                              |                            |            | 32,980,000    |            |              |            | 31,883,000  |           
|                                           | Prepaid expenses                                                                                                                              |                            |            | 660,000       |            |              |            | 614,000     |           
|                                           |                                                                                                                                               |                            |            |               |            |              |            |            
|                                           |                                                                                                                                               | Total current assets       |            |               | 62,431,000 |              |            |             | 50,277,000 | 
|                                           | Equipment and improvements, net                                                                                                               |                            |            | 7,090,000     |            |              |            | 7,054,000   |           
|                                           | Other assets                                                                                                                                  |                            |            | 1,899,000     |            |              |            | 2,033,000   |           
|                                           |                                                                                                                                               |                            |            |               |            |              |            |            
|                                           |                                                                                                                                               | Total Assets               |            | $             | 71,420,000 |              |            | $           | 59,364,000 | 
|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |           
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                               |                            |            |               |            |              |            |            
|Current Liabilities                        |                                                                                                                                               |                            |            |               |            |              |            |            
|                                           | Accrued compensation                                                                                                                          |                            | $          | 14,463,000    |            |              | $          | 12,805,000  |           
|                                           | Accounts payable and other accrued expenses                                                                                                   |                            |            | 9,539,000     |            |              |            | 7,757,000   |           
|                                           | Current portion of subordinated notes payable                                                                                                 |                            |            | 2,418,000     |            |              |            | 2,258,000   |           
|                                           | Income taxes payable                                                                                                                          |                            |            | 829,000       |            |              |            | 1,454,000   |           
|                                           | Deferred income taxes                                                                                                                         |                            |            | 1,327,000     |            |              |            | 1,327,000   |           
|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |           
|                                           |                                                                                                                                               | Total current liabilities  |            |               | 28,576,000 |              |            |             | 25,601,000 | 
|                                          
|Subordinated notes payable                 |                                                                                                                                               |                            | 6,311,000  |               |            |              | 8,095,000  |            
|Deferred income taxes                      |                                                                                                                                               |                            | 666,000    |               |            |              | 666,000    |            
|                                          
|Stockholders equity                       |                                                                                                                                               |                            |            |               |            |              |            |            
|                                           | Common stock, $.01 par value, 25,000,000 shares
authorized; 6,379,590 and 5,719,162 shares issued;
5,095,890 and 4,795,213 shares outstanding |                            |            | 64,000        |            |              |            | 57,000      |           
|                                           | Additional paid-in capital                                                                                                                    |                            |            | 46,874,000    |            |              |            | 35,559,000  |           
|                                           | Retained earnings                                                                                                                             |                            |            | 15,164,000    |            |              |            | 7,534,000   |           
|                                           | Treasury stock, at cost                                                                                                                       |                            |            | (26,235,000   | )          |              |            | (18,148,000 | )         
|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |           
|                                           |                                                                                                                                               | Total stockholders equity |            |               | 35,867,000 |              |            |             | 25,002,000 | 
|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |           
|Total Liabilities and Stockholders Equity |                                                                                                                                               | $                          | 71,420,000 |               |            | $            | 59,364,000 |            
|                                           |                                                                                                                                               |                            |            |               |            |              |            |             |           

The accompanying notes are an integral part of these consolidated financial statements

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |            |             | 
|------------------------------------------- | -------------------------------- | ------------------------ | ---------- | -------------------------------- | ---------- | ------------------------------- | ---------- | ---------- | ---------- | ---- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | 
|                                            |                                  |                          |            | Three Months ended September 30, |            | Nine Months ended September 30,
|                                            |                                  |                          |            |                                  |            |                                
|                                            |                                  |                          |            | 2003                             |            | 2002                            |            | 2003       |            | 2002
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |     
|Sales                                       |                                  | $                        | 49,397,000 |                                  |            | $                               | 42,911,000 |            |            | $    | 147,516,000 |            |             | $ | 119,585,000 |           
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Costs and expenses:                         |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|                                            | Labor costs and related benefits |                          |            | 25,932,000                       |            |                                 |            | 22,024,000 |            |      |             | 75,770,000 |             |   |             | 64,561,000 |            
|                                            | Subcontractor & other costs      |                          |            | 14,320,000                       |            |                                 |            | 13,095,000 |            |      |             | 45,788,000 |             |   |             | 32,310,000 |            
|                                            | Facility costs                   |                          |            | 2,685,000                        |            |                                 |            | 2,518,000  |            |      |             | 7,748,000  |             |   |             | 7,544,000  |            
|                                            | Travel and other                 |                          |            | 2,110,000                        |            |                                 |            | 1,783,000  |            |      |             | 5,357,000  |             |   |             | 4,350,000  |            
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|                                            |                                  | Total costs and expenses |            |                                  | 45,047,000 |                                 |            |            | 39,420,000 |      |             |            | 134,663,000 |   |             |            | 108,765,000 | 
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Income from operations                      |                                  |                          | 4,350,000  |                                  |            |                                 | 3,491,000  |            |            |      | 12,853,000  |            |             |   | 10,820,000  |           
|Interest expense (income), net              |                                  |                          | (17,000    | )                                |            |                                 | (9,000     | )          |            |      | (33,000     | )          |             |   | (48,000     | )         
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Income before provision for
taxes on income |                                  |                          | 4,367,000  |                                  |            |                                 | 3,500,000  |            |            |      | 12,886,000  |            |             |   | 10,868,000  |           
|Provision for taxes on income               |                                  |                          | 1,778,000  |                                  |            |                                 | 1,400,000  |            |            |      | 5,256,000   |            |             |   | 4,347,000   |           
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Net income                                  |                                  | $                        | 2,589,000  |                                  |            | $                               | 2,100,000  |            |            | $    | 7,630,000   |            |             | $ | 6,521,000   |           
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Basic earnings per share                    |                                  | $                        | 0.52       |                                  |            | $                               | 0.43       |            |            | $    | 1.53        |            |             | $ | 1.26        |           
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           
|Diluted earnings per share                  |                                  | $                        | 0.48       |                                  |            | $                               | 0.39       |            |            | $    | 1.41        |            |             | $ | 1.15        |           
|                                            |                                  |                          |            |                                  |            |                                 |            |            |            |      |             |            |             |   |             |           

The accompanying notes are an integral part of these consolidated financial statements

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |           |           |             |  
|-------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------------------- | --------- | ------------------------------- | ---------- | ----------- | --------- | --------- | ----------- | -
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           | Nine Months ended September 30,
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           | 2003                            |            | 2002       
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |            
|Cash flows from operating activities:              |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |            
|                                                   | Net income                                                                        |                                                                                       | $                                  | 7,630,000                                            |           |                                 | $          | 6,521,000   |          
|                                                   | Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   |                                                                                       | Depreciation and amortization      |                                                      |           | 1,369,000                       |            |             |           | 1,597,000 |            
|                                                   |                                                                                   |                                                                                       | Loss on sale of equipment          |                                                      |           |                                |            |             |           | 87,000    |            
|                                                   |                                                                                   |                                                                                       | Stock-based compensation           |                                                      |           | 4,242,000                       |            |             |           | 3,752,000 |            
|                                                   |                                                                                   |                                                                                       | Tax benefit relating to stock plan |                                                      |           | 1,676,000                       |            |             |           | 1,467,000 |            
|                                                   |                                                                                   |                                                                                       | Changes in assets and liabilities: |                                                      |           |                                 |            |             |           |           |            
|                                                   |                                                                                   |                                                                                       |                                    | Receivables, net                                     |           |                                 | (1,097,000 | )           |           |           | (810,000    | )
|                                                   |                                                                                   |                                                                                       |                                    | Prepaid expenses                                     |           |                                 | (46,000    | )           |           |           | (141,000    | )
|                                                   |                                                                                   |                                                                                       |                                    | Other assets                                         |           |                                 | 134,000    |             |           |           | 48,000      |  
|                                                   |                                                                                   |                                                                                       |                                    | Accrued compensation                                 |           |                                 | 1,658,000  |             |           |           | 767,000     |  
|                                                   |                                                                                   |                                                                                       |                                    | Accounts payable and other accrued expenses          |           |                                 | 1,782,000  |             |           |           | 91,000      |  
|                                                   |                                                                                   |                                                                                       |                                    | Income taxes payable                                 |           |                                 | (625,000   | )           |           |           | (410,000    | )
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   |                                                                                       |                                    | Net cash provided by (used for) operating activities |           |                                 | 16,723,000 |             |           |           | 12,969,000  |  
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|Cash flows from investing activities:              |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |            
|                                                   | Purchases of equipment and improvements                                           |                                                                                       |                                    | (1,265,000                                           | )         |                                 |            | (743,000    | )        
|                                                   | Acquisition, net of cash acquired                                                 |                                                                                       |                                    | (140,000                                             | )         |                                 |            |            |          
|                                                   | Proceeds from sale of short-term investments                                      |                                                                                       |                                    |                                                     |           |                                 |            | 8,727,000   |          
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   |                                                                                       |                                    | Net cash provided by (used for) investing activities |           |                                 | (1,405,000 | )           |           |           | 7,984,000   |  
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|Cash flows from financing activities:              |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |            
|                                                   | Proceeds from issuance of stock                                                   |                                                                                       |                                    | 5,404,000                                            |           |                                 |            | 3,703,000   |          
|                                                   | Redemption of preferred stock                                                     |                                                                                       |                                    |                                                     |           |                                 |            | (3,095,000  | )        
|                                                   | Cash purchases of treasury stock                                                  |                                                                                       |                                    | (7,904,000                                           | )         |                                 |            | (11,346,000 | )        
|                                                   | Principal payments on subordinated notes payable                                  |                                                                                       |                                    | (1,807,000                                           | )         |                                 |            | (1,516,000  | )        
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   |                                                                                       |                                    | Net cash provided by (used for) financing activities |           |                                 | (4,307,000 | )           |           |           | (12,254,000 | )
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|Net increase in cash                               |                                                                                   |                                                                                       | 11,011,000                         |                                                      |           |                                 | 8,699,000  |            
|Cash and cash equivalents at beginning of period   |                                                                                   |                                                                                       | 17,780,000                         |                                                      |           |                                 | 10,303,000 |            
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|Cash and cash equivalents at end of period         |                                                                                   | $                                                                                     | 28,791,000                         |                                                      |           | $                               | 19,002,000 |            
|                                                   |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|Supplemental disclosures of cash flow information: |                                                                                   |                                                                                       |                                    |                                                      |           |                                 |            |            
|                                                   | Cash paid during the period for:                                                  |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   | Interest                                                                              |                                    | $                                                    | 126,000   |                                 |            | $           | 183,000   |          
|                                                   |                                                                                   | Income taxes                                                                          |                                    | $                                                    | 4,257,000 |                                 |            | $           | 3,325,000 |          
|                                                   | Non-cash investing and financing activities:                                      |                                                                                       |                                    |                                                      |           |                                 |            |             |          
|                                                   |                                                                                   | Issuance of subordinated notes payable in connection
with purchases of treasury stock |                                    | $                                                    | 183,000   |                                 |            | $           | 3,450,000 |          

The accompanying notes are an integral part of these consolidated financial statements

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SPARTA, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note A - Basis of Presentation

The accompanying financial information has been prepared in accordance
with the instructions to Form 10-Q and therefore does not necessarily include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.

The Companys fiscal year is the 52 or 53 week period ending on the Sunday
closest to December 31. The Companys last fiscal year ended on December 29,
2002, its third quarter ended September 28, 2003, and its corresponding third
quarter last year ended on September 29, 2002. To aid the reader of the
financial statements, the year-end has been presented as December 31, 2002 and
the three and nine-month period ends have been presented as September 30, 2003
and September 30, 2002.

In the opinion of management, the unaudited financial information for the
three and nine-month periods ended September 30, 2003 and September 30, 2002
reflects all adjustments (which include only normal, recurring adjustments)
necessary for a fair presentation thereof.

Note B - Income Taxes

Income taxes for interim periods are computed using the estimated annual
effective rate method.

Note C  Computation of Earnings Per Share

|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |      | 
|----------------------------------- | ----------------- | - | -------------------------------- | ---- | ---------------------------- | - | --------- | ---- | ---- | - | --------- | ---- |  | - | --------- | ---- | 
|                                    |                   |   | Three months ended September 30, |      | Nine months ended September,
|                                    |                   |   |                                  |      |                             
|                                    |                   |   | 2003                             |      | 2002                         |   | 2003      |      | 2002
|                                    |                   |   |                                  |      |                              |   |           |      |     
|Basic EPS                           |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|Net income                          |                   | $ | 2,589,000                        |      |                              | $ | 2,100,000 |      |      | $ | 7,630,000 |      |  | $ | 6,521,000 |     
|Accretion adjustment                |                   |   |                                  |      |                              |   |          |      |      |   |           |      |  |   | (347,000  | )   
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|                                    |                   | $ | 2,589,000                        |      |                              | $ | 2,100,000 |      |      | $ | 7,630,000 |      |  | $ | 6,174,000 |     
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|Weighted average
shares outstanding |                   |   | 4,946,425                        |      |                              |   | 4,831,686 |      |      |   | 4,996,988 |      |  |   | 4,889,930 |     
|                                    | Per share amounts |   | $                                | 0.52 |                              |   | $         | 0.43 |      |   | $         | 1.53 |  |   | $         | 1.26 | 
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|Dilutied EPS                        |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|Net income                          |                   | $ | 2,589,000                        |      |                              | $ | 2,100,000 |      |      | $ | 7,630,000 |      |  | $ | 6,521,000 |     
|Accretion adjustment                |                   |   |                                 |      |                              |   |          |      |      |   |          |      |  |   | (347,000  | )   
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|                                    |                   | $ | 2,589,000                        |      |                              | $ | 2,100,000 |      |      | $ | 7,630,000 |      |  | $ | 6,174,000 |     
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|Weighted average
shares outstanding |                   |   | 4,946,425                        |      |                              |   | 4,831,686 |      |      |   | 4,996,988 |      |  |   | 4,889,930 |     
|Stock options                       |                   |   | 370,030                          |      |                              |   | 446,295   |      |      |   | 355,393   |      |  |   | 395,415   |     
|Restricted stock                    |                   |   | 73,887                           |      |                              |   | 90,327    |      |      |   | 73,887    |      |  |   | 90,327    |     
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     
|                                    |                   |   | 5,390,342                        |      |                              |   | 5,368,308 |      |      |   | 5,426,268 |      |  |   | 5,375,672 |     
|                                    | Per share amounts |   | $                                | 0.48 |                              |   | $         | 0.39 |      |   | $         | 1.41 |  |   | $         | 1.15 | 
|                                    |                   |   |                                  |      |                              |   |           |      |      |   |           |      |  |   |           |     

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Note D  Accounting for Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance
with the intrinsic value method described in Accounting Principles Board
Opinion No. 25 (APB 25) and related interpretations. Had compensation expense
for these plans been determined in accordance with the fair value method
described in Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), the Companys net income and net
income per share would have been reduced to the pro forma amounts in the
following table.

|            |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |            |  
|----------- | ------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- |  | ---- | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|            |                                                                                             |  | Three months ended September 30, |           | Nine months ended September 30,
|            |                                                                                             |  |                                  |           |                                
|            |                                                                                             |  | 2003                             |           | 2002                            |  | 2003 |           | 2002
|            |                                                                                             |  |                                  |           |                                 |  |      |           |     
|Net income  |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |           
|            | As reported                                                                                 |  | $                                | 2,589,000 |                                 |  | $    | 2,100,000 |      |  | $ | 7,630,000  |   |  | $ | 6,174,000  |  
|            | Add after-tax stock-based
compensation expense
included in determining
net income           |  |                                  | 421,000   |                                 |  |      | 344,000   |      |  |   | 1,084,000  |   |  |   | 679,000    |  
|            | Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used |  |                                  | (742,000  | )                               |  |      | (580,000  | )    |  |   | (1,742,000 | ) |  |   | (1,595,000 | )
|            |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |            |  
|            | Pro forma net income                                                                        |  | $                                | 2,268,000 |                                 |  | $    | 1,864,000 |      |  | $ | 6,972,000  |   |  | $ | 5,258,000  |  
|            |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |            |  
|Basic EPS   |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |           
|            | As reported                                                                                 |  | $                                | 0.52      |                                 |  | $    | 0.43      |      |  | $ | 1.53       |   |  | $ | 1.26       |  
|            | Pro forma                                                                                   |  |                                  | 0.46      |                                 |  |      | 0.39      |      |  |   | 1.40       |   |  |   | 1.08       |  
|Diluted EPS |                                                                                             |  |                                  |           |                                 |  |      |           |      |  |   |            |   |  |   |           
|            | As reported                                                                                 |  |                                  | 0.48      |                                 |  |      | 0.39      |      |  |   | 1.41       |   |  |   | 1.15       |  
|            | Pro forma                                                                                   |  |                                  | 0.42      |                                 |  |      | 0.35      |      |  |   | 1.28       |   |  |   | 0.98       |  

Note E  Stockholders Equity

For the nine months ended September 30, 2003, proceeds from the issuance
of common stock, primarily as the result of exercises of stock options, totaled
$5.4 million. In addition, the Company repurchased a total of 358,096 common
shares totaling approximately $8.1 million, of which $0.2 million was
repurchased in exchange for promissory notes.

Treasury stock is shown at cost, and consisted of 1,282,045 shares and
923,949 shares of common stock at September 30, 2003 and December 31, 2002,
respectively. Repurchase of outstanding stock by the Company in exercise of
its right of repurchase upon termination of employment (as defined) are made at
estimated fair value. The stock price is calculated quarterly by the Company
using a formula approved by the Board of Directors (which the Company believes
estimates fair value). The stock price formula is evaluated annually by
reference to discounted cash flow analysis and other financial valuation
techniques.

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Note F  Commitments and Contingencies

In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an Interpretation of FASB Statements 5, 57, and 107, and rescission of
FASB Interpretation No. 34. FIN 45 requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken by issuing the guarantee. FIN 45 also requires additional
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The
accounting requirements for the initial recognition of guarantees are
applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for all
guarantees outstanding, regardless of when they were issued or modified, during
the first quarter of fiscal 2003. The adoption of FIN 45 did not have a
material effect on the Companys consolidated financial statements.

As permitted under Delaware law, the Company has entered into agreements
whereby it indemnifies its officers and directors over his or her lifetime for
certain events or occurrences while the
officer or director is, or was serving, in such capacity. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the Company has a
Director and Officer insurance policy that limits its exposure and should
enable it to recover a portion of any future amounts paid. As a result of the
insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements is minimal. All of these indemnification
agreements were grandfathered under the provisions of FIN 45 as they were in
effect prior to December 31, 2002. Accordingly, the Company has no liabilities
recorded for these agreements as of September 30, 2003.

In addition, the Company has entered into standard indemnification
agreements in the ordinary course of business. Pursuant to these agreements,
the Company indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the indemnified party
(generally our business partners or customers) in connection with any claim by
any third party with respect to the Companys products. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited.
The Company has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company believes
the estimated fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of September 30,
2003.

The Company has no material investigations, claims, or lawsuits arising
out of its business, nor any known to be pending. The Company is subject to
certain legal proceedings and claims that arise in the ordinary course of its
business. In the opinion of management, the ultimate outcome of such matters
will not have a material impact on the Companys financial position, results of
operations or cash flows.

Note G  Other Recent Accounting Pronouncements

The Company adopted the following Statements of Financial Accounting
Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting
for acquired business using the purchase method of accounting; SFAS 142, which
addressees accounting for acquired goodwill and other intangible assets; SFAS
143, which addresses accounting for obligations associated with the retirement

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of tangible long-lived assets and the associated retirement costs; and SFAS
144, which addresses the impairment or disposal of long-lived assets. Adoption
of these standards did not have a material effect on the Companys financial
position or results of operations.

During December 2002, the FASB issued SFAS 148, which provides alternative
transition methods for companies adopting a voluntary change to the fair value
method of accounting for stock-based compensation. SFAS 148 also requires
enhanced disclosure regarding the method of accounting and the effect of the
method used on reported results of operations. SFAS 148 is effective for
fiscal years ending after December 15, 2002 and interim periods beginning after
December 15, 2002. The Company adopted the disclosure provisions of SFAS 148
in December 2002, and has elected to continue to account for its stock-based
compensation under the intrinsic value method.

In January 2003, the Company adopted SFAS 146, which addresses accounting
for costs associated with exit or disposal activities. In addition, the FASB
issued FIN 46, which requires that certain variable interest entities be
consolidated by the primary beneficiary of the entity if the equity investors
in the entity do not have a controlling financial interest or do not have
sufficient equity at risk. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. For all such entities
created prior to February 1, 2003, FIN 46 is effective for interim or annual
fiscal periods ending after June 15, 2003. Adoption of these statements did
not have a material effect on the Companys financial position or results of
operations

In April 2003, the FASB issued SFAS 149, which amends and clarifies
accounting guidance on derivative instruments and hedging activities. In May
2003, the FASB issued SFAS 150, which addresses accounting for certain
financial instruments that have characteristics of both liabilities and equity.
The Company has not entered into derivative instruments covered by SFAS 149 or
financial instruments covered by SFAS 150. Adoption of these statements is
therefore not expected to have a material effect on the Companys financial
position or results of operations.

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

Results of Operations

The following tables present certain key operating data for the periods
indicated:

|                                                        |                                   |   |                                            |    |                                 |   |        |    |      |   |         |    |   |   |         |    |  
|------------------------------------------------------- | --------------------------------- | - | ------------------------------------------ | -- | ------------------------------- | - | ------ | -- | ---- | - | ------- | -- | - | - | ------- | -- | -
|                                                        |                                   |   | Operating Results                         
|                                                        |                                   |   |                                           
|                                                        |                                   |   | (amounts in thousands, except percentages)
|                                                        |                                   |   | Three months ended September 30,           |    | Nine months ended September 30,
|                                                        |                                   |   |                                            |    |                                
|                                                        |                                   |   | 2003                                       |    | 2002                            |   | 2003   |    | 2002
|                                                        |                                   |   |                                            |    |                                 |   |        |    |     
|Sales                                                   |                                   | $ | 49,397                                     |    |                                 | $ | 42,911 |    |      | $ | 147,516 |    |   | $ | 119,585 |   
|Sales by business area, as a
percentage of total sales: |                                   |   |                                            |    |                                 |   |        |    |      |   |         |    |   |   |         |   
|                                                        | Ballistic Missile Defense (BMD) |   |                                            | 48 | %                               |   |        | 45 | %    |   |         | 48 | % |   |         | 43 | %
|                                                        | Non BMD Dept of Defense (DoD)   |   |                                            | 49 | %                               |   |        | 49 | %    |   |         | 49 | % |   |         | 49 | %
|                                                        | Non-DoD                           |   |                                            | 3  | %                               |   |        | 6  | %    |   |         | 3  | % |   |         | 8  | %
|Gross profit (1)                                        |                                   | $ | 4,561                                      |    |                                 | $ | 3,815  |    |      | $ | 13,566  |    |   | $ | 11,292  |   
|Gross profit as a % of costs (1)                        |                                   |   | 10.2                                       | %  |                                 |   | 9.8    | %  |      |   | 10.1    | %  |   |   | 10.4    | % 
|Income from operations                                  |                                   | $ | 4,367                                      |    |                                 | $ | 3,500  |    |      | $ | 12,886  |    |   | $ | 10,868  |   
|Net income                                              |                                   | $ | 2,589                                      |    |                                 | $ | 2,100  |    |      | $ | 7,630   |    |   | $ | 6,521   |   



| | (1) |  | The Company defines gross profit as sales less all costs that are
allowable for and allocable to contracts under government procurement
regulations. As such, gross profit excludes certain unallowable
expenses. Management considers gross profit, and gross profit as a
percentage of costs, to be key measures of the Companys contract
performance. It should also be considered in conjunction with income
from operations, net income, and other measures of financial
performance. The following presents a reconciliation of gross profit
to income from operations (amounts in thousands) :
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  
|------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                          |  | Three months ended September 30, |       | Nine months ended September 30,
|                          |  |                                  |       |                                
|                          |  | 2003                             |       | 2002                            |  | 2003 |       | 2002
|                          |  |                                  |       |                                 |  |      |       |     
|Gross profit              |  | $                                | 4,561 |                                 |  | $    | 3,815 |      |  | $ | 13,566 |   |  | $ | 11,292 |  
|Less unallowable expenses |  |                                  | (194  | )                               |  |      | (315  | )    |  |   | (680   | ) |  |   | (424   | )
|                          |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  
|Income from Operations    |  | $                                | 4,367 |                                 |  | $    | 3,500 |      |  | $ | 12,886 |   |  | $ | 10,868 |  
|                          |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  

The Companys contract revenues for the three-month period ended September
30, 2003 increased 15%, from $42.9 million for the third quarter of 2002 to
$49.4 million for the third quarter of 2003. Year-to-date sales for 2003 are
$147.5 million, an increase of 23% above performance through September of 2002.
The most significant contributor to the Companys revenue growth has been in
BMD programs, where revenues increased 25%, from $18.9 million for the
three-month period ended September 30, 2002 to $23.7 million for the
corresponding period in 2003. Year-to-date, BMD revenues have increased 39%,
from $51.0 million in 2002 to $71.1 million in 2003. In addition to continuing
its work on BMD systems engineering and technical analysis, the Company has
generated growth in its BMD business base through penetration of other BMD
program elements. Revenue on other DoD programs increased 15%, from $21.0
million during the third quarter of 2002 to $24.2 million for the third quarter
of 2003, primarily due to increased revenue on programs for a variety of
intelligence agencies as a result of the governments increased focus on
intelligence in response to the terrorist attacks of September 11. Non-DoD
sales decreased 47% during the third quarter, from $2.6 million as of September
2002 to $1.4 million as of September 2003, due to the completion in July 2002
of a contract to provide a variety of engineering and other range support
services to the NASA Dryden Flight Research Center.

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The Company defines gross profit as sales less all costs that are
allowable for and allocable to contracts under government procurement
regulations. As such, gross profit excludes certain unallowable expenses, as
well as interest income and interest expense. Management considers gross
profit, and the
gross profit rate (gross profit as a percentage of contract costs), to be key
measures of the Companys contract performance. It should also be considered
in conjunction with income from operations, net income, and other measures of
financial performance.

The gross profit rate (gross profit as a percentage of contract costs)
increased from 9.8% in the third quarter of 2002 to 10.2% in third quarter of
2003. The increase in the gross profit rate for the quarter, relative to the
corresponding quarter of 2002, is primarily attributable to the write-off of
$125,000 (due to uncollectibility) in September 2002 of costs incurred on a
commercial contract. In addition, the gross profit rate during the quarter was
affected by two other factors: the mix of contract types, and the proportion
of the Companys total revenues derived from BMD programs. During the third
quarter of 2003, time and material and fixed price contracts comprised 40% of
total sales, compared with 30% of total sales in the corresponding quarter of
2002. The Company generally earns higher profits on time and material and
fixed price contracts than it does on cost reimbursable contracts, due to the
greater risk associated with such contract types. Offsetting the effect of the
change in contract type mix was the increase in BMD revenues, from 45% of total
revenues in the third quarter of 2002 to 48% in the corresponding quarter of
2003. The gross profit rate on many of the Companys BMD programs tends to be
lower than on other programs because subcontractor costs (on which the Company
typically receives lower fees) comprise a significant portion of the work
effort on many BMD programs.

Year-to-date, the gross profit rate continued to trend slightly lower than
last year, declining from 10.4% through September 2002 to 10.1% through
September 2003. Year-to-date, the impact on the gross profit rate of the
change in contract type mix approximated that for the quarter. However, the
impact on the gross profit rate of the increase in the proportion of BMD
revenues was greater over the year-to-date period than for the quarter, as
revenue on BMD programs increased from 43% of year-to-date sales in 2002 to 48%
in 2003. The write-off referred to above had an insignificant effect on the
year-to-date profit rate.

The Company earned net interest income during the third quarter of 2003
and 2002. During the third quarter of 2003, the Company had cash receipts
totaling $52.2 million, an increase of $8.9 million over the corresponding
period in 2002. Both the Companys investments in cash equivalents and the
Companys long-term debt are floating rate. Accordingly, the reduction in
average interest rates from 2002 to 2003 had a minimal effect on net interest.

The Companys effective income tax rate was 41% and 40% during the third
quarter of 2003 and 2002, respectively. The increase in the effective tax rate
in 2003 is attributable to an increase in certain non-deductible compensation
expenses.

Backlog

Although the Companys backlog has historically been indicative of its
future revenues, there can be no assurance that this will continue. The
Companys backlog is typically subject to variations from year to year as
contracts are completed, major existing contracts are renewed, or major new
contracts are awarded. Additionally, all U.S. Government contracts included in
backlog, whether or not funded, may be terminated at the convenience of the
U.S. Government. Moreover, U.S. Government contracts are conditioned upon the
continuing availability of congressional appropriations. New presidential
administrations, changes in the composition of Congress, and disagreement or
significant delay between Congress and the Administration in reaching a defense
budget accord can all significantly affect the timing of funding on the
Companys contract backlog. Delays in contract funding resulting from these

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factors may have a significant adverse effect on the Companys financial
position and results of operations.

The following table compares the Companys 12-month contract backlog as of
the dates indicated:

|                  |                        |   |                           |         |              |   |               |         |  |   |         |         | 
|----------------- | ---------------------- | - | ------------------------- | ------- | ------------ | - | ------------- | ------- |  | - | ------- | ------- | 
|                  |                        |   | 12-Month Contract Backlog
|                  |                        |   |                          
|                  |                        |   | (amounts in thousands)   
|                  |                        |   |                          
|                  |                        |   | September 30,             |         | December 31, |   | September 30,
|                  |                        |   | 2003                      |         | 2002         |   | 2002         
|                  |                        |   |                           |         |              |   |              
|Funded            |                        | $ | 85,200                    |         |              | $ | 60,500        |         |  | $ | 63,300  |        
|Unfunded          |                        |   | 113,900                   |         |              |   | 114,100       |         |  |   | 101,100 |        
|                  |                        |   |                           |         |              |   |               |         |  |   |         |        
|                  | Total contract backlog |   | $                         | 199,100 |              |   | $             | 174,600 |  |   | $       | 164,400 | 
|                  |                        |   |                           |         |              |   |               |         |  |   |         |        
|By business area: |                        |   |                           |         |              |   |               |         |  |   |         |        
|                  | BMD                    |   | $                         | 92,100  |              |   | $             | 78,600  |  |   | $       | 70,600  | 
|                  | Other DoD              |   |                           | 100,900 |              |   |               | 89,000  |  |   |         | 80,600  | 
|                  | Non-DoD                |   |                           | 6,100   |              |   |               | 7,000   |  |   |         | 13,200  | 
|                  |                        |   |                           |         |              |   |               |         |  |   |         |        
|                  | Total contract backlog |   | $                         | 199,100 |              |   | $             | 174,600 |  |   | $       | 164,400 | 
|                  |                        |   |                           |         |              |   |               |         |  |   |         |        

The 12-month contract backlog, representing expected sales over the next
twelve months on existing contracts, increased from $174.6 million at the end
of 2002 to $199.1 million as of September 30, 2003, an increase of 14%. BMD
contract backlog increased $13.5 million, or 17%, during the first nine months
of 2003, as the Company has continued to generate growth in its BMD business
base, both through increased level-of-effort in certain of the Companys
existing BMD program areas, and through penetration of other BMD program
elements. Other DoD contract backlog increased $11.9 million, or 13%, while
Non-DoD contract backlog decreased $0.9 million, a decrease of 13%, during the
first nine months of 2003.

In the third quarter of 2003, the Company had ten significant competitive
contract/task order wins, one sole-source win, and six competitive
contract/task order losses. In our Missile Defense business area, Advanced
Systems Technology Operation (ASTO) won the Advanced Systems Technology
Development contract from the Missile Defense Agency. This is a one-year
Indefinite Delivery Indefinite Quantity (IDIQ) contract with a one-year base
plus four one-year options. The total program value is estimated at $28.6
million. The Space and Missile Defense Operation (SMDO), as a subcontractor to
BAe Systems, won an IDIQ contract on the US STRATCOM Architecture and Mission
Support Program. This effort with a new customer has an expected value of
$8-10 million over five years. SMDO also won a GSA Blanket Purchase Agreement
from the Air Force Space and Missile Systems Center as part of their Technical
Acquisition Support Services Program. The estimated value of this contract is
$2.5 million over 21⁄2 years.

In our Intelligence business area, the Advanced Communications Technology
Operation (ACTO) won a $1.2 million, one-year follow-on contract from the
Federal Bureau of Investigation on the Pilaster 2 program. ACTO also won two
other contracts from classified customers totaling $4.2 million for one year.
As part of the National Security Agency Cross Domain Solutions Program, the
Information System and Security Operation (ISSO) won a sole-source $5 million
contract for four years (one-year base plus three one-year options). ACTO lost
a $5 million, five-year contract from the Tailored Access Office as a
subcontractor to Booz Allen Hamilton, and ISSO lost a $2.6 million, five-year
task order contract on the ATLAS Program as a subcontractor to QSS.

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In our Homeland Security business area, in a collaborative effort between ASTO
and the Defense Systems and Technology Operation (DSTO), the Company won a $2.8
million, three-year subcontract from SRS Technologies on the Man Portable Air
Defense Countermeasures Program. This is our first contract with the new
Department of Homeland Security.

In Military Systems, the Company had two significant contract wins and four
losses. The Military Systems Operation (MSO) won the competitive follow-on
contract to its Laboratory and Operations contract from the Missile and Space
Intelligence Center. The new effort, Integrated Systems Production and JRAAC
Operations, is valued at $36.8 million over five years. As a subcontractor to
the Advanced Logistics Solutions Joint Venture, the Technical and Acquisition
Support Operation (TASO) won a $2 million, 11⁄2 year contract from the Army
Missile and Aviation Command for Logistics Channel Management. Significant
losses include a $19 million, four-year subcontract from Orbital Sciences
Corporation for the Air Force Space Based Surveillance System (SMDO); an $11
million, five-year subcontract from Decisive Analytics Corporation for the Army
Space Command C4ISR Operational Management Engineering and Technical Services
Program (SMDO); a $1.8 million, 11/2 year subcontract from the Advanced
Logistics Solutions Joint Venture for support to the Army Missile and Aviation
Command Aviation Systems Program Management Office (TASO); and a $2.8 million,
three-year subcontract from GeoCenters for support to the Army CECOM Night
Vision Electro Optics and Sensors Laboratory (MSO).

In the Hardware Systems business area, the Composite Products Operation (CPO)
was part of the team of Boeing and MBDA that was selected for the Air Force
Small Diameter Bomb Program. CPO will provide composite wing kits for these
new smart weapons. In the first two years, CPO will receive $2.4 million to
complete the development of the wing kits, after which they will participate in
the nine-year production program. The total value of the production program to
the Company is yet to be specified.

Liquidity and Capital Resources

The following tables sets forth, for the periods indicated, selected
financial information:

|                                                           |  |               |            |              |  |               |            |  |  |   |            | 
|---------------------------------------------------------- |  | ------------- | ---------- | ------------ |  | ------------- | ---------- |  |  | - | ---------- | 
|                                                           |  | Balance at   
|                                                           |  |              
|                                                           |  | September 30, |            | December 31, |  | September 30,
|                                                           |  | 2003          |            | 2002         |  | 2002         
|                                                           |  |               |            |              |  |              
|Stockholders equity                                       |  | $             | 35,867,000 |              |  | $             | 25,002,000 |  |  | $ | 23,981,000 | 
|Subordinated notes payable                                 |  | $             | 8,730,000  |              |  | $             | 10,353,000 |  |  | $ | 10,908,000 | 
|Borrowings under line of credit                            |  |               |           |              |  |               |           |  |  |   |           | 
|Number of days sales in
receivables
(year-to-date average) |  |               | 63         |              |  |               | 64         |  |  |   | 64         | 
|Current ratio                                              |  |               | 2.2        |              |  |               | 2.0        |  |  |   | 2.1        | 

Overview

The Companys principal sources of capital for funding its operations are
funds generated by ongoing business activities and proceeds from exercise of
stock options and the issuance of common stock. These sources are augmented,
as necessary, by borrowings under the Companys bank line of credit. The
principal uses of capital are for the repurchase of preferred and common stock,
repayments of amounts borrowed under the bank line of credit, principal
payments on subordinated promissory notes, and capital expenditures.

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U.S. Government contracts are conditioned upon the continuing availability
of congressional appropriations. Congress usually appropriates funds on a
fiscal year basis, even though contract performance may take several years.
Consequently, at the outset of a major program, the contract is usually
partially funded and additional monies are normally committed to the contract
by the procuring agency only as Congress makes appropriations for future years.
These appropriations are therefore subject to changes as a result of increases
or decreases in the overall budget. New presidential administrations, change
in the composition of Congress, and disagreement or significant delay between
Congress and the Administration in reaching a defense budget accord can all
significantly affect the timing of funding on the Companys contract backlog.
Delays in contract funding resulting from these factors may have a significant
adverse effect on the Companys liquidity and days sales outstanding (DSO).

The Companys bank line of credit provides for borrowings of up to $6.0
million, and matures July 1, 2005. Borrowings under the line of credit
agreement are secured by accounts receivable and certain equipment and
improvements, and bear interest at the prime rate. The line of credit
agreement prohibits the payment of dividends by the Company without the banks
prior consent and requires the Company to maintain certain financial ratios.
The Company was in compliance with all such requirements at September 30, 2003.
The Company believes that, as in the past, it will be able to renew its
banking agreement under similar terms. There were no amounts outstanding under
the bank line of credit at September 30, 2003

Generally, the Company limits its stockholders to current employees and
directors of the Company. Accordingly, the Companys Amended and Restated
Certificate of Incorporation places restrictions on the transferability of the
Companys common stock and grant the Company the right to repurchase the shares
held by any stockholder whose association with the Company terminates.
Generally, the Companys policy is to repurchase the stockholdings of all
individuals terminating their association with the Company, so as to retain all
stockholdings among active employees and directors. However, during 1993 and
1994, the 40% reduction in the Companys staff level resulted in the
termination of employees who held, in the aggregate, approximately 30% of the
Companys total common stock then outstanding. Consequently, in April 1994,
the Company temporarily suspended the policy of repurchasing all of the stock
held by terminating employees so as not to deplete stockholders equity. As of
September 30, 2003, the percentage of the Companys outstanding common stock
held by former employees totaled approximately 3.5%.

The policy of repurchasing all stockholdings of terminated employees was
reinstated in 1997. In support of this policy the Board of Directors
authorized the Companys Chief Executive Officer to issue, at his discretion,
promissory notes to repurchase stock held by certain terminating employees.
Such promissory notes are subordinated to borrowings under the bank line of
credit. In addition to repurchasing the stockholdings of terminated employees,
the Company has established and maintains a program that periodically permits
the Companys stockholders to offer shares for sale to the Company. The
Companys repurchase program, which is conducted on a quarterly basis, is a
voluntary program on the part of the Company, and the Companys stockholders
therefore have no right to compel the Company to repurchase any of the
stockholders shares. There can be no assurance that the Company will continue
its voluntary repurchase program. Moreover, the number of shares that the
Company may repurchase is subject to legal restrictions imposed by applicable
corporate law affecting the ability of corporations generally to repurchase
shares of their capital stock. In addition, the number of shares which the
Company may repurchase is subject to a self-imposed quarterly repurchase
limitation which is designed to ensure that the Companys repurchase of its
shares does not materially impair the Companys liquidity or financial
condition. The Board of Directors may approve waivers to the self-imposed
quarterly repurchase limitation.

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Cash Flow Information

During the first three quarters of 2003 the Companys cash balances
increased $11.0 million compared with the prior year end.

Operating activities generated $16.7 million in cash during the first
three quarters of 2003. The Company generated $7.6 million in net income
through September of 2003. Non-cash expenses totaled $5.6 million, of which
$4.2 million related to the Companys practice of issuing shares of common
stock in connection with certain compensation and benefit plans. The Company
expects to continue to follow this practice for the foreseeable future. The
income tax benefit relating to stock compensation plans provided $1.7 million
in cash flow during the first three quarters of 2003 and the company generated
an additional $1.8 million in cash from working capital

Although sales through September 2003 increased 23% in comparison with the
corresponding period in 2002, accounts receivable increased only 3% from $31.9
million at December 31, 2002 to $33.0 million at September 30, 2003. This
favorable aspect of working capital performance (relative to sales growth) is
primarily a result of the reduction in average DSO from 65 days as of December
2002 to 55 days as of September 2003. The Company continues to emphasize rapid
billing and collection of its receivables, however, there can be no assurance
that the Company will be able to further reduce, or maintain, its average DSO.

Through the nine months ended September 2003 the Companys capital
expenditures totaled approximately $1.4 million. The Company currently does
not expect a significant change in its level of capital expenditures.

In connection with the aforementioned stock repurchase policies, the
Company repurchased a total of 358,096 common shares totaling approximately
$8.1 million. Of this total, $0.2 million was repurchased in exchange for
promissory notes. Year-to-date principal payments on promissory notes as of
the end of the third quarter of 2003 totaled $1.8 million. Proceeds from the
issuance of common stock, primarily as the result of exercises of stock
options, totaled $5.4 million.

The Company anticipates that its existing capital resources and access to
its line of credit will be sufficient to fund planned operations for the next
year and for the foreseeable future.

Recent Accounting Pronouncements

The Company adopted the following Statements of Financial Accounting
Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting
for acquired business using the purchase method of accounting; SFAS 142, which
addressees accounting for acquired goodwill and other intangible assets; SFAS
143, which addresses accounting for obligations associated with the retirement
of tangible long-lived assets and the associated retirement costs; and SFAS
144, which addresses the impairment or disposal of long-lived assets. Adoption
of these standards did not have a material effect on the Companys financial
position or results of operations.

During December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS 148, which provides alternative transition methods for companies
adopting a voluntary change to the fair value method of accounting for
stock-based compensation. SFAS 148 also requires enhanced disclosure regarding
the method of accounting and the effect of the method used on reported results
of operations. SFAS 148 is effective for fiscal years ending after December
15, 2002 and interim periods beginning after December 15, 2002. The Company
adopted the disclosure provisions of SFAS 148 in December

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2002, and has elected
to continue to account for its stock-based compensation under the intrinsic
value method.

In November 2002, the FASB issued FASB Interpretation (FIN) 45, which
requires disclosures about obligations under certain guarantees issued by the
Company, and which requires recognition of a liability for the fair value of
the obligation undertaken in issuing the guarantee. The liability recognition
provisions of FIN 45 are applicable to guarantees issued or modified after
December 31, 2002, and the disclosure provisions are effective for interim or
annual fiscal periods ending after December 15, 2002. Adoption of FIN 45 did
not have a material effect on the Companys financial position or results of
operations.

In January 2003, the Company adopted SFAS 146, which addresses accounting
for costs associated with exit or disposal activities. In addition, the FASB
issued FIN 46, which requires that certain variable interest entities be
consolidated by the primary beneficiary of the entity if the equity investors
in the entity do not have a controlling financial interest or do not have
sufficient equity at risk. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. For all such entities
created prior to February 1, 2003, FIN 46 is effective for interim or annual
fiscal periods ending after June 15, 2003. Adoption of these statements did
not have a material effect on the Companys financial position or results of
operations

In April 2003, the FASB issued SFAS 149, which amends and clarifies
accounting guidance on derivative instruments and hedging activities. In May
2003, the FASB issued SFAS 150, which addresses accounting for certain
financial instruments that have characteristics of both liabilities and equity.
The Company has not entered into derivative instruments covered by SFAS 149 or
financial instruments
covered by SFAS 150. Adoption of these statements is therefore not expected to
have a material effect on the Companys financial position or results of
operations.

Effects of Federal Funding for Defense Programs

The Company continues to derive over 90% of its revenues from contracts
with U.S. Government agencies. The Companys government contracts may be
terminated, in whole or in part, at the convenience of the customer (as well as
in the event of default). In the event of a termination for convenience, the
customer is generally obligated to pay the costs incurred by the Company under
the contract plus a fee based upon work completed. Through the first three
quarters of 2003 there has been one contract terminated for the convenience of
the U.S. Government. The total contract value of this contract was $0.1
million. This termination did not have a material effect on the Companys
financial condition or results of operations. The Company does not anticipate
any additional termination of programs or contracts in 2003. However, no
assurances can be given that such events will not occur.

In addition to the right of the U.S. government to terminate contracts for
convenience, U.S. government contracts are conditioned upon the continuing
availability of congressional appropriations. These appropriations are
therefore subject to changes as a result of increases or decreases in the
overall budget. New presidential administrations, change in the composition of
Congress, and disagreement or significant delay between Congress and the
Administration in reaching a defense budget accord can all significantly affect
the timing of funding on the Companys contract backlog. Delays in contract
funding resulting from these factors may have a significant adverse effect on
the Companys revenue recognition, liquidity, and DSO.

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Forward-Looking Statements

All statements in this report that do not directly and exclusively relate
to historical facts constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
represent the Companys intentions, plans, expectations and beliefs, and are
subject to risks, uncertainties and other factors, many of which are outside
the Companys control. These factors could cause our actual results,
performance, achievements or industry results to differ materially from the
results, performance or achievements expressed or implied by such
forward-looking statements. These factors are described in more detail in the
Companys Annual Report on Form 10-K for the fiscal year ended December 29,
2002, and such other filings that the Company makes with the SEC from time to
time. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date hereof.




Item 3 Quantitative and Qualitative Disclosures about Market Risk

Refer to item 7A in the Companys Annual Report on Form 10-K for the year ended
December 29, 2002.




Item 4 Controls and Procedures



|(a) |  | Evaluation of Disclosure Controls and Procedures
|--- |  | ------------------------------------------------

Management has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of
September 28, 2003. Based on the results of this evaluation, management
believes that such controls and procedures are operating effectively.



|(b) |  | Changes in Internal Controls
|--- |  | ----------------------------

There has been no change in the Companys internal control over financial
reporting that occurred in the quarterly period covered by this report that has
materially affected, or is reasonably likely to materially affect the Companys
internal control over financial reporting.




Part II OTHER INFORMATION




Item 1 Legal Proceedings

The Company has no material investigations, claims, or lawsuits arising
out of its business, nor any known to be pending. The Company is subject to
certain legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the ultimate
outcome of such matters will not have a material impact on the Companys
financial position, results of operations or cash flows.




Item 2 Changes in Securities and Use of Proceeds

Not Applicable

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Item 3 Defaults Upon Senior Securities

Not Applicable




Item 4 Submission of Matters to a Vote of Security Holders

Not Applicable




Item 5 Other Information

Not Applicable




Item 6 Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

| |  |               |  |                                                                                                                                                   
| |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit 10.30 |  | Second Amended and Restated Loan Agreement dated September
22, 2003 between the Company and Union Bank of California,
N.A.                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 10.31 |  | Commercial Promissory Note dated September 22, 2003 between
the Company and Union Bank of California, N.A.                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 31.1  |  | Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 31.2  |  | Certification of Chief Financial Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 32.1  |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 32.2  |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.



|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On July 22, 2003, SPARTA, Inc issued a memorandum to its stockholders and
its employees dated July 21, 2003 regarding Second Quarter 2003 Report and
Stock Price Evaluation reporting (1) the establishment of the price of its
common stock at $24.57 per share, and (2) revenues and net income for the
fiscal quarter ended June 30, 2003. Pursuant to the Commissions regulations,
the foregoing information was reported on Form 8-K filed July 23, 2003.

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Signature

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.

|                        |  |     |  |                        
|----------------------- |  | --- |  | -----------------------
|                        |  |     |  | SPARTA, INC.           
|                        |  |     |  |                        
|                        |  |     |  | (Registrant)           
|                        |  |     |  |                        
|Date: November 11, 2003 |  | By: |  | /s/ David E. Schreiman 
|                        |  |     |  |                        
|                        |  |     |  | David E. Schreiman     
|                        |  |     |  | Vice President and     
|                        |  |     |  | Chief Financial Officer

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Exhibit Index

| |  |               |  |                                                                                                                                                   
| |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit No.   |  | Description                                                                                                                                       
|
| |  | Exhibit 10.30 |  | Second Amended and Restated Loan Agreement dated September
22, 2003 between the Company and Union Bank of California,
N.A.                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 10.31 |  | Commercial Promissory Note dated September 22, 2003 between
the Company and Union Bank of California, N.A.                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 31.1  |  | Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 31.2  |  | Certification of Chief Financial Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002                                        
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 32.1  |  | Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
| |  |               |  |                                                                                                                                                   
| |  | Exhibit 32.2  |  | Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

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