**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-Q**





**ý**
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****FOR
                THE QUARTERLY PERIOD ENDED MARCH 31, 2006****o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
                ACT OF 1934**







**Commission
      file number 000-04169**





**SYS**


(Exact
      name of Registrant as specified in its charter)




**California**
            
            **95-2467354**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)







**5050
                Murphy Canyon Road, Suite 200, San Diego, California
                92123**


**(858)
      715-5500**


(Address,
      including zip code, and telephone number, including


area
      code, of Registrant’s principal executive offices)





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




Indicate
      by check mark whether the Registrant is an accelerated filer (as defined in
      Exchange Act Rule 12b-2) Yes o No ý




As
      of May
      9, 2006 there were 15,122,144 shares of the registrant’s common stock
      outstanding.










1











**SYS**




**FORM
      10-Q**




**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2006**




**INDEX**




**PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              
              Financial
                  StatementsCondensed
                  Consolidated Balance
                  Sheets at June 30, 2005 and March 31, 2006Condensed
                  Consolidated Statements
                  of Operations
                  for the Three and Nine Months Ended March 31, 2006 and March 25,
                  2005Condensed
                  Consolidated Statements of Cash Flows
                  for the Nine Months Ended March 31, 2006 and March 25, 2005 (as
                  restated
                  see Note 1)Notes
                  to Condensed Consolidated Financial StatementsItem
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  OperationsItem
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market RiskItem
                  4.
              
              Controls
                  and Procedures**PART
                  II. OTHER INFORMATION**Item
                  1.
              
              Legal
                  ProceedingsItem
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of ProceedsItem
                  3.
              
              Defaults
                  Upon Senior SecuritiesItem
                  4.
              
              Submission
                  of Matters to a Vote of Security HoldersItem
                  5.
              
              Other
                  InformationItem
                  6.
              
              ExhibitsSignaturesExhibit
                  31.1Exhibit
                  31.2Exhibit
                  32.1Exhibit
                  32.2






































2





**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Financial Statements**


SYS
                AND SUBSIDIARIES
              CONDENSED
                CONSOLIDATED BALANCE SHEETSMarch
                31,
            
            
            June
                30,2006
            
            
            2005ASSETSCurrent
                AssetsCash
            
            $
            6,238,000
            
            $
            3,485,000Accounts
                receivable, net
            
            
            10,356,000
            
            
            10,992,000Inventory
            
            
            859,000
            
            
            97,000Prepaid
                expenses
            
            
            473,000
            
            
            166,000Income
                tax refund receivable
            
            
            611,000
            
            
            --Total
                current assets
            
            
            18,537,000
            
            
            14,740,000Furniture,
                equipment and leasehold improvements, net of accumulated depreciation
                and
                amortization of $1,816,000 and $1,428,000
            
            
            1,539,000
            
            
            1,169,000Capitalized
                software, net of accumulated amortization of $73,000 and
                $58,000
            
            
            29,000
            
            
            44,000Intangible
                assets, net of accumulated amortization of $758,000 and
                $315,000
            
            
            1,801,000
            
            
            1,188,000Goodwill
            
            
            13,108,000
            
            
            7,309,000Other
                assets
            
            
            299,000
            
            
            305,000Total
                assets
            
            $
            35,313,000
            
            $
            24,755,000LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Borrowings
                under bank line of credit
            
            $
            1,029,000
            
            $
            --Accounts
                payable
            
            
            1,156,000
            
            
            1,216,000Accrued
                payroll and related expenses
            
            
            2,256,000
            
            
            2,954,000Income
                taxes payable
            
            
            --
            
            
            138,000Other
                accrued liabilities
            
            
            945,000
            
            
            1,058,000Current
                portion of deferred tax liabilities
            
            
            461,000
            
            
            562,000Current
                portion of convertible notes payable, related party
            
            
            791,000
            
            
            388,000Current
                portion of convertible notes payable
            
            
            1,075,000
            
            
            319,000Deferred
                revenue
            
            
            197,000
            
            
            54,000Total
                current liabilities
            
            
            7,910,000
            
            
            6,689,000Convertible
                notes payable, net of current portion, related party
            
            
            1,171,000
            
            
            973,000Convertible
                notes payable, net of current portion
            
            
            2,150,000
            
            
            1,436,000Other
                liabilities
            
            
            109,000
            
            
            4,000Deferred
                tax liabilities
            
            
            249,000
            
            
            249,000Total
                liabilities
            
            
            11,589,000
            
            
            9,351,000COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITY:4%
                convertible preferred stock, $.50 par value; 250,000
                sharesauthorized,
                none issued or outstanding
            
            
            --
            
            
            --9%
                preferred stock, $1.00 par value; 2,000,000 sharesauthorized,
                none issued or outstanding
            
            
            --
            
            
            --Common
                stock, no par value; 48,000,000 shares authorized;13,753,119
                and 10,623,049 shares issued and outstandingas
                of March 31, 2006 and June 30, 2005, respectively
            
            
            21,776,000
            
            
            12,792,000Retained
                earnings
            
            
            1,948,000
            
            
            2,612,000Total
                stockholders’ equity
            
            
            23,724,000
            
            
            15,404,000Total
                liabilities and stockholders’ equity
            
            $
            35,313,000
            
            $
            24,755,000





See
      accompanying notes to unaudited condensed consolidated financial
      statements.





3











SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONSThree
                  Months Ended
              Nine
                  Months EndedMarch
                  31,
              
              
              March
                  25,
              
              
              March
                  31,
              
              
              March
                  25,2006
              
              
              2005
              
              
              2006
              
              
              2005Revenues
              
              $
              13,388,000
              
              $
              10,944,000
              
              $
              38,930,000
              
              $
              32,513,000Operating
                  costs and expenses:Costs
                  of revenue
              
              
              11,920,000
              
              
              8,956,000
              
              
              32,401,000
              
              
              27,061,000Selling,
                  general and administrative
              
              
              2,555,000
              
              
              1,288,000
              
              
              5,359,000
              
              
              3,512,000Research
                  and development
              
              
              744,000
              
              
              49,000
              
              
              1,695,000
              
              
              109,000Total
                  operating costs and expenses
              
              
              15,219,000
              
              
              10,293,000
              
              
              39,455,000
              
              
              30,682,000Income
                  (loss) from operations
              
              
              (1,831,000
              )
              
              651,000
              
              
              (525,000
              )
              
              1,831,000Other
                  (income) expense:Other
                  income
              
              
              (35,000
              )
              
              (19,000
              )
              
              (93,000
              )
              
              (19,000
              )Interest
                  expense
              
              
              123,000
              
              
              130,000
              
              
              313,000
              
              
              366,000Total
                  other (income) expense
              
              
              88,000
              
              
              111,000
              
              
              220,000
              
              
              347,000Income
                  (loss) before income taxes
              
              
              (1,919,000
              )
              
              540,000
              
              
              (745,000
              )
              
              1,484,000Income
                  tax provision (benefit)
              
              
              (586,000
              )
              
              219,000
              
              
              (81,000
              )
              
              603,000Net
                  income (loss)
              
              $
              (1,333,000
              )
              $
              321,000
              
              $
              (664,000
              )
              $
              881,000Net
                  income (loss) per share:Basic
              
              $
              (0.10)
              
              $
              0.04
              
              $
              (0.06)
              
              $
              0.11Diluted
              
              $
              (0.10)
              
              $
              0.03
              
              $
              (0.06)
              
              $
              0.09Weighted
                  average shares:Basic
              
              
              13,132,772
              
              
              8,825,460
              
              
              11,958,144
              
              
              8,383,598Diluted
              
              
              13,132,772
              
              
              11,276,234
              
              
              11,958,144
              
              
              11,044,063








See
      accompanying notes to unaudited condensed consolidated financial
      statements.











4










SYS
                AND SUBSIDIARIES
              CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS
              NINE
                MONTHS ENDED MARCH 31, 2006 AND MARCH 25, 20052006
            
            
            2005(Restated-
                see Note 1)Cash
                Flows from Operating Activities:Net
                income (loss)
            
            $
            (664,000
            )
            $
            881,000Adjustments
                to reconcile net income (loss) to cash provided by(used
                in) operating activities:Depreciation
                and amortization
            
            
            866,000
            
            
            424,000Share-based
                compensation expense
            
            
            409,000
            
            
            --Share-based
                compensation expense - Polexis acquisition
            
            
            --
            
            
            67,000Accretion
                of debt discount
            
            
            31,000
            
            
            32,000Gain
                on disposition of equipment
            
            
            --
            
            
            (8,000
            )Deferred
                taxes, net
            
            
            (101,000
            )
            
            --Stock
                contributed to employee benefit plan
            
            
            542,000
            
            
            --Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            867,000
            
            
            (654,000
            )Inventory
            
            
            4,000
            
            
            (27,000
            )Prepaid
                expenses
            
            
            (239,000
            )
            
            370,000Income
                tax refund receivable
            
            
            (611,000
            )
            
            (58,000
            )Accounts
                payable
            
            
            (199,000
            )
            
            (568,000
            )Accrued
                payroll and related taxes
            
            
            (967,000
            )
            
            61,000Income
                taxes payable
            
            
            (138,000
            )
            
            114,000Other
                accrued liabilities
            
            
            (263,000
            )
            
            103,000Deferred
                revenue
            
            
            (83,000
            )
            
            (13,000
            )Net
                cash provided by (used in) operating activities
            
            
            (546,000
            )
            
            724,000Cash
                Flows from Investing Activities:Purchases
                of furniture, equipment and leasehold improvements
            
            
            (581,000
            )
            
            (431,000
            )Cash
                paid for acquisitions, net of cash acquired
            
            
            (4,640,000
            )
            
            (808,000
            )Proceeds
                from sale of investment
            
            
            90,000
            
            
            --Proceeds
                from sale of furniture and equipment
            
            
            --
            
            
            5,000Other
            
            
            (76,000
            )
            
            (133,000
            )Net
                cash used in investing activities
            
            
            (5,207,000
            )
            
            (1,367,000
            )Cash
                Flows from Financing Activities:Net
                line of credit borrowings
            
            
            1,029,000
            
            
            --Payments
                of notes payable and other borrowings
            
            
            (100,000
            )
            
            (569,000
            )Payments
                on capital lease obligations
            
            
            --
            
            
            (16,000
            )Proceeds
                from issuance of convertible notes payable
            
            
            3,107,000
            
            
            --Proceeds
                from common stock issued in private placement
            
            
            3,107,000
            
            
            --Debt
                issuance costs
            
            
            --
            
            
            (55,000
            )Withholdings
                related to employee stock purchase plan
            
            
            189,000
            
            
            --Issuance
                of stock to participants of employee stock purchase plan
            
            
            419,000
            
            
            194,000Proceeds
                from exercise of stock options and warrants
            
            
            798,000
            
            
            27,000Registration
                costs
            
            
            (43,000
            )
            
            (17,000
            )Net
                cash provided by financing activities
            
            
            8,506,000
            
            
            (436,000
            )Net
                increase (decrease) in cash
            
            
            2,753,000
            
            
            (1,079,000
            )Cash
                at beginning of year
            
            
            3,485,000
            
            
            2,159,000Cash
                at end of period
            
            $
            6,238,000
            
            $
            1,080,000





See
      accompanying notes to unaudited condensed consolidated financial
      statements.


5





SYS
                AND SUBSIDIARIES
              CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
              NINE
                MONTHS ENDED MARCH 31, 2006 AND MARCH 25, 20052006
            
            
            2005Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            238,000
            
            $
            306,000Income
                taxes paid
            
            $
            769,000
            
            $
            485,000Supplemental
                disclosure of noncash investing and financing activities:Acquisitions:Fair
                value of assets acquired, net of cash received
            
            $
            8,107,000
            
            $
            3,991000Less
                other liabilities
            
            
            (889,000
            )
            
            (1,556,000
            )Less
                note payable issued and assumed
            
            
            (100,000
            )
            
            (653,000
            )Less
                value of warrants issued
            
            
            (64,000
            )
            
            --Less
                common stock issued
            
            
            (2,414,000
            )
            
            (974,000
            )Cash
                paid
            
            $
            4,640,000
            
            $
            808,000Common
                stock issued on conversion of notes payable
            
            $
            1,085,000
            
            $
            698,000Common
                stock exchanged upon exercise of stock options - 25,498 shares in
                2006 and 52,846 in 2005
            
            $
            95,000
            
            $
            174,000






















































































See
      accompanying notes to unaudited condensed consolidated financial
      statements.





6


SYS
      AND
      SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




**1.
      Basis of Financial Statement Preparation and Significant Accounting
      Policies:**





The
      accompanying condensed consolidated financial information of SYS and its
      subsidiaries (SYS or the Company) should be read in conjunction with the Notes
      to Consolidated Financial Statements contained in our Annual Report on
      Form 10-KSB to the Securities and Exchange Commission (SEC) for the year
      ended June 30, 2005. The accompanying financial information includes all
      subsidiaries on a consolidated basis and all normal recurring adjustments which
      are considered necessary by the Company's management for a fair presentation
      of
      the financial position, results of operations and cash flows for the periods
      presented. However, these results are not necessarily indicative of results
      for
      a full fiscal year. Additionally, certain prior period amounts have been
      reclassified to conform to the current period presentation. Substantially all
      of
      the Company’s operations are conducted in the United States.





The
      Company’s fiscal year is from July 1 through June 30.  The
      Company uses the 5-4-4 weeks per period method for each quarter; periods one
      (July) and twelve (June) may vary slightly in the actual number of days due
      to
      the beginning and end of each fiscal year.





**Use
      of Estimates:**




The
      preparation of financial statements in conformity with Generally Accepted
      Accounting Principles in the United States (US GAAP) requires management to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. In the future, the Company may realize actual
      results that differ from the current reported estimates.  The Company’s
      significant estimates include those related to revenues and customer billings,
      recovery of indirect costs, allowance for doubtful accounts, valuation of
      long-lived assets including identifiable intangibles and goodwill, accounting
      for income taxes including any related valuation allowance, contingencies,
      and
      share-based compensation.





**Development
      Costs of Software to be Sold**





Costs
      related to research and development are generally charged to expense as
      incurred. Capitalization of material software development costs begins when
      a
      product’s technological feasibility has been established in accordance with the
      provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
      Marketed.” To date, there is only a short time period between achieving
      technological feasibility, which the Company has defined as the establishment
      of
      a working model, which typically occurs when beta testing commences, and the
      general availability of such software. Consequently, software development costs
      qualifying for capitalization have been insignificant.





**Revenue
      Recognition**





The
      majority of the Company’s revenue is derived from contracts with agencies of the
      U.S. Government that are typically cost-plus-fee, time-and-material and
      fixed-price contracts. Revenue on these contracts results from work performed
      on
      these contracts by the Company’s employees and subcontractors and from
      pass-through of costs for material. Revenue on cost-plus-fee contracts is
      recorded as contract allowable costs are incurred and fees earned. Revenue
      for
      time-and-material contracts is recorded on the basis of contract allowable
      labor
      and subcontractor hours worked times the contract defined billing rates plus
      the
      cost of material used in the performance on the contract. Revenue from
      service-type fixed-price contracts is recognized ratably over the contract
      period or by other appropriate output methods to measure service provided,
      and
      contract costs are expensed as incurred. Under fixed-price contracts, other
      than
      service-type contracts, revenue is recognized under the percentage of completion
      method, on the basis of costs incurred in relation to estimated total costs
      to
      complete the contract. The risk to the Company on a fixed-price contract is
      that
      if actual costs exceed the estimated costs to complete the contract, operating
      income is negatively impacted.





Contract
      costs, including indirect costs, on certain U.S. Government contracts are
      subject to audit by the Defense Contract Audit Agency (the DCAA) before final
      billing and collection of receivables. Revenues have been recorded at amounts
      expected to be realized upon final settlement. Anticipated contract losses
      are
      recognized in the period in which they are identified.





The
      Company also recognizes revenue from the sale of hardware, hardware products
      which include software that is more than incidental, hardware and software
      maintenance agreements, and Application Service Provider (ASP) services. The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      delivery has occurred or services have been provided, the sale price is fixed
      or
      determinable, and collectibility is probable.





Revenue
      from product sales is generally recognized upon shipment, or once all applicable
      criteria have been met. Allowances are provided for estimated returns, discounts
      and trade-ins. Such allowances are adjusted periodically to reflect actual
      and
      anticipated experience.





Revenue
      from maintenance and ASP services are recognized ratably over the maintenance
      term, which is typically one or two years. The unrecognized revenue portion
      of
      maintenance agreements billed is recorded as deferred revenue.





Certain
      agreements include multiple deliverables or elements for products, software
      and/or services. Accordingly, the Company separates its deliverables into units
      of accounting in accordance with the provisions of Emerging Task Force (“EITF”)
      Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
      Deliverables” using the residual method. In the absence of fair value for an
      undelivered element, the arrangement is accounted for as a single unit of
      accounting, resulting in a deferral of revenue recognition for the delivered
      elements until the undelivered elements are fulfilled.





Revenue
      on software products and software-related elements are recognized, in accordance
      with AICPA Statement of Position (SOP) No. 97-2, “Software Revenue
      Recognition.” For arrangements that include both hardware products and software
      products, the Company evaluates the arrangement based on EITF 03-5, *“Applicability
      of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
      Arrangement Containing More-Than-Incidental Software.”* In
      accordance with the provisions of EITF 03-5, the arrangement is divided
      between software-related elements and non-software deliverables.
      Software-related elements are accounted for in accordance with SOP 97-2. When
      software arrangements contain multiple elements and vendor specific objective
      evidence of fair value exists for all undelivered elements, the Company accounts
      for the delivered elements in accordance with the “Residual Method” prescribed
      by SOP No. 98-9. Otherwise, revenue is deferred and recognized in
      accordance with SOP 97-2.




7




**Indirect
      Expense Rate Variance:**




For
      interim reporting purposes, SYS applies overhead and selling, general and
      administrative expenses as a percentage of direct contract costs based on annual
      budgeted indirect expense rates. To the extent actual expenses for an interim
      period are greater than the budgeted rates, the variance is deferred if
      management believes it is probable that the variance will be absorbed by future
      contract activity. This probability assessment includes projecting whether
      future indirect costs will be sufficiently less than the annual budgeted rates
      or can be absorbed by seeking increased billing rates applied on cost-plus-fee
      contracts. At the end of each interim reporting period, management assesses
      the
      recoverability of any amount deferred to determine if any portion should be
      charged to expense. In assessing the recoverability of variances deferred,
      management takes into consideration estimates of the amount of direct labor
      and
      other direct costs to be incurred in future interim periods, the feasibility
      of
      modifications for provisional billing rates, and the likelihood that an approved
      increase in provisional billing rates can be passed along to a customer.
      Variances are charged to expense in the periods in which it is determined that
      such amounts are not probable of recovery.





**New
      Accounting Standards:**





In
      June
      2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
      “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces
      Accounting Principles Board Opinion No. 20 (“APB 20”) and SFAS No. 3, “Reporting
      Accounting Changes in Interim Financial Statements”, and applies to all
      voluntary changes in accounting principle, and changes the requirements for
      accounting for and reporting of a change in accounting principle. APB 20
      previously required that most voluntary changes in accounting principle be
      recognized by including in net income of the period of change a cumulative
      effect of changing to the new accounting principle whereas SFAS 154 requires
      retrospective application to prior periods’ financial statements of a voluntary
      change in accounting principle, unless it is impracticable. SFAS 154 enhances
      the consistency of financial information between periods. The Company early
      adopted SFAS 154 in its first quarter of fiscal year 2006. The adoption of
      SFAS
      154 did not have a material impact on the Company’s results of operations or
      financial position.





In
      November 2004, the FASB issued SFAS No.
      151,
      "Inventory Costs" ("SFAS 151"), an amendment of ARB No. 43, Chapter 4. SFAS
      151
      clarifies the accounting for abnormal amounts of idle facility expense, freight,
      handling costs and wasted material. SFAS 151 is effective for inventory costs
      incurred during fiscal years beginning after June 15, 2005. The adoption of
      SFAS
      No. 151 did not have a material effect on the Company’s financial position,
      results of operations or cash flows.




**Reclassifications:**
 
 Certain
        prior year amounts have been reclassified to conform to the presentation
        for the
        current year.


**Restatement
      of Statement of Cash Flows:**





The
      amounts presented in the statements of cash flows for the nine months ended
      March 25, 2005 have been restated to correct errors in the classification of
      certain items between cash flows from operating activities and cash flows from
      investing activities and financing activities. Specifically, $660,000 was
      erroneously classified as a reduction to cash flows from operating activities
      of
      which $605,000 should have been classified as an increase in cash used by
      investing activities and $55,000 should have been classified as an increase
      in
      cash used by financing activities. The primary cause of the errors related
      to
      the misclassification of cash flows related to business combination
      transactions. This restatement did not result in a change to the net income
      for
      the nine months ended March 25, 2005 or a change in the net decrease in cash
      for
      the nine months ended March 25, 2005. The corrections made in the statements
      of
      cash flows for the nine months ended March 25, 2005 do not affect the statement
      of cash flows for the twelve months ended June 30, 2005 as reported in the
      2005
      Form 10-K.




8


The
        following table summarizes the corrections and reclassifications to the
        statement of cash flows for the nine months ended March 25,
        2005:
 
 As
                  Originally Reported
              
              Corrections
              
              Reclassifications
              
              As
                  RestatedCash
                  Flows from Operating Activities:Net
                  income
              
              $
              881,000
              
              $
              --
              
              $
              --
              
              $
              881,000Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              396,000
              
              
              28,000
              
              
              --
              
              
              424,000Share-based
                  compensation expense
              
              
              --
              
              
              --
              
              
              --
              
              
              --Share-based
                  compensation expense - Polexis acquisition
              
              
              --
              
              
              67,000
              
              
              --
              
              
              67,000Straight-line
                  rent adjustment
              
              
              (98,000
              )
              
              --
              
              
              98,000
              
              
              --Accretion
                  of debt discount
              
              
              32,000
              
              
              --
              
              
              --
              
              
              32,000Gain
                  on disposition of equipment
              
              
              (8,000
              )
              
              --
              
              
              --
              
              
              (8,000
              )Changes
                  in operating assets and liabilities:
              
              
              --
              
              
              --
              
              
              --
              
              
              --Accounts
                  receivable
              
              
              (620,000
              )
              
              (34,000
              )
              
              --
              
              
              (654,000
              )Income
                  tax refund receivable
              
              
              (58,000
              )
              
              --
              
              
              --
              
              
              (58,000
              )Inventory
              
              
              (27,000
              )
              
              --
              
              
              --
              
              
              (27,000
              )Prepaid
                  expenses
              
              
              370,000
              
              
              --
              
              
              --
              
              
              370,000Other
                  assets
              
              
              (145,000
              )
              
              145,000
              
              
              --
              
              
              --Accounts
                  payable
              
              
              (672,000
              )
              
              104,000
              
              
              --
              
              
              (568,000
              )Accrued
                  payroll and related taxes
              
              
              61,000
              
              
              --
              
              
              --
              
              
              61,000Income
                  taxes payable
              
              
              114,000
              
              
              --
              
              
              --
              
              
              114,000Other
                  accrued liabilities
              
              
              (183,000
              )
              
              384,000
              
              
              (98,000
              )
              
              103,000Deferred
                  revenue
              
              
              21,000
              
              
              (34,000
              )
              
              --
              
              
              (13,000
              )Net
                  cash provided by operating activities
              
              
              64,000
              
              
              660,000
              
              
              --
              
              
              724,000Cash
                  Flows from Investing Activities:Purchases
                  of furniture, equipment and leasehold improvements
              
              
              (408,000
              )
              
              (23,000
              )
              
              --
              
              
              (431,000
              )Cash
                  paid for acquisitions, net of cash acquired
              
              
              (354,000
              )
              
              (454,000
              )
              
              --
              
              
              (808,000
              )Proceeds
                  from sale of furniture and equipment
              
              
              --
              
              
              5,000
              
              
              --
              
              
              5,000Other
              
              
              --
              
              
              (133,000
              )
              
              --
              
              
              (133,000
              )Net
                  cash used in investing activities
              
              
              (762,000
              )
              
              (605,000
              )
              
              --
              
              
              (1,367,000
              )Cash
                  Flows from Financing Activities:Payments
                  of notes payable and other borrowings
              
              
              (569,000
              )
              
              --
              
              
              --
              
              
              (569,000
              )Payments
                  on capital lease obligations
              
              
              (16,000
              )
              
              --
              
              
              --
              
              
              (16,000
              )Debt
                  issuance costs
              
              
              --
              
              
              (55,000
              )
              
              --
              
              
              (55,000
              )Issuance
                  of stock to participants of employee stock purchase plan
              
              
              --
              
              
              --
              
              
              194,000
              
              
              194,000Proceeds
                  from exercise of stock options and warrants
              
              
              204,000
              
              
              --
              
              
              (177,000
              )
              
              27,000Registration
                  costs
              
              
              --
              
              
              --
              
              
              (17,000
              )
              
              (17,000
              )Net
                  cash used by financing activities
              
              
              (381,000
              )
              
              (55,000
              )
              
              --
              
              
              (436,000
              )Net
                  increase (decrease) in and cash equivalents
              
              
              (1,079,000
              )
              
              --
              
              
              --
              
              
              (1,079,000
              )Cash
                  at beginning of year
              
              
              2,159,000
              
              
              --
              
              
              --
              
              
              2,159,000Cash
                  at end of year
              
              $
              1,080,000
              
              $
              --
              
              $
              --
              
              $
              1,080,000
 
 9


**2.
      Recent Developments:**





As
      of
      March 31, 2006, unfavorable indirect expense variances totaled $1,602,000 of
      which $909,000 was deferred as of December 30, 2005 and $313,000 was deferred
      as
      of September 30, 2005. At March 31, 2006, management determined that it was
      no
      longer probable that these deferred costs would be recovered by future contract
      activity in the remainder of the fiscal year. Accordingly, the $1,602,000 of
      unfavorable indirect expense variances were charged to expense of which $724,000
      was charged to costs of revenues and $878,000 was charged to selling, general
      and administrative expense. The change in management’s assessment of probable
      recovery of the indirect expense variances during the current quarter was the
      result of reductions in projections of direct contract activity in relation
      to
      the projections of indirect expenses for the remainder of the current fiscal
      year.




As
      a
      result of losses recognized for the current period ended March 31, 2006, the
      Company was in default of the financial covenants of its bank line of credit
      related to minimum quarterly net income and the ratio of cash flow to the
      current portion of long term debt. The lender has granted a waiver of these
      covenants for the measurement period ended March 31, 2006.


During
      the three months ended March 31, 2006, the Company completed its valuation
      of
      the assets and liabilities related to the acquisitions of cVideo and Logic
      Innovations (see Note 11), which were acquired on December 2, 2005 and November
      7, 2005, respectively. The final valuation resulted in an allocation of the
      purchase price that was different from the preliminary allocation used in the
      financial statements as of December 30, 2005. If the information from the final
      valuation had been used, the amounts reported for the three and six month
      periods ended December 31, 2005 for amortization expense would have increased
      by
      $96,000 and contract costs would have increased by $143,000.


**3.
      Share-based Compensation:**





The
      Company has two stock plans that provide for the grant to employees of stock
      options, permit the grant of non-statutory share-based awards to paid
      consultants, and provide for the automatic grant of non-statutory share-based
      awards to outside directors. The plans may have options with terms of no more
      than ten years. The maximum terms of the options granted under these plans
      have
      been seven years with a maximum vesting of five years. The Company also has
      an
      employee stock purchase plan (ESPP) for employees to purchase its common stock
      at a discount. The ESPP provides for enrollment on the first day of a six-month
      period in which the employees can elect payroll deductions for the purchase
      of
      the Company’s common stock. The exercise date of the ESPP shall be the last day
      of the six month period and the purchase price shall be 85% of the fair market
      value of a share of common stock on the enrollment or exercise date, whichever
      is lower.





Prior
      to
      July 1, 2005, the Company accounted for its stock plans under the
      provisions of APB No. 25, “Accounting for Stock Issued to Employees” (APB
      No. 25) and FASB Interpretation (FIN) No. 44, “Accounting for
      Certain Transactions Involving Stock Compensation - an Interpretation of APB
      Opinion No. 25” (FIN No. 44) and
      made
      pro forma footnote disclosures as required by Statement of Financial Accounting
      Standards (SFAS) No. 148, “Accounting For Stock-Based Compensation - Transition
      and Disclosure”, which amends SFAS No. 123, “Accounting For Stock-Based
      Compensation” .
      The
      Company adopted Statement of Financial Accounting Standards No. 123
      (revised 2004), Share-Based Payment (SFAS No. 123R), effective July 1, 2005
      using the modified-prospective-transition method. Accordingly, prior period
      amounts have not been restated. Under this transition method, share-based
      compensation expense recognized during the nine months ended March 31, 2006
      includes stock options granted prior to, but not yet vested as of July 1,
      2005, based on the grant-date fair value estimated in accordance with the
      original provisions of SFAS No. 123 and the following items based on the
      grant date values estimated in accordance with the provisions of SFAS No. 123R:
      (a) stock options granted after June 30, 2005, (b) ESPP with offering periods
      commencing subsequent to June 30, 2005, (c) a stock purchase agreement
      issued to an employee that provided for the purchase of the Company’s stock at a
      discount and (d) stock issued to employees of the Company.





10


The
      following is a summary of the share-based compensation expense recognized by
      the
      Company in the three and nine month periods ended March 31, 2006:





Three
                Months
            
            Nine
                MonthsStock
                options
            
            $
            36,000
            
            $
            101,000Employee
                stock purchase plan
            
            
            68,000
            
            
            144,000Employee
                stock purchase agreement
            
            
            --
            
            
            74,000Shares
                issued and issuable to employees in connection with acquisition of
                Antin
            
            
            39,000
            
            
            90,000Total
            
            $
            143,000
            
            $
            409,000





The
      estimated fair value of the Company’s share-based awards, less expected
      forfeitures, is amortized over the awards’ vesting period on a straight-line
      basis for awards granted after the adoption of SFAS No. 123R and on a
      graded-vesting basis for awards granted prior to the adoption of SFAS No. 123R.





The
      adoption of SFAS No. 123R resulted in a reduction to income before income taxes
      and net income of $104,000 and $245,000, respectively, for the three and nine
      month periods ended March 31, 2006. The impact on basic and diluted earnings
      per
      share for the three and nine month periods ended March 31, 2006 was $0.01 and
      $0.02, respectively. There was no impact on cash flow from operating activities
      or from financing activities as a result of the adoption of SFAS No.
      123R.





On
      June
      29, 2005, the Board of Directors of SYS approved the acceleration of the vesting
      of all outstanding unvested stock options (the Acceleration). The Acceleration
      was effective for all such options outstanding on June 30, 2005, all of which
      were granted by the Company when the accounting rules permitted use of the
      intrinsic-value method of accounting for stock options. All of the other terms
      and conditions applicable to such outstanding stock option grants still apply.
      Under APB No. 25, the Acceleration resulted in recognition of share-based
      compensation expense of $51,000 which was determined by measuring the intrinsic
      value on the date of the modification of the options that otherwise would have
      expired unexercised. The Company's decision to accelerate the vesting of these
      options was in anticipation of compensation expense to be recorded in connection
      with outstanding unvested stock options issued to employees subsequent to the
      effective date of SFAS No. 123R issued in December 2004. As a result of the
      Acceleration, options to purchase 785,642 shares of the Company's common stock
      became immediately exercisable. If these options had not been accelerated,
      additional share-based compensation expense totaling $47,000 and $142,000 would
      have been recognized in the three and nine month periods ended March 31, 2006,
      respectively, and a balance of $436,000 would have been recognized over a
      weighted average remaining vesting period of approximately 3.2 years. Holders
      of
      incentive stock options to purchase 246,800 shares of common stock elected
      to
      decline the acceleration of their options because the acceleration would have
      the effect of changing the status of such options for federal income tax
      purposes from an incentive stock option to a non-qualified stock
      option.





The
      modified prospective transition method of SFAS No. 123R requires the
      presentation of pro forma information, for periods presented prior to the
      adoption of SFAS No. 123R, regarding net income and net income per share as
      if the Company had accounted for its stock plans under the fair value method
      of
      SFAS No. 123R. For pro forma purposes, fair value of stock options and ESPP
      awards was estimated using the Black-Scholes option valuation model. The fair
      value of all of the Company’s share-based awards was estimated assuming no
      expected dividends and estimates of expected life, volatility and risk-free
      interest rate at the time of grant.





11


The
      following table illustrates the effect on net income and net income per share
      if
      the Company had accounted for its stock plans under the fair value method of
      accounting under SFAS No. 123R for the three and nine month periods ended
      March 25, 2005:


Three
                Months
            
            Nine
                MonthsNet
                income - as reported
            
            $
            321,000
            
            $
            881,000Add
                total share-based employee compensation expense in reported net income,
                net of related tax effects
            
            
            --
            
            
            --Deduct
                total share-based employee compensation expense determined under
                fair
                value based method for all stock option awards, net of tax
            
            
            (49,000
            )
            
            (159,000
            )Net
                income - pro forma
            
            $
            272,000
            
            $
            722,000Basic
                income per common share:As
                reported
            
            $
            0.04
            
            $
            0.11Pro
                forma
            
            $
            0.03
            
            $
            0.09Diluted
                income per common share:As
                reported
            
            $
            0.03
            
            $
            0.09Pro
                forma
            
            $
            0.03
            
            $
            0.08





The
      fair
      value of the Company’s share-based awards granted in the nine-month period ended
      March 25, 2005 was estimated using the following weighted-average
      assumptions:


Dividend
                yield
            0.0%Expected
                volatility
            44.0%Risk-free
                interest rate
            3.7%Expected
                lives
            4.50





The
      maximum terms of the options granted under the Company’s stock option plans have
      been seven years with a maximum vesting of five years. At March 31, 2006, the
      Company had 1,124,250 shares of common stock available for future grants under
      its plans.





The
      following table summarizes certain information regarding stock options during
      the nine month period ended March 31, 2006:


WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicShares
            
            Price
            
            Term
                (Yrs)
            
            ValueBalance
                outstanding at beginning of year
            
            
            2,391,100
            
            $
            1.95Granted
            
            
            293,500
            
            $
            3.85Exercised
            
            
            (429,350
            )
            $
            1.41Cancelled
            
            
            (7,150
            )
            $
            1.68Balance
                outstanding at end of quarter
            
            
            2,248,100
            
            $
            2.30
            
            
            2.79
            
            $
            3,484,000Options
                exercisable at end of quarter
            
            
            1,793,800
            
            $
            2.06
            
            
            2.52
            
            $
            3,142,000





During
      the nine months ended March 31, 2006, stock options were exercised and paid
      for
      by the option holders by tendering 25,498 shares of the Company’s outstanding
      stock owned by the option holders. The 25,498 tendered shares had a fair market
      value of $95,000.





The
      total
      intrinsic value of options exercised during the nine months ended March 31,
      2006
      was $1,029,000. As of March 31, 2006, there was $352,000 of total unrecognized
      compensation cost related to non-vested stock options granted and outstanding;
      that cost is expected to be recognized through fiscal year 2010, with a weighted
      average remaining period of 4 years. Cash received from stock option exercises
      was $511,000 during the nine months ended March 31, 2006.





The
      2003
      Employee Stock Purchase Plan (ESPP) allows employees to designate a portion
      of
      their base compensation to be used to purchase the Company’s common stock at a
      purchase price per share at 85% of the lower of the fair market value on the
      first or last day of each offering period. Each offering period lasts six
      months. ESPP awards were valued using the Black-Scholes model with an expected
      life of 6 months, expected volatility of 51.9%, a 3.9% risk free interest rate
      and no expected dividends. As of March 31, 2006 there was $65,000 of
      unrecognized compensation cost related to the ESPP.





On
      August
      16, 2005, the Company entered into a restricted stock purchase agreement with
      an
      employee as an inducement to employment. The agreement allowed the employee
      to
      purchase between 200,000 and 250,000 shares of the Company’s common stock by
      November 15, 2005. The purchase price was to be 90 percent of the average
      closing price between the date of the agreement and the purchase date but in
      no
      event less than $2.50 per share. The rights to purchase the shares vested
      one-half on September 30, 2005 and one-half on November 15, 2005. The Company
      valued this agreement using an option pricing model with an expected life of
      three months, expected volatility of 48.58%, a 3.52% risk free interest rate
      and
      no expected dividends. As of March 31, 2006 there was no unrecognized
      compensation cost related to this stock purchase agreement. On November 9,
      2005
      the Company and the employee determined that the employee would not be able
      to
      exercise his rights or fulfill his obligations within the terms of the
      agreement. As a result, the Company and the employee mutually agreed to, and
      executed, a rescission of the restricted stock purchase agreement.





On
      September 12, 2005, SYS’s Board of Directors approved the issuance of an
      additional 25,130 shares of the Company’s common stock to be issued to SYS
      employees that were former Antin stockholders (former Antin
      stockholders), in addition to those shares still being held in escrow, as a
      result of a modification of a working capital purchase price adjustment provided
      for in the purchase agreement. One-half of the shares were issued directly
      to
      the former Antin stockholders and the balance were placed in escrow which are
      contingently issuable to the former Antin stockholders based upon the future
      operating performance of Antin through June 30, 2006. As a result of the
      terms of a modification to the original working capital purchase price
      adjustment, the $51,000 value of the 12,565 shares issued directly to the former
      Antin stockholders was treated as share-based compensation expense in the six
      months ended December 30, 2005. During the three months ended March 31, 2006,
      the Company determined that it was probable that the future performance will
      be
      met. Accordingly, the Company recorded share-based compensation expense of
      $39,000 representing the cumulative pro-rata value of the 12,565 shares to
      be
      issued.


12


**4.
      Accounts receivable:**




Accounts
      receivables consist of the following:


March
                31,
            
            June
                30,2006
            
            2005Amounts
                billed
            
            $
            5,429,000
            
            $
            6,356,000Amounts
                unbilled:Costs
                and profits in excess of billings
            
            
            4,540,000
            
            
            4,321,000Retentions,
                due upon completion of contracts
            
            
            204,000
            
            
            154,000Recoverable
                costs subject to closure of contracts
            
            
            301,000
            
            
            209,000Allowance
                for doubtful accounts
            
            
            (118,000
            )
            
            (48,000
            )Totals
            
            $
            10,356,000
            
            $
            10,992,000





At
      March
      31, 2006, costs and profits in excess of billings consisted of amounts billable
      subsequent to period-end.





The
      balances comprising receivables pursuant to retainage provisions will be due
      upon completion of the contracts and audits of overhead rates by the Defense
      Contract Audit Agency (DCAA). Recoverable costs subject to closure of contracts
      consisted primarily of revenues recognized on specific delivery orders as a
      result of actual indirect expense rates exceeding the provisionally approved
      indirect rates. These receivables will be billable upon closure of DCAA audits
      of overhead rates of the specific delivery orders or the contracts. Based on
      the
      Company’s experience with similar contracts in recent years, the balances at
      March 31, 2006 are expected to be collected in fiscal 2007, 2008 and 2009.
      In
      accordance with industry practice, the amounts in unbilled that may be collected
      beyond the next twelve months are included in current assets.





**5.
      Inventory**





Inventory
      consisted of the following:




March
                31,
            
            June
                30,2006
            
            2005Raw
                materials
            
            $
            541,000
            
            $
            54,000Work
                in process
            
            
            62,000
            
            
            7,000Finished
                goods
            
            
            256,000
            
            
            36,000$
            859,000
            
            $
            97,000


**6.
      Intangible Assets and Goodwill:**





Intangible
      assets consist of the following:





WeightedAverage
            
            GrossAmortization
            
            Carrying
            
            AccumulatedPeriod
                (Yrs)
            
            Value
            
            Amortization
            
            NetMarch
                31, 2006Technology
            
            
            5
            
            $
            890,000
            
            $
            170,000
            
            $
            720,000Customer
                contracts
            
            
            9
            
            
            662,000
            
            
            114,000
            
            
            548,000Patents
            
            
            15
            
            
            280,000
            
            
            24,000
            
            
            256,000All
                other identifiable intangibles
            
            
            2
            
            
            727,000
            
            
            450,000
            
            
            277,000$
            2,559,000
            
            $
            758,000
            
            $
            1,801,000June
                30, 2005Technology
            
            
            5
            
            $
            390,000
            
            $
            71,000
            
            $
            319,000Customer
                contracts
            
            
            10
            
            
            520,000
            
            
            50,000
            
            
            470,000Patents
            
            
            15
            
            
            280,000
            
            
            10,000
            
            
            270,000All
                other identifiable intangibles
            
            
            2
            
            
            313,000
            
            
            184,000
            
            
            129,000$
            1,503,000
            
            $
            315,000
            
            $
            1,188,000





13




The
      following is a summary of the changes to goodwill as allocated to each of the
      Company’s reporting segments, Defense
      Solutions Group (DSG) and Public Safety, Security and Industrial Systems Group
      (PSSIG) .





DSG
            
            PSSIG
            
            TotalPolexis
                acquisition March 2004
            
            $
            2,727,000
            
            $
            2,726,000
            
            $
            5,453,000Antin
                acquisition January 2005
            
            
            1,856,000
            
            
            --
            
            
            1,856,000Balance
                June 30, 2005
            
            
            4,583,000
            
            
            2,726,000
            
            
            7,309,000Miscellaneous
                adjustments to purchase price allocations
            
            
            (5,000
            )
            
            --
            
            
            (5,000
            )Xsilogy
                acquisition December 2004
            
            
            --
            
            
            608,000
            
            
            608,000Webtech
                acquisition August 2005
            
            
            61,000
            
            
            --
            
            
            61,000Logic
                acquisition November 2005
            
            
            --
            
            
            3,267,000
            
            
            3,267,000cVideo
                acquisition December 2005
            
            
            --
            
            
            1,868,000
            
            
            1,868,000Balance
                March 31, 2006
            
            $
            4,639,000
            
            
            8,469,000
            
            $
            13,108,000





The
      purchase agreement for Xsilogy, Inc., acquired in December 2004, provides for
      additional consideration to be earned upon achieving certain milestones. As
      a
      result of a determination during the quarter ended September 30, 2005 that
      certain milestones had been met as of June 30, 2005, Xsilogy was paid cash
      of
      $315,000 and issued 80,000 shares of SYS stock at a value of $376,000. The
      total
      of this consideration was first used to eliminate the contingent consideration
      liability of $97,000 and the balance of $594,000 was added to goodwill.


**7.
      Notes payable and other debt**




Notes
      payable at March 31, 2006 and June 30, 2005 are as follows:


Related
                  PartyMarch
                  31,
              
              June
                  30,
              
              March
                  31,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Convertible
                  notes payable, unsecured, bear interest at 10% payable quarterly,
                  originally due at various dates starting in November 2004 but extended
                  at
                  option of note holders to various dates starting in November 2005,
                  convertible at any time into common stock at the rate of $1.00
                  per
                  share.
              
              $
              --
              
              $
              319,000
              
              $
              --
              
              $
              388,000Convertible
                  notes payable, unsecured, bear interest at 10% per annum payable
                  quarterly, due December 31, 2006, convertible at any time into
                  common
                  stock at a rate of $2.20 per share.
              
              
              800,000
              
              
              887,000
              
              
              713,000
              
              
              713,000Unamortized
                  discount related to convertible notes payable due December 31,
                  2006
              
              
              (20,000
              )
              
              (40,000
              )
              
              (18,000
              )
              
              (32,000
              )Convertible
                  notes payable, issued in conjunction with Polexis acquisition,
                  unsecured
                  and subordinate to the Company's bank debt, bear interest at 10%
                  per annum
                  payable quarterly, due March 31, 2007, convertible at any time
                  into common
                  stock at the rate of $2.32 per share.
              
              
              295,000
              
              
              589,000
              
              
              96,000
              
              
              96,000Convertible
                  note payable, issued in conjunction with Antin acquisition, unsecured
                  and
                  subordinate to the Company’s bank debt, bears interest at 6% per annum
                  payable quarterly, due May 11, 2007, convertible at any time into
                  common
                  stock at the rate of $2.50 per share.
              
              
              --
              
              
              --
              
              
              196,000
              
              
              196,000Convertible
                  notes payable, unsecured and subordinate to the Company’s bank debt, bear
                  interest at 10% per annum payable quarterly, due February 14, 2009,
                  convertible at any time into common stock at a rate of $3.60 per
                  share.
              
              
              2,150,000
              
              
              --
              
              
              975,000
              
              
              --3,225,000
              
              
              1,755,000
              
              
              1,962,000
              
              
              1,361,000Less
                  current portion
              
              
              (1,075,000
              )
              
              (319,000
              )
              
              (791,000
              )
              
              (388,000
              )$
              2,150,000
              
              $
              1,436,000
              
              $
              1,171,000
              
              $
              973,000





14


During
      the nine months ended March 31, 2006, holders of $1,084,000 of convertible
      notes
      payable elected to convert the notes payable into 872,621 shares of common
      stock.




The
      Company has a bank line of credit facility which provides for borrowings of
      up
      to $4,000,000. This facility expires in December 2006, contains financial and
      other covenants, and is collateralized by substantially all of the assets of
      the
      Company. Borrowings pursuant to the line of credit bear interest (8.0% as of
      March 31, 2006) at the bank’s prime rate plus 0.25%. As of March 31, 2006, the
      Company had $1,029,000 of borrowings outstanding under this line of credit.
      As
      discussed in Note 2, as a result of losses recognized for the current period
      ended March 31, 2006, the Company was in default of the financial covenants
      under its bank line of credit related to minimum quarterly net income and the
      ratio of cash flow to the current portion of long term debt. The lender has
      granted a waiver of these covenants for the measurement period ended March
      31,
      2006. The Company is currently in negotiations with the lender to modify the
      covenants. However, if the covenants are not modified the Company believes
      that
      it will be in default of the loan covenants at June 30, 2006. In this event,
      the
      Company will seek an additional waiver. However there can be no assurances
      that
      a waiver will be obtained and, pursuant to the terms of the loan agreement,
      the
      lender could require the Company to repay the outstanding balance and cancel
      the
      credit facility.




**8.
      Earnings Per Share**




Basic
      net
      income per common share is calculated by dividing net income applicable to
      common stock by the weighted average number of common shares outstanding during
      the period. The calculation of diluted net income per common share is similar
      to
      that of basic net income per common share, except that the denominator is
      increased to include the number of additional common shares that would have
      been
      outstanding if all potentially dilutive common shares, principally those
      issuable upon the conversion of notes payable and the exercise of stock options
      and warrants, were issued during the period.





The
      following table summarizes the calculation of basic and diluted net income
      per
      common share for each period:





Three
                Months Ended
            
            Nine
                Months EndedMarch
                31,
            
            March
                25,
            
            March
                31,
            
            March
                25,2006
            
            2005
            
            2006
            
            2005Numerators:Net
                income (loss)
            
            $
            (1,333,000
            )
            $
            321,000
            
            $
            (664,000
            )
            $
            881,000Add
                back - interest expense on convertible notes, net of tax
                effects
            
            
            --
            
            
            57,000
            
            
            --
            
            
            165,000Net
                income (loss) applicable to common stockholders- diluted
            
            $
            (1,333,000
            )
            $
            378,000
            
            $
            (664,000
            )
            $
            1,046,000Denominators:Weighted
                average shares for basic net income per common share
            
            
            13,132,772
            
            
            8,825,460
            
            
            11,958,144
            
            
            8,383,598Add
                dilutive effect of assumed exercise of stock options and warrants
                using
                the treasury stock method
            
            
            --
            
            
            749,074
            
            
            --
            
            
            712,261Add
                dilutive effect of assumed conversion of convertible promissory
                notes
            
            
            --
            
            
            1,701,700
            
            
            --
            
            
            1,948,204Weighted
                average shares for diluted net income per common share
            
            
            13,132,772
            
            
            11,276,234
            
            
            11,958,144
            
            
            11,044,063Basic
                net income (loss) per common share
            
            $
            (0.10)
            
            $
            0.04
            
            $
            (0.06)
            
            $
            0.11Diluted
                net income (loss) per common share
            
            $
            (0.10)
            
            $
            0.03
            
            $
            (0.06)
            
            $
            0.09





15





The
      following is a table of the weighted average shares excluded from the
      calculation of diluted net income per common share because their effect would
      be
      anti-dilutive:




Three
                Months Ended
            
            Nine
                Months EndedMarch
                31,
            
            March
                25,
            
            March
                31,
            
            March
                25,2006
            
            2005
            
            2006
            
            2005Options
                with exercise price in excess of average market price
            
            
            293,000
            
            
            --
            
            
            218,000
            
            
            218,000All
                other options and warrants
            
            
            935,000
            
            
            --
            
            
            1,000,000
            
            
            --Other
            
            
            21,000
            
            
            --
            
            
            58,000
            
            
            --Shares
                issuable upon conversion of notes payable
            
            
            1,399,000
            
            
            --
            
            
            1,518,000
            
            
            --Total
                shares excluded
            
            
            2,648,000
            
            
            --
            
            
            2,794,000
            
            
            218,000





**9.
      Legal Matters:**





Periodically,
      we are involved in legal actions in the normal course of business, including
      audits and investigations by various governmental agencies that result from
      our
      work as a governmental contractor. There are currently no such legal matters
      outstanding.




**10.
      Stockholders’ Equity:**





In
      addition to the share-based compensation transactions and other equity
      transactions described elsewhere, the following is a summary of other changes
      to
      stockholder’s equity during the nine month period ended
      March 31, 2006:





Issuance
      of shares to participants of the ESPP of 88,719 shares valued at $196,000 in
      satisfaction of the liability at June 30, 2005 and 99,985 shares valued at
      $223,000 related to employee purchases based on employee withholding during
      the
      six month period ended December 30, 2005.





Contribution
      to the Company’s ESOP/401(k) plan of 143,672 shares valued at
      $542,000.





Holders
      of warrants issued in connection with the Company’s sale of common stock in June
      2005 exercised warrants to purchase 114,888 shares at an exercise price of
      $2.50
      per share or $287,000. As of March 31, 2006, the remaining outstanding
      warrants related to this sale of common stock are exercisable into 313,401
      shares of common stock at $2.50 per share. As of March 31, 2006 there were
      also
      outstanding warrants that are exercisable into 110,000 shares of common stock
      at
      $4.00 per share that were issued in October 2005 to the investment bankers
      that
      assisted with a private offering of the Company’s common stock.





On
      February 14, 2006, SYS completed a private placement of $6,250,000 in a
      subscription offering of 125 units consisting of common stock and unsecured
      subordinated convertible notes. Each unit consisted of 6,944 restricted shares
      of SYS Common Stock at $3.60 per share and a three-year $25,000 unsecured
      subordinated convertible note payable bearing interest at 10% per annum, payable
      quarterly. The note holder has the option to convert all but not part of the
      note at any time prior to maturity into shares of SYS common stock at $3.60
      per
      share, or keep the note until maturity. SYS has a conversion option commencing
      one year from the date of issuance whereby if the Company’s stock trades at
      $5.40 per share for at least five consecutive trading days, SYS can force the
      conversion of the notes then outstanding.  SYS
      issued 868,000 shares of common stock pursuant to this offering. An additional
      868,000 shares could be issued if all of the notes are converted into common
      stock.


16


**11.
      Acquisitions and Technology Purchases:**





**Acquisition
      of Web Tech:**





Effective
      on August 22, 2005, the Company acquired the assets of Web Technologies, LLC
      (Web Tech). The acquisition was to further the Company’s goal of acquiring
      technology companies which expand our products and customer base. The
      transaction was accounted for using the purchase method in accordance with
      SFAS
      No. 141, Business Combinations, whereby the net tangible and intangible assets
      acquired and liabilities assumed were recognized at their estimated fair market
      values at the date of acquisition. The
      consideration consisted of $140,000 cash and an additional $100,000 due and
      paid
      on January 31, 2006. The fair value of the assets acquired were as follows:
      Equipment- $100,000, Intangible assets- $154,000, and Goodwill- $61,000. The
      intangible assets are being amortized over an average of three years. The excess
      of the Company’s total acquisition costs of $315,000, including transaction
      costs of $75,000, over the estimated fair value of the net assets acquired
      was
      allocated to goodwill.  The goodwill is not subject to amortization but the
      amount assigned to goodwill is deductible for tax purposes.





**Technology
      Purchase:**





On
      September 27, 2005, the Company entered into an agreement to purchase certain
      technology and intellectual property rights related to the ForceViz technology
      of Lomasoft Corporation. The purchase price consisted of $50,000 cash and
      warrants to purchase 50,000 shares of the Company’s stock at a price of $3.87
      per share. Transaction costs totaled $12,000. The $65,000 fair value of the
      warrants was based on the Black Scholes model using a 34% expected volatility
      rate, 4% risk-free interest rate, an estimated life of five years and assumed
      no
      dividends. The agreement provides for additional contingent consideration of
      warrants to purchase 50,000 shares of SYS common stock at a price equal to
      $3.87
      per share for each of the two revenue-based milestones for the years ending
      June
      30, 2006 and 2007. All of the warrants will have a five year exercise period
      and
      piggy-back registration rights. The total acquisition costs of $127,000,
      including $12,000 of transaction costs, has been allocated to intangible assets
      and is being amortized over 7 years. This transaction was accounted for as
      an
      asset purchase and not a business combination.





**Acquisition
      of Logic Innovations:**





On
      November 7, 2005, SYS acquired all of the outstanding stock of Logic
      Innovations, Inc. (“Logic”), a privately held, San Diego-based provider of
      solutions that help to ensure the fast and efficient delivery of digital audio,
      video and data to the broadcasting, communications and consumer electronics
      industries for approximately $4,031,000 in cash and stock. The acquisition
      enables the Company to provide enhanced capabilities to pursue a broader cross
      section of SYS’s customer base.





The
      transaction was completed pursuant to an Agreement and Plan of Merger
      (Agreement) by and among the Company, Shadow II, Inc. (a wholly-owned subsidiary
      of the Company), Logic and all of the stockholders of Logic. As a result of
      the
      acquisition, Shadow II became a wholly owned subsidiary of SYS and, therefore,
      is included in the consolidated financial results of SYS effective for periods
      subsequent to November 7, 2005.




The
      merger consideration consisted of $2,000,000 in cash and 445,768 shares of
      restricted SYS common stock with a value of $2,031,000 based on an average
      closing price of $4.56. Additional consideration may be earned subject to
      achieving future revenue and operating income targets.





17


The
      transaction was accounted for using the purchase method in accordance with
      SFAS
      No. 141, Business Combinations, whereby the net tangible and intangible assets
      acquired and liabilities assumed were recognized at their estimated fair market
      values at the date of acquisition.  The
      following table summarizes the fair values of the assets and liabilities of
      Logic at the date of acquisition:




EstimatedLife
                inValue
            
            YearsCash
            
            $
            157,000Accounts
                receivable
            
            
            100,000Prepaid
                expenses
            
            
            38,000Inventory
            
            
            519,000Property,
                furniture and equipment, net
            
            
            40,000
            
            
            2-5Other
                assets
            
            
            17,000Customer
                relationships
            
            
            57,000
            
            
            5In
                process research and development
            
            
            68,000
            
            
            ExpensedBacklog
            
            
            94,000
            
            
            1Technology
            
            
            302,000
            
            
            5Trade
                name
            
            
            144,000
            
            
            3Goodwill
            
            
            3,267,000Total
                assets acquired
            
            
            4,803,000Accounts
                payable
            
            
            (122,000
            )Accrued
                payroll and related expenses
            
            
            (83,000
            )Other
                accrued liabilities
            
            
            (363,000
            )Assets
                acquired less liabilities assumed
            
            
            4,235,000Less
                cash acquired
            
            
            (157,000
            )Net
                assets acquired
            
            $
            4,078,000





The
      excess of the Company’s total acquisition costs of $4,235,000, including
      transaction costs of $203,000, over the estimated fair value of the net assets
      acquired was allocated to goodwill as part of the Public Safety, Security and
      Industrial Systems Group segment. The goodwill is not subject to amortization
      and none of the amount assigned to goodwill is deductible for tax
      purposes.





**Acquisition
      of cVideo:**


On
      December 2, 2005, SYS acquired all of the assets and assumed certain specified
      liabilities of cVideo, Inc., a San Diego based provider of interactive video
      and
      information analysis products for business surveillance and security
      applications. The acquisition enables the Company to provide enhanced
      capabilities to pursue a broader cross section of SYS’s customer base. The
      purchase price consisted of approximately $1,868,000 of cash to the seller
      and
      various creditors as initial consideration and additional contingent
      consideration based on future revenue milestones.





18


The
      transaction was accounted for using the purchase method in accordance with
      SFAS
      No. 141, Business Combinations, whereby the net tangible and intangible assets
      acquired and liabilities assumed were recognized at their estimated fair market
      values at the date of acquisition.  The
      following table summarizes the fair values of the assets and liabilities of
      cVideo at the date of acquisition:





EstimatedLife
                inValue
            
            YearsAccounts
                receivable
            
            $
            117,000Prepaid
                expenses
            
            
            30,000Inventory
            
            
            261,000Property,
                furniture and equipment, net
            
            
            37,000
            
            
            2-5Other
                assets
            
            
            22,000Customer
                relationships
            
            
            9,000
            
            
            5Technology
            
            
            71,000
            
            
            5Goodwill
            
            
            1,868,000Total
                assets acquired
            
            
            2,415,000Accounts
                payable
            
            
            (17,000
            )Accrued
                payroll and related expenses
            
            
            (186,000
            )Other
                accrued liabilities
            
            
            (214,000
            )Net
                assets acquired
            
            $
            1,998,000





The
      excess of the Company’s total acquisition costs of $1,998,000, including
      transaction costs of $130,000, over the estimated fair value of the net assets
      acquired was allocated to goodwill.  The goodwill is not subject to
      amortization but the amount assigned to goodwill is deductible for tax
      purposes.





**Pro
      Forma Results of Operations:**





On
      December 14, 2004, the Company acquired the assets and assumed certain
      liabilities of Xsilogy, Inc. (Xsilogy). On January 3, 2005, the Company acquired
      all of the outstanding securities of Antin Engineering, Inc. (Antin). As
      discussed above, on August 22, 2005 the Company acquired a business from Web
      Tech, on November 7, 2005 the Company acquired the outstanding stock of Logic,
      and on December 2, 2005 the Company acquired the assets of cVideo. The following
      summary presents pro forma consolidated results of operations for the three
      and
      nine month periods ended March 31, 2006 and March 25, 2005 as if all of these
      acquisitions had occurred as of the beginning of the periods presented and
      includes adjustments that were directly attributable to the transaction or
      were
      expected to have a continuing impact on the Company. No pro forma information
      is
      presented for the three months ended March 31, 2006 because all of the
      acquisitions had taken place by the beginning of the period.




19


The
      pro
      forma results are unaudited and for illustrative purposes only for the
      applicable period, and do not purport to be indicative of the actual results
      which would have occurred had the acquisitions (excluding technology purchases)
      been completed as of the beginning of the period, nor are they indicative of
      results of operations which may occur in the future.





March
                25, 2005As
                Reported
            
            Pro
                Forma**Three
                Month periods:**Revenues
            
            $
            10,944,000
            
            $
            14,193,000Operating
                income
            
            
            651,000
            
            
            1,171,000Net
                income
            
            
            321,000
            
            
            203,000Net
                income per common share:Basic
            
            $
            0.04
            
            $
            0.02Diluted
            
            $
            0.03
            
            $
            0.02Weighted
                average shares outstanding:Basic
            
            
            8,825,460
            
            
            9,595,199Diluted
            
            
            11,276,234
            
            
            12,373,953





March
                31, 2006
            
            March
                25, 2005As
                Reported
            
            Pro
                Forma
            
            As
                Reported
            
            Pro
                Forma**Nine
                Month periods:**Revenues
            
            $
            38,930,000
            
            $
            40,498,000
            
            $
            32,513,000
            
            $
            44,767,000Operating
                income (loss)
            
            
            (525,000
            )
            
            (1,504,000
            )
            
            1,831,000
            
            
            1,957,000Net
                income (loss)
            
            
            (664,000
            )
            
            (1,538,000
            )
            
            881,000
            
            
            446,000Net
                income (loss) per common share:Basic
            
            $
            (0.06)
            
            $
            (
                0.13)
            
            $
            0.11
            
            $
            0.05Diluted
            
            $
            (0.06)
            
            $
            (
                0.13)
            
            $
            0.09
            
            $
            0.05Weighted
                average shares outstanding:Basic
            
            
            11,958,144
            
            
            12,274,810
            
            
            8,383,598
            
            
            9,153,337Diluted
            
            
            11,958,144
            
            
            12,274,810
            
            
            11,044,063
            
            
            12,141,782





The
      basic
      and fully diluted shares outstanding have been adjusted to give effect to the
      issuance of 323,971 shares at the time of the Antin acquisition, 327,980 shares
      that were subsequently issued related to contingent consideration for Antin
      and
      Xsilogy, and the issuance of 445,768 shares related to the acquisition of Logic.





**12.
      Segment Information:**




During
      the year ended June 30, 2005, the Company reported operating results and
      financial data for two reporting segments: Defense Solutions Group (DSG) and
      the
      Sensor Networking Systems and Products Group (SNG). DSG provided engineering,
      technical, and financial and management services primarily to U.S. Government
      customers. SNG was formed subsequent to the acquisition of the assets of Xsilogy
      to provide wireless sensor network technologies and applications to a broad
      base
      of customers including commercial and industrial customers as well as the U.S.
      Government. In March 2005, the Company formed a Public Safety and Security
      Division (PSS) as a component for DSG. Antin and Webtech have been included
      in
      the DSG segment.


20


Effective
      July 1, 2005 the activities of the SNG and PSS were reorganized into a new
      business group named the Public Safety, Security and Industrial Systems Group
      (PSSIG). This group became a reportable business segment in place of the SNG
      for
      reporting in fiscal year 2006. Revenues in this group include products and
      equipment sales, software, engineering and installation services for industrial
      and commercial customers as well as government customers. Prior year amounts
      have been reclassified to reflect the inclusion of SNG and PSS into the new
      PSSIG segment. Logic and cVideo have been included in the PSSIG segment. The
      following information is for the three and nine month periods ended March 31,
      2006 and March 25, 2005:





Three
                Months Ended
            
            Nine
                Months Ended2006
            
            2005
            
            2006
            
            2005Revenue:DSG
            
            $
            10,491,000
            
            $
            10,262,000
            
            $
            33,564,000
            
            $
            31,084,000PSSIG
            
            
            2,897,000
            
            
            682,000
            
            
            5,366,000
            
            
            1,429,000Totals
            
            $
            13,388,000
            
            $
            10,944,000
            
            $
            38,930,000
            
            $
            32,513,000Income
                (loss) from operations:DSG
            
            $
            (1,448,000
            )
            $
            839,000
            
            $
            (281,000
            )
            $
            1,991,000PSSIG
            
            
            (383,000
            )
            
            (188,000
            )
            
            (244,000
            )
            
            (160,000
            )Totals
            
            $
            (1,831,000
            )
            $
            651,000
            
            $
            (525,000
            )
            $
            1,831,000Capital
                expenditures:DSG
            
            $
            174,000
            
            $
            89,000
            
            $
            380,000
            
            $
            408,000PSSIG
            
            
            15,000
            
            
            --
            
            
            201,000
            
            
            --Totals
            
            $
            189,000
            
            $
            89,000
            
            $
            581,000
            
            $
            408,000Depreciation
                and amortization:DSG
            
            $
            324,000
            
            $
            170,000
            
            $
            657,000
            
            $
            396,000PSSIG
            
            
            83,000
            
            
            --
            
            
            209,000
            
            
            --Totals
            
            $
            407,000
            
            $
            170,000
            
            $
            866,000
            
            $
            396,000March
                31, 2006
            
            
            June
                30,
              2005Identifiable
                assets:DSG
            
            $
            22,205,000
            
            $
            22,029,000PSSIG
            
            
            13,108,000
            
            
            2,726,000Totals
            
            $
            35,313,000
            
            $
            24,755,000Goodwill:DSG
            
            $
            4,639,000
            
            $
            4,583,000PSSIG
            
            
            8,469,000
            
            
            2,726,000Totals
            
            $
            13,108,000
            
            $
            7,309,000





21





**13.
      Subsequent Event:**





**Acquisition
      of Reality Based IT Services, Ltd. (RBIS):**





Effective
      April 2, 2006, SYS acquired all of the outstanding stock of Reality Based IT
      Services, Ltd. (“RBIS”), a privately held, Laurel, Maryland-based provider of
      information systems consulting addressing information security issues for the
      U.S. Department of Defense for approximately $9,364,000 in cash and shares
      of
      SYS common stock. RBIS engineers develop, implement, and maintain convergent
      security services that are delivered by personnel with U.S. Top Secret
      government clearances. The acquisition enables the Company to provide enhanced
      capabilities to pursue a broader cross section of SYS’s customer
      base.





The
      transaction was completed pursuant to a Stock Purchase Agreement (SPA) by and
      between SYS, and the sole stockholder of RBIS. As a result of the acquisition,
      RBIS has become a wholly owned subsidiary of SYS. Therefore the results of
      the
      combined entities will be included in the consolidated financial statements
      of
      SYS effective for periods subsequent to March 31, 2006.





The
      consideration to the seller was funded with $5,636,000 of cash and 963,277
      shares of SYS common stock with a value of $3,728,000, or $3.87 per share,
      based
      on an average of the closing price of SYS’s common stock for the period two days
      before and two days after the measurement date. Additional consideration may
      be
      earned subject to achieving future revenue and profitability milestones. In
      addition, the seller will be due up to $375,000 should SYS make an election
      under the Internal Revenue Code that results in the seller incurring additional
      income taxes as a result of the election. The acquisition is being accounted
      for
      using the purchase method of accounting in accordance with Statement of
      Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
      whereby the total cost of the acquisition has been allocated to tangible and
      intangible assets acquired based upon a preliminary determination of fair values
      at the effective date of the acquisition. An independent valuation will be
      performed to finalize the purchase price allocation of the assets and
      liabilities acquired, at which time the preliminary allocation of the purchase
      price may be revised. Management expects to complete the valuation during the
      fourth quarter of the current fiscal year.




The
      allocation of the purchase price is subject to refinement. The following table
      summarizes the preliminary allocation of the purchase price including an
      estimate of transaction costs of $274,000.




EstimatedValue
            
            Life
                in YearsCash
            
            $
            38,000Accounts
                receivable
            
            
            1,936,000Prepaid
                expenses
            
            
            82,000Property,
                furniture and equipment, net
            
            
            180,000
            
            
            2-5Customer
                relationships
            
            
            626,000
            
            
            8Backlog
            
            
            171,000
            
            
            1⁄2Trade
                name
            
            
            100,000
            
            
            3Non
                compete agreement
            
            
            50,000
            
            
            2Goodwill
            
            
            6,822,000Total
                assets acquired
            
            
            10,005,000Accounts
                payable
            
            
            (46,000
            )Accrued
                payroll and related expenses
            
            
            (310,000
            )Notes
                payable
            
            
            (11,000
            )Net
                assets acquired
            
            $
            9,638,000





22


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





*To
      the extent that the information presented in this quarterly report discusses
      financial projections, information or expectations about our business plans,
      results of operations, products or markets, or otherwise makes statements about
      future events, such statements are forward-looking. Such forward-looking
      statements can be identified by the use of words such as “intends”,
“anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”,
“plans” and “proposes”.*





*Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements. Moreover, neither we, nor any other person, assume
      responsibility for the accuracy and completeness of the forward-looking
      statements. We are under no obligation to update any of the forward-looking
      statements after the filing of this Quarterly Report on Form 10-Q to conform
      such statements to actual results or to changes in our
      expectations.*





*The
      following discussion should be read in conjunction with our unaudited
      consolidated financial statements and the related notes and other financial
      information appearing elsewhere in this Form 10-Q. Readers are also urged to
      review and consider the various disclosures made by us which advise interested
      parties of the factors which affect our business, including without limitation
      the disclosures made under the caption “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” under the caption “Risks Related
      to Our Business,” and in the audited consolidated financial statements and
      related notes included in our Annual Report filed on Form 10-KSB for the year
      ended June 30, 2005 and other reports and filings made with the Securities
      and
      Exchange Commission.*





**Overview**





SYS
      and
      its subsidiaries provide information connectivity solutions that capture,
      analyze and present real-time information to decision makers. The Company’s
      tailored solutions deliver enhanced decision-making, asset management and
      reduction of response times to its customers, which include the Department
      of
      Defense, Department of Homeland Security and large industrial, energy, and
      transportation companies. Built upon standards-based interoperable platforms,
      SYS Technologies’ solutions utilize software, sensors, digital video broadcast
      and surveillance technologies, wireless communications networks,
      decision-support tools and Net-centric technologies. Founded in 1966, SYS is
      headquartered in San Diego and has principal offices in California, Maryland,
      Virginia and Washington, DC. For additional information, visit www.systechnologies.com .





We
      enhance situational awareness in battlefield, environmental disaster and crisis
      environments for our national security customers. We optimize utilization of
      remote assets for our industrial, energy and transportation customers. We also
      provide solution lifecycle support with program, financial, test and logistical
      services, including classroom and online training.





Historically,
      our revenues have been generated by providing services to the Department of
      Defense (DoD). While we are continuing to grow our DoD business, we also have
      a
      growing revenue base with other U.S. Government agencies, including the
      Department of Homeland Security (DHS), Defense Advanced Research Program
      Administration (DARPA), Defense Systems Information Agency (DISA), municipal
      and
      state governments, and Fortune 1000 companies in the industrial marketplace.





The
      Company has two reportable business segments. The Defense Solutions Group (DSG)
      and the Public Safety, Security and Industrial Systems Group (PSSIG).





The
      DSG
      provides engineering, technical, information systems, and financial management
      services primarily to U.S. Government customers, including the DoD and other
      agencies. The business of the DSG can be further categorized into two broad
      categories, namely (i) Command, Control, Computers, Communications,
      Intelligence, Surveillance and Reconnaissance (C4ISR) and (ii) legacy
      businesses. The C4ISR business supports agencies and organizations of the DoD
      and the DHS by providing systems engineering and systems integration, software
      development, geospatial information systems and situational awareness tools.
      The
      legacy business supports a broad spectrum of program management, infrastructure
      management and business operations functions principally for U.S. Government
      or
      DoD customers.





The
      PSSIG
      was formed on July 1, 2005 to consolidate the activities previously performed
      in
      the (i) Sensor Networking Systems and Products Group (ii) the Public Safety
      and
      Security Division and (iii) programs previously captured in the DSG where the
      activities were focused on public safety and security. This group leverages
      the
      capabilities acquired through prior acquisitions together with our other core
      capabilities including software integration and geospatial information
      processing. The PSSIG offers a comprehensive solution to our customer base,
      addressing homeland security and business security issues at the federal, state,
      and local levels.





The
      PSSIG
      draws on technical resources throughout SYS to effect timely and reliable
      solutions to meet the command and response needs of fire and law enforcement
      as
      well as other agencies in crisis environments. The scope of this effort involves
      the application of existing SYS sensor technology, wireless sensor networking,
      the application of service oriented internet architectures, information
      visualization, and decision support technologies. The formation of this group
      at
      the beginning of the current fiscal year reflects our commitment to applying
      our
      technology base to solving homeland security and homeland defense issues.





During
      the second quarter we completed two additional acquisitions the results of
      which
      are included in the PSSIG operating segment from their date of
      acquisition:





·
            The
                first, Logic Innovations, Inc. (Logic) is a leading provider of innovative
                broadcast solutions that ensure the fast and efficient delivery of
                digital
                audio, video and data to the broadcasting, satellite, communications
                and
                consumer electronics industries. Applications for Logic’s products include
                the television broadcast industry for the delivery of broadcast content;
                satellite service providers for the delivery of advanced video and
                data
                services over its video networks; corporations for internal distributed
                learning and/or financial information distribution; and government
                for use
                in monitoring and surveillance
                applications;





·
            The
                second, cVideo Inc. (cVideo)is
                a developer of software-based integrated digital video applications
                used
                in video surveillance, integrated security, and loss prevention solutions
                for industrial and governmental applications. Specific market segments
                include point-of-sale, central alarm monitoring, and other video
                surveillance applications. cVideo’s products utilize patented
                software-based video compression source code. cVideo’s software
                applications are designed to make the use of video more practical
                by
                improving the usability of video and data to impact the customer’s bottom
                line. It is the goal of SYS Technologies to make the cVideo product
                line
                interoperable with our Vigilys command response system for first
                responders. SYS will provide the video surveillance package as a
                value
                added component to our baseline
                system.






On
      April
      2, 2006, SYS acquired Realty Based IT Services, Ltd. (RBIS), a provider of
      Information Technology (IT) security engineering which develops, implements
      and
      maintains convergent security services that are delivered by personnel with
      high
      level U.S. government clearances.




23




These
      acquisitions primarily provide us with enhanced capabilities to pursue a broader
      cross section of the DoD, DHS and other government markets. As a result we
      have
      also expanded our customer base. In the cases of cVideo and Logic, which operate
      in industries where sales often occur through distributors, we may not be able
      to pursue their customers with our overall SYS solutions.




Our
      revenues have grown internally by establishing new business units with
      experienced senior executives who have the ability to grow these business units
      and expand our customer base and through acquisitions of other government and
      non-government technology companies. Our objective is to continue growing
      revenues organically and through acquisitions. In order to assist in
      accomplishing this objective, we have continued to increase our selling, general
      and administrative, and research and development expenditures related to new
      business development and the necessary infrastructure to support a larger
      organization. We plan to selectively acquire businesses and technologies that
      meet our primary objective of providing us with enhanced capabilities to pursue
      a broader cross section of the DoD, DHS and other government markets, which
      at
      the same time, may enable us to achieve our secondary objective of broadening
      our customer base.. Although there can be no assurances, we expect each of
      the
      acquisitions to be capable of being profitable on a stand-alone basis within
      2-3
      quarters after acquisition. We are currently reviewing additional potential
      targets. We anticipate that we will need to obtain additional financing through
      the sale of equity or debt securities to fund any such acquisitions. Our
      research and development activities are primarily oriented towards developing
      the products of our acquisitions with the intent of accelerating the development
      cycle and increasing sales.





We
      expect
      that this operating strategy will continue and we also expect that, with the
      expanded capabilities we’ve acquired, together with our existing capabilities,
      we will be able to bid on larger government contracts and programs. We also
      expect to continue to participate in recompetes on our existing engineering
      and
      management contracts. Our rate of revenue growth depends upon many factors,
      including, among others, our success in bidding on new contracts and re-competes
      of our existing contracts, the continuation of our existing programs, our
      ability to develop and launch products, as well as the demand for services
      or
      products under our contracts, the funding levels for our contracts, our ability
      to meet demand for our services or products, and our ability to grow the
      businesses of our acquired companies.





Our
      gross
      margins (revenues less contract costs) are affected by the mix of contract
      types
      (cost reimbursement, fixed-price or time and materials) as well as the mix
      of
      prime contracts versus subcontracts. Further, with the recent inclusion of
      products based companies such as Logic and cVideo, our gross margins will be
      affected by the cost and availability of materials and components, product
      mix
      and other fixed and variable costs. Significant portions of our contracts are
      time and materials and cost reimbursement contracts. Subject to contract limits,
      we are reimbursed for labor hours at negotiated hourly billing rates and other
      direct expenses under time and materials contracts and reimbursed for all actual
      costs, plus a fee, or profit, under reimbursement contracts. The financial
      risks
      under these contracts are generally lower than those associated with other
      types
      of contracts, and margins are also typically lower than those on fixed-price
      contracts. The U.S. Government also has awarded us fixed-price contracts. Such
      contracts carry higher financial risks because we must deliver the products,
      systems or contract services at a cost below the fixed contract value in order
      to earn a profit.





We
      have
      derived a majority of our revenues from U.S. Government contracts under which
      we
      act as a prime contractor. We also provide services indirectly as a
      subcontractor. We intend to focus on retaining and increasing the percentage
      of
      our business as prime contractor because it provides us with client
      relationships that generate higher levels of revenue.  Currently our mix of
      contracts consists of approximately 60% prime contracts and 40% subcontracts
      compared to a mix of 65% prime contracts and 35% subcontracts at March 25,
      2005.





As
      of
      March 31, 2006, the Company’s delivery order and contract tasking backlog for
      the DSG business totaled approximately $33.0 million, of which $17.0 million
      was
      funded and $16.0 million had been ordered, but not yet funded.  As of
      March 25, 2005 the delivery order and contract tasking backlog totaled
      approximately $ 30.0 million, of which $17.0 million was funded and $13.0
      million had been ordered, but not yet funded. Backlog yet to be funded is
      generally funded on an incremental basis. The PSSIG segment backlog as of March
      31, 2006 was $1.2 million of which $1.1 million was funded and $.1 million
      was
      ordered.





All
      of
      our U.S. government contracts are subject to audit and various cost controls
      and
      include standard provisions for termination for the convenience of the U.S.
      government. Multi-year U.S. government contracts and related orders are subject
      to cancellation if funds for contract performance for any subsequent year become
      unavailable.





**EVENTS,
      TRENDS AND UNCERTAINTIES:**





Management
      currently considers the following events, trends and uncertainties to be
      important to understanding the financial condition and operating performance
      of
      SYS. Almost all of the areas that generate opportunities for SYS also generate
      risks at the same time. The following demonstrates some of these opportunities
      and risks for several areas.





·
            **Contract
                Type**.
                Federal Government contracting practices tends to run in cycles.
                The
                preferred form of contracting varies and ranges from large contracts
                with
                multiple subcontractors and wide areas of work scope to small contracts
                with more specific areas of scope. Unless the Government has a very
                specific requirement, most of this work is done on an Indefinite-Delivery,
                Indefinite-Quantity type of contract. In general, the Government
                is now
                trending towards issuing large Multiple Award Contracts (“MAC”) where
                multiple winners continue to compete on a task by task basis. This
                trend
                was reinforced through the SeaPort-Enhanced MAC contract that is
                envisioned to become a key contracting component for Naval Sea Air
                Command
                (NAVSEA) in the future and be of great potential benefit to SYS.
                All tasks
                awarded under the SeaPort-Enhanced MAC type contracts will be
                competitively bid among all eligible MAC holders. In addition, the
                cost
                plus nature of these tasks reduces performance risks but lowers the
                opportunity to make larger fees.





The
                task awards are frequently awarded on a cost reimbursable basis,
                cover a
                broader spectrum of activity and in general favor large businesses.
                SYS
                has been awarded a SeaPort-Enhanced contract which offers opportunity
                for
                SYS to bid on areas that it might not otherwise have an opportunity
                to
                bid. On the other hand, if the scope of the task is too large it
                may
                exceed SYS’ ability to respond. Despite the desire of upper level
                Government management to convert these contracts to fixed price contracts
                this is not usually achieved due to a lack of well defined specifications
                of the work to be performed. Thus, increasingly SYS is competing
                with
                larger companies for cost reimbursable contract opportunities that
                do not
                effectively consider innovation in the pricing evaluation and favor
                larger
                businesses doing business as usual where they may have a competitive
                pricing advantage and the advantage of performing on a larger scope
                of
                work. Reduction of this risk will depend on SYS’ ability to convince the
                Government that they can get better product at a better value by
                issuing
                more focused tasks versus large generic
                tasks.





In
                addition, SYS will pursue time and materials or fixed price contracts
                where SYS can be more agile and creative with process, technology,
                expertise, and management functions to provide a solution and to
                reduce
                the price for the customer.




24


The
      following table shows our revenues from each of these types of contracts as
      a
      percentage of our total contracts based revenues for the three and nine month
      periods ended March 31, 2006 and March 25, 2005:





Three
                Months Ended
            
            Nine
                months Ended2006
            
            2005
            
            2006
            
            2005Cost
                reimbursable
            75%
            
            63%
            
            81%
            
            64%Time
                and materials
            16%
            
            26%
            
            13%
            
            27%Fixed
                price
            9%
            
            11%
            
            6%
            
            9%Total
            100%
            
            100%
            
            100%
            
            100%








·
            **Iraq
                and Other Crises.**The US Government is currently prosecuting a major war effort in
                Iraq, a
                major world wide global war on terrorism including troops in Afghanistan
                and other countries, as well as domestic crises caused by floods,
                hurricanes and other disasters. The products and services that SYS
                offers
                in information connectivity, sensor networking, and command and control
                provides solutions to the real-time information and communications
                challenges faced in the efforts to address these crises.





However,
      defense firms and industry experts are concerned that money spent on Iraq is
      taking away from funding for these transformational technology solutions. At
      the
      same time, defense firms face concerns that existing programs could be cut
      or
      significantly slowed down or that their funding could be reallocated to other
      programs or directly to funding Iraq.





Further,
      the funding for research and development or purchase of products to assist
      in
      dealing with future disasters often suffers while the rescue and rebuilding
      are
      in process. Our ability to generate decision support tools which will help
      in
      the response to future crises may be recognized but there may not be funding
      to
      purchase our products and services and to provide funds to rebuild in disaster
      areas. We believe that some of our efforts will be accelerated and some will
      slow down during the rebuilding process.





·
            **Revenue
                Mix.**Our
                business areas that encompass program management, financial management,
                base support, and logistics support (together “legacy” business or
                infrastructure support) have been in a continuous slow decline for
                the
                past five years while during this same period our C4ISR business
                has
                steadily grown. We anticipate that this trend will continue as the
                DoD
                continues to implement their Information Transformation focusing
                on
                enhanced information technology and communications systems, data
                acquisition and real time situational awareness on such programs
                as
                Composable FORCEnet and Battle Force Composite Network, and Integrated
                Autonomous Network Management.





We
      believe growth in the legacy area will come from the following areas: (i)
      increasing usage of technology to reduce ongoing support costs, (ii) adoption
      by
      the Government of the use of process improvement to achieve cost reduction,
      (iii) charging lower prices per hour, and (iv) capturing a greater market share.
      Some of these approaches may result in lower margins.





The
      area
      of infrastructure support is continuously reduced in order to fund other needs
      such as the war on terrorism, the Iraq War, as well as hurricane and other
      disaster relief. The specific risk to SYS is whether the growing information
      connectivity business can exceed the rate at which this infrastructure business
      is diminishing and whether SYS can capture a larger market share in this area.





·
            **Net
                Centric Warfare.**The concept of using Net Centric approaches (an information
                superiority-enabled concept of operations that generates increased
                combat
                power by networking sensors, decision makers, and shooters to achieve
                shared awareness, increased speed of command, higher tempo of operations,
                greater lethality, increased survivability, and a degree of
                self-synchronization) as a force multiplier is gaining momentum.
                SYS has a
                number of contracts in this arena which have applications in the
                DoD,
                local and state governments, and industrial firms. SYS’s core strengths in
                the C4ISR and knowledge management arenas coupled with the acquisitions
                of
                Polexis, Xsilogy, Antin Engineering and RBIS have provided SYS with
                key
                elements for these solutions, including systems and software engineering
                services, software products and tools, wireless sensor networking
                products
                and command response systems. While management believes that we have
                assembled key technologies and solutions to effectively compete in
                the Net
                Centric business as DoD funding continues to increase in this arena,
                increased attention will also be forthcoming from larger businesses
                such
                as Lockheed, General Dynamics, and Northrop Grumman. As discussed
                before
                SYS has a pricing advantage over these companies for many areas,
                but these
                larger businesses have the advantage of tackling larger programs
                with a
                broader scope of work.





·
            **SYS
                Strategy**.
                Our business growth strategy is focused on continuing to develop
                our core
                strengths in C4ISR, information technology, and systems integration
                while
                adding products and capabilities that will allow us to grow our markets
                in
                these areas as well as expand into other markets, including commercial
                and
                industrial markets. We intend to accomplish this growth strategy
                through
                acquisitions and through productizing capabilities and solutions
                developed
                through our engineering services. We believe that this strategy will
                enable us to diversify our revenue sources, compete for larger DoD
                programs and grow our operating margins, especially through the inclusion
                of products. Three key aspects of this strategy are as
                follows:





o
            **Timing**.
                The process of transforming a company from a legacy service provider
                to
                one providing a mix of high technology services and products has
                to be
                done in a staged fashion. As the revenues from the legacy revenues
                decrease, new revenues from new customers need to be generated in
                a
                coincident fashion.





o
            **Products.**Moving to greater product revenues has great potential for SYS. The
                primary issue is time. The products have to be effective and timely.
                It is
                challenging for a small company to put the effort required into a
                new
                product and to do so in a timely fashion while generating quarterly
                profits. We are also creating the infrastructure to effect product
                development, marketing, sales, manufacturing and distribution. We
                have
                some risk in coming to the market too late or with generating new
                sales to
                cover the new expenses. We intend to develop the products in a timely
                manner and maintain our profitability, but near term quarterly revenue
                and
                profit could be impacted if sales are
                delayed.





**Acquisitions** .
      One of
      the ways to deal with creating additional capabilities (e.g. products or niche
      service areas that broaden offerings) is to acquire smaller companies that
      have
      these capabilities. As we accelerate the process, we have to have the existing
      infrastructure in place to accommodate the new organizations and have them
      adapt
      to our systems and methodologies. We also need to have the resources and talent
      to recognize and evaluate these opportunities and to price them in a fashion
      that makes the process ultimately viable.





We
      are at
      risk that not all of the acquisitions will be viable and a write down of any
      of
      these will be detrimental to quarterly earnings. The
      recoverability of the carrying value of these assets is assessed on a regular
      basis. If there is not a significant improvement in the cash flow generated
      from
      these assets in a reasonable period of time or other evidence of recoverability,
      consideration of an impairment charge may be appropriate in a future period
      in
      accordance with generally accepted accounting principles.





25


The
      operating results for the three and nine month periods ended March 31, 2006
      were
      principally affected by the following additional factors;




**Continuing
      Resolution.** All
      agencies of the Federal government must have appropriated funds by the start
      of
      the government’s fiscal year (October 1) to operate. Since Congress seldom
      completes its appropriations work before October 1, the way to keep the
      government from shutting down without an appropriations act is by passing a
      "continuing resolution," (CR) or stop-gap appropriations measure.  If the
      House, the Senate, and the President are in agreement that a CR is in order,
      it
      can be quickly passed and the government continues to operate. Programs and
      activities may be funded up to the lower of the House-passed level, the
      Senate-passed level, or the previous year’s rate.





This
      year
      the CR was signed on September 28, 2005. The CR was initially intended to fund
      programs and activities through November 18 or until enactment of the applicable
      appropriations Act, whichever occurs first. The CR included standard language
      prohibiting agencies from initiating or resuming programs or procurements not
      funded in FY 05, and this particular CR was especially egregious because it
      drastically reduced funding for many federal programs. The Senate voted on
      November 18 to continue the CR through December 17, and the President finally
      signed the DoD Authorization Bill on December 30, 2005. Government agencies
      were
      notified in January 2006 that the Authorization Bill was in effect. SPAWAR,
      the
      agency through which a significant portion of our contract funding flows,
      notified SYS in early January 2006 that they could start the process of sending
      SYS the monies previously designated for our contracts.





This
      CR
      process took longer than usual and the consequences to us were severe in that
      our sponsors typically only fund on an incremental level. As a result, a
      significant amount of anticipated funding for the second and third quarters
      was
      delayed beyond our initial expectations. We estimate that for the nine months
      ended March 31, 2006, the revenues for contracts affected by the delays in
      the
      CR process were approximately $1,000,000 less than if the process had not been
      delayed. We anticipate that our revenues for the fourth quarter may be increased
      by up to $400,000 as a result of additional funding on contracts that had been
      affect the CR process delays in previous quarters.





**Navy
      Marine Corps Intranet Program (NMCI).** This is
      a program where we have been performing in two separate efforts for the Navy.
      The first effort, which is the one that has grown in the past and will continue
      to grow in the future, is based on work being performed to evaluate the
      effectiveness of the program for the Navy. The second effort is more traditional
      information technology support activities as a subcontractor to EDS for a number
      of bases in Southern California. This effort of the program has been declining
      for the past several quarters and all subcontractors have been continuously
      forced to lower billing rates during this time. As a result both, revenues
      and
      margins have deteriorated. During the second quarter of the current fiscal
      year
      we made the strategic decision to no longer pursue the tasking on this EDS
      subcontracting effort and entered into an agreement with a small defense
      services company for those tasks to be transferred to that company in exchange
      for royalty payments to SYS based on revenues for the next twelve months.
      Accordingly, our revenues from that program ceased commencing in the third
      quarter of this fiscal year. Revenues under this effort were approximately
      $69,000 and $645,000 for the three and nine month periods, respectively, in
      2006
      compared to $606,000 and $2,190,000 in the three and nine month periods,
      respectively, in 2005.





**Change
      in Contract Types** .
      Two
      contracts totaling approximately $6.0M in annual revenues that were previously
      structured as fixed price contracts providing a higher level of profitability
      were converted to cost reimbursable contracts by the customers in the current
      fiscal year. Some portion of those contracts carried forward into our first
      quarter so the full impact of the reduced margins didn’t affect our
      profitability until the second quarter.





**Product
      Development Expenses.** During
      the current fiscal year we have significantly increased our research and
      development and sales and marketing activities associated with our newly
      developing product lines. We are currently investing in the following new
      product activities:





·
            **BattGuard.**This
                is the SensorWorX based wireless sensor module for utilities to monitor
                the health of batteries for which we are presently under contract
                by a
                major NYSE public utility to deploy BattGuard. Although we had expected
                to
                deploy this product in the third or fourth quarter of this fiscal
                year, we
                now expect to deploy this product for this customer in the first
                half of
                fiscal 2007. Efforts are underway to productize this for the utility
                vertical markets and to forge strategic alliances with industry channel
                partners.





·
            **TTX.**This is the SensorWorX based wireless sensor module for biotech and
                pharmaceutical companies to monitor ultra low temperature freezers
                containing high value bio materials for which we already have a system
                deployed for Novartis. Efforts are underway to productize this for
                the
                biotech vertical markets and to forge strategic alliances with industry
                channel partners.





·
            **Track
                Tags.**We
                are presently under contract to develop a wireless remote asset tracking
                product to be used for vehicle tracking. This product utilizes the
                SensorWorX wireless modules as well as the Xsilogy SkyRamp and datacenter
                capabilities. We are concurrently working to productize this at pricing
                levels that will enable us to pursue multiple other market opportunities
                and are developing channel partner sales and marketing
                efforts.





·
            **Other
                Contract.**We
                are currently under contract to develop and build a wearable communication
                gateway for first responders that connects a portable environmental
                monitoring device with a geospatial information system integrated
                into an
                incident management system. We anticipate that this will develop
                into a
                larger market opportunity to retrofit existing systems used in the
                field
                with this upgraded set of
                capabilities.





·
            **Vigilys.**Vigilys is a data interoperability activity coordination solution
                providing “right-time” situational status and mission execution support
                for public safety providers. Vigilys is the foundation into which
                legacy
                systems and new capabilities are connected for interoperations. 
                Customers can opt for an end-to-end solution, or leverage current
                modules
                with the Vigilys Interoperability Suite.  With this capability we are
                able to integrate other SYS products, such as SensorWorX, cVideo
                surveillance and TAPS.  We are currently in discussions with a major
                water utility that would use the cVideo surveillance products for
                security
                purposes and would then also likely deploy our SensorWorX technology
                to
                monitor water conditions which would be transmitted to its command
                center.





In
      October 2005, SYS delivered Vigilys as part of the Emergency Response Management
      Network (ERMN), a distributed decision-making and situational awareness platform
      for the State of California, the Governors Office of Emergency Services (CA-OES)
      and California Department of Transportation (CALTRANS).





The
      ERMN
      is a multi-phased initiative funded jointly by the Department of Homeland
      Security through its Office of Domestic preparedness and the State of California
      being led by the CA-OES and CALTRANS. The first phase of the project is an
      initial proof of concept in advance of future roll-out phases. We had
      anticipated a more rapid roll-out of this solution for California in the third
      quarter which we now believe will be in the first half of our next fiscal year.
      This has been delayed due to lack of funding at the California state level,
      but
      we expect that we will be able to market this solution to smaller city and
      state
      governments as well as fire departments and other early responder
      organizations.





26
 **Corporate
        Development Expenses.** During
        the first three quarters we incurred expenses related to public relations
        activities and marketing expenses to help position SYS in the market place
        and
        to provide assistance in staying abreast of long term project opportunities
        in
        the government markets.
 
 **Acquisitions.** We
        acquired three companies during the nine months ended March 31, 2006 and
        we
        acquired RBIS on April 2, 2006. Recurring internal expenses associated with
        the
        labor to research, analyze and evaluate these firms is extensive and not
        a
        reimbursable cost on our Government contracts so these costs have a direct
        impact on our profitability. In addition, there is often some overlap in
        overhead related costs in the period subsequent to the acquisitions until
        common
        systems and practices are fully aligned.


**Management
      Summary**





Revenues
      and profits for the three and nine month periods of 2006 were significantly
      impacted by two major themes. First, we experienced funding delays and
      uncertainties caused by the continuing resolution process, which resulted in
      decreased revenues. Second, we have made internal investments in product
      development and marketing and we have experienced delays in product
      introductions compared to original plans. As a result, we have incurred
      significant expenses in the advancement of these technologies into products
      and
      related marketing expenses without a corresponding increase in revenues. This
      resulted in increased SG&A and R&D costs. We anticipate that some of
      these projects will develop into fully marketable products in the near term
      and
      will begin generating revenues. At the same time, we may decide to make further
      investments into other product development based opportunities. One such area
      of
      focus will likely be efforts to fully integrate the capabilities of the Logic
      Innovations and cVideo technologies together with our SensorWorX network
      architecture and to our Vigilys product offering.





A
      consequence of the combination of decreased revenues and the increased expenses
      noted above was the need to charge to expense the indirect expense rate
      variances incurred in the third quarter as well as variances incurred and
      deferred in the two previous quarters of fiscal 2006. As of March 31, 2006,
      unfavorable indirect expense variances totaled $1,602,000, of which $909,000
      was
      deferred as of December 30, 2005 and $313,000 was deferred as of September
      30,
      2005. Management determined that it was no longer probable that these variances
      would be recovered by future contract activity in the remainder of the fiscal
      year. Accordingly, the $1,602,000 of unfavorable indirect expense variances
      were
      charged to expense of which $724,000 was charged to costs of revenues and
      $878,000 was charged to selling, general and administrative expense. The change
      in management’s assessment of probable recovery of the indirect expense
      variances during the current quarter was the result of reductions in projections
      of direct contract activity in relation to the projections of indirect expenses
      for the remainder of the current fiscal year. These projections were impacted
      by
      delays in new product launches, resulting in reduced revenues and greater
      development expenses, and additional expenses to support our infrastructure
      needs.




**Results
      of Operations**





The
      following table sets forth certain items, including consolidated revenues for
      the three and nine month periods ended March 31, 2006 and March 25, 2005 (in
      thousands):


Three
                      Months Ended
                  
                  Nine
                      Months Ended2006
                  
                  %
                  
                  2005
                  
                  %
                  
                  2006
                  
                  %
                  
                  2005
                  
                  %Revenues
                  
                  $
                  13,388
                  
                  
                  100.0
                  %
                  $
                  10,944
                  
                  
                  100.0
                  %
                  $
                  38,930
                  
                  
                  100.0
                  %
                  $
                  32,513
                  
                  
                  100.0
                  %Operating
                      costs and expenses:Costs
                      of revenues
                  
                  
                  11,920
                  
                  
                  89.0
                  %
                  
                  8,956
                  
                  
                  81.9
                  %
                  
                  32,401
                  
                  
                  83.2
                  %
                  
                  27,061
                  
                  
                  83.2
                  %Selling,
                      general & administrative
                  
                  
                  2,555
                  
                  
                  19.1
                  %
                  
                  1,288
                  
                  
                  11.8
                  %
                  
                  5,359
                  
                  
                  13.8
                  %
                  
                  3,512
                  
                  
                  10.8
                  %Research
                      and development
                  
                  
                  744
                  
                  
                  5.6
                  %
                  
                  49
                  
                  
                  0.4
                  %
                  
                  1,695
                  
                  
                  4.3
                  %
                  
                  109
                  
                  
                  0.4
                  %Total
                      operating costs and expenses
                  
                  
                  15,219
                  
                  
                  113.7
                  %
                  
                  10,293
                  
                  
                  94.1
                  %
                  
                  39,455
                  
                  
                  101.3
                  %
                  
                  30,682
                  
                  
                  94.4
                  %Income
                      (loss) from operations
                  
                  
                  (1,831
                  )
                  
                  -13.7
                  %
                  
                  651
                  
                  
                  5.9
                  %
                  
                  (525
                  )
                  
                  -1.3
                  %
                  
                  1,831
                  
                  
                  5.6
                  %Other
                      income
                  
                  
                  35
                  
                  
                  0.3
                  %
                  
                  19
                  
                  
                  .2
                  %
                  
                  93
                  
                  
                  0.2
                  %
                  
                  19
                  
                  
                  .1
                  %Interest
                      expense
                  
                  
                  (123
                  )
                  
                  -0.9
                  %
                  
                  (130
                  )
                  
                  -1.2
                  %
                  
                  (313
                  )
                  
                  -0.8
                  %
                  
                  (366
                  )
                  
                  -1.1
                  %Income
                      (loss) before income taxes
                  
                  
                  (1,919
                  )
                  
                  -14.3
                  %
                  
                  540
                  
                  
                  4.9
                  %
                  
                  (745
                  )
                  
                  -1.9
                  %
                  
                  1,484
                  
                  
                  4.6
                  %Income
                      tax provision (benefit)
                  
                  
                  (586
                  )
                  
                  -4.3
                  %
                  
                  219
                  
                  
                  2.0
                  %
                  
                  (81
                  )
                  
                  -.2
                  %
                  
                  603
                  
                  
                  1.9
                  %Net
                      income (loss)
                  
                  $
                  (1,333
                  )
                  
                  -10.0
                  %
                  $
                  321
                  
                  
                  2.9
                  %
                  $
                  (664
                  )
                  
                  -1.7
                  %
                  $
                  881
                  
                  
                  2.7
                  %


*Revenues.* For
      the
      third quarter of 2006, our revenues increased by approximately $2.5 million
      or
      22% to $13.4 million from $10.9 million for the same period in 2005. The
      increase in revenues was primarily attributable to the acquisitions of Antin,
      WebTech, Logic and cVideo which collectively accounted for $2.0 million of
      revenues during the quarter. Additional increases were derived from support
      of
      C4ISR initiatives such as the Composable FORCEnet and Battle Force Composite
      Network, Integrated Autonomous Network Management and sensor network programs
      which grew by approximately $800,000 over the prior year. These total increases
      of approximately $2.8 million were offset by a net $300,000 reduction in
      revenues on the legacy business programs, all of which were due to planned
      decreases in activities by those customers and is consistent with management’s
      expectations of the general trends in our business. For the year to date, our
      revenues increased by approximately $6.4 million or 20% for the exact same
      reasons discussed in the quarterly results. Acquisition related revenues added
      approximately $7.5 million and C4ISR initiatives and sensor network programs
      added approximately $2.1 million for a total of $9.6 million in increases offset
      by $3.2 million in decreases in the legacy business.





27


Revenues
      by operating segment for the three and nine month periods ended March 31, 2006
      and March 25, 2005 (in thousands) are as follows:





Three
                Months Ended
            
            Nine
                Months Ended2006
            
            2005
            
            Change
            
            2006
            
            2005
            
            ChangeDSG
            
            $
            10,491
            
            $
            10,262
            
            $
            229
            
            $
            33,564
            
            $
            31,084
            
            $
            2,480PSSIG
            
            
            2,897
            
            
            682
            
            
            2,215
            
            
            5,366
            
            
            1,429
            
            
            3,937Total
                revenues
            
            $
            13,388
            
            $
            10,944
            
            $
            2,444
            
            $
            38,930
            
            $
            32,513
            
            $
            6,417





As
      previously discussed, revenues related to programs previously captured in the
      DSG, where the activities were focused on public safety and security, have
      been
      included in the PSSIG to reflect the nature of the business being performed.
      The
      growth in the PSSIG operating segment is primarily attributable to growth from
      the recent acquisitions of Logic and cVideo which together added revenues of
      $1,323,000 and $2,002,000 in the three and nine month periods, respectively,
      and
      growth in the following programs: (i) Office of Disaster Preparedness (ODP)
      Interoperable Communications Technology Assistance (ITP) focused on
      interoperable communications for public safety; (ii) the Joint Warning and
      Reporting Network (JWARN), a program that provides the military services near
      real-time operational capabilities to collect, analyze and report nuclear,
      biological and chemical agent detections, identification, location and warning
      information; (iii) Composeable FORCEnet used in various homeland security
      related scenarios including hurricane Katrina relief efforts and other first
      responder situations and (iv) various contract related revenues developing
      wireless products incorporating the SensorWorX related products and architecture
      . All of these programs had significant growth in revenues over the prior
      year.





*Costs
      of revenue.* Costs of revenue include all direct costs such as labor, materials and
      subcontractor costs.  Costs of revenue also include indirect overhead costs
      such as facilities, indirect labor, fringe benefits and other discretionary
      costs which are pooled and allocated to contracts on a pro rata basis.
      Generally, changes in direct costs are correlated to changes in revenue as
      resources are consumed in the production of that revenue.




As
      a
      percentage of revenue, costs of revenue were 89.0% for the third quarter of
      2006
      and 81.9% for the same period in 2005, resulting in gross margins of 11.0%
      and
      18.1%, respectively. For the year to date, costs of revenue were 83.2% and
      83.2%
      for the same period in the prior year, resulting in gross margins of 16.8%
      in
      each year. The decrease in the gross margin in the third quarter was primarily
      due to the following: expense of approximately $724,000 of indirect expense
      rate
      variances accumulated through March 31, 2006 of which $253,000 related to
      indirect expense rate variances deferred from prior quarters; $157,000 of costs
      related to the refinement of Logic’s purchase price allocation for finished
      goods which were subsequently sold and charged to expense in the current
      quarter; and the effect of the increase in the percentage of cost-plus-fee
      contracts that typically result in lower gross profit margins than other types
      of contracts. There was no change to the year to date gross margins because
      the
      effect of the additional costs of the third quarter were offset by the following
      circumstances: (i) the current year has a higher proportion of direct labor
      to
      total costs, which carries a higher margin than other costs of revenue, (ii)
      completion of certain fixed price contracts where profit margins improved over
      the duration of the contract and (iii) the current year includes products based
      revenues as a result of recent acquisitions, with higher gross margins than
      the
      services based business.





*Selling,
      general and administrative expenses.* Selling, general and administrative (SG&A) expenses include indirect labor,
      fringe benefits, sales and marketing, bid and proposal (B&P) and other
      indirect costs. For the three and nine month periods, SG&A increased by
      approximately $1.3 million and $1.8 million, respectively, over the same periods
      in the prior year. These increases were attributable to the following: charging
      to expense approximately $878,000 of indirect expense rate variances related
      to
      SG&A expenses accumulated through March 31, 2006 of which $656,000 related
      to indirect expense rate variances deferred from prior quarters; investments
      made to expand our bid and proposal activities, sales and marketing efforts,
      and
      in our infrastructure to accommodate the increased scope of business operations
      from recent growth and acquisitions. We anticipate that we will likely maintain
      this level of SG&A expenditures during the remainder of fiscal 2006 as we
      develop new business lines, pursue acquisitions, sales and marketing activities.





*Research
      and Development expenses.* Research
      and development (R&D) expenses for the three and nine month periods in the
      current year were approximately $700,000 and $1.7 million, respectively, and
      consisted primarily of burdened labor and materials costs. The incurrence of
      R&D expenses was made as a strategic decision at the beginning of the
      current fiscal year. The current R&D activities in process were discussed
      previously in the events and trends section. We anticipate that we will maintain
      this level of R&D for future periods as we continue to develop new products.
      We had no significant product development programs in the prior
      year.





*Income
      (loss) from operations.* The
      Company incurred losses from operations of $1.8 million and $525,000 in the
      three and nine month periods of the current year compared to income from
      operations of $651,000 and $1.8 million in the three and nine month periods,
      respectively, in the prior year. This decrease in income from operations is
      primarily due to the $1,608,000 of charges for indirect expense rate variances
      in costs of revenues and SG&A and other investments made in SG&A and
      R&D. The $525,000 current year to date operating loss is not expected to be
      recovered by an operating profit in the fourth quarter.




We
      test
      impairment losses on long-lived assets with definitive lives when events or
      changes in circumstances indicate that the undiscounted cash flows estimated
      to
      be generated by such assets are less than their carrying value and, accordingly,
      all or a portion of such carrying value may not be recoverable. Impairment
      losses are then measured by comparing the fair value of assets to their carrying
      amounts. Although our testing of impairment as of March 31, 2006 did not
      indicate impairment exists, if we continue to incur losses in the future, our
      impairment tests could result in the recognition of impairment charges and
      such
      charges could be material.





Income
      from operations for the current fiscal year includes share-based compensation
      expense incurred during the three and nine month periods of approximately
      $143,000 and $409,000, respectively, which included non-cash expenses associated
      with stock options granted to employees and the employee stock purchase plan.
      The recognition of these share-based compensation expenses is in accordance
      with
      FASB No. 123R, which was adopted as of the beginning of the current fiscal
      year.




*Interest
      expense.* Interest
      expense decreased slightly during both the three month and nine month periods
      as
      compared to the prior year. This decrease is primarily attributable to the
      conversion of convertible notes payable into common stock during the current
      and
      prior fiscal years.




*Income
      tax provision.* The
      income tax provision (benefit) as a percentage of income (loss) before taxes
      was
      30.5% and 10.9% in the three and nine month periods, respectively, in the
      current year as compared to 40.6% for the three and nine month periods in the
      prior year. The change in rates is primarily attributable to certain amounts
      of
      share-based compensation expenses recorded in accordance with SFAS 123R which
      are not deductible for tax purposes and accordingly have a direct impact on
      the
      effective tax rate.







28


**Liquidity
      and Capital Resources**





At
      March
      31, 2006, SYS had cash of approximately $6.2 million. This is an increase of
      approximately $2.8 million from the balance at June 30, 2005. The increase
      is
      primarily due to cash provided by financing activities of approximately $8.5
      million less cash used by investing activities of approximately $5.2 million
      of
      which $4.6 million was used for acquisitions, and cash used by operations of
      $546,000. The cash provided by financing activities includes the $6.2 million
      proceeds from the Company’s private placement completed in February
      2006.





Net
      working capital was $10 million at March 31, 2006 compared to $8.1 million
      at
      June 30, 2005. The primary reason for the $2.0 million increase in net
      working capital was the cash provided from the private placement in February
      2006. This increase was offset by the $4.6 million of cash used for acquisitions
      and the classification of $1.9 million of convertible notes payable as current
      liabilities that had previously been non-current liabilities.




As
      of
      March 31, 2006, SYS had notes payable totaling $5.2 million consisting of $1.5
      million remaining from a $3.2 million private placement completed during 2004
      (excluding $38,000 balance of note discount), $391,000 issued in connection
      with
      the acquisition of Polexis, $196,000 issued in connection with the Antin
      acquisition, and $3.1 million issued in conjunction with the private placement
      in February 2006. Other than the $3.60 conversion rate on the notes payable
      issued in February 2006, the conversion rates on the balance of the notes
      payable are all at prices less than the current market price as of March 31,
      2006.





Additions
      to furniture and equipment were $581,000 year to date due to the acquisition
      of
      furniture, equipment and software. SYS establishes a capital expenditures plan
      each year in connection with its annual budgeting process. SYS estimates that
      its capital expenditures for its current operations during the 2006 fiscal
      year
      will range from $650,000 to $750,000.





On
      February 14, 2006, SYS completed a private placement of $6,250,000 in a
      subscription offering of 125 units consisting of common stock and unsecured
      subordinated convertible notes. Each unit consisted of 6,944 restricted shares
      of SYS Common Stock at $3.60 per share and a three-year $25,000 unsecured
      subordinated convertible note payable bearing interest at 10% per annum, payable
      quarterly. The note holder has the option to convert all but not part of the
      note at any time prior to maturity into shares of SYS common stock at $3.60
      per
      share, or keep the note until maturity. SYS has a conversion option commencing
      one year from the date of issuance whereby if the Company’s stock trades at
      $5.40 per share for at least five consecutive trading days, SYS can force the
      conversion of the notes then outstanding.  SYS
      issued 868,000 shares of common stock pursuant to this offering. An additional
      868,000 shares could be issued if all of the notes are converted into common
      stock.





One
      of
      our regular sources of liquidity is our revolving line of credit facility for
      $4.0 million that expires on December 28, 2006. Our revolving line of
      credit facility had a balance of $1.0 million and had available borrowing
      capacity of approximately $3.0 million at March 31, 2006.





The
      $4.0
      million revolving line of credit facility allows SYS to use (i) the full $4.0
      million for working capital purposes or (ii) under a Sub Facility, up to $2.0
      million of the credit facility for permitted acquisition purposes and $750,000
      for minority investment purposes. SYS must maintain certain financial covenants,
      including tangible effective net worth, current assets to current liabilities,
      debt to worth and cash flow coverage. As of March 31, 2006, the Company was
      in
      default of the financial covenants related to minimum quarterly net income
      and
      the ratio of cash flow to the current portion of long term debt. The lender
      has
      granted a waiver of these covenants for the measurement period ended March
      31,
      2006. The Company is currently in negotiations with the lender to modify the
      covenants. However, if the covenants are not modified the Company believes
      that
      it will be in default of the loan covenants at June 30, 2006. In this event,
      the
      Company will seek an additional waiver. However there can be no assurances
      that
      a waiver will be obtained and, pursuant to the terms of the loan agreement,
      the
      lender could require the Company to repay the outstanding balance and cancel
      the
      credit facility.





The
      line
      of credit is subject to certain restrictions on permitted acquisitions and
      minority investments, and in some cases must receive the lender’s consent prior
      to using the facility for such purposes. If used for permitted acquisitions
      or
      minority investments these advances must be repaid over 48 months. SYS has
      the
      option of being charged prime plus 0.25% or LIBOR plus 300 basis points on
      the
      credit facility and prime plus 0.50% or LIBOR plus 325 basis points on the
      sub
      facility subject to minimum advance amounts and duration under the LIBOR option.
      The loan is collateralized by all of our assets including accounts receivable.
      Borrowings are limited to 80% of our billed accounts receivable that are less
      than 90 days old.





Management
      believes that SYS will have sufficient cash flow from operations and funds
      available under the revolving credit agreement to finance its operating and
      capital requirements through December 28, 2006, the expiration date of the
      revolving credit agreement. Management intends to extend the expiration date
      of
      the current agreement or otherwise negotiate a new line of credit upon the
      expiration of the current agreement. However, long-term liquidity and continued
      acquisition related growth will depend on our ability to manage cash, raise
      cash
      and regain profitability. The Company may seek to raise additional capital
      from
      time to time as market conditions permit and subject to Board approval. The
      loss
      for the current fiscal year may impact our ability to raise capital or extend
      the expiration date or our revolving credit agreement.





29


**Off-Balance
      Sheet Arrangements**





SYS
      does
      not have any off
      balance sheet arrangements, investments in special purpose entities or
      undisclosed borrowings or debt. In addition, SYS has not entered into any
      derivative contracts.





**Critical
      Accounting Policies and Estimates**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires management to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent liabilities. On
      an
      ongoing basis, management evaluates its estimates, including those that relate
      to revenues and customer billings, recovery of indirect costs, long-lived
      assets, intangible assets, income tax contingencies, share-based compensation
      and litigation. Management bases its estimates on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions and conditions. If actual results significantly differ from
      management’s estimates, our financial condition and results of operations could
      be materially impaired.





SYS
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in the preparation of its consolidated financial
      statements.





The
      majority of the Company’s revenue is derived from contracts with agencies of the
      U.S. Government that are typically cost-plus-fee, time-and-material and
      fixed-price contracts. Revenue on these contracts results from work performed
      on
      these contracts by the Company’s employees and subcontractors and from
      pass-through of costs for material. Revenue on cost-plus-fee contracts is
      recorded as contract allowable costs are incurred and fees earned. Revenue
      for
      time-and-material contracts is recorded on the basis of contract allowable
      labor
      and subcontractor hours worked times the contract defined billing rates plus
      the
      cost of material used in the performance on the contract. Revenue from
      service-type fixed-price contracts is recognized ratably over the contract
      period or by other appropriate output methods to measure service provided,
      and
      contract costs are expensed as incurred. Under fixed-price contracts, other
      than
      service-type contracts, revenue is recognized under the percentage of completion
      method, on the basis of costs incurred in relation to estimated total costs
      to
      complete the contract. The risk to the Company on a fixed-price contract is
      that
      if actual costs exceed the estimated costs to complete the contract, operating
      income is negatively impacted.





In
      general, SYS does not recognize revenues in excess of the allowable funding
      limitations on any delivery order or contract until negotiations are finalized.
      On occasion, our customers request that we proceed on a tasking in advance
      of
      the formal contract modification. We evaluate these requests according to their
      characteristics and the circumstances in which they occur after taking all
      factors into consideration such as probability of cost recovery, our experience
      with the customer, and satisfactory evidence that supports the customer’s intent
      to issue the modification. In these circumstances, if revenue recognition
      criteria are met, we only record revenue equal to costs incurred until such
      time
      as contract modifications are finalized. If our assessment for the probability
      of cost recovery changes in a subsequent period due to a change in circumstances
      then the revenues associated with those costs incurred may be
      reversed.





For
      interim reporting purposes, SYS applies overhead and selling, general and
      administrative expenses as a percentage of direct contract costs based on annual
      budgeted indirect expense rates. To the extent actual expenses for an interim
      period are greater than the budgeted rates, the variance is deferred if
      management believes it is probable that the variance will be absorbed by future
      contract activity. This probability assessment includes projecting whether
      future indirect costs will be sufficiently less than the annual budgeted rates
      or can be absorbed by seeking increased billing rates applied on cost-plus-fee
      contracts. At the end of each interim reporting period, management assesses
      the
      recoverability of any amount deferred to determine if any portion should be
      charged to expense. In assessing the recoverability of variances deferred,
      management takes into consideration estimates of the amount of direct labor
      and
      other direct costs to be incurred in future interim periods, the feasibility
      of
      modifications for provisional billing rates, and the likelihood that an approved
      increase in provisional billing rates can be passed along to a customer.
      Variances are charged to expense in the periods in which it is determined that
      such amounts are not probable of recovery.





Contract
      costs, including indirect costs, on certain U.S. Government contracts are
      subject to audit by the Defense Contract Audit Agency (DCAA) before final
      payment is received. We record revenues and accounts receivable at amounts
      expected to be realized upon final settlement.





The
      Company also recognizes revenue from the sale of hardware, hardware products
      which include software that is more than incidental, hardware and software
      maintenance agreements, and Application Service Provider (ASP) services. The
      Company recognizes revenue when persuasive evidence of an arrangement exists,
      delivery has occurred or services have been provided, the sale price is fixed
      or
      determinable, and collectibility is probable.





Revenue
      from product sales is generally recognized upon shipment, or once all applicable
      criteria have been met. Allowances are provided for estimated returns, discounts
      and trade-ins. Such allowances are adjusted periodically to reflect actual
      and
      anticipated experience.





Revenues
      from maintenance and ASP services are recognized ratably over the maintenance
      term, which is typically one or two years. The unrecognized revenue portion
      of
      maintenance agreements billed is recorded as deferred revenue.





Certain
      agreements include multiple deliverables or elements for products, software
      and/or services. Accordingly, the Company separates its deliverables into units
      of accounting in accordance with the provisions of Emerging Task Force (“EITF”)
      Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
      Deliverables” using the residual method. In the absence of fair value for an
      undelivered element, the arrangement is accounted for as a single unit of
      accounting, resulting in a deferral of revenue recognition for the delivered
      elements until the undelivered elements are fulfilled.





Revenue
      on software products and software-related elements are recognized, in accordance
      with SOP No. 97-2, “Software Revenue Recognition.” For arrangements that
      include both hardware products and software products, the Company evaluates
      the
      arrangement based on EITF 03-5, *“Applicability
      of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
      Arrangement Containing More-Than-Incidental Software.”* In
      accordance with the provisions of EITF 03-5, the arrangement is divided
      between software-related elements and non-software deliverables.
      Software-related elements are accounted for in accordance with SOP 97-2. When
      software arrangements contain multiple elements and vendor specific objective
      evidence of fair value exists for all undelivered elements, the Company accounts
      for the delivered elements in accordance with the “Residual Method” prescribed
      by SOP No. 98-9. Otherwise, revenue is deferred and recognized in
      accordance with SOP 97-2.





Our
      accounts receivable balances include unbilled receivables which are comprised
      of
      work-in-process which will be billed in accordance with contract terms and
      delivery schedules, as well as amounts billable upon final DCAA audit of our
      overhead rates, contract completion, milestones or completion of rate
      negotiations. Payments to us for performance on certain of our U.S. Government
      contracts are subject to audit by the DCAA, and are subject to government
      funding. We provide an allowance against our receivables for estimated losses
      that may result from rate negotiations and audit adjustments. To the extent
      that
      actual adjustments due to rate negotiations or audit adjustments differ from
      our
      estimates, our revenue may be impacted. Historically, SYS has not required
      significant allowances for these risks.





30


Since
      our
      primary customer is the U.S. Government, SYS historically has not recorded
      significant charges for bad debt expense. Bad debt charges, if needed, are
      recognized in the period in which they are identified.





The
      carrying value of our deferred tax assets, which are netted against deferred
      tax
      liabilities, assumes that SYS will be able to generate sufficient future taxable
      income, based on estimates and assumptions. If these estimates and assumptions
      change in the future, SYS may be required to record valuation allowances against
      its deferred tax assets resulting in additional income tax expenses. The
      likelihood of a material change in our expected realization of these assets
      is
      dependent on future taxable income, our ability to deduct tax loss carryforwards
      against future taxable income and the effectiveness of our tax planning
      strategies.





Goodwill
      represents the excess of costs over fair value of assets of businesses acquired.
      Effective January 1, 2002, SYS adopted SFAS No. 142, “Goodwill and
      Other Intangible Assets,” which establishes financial accounting and reporting
      for acquired goodwill and other intangible assets and supersedes APB Opinion
      No. 17, “Intangible Assets”. Goodwill and intangible assets acquired in a
      purchase business combination and determined to have an indefinite useful life
      are not amortized, but instead tested for impairment at least annually in
      accordance with the provisions of SFAS No. 142. SFAS No. 142 also
      requires that intangible assets with estimable useful lives be amortized over
      their respective estimated useful lives to their estimated residual values,
      and
      reviewed for impairment in accordance with SFAS No. 144, “Accounting for
      Impairment or Disposal of Long-Lived Assets.”




SFAS
        No. 142 requires that goodwill be tested for impairment at the reporting
        unit level at adoption and at least annually thereafter, utilizing a two
        step
        methodology. Under
        the
        first step, the fair value of the reporting unit is compared with its carrying
        value (including goodwill). If the fair value of the reporting unit is less
        than
        its carrying value, an indication of goodwill impairment exists for the
        reporting unit and the enterprise must perform step two of the impairment
        test.
        If fair value of the reporting unit exceeds its carrying value, step two
        does
        not need to be performed. For purposes of performing the second step, the
        fair
        value of a reporting unit is allocated to all the assets and liabilities
        of the
        reporting unit as if the reporting unit had been acquired in a business
        combination at the date of the impairment test. The fair value of tangible
        net
        assets and both recognized and unrecognized intangible assets is deducted
        from
        the fair value of the reporting unit to determine the implied fair value
        of
        reporting unit goodwill. If the implied fair value of the reporting unit
        goodwill is lower than its carrying amount, goodwill is impaired and is written
        down to its implied fair value. SYS performs its annual testing for impairment
        of goodwill and other intangible assets in the fourth quarter of each year.
 SFAS
          144
          requires that impairment be tested on long-lived assets with definitive
          lives
          when events or changes in circumstances indicate that the carrying amount
          may
          not be recoverable. For assets classified as held and used, an impairment
          loss
          is recognized only if the carrying amount of the asset is not recoverable
          and
          exceeds its fair value. The carrying amount of an asset is not recoverable
          if it
          exceeds the sum of the undiscounted cash flows expected to result from
          the use
          and eventual disposition of that asset, excluding future interest costs
          the
          Company will recognize as an expense when incurred. The Company measures
          an
          impairment loss as the excess of the carrying amount of a long-lived asset
          or
          asset group over its fair value.


Costs
      related to research and development are charged to expense as incurred.
      Capitalization of development costs for software to be sold begins when a
      product’s technological feasibility has been established in accordance with the
      provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
      Marketed.” To date, the time period between achieving technological feasibility,
      which the Company has defined as the establishment of a working model, which
      typically occurs when beta testing commences, and the general availability
      of
      such software, has been short, and as such, software development costs
      qualifying for capitalization have been insignificant.





Share-Based
      Compensation: Beginning on July 1, 2005 we account for our employee stock
      purchase plan (ESPP), stock plans and other forms of share-based compensation
      under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition
      of
      the fair value of share-based compensation in net income. The fair value of
      our
      share-based compensation was estimated using a Black-Scholes option valuation
      model. This model requires the input of highly subjective assumptions and
      elections in adopting and implementing SFAS No. 123R, including expected stock
      price volatility and the estimated life of each award. The fair value of
      share-based awards is amortized over the vesting period of the award and we
      have
      elected to use the straight-line method for awards granted after the adoption
      of
      SFAS No. 123R and continue to use a graded vesting method for awards granted
      prior to the adoption of SFAS No. 123R. Prior to the adoption of SFAS No. 123R,
      we accounted for our share-based compensation under the provisions of Accounting
      Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees”
(APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation
      No.
      44, “Accounting for Certain Transactions Involving Stock Compensation — an
      Interpretation of APB Opinion No. 25” and made pro forma footnote disclosures as
      required by Statement of Financial Accounting Standards (SFAS) No. 148,
“Accounting For Stock-Based Compensation - Transition and Disclosure”, which
      amends SFAS No. 123, “Accounting For Stock-Based Compensation”. Pro forma net
      income (loss) and pro forma net income (loss) per share disclosed in the
      footnotes to our condensed consolidated financial statements were estimated
      using a Black-Scholes option valuation model.





31


**Risks
      Related to Our Business**




*We
      urge you to consider the following risk factors and all other information
      contained herein as well as the information included in our Annual Report on
      Form 10-KSB for the year ended June 30, 2005, and other reports and filings
      made
      with the Securities and Exchange Commission in evaluating our business and
      prospects. Risks and uncertainties, in addition to those we describe below,
      that
      are not presently known to us or that we currently believe are immaterial may
      also impair our business operations. If any of the following risks occur, our
      business and financial results could be harmed, and the price of our common
      stock could decline.  You should also refer to the other information
      contained in this report, including our consolidated financial statements and
      related notes.*





**We
      have depended upon a single customer, the U.S. Government, for the majority
      of
      our revenues to date, and a decrease in its demand for our services might harm
      our operating results.**




A
      substantial part of our business at the present time is with the DoD. Even
      though the level of business with this customer is growing and we have
      negotiated multiple-year contracts that include option and award years, there
      is
      no certainty that budget changes in Congress or the DoD will not seriously
      affect us.  In addition, there is no certainty that the U.S. Government
      will exercise each option or award year available on a contract.





SYS
      may,
      depending on the contract, perform as a prime contractor or as a subcontractor
      to another prime contractor. In cases where we perform as a subcontractor,
      we
      may be subject to price modifications required by the prime contractor. Such
      price modifications, if not mitigated by a corresponding reduction of costs,
      could have a negative impact on our profitability.





**A
      significant number of our customers are government agencies subject to unique
      political and budgetary constraints and have special contracting requirements
      that may affect our ability to obtain new government
      customers.**




A
      significant number of our customers are government agencies, principally DoD
      agencies. These agencies often do not set their own budgets and therefore have
      little control over the amount of money they can spend. In addition, these
      agencies experience political pressure that may dictate the manner in which
      they
      spend money. Due to political and budgetary processes and other scheduling
      delays that frequently occur in the contract or bidding process, some government
      agency orders may be canceled or substantially delayed, and the receipt of
      revenues or payments may be substantially delayed.




In
      addition, future sales to government agencies will depend on our ability to
      meet
      government contracting requirements, certain of which may be onerous or
      impossible to meet, resulting in our inability to obtain particular contracts.
      Common requirements in government contracts include bonding, provisions
      permitting the purchasing agency to modify or terminate at will the contract
      without penalty and provisions permitting the agency to perform investigations
      or audits of our business practices.




The
      U.S.
      Government has a program that encourages and sometimes requires large prime
      contractors to use small businesses.  The U.S. Government restricts the
      competition on some contracts to only qualifying small businesses.  Some of
      our contracts and subcontracts have been awarded based on our eligibility as
      a
      small business.  The definition of a small business changes depending on
      the type of product or service provided.  The U.S. Government uses the
      North American Industry Classification System (NAICS) codes to classify the
      small business size standards for all industries.  One of our primary NAICS
      codes is for engineering services, and beginning in fiscal year 2005, we will
      no
      longer qualify as a small business using this code.  We still qualify as a
      small business using several other NAICS codes.  In addition, the small
      business contracts currently held by SYS do not expire as a result of our no
      longer qualifying as a small business under any specific NAICS Code.  
Some of these contracts have option years, which are not affected by this change
      in small business status. While our revenues to date include revenues based
      on
      our qualifying as a small business pursuant to U.S. Government regulations
      under
      which it is no longer eligible as a small business; we believe the majority
      of
      these revenues will be able to be moved to other contracts and, therefore,
      will
      not be material to our financial condition or results of operations.  Our
      future revenues may be impacted by not qualifying as a small business under
      certain NAICS codes.





**Any
      inability to adequately retain or protect our employees, customer relationships
      and proprietary technology could harm our ability to
      compete.**





Our
      future success and ability to compete depends in part upon our employees and
      customer relationships and proprietary technology and trademarks, which we
      attempt to protect with a combination of patent, copyright, trademark and trade
      secret claims, as well as with our confidentiality procedures and contractual
      provisions. These legal protections afford only limited protection and are
      time-consuming and expensive to obtain and/or maintain. Further, despite our
      efforts, we may be unable to prevent third parties from soliciting our employees
      or customers or infringing upon or misappropriating our intellectual
      property.  Our employees, customer relationships and intellectual property
      may not be adequate to provide us with a competitive advantage or to prevent
      competitors from entering the markets for our products and services.
      Additionally, our competitors could independently develop non-infringing
      technologies that are competitive with, and equivalent or superior to, our
      technology. Monitoring infringement and/or misappropriation of intellectual
      property can be difficult, and there is no guarantee that we would detect any
      infringement or misappropriation of our proprietary rights. Even if we were
      to
      detect infringement or misappropriation of our proprietary rights, litigation
      to
      enforce these rights would be costly and would cause us to divert financial
      and
      other resources away from our business operations.





32


**The
      departure of certain key personnel could harm the financial condition of
      SYS.**





Certain
      key employees, such as Clifton L. Cooke, Jr., Edward M. Lake, and Kenneth D.
      Regan, are intimately involved in our business and have day-to-day relationships
      with critical customers. Competition for highly skilled business, product
      development, technical and other personnel is intense, and there can be no
      assurance that we will be successful in recruiting new personnel or in retaining
      our existing personnel. A failure on our part to retain the services of these
      key personnel could have a material adverse effect on our operating results
      and
      financial condition. We do not maintain key man life insurance on any of our
      employees.





**We
      face numerous competitors.**





We
      have
      many competitors with comparable characteristics and capabilities that compete
      for the same group of customers. Our competitors are competent and experienced
      and are continuously working to take projects away from us. Many of our
      competitors have greater financial, technical, marketing and other resources
      than we do. Our ability to compete effectively may be adversely affected by
      the
      ability of these competitors to devote greater resources to the sales and
      marketing of their products and services than are available to us.





**We
      must comply with numerous U.S. Government regulations.**




SYS
      could
      become liable for penalties under various procurement rules and
      regulations.  Changes in government regulations could harm our operating
      results.  Our business must comply with and is affected by various
      government regulations.  Among the most significant regulations
      are:





·
            the
                Federal Acquisition Regulations, and agency regulations supplemental
                to
                the Federal Acquisition Regulations, which comprehensively regulate
                the
                formation, administration and performance of government
                contracts;





·
            the
                Truth in Negotiations Act, which requires certification and disclosure
                of
                all cost and pricing data in connection with contract negotiations;





·
            government
                accounting regulations, which impose accounting requirements that
                govern
                our right to reimbursement under certain cost-based government contracts;
                and





·
            laws,
                regulations and executive orders restricting the use and dissemination
                of
                information classified for national security purposes and the exportation
                of certain products and technical data.




**Accuracy
      of indirect billing rates is critical.**




Our
      indirect billing rates are approved at least annually by the Defense Contract
      Management Agency (DCMA) after being reviewed by the Defense Contract Audit
      Agency (DCAA).  These rates can differ from our actual indirect
      rates.  We budget to have our actual indirect rates as close as possible to
      our government approved indirect rates at fiscal year end.  Throughout the
      year, management assesses how these rates compare to forecasted rates for the
      year.  If a
      variance is expected to exceed the amount to be billed, provisions for such
      variance are recognized at that time.





For
      interim reporting purposes, SYS applies overhead and selling, general and
      administrative expenses as a percentage of direct contract costs based on annual
      budgeted indirect expense rates. To the extent actual expenses for an interim
      period are greater than the budgeted rates, the variance is deferred if
      management believes it is probable that either the variance will be absorbed
      by
      future contract activity. This probability assessment includes projecting
      whether future indirect costs will be sufficiently less than the annual budgeted
      rates or can be absorbed by seeking increased billing rates applied on
      cost-plus-fee contracts. At the end of each interim reporting period, management
      assesses the recoverability of any amount deferred to determine if any portion
      should be charged to expense. In assessing the recoverability of variances
      deferred, management takes into consideration estimates of the amount of direct
      labor and other direct costs to be incurred in future interim periods, the
      feasibility of modifications for provisional billing rates, and the likelihood
      that an approved increase in provisional billing rates can be passed along
      to a
      customer. If assumptions about the probability of recovering deferred variances
      change, deferred amounts could be expensed and such expenses could have a
      material adverse effect on the results of operations.





**We
      rely on subcontractors.**





We
      regularly employ subcontractors to assist us in satisfying our contractual
      obligations. If these subcontractors fail to perform their contractual
      obligations adequately, our prime contract performance and our ability to obtain
      future business could be materially and adversely impacted.





Our
      performance of government contracts may involve the issuance of subcontracts
      to
      other companies upon which we rely to perform all or a portion of the work
      we
      are obligated to deliver to our customers.  There is a risk that we may
      have disputes with subcontractors concerning a number of issues, including
      the
      quality and timeliness of work performed by the subcontractor, customer concerns
      about the subcontractor, our decision not to extend task orders or issue new
      task orders under a subcontract, or our hiring of former personnel of a
      subcontractor.  A failure by one or more of our subcontractors to
      satisfactorily deliver agreed-upon services on a timely basis could materially
      and adversely impact our ability to perform our obligations as a prime
      contractor.  In extreme cases, such subcontractor performance deficiencies
      could result in the government terminating our contract for default.  A
      default termination could expose us to liability for excess costs of procurement
      by the government and have a material adverse effect on our ability to compete
      for future contracts and task orders.





33


**Security
      clearances are necessary.**




If
      SYS
      cannot obtain the necessary security clearances, we may not be able to perform
      classified work for the government and our revenues may suffer.  Certain
      government contracts require our facilities and some of our employees to
      maintain security clearances.  If we lose or are unable to obtain security
      clearances required for a particular contract, the client can terminate the
      contract or decide not to renew it upon its expiration.  As a result, to
      the extent we cannot obtain the required security clearances for our employees
      working on a contract, we may not derive the revenue anticipated from that
      contract. Any such reduction in revenue, if not replaced with revenue from
      other
      contracts, could seriously harm our operating results.




Security
      breaches in sensitive government systems could result in the loss of clients
      and
      negative publicity.  Many of the systems we develop involve managing and
      protecting information involved in national security and other sensitive
      government functions.  A security breach in one of these systems could
      cause serious harm to our business, could result in negative publicity and
      could
      prevent us from having further access to such critically sensitive systems
      or
      other similarly sensitive areas for other government clients.





**There
      are risks associated with our planned growth.**




We
      plan
      to grow our revenues and profits by adding to our existing customer base through
      internal growth and by the acquisition of other government services and
      government or commercial technology related companies.  Over the past five
      years we have hired senior management personnel capable of establishing new
      business units within SYS.  Rapid expansion through internal growth has
      required additional capital resources.  We plan to continue this approach
      to building our government services business.  There can be no assurance
      that this approach will result in profitability in the future.





Management
      believes that we can grow through the acquisition of other government services
      companies and government or commercial technology related companies that have
      product offerings which may be sold to both commercial and government
      customers.  The acquisition of other companies and growing those businesses
      is uncertain and contains a variety of business risks,
      including: integration, cultural differences, the retention of key
      personnel, competition, protection of intellectual property, profitability,
      industry changes and others.  Although we do not have an agreement to
      acquire any specific company at this time, we intend to attempt to expand our
      operations through the acquisition of other companies. Acquisitions and
      attempted acquisitions may place a strain on our limited personnel, financial
      and other resources. Our ability to manage this growth, should it occur, will
      require expansion of our capabilities and personnel.  We may not be able to
      find qualified personnel to fill additional positions or be able to successfully
      manage a larger organization. Further, we intend to finance these transactions
      through a combination of cash, equity and debt. Using our stock as a currency
      may have limitations as the trading volume in our stock has been limited, our
      stock price has been volatile, and our stock may not maintain a price sufficient
      to support transactions without being excessively dilutive.




**We
      have very limited assets upon which to rely for adjusting to business variations
      and for growing new businesses.**




While
      we
      are likely to look for new funding to assist in the acquisition of other
      profitable businesses, it is uncertain whether such funds will be available.
      Our
      substantial reliance on our revolving line of credit facility with Comerica
      Bank
      - California imposes certain limitations on us. If we are to grow and expand
      our
      operations, we will need to raise significant amounts of additional capital.
      There can be no assurance that we will be successful in raising a sufficient
      amount of additional capital, or if we are successful, that we will be able
      to
      raise capital on reasonable terms. If we do raise additional capital, our
      existing shareholders may incur substantial and immediate dilution. The net
      loss reported for the nine months ended March 31, 2006 may further impact our
      ability to raise capital.




As
      of
      March 31, 2006, the Company was in default of the financial covenants under
      its
      bank line of credit related to minimum quarterly net income and the ratio of
      cash flow to the current portion of long term debt. The lender has granted
      a
      waiver of these covenants for the measurement period ended March 31, 2006.
      The
      Company is currently in negotiations with the lender to modify the covenants,
      however, if the covenants are not modified and the Company is in default of
      the
      loan covenants at June 30, 2006, or the Company is not able to return to
      profitability, which may create a default in the loan covenants after they
      are
      modified, the lender may require the Company to pay the outstanding balance
      and
      cancel the credit facility.





**There
      are a large number of shares that may be available for future sale, and the
      sale
      of these shares may depress the market price of our common
      stock.**




As
      of March
      31,
      2006, we had issued 13,753,119 shares of common stock. Up to 2,248,100 shares
      of
      common stock were issuable upon exercise of employee stock options at prices
      ranging from $1.00 to $4.10 per share, 687,500 shares were issuable upon the
      conversion of convertible notes from a private placement in 2004 at $2.20 per
      share, 168,563 shares were issuable upon the conversion of convertible notes
      from the acquisition of Polexis at $2.32 per share, 78,400 shares were issuable
      upon the conversion of the convertible note payable from the Antin acquisition
      at $2.50 per share, 868,056 were issuable upon the conversion of the convertible
      note payable from the private placement in 2006 at $3.60 per share, 313,401
      shares were issuable upon the exercise of warrants issued in connection with
      a
      private placement of securities completed in 2005 exercisable at $2.50 per
      share, 50,000 shares were issuable upon the exercise of warrants issued in
      connection with the acquisition of the Lomasoft technology exercisable at $3.87
      per share, and 110,000 shares were issuable upon the exercise of warrants issued
      in conjunction with various transactions exercisable at $4.00 per share. The
      sale of shares issued upon any conversion of our outstanding convertible notes
      or the exercise of outstanding options, warrants or the stock purchase agreement
      could adversely affect the market price of our common stock.





34


**There
      is a limited market for our common stock.**




Our
      common stock is traded on the American Stock Exchange.  Trading in our
      common stock has been sporadic, and at present, there is a limited market for
      the stock. There can be no assurance that a stronger market will develop. Even
      if such a market does develop, it may not be sustained.  There are no
      analysts currently covering the Company.




**Future
      sales of our common stock by existing shareholders under Rule 144 could decrease
      the trading price of our common stock.**




As
      of March
      31, 2006, a total of 6,598,020 shares of our outstanding common stock were
      “restricted securities” and could be sold in the public markets only in
      compliance with Rule 144 adopted under the Securities Act of 1933 or other
      applicable exemptions from registration. Rule 144 provides that a person holding
      restricted securities for a period of one year may thereafter sell, in brokerage
      transactions, an amount not exceeding in any three-month period the greater
      of
      either (i) 1% of the issuer’s outstanding common stock or (ii) the average
      weekly trading volume in the securities during a period of four calendar weeks
      immediately preceding the sale. Persons who are not affiliated with the issuer
      and who have held their restricted securities for at least two years are not
      subject to the volume limitation. Possible or actual sales of our common stock
      by present shareholders under Rule 144 could have a depressive effect on the
      price of our common stock.




**Our
      directors, executive officers and affiliated persons beneficially own
      approximately 30.7% of our stock, including stock options and warrants
      exercisable within 60 days of March 31, 2006; their interests could conflict
      with yours; significant sales of stock held by them could have a negative effect
      on our stock price; shareholders may be unable to exercise
      control.**





As
      of March
      31,
      2006, our directors, executive officers and affiliated persons were the
      beneficial owners of approximately 30.7% of our common stock, including stock
      options exercisable within 60 days of March 31, 2006. As a result, our executive
      officers, directors and affiliated persons will have a significant ability
      to:





•
elect
      or defeat the election of our directors;


•
amend
      or prevent amendment of our articles of incorporation or bylaws;


•
effect
      or prevent a merger, sale of assets or other corporate transaction;
      and


•
control
      the outcome of any other matter submitted to the shareholders for
      vote.





As
      a
      result of their ownership and positions, our directors and executive officers,
      collectively, are able to significantly influence all matters requiring
      shareholder approval, including the election of directors and approval of
      significant corporate transactions. In addition, sales of significant amounts
      of
      shares held by our directors and executive officers, or the prospect of these
      sales, could adversely affect the market price of our common stock. Management’s
      stock ownership may discourage a potential acquirer from making a tender
      offer or otherwise attempting to obtain control of us, which in turn could
      reduce our stock price or prevent our shareholders from realizing a premium
      over
      our stock price.





**ITEM
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment income and interest expense. As of March 31, 2006 our cash was
      primarily invested in a money market interest bearing account. A hypothetical
      10% adverse change in the average interest rate on our money market cash
      investments would have had no material effect on net income for the quarter
      ended March 31, 2006. We currently do not utilize any derivative financial
      instruments to hedge interest rate risks.





The
      following table presents scheduled principal payments and related weighted
      average interest rates of the Company’s long-term fixed rate debt for the fiscal
      years ended June 30:




2006
            
            2007
            
            2008
            
            2009
            
            Total
            
            Fair
                Value (1)Fixed
                rate debt
            
            $
            --
            
            $
            2,062,000
            
            $
            --
            
            $
            3,125,000
            
            $
            5,187,000
            
            $
            5,187,000Weighted
                average interest rate
            
            
            10.0
            %
            
            10.0
            %
            
            10.0
            %
            
            10.0
            %
            
            10.0
            %
            
            10.0
            %





The
      Company’s $4,000,000 line of credit facility bears interest on outstanding
      balances at the bank’s prime rate plus .25%. The Company incurred $18,000 and
      $24,000 of interest on this credit facility in the three months and nine month
      periods ended March 31, 2006, respectively and the interest for the year ended
      June 30, 2005 was $29,000. Based on the Company’s recent history of borrowings
      under this credit facility, if there was a hypothetical 10% adverse change
      in
      the average interest rate, the additional interest expense would not have had
      a
      material effect on net income for the quarter ended March 31, 2006.





(1)
      The
      fair value of fixed-rate debt was estimated based on the current rates offered
      for fixed-rate debt with similar risks and maturities.





**ITEM
      4. Controls and Procedures**





**Disclosure
      Controls and Procedures**





As
      required by Exchange Act Rule 13a−15(b), as of March 31, 2006, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and our Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures as defined in Rule 13a−15(e). Based upon that evaluation, our Chief
      Executive Officer, along with our Chief Financial Officer, concluded that our
      disclosure controls and procedures are effective.





We
      intend
      to review and evaluate the design and effectiveness of our disclosure controls
      and procedures on an ongoing basis and to correct any material deficiencies
      that
      we may discover. Our objective is to ensure that our senior management has
      timely access to material information that could affect our
      business.





**Changes
      in Internal Control over Financial Reporting**




There
        has
        been no change in our internal control over financial reporting during our
        most
        recent fiscal quarter that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting. However,
        certain changes were implemented in conjunction with the preparation of our
        2005
        year end financial statements that improved the monitoring controls over
        the
        preparation of our comparative statements of cash flows. Those revised controls
        operated effectively throughout 2006 and in conjunction with the preparation
        of
        the March 31, 2006 comparative financial statements resulted in the
        identification of the need to restate the March 25, 2005 statement of cash
        flows
        as discussed in Footnote 1 of the Notes to Condensed Consolidated Financial
        Statements.


35


**PART
      II - OTHER INFORMATION**


**Item
      1****.****Legal Proceedings**




**Item
      2.** **Unregistered
      Sales Of Equity Securities And Use Of Proceeds.**


On
      September 12, 2005, SYS’s Board of Directors approved the issuance of an
      additional 25,130 shares of the Company’s common stock to be issued to the Antin
      Engineering, Inc. (Antin) stockholders as a result of a modification to a
      working capital purchase price adjustment provided for in the purchase
      agreement. One-half of the shares were issued directly to the Antin stockholders
      and the balance were placed in escrow which are contingently issuable to the
      stockholders based upon the future operating performance of Antin through
      June 30, 2006. The
      12,565 shares issued directly to the Antin shareholders were valued at $4.10
      per
      share or $51,517.





On
      September 27, 2005, warrants to purchase 50,000 shares of the SYS common stock
      at a volume weighted average price of $3.87 were issued in conjunction with
      the
      acquisition of technology and intellectual property rights from Lomasoft
      Corporation. The warrants expire in five years and contain piggy-back
      registration rights. The Company is obligated to use its best efforts to
      register these shares within one year of the purchase date.





As
      a
      result of a determination during the quarter ended September 30, 2005 that
      certain milestones had been met as of June 30, 2005, Xsilogy, Inc. was issued
      80,000 shares of SYS stock on December 16, 2005 at a value of
      $376,000.





On
      November 7, 2005, 445,768 shares of SYS common stock were issued in connection
      with the acquisition of all of the outstanding stock of Logic Innovations,
      Inc.
      These shares were valued based on an average closing price of $4.56 per
      share.





On
      February 14, 2006, SYS completed a private placement of $6,250,000 in a
      subscription offering of 125 units consisting of common stock and unsecured
      subordinated convertible notes. Each unit consisted of 6,944 restricted shares
      of SYS Common Stock at $3.60 per share and a three-year $25,000 unsecured
      subordinated convertible note payable bearing interest at 10% per annum, payable
      quarterly. The note holder has the option to convert all but not part of the
      note at any time prior to maturity into shares of SYS common stock at $3.60
      per
      share, or keep the note until maturity. SYS has a conversion option commencing
      one year from the date of issuance whereby if the Company’s stock trades at
      $5.40 per share for at least five consecutive trading days, SYS can force the
      conversion of the notes then outstanding.  SYS
      will
      immediately issue 868,000 shares of common stock pursuant to this offering.
      An
      additional 868,000 shares could be issued if all of the notes are converted
      into
      common stock.




**Item
      3****.****Defaults
      Upon Senior Securities**


The
      Company has a bank line of credit facility which provides for borrowings of
      up
      to $4,000,000. This facility expires in December 2006, contains financial and
      other covenants, and is collateralized by substantially all of the assets of
      the
      Company. Borrowings pursuant to the line of credit bear interest (8.0% as of
      March 31, 2006) at the bank’s prime rate plus 0.25%. As of March 31, 2006, the
      Company had $1,029,000 of borrowings outstanding under this line of credit.
      The
      Company is currently in negotiations with the lender to modify the covenants.
      However, if the covenants are not modified the Company believes that it will
      be
      in default of the loan covenants at June 30, 2006. In this event, the Company
      will seek an additional waiver. However there can be no assurances that a waiver
      will be obtained and, pursuant to the terms of the loan agreement, the lender
      could require the Company to repay the outstanding balance and cancel the credit
      facility.




**Item
      4** **.** **Submission of Matters to a Vote of Securities Holders**


On
      December 16, 2005, the Company held its 2005 Annual Meeting of Shareholders.
      There were 11,264,448 shares eligible as of the record date and 9,349,364 shares
      were represented either in person or by proxy at the meeting. The following
      matters were voted on at the meeting:




(a.)
      Proposal to elect the Directors pursuant to management's nominations.  This
      proposal was approved with 9,335,234 shares voting in favor, 14,130 shares
      voting against.




(b.)
      Proposal to approve the appointment of KPMG LLP as the independent registered
      public accounting firm for the corporation for its 2006 fiscal year.  This
      proposal was approved with 9,189,539 shares voting in favor, 138,311 shares
      voting against, and 21,514 shares abstaining.




**Item
      5** **.** **Other Information**


At
      the
      Annual Board of Directors meeting held on December 16, 2005, the following
      people were elected as Chairman and officers of the Company:


David
                A. Derby
            ChairmanAlfred
                M. Gray
            Vice-ChairmanClifton
                L. Cooke, Jr.
            President
                and Chief Executive OfficerEdward
                M. Lake
            Chief
                Financial OfficerMichael
                W. Fink
            SecretaryRobert
                A. Babbush
            Assistant
                SecretaryKenneth
                D. Regan
            President,
                Defense Solutions GroupBen
                Goodwin
            President,
                Public Safety and Security Division





At
      the
      Annual Board of Directors meeting held on December 16, 2005, the following
      people were elected as members of the following Directors’
Committees:


**Audit
                Committee**
            
            **Executive
                Committee**Thomas
                A. Page, Chairman
            
            David
                A. Derby, ChairmanDavid
                A. Derby
            
            John
                M. BurnsJohn
                R. Hicks
            
            Clifton
                L. Cooke, Jr.Charles
                E. Vandeveer
            
            John
                R. Hicks**Compensation
                Committee**
            
            **Senior
                Advisory Committee**Gail
                K. Naughton, Chairman
            
            Alfred
                M. Gray, ChairmanJohn
                M. Burns
            
            Clifton
                L. Cooke, Jr.John
                R. HicksCharles
                E. Vandeveer


36





**Item
      6** **.** **Exhibits**





2.1
            
            Certificate
                of Ownership filed with the California Secretary of State on
                November 28, 1979, filed as Exhibit 2.1 to the Company’s report on
                Form 10-K for the fiscal year ended June 30, 1979, and incorporated
                by this reference.2.2
            
            Certificate
                of Ownership filed with the California Secretary of State on
                March 18, 1985, incident to change of name of the Company, filed as
                Exhibit 3.6 to this Company’s report on Form 10-K for the fiscal year
                ended June 30, 1985, and incorporated by this
                reference.2.3
            
            Testmasters,
                Inc. Stock Purchase Agreement, filed as Exhibit 2.1 to this Company’s
                Registration Statement on Form SB-2 dated May 24, 2002, and incorporated
                by this reference.2.4
            
            Polexis
                merger agreement, filed as Exhibit 2.2 to this Company’s Registration
                Statement on Form SB-2 dated April 19, 2004, and incorporated by this
                reference.2.5
            
            Asset
                purchase and sale agreement effective as of December 15, 2004, by and
                between SYS and Xsilogy, Inc filed as Exhibit 2.5 to this Company’s report
                on Form 10-QSB dated February 7, 2005, and incorporated by this
                reference.2.6
            
            Agreement
                and plan of merger effective as of January 3, 2005 among SYS, Shadow
                I, Inc., a wholly-owned subsidiary of SYS, Antin Engineering, Inc.,
                and
                the stockholders of Antin Engineering, Inc. filed as Exhibit 2.6
                to this
                Company’s report on Form 10-QSB dated February 7, 2005, and
                incorporated by this reference.2.7
            
            Agreement
                and Plan of Merger effective as of November 7, 2005 among SYS, Shadow
                II,
                Inc., a wholly owned subsidiary of SYS, Logic Innovations, Inc. and
                the
                stockholders of Logic Innovations, Inc.2.8
            
            Asset
                purchase and sale agreement effective December 2, 2005 among SYS,
                cVideo,
                Inc. and certain of the stockholders of cVideo, Inc.2.9
            
            Stock
                Purchase Agreement effective as of April 2, 2006, between SYS and
                Gary E. Murphy (the sole stockholder of Reality Based IT Services,
                Ltd.),
                incorporated by reference from the Form 8-K dated April 6,
                2006.3.1
            
            Articles
                of Incorporation for SYS, as amended, filed as Exhibit 3.1 to the
                Company’s Registration Statement on Form SB-2, filed May 24, 2002, and
                incorporated by this reference.3.2
            
            Bylaws
                of SYS filed as Exhibit 3.2 to the Company’s Registration Statement on
                Form SB-2, filed May 24, 2002, and incorporated by this
                reference.4.1
            
            Certificate
                of Determination of Preferences of Preferred Shares of Systems Associates,
                Inc., filed by the Company with the California Secretary of State
                on
                July 28, 1968, filed as Exhibit 3.2 to the Company’s report on Form
                10-K for the fiscal year ended June 30, 1981, and incorporated by
                this reference.4.2
            
            Certificate
                of Determination of Preferences of Preference Shares of Systems
                Associates, Inc., filed by the Company with the California Secretary
                of
                State on December 27, 1968, filed as Exhibit 3.3 to the Company’s
                report on Form 10-K for the fiscal year ended June 30, 1981, and
                incorporated by this reference.4.3
            
            Certificate
                of Determination of Series B 9% Cumulative Convertible Callable Non-Voting
                Preference Stock was filed by the Company with the California Secretary
                of
                State on August 15, 1996, and included in Exhibit
                3(i).4.4
            
            Form
                of Subscription Agreement from the November 2001 Offering, filed as
                Exhibit 4.1 to this Company’s Registration Statement on Form SB-2 dated
                May 24, 2002.4.5
            
            Form
                of Convertible Note from the November 2001 Offering, filed as Exhibit
                4.2 to this Company’s Registration Statement on Form SB-2 dated May 24,
                2002.4.6
            
            Form
                of Subscription Agreement from the December 2003 Offering
                (Convertible Note from December 2003 Offering included), filed as
                Exhibit 4.3 to this Company’s Registration Statement on Form SB-2 dated
                April 19, 2004.4.7
            
            Securities
                Purchase Agreement, dated as of May 27, 2005, by and among SYS and
                the
                investor parties as identified on the signature pages thereto, filed
                as
                exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated by
                this
                reference.4.8
            
            Registration
                Rights Agreement, dated as of May 27, 2005, by and among SYS and
                the
                investor parties as identified on the signature pages thereto, filed
                as
                exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated by
                this
                reference.4.9
            
            Form
                of Warrant to be issued by SYS to the investors in connection with
                the
                Securities Purchase Agreement from May 2005 Offering, filed as exhibit
                10.1 to Form 8-K filed on June 3, 2005 and incorporated by this
                reference.4.10
            
            Form
                of Subscription Agreement from the Company’s February 14, 2006
                Offering, filed as Exhibit 99.1 to the Company’s report on Form 8-K
                dated February 14, 2006, and incorporated by this
                reference.4.11
            
            Form
                of Unsecured Subordinated Convertible Note from the Company’s
                February 14, 2006 Offering, filed as Exhibit 99.2 to the
                Company’s report on Form 8-K dated February 14, 2006 and incorporated
                by this reference.4.12
            
            Form
                of Subordination Agreement from the Company’s February 14, 2006
                Offering, filed as Exhibit 99.3 to the Company’s report on Form 8-K
                dated February 14, 2006, and incorporated by this
                reference.10.1
            
            SYS
                1997 Incentive Stock Option and Restricted Stock Plan filed as Attachment
                1 to the Company’s Proxy Statement filed on February 21, 1997, and
                incorporated by this reference.10.2
            
            SYS
                2003 Stock Option Plan filed as Exhibit 10.2 to the Company’s report on
                Form S-8 filed on April 8, 2003, and incorporated by this
                reference.10.3
            
            SYS
                2003 Employee Stock Purchase Plan filed as Exhibit 10.3 to the Company’s
                report on Form S-8 filed on April 8, 2003, and incorporated by this
                reference.10.4
            
            Employment
                contract for Clifton L. Cooke, Jr., the Company’s Chief Executive Officer
                filed as Exhibit 10.4 to the Company’s report on Form 10-KSB for the
                fiscal year ended June 30, 2004, and incorporated by this
                reference.10.5
            
            Employment
                contract for Edward M. Lake, the Company’s Chief Financial Officer and
                Executive Vice President of Financial Operations filed as Exhibit
                10.5 to
                the Company’s report on Form 10-KSB for the fiscal year ended
                June 30, 2004, and incorporated by this reference.10.6
            
            Employment
                contract for Michael W. Fink, the Company’s Secretary and Sr. Vice
                president of Finance and Contracts filed as Exhibit 10.6 to the Company’s
                report on Form 10-KSB for the fiscal year ended June 30, 2004, and
                incorporated by this reference.10.7
            
            Employment
                contract for Robert A. Babbush, the Company’s Assistant Secretary and Sr.
                Vice President of Administration filed as Exhibit 10.7 to the Company’s
                report on Form 10-KSB for the fiscal year ended June 30, 2004, and
                incorporated by this reference.10.8
            
            Employment
                contract for Colin Hirayama, the Company’s Sr. Vice President of
                Technology Assessment filed as Exhibit 10.8 to the Company’s report on
                Form 10-KSB for the fiscal year ended June 30, 2004, and incorporated
                by this reference.10.9
            
            Employment
                contract for Robert Holmes, the Company’s Defense Solutions Group’s Sr.
                Vice President of Defense Operations filed as Exhibit 10.9 to the
                Company’s report on Form 10-KSB for the fiscal year ended June 30,
                2004, and incorporated by this reference.10.10
            
            Employment
                contract for Kenneth D. Regan, the Company’s Defense Solutions Group’s
                President and Chief Operating Officer filed as Exhibit 10.10 to the
                Company’s report on Form 10-KSB for the fiscal year ended June 30,
                2004, and incorporated by this reference.10.11
            
            Employment
                contract for Linda E. Gagnon, the Company’s Defense Solutions Group’s
                Division Sr. Vice President, Engineering and Management Solutions
                filed as
                Exhibit 10.11 to the Company’s report on Form 10-KSB for the fiscal year
                ended June 30, 2004, and incorporated by this
                reference.10.12
            
            Restricted
                stock purchase agreement between SYS and Ben Goodwin dated August
                16,
                2005, filed as exhibit 99.1 to Form 8-K filed August 18,
                2005.31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





37








**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.






SYS(Registrant)Date:
            May
                19, 2006
            
            /s/
                Clifton L. Cooke, Jr.Clifton
                L. Cooke, Jr.Chief
                Executive OfficerDate:
            May
                19, 2006
            
            /s/
                Edward M. LakeEdward
                M. LakeChief
                Financial Officer








38


**Exhibit
      31.1**




**CERTIFICATION
      OF CHIEF EXECUTIVE OFFICER**




I,
      Clifton L. Cooke, Jr., certify that:




1.
      I have
      reviewed this quarterly report on Form 10-Q of SYS;




2.
      Based
      on my knowledge, this report does not contain any untrue statement of a material
      fact or omit to state a material fact necessary to make the statements made,
      in
      light of the circumstances under which such statements were made, not misleading
      with respect to the period covered by this report;





3.
      Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the financial
      condition, results of operations and cash flows of the registrant as of, and
      for, the periods presented in this report.




4.
      The
      registrant’s other certifying officer(s) and I are responsible for establishing
      and maintaining disclosure controls and procedures (as defined in Exchange
      Act
      Rules 13a-15(e) and 15d-15(e)) for the registrant and have:




a)
      Designed such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure that
      material information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities, particularly
      during the period in which this report is being prepared; and




b)
      Evaluated the effectiveness of the registrant’s disclosure controls and
      procedures and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period covered
      by this report based on such evaluation; and




c) 
      Disclosed in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent fiscal
      quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially affect,
      the
      registrant’s internal control over financial reporting; and




5.
      The
      registrant’s other certifying officer(s) and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      registrant’s auditors and the audit committee of registrant’s board of directors
      (or persons performing the equivalent functions):




a) 
      All significant deficiencies and material weaknesses in the design or operation
      of internal control over financial reporting which are reasonably likely to
      adversely affect the registrant’s ability to record, process, summarize and
      report financial information; and




b) 
      Any fraud, whether or not material, that involves management or other employees
      who have a significant role in the registrant’s internal control over financial
      reporting.






Dated:
                May 19, 2006
            
            By:
            /s/
                Clifton L. Cooke, Jr.Clifton
                L. Cooke, Jr.Chief
                Executive Officer








39


**Exhibit
      31.2**




**CERTIFICATION
      OF CHIEF FINANCIAL OFFICER**




I,
      Edward
      M. Lake, certify that:




1.
      I have
      reviewed this quarterly report on Form 10-Q of SYS;




2.
      Based
      on my knowledge, this report does not contain any untrue statement of a material
      fact or omit to state a material fact necessary to make the statements made,
      in
      light of the circumstances under which such statements were made, not misleading
      with respect to the period covered by this report;




3.
      Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the financial
      condition, results of operations and cash flows of the registrant as of, and
      for, the periods presented in this report.




4.
      The
      registrant’s other certifying officer(s) and I are responsible for establishing
      and maintaining disclosure controls and procedures (as defined in Exchange
      Act
      Rules 13a-15(e) and 15d-15(e)) for the registrant and have:




a)
      Designed such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure that
      material information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities, particularly
      during the period in which this report is being prepared; and




b)
      Evaluated the effectiveness of the registrant’s disclosure controls and
      procedures and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period covered
      by this report based on such evaluation; and




c)
      Disclosed in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent fiscal
      quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially affect,
      the
      registrant’s internal control over financial reporting; and




5.
      The
      registrant’s other certifying officer(s) and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      registrant’s auditors and the audit committee of registrant’s board of directors
      (or persons performing the equivalent functions):




a)
      All
      significant deficiencies and material weaknesses in the design or operation
      of
      internal control over financial reporting which are reasonably likely to
      adversely affect the registrant’s ability to record, process, summarize and
      report financial information; and




b)
      Any
      fraud, whether or not material, that involves management or other employees
      who
      have a significant role in the registrant’s internal control over financial
      reporting.






Dated:
                May 19, 2006
            
            By:
            /s/
                Edward M. LakeEdward
                M. LakeChief
                Financial Officer








40


**Exhibit
      32.1**




**CERTIFICATION
      OF CHIEF EXECUTIVE OFFICER**




I,
      Clifton L. Cooke, Jr., Chief Executive Officer of SYS (the “Registrant”), do
      hereby certify pursuant to Rule 15d-14(b) of the Securities and Exchange Act
      of
      1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
      States Code that:




(1)
      the
      Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
      ended March 31, 2006 (the “Report”), to which this statement is filed as an
      exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities Exchange Act of 1934, as amended; and




(2)
      the
      information contained in the Report fairly presents, in all material respects,
      the financial condition and results of operations of the
      Registrant.




Dated:
                May 19, 2006
            
            By:
            /s/
                Clifton L. Cooke, Jr.Clifton
                L. Cooke, Jr.Chief
                Executive Officer








41


**Exhibit
      32.2**




**CERTIFICATION
      OF CHIEF FINANCIAL OFFICER**




I,
      Edward
      M. Lake, Chief Financial Officer of SYS (the “Registrant”), do hereby certify
      pursuant to Rule 15d-14(b) of the Securities and Exchange Act of 1934, as
      amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
      that:




(1)
      the
      Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
      ended March 31, 2006 (the “Report”), to which this statement is filed as an
      exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
      the
      Securities Exchange Act of 1934, as amended; and




(2)
      the
      information contained in the Report fairly presents, in all material respects,
      the financial condition and results of operations of the
      Registrant.




Dated:
                May 19, 2006
            
            By:
            /s/
                Edward M. LakeEdward
                M. LakeChief
                Financial Officer