##### 



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 December 31, 2003

or

 ̈
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


For the Transition period from _______________ to ________________

Commission File Number 000-08193

SENSYTECH, INC.(Exact name of registrant as specified in its charter)


Delaware
    
    38-1873250(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)


8419 Terminal Road, Newington, Virginia 22122-1430
(Address of principal executive offices)



Issuers telephone number (703)550-7000

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, and (2) has been subject to such filing
requirements for the past 90 days.

Yes  ý
     No   ̈

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)

Yes   ̈
     No  ý

As of February 4, 2004, there were 6,536,512 shares of the Registrants
Common Stock, par value $.01 per share, outstanding.





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SENSYTECH, INC. AND
SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT

FOR THE QUARTER ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at December 31, 2003 and September 30, 2003
    
    
    3-4Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 2003 and December 31, 2002
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2003 and December 31, 2002
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7-10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16Signatures
    
    
    
    
    17Exhibits
    
    
    
    
    18-20


2



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SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

ASSETS

December 31, 2003
    
    September 30, 2003CURRENT ASSETSCash and cash equivalents
    
    $
    14,122,000
    
    
    $
    13,445,000Accounts receivable, net of allowance for
doubtful accounts of $200,000
    
    
    7,090,000
    
    
    
    15,916,000Unbilled contract costs, net
    
    
    14,386,000
    
    
    
    8,486,000Inventories
    
    
    1,976,000
    
    
    
    1,690,000Deferred income taxes
    
    
    885,000
    
    
    
    793,000Other current assets
    
    
    400,000
    
    
    
    328,000TOTAL CURRENT ASSETS
    
    
    38,859,000
    
    
    
    40,658,000PROPERTY AND EQUIPMENT
    
    
    4,107,000
    
    
    
    3,350,000OTHER ASSETSDeferred income taxes
    
    
    196,000
    
    
    
    224,000Intangibles, net
    
    
    108,000
    
    
    
    133,000Other assets
    
    
    187,000
    
    
    
    73,000TOTAL ASSETS
    
    $
    43,457,000
    
    
    $
    44,438,000


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

3



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SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited), continued

LIABILITIES AND STOCKHOLDERS EQUITY

December 31, 2003
    
    September 30, 2003CURRENT LIABILITIESAccounts payable, including related party payables
of $52,000 and $51,000
    
    $
    2,723,000
    
    
    $
    3,780,000Accrued salaries, benefits, and related expenses
    
    
    1,481,000
    
    
    
    2,628,000Other accrued expenses
    
    
    1,093,000
    
    
    
    862,000Billings in excess of costs
    
    
    520,000
    
    
    
    1,172,000Income taxes payable
    
    
    462,000
    
    
    
    63,000TOTAL CURRENT LIABILITIES
    
    
    6,279,000
    
    
    
    8,505,000Commitments and ContingenciesSTOCKHOLDERS EQUITYCommon Stock, $.01 par value; 25,000,000 shares
authorized; 6,642,090 and 6,617,223 shares issued
at December 31, 2003 and September 30, 2003
    
    
    66,000
    
    
    
    66,000Additional paid-in capital
    
    
    25,544,000
    
    
    
    25,172,000Treasury stock, at cost, 126,245 shares at
December 31, 2003 and September 30, 2003
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    12,102,000
    
    
    
    11,229,000TOTAL STOCKHOLDERS EQUITY
    
    
    37,178,000
    
    
    
    35,933,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    43,457,000
    
    
    $
    44,438,000


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

4



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SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the Three Months EndedDecember 31,2003
    
    2002REVENUESContract revenues
    
    $
    12,665,000
    
    
    $
    11,723,000COSTS AND EXPENSESCost of revenues, including related party expenses
of $4,000 and $11,000
    
    
    9,509,000
    
    
    
    9,251,000General and administrative expenses, including
related party expenses of $112,000 and $10,000
    
    
    1,698,000
    
    
    
    1,063,000Total costs and expenses
    
    
    11,207,000
    
    
    
    10,314,000INCOME FROM OPERATIONS
    
    
    1,458,000
    
    
    
    1,409,000OTHER INCOME (EXPENSES)Interest income
    
    
    17,000
    
    
    
    5,000Interest expense
    
    
    
    
    
    
    (45,000
    )Other income (expenses), net
    
    
    4,000
    
    
    
    (6,000
    )INCOME BEFORE INCOME TAXES
    
    
    1,479,000
    
    
    
    1,363,000INCOME TAX PROVISION
    
    
    (606,000
    )
    
    
    (559,000
    )NET INCOME
    
    $
    873,000
    
    
    $
    804,000PER SHARE AMOUNTBasic earnings per share
    
    $
    0.13
    
    
    $
    0.16Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.16


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

5



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SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months EndedDecember 31,2003
    
    2002Cash flows from operating activities:Net income
    
    $
    873,000
    
    
    $
    804,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    263,000
    
    
    
    260,000Stock-based compensation expense
    
    
    144,000
    
    
    
    Deferred taxes
    
    
    (64,000
    )
    
    
    (180,000
    )Cash provided (used) by assets and liabilitiesAccounts receivable
    
    
    8,826,000
    
    
    
    (1,332,000
    )Unbilled contract costs
    
    
    (5,900,000
    )
    
    
    (492,000
    )Inventories
    
    
    (286,000
    )
    
    
    92,000Other assets
    
    
    (186,000
    )
    
    
    278,000Income taxes payable
    
    
    454,000
    
    
    
    26,000Accounts payable
    
    
    (1,057,000
    )
    
    
    (1,297,000
    )Other accrued expenses
    
    
    (916,000
    )
    
    
    (99,000
    )Billing in excess of costs
    
    
    (652,000
    )
    
    
    (1,156,000
    )Net cash provided by (used in) operating activities
    
    
    1,499,000
    
    
    
    (3,096,000
    )Cash flows from investing activities:Net acquisition of property and equipment
    
    
    (995,000
    )
    
    
    (306,000
    )Net cash used in investing activities
    
    
    (995,000
    )
    
    
    (306,000
    )Cash flows from financing activities:Stock issuance costs
    
    
    
    
    
    
    (1,774,000
    )Proceeds from line of credit
    
    
    
    
    
    
    2,055,000Repayments of line of credit
    
    
    
    
    
    
    (4,955,000
    )Proceeds from stock issuance
    
    
    
    
    
    
    18,400,000Proceeds of stock option exercises
    
    
    173,000
    
    
    
    48,000Purchase of treasury stock
    
    
    
    
    
    
    (9,000
    )Net cash provided financing activities
    
    
    173,000
    
    
    
    13,765,000Net increase in cash and cash equivalents
    
    
    677,000
    
    
    
    10,363,000Cash and cash equivalents, beginning of period
    
    
    13,445,000
    
    
    
    700,000Cash and cash equivalents, end of period
    
    $
    14,122,000
    
    
    $
    11,063,000Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    55,000Cash paid for income taxes
    
    $
    216,000
    
    
    $
    712,000Non-cash investing and financing activities:Tax benefit on stock option exercises included in additional paid-in capital
    
    $
    55,000
    
    
    $
    17,000Stock issuance costs included in accounts payable
    
    $
    
    
    
    $
    143,000


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

6



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SENSYTECH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring items) considered necessary for fair presentation have been
included. Operating results for the three-month period ended December 31,
2003, are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2004. Inter-company accounts and
transactions have been eliminated in consolidation. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Sensytech, Inc.s Annual Report on Form 10-K for the fiscal year ended
September 30, 2003.

2. RECLASSIFICATIONS

Certain reclassifications, including segment information discussed in Note
6, were made to conform the prior year financial statements to the presentation
adopted in the 2004 consolidated financial statements.

3. INVENTORIES

Inventories consist of the following:

December 31, 2003
    
    September 30, 2003Raw materials
    
    $
    864,000
    
    
    $
    515,000Component parts, work in process
    
    
    1,112,000
    
    
    
    1,141,000Finished component parts
    
    
    
    
    
    
    34,000$
    1,976,000
    
    
    $
    1,690,000


4. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
computed using the weighted average number of common and common equivalent
shares outstanding during each period. The following summary is presented for
the three month periods ended December 31:

December 31,2003
    
    2002Net income
    
    $
    873,000
    
    
    $
    804,000Weighted average shares outstanding  basic
    
    
    6,499,000
    
    
    
    5,049,000Effect of dilutive securities:Net shares issuable upon exercise of stock options
    
    
    177,000
    
    
    
    130,000Weighted average shares outstanding  diluted
    
    
    6,676,000
    
    
    
    5,179,000Basic earnings per share
    
    $
    .13
    
    
    $
    .16Diluted earnings per share
    
    $
    .13
    
    
    $
    .16


7



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5. STOCK OPTION COMPENSATION

The Company continues to account for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations using
the intrinsic value method, which resulted in compensation cost for options
granted of $144,000 for the three month period ended December 31, 2003. No
compensation expense was recorded for the three months ended December 31, 2002.
Had compensation expense for the Companys four stock-based compensation plans
been determined based upon fair values at the grant dates for awards under
those plans in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the Companys net income and earnings per share for the three
months ended December 31, would have been reduced to the pro forma amounts
indicated below.

December 31,2003
    
    2002Net income, as reported
    
    $
    873,000
    
    
    $
    804,000Less: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects
    
    
    49,000
    
    
    
    66,000Pro forma net income
    
    $
    824,000
    
    
    $
    738,000Earnings per share:Basic  as reported
    
    $
    .13
    
    
    $
    .16Basic  pro forma
    
    $
    .13
    
    
    $
    .15Diluted  as reported
    
    $
    .13
    
    
    $
    .16Diluted  pro forma
    
    $
    .12
    
    
    $
    .14


6. SEGMENT INFORMATION

The Company operates in the passive surveillance and countermeasures
market for domestic and international clients. The Companys systems are
globally applicable to the defense markets and their allied information
agencies for land, air, and sea-based applications. The Company believes that
its passive surveillance and countermeasures products and services are among
the best in the world. The Companys goal is to provide its customers with
total system surveillance solutions across the electromagnetic spectrum, using
products manufactured by it and by others. The Company has elected to merge
the Communications and Imaging Groups and form the Surveillance
Technology Group for fiscal year 2004. Accordingly, information from prior years has been
restated to reflect that change. The Company is customer-focused and provides
tailored, solution-based systems through the following groups:



| |  | Defense Systems (DS) Group designs, develops, manufactures, and
supports products which intercept, analyze, classify, identify, locate
and track microwave signals from radars and weapons, which may
originate from potentially hostile sources. It provides communication
data links and remote targeting systems and provides equipment and
systems, which are used to carry out defensive measures against hostile
signals or their sources to protect high value assets. The groups
systems are used on military platforms, such as ships, submarines,
patrol aircraft, as well as at ground installations.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Surveillance Technology (Surveillance) Group designs, develops,
manufactures, and supports products which intercept signals and analyze
communications in a variety of transmission media, and then identify
and locate the sources of these signals and communication. These
systems are generally used by operators on board aircraft, ships and
ground installations to intercept various kinds of transmissions over
established communications networks.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



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| |  | Surveillance also designs,
develops, manufactures and supports products that are installed on
special purpose aircraft and land vehicles and use multispectral,
infrared, and light imaging systems to perform remote surveys.
Applications of this technology include environmental pollution,
facility inspection, utility monitoring, surface mineral exploration
and other special purpose inspections where on-site inspections are not
possible or desirable.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Both business segments offer applicable system engineering services which
provide concept studies, system definition and services to aid in specification
of customer requirements. These activities are performed for either present or
prospective customers and are principally undertaken to assist the customer in
the procurement of major integrated passive surveillance systems and where
applicable, active electronic countermeasures.

The Surveillance Group manufactures in its Newington, Virginia and Ann
Arbor, Michigan facilities. The Defense Systems Group manufactures in its
Newington, Virginia; Camarillo, California; Smithfield, Pennsylvania and
Farmingdale, New Jersey facilities.

The Company does not have a significant amount of inter-segment revenue
and evaluates segment performance based upon revenue and income from operations
by group. The combined segments income from operations equals the income from
operations as reported in the Consolidated Income Statements of the Company.
The Company does not allocate interest, other income and expenses or income
taxes to the two segments and does not produce separate balance sheet
information for each segment. The revenue and income from operations by segment
for the three months ended December 31 are as follows:

December 31,2003
    
    2002Revenue:DS
    
    $
    7,880,000
    
    
    $
    6,449,000Surveillance
    
    
    4,785,000
    
    
    
    5,274,000Total
    
    $
    12,665,000
    
    
    $
    11,723,000Income From Operations:DS
    
    $
    (156,000
    )
    
    $
    417,000Surveillance
    
    
    1,614,000
    
    
    
    992,000Total
    
    $
    1,458,000
    
    
    $
    1,409,000


7. RECENTLY ISSUED ACCOUNTING STANDARD

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation
and disclosure by business enterprises of variable interest entities. The
consolidated requirements of FIN 46 apply to existing variable interest
entities in the first fiscal year or interim period beginning after June 15,
2003. FIN 46 does not have any impact on the consolidated financial statements
or disclosures of the Company as it does not have any variable interest
entities.

In April 2003, the FASB issues Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS No, 149). SFAS
No. 149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The provisions of SFAS No. 149 are effective for
contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003. SFAS
No. 149 is not expected to have any impact on the consolidated financial
statements or disclosures of the Company as it does not have any derivative
instruments or hedging activities.

9



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In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 changes the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
At present, the Company has not issued financial instruments with
characteristics of both liabilities and equity.

8. PRODUCT WARRANTY

The Company records estimated warranty costs on the accrual basis of
accounting. These reserves are based on the expected cost of providing
materials and service within the agreed upon period. Activity in the warranty
accrual is as follow:

Three Months EndingDecember 31,2003
    
    2002Balance  beginning of period
    
    $
    412,000
    
    
    $
    276,000Accruals for warranties issued during the period
    
    
    52,000
    
    
    
    489,000Settlements during the period
    
    
    (52,000
    )
    
    
    (15,000
    )Balance  end of period
    
    $
    412,000
    
    
    $
    750,000


9. COST ASSOCIATED WITH EXIT ACTIVITY

On July 15, 2003, the Company announced its intention to close the
facility in Farmingdale, New Jersey and move these operations to Smithfield,
Pennsylvania. In September 2003, the Company signed a lease for a 60,000
square foot facility for its Smithfield, Pennsylvania operations. The term of
the lease is for ten years with two five year options. The Company anticipates
this move to be completed in February 2004. Employees not transferring from
the New Jersey location will receive severance pay and/or retention bonuses,
providing they leave the Company in accordance with the Companys transition
plan. The cost associated with the severance and retention plan is estimated
to be approximately $275,000. To date, $270,000 of severance and retention has
been expensed of which $147,000 was expensed during the three months ended
December 31, 2003, and $198,000 was accrued and unpaid as of this date. Other
exit costs associated with the transition are estimated to be $893,000. These
costs consist principally of training, relocation and moving costs. To date,
$404,000 of these costs has been expensed of which $264,000 was expensed during
the three months ended December 31, 2003. The cost of the severance and
retention plan and the other exit costs are reported in the cost of revenues
and general and administrative expense line items of the Consolidated
Statements of Income.

10. RELATED PARTY TRANSACTIONS

The Company has entered into an agreement with Rockwell Venture Capital,
Inc, a privately owned company controlled by S. Kent Rockwell, the Companys
Chief Executive Officer, to rent an aircraft used for Company business. The
Company believes that the terms of the rental agreement are at least as
favorable as those it could obtain from an unrelated third party. For the
three months ended December 31, 2003, the Company recorded expenses of $116,000
for the use of the aircraft of which $52,000 was unpaid as of December 31,
2003.

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

The following discussion provides information which management believes is
relevant to an assessment and an understanding of the Companys operations and
financial condition. This discussion should be read in conjunction with the
condensed consolidated financial statements and accompanying notes.

10



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Forward-looking Statements

Statements in this filing which are not historical facts are
forward-looking statements under the provision of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks
and uncertainties. These statements are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions or results may materially differ from the anticipated events,
transactions or results described in such statements. The Companys ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. In addition to those specifically mentioned
above, such risks and uncertainties include, but are not limited to, the
existence of demand for, and acceptance of the Companys products and services,
regulatory approvals, export approvals, economic conditions both domestically
and internationally, the impact of competition and pricing, results of
financing efforts and other factors affecting the Companys business that are
beyond the Companys control. All of our forward-looking statements should be
considered in light of these factors. You should not put undue reliance on any
forward-looking statements. The Company undertakes no obligation to update
these forward-looking statements to reflect new information, future events or
otherwise, except as provided by law.

Overview

The Company is a designer, developer and manufacturer of electronics,
communications and technology products for the defense and intelligence
markets. Specifically, the Company specializes in integrated passive
surveillance, communications and data links, electronic countermeasures and
threat simulators, and airborne imaging and scanning systems. Its products are
developed for use primarily by U.S. federal government customers and U.S.
approved foreign governments, including U.S. defense and intelligence agencies,
foreign governments agencies, and civilian agencies.

The Companys revenues are primarily derived from fixed-price contracts,
under which it performs specific tasks for a fixed price. Under fixed-price
contracts the Company assumes the risk of cost overruns and receives the
benefit of cost savings. All of the Companys U.S. federal government
contracts, whether it is the prime contractor or a subcontractor, are subject
to audit and cost controls. As a result, the U.S. federal government
contracting authorities typically have the right to object to the Companys
costs as not allowable or as unreasonable, which can result in it bearing all
or a portion of these costs itself rather than recovering them from the U.S.
federal government.

To estimate revenues for performance under U.S. federal government
fixed-price and cost-reimbursement contracts, including customer-funded
research and development, the Company uses the percentage of completion method
of accounting under which estimated revenues are determined on the basis of
completion to date (i.e., the total contract amount multiplied by percent of
performance to date less revenue value recognized in previous periods). The
Company records revenues under cost-reimbursement contracts as costs are
incurred and it includes estimated earned fees in the proportion that costs
incurred to date bear to total estimated costs. The Company increases or
decreases fees under certain U.S. federal government contracts in accordance
with cost or performance incentive provisions which measure actual performance
against established targets or other criteria. The Company includes such
incentive fee awards or penalties, which historically are not material, in
revenues at the time the amounts can be determined reasonably. The Company
recognizes anticipated probable losses at the time they become known. The
Companys future operating results may be affected if actual contract costs
incurred differ from our current estimates of total contract costs.

The Company expenses operating costs such as cost of revenues, general and
administrative, independent research and development expenses, and bid and
proposal costs in the period incurred. The major components of these costs are
compensation, materials, and overhead. Intangible assets are amortized over
their useful lives.

The Companys results of operations, particularly its revenues, gross
profit and cash flow, may vary significantly from period to period depending on
a number of factors, including the progress of contract performance, revenues
earned on contracts, the timing of customer orders and billing of other direct
costs, timing of receipt of significant change orders, the commencement and
completion of contracts during any particular quarter, the timing of government
contract awards, the term of each contract that it has been awarded, foreign
budget reallocations, currency fluctuations, and general political and economic
conditions.

11



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##### 



Because a significant portion of our expenses, such as personnel
and facilities costs, are fixed in the short term, successful contract
performance and variation in the volume of activity, as well as in the number
of contracts commenced or completed during any period may cause significant
variations in operating results. As a result of the factors above,
period-to-period comparisons of its revenues and operating results may not be
meaningful.

Three Months Ended December 31, 2003 Compared to Three Months Ended December
31, 2002

Revenues:

Revenues increased $942,000, or 8.0% to $12,665,000 for the three months
ended December 31, 2003 from $11,723,000 for the three months ended December
31, 2002. The increase was due primarily to new contract awards or
modifications of existing contracts in the Defense Systems Group of $1,431,000,
offset by a decrease in the Surveillance Technology Group of $489,000. During
the three months ended December 31, 2003, the four largest non-classified
revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense
System, the AN/SLQ-4A Radio Terminal Set, the Quickstrike mine and the
AN/SLQ-25A Engineering R&D, which contributed 33.7% of revenues.

The total amount of negotiated backlog, including both unfilled firm
orders for the Companys products for which funding had been authorized and
appropriated by the customer and firm orders for which funding had not been
appropriated as of December 31, 2003 and 2002, was $21,293,000 and $34,980,000,
respectively.

Cost of Revenues:

Cost of revenues increased $258,000, or 2.8%, to $9,509,000 for the three
months ended December 31, 2003 from $9,251,000 for the three months ended
December 31, 2002. Cost of revenues as a percentage of revenues decreased to
75.1% for the three months ended December 31, 2003 from 78.9% for the three
months ended December 31, 2002.

General and Administrative Expenses:

General and administrative expenses increased $635,000, or 59.7%, to
$1,698,000 for the three months ended December 31, 2003 from $1,063,000 for the
three months ended December 31, 2002. The increase was due principally to an
increase in bid & proposal/internal research and development of $434,000 and an
increase in stock based compensation of $144,000. The remaining increase is
due to higher salaries and benefits over the prior year.

For the three months ended December 31, 2003, internal research and
development was $494,000 compared to $155,000 for the three months ended
December 31, 2002 and represented 29.1% and 14.6% of general and administrative
expense, respectively.

Income Tax Expense:

Income tax expense consists of federal and state income taxes. Income tax
expense increased $47,000 or 8.4% to $606,000 for the three months ended
December 31, 2003, from $559,000 for the three months ended December 31, 2002.
The increase was primarily due to increased and improved profitability for the
three month period ended December 31, 2003. Our effective tax rate was 41.0%
for the three months ended December 31, 2003 and 2002 and varies from the
federal statutory rate primarily due to state taxes and other nondeductible
expenses.

Net Income:

Net income increased $69,000, or 8.6%, to $873,000 for the three months
ended December 31, 2003 from $804,000 for the three months ended December 31,
2002. The increase was the result of an increase in revenues that was
partially offset by an increase in costs and expenses. Net income as a percentage of
revenue was 6.9% for the three month periods ended December 31, 2003 and 2002.

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Liquidity and Capital Resources

Historically, our primary source of liquidity is cash provided by
operations and our line of credit. Our liquidity requirements depend on a
number of factors, including the timing of production under our federal
government and foreign sales contracts. We had cash and cash equivalents of
$14,122,000 at December 31, 2003, as compared to $11,063,000 at December 31,
2002. The increase was primarily due to an increase in cash provided by
operating activities, partially offset by cash invested in plant and equipment.

Cash provided by operating activities was approximately $1,499,000 for the
three months ended December 31, 2003 compared to cash used in operating
activities of approximately $3,096,000 for the three months ended December 31,
2002, an increase of approximately $4,595,000. The primary reasons for this
increase were a net decrease in billed accounts receivable and unbilled
contract cost of $4,750,000, partially offset by increases in inventory and
decreases in accounts payable or other accrued expenses.

Cash used in investing activities was approximately $995,000 during the
three months ended December 31, 2003 compared to approximately $306,000 for the
three months ended December 31, 2002, an increase of approximately $689,000.
The primary reasons for the increase was property and equipment acquired for
the new facility in Smithfield, Pennsylvania during the three months ended
December 31, 2003.

Cash provided by financing activities was approximately $173,000 during
the three months ended December 31, 2003 compared to cash used in financing
activities of approximately $13,765,000 for the three months ended December 31,
2002, a decrease of $13,592,000. The primary reasons for this decrease was the
net proceeds of $16,467,000 received from the sale of 2.3 million shares of
common stock, which was partially offset by cash used for the repayment of the
line of credit in 2003 compared to only proceeds from stock options exercises
in 2004.

The Company has a $15,000,000 line of credit with Bank of America. The
line of credit is for one year and is set to expire on February 28, 2004. The
Company is in negotiations with Bank of America to renew the line of credit.
The total borrowing base generally cannot exceed the sum of 90% of qualified
government accounts receivable and 80% of qualified non-government accounts
receivable. Total letters of credit at December 31, 2003 were $1,180,000. The
line of credit is available to finance the performance of government contracts,
to support the issuance of stand-by letters of credit, and for short-term
working capital purposes. At December 31, 2003, there were no borrowings under
the line of credit. The borrowing base at December 31, 2003 was $1,202,000

The bank agreement establishes the interest rate at the LIBOR plus 200 to
285 basis points, determined by the Companys ratio of funded debt to earnings
before interest, taxes, depreciation and amortization. All borrowings under
the line of credit are collateralized by the Companys accounts receivable,
equipment, contracts, and general intangibles. The agreement also contains
various covenants as to dividends restrictions, working capital, tangible net
worth, earnings and debt-to-equity ratios. Unused commitment fees of one
quarter or one percent per annum are required.

Market Risks

In addition to the risks inherent in its operations, the Company is
exposed to certain financial, market, political and economic risks. The
following discussion provides additional detail regarding its exposure to
credit, interest rates and foreign exchange rates.

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Cash and Cash Equivalents:

All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents. The
Company maintains cash and cash equivalents with various financial institutions
in excess of the amount insured by the Federal Deposit Insurance Corporation.
It believes that any credit risk related to these cash and cash equivalents is
minimal.

Interest Rates:

The Companys line of credit financing provides available borrowing to it
at variable interest rates. There were no outstanding borrowings at December
31, 2003. Accordingly, the Company does not believe that any movement in
interest rates would have a material impact on future earnings or cash flows.
However, if the Company were to significantly increase borrowing under the
current line of credit agreement, future interest rate changes could
potentially have a material impact.

Foreign Currency:

The Company has contracts to provide services to U.S. approved foreign
countries. Its foreign sales contracts require payment in U.S. dollars, so it
is not affected by foreign currency fluctuations.

Contractual Obligations and Commitments:

Contractual Cash Obligations:

Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due inTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterOperating leases
    
    $
    12,111,000
    
    
    $
    976,000
    
    
    $
    1,225,000
    
    
    $
    1,221,000
    
    
    $
    1,184,000
    
    
    $
    1,168,000
    
    
    $
    6,337,000Line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,111,000
    
    
    $
    976,000
    
    
    $
    1,225,000
    
    
    $
    1,221,000
    
    
    $
    1,184,000
    
    
    $
    1,168,000
    
    
    $
    6,337,000


Other Commercial Commitments:

Total
    
    Less than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    1,180,000
    
    
    $
    641,000
    
    
    $
    539,000


Cost Associated with Exit Activity

On July 15, 2003, the Company announced its intention to close the
facility in Farmingdale, New Jersey and move these operations to Smithfield,
Pennsylvania. In September 2003, the Company signed a lease for a 60,000
square foot facility for its Smithfield, Pennsylvania operations. The term of
the lease is for ten years with two five year options. The Company anticipates
this move to be completed in February 2004. Employees not transferring from
the New Jersey location will receive severance pay and/or retention bonuses,
providing they leave the Company in accordance with the Companys transition
plan. The cost associated with the severance and retention plan is estimated
to be approximately $275,000. To date, $270,000 of severance and retention has
been expensed of which $147,000 was expensed during the three months ended
December 31, 2003, and $198,000 was accrued and unpaid as of this date. Other
exit costs associated with the transition are estimated to be $893,000. These
costs consist principally of training, relocation and moving costs.

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To date,
$404,000 of these costs has been expensed of which $264,000 was expensed during
the three months ended December 31, 2003. The cost of the severance and
retention plan and the other exit costs are reported in the cost of revenues
and general and administrative expense line items of the Consolidated
Statements of Income.

Critical Accounting Policies and Estimates

The Companys consolidated financial statements are based on the
application of significant accounting policies, which require management to
make significant estimates and assumptions. The Company believes that the
following are the critical judgment areas in the application of its accounting
policies that affect its financial position and results of operations.

Revenue Recognition:

Most of the Companys sales are generated under U.S. Federal government
fixed-price and cost-type contracts, which require revenue recognition
judgments. Revenues are primarily recognized on the percentage of completion
basis. In doing so, the Company makes important judgments in estimating
revenue, cost and progress towards completion. The Company has an internal
process where it monitors contract performance and cost on a monthly basis.
Each quarter, management reviews, among other items, progress against schedule,
project staffing, risks and issues, subcontract management, incurred and
estimated costs, and disposition of prior action items. These judgments
underlie the Companys determinations regarding overall contract value,
contract profitability, and timing of revenue recognition. Revenue and cost
estimates are revised periodically based on changes in circumstances. To the
extent that a revised estimate affects contract profit or revenue previously
recognized, the Company records the effect of the revision in the period in
which the facts requiring the revision become known. If the estimated cost to
complete exceeds the value of the contract, a reserve for estimated loss is
recognized immediately. It is reasonably possible that future operating
results may be affected if actual contract costs incurred differ from total
contract costs currently estimated by management. Revenue under time and
material contracts is based on hours incurred times approved loaded labor rates
plus other cost incurred plus general and administrative expense allocated to
other costs incurred. The Company has no reason to believe that cost and
estimated earning in excess of billing on uncompleted contracts are not
realizable.

Accounts Receivable:

The Company is required to estimate the collectibility of its trade
receivables. Judgment is required in assessing the realization of receivables,
and the reserve requirements are based on the best facts available to the
Company. Since most of the Companys sales are generated under U.S. Federal
government contracts, its allowance for doubtful accounts is not significant.

Inventories:

The Company records its inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, the Company is required to
make judgments as to future demand requirements and compare these with the
current or committed inventory levels. Inventory is generally purchased to
fulfill a specific contract commitment. The Company wrote down inventory for a
specific project in 2003. The inventory was purchased, built and configured
for the specific project, and such project has been delayed and has not yet
been awarded. As a result, the Company wrote down the inventory based on
expected uses in the next nine months. The Company has allocated and will
continue to allocate this inventory to other business objectives when given the
opportunity.

Income Taxes:

The Company currently has deferred tax assets resulting from net operating
loss carryforwards, which will reduce taxable income in future periods. At
December 31, 2003 and 2002, the Company did not provide a valuation allowance
as
it believed it was more likely than not that the remaining net deferred tax
assets will be realized, principally based on forecasted taxable income.

15



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The
Companys new Pennsylvania production facility is within the Keystone
Opportunity Zone. As a result, income from that facility is exempt from state
and local taxes for a period of ten years.

Recently Issued Accounting Standard

See the notes accompanying the unaudited consolidated financial statements
as of and for the three months ended December 31, 2003.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The information called for by this item is provided under Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Item 4. Controls and Procedures



|(a) |  | Our management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered
by this Quarterly Report on Form 10-Q. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | During the last quarter, there were no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation of these controls.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART II  OTHER INFORMATION

Item 6. Exhibits and Report on Form 8-K

Exhibits

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*
    
    Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished but
not filed as an exhibit to this report of Form 10-Q.




---

|* |  | Document filed herewith.
|- |  | ------------------------

Reports on Form 8-K
A Form 8K was filed on October 24, 2003 providing information under Item 5.
A Form 8K was filed on October 24, 2003 providing information under Item 9.
A Form 8K was filed on December 18, 2003 providing information under Item 12.

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SIGNATURES

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

SENSYTECH, INC.February 12, 2004
    
    By:
    
    /s/ S. Kent RockwellS. Kent RockwellChairman and Chief Executive OfficerFebruary 12, 2004
    
    By:
    
    /s/ Donald F. FultzDonald F. FultzVice President and Chief Financial Officer


17