##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2003

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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)


Registrant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 | ü |  | No | 
|    |   |  |    | 

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

|    |  |  |    |  
|--- |  |  | -- | -
|Yes |  |  | No | ü
|    |  |  |    |  

As of August 1, 2003, there were 6,486,678 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 JUNE 30, 2003

TABLE OF CONTENTS

|               |         |                       |                                                                                       |                                                                                                                                                                   |       |       |      | 
|-------------- | ------- | --------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ----- | ---- | 
|PART I.        |         | FINANCIAL INFORMATION |                                                                                       |                                                                                                                                                                   |       |      
|               | Item 1. |                       | Financial Statements (Unaudited)                                                      |                                                                                                                                                                   |       |       |     
|               |         |                       |                                                                                       | Condensed Consolidated Balance Sheets at June 30, 2003 and September 30, 2002                                                                                     |       |       | 3-4  | 
|               |         |                       |                                                                                       | Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 2003 and June 30, 2002,
and the Nine Months Ended June 30, 2003 and June 30, 2002 |       |       | 5    | 
|               |         |                       |                                                                                       | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2003 and June 30, 2002                                                         |       |       | 6    | 
|               |         |                       |                                                                                       | Notes to Condensed Consolidated Financial Statements                                                                                                              |       |       | 7-11 | 
|               | Item 2. |                       | Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                                                   |       | 11-17 |     
|               | Item 3. |                       | Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                                                   |       | 17    |     
|               | Item 4. |                       | Controls and Procedures                                                               |                                                                                                                                                                   |       | 17    |     
|PART II.       |         | OTHER INFORMATION     |                                                                                       |                                                                                                                                                                   |       |      
|               | Item 4. |                       | Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                                                   |       | 18    |     
|               | Item 6. |                       | Exhibits and Reports of Form 8-K                                                      |                                                                                                                                                                   |       | 18    |     
|Signatures     |         |                       |                                                                                       |                                                                                                                                                                   | 19    |      
|Certifications |         |                       |                                                                                       |                                                                                                                                                                   | 20-22 |      

2



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##### 



PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

ASSETS

|                       |                                                                         |   |               |            |                    |   |            |           | 
|---------------------- | ----------------------------------------------------------------------- | - | ------------- | ---------- | ------------------ | - | ---------- | --------- | 
|                       |                                                                         |   | June 30, 2003 |            | September 30, 2002
|                       |                                                                         |   |               |            |                   
|CURRENT ASSETS         |                                                                         |   |               |            |                    |   |            |          
|                       | Cash and cash equivalents                                               |   | $             | 18,769,000 |                    |   | $          | 700,000   | 
|                       | Accounts receivable, net of allowance for
doubtful accounts of $200,000 |   |               | 9,595,000  |                    |   |            | 8,880,000 | 
|                       | Unbilled contract costs, net                                            |   |               | 7,274,000  |                    |   |            | 8,820,000 | 
|                       | Inventories                                                             |   |               | 2,166,000  |                    |   |            | 3,168,000 | 
|                       | Deferred income taxes                                                   |   |               | 411,000    |                    |   |            | 411,000   | 
|                       | Other current assets                                                    |   |               | 409,000    |                    |   |            | 272,000   | 
|                       |                                                                         |   |               |            |                    |   |            |           | 
|TOTAL CURRENT ASSETS   |                                                                         |   | 38,624,000    |            |                    |   | 22,251,000 |          
|PROPERTY AND EQUIPMENT |                                                                         |   | 2,696,000     |            |                    |   | 2,608,000  |          
|OTHER ASSETS           |                                                                         |   |               |            |                    |   |            |          
|                       | Deferred income taxes                                                   |   |               | 216,000    |                    |   |            | 260,000   | 
|                       | Intangibles, net                                                        |   |               | 175,000    |                    |   |            | 400,000   | 
|                       | Other assets                                                            |   |               | 103,000    |                    |   |            | 333,000   | 
|                       |                                                                         |   |               |            |                    |   |            |           | 
|TOTAL ASSETS           |                                                                         | $ | 41,814,000    |            |                    | $ | 25,852,000 |          
|                       |                                                                         |   |               |            |                    |   |            |           | 

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

|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | ---------- | ------------------ | - | ---------- | --------- | -
|                                           |                                                                                                                                           |   | June 30, 2003 |            | September 30, 2002
|                                           |                                                                                                                                           |   |               |            |                   
|CURRENT LIABILITIES                        |                                                                                                                                           |   |               |            |                    |   |            |          
|                                           | Line of credit                                                                                                                            |   | $             |           |                    |   | $          | 2,900,000 |  
|                                           | Accounts payable                                                                                                                          |   |               | 1,789,000  |                    |   |            | 2,916,000 |  
|                                           | Accrued salaries, benefits, and related expenses                                                                                          |   |               | 2,200,000  |                    |   |            | 2,093,000 |  
|                                           | Other accrued expenses                                                                                                                    |   |               | 1,441,000  |                    |   |            | 438,000   |  
|                                           | Billings in excess of costs                                                                                                               |   |               | 1,578,000  |                    |   |            | 2,342,000 |  
|                                           | Income taxes payable                                                                                                                      |   |               | 205,000    |                    |   |            | 497,000   |  
|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  
|TOTAL CURRENT LIABILITIES                  |                                                                                                                                           |   | 7,213,000     |            |                    |   | 11,186,000 |          
|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  
|STOCKHOLDERS EQUITY                       |                                                                                                                                           |   |               |            |                    |   |            |          
|                                           | Common Stock, $.01 par value; 25,000,000 shares
authorized; 6,606,023 and 4,239,223 shares issued
at June 30, 2003 and September 30, 2002 |   |               | 66,000     |                    |   |            | 42,000    |  
|                                           | Additional paid-in capital                                                                                                                |   |               | 24,943,000 |                    |   |            | 7,972,000 |  
|                                           | Treasury stock, at cost, 126,245 shares at
June 30, 2003 and 125,245 shares at
September 30, 2002                                         |   |               | (534,000   | )                  |   |            | (525,000  | )
|                                           | Retained earnings                                                                                                                         |   |               | 10,126,000 |                    |   |            | 7,177,000 |  
|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  
|TOTAL STOCKHOLDERS EQUITY                 |                                                                                                                                           |   | 34,601,000    |            |                    |   | 14,666,000 |          
|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                           | $ | 41,814,000    |            |                    | $ | 25,852,000 |          
|                                           |                                                                                                                                           |   |               |            |                    |   |            |           |  

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 Ended |            | For the Nine Months Ended
|                           |                                     |                          |           | June 30,                   |            | June 30,                 
|                           |                                     |                          |           |                            |            |                          
|                           |                                     |                          |           | 2003                       |            | 2002                      |           | 2003      |           | 2002
|                           |                                     |                          |           |                            |            |                           |           |           |           |     
|REVENUES                   |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |           
|                           | Contract revenues                   |                          | $         | 13,100,000                 |            |                           | $         | 9,031,000 |           |      | $          | 37,676,000 |            |   | $          | 20,509,000 |           
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|COSTS AND EXPENSES         |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |           
|                           | Cost of revenues                    |                          |           | 9,704,000                  |            |                           |           | 7,165,000 |           |      |            | 28,443,000 |            |   |            | 15,363,000 |           
|                           | General and administrative expenses |                          |           | 1,645,000                  |            |                           |           | 724,000   |           |      |            | 4,267,000  |            |   |            | 2,529,000  |           
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|                           |                                     | Total costs and expenses |           |                            | 11,349,000 |                           |           |           | 7,889,000 |      |            |            | 32,710,000 |   |            |            | 17,892,000 | 
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|INCOME FROM OPERATIONS     |                                     |                          | 1,751,000 |                            |            |                           | 1,142,000 |           |           |      | 4,966,000  |            |            |   | 2,617,000  |           
|OTHER INCOME (EXPENSES)    |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |           
|                           | Interest income                     |                          |           | 36,000                     |            |                           |           | 2,000     |           |      |            | 79,000     |            |   |            | 33,000     |           
|                           | Interest expense                    |                          |           | (1,000                     | )          |                           |           | (7,000    | )         |      |            | (49,000    | )          |   |            | (9,000     | )         
|                           | Other income                        |                          |           | 5,000                      |            |                           |           | 10,000    |           |      |            | 12,000     |            |   |            | 77,000     |           
|                           | Other expenses                      |                          |           |                           |            |                           |           |          |           |      |            | (10,000    | )          |   |            | (11,000    | )         
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|INCOME BEFORE INCOME TAXES |                                     |                          | 1,791,000 |                            |            |                           | 1,147,000 |           |           |      | 4,998,000  |            |            |   | 2,707,000  |           
|INCOME TAX PROVISION       |                                     |                          | (733,000  | )                          |            |                           | (477,000  | )         |           |      | (2,049,000 | )          |            |   | (1,110,000 | )         
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|NET INCOME                 |                                     | $                        | 1,058,000 |                            |            | $                         | 670,000   |           |           | $    | 2,949,000  |            |            | $ | 1,597,000  |           
|                           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |            |           
|PER SHARE AMOUNT           |                                     |                          |           |                            |            |                           |           |           |           |      |            |            |            |   |            |           
|                           | Basic earnings per share            |                          | $         | 0.16                       |            |                           | $         | 0.17      |           |      | $          | 0.49       |            |   | $          | 0.40       |           
|                           | Diluted earnings per share          |                          | $         | 0.16                       |            |                           | $         | 0.16      |           |      | $          | 0.48       |            |   | $          | 0.38       |           

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)

|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ----------------- | ---------- | ---- | ---------- | ---------- | ---------- | -
|                                                     |                                                                                               |                                  |            | Nine Months Ended
|                                                     |                                                                                               |                                  |            | June 30,         
|                                                     |                                                                                               |                                  |            |                  
|                                                     |                                                                                               |                                  |            | 2003              |            | 2002
|                                                     |                                                                                               |                                  |            |                   |            |     
|Cash flows from operating activities:                |                                                                                               |                                  |            |                   |            |      |            |           
|                                                     | Net income                                                                                    |                                  | $          | 2,949,000         |            |      | $          | 1,597,000  |           
|                                                     | Adjustments to reconcile net income to net cash provided by
(used in) operating activities:   |                                  |            |                   |            |      |            |            |           
|                                                     |                                                                                               | Depreciation and amortization    |            |                   | 980,000    |      |            |            | 625,000    |  
|                                                     |                                                                                               | Stock-based compensation expense |            |                   | 201,000    |      |            |            |           |  
|                                                     |                                                                                               | Deferred taxes                   |            |                   | (37,000    | )    |            |            | 205,000    |  
|                                                     | Cash provided (used) by assets and liabilities                                                |                                  |            |                   |            |      |            |            |           
|                                                     |                                                                                               | Accounts receivable              |            |                   | (715,000   | )    |            |            | (737,000   | )
|                                                     |                                                                                               | Unbilled contract costs          |            |                   | 1,546,000  |      |            |            | (5,987,000 | )
|                                                     |                                                                                               | Inventories                      |            |                   | 1,002,000  |      |            |            | (3,753,000 | )
|                                                     |                                                                                               | Other assets                     |            |                   | 93,000     |      |            |            | (266,000   | )
|                                                     |                                                                                               | Accounts payable                 |            |                   | (1,133,000 | )    |            |            | 1,288,000  |  
|                                                     |                                                                                               | Other accrued expenses           |            |                   | 1,110,000  |      |            |            | 1,101,000  |  
|                                                     |                                                                                               | Billing in excess of costs       |            |                   | (764,000   | )    |            |            | 2,532,000  |  
|                                                     |                                                                                               | Income taxes payable             |            |                   | (125,000   | )    |            |            | 477,000    |  
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Net cash provided by (used in) operating activities                                           |                                  |            | 5,107,000         |            |      |            | (2,918,000 | )         
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Cash flows from investing activities:                |                                                                                               |                                  |            |                   |            |      |            |           
|                                                     | Net acquisition of property and equipment                                                     |                                  |            | (837,000          | )          |      |            | (705,000   | )         
|                                                     | Acquisition of FEL Corporation assets                                                         |                                  |            |                  |            |      |            | (1,996,000 | )         
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Net cash used in investing activities                                                         |                                  |            | (837,000          | )          |      |            | (2,701,000 | )         
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Cash flows from financing activities:                |                                                                                               |                                  |            |                   |            |      |            |           
|                                                     | Stock issuance costs                                                                          |                                  |            | (1,933,000        | )          |      |            |           |           
|                                                     | Proceeds from line of credit                                                                  |                                  |            | 2,055,000         |            |      |            | 1,250,000  |           
|                                                     | Repayments of line of credit                                                                  |                                  |            | (4,955,000        | )          |      |            |           |           
|                                                     | Proceeds from stock issuance                                                                  |                                  |            | 18,400,000        |            |      |            |           |           
|                                                     | Proceeds of stock option exercises                                                            |                                  |            | 241,000           |            |      |            | 195,000    |           
|                                                     | Purchase of treasury stock                                                                    |                                  |            | (9,000            | )          |      |            |           |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Net cash provided by financing activities                                                     |                                  |            | 13,799,000        |            |      |            | 1,445,000  |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                                               |                                  | 18,069,000 |                   |            |      | (4,174,000 | )         
|Cash and cash equivalents, beginning of period       |                                                                                               |                                  | 700,000    |                   |            |      | 4,362,000  |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Cash and cash equivalents, end of period             |                                                                                               | $                                | 18,769,000 |                   |            | $    | 188,000    |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Supplemental disclosure of cash flow information:    |                                                                                               |                                  |            |                   |            |      |            |           
|                                                     | Cash paid for interest                                                                        |                                  | $          | 43,000            |            |      | $          | 6,000      |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Cash paid for income taxes                                                                    |                                  | $          | 2,212,000         |            |      | $          | 321,000    |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|Non-cash
investing and financing activities:         |                                                                                               |                                  |            |                   |            |      |            |           
|                                                     | Tax benefit on stock option exercises included in income taxes payable                        |                                  | $          | 167,000           |            |      | $          | 50,000     |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Acquisition related costs included in accounts payable and
accrued expenses                   |                                  | $          |                  |            |      | $          | 104,000    |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           
|                                                     | Acquisition of property and equipment included in Property and
Equipment and Accounts Payable |                                  | $          | 6,000             |            |      | $          |           |           
|                                                     |                                                                                               |                                  |            |                   |            |      |            |            |           

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

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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 nine-month period ended June 30, 2003, are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2003. 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, 2002.
Certain reclassifications have been made to the prior year financial
statements to conform to the 2003 presentation.

2. INVENTORIES

Inventories consist of the following:

|                                 |  |               |           |                    |  |   |           | 
|-------------------------------- |  | ------------- | --------- | ------------------ |  | - | --------- | 
|                                 |  | June 30, 2003 |           | September 30, 2002
|                                 |  |               |           |                   
|Raw materials                    |  | $             | 761,000   |                    |  | $ | 989,000   | 
|Component parts, work in process |  |               | 1,371,000 |                    |  |   | 2,004,000 | 
|Finished component parts         |  |               | 34,000    |                    |  |   | 175,000   | 
|                                 |  |               |           |                    |  |   |           | 
|                                 |  | $             | 2,166,000 |                    |  | $ | 3,168,000 | 
|                                 |  |               |           |                    |  |   |           | 

3. 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 months and nine months periods ended June 30:

|                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|-------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                   |  | Three Months Ended |           | Nine Months Ended
|                                                   |  | June 30,           |           | June 30,         
|                                                   |  |                    |           |                  
|                                                   |  | 2003               |           | 2002              |  | 2003 |           | 2002
|                                                   |  |                    |           |                   |  |      |           |     
|Net income                                         |  | $                  | 1,058,000 |                   |  | $    | 670,000   |      |  | $ | 2,949,000 |  |  | $ | 1,597,000 | 
|Weighted average shares outstanding  basic        |  |                    | 6,457,086 |                   |  |      | 4,022,598 |      |  |   | 5,975,103 |  |  |   | 3,996,201 | 
|Effect of dilutive securities:                     |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|Net shares issuable upon exercise of stock options |  |                    | 160,307   |                   |  |      | 261,704   |      |  |   | 141,471   |  |  |   | 236,240   | 
|Weighted average shares outstanding  diluted      |  |                    | 6,617,393 |                   |  |      | 4,284,302 |      |  |   | 6,116,574 |  |  |   | 4,232,441 | 
|Basic earnings per share                           |  | $                  | .16       |                   |  | $    | .17       |      |  | $ | .49       |  |  | $ | .40       | 
|Diluted earnings per share                         |  | $                  | .16       |                   |  | $    | .16       |      |  | $ | .48       |  |  | $ | .38       | 

7



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4. ACQUISITION

On February 1, 2002, the Companys wholly-owned subsidiary, ST Production
Systems, Inc. (STPSI), acquired the operating assets and assignment of
certain defense contracts of FEL Corporation (FEL), for an aggregate purchase
price of approximately $2,050,000. The acquisition has been recorded under the
purchase method of accounting and, accordingly, the results of operations of
STPSI since February 1, 2002 have been included in the consolidated financial
statements. In connection with the acquisition, $600,000 of intangible assets
were identified, related to acquired contracts, and were determined to have
estimated lives of eighteen to thirty-six months. The Company recognized no
goodwill in connection with the acquisition. Amortization expense was $75,000
and $225,000 for the three months and nine months ended June 30, 2003.
Amortization expense was $75,000 and $125,000 for the three and nine months
ended June 30, 2002.

The following condensed proforma results of operations reflect the
proforma combination of the Company and the acquired FEL assets as if the
combination occurred at the beginning of the periods presented, compared with
the actual results of operations for Sensytech for the nine months ended June
30, 2002.

|                           |  |                   |            |          |  |   |            | 
|-------------------------- |  | ----------------- | ---------- | -------- |  | - | ---------- | 
|                           |  | Nine Months Ended
|                           |  | June 30, 2002    
|                           |  |                  
|                           |  | Historical        |            | Proforma
|                           |  |                   |            |         
|Revenues                   |  | $                 | 20,509,000 |          |  | $ | 24,533,000 | 
|Income from operations     |  |                   | 2,617,000  |          |  |   | 2,397,000  | 
|Net income                 |  |                   | 1,597,000  |          |  |   | 1,445,000  | 
|Basic earnings per share   |  |                   | .40        |          |  |   | .36        | 
|Diluted earnings per share |  |                   | .38        |          |  |   | .34        | 

Proforma adjustments include the amortization of intangible assets over an
eighteen to thirty-six month period, the reduction of interest income for cash
used for the acquisition and depreciation for acquired equipment using a three
year life.

5. SEGMENT INFORMATION

The Company operates in the passive surveillance and countermeasures
market for domestic and international clients. Its systems are globally
applicable to the defense markets and their allied information agencies for
land, air, and sea-based applications. The Companys goal is to provide
customers with total system surveillance solutions across the electromagnetic
spectrum, using products manufactured by it and by others. The Company is
customer-focused by providing tailored solution-based systems as follows:



| |  |  | 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 that 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, and patrol aircraft, as
well as at ground installations. Included in this group are the
programs acquired through the February 2002 acquisition of the operating
assets of FEL Corporation, which are operated through the Companys ST
Productions Systems, Inc. subsidiary.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Communication (Comms) 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 communications. 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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##### 





| |  |  | Imaging Group 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All three business segments offer applicable system engineering services
which provide concept studies, system definition and services to aid in the
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 Communications Group manufactures in its Newington, Virginia facility.
The Defense Systems Group manufactures in its Newington, Virginia,
Farmingdale, New Jersey and Camarillo, California facilities. The Imaging
Group products are manufactured in the Ann Arbor, Michigan facility.

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 income from operations of the three segments equals the
income from operations as reported in the Consolidated Statements of Income of
the Company. The Company does not allocate interest, other income and expenses
or income taxes to the three segments and does not produce separate balance
sheet information for each segment. During the three and nine months periods
ended June 30, 2003, the Company experienced a loss on a fixed-price contract
in the Defense Systems Group in the amount of $573,000 and $850,000,
respectively.

The revenue and income from operations by segment for the three and nine
months ended June 30, 2003 and 2002 are as follows:

|                       |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |            | 
|---------------------- | ------- |  | ------------------ | ---------- | ----------------- |  | ---- | --------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                       |         |  | Three Months Ended |            | Nine Months Ended
|                       |         |  | June 30,           |            | June 30,         
|                       |         |  |                    |            |                  
|                       |         |  | 2003               |            | 2002              |  | 2003 |           | 2002
|                       |         |  |                    |            |                   |  |      |           |     
|Revenue:               |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           
|                       | DS      |  | $                  | 7,863,000  |                   |  | $    | 5,402,000 |      |  | $ | 21,813,000 |  |  | $ | 11,010,000 | 
|                       | Comms   |  |                    | 4,301,000  |                   |  |      | 2,627,000 |      |  |   | 12,172,000 |  |  |   | 6,822,000  | 
|                       | Imaging |  |                    | 936,000    |                   |  |      | 1,002,000 |      |  |   | 3,691,000  |  |  |   | 2,677,000  | 
|                       |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           
|                       | Total   |  | $                  | 13,100,000 |                   |  | $    | 9,031,000 |      |  | $ | 37,676,000 |  |  | $ | 20,509,000 | 
|                       |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           
|Income from operations |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           
|                       | DS      |  | $                  | 76,000     |                   |  | $    | 243,000   |      |  | $ | 969,000    |  |  | $ | 510,000    | 
|                       | Comms   |  |                    | 1,404,000  |                   |  |      | 621,000   |      |  |   | 3,323,000  |  |  |   | 1,571,000  | 
|                       | Imaging |  |                    | 271,000    |                   |  |      | 278,000   |      |  |   | 674,000    |  |  |   | 536,000    | 
|                       |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           
|                       | Total   |  | $                  | 1,751,000  |                   |  | $    | 1,142,000 |      |  | $ | 4,966,000  |  |  | $ | 2,617,000  | 
|                       |         |  |                    |            |                   |  |      |           |      |  |   |            |  |  |   |           

6. LINE OF CREDIT

The Company entered into a line of credit and related note payable with
Bank of America in February 2001. Effective February 2002, the Company renewed
the line of credit and the amount available under the line of credit was
increased from $5,000,000 to $10,000,000. Effective February 28, 2003, the
Company renewed its line of credit and increased the availability to
$15,000,000, which expires on February 28, 2004. However, 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 June 30, 2003 were $1,656,000. 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-

9



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##### 



term working capital purposes. At June 30, 2003, there were no borrowings
under the line of credit. The borrowing base at June 30, 2003 was $5,723,000.

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 of one percent per annum are required.

7.     STOCK  BASED 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 $110,000 and $201,000 for the three month and nine month periods
ended June 30, 2003. No compensation expense was recorded for the three months
and nine months ended June 30, 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 would have been reduced to the pro forma amounts
indicated below.

|                                                                                                                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                                                                                    |  | Three Months Ended |           | Nine Months Ended
|                                                                                                                                    |  | June 30,           |           | June 30,         
|                                                                                                                                    |  |                    |           |                  
|                                                                                                                                    |  | 2003               |           | 2002              |  | 2003 |         | 2002
|                                                                                                                                    |  |                    |           |                   |  |      |         |     
|Net income, as reported                                                                                                             |  | $                  | 1,058,000 |                   |  | $    | 670,000 |      |  | $ | 2,949,000 |  |  | $ | 1,597,000 | 
|Less: Total
stock-based employee
compensation
expense determined
under fair value
method for
all awards, net of
related tax effects |  |                    | 33,000    |                   |  |      | 145,000 |      |  |   | 156,000   |  |  |   | 360,000   | 
|                                                                                                                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Pro forma net income                                                                                                                |  | $                  | 1,025,000 |                   |  | $    | 525,000 |      |  | $ | 2,793,000 |  |  | $ | 1,237,000 | 
|                                                                                                                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Earnings per share:                                                                                                                 |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Basic  as reported                                                                                                                 |  | $                  | 0.16      |                   |  | $    | 0.17    |      |  | $ | 0.49      |  |  | $ | 0.40      | 
|Basic  pro forma                                                                                                                   |  | $                  | 0.16      |                   |  | $    | 0.13    |      |  | $ | 0.47      |  |  | $ | 0.31      | 
|Diluted  as reported                                                                                                               |  | $                  | 0.16      |                   |  | $    | 0.16    |      |  | $ | 0.48      |  |  | $ | 0.38      | 
|Diluted  pro forma                                                                                                                 |  | $                  | 0.15      |                   |  | $    | 0.12    |      |  | $ | 0.46      |  |  | $ | 0.29      | 

The Black-Scholes model was used to estimate the fair value of the options.
The expected life is equal to the term of the option. For the three and nine
months ended June 30, 2003, the Company assumes an expected volatility of 48.8%
and a risk free rate of 1.17%, compared to an expected volatility of 68.8% and
a risk free rate of 2.5% for the three and nine months ended June 30, 2002.

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 follows:
10

|                                                 |  |                    |          |                   |  |      |         |      |  |   |          |   |  |   |         | 
|------------------------------------------------ |  | ------------------ | -------- | ----------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | 
|                                                 |  | Three Months Ended |          | Nine Months Ended
|                                                 |  | June 30,           |          | June 30,         
|                                                 |  |                    |          |                  
|                                                 |  | 2003               |          | 2002              |  | 2003 |         | 2002
|                                                 |  |                    |          |                   |  |      |         |     
|Balance  beginning of period                    |  | $                  | 660,000  |                   |  | $    | 137,000 |      |  | $ | 275,000  |   |  | $ | 12,000  | 
|Accruals for warranties issued during the period |  |                    | 391,000  |                   |  |      | 87,000  |      |  |   | 946,000  |   |  |   | 212,000 | 
|Settlements during the period                    |  |                    | (130,000 | )                 |  |      |        |      |  |   | (300,000 | ) |  |   |        | 
|                                                 |  |                    |          |                   |  |      |         |      |  |   |          |   |  |   |         | 
|Balance  end of period                          |  | $                  | 921,000  |                   |  | $    | 224,000 |      |  | $ | 921,000  |   |  | $ | 224,000 | 
|                                                 |  |                    |          |                   |  |      |         |      |  |   |          |   |  |   |         | 

9. RECENTLY ISSUED ACCOUNTING STANDARDS

FASB Interpretation No.46 (FIN 46), Consolidation of Variable Interest
Entities, addresses consolidation and disclosure by business enterprises of
variable interest entities. The consolidation requirements of FIN46 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 Financial Accounting Standards Board (FASB) issued
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 is 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.

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.
SFAS No. 150 requires that those instruments be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. At present, the Company has not issued
financial instruments with characteristics of both liabilities and equity.

10. SUBSEQUENT EVENT

On July 15, 2003, the Company announced its intention to close the
facility in Farmingdale, New Jersey and move its operations to Uniontown,
Pennsylvania.
The Company is currently negotiating a lease of approximately 60,000
square feet for its Uniontown, Pennsylvania operations. The term of
the lease will be ten years with two five year options, and an
expected inception date of  September 15, 2003. The Company
anticipates this move to occur within the six month period ending December 31,
2003. Employees not transferring from New Jersey will receive severance pay,
providing they leave the Company in accordance with the Companys transition
plan. The cost associated with the severance pay under the transition plan is
currently not determinable.

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.

11



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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,
policy decisions of the federal government, particularly in the defense area,
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 its 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, it 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 agencies, and civilian agencies.

To record 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 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 earned fees in the proportion that costs incurred to date bear to
total estimated costs. It 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. It includes such incentive fee awards or penalties, which
historically are not material, in revenues at the time the amounts can be
determined reasonably. It recognizes anticipated losses at the time they become
known. Its future operating results may be affected if actual contract costs
incurred differ from its current estimates of total contract costs.

Its 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 its U.S. federal government contracts, whether the Company 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 its costs as not allowable or as
unreasonable, which can result in its bearing all or a portion of these costs
itself rather than recovering them from the U.S. federal government.

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.

Its 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,

12



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the timing of customer orders and billing of other direct costs, 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. Because a significant portion of its
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 June 30, 2003 Compared to Three Months Ended June 30, 2002

Revenues:

Revenues increased $4,069,000, or 45.1% to $13,100,000 for the three
months ended June 30, 2003 from $9,031,000 for the three months ended June 30,
2002. The increase was due primarily to increased revenue in the Communications
Group of approximately $1,674,000, in addition to revenues attributable to ST
Production Systems, Inc., which is included as part of its Defense Systems
Group, of approximately $1,442,000. The remaining increase is attributed to
other Defense Systems revenue partially offset by a decline in the Imaging
Group revenues. During the three months ended June 30, 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 RWB
Production-Lockheed and AN/SLQ-25A Shipsets, which contributed 36.6% 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 June 30, 2003 and 2002, was $35,898,000 and $24,400,000,
respectively.

Cost of Revenues:

Cost of revenues increased $2,539,000, or 35.4%, to $9,704,000 for the
three months ended June 30, 2003 from $7,165,000 for the three months ended
June 30, 2002. The increase was primarily attributed to costs associated with
the increased production which was a significant part of the growth in revenues
for the period. During the three month period ended June 30, 2003, the Company
experienced a loss on a fixed-price contract in the Defense Systems Group in
the amount of $573,000. Cost of revenues as a percentage of revenues decreased
to 74.1% for the three months ended June 30, 2003 from 79.3% for the three
months ended June 30, 2002. The decrease in cost of revenues as a percentage
of revenues is attributed primarily to the profitability of the Communications
Group.

General and Administrative Expenses:

General and administrative expenses increased $921,000, or 127.2%, to
$1,645,000 for the three months ended June 30, 2003 from $724,000 for the three
months ended June 30, 2002. The increase was due principally to additional
salaries, benefits and other related expenses of new and existing employees and
an increase in internal research and development expense.

For the three months ended June 30, 2003, internal research and
development was $712,000 compared to $58,000 for the three months ended June
30, 2002 and represented 43.3% and 8.0% of general and administrative expense,
respectively.

Interest Income:

Interest income increased $34,000 or over 100% to $36,000 for the three
months ended June 30, 2003 from $2,000 for the three months ended June 30,
2002. The increase was primarily the result of the income earned on a higher

13



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##### 



invested balance of excess cash during the period.

Other Income and Other Expenses:

Other income decreased $5,000 to $5,000 for the three months ended June
30, 2003 from $10,000 for the three months ended June 30, 2002. The decrease
was due to a reduction in sublease income.

Income Tax Expense:

Income tax expense consists of federal and state income taxes. Income tax
expense increased $256,000 or 53.7% to $733,000 for the three months ended June
30, 2003, from $477,000 for the three months ended June 30, 2002. The increase
was primarily due to increased and improved profitability during the three
month period ended June 30, 2003. The Companys effective tax rate was 41% for
the three months ended June 30, 2003 and 2002 and varies from the federal
statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

Net income increased $388,000 or 57.9% to $1,058,000 for the three months
ended June 30, 2003, from $670,000 for the three months ended June 30, 2002.
The increase is due primarily to an increase in revenues and improved
profitability on certain Communications Group contracts. Net income as a
percentage of revenue was 8.1% for the three months ended June 30, 2003
compared to 7.4% for the three months ended June 30, 2002, which is consistent
with the trend described above.

Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

Revenues:

Revenues increased $17,167,000, or 83.7% to $37,676,000 for the nine
months ended June 30, 2003 from $20,509,000 for the nine months ended June 30,
2002. The increase was due primarily to increased revenue in the Communications
Group and the Imaging Group of approximately $6,364,000 in addition to revenues
attributable to ST Production Systems, Inc., which is included as part of its
Defense Systems Group, of approximately $8,703,000. The remaining increase is
attributed to other Defense Systems revenue. During the nine months ended June
30, 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 Hyperspectral Imaging System, and the AN/DPT-2B Based Payload for Lead
In Fighter Hawk Radar Emulator, which contributed 37.1% of revenues.

Cost of Revenues:

Cost of revenues increased $13,080,000, or 85.1%, to $28,443,000 for the
nine months ended June 30, 2003 from $15,363,000 for the nine months ended June
30, 2002. The increase was primarily attributed to cost associated with the
increased production which was a significant part of the growth in revenues for
the nine month period. During the nine month period ended June 30, 2003, the
Company experienced a loss on a fixed-price contract in the Defense Systems
Group in the amount of $850,000. Cost of revenues as a percentage of revenues
increased to 75.5% for the nine months ended June 30, 2003 from 74.9% for the
nine months ended June 30, 2002. The increase was primarily attributed to costs
associated with the revenues generated by ST Production Systems, Inc. This
subsidiary operates in a price sensitive market, which results in lower gross
margins. However, this was offset in part by higher profit margins on
Communications Group contracts.

General and Administrative Expenses:

General and administrative expenses increased $1,738,000, or 68.7%, to
$4,267,000 for the nine months ended

14



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##### 



June 30, 2003 from $2,529,000 for the nine months ended June 30, 2002.
The increase was due principally to additional salaries, benefits and other
related expenses of new and existing employees and to an increase in internal
research and development expense.

For the nine months ended June 30, 2003, internal research and development
was $1,344,000 compared to $678,000 for the nine months ended June 30, 2002 and
represented 31.5% and 26.8% of general and administrative expense,
respectively.

Interest Income and Interest Expense:

Interest income increased $46,000 or over 100% to $79,000 for the nine
months ended June 30, 2003 from $33,000 for the nine months ended June 30,
2002. The increase was primarily the result of the income earned on a higher
invested balance of excess cash during the period. Interest expense increased
$40,000 or over 100% to $49,000 for the nine months ended June 30, 2003 from
$9,000 for the nine months ended June 30, 2002. The increase was primarily due
to interest expense incurred during the first three months of fiscal year 2003.

Other Income and Other Expenses:

Other income decreased $65,000 to $12,000 for the nine months ended June
30, 2003 from $77,000 for the nine months ended June 30, 2002. The decrease
was due to a reduction in sublease income.

Income Tax Expense:

Income tax expense consists of federal and state income taxes. Income tax
expense increased $939,000 or 84.6% to $2,049,000 for the nine months ended
June 30, 2003, from $1,110,000 for the nine months ended June 30, 2002. The
increase was primarily due to increased and improved profitability during the
nine month period ended June 30, 2003. The Companys effective tax rate was
41% for the nine months ended June 30, 2003 and 2002 and varies from the
federal statutory rate primarily due to state taxes and other nondeductible
expenses.

Net Income:

Net income increased $1,352,000 or 84.7% to $2,949,000 for the nine months
ended June 30, 2003, from $1,597,000 for the nine months ended June 30, 2002.
The increase is due primarily to an increase in revenues during the period.
Net income as a percentage of revenue was 7.8% for the nine months ended June
30, 2003 and June 30, 2002, respectively.

Liquidity and Capital Resources

Historically, the Companys primary source of liquidity is cash provided
by operations and its line of credit. The Companys liquidity requirements
depend on a number of factors, including the timing of production under its
federal government and foreign sales contracts. On November 22, 2002, the
Company sold 2 million shares of common stock for net proceeds, after costs and
underwriters commissions, of $14,235,000. On December 12, 2002 the
underwriters exercised their overallotment option which provided net proceeds
to the Company of $2,232,000 from the sale of an additional 300,000 shares. The
Company had cash and cash equivalents of $18,769,000 at June 30, 2003, as
compared to $700,000 at September 30, 2002. The increase was primarily due to
the net proceeds of $16,467,000 received from the sale of 2.3 million shares of
common stock and cash provided by operating activities. The increase was
partially offset by cash used in investing activities and the repayment of the
line of credit.

Cash provided by operating activities was approximately $5,107,000 for the
nine months ended June 30, 2003, compared to cash used in operating activities
of approximately $2,918,000 for the nine months ended June 30, 2002, an
increase of approximately $8,025,000. The primary reasons for this increase
were an increase in net income, a net

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decrease in billed and unbilled accounts receivables, a decrease in
inventories and a decrease in other assets. The increase was offset in part by
a decrease in accounts payable, billing in excess of costs and income taxes
payable.

Cash used in investing activities was approximately $837,000 during the
nine months ended June 30, 2003, compared to approximately $2,701,000 for the
nine months ended June 30, 2002, a decrease of approximately $1,864,000. The
primary reason for the decrease were the acquisition of FEL Corporation assets
during the nine months ended June 30, 2002 compared to only capital
expenditures for property and equipment in 2003.

Cash provided by financing activities was approximately $13,799,000 during
the nine months ended June 30, 2003, compared to cash provided by financing
activities of approximately $1,445,000 for the nine months ended June 30, 2002,
an increase of $12,354,000. The increase was primarily due to the net proceeds
of $16,467,000 received from the sale of 2.3 million shares of common stock.
The increase was partially offset by cash used for the repayment of the line of
credit.

The Company has a $15,000,000 line of credit with Bank of America which
expires on February 28, 2004. 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. Prior to
renewal of its line of credit, the Company had a $10,000,000 line that expired
on February 28, 2003. The bank agreement establishes the interest rate at the
London Interbank Offering Rate (LIBOR) plus 200 to 285 basis points, determined
by the Company ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. Under 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. The
borrowing base art June 30, 2003 was $5,723,000. As of June 30, 2003, there
were no borrowings under its line of credit. The Company has given the lender
a security interest in substantially all of its assets to secure the debt under
its credit facility.

The Company believes its existing funds, cash generated by operations, and
amounts available for borrowings under its line of credit will be sufficient to
meet its current working capital requirements

Market Risks

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

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 June 30,
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.

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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

The Companys line of credit balance was $2,900,000 as of September 30,
2002. All outstanding borrowings under the line of credit were paid off in the
first fiscal quarter of 2003 with proceeds of the sale of common stock. There
were no outstanding borrowings under the line of credit at June 30, 2003.

In connection with the February 2003 line of credit renewal, the letters
of credit were revised. Total letters of credit at June 30, 2003 were
$1,656,000. Letters of credit of $1,015,000 expire in less than one year and
$641,000 expire in one to three years.

On July 15, 2003, the Company announced its intention to close the
facility in Farmingdale, New Jersey and move its operations to
Uniontown, Pennsylvania.  The Company is currently negotiating a
lease of approximately 60,000 square feet for its Uniontown,
Pennsylvania operations.  The term of the lease will be ten years
with two five year options, and an expected inception date of  September 15, 2003.

Critical Accounting Policies and Estimates

There have been no material changes in the Companys critical accounting
policies and estimates during the nine months ended June 30, 2003, except as
noted below. A complete description of the Companys critical accounting
policies and estimates is included in Part II, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, in the
Companys Annual Report on Form 10-K for the year ended September 30, 2002.

Inventories:

The Company is required to state its inventories at the lower of cost or
market. In assessing the ultimate realization of inventories, it 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. At June 30, 2003, it had $854,000 in
inventory related to a program for the Egyptian Navy. While the
inventory was purchased, built and configured for the project, the Company has
allocated and will continue to allocate inventory to other business
objectives.
Although the Company has
no reason to believe this contract is in jeopardy, given the delays
experienced, it cannot, with any certainty, plan on a contract notice to
proceed until sometime after August 2004.

Research and Development:

The Company includes internally funded research and development costs in
general and administrative expenses in its consolidated income statements. Its
applied research and development during the nine months ended June 30, 2003
focused on advanced scanning capabilities, an upgrade to a digital receiver and
upgraded pulse analyzer; all of which are expected to assist in anticipated
future contracts. It expensed $712,000 and $58,000 of internally funded
research and development costs during the three months ended June 30, 2003 and
2002, respectively. It expensed $1,344,000 and $678,000 of internally funded
research and development costs during the nine months ended June 30, 2003 and
2002, respectively.

Item 3. Quantitative and Qualitative Disclosures 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) |  | The Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure controls and
procedures are effective based on their evaluations of these
controls, which was done
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |     |  | within the last 90 days.                                                                                                                                                                                        
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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 4. Submission of Matters to a Vote of Security Holders

None

Item 6. Exhibits and Reports on Form 8-K



| | (a)   |  | 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 on Form 10-Q.
|
| | (b)   |  | Reports on Form 8-K                                                                                                                                                                                
|
| |       |  | A Form 8-K was filed on May 14, 2003 providing information under Item 12.                                                                                                                          



---

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

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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.
|               
|August 13, 2003 | By:             | /s/ S. Kent Rockwell                      
|                |                 |                                           
|                |                 | S. Kent Rockwell                          
|                |                 | Chairman and Chief Executive Officer      
|               
|                |                 |                                           
|August 13, 2003 | By:             | /s/ Donald F. Fultz                       
|                |                 |                                           
|                |                 | Donald F. Fultz                           
|                |                 | Vice President and Chief Financial Officer

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