##### 



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 March 31, 2003

or

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

For the Transition period from _______________ to ________________

Commission File Number 000-08193

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

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

8419 Terminal Road, Newington, Virginia 22122-1430

(Address of principal executive offices)

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 May 12, 2003, there were 6,444,678 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 MARCH 31, 2003

TABLE OF CONTENTS

|               |                                                                                                                                                                      |  |       |       | 
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- | 
|PART I.        | FINANCIAL INFORMATION                                                                                                                                                |  |       |       | 
|              
|Item 1.        | Financial Statements (Unaudited)                                                                                                                                     |  |       |       | 
|              
|               | Condensed Consolidated Balance Sheets at March 31, 2003 and September 30, 2002                                                                                       |  |       | 3-4   | 
|              
|               | Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and March 31, 2002,
and the Six Months Ended March 31, 2003 and March 31, 2002 |  |       | 5     | 
|              
|               | Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2003 and March 31, 2002                                                           |  |       | 6     | 
|              
|               | Notes to Condensed Consolidated Financial Statements                                                                                                                 |  |       | 7-10  | 
|              
|Item 2.        | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                |  |       | 11-16 | 
|              
|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                                                                                                                  |  |       | 17    | 
|              
|Item 6.        | Exhibits and Reports of Form 8-K                                                                                                                                     |  |       | 18    | 
|              
|Signatures     |                                                                                                                                                                      |  | 19    |      
|              
|Certifications |                                                                                                                                                                      |  | 20-21 |      

2



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##### 



PART I.  FINANCIAL INFORMATION

Item 1. Financial
Statements

SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

ASSETS

|                       |                                                                         |   |                |            |                    |   |            |           | 
|---------------------- | ----------------------------------------------------------------------- | - | -------------- | ---------- | ------------------ | - | ---------- | --------- | 
|                       |                                                                         |   | March 31, 2003 |            | September 30, 2002
|                       |                                                                         |   |                |            |                   
|CURRENT ASSETS         |                                                                         |   |                |            |                    |   |            |          
|                       | Cash and cash equivalents                                               |   | $              | 14,368,000 |                    |   | $          | 700,000   | 
|                       | Accounts receivable, net of allowance for
doubtful accounts of $200,000 |   |                | 10,924,000 |                    |   |            | 8,880,000 | 
|                       | Unbilled contract costs, net                                            |   |                | 7,834,000  |                    |   |            | 8,820,000 | 
|                       | Inventories                                                             |   |                | 2,732,000  |                    |   |            | 3,168,000 | 
|                       | Deferred income taxes                                                   |   |                | 377,000    |                    |   |            | 411,000   | 
|                       | Other current assets                                                    |   |                | 263,000    |                    |   |            | 272,000   | 
|                       |                                                                         |   |                |            |                    |   |            |          
|TOTAL CURRENT ASSETS   |                                                                         |   | 36,498,000     |            |                    |   | 22,251,000 |          
|                      
|PROPERTY AND EQUIPMENT |                                                                         |   | 2,740,000      |            |                    |   | 2,608,000  |          
|                      
|OTHER ASSETS           |                                                                         |   |                |            |                    |   |            |          
|                       | Deferred income taxes                                                   |   |                | 260,000    |                    |   |            | 260,000   | 
|                       | Intangibles, net                                                        |   |                | 250,000    |                    |   |            | 400,000   | 
|                       | Other assets                                                            |   |                | 70,000     |                    |   |            | 333,000   | 
|                       |                                                                         |   |                |            |                    |   |            |          
|TOTAL ASSETS           |                                                                         | $ | 39,818,000     |            |                    | $ | 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

|                                           |                                                                                                                                            |   |                |            |                    |   |            |           |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | - | -------------- | ---------- | ------------------ | - | ---------- | --------- | -
|                                           |                                                                                                                                            |   | March 31, 2003 |            | September 30, 2002
|                                           |                                                                                                                                            |   |                |            |                   
|CURRENT LIABILITIES                        |                                                                                                                                            |   |                |            |                    |   |            |          
|                                           | Line of credit                                                                                                                             |   | $              |           |                    |   | $          | 2,900,000 |  
|                                           | Accounts payable                                                                                                                           |   |                | 2,314,000  |                    |   |            | 2,916,000 |  
|                                           | Accrued salaries, benefits, and related expenses                                                                                           |   |                | 1,969,000  |                    |   |            | 2,093,000 |  
|                                           | Other accrued expenses                                                                                                                     |   |                | 1,086,000  |                    |   |            | 438,000   |  
|                                           | Billings in excess of costs                                                                                                                |   |                | 1,159,000  |                    |   |            | 2,342,000 |  
|                                           | Income taxes payable                                                                                                                       |   |                | 62,000     |                    |   |            | 497,000   |  
|                                           |                                                                                                                                            |   |                |            |                    |   |            |          
|TOTAL CURRENT LIABILITIES                  |                                                                                                                                            |   | 6,590,000      |            |                    |   | 11,186,000 |          
|                                           |                                                                                                                                            |   |                |            |                    |   |            |          
|STOCKHOLDERS EQUITY                       |                                                                                                                                            |   |                |            |                    |   |            |          
|                                           | Common Stock, $.01 par value; 25,000,000 shares
authorized; 6,571,623 and 4,239,223 shares issued
at March 31, 2003 and September 30, 2002 |   |                | 66,000     |                    |   |            | 42,000    |  
|                                           | Additional paid-in capital                                                                                                                 |   |                | 24,628,000 |                    |   |            | 7,972,000 |  
|                                           | Treasury stock, at cost, 126,245 shares at
March 31, 2003 and 125,245 shares at
September 30, 2002                                         |   |                | (534,000   | )                  |   |            | (525,000  | )
|                                           | Retained earnings                                                                                                                          |   |                | 9,068,000  |                    |   |            | 7,177,000 |  
|                                           |                                                                                                                                            |   |                |            |                    |   |            |          
|TOTAL STOCKHOLDERS EQUITY                 |                                                                                                                                            |   | 33,228,000     |            |                    |   | 14,666,000 |          
|                                           |                                                                                                                                            |   |                |            |                    |   |            |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                            | $ | 39,818,000     |            |                    | $ | 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 Six Months Ended
|                           |                                     |                          |           | March 31,                  |            | March 31,               
|                           |                                     |                          |           |                            |            |                         
|                           |                                     |                          |           | 2003                       |            | 2002                     |          | 2003      |           | 2002
|                           |                                     |                          |           |                            |            |                          |          |           |           |     
|REVENUES                   |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|                           | Contract revenues                   |                          | $         | 12,853,000                 |            |                          | $        | 7,069,000 |           |      | $          | 24,576,000 |            |   | $         | 11,478,000 |           
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|COSTS AND EXPENSES         |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|                           | Cost of revenues                    |                          |           | 9,488,000                  |            |                          |          | 5,176,000 |           |      |            | 18,739,000 |            |   |           | 8,198,000  |           
|                           | General and administrative expenses |                          |           | 1,559,000                  |            |                          |          | 1,062,000 |           |      |            | 2,622,000  |            |   |           | 1,805,000  |           
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|                           |                                     | Total costs and expenses |           |                            | 11,047,000 |                          |          |           | 6,238,000 |      |            |            | 21,361,000 |   |           |            | 10,003,000 |  
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|INCOME FROM OPERATIONS     |                                     |                          | 1,806,000 |                            |            |                          | 831,000  |           |           |      | 3,215,000  |            |            |   | 1,475,000 |           
|                          
|OTHER INCOME (EXPENSES)    |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|                           |                                     | Interest income          |           |                            | 38,000     |                          |          |           | 11,000    |      |            |            | 43,000     |   |           |            | 31,000     |  
|                           |                                     | Interest expense         |           |                            | (3,000     | )                        |          |           |          |      |            |            | (48,000    | ) |           |            | (2,000     | )
|                           |                                     | Other income             |           |                            | 3,000      |                          |          |           | 30,000    |      |            |            | 7,000      |   |           |            | 67,000     |  
|                           |                                     | Other expenses           |           |                            |           |                          |          |           |          |      |            |            | (10,000    | ) |           |            | (11,000    | )
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|INCOME BEFORE INCOME TAXES |                                     |                          | 1,844,000 |                            |            |                          | 872,000  |           |           |      | 3,207,000  |            |            |   | 1,560,000 |           
|                          
|INCOME TAX PROVISION       |                                     |                          | (757,000  | )                          |            |                          | (358,000 | )         |           |      | (1,316,000 | )          |            |   | (633,000  | )         
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|NET INCOME                 |                                     | $                        | 1,087,000 |                            |            | $                        | 514,000  |           |           | $    | 1,891,000  |            |            | $ | 927,000   |           
|                           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|PER SHARE AMOUNT           |                                     |                          |           |                            |            |                          |          |           |           |      |            |            |            |   |           |           
|                           | Basic earnings per share            |                          | $         | 0.17                       |            |                          | $        | 0.13      |           |      | $          | 0.33       |            |   | $         | 0.23       |           
|                           | Diluted earnings per share          |                          | $         | 0.16                       |            |                          | $        | 0.12      |           |      | $          | 0.32       |            |   | $         | 0.22       |           

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)

|                                                     |                                                                                               |                                  |            |                  |            |   |            |            |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ---------------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                     |                                                                                               |                                  |            | Six Months Ended
|                                                     |                                                                                               |                                  |            | March 31,       
|                                                     |                                                                                               |                                  |            |                 
|Cash flows from operating activities:                |                                                                                               | 2003                             |            | 2002            
|                                                     |                                                                                               |                                  |            |                 
|                                                     | Net income                                                                                    |                                  | $          | 1,891,000        |            |   | $          | 927,000    |           
|                                                     | Adjustments to reconcile net income to net cash provided by
(used in) operating activities:   |                                  |            |                  |            |   |            |            |           
|                                                     |                                                                                               | Depreciation and amortization    |            |                  | 598,000    |   |            |            | 279,000    |  
|                                                     |                                                                                               | Stock-based compensation expense |            |                  | 53,000     |   |            |            |           |  
|                                                     |                                                                                               | Deferred taxes                   |            |                  | 34,000     |   |            |            | 238,000    |  
|                                                     | Cash provided (used) by assets and liabilities                                                |                                  |            |                  |            |   |            |            |           
|                                                     |                                                                                               | Accounts receivable              |            |                  | (2,044,000 | ) |            |            | (270,000   | )
|                                                     |                                                                                               | Unbilled contract costs          |            |                  | 986,000    |   |            |            | (2,755,000 | )
|                                                     |                                                                                               | Inventories                      |            |                  | 436,000    |   |            |            | (2,449,000 | )
|                                                     |                                                                                               | Other assets                     |            |                  | 272,000    |   |            |            | (269,000   | )
|                                                     |                                                                                               | Accounts payable                 |            |                  | (610,000   | ) |            |            | 870,000    |  
|                                                     |                                                                                               | Other accrued expenses           |            |                  | 524,000    |   |            |            | 769,000    |  
|                                                     |                                                                                               | Billing in excess of costs       |            |                  | (1,183,000 | ) |            |            | 1,981,000  |  
|                                                     |                                                                                               | Income taxes payable             |            |                  | (393,000   | ) |            |            | 494,000    |  
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Net cash provided by (used in) operating activities                                           |                                  |            | 564,000          |            |   |            | (185,000   | )         
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Cash flows from investing activities:                |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Net acquisition of property and equipment                                                     |                                  |            | (572,000         | )          |   |            | (513,000   | )         
|                                                     | Acquisition of FEL Corporation assets                                                         |                                  |            |                 |            |   |            | (1,950,000 | )         
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Net cash used in investing activities                                                         |                                  |            | (572,000         | )          |   |            | (2,463,000 | )         
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Cash flows from financing activities:                |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Stock issuance costs                                                                          |                                  |            | (1,933,000       | )          |   |            |           |           
|                                                     | Proceeds from line of credit                                                                  |                                  |            | 2,055,000        |            |   |            |           |           
|                                                     | Repayments of line of credit                                                                  |                                  |            | (4,955,000       | )          |   |            |           |           
|                                                     | Proceeds from stock issuance                                                                  |                                  |            | 18,400,000       |            |   |            |           |           
|                                                     | Proceeds of stock option exercises                                                            |                                  |            | 118,000          |            |   |            | 76,000     |           
|                                                     | Purchase of treasury stock                                                                    |                                  |            | (9,000           | )          |   |            |           |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Net cash provided by financing activities                                                     |                                  |            | 13,676,000       |            |   |            | 76,000     |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                                               |                                  | 13,668,000 |                  |            |   | (2,572,000 | )         
|Cash and cash equivalents, beginning of period       |                                                                                               |                                  | 700,000    |                  |            |   | 4,362,000  |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Cash and cash equivalents, end of period             |                                                                                               | $                                | 14,368,000 |                  |            | $ | 1,790,000  |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Supplemental disclosure of cash flow information:    |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Cash paid for interest                                                                        |                                  | $          | 43,000           |            |   | $          |           |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Cash paid for income taxes                                                                    |                                  | $          | 1,712,000        |            |   | $          |           |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|Non-cash investing and financing activities:         |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Tax benefit on stock option exercises included in income taxes payable                        |                                  | $          | 42,000           |            |   | $          |           |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Acquisition related costs included in accounts payable and
accrued expenses                   |                                  | $          |                 |            |   | $          | 150,000    |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           
|                                                     | Acquisition of property and equipment included in Property and
Equipment and Accounts Payable |                                  | $          | 8,000            |            |   | $          |           |           
|                                                     |                                                                                               |                                  |            |                  |            |   |            |           

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

6



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SENSYTECH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring items) considered necessary for fair presentation have been
included. Operating results for the six-month period ended March 31, 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:

|                                 |  |                |           |                    |  |   |           | 
|-------------------------------- |  | -------------- | --------- | ------------------ |  | - | --------- | 
|                                 |  | March 31, 2003 |           | September 31, 2002
|                                 |  |                |           |                   
|Raw materials                    |  | $              | 836,000   |                    |  | $ | 989,000   | 
|Component parts, work in process |  |                | 1,868,000 |                    |  |   | 2,004,000 | 
|Finished component parts         |  |                | 28,000    |                    |  |   | 175,000   | 
|                                 |  |                |           |                    |  |   |           | 
|                                 |  | $              | 2,732,000 |                    |  | $ | 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 six months periods ended March 31:

|                                                   |  |                    |           |                  |  |      |           |      |  |   |           |  |  |   |           | 
|-------------------------------------------------- |  | ------------------ | --------- | ---------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                   |  | Three Months Ended |           | Six Months Ended
|                                                   |  | March 31,          |           | March 31,       
|                                                   |  |                    |           |                 
|                                                   |  | 2003               |           | 2002             |  | 2003 |           | 2002
|                                                   |  |                    |           |                  |  |      |           |     
|Net income                                         |  | $                  | 1,087,000 |                  |  | $    | 514,000   |      |  | $ | 1,891,000 |  |  | $ | 927,000   | 
|Weighted average shares outstanding  basic        |  |                    | 6,434,177 |                  |  |      | 3,999,325 |      |  |   | 5,734,112 |  |  |   | 3,982,975 | 
|Effect of dilutive securities:                     |  |                    |           |                  |  |      |           |      |  |   |           |  |  |   |           | 
|Net shares issuable upon exercise of stock options |  |                    | 163,843   |                  |  |      | 274,910   |      |  |   | 142,196   |  |  |   | 209,901   | 
|Weighted average shares outstanding  diluted      |  |                    | 6,598,020 |                  |  |      | 4,274,235 |      |  |   | 5,876,308 |  |  |   | 4,192,876 | 
|Basic earnings per share                           |  | $                  | .17       |                  |  | $    | .13       |      |  | $ | .33       |  |  | $ | .23       | 
|Diluted earnings per share                         |  | $                  | .16       |                  |  | $    | .12       |      |  | $ | .32       |  |  | $ | .22       | 

7



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##### 



4. ACQUSITION

On February 1, 2002, our 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 $150,000 for the three months and six months ended March 31, 2003.
Amortization expense was $50,000 for the three months and six months ended
March 31, 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 three months and six
months ended March 31, 2002.

|                           |  |                    |           |                  |  |            |           |          |  |   |            |  |  |   |            | 
|-------------------------- |  | ------------------ | --------- | ---------------- |  | ---------- | --------- | -------- |  | - | ---------- |  |  | - | ---------- | 
|                           |  | Three Months Ended |           | Six Months Ended
|                           |  | March 31, 2002     |           | March 31, 2002  
|                           |  |                    |           |                 
|                           |  | Historical         |           | Proforma         |  | Historical |           | Proforma
|                           |  |                    |           |                  |  |            |           |         
|Revenues                   |  | $                  | 7,069,000 |                  |  | $          | 8,075,000 |          |  | $ | 11,478,000 |  |  | $ | 15,502,000 | 
|Income from operations     |  |                    | 831,000   |                  |  |            | 776,000   |          |  |   | 1,475,000  |  |  |   | 1,255,000  | 
|Net income                 |  |                    | 514,000   |                  |  |            | 451,000   |          |  |   | 927,000    |  |  |   | 686,000    | 
|Basic earnings per share   |  |                    | .13       |                  |  |            | .12       |          |  |   | .23        |  |  |   | .18        | 
|Diluted earnings per share |  |                    | .12       |                  |  |            | .11       |          |  |   | .22        |  |  |   | .16        | 

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

We operate in the passive surveillance and countermeasures market for
domestic and international clients. Our systems are globally applicable to the
defense markets and their allied information agencies for land, air, and
sea-based applications. We believe that our passive surveillance and
countermeasures products and services are among the best in the world.  Our goal
is to provide customers with total system surveillance solutions across the
electromagnetic spectrum, using products manufactured by us and by others. We
are 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, patrol aircraft, as well
as at ground installations. Included in this group are the programs
acquired through our February 2002 acquisition of the operating assets
of FEL Corporation, which we operate through our 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 communication. These systems are generally
used by operators on board aircraft, ships and ground installations to
intercept various kinds of transmissions over established communications
networks.                                                                                                                                                                                                                                                                                                                                                                            

8



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| |  |  | 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
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.

Manufacturing of the Communications Group is in Newington, Virginia. The
Defense Systems Group manufactures in its Newington, Virginia, Farmingdale, New
Jersey and Camarillo, CA 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 segments income from operations 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.

The revenue and income from operations by segment for the three and six
months ended March 31, 2003 and 2002 are as follows:

|                       |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |            | 
|---------------------- | ------- |  | ------------------ | ---------- | ---------------- |  | ---- | --------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                       |         |  | Three Months Ended |            | Six Months Ended
|                       |         |  | March 31,          |            | March 31,       
|                       |         |  |                    |            |                 
|                       |         |  | 2003               |            | 2002             |  | 2003 |           | 2002
|                       |         |  |                    |            |                  |  |      |           |     
|Revenue:               |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           
|                       | DS      |  | $                  | 7,501,000  |                  |  | $    | 3,991,000 |      |  | $ | 13,950,000 |  |  | $ | 5,608,000  | 
|                       | Comms   |  |                    | 4,117,000  |                  |  |      | 2,416,000 |      |  |   | 7,871,000  |  |  |   | 4,195,000  | 
|                       | Imaging |  |                    | 1,235,000  |                  |  |      | 662,000   |      |  |   | 2,755,000  |  |  |   | 1,675,000  | 
|                       |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           
|                       | Total   |  | $                  | 12,853,000 |                  |  | $    | 7,069,000 |      |  | $ | 24,576,000 |  |  | $ | 11,478,000 | 
|                       |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           
|Income from operations |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           
|                       | DS      |  | $                  | 476,000    |                  |  | $    | 221,000   |      |  | $ | 893,000    |  |  | $ | 267,000    | 
|                       | Comms   |  |                    | 1,138,000  |                  |  |      | 529,000   |      |  |   | 1,919,000  |  |  |   | 950,000    | 
|                       | Imaging |  |                    | 192,000    |                  |  |      | 81,000    |      |  |   | 403,000    |  |  |   | 258,000    | 
|                       |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           
|                       | Total   |  | $                  | 1,806,000  |                  |  | $    | 831,000   |      |  | $ | 3,215,000  |  |  | $ | 1,475,000  | 
|                       |         |  |                    |            |                  |  |      |           |      |  |   |            |  |  |   |           

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. 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. 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 and
expires February 28, 2004. At March 31, 2003, there were no borrowings under
the line of credit.

9



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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 no compensation cost for options
granted. 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 and 148,
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 |           | Six Months Ended
|                                                                                                                                    |  | March 31,          |           | March 31,       
|                                                                                                                                    |  |                    |           |                 
|                                                                                                                                    |  | 2003               |           | 2002             |  | 2003 |         | 2002
|                                                                                                                                    |  |                    |           |                  |  |      |         |     
|Net income, as reported                                                                                                             |  | $                  | 1,087,000 |                  |  | $    | 514,000 |      |  | $ | 1,891,000 |  |  | $ | 927,000 | 
|Less: Total stock-based
employee compensation
expense determined under fair
value method for all
awards, net of related tax
effects |  |                    | 57,000    |                  |  |      | 114,000 |      |  |   | 123,000   |  |  |   | 215,000 | 
|                                                                                                                                    |  |                    |           |                  |  |      |         |      |  |   |           |  |  |   |         | 
|Pro forma net income                                                                                                                |  | $                  | 1,030,000 |                  |  | $    | 400,000 |      |  | $ | 1,768,000 |  |  | $ | 712,000 | 
|                                                                                                                                    |  |                    |           |                  |  |      |         |      |  |   |           |  |  |   |         | 
|Earnings per share:                                                                                                                 |  |                    |           |                  |  |      |         |      |  |   |           |  |  |   |         | 
|Basic  as reported                                                                                                                 |  | $                  | 0.17      |                  |  | $    | 0.13    |      |  | $ | 0.33      |  |  | $ | 0.23    | 
|Basic  pro forma                                                                                                                   |  | $                  | 0.16      |                  |  | $    | 0.10    |      |  | $ | 0.31      |  |  | $ | 0.18    | 
|                                                                                                                                   
|Diluted  as reported                                                                                                               |  | $                  | 0.16      |                  |  | $    | 0.12    |      |  | $ | 0.32      |  |  | $ | 0.22    | 
|Diluted  pro forma                                                                                                                 |  | $                  | 0.16      |                  |  | $    | 0.09    |      |  | $ | 0.30      |  |  | $ | 0.17    | 

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 six
months ended March 31, 2003, we assume 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 six months ended March 31, 2002.

8. RECENTLY ISSUED ACOUNTING STANDARDS

FASB Interpretation No.46 (FIN 46), Consolidation of Variable Interest
Entities, addresses consolidation and disclosure by business enterprises of
variable interest entities. 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.

9. SUBSEQUENT EVENT

On April 4, 2003, The Company withdrew the letter of intent to purchase
Codem Systems, Inc. The Companies will continue their existing business
relationship to jointly sell products that provide synergistic value to
respective customers.

10



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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.

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 our forward-looking statements should be
considered in light of these factors. You should not put undue reliance on any
forward-looking statements. The Company undertakes no obligation to update
these forward-looking statements to reflect new information, future events or
otherwise, except as provided by law.

Overview

We are a designer, developer and manufacturer of electronics,
communications and technology products for the defense and intelligence
markets. Specifically, we specialize in integrated passive surveillance,
communications and data links, electronic countermeasures and threat
simulators, and airborne imaging and scanning systems. Our 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 governments 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, we use 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). We record revenues
under cost-reimbursement contracts as costs are incurred and we include earned
fees in the proportion that costs incurred to date bear to total estimated
costs. We increase or decrease 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. We
include such incentive fee awards or penalties, which historically are not
material, in revenues at the time the amounts can be determined reasonably. We
recognize anticipated losses at the time they become known. Our future
operating results may be affected if actual contract costs incurred differ from
our current estimates of total contract costs.

Our revenues are primarily derived from fixed-price contracts, under which
we perform specific tasks for a fixed price. Under fixed-price contracts we
assume the risk of cost overruns and receive the benefit of cost savings. All
of our U.S. federal government contracts, whether we are 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 our costs as not allowable or as unreasonable, which can result in
our bearing all or a portion of these costs ourselves rather than recovering
them from the U.S. federal government.

11



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We expense 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.

Our results of operations, particularly our revenues, gross profit and
cash flow, may vary significantly from period to period depending on a number
of factors, including the progress of contract performance, revenues earned on
contracts, the timing of customer orders and billing of other direct costs, the
commencement and completion of contracts during any particular quarter, the
timing of government contract awards, the term of each contract that we have
been awarded, foreign budget reallocations, currency fluctuations, and general
political and economic conditions. Because a significant portion of our
expenses, such as personnel and facilities costs, are fixed in the short term,
successful contract performance and variation in the volume of activity, as
well as in the number of contracts commenced or completed during any period may
cause significant variations in operating results. As a result of the factors
above, period-to-period comparisons of our revenues and operating results may
not be meaningful.

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

Revenues:

Revenues increased $5,784,000, or 81.8% to $12,853,000 for the three
months ended March 31, 2003 from $7,069,000 for the three months ended March
31, 2002. The increase was due primarily to new contract awards in the
Communications Group and the Imaging Group of approximately $2,274,000, in
addition to revenues attributable to ST Production Systems, Inc., the
subsidiary that holds the assets we acquired from FEL Corporation and which we
include as part of our Defense Systems Group, of approximately $3,094,000. The
remaining increase is attributed to other Defense Systems revenue. During the
three months ended March 31, 2003, the four largest non-classified revenue
producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System,
the AN/SLQ-4A Radio Terminal Set, the Hyperspectral Imaging System, and the
AN/DPT-2B Based Payload for Lead In Fighter Hawk Radar Emulator, which
contributed 39.6% 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 March 31, 2003 and 2002, was $29,574,000 and $21,403,000,
respectively.

Cost of Revenues:

Cost of revenues increased $4,312,000, or 83.3%, to $9,488,000 for the
three months ended March 31, 2003 from $5,176,000 for the three months ended
March 31, 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 margin. Cost of
revenues as a percentage of revenues increased to 73.8% for the three months
ended March 31, 2003 from 73.2% for the three months ended March 31, 2002.

General and Administrative Expenses:

General and administrative expenses increased $497,000, or 46.8%, to
$1,559,000 for the three months ended March 31, 2003 from $1,062,000 for the
three months ended March 31, 2002. The increase was due principally to added
salaries, benefits and other related expenses of new employees hired and to
increases in salaries and benefits for our existing employees.

For the three months ended March 31, 2003, internal research and
development was $477,000 compared to $423,000 for the three months ended March
31, 2002 and represented 30.6% and 39.8% of general and administrative expense,
respectively.

12



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Interest Income:

Interest income increased $27,000 or over 100% to $38,000 for the three
months ended March 31, 2003 from $11,000 for the three months ended March 31,
2002. The increase was primarily the result of the income on a larger amount
of investments.

Other Income and Other Expenses:

Other income decreased $27,000 to $3,000 for the three months ended March
31, 2003 from $30,000 for the three months ended March 31, 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 $399,000 or 111.5% to $757,000 for the three months ended
March 31, 2003, from $358,000 for the three months ended March 31, 2002. The
increase was primarily due to increased and improved profitability for the
three month period ended March 31, 2003. Our effective tax rate was 41% for
the three months ended March 31, 2003 and 2002 and varies from the federal
statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

Net income increased $573,000 or 111.5% to $1,087,000 for the three months
ended March 31, 2003, from $514,000 for the three months ended March 31, 2002.
The increase is due primarily to an 81.8% increase in revenues and a decrease
in G&A as a percentage of revenue to 12.1% from 15.0% for the three months
ended March 31, 2003 and 2002, respectively. Net income as a percentage of
revenue was 8.5% for the three months ended March 31, 2003 compared to 7.3% for
the three months ended March 31, 2002. The increase is primarily due to
increased and improved profitability.

Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002

Revenues:

Revenues increased $13,098,000, or 114.1% to $24,576,000 for the six
months ended March 31, 2003 from $11,478,000 for the six months ended March 31,
2002. The increase was due primarily to new contract awards in the
Communications Group and the Imaging Group of approximately $4,756,000, in
addition to revenues attributable to ST Production Systems, Inc., the
subsidiary that holds the assets we acquired from FEL Corporation and which we
include as part of our Defense Systems Group, of approximately $7,273,000. The
remaining increase is attributed to other Defense Systems revenue. During the
six months ended March 31, 2003, the four largest non-classified revenue
producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System,
the AN/SLQ-4A Radio Terminal Set, the Hyperspectral Imaging System, and the
AN/DPT-2B Based Payload for Lead In Fighter Hawk Radar Emulator, which
contributed 39.3% of revenues.

Cost of Revenues:

Cost of revenues increased $10,541,000, or 128.6%, to $18,739,000 for the
six months ended March 31, 2003 from $8,198,000 for the six months ended March
31, 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 margin. Cost of revenues
as a percentage of revenues increased to 76.3% for the six months ended March
31, 2003 from 71.4% for the six months ended March 31, 2002.

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General and Administrative Expenses:

General and administrative expenses increased $817,000, or 45.3%, to
$2,622,000 for the six months ended March 31, 2003 from $1,805,000 for the six
months ended March 31, 2002. The increase was due principally to added
salaries, benefits and other related expenses of new employees hired and to
increases in salaries and benefits to our existing employees.

For the six months ended March 31, 2003, internal research and development
was $631,000 compared to $836,000 for the six months ended March 31, 2002 and
represented 24.1% and 46.3% of general and administrative expense,
respectively.

Interest Income and Interest Expense:

Interest income increased $12,000 or 38.7% to $43,000 for the six months
ended March 31, 2003 from $31,000 for the six months ended March 31, 2002. The
increase was primarily the result of the return on a larger investment amount.
Interest expense increased $46,000 or over 100% to $48,000 for the six months
ended March 31, 2003 from $2,000 for the six months ended March 31, 2002. The
increase was primarily due to interest expense incurred due to borrowings on
the line of credit.

Other Income and Other Expenses:

Other income decreased $60,000 to $7,000 for the six months ended March
31, 2003 from $67,000 for the six months ended March 31, 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 $683,000 or 107.9% to $1,316,000 for the six months ended
March 31, 2003, from $633,000 for the six months ended March 31, 2002. The
increase was primarily due to increased and improved profitability for the six
month period ended March 31, 2003. Our effective tax rate was 41% for the six
months ended March 31, 2003 and 2002 and varies from the federal statutory rate
primarily due to state taxes and other nondeductible expenses.

Net Income:

Net income increased $964,000 or 104.0% to $1,891,000 for the six months
ended March 31, 2003, from $927,000 for the six months ended March 31, 2002.
The increase is due primarily to a 114.1% increase in revenues; a decrease in
G&A as a percentage of revenue to 10.7% from 15.7% for the six months ended
March 31, 2003 and 2002, respectively; offset by an increase in cost of revenue
as a percentage of revenue to 76.3% from 71.4% for the same six month period.
Net income as a percentage of revenue was 7.7% for the six months ended March
31, 2003 compared to 8.1% for the six months ended March 31, 2002. The
decrease is primarily due to lower margins in our subsidiary ST Productions
Systems, Inc.

Liquidity and Capital Resources

Historically, our primary source of liquidity is cash provided by
operations and our line of credit. Our liquidity requirements depend on a
number of factors, including the timing of production under our federal
government and foreign sales contracts. 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. We had cash and cash
equivalents of $14,368,000 at March 31, 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

14



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stock. 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 $564,000 for the
six months ended March 31, 2003, compared to cash used in operating activities
of approximately $185,000 for the six months ended March 31, 2002, an increase
of approximately $749,000. The primary reasons for this increase were an
increase in net income, a net decrease in billed and unbilled accounts
receivables, and a decrease in inventories and other assets. The increase was
partially offset by a decrease in accounts payable, billing in excess of costs,
income taxes payable and other accrued expenses.

Cash used in investing activities was approximately $572,000 during the
six months ended March 31, 2003, compared to approximately $2,463,000 for the
six months ended March 31, 2002, a decrease of approximately $1,891,000. The
primary reasons for the decrease were the acquisition of FEL Corporation assets
and lower expenditures for other property and equipment during the six months
ended March 31, 2002 compared to only capital expenditures for property and
equipment in 2003.

Cash provided by financing activities was approximately $13,676,000 during
the six months ended March 31, 2003, compared to cash provided by financing
activities of approximately $76,000 for the six months ended March 31, 2002, an
increase of $13,600,000. 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. 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 and expires February 28, 2004. 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. As of March 31, 2003, there were no borrowings under our line of
credit. We have given the lender a security interest in substantially all of
our assets to secure the debt under our credit facility.

We believe our existing funds, cash we generate by operations, and amounts
available for borrowings under our line of credit will be sufficient to meet
our current working capital.

Market Risks

In addition to the risks inherent in our operations, we are exposed to
financial, market, political and economic risks. The following discussion
provides additional detail regarding our 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. We
maintain cash and cash equivalents with various financial institutions in
excess of the amount insured by the Federal Deposit Insurance Corporation. We
believe credit risk related to these cash and cash equivalents is minimal.

15



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Interest Rates:

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

Foreign Currency:

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

Contractual Obligations and Commitments

The Companys line of credit balance was $2,900,000 as of September 31,
2002. All outstanding borrowings under the line of credit were paid off in the
first quarter of 2003 with proceeds of the sale of common stock. There were no
outstanding borrowings under the line of credit at March 31, 2003.

In connection with the February 2003 line of credit renewal, the letters
of credit were revised. Total letters of credit at March 31, 2003 were
$4,000,000. Letters of credit of $2,564,000 expire in less than one year and
$1,436,000 expire in one to three years.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies
and estimates during the six months ended March 31, 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 our Annual
Report on Form 10-K for the year ended September 30, 2002.

Inventories:

We are required to state our inventories at the lower of cost or market.
In assessing the ultimate realization of inventories, we are 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 March 31, 2003, we had $1,266,000 in
inventory related to a program for the Egyptian Navy. Although we have no
reason to believe this contract is in jeopardy, given the delays experienced,
we cannot, with any certainty, plan on a contract notice to proceed until
sometime after September 30, 2003.

Research and Development:

We include internally funded research and development costs in general and
administrative expenses in our consolidated income statements. Our applied
research and development during the six months ended March 31, 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. We expensed $477,000 and $429,000 of internally funded research and
development costs during the three months ended March 31, 2003 and 2002,
respectively. We expensed $631,000 and $836,000 of internally funded research
and development costs during the six months ended March 31, 2003 and 2002,
respectively.

16



---



##### 



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 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

During the period covered by this report, the Company filed with the Securities
and Exchange Commission and delivered to its shareholders the Companys Proxy
Statement for its Annual Meeting of Stockholders held February 18, 2003.



| | (a) |  | The Companys Annual Meeting of Stockholders was held on February 18,
2003.           
| | --- |  | --------------------------------------------------------------------------------------
|
| | (b) |  | The nominees for the Board of Directors are identified below.                         
|
| | (c) |  | The inspector of election tabulated the following votes for the
election of directors:

Election of Directors

|                   |                       |           |           |                  |  |                 |           |                 |  |  |        | 
|------------------ | --------------------- | --------- | --------- | ---------------- |  | --------------- | --------- | --------------- |  |  | ------ | 
|                   |                       |           |           |                  |  | Number of Votes |           | Abstentions and
|Nominee for Office | Number of
Votes For | Against |           | Broker Non-Votes
|                   |                       |           |           |                  |  |                
|Charles W. Bernard |                       |           | 5,253,188 |                  |  |                 | 200       |                 |  |  | 21,510 | 
|John Irvin         |                       |           | 5,244,588 |                  |  |                 | 8,800     |                 |  |  | 21,510 | 
|S. R. Perrino      |                       |           | 5,244,388 |                  |  |                 | 9,000     |                 |  |  | 21,510 | 
|Philip H. Power    |                       |           | 5,244,688 |                  |  |                 | 8,700     |                 |  |  | 21,510 | 
|S. Kent Rockwell   |                       |           | 4,207,610 |                  |  |                 | 1,045,778 |                 |  |  | 21,510 | 
|John D. Sanders    |                       |           | 5,244,488 |                  |  |                 | 8,900     |                 |  |  | 21,510 | 
|Lloyd A. Semple    |                       |           | 4,207,559 |                  |  |                 | 1,045,829 |                 |  |  | 21,510 | 

The inspector of election tabulated the following votes for the ratification of
the selection of PricewaterhouseCoopers LLP as the Companys independent
accountants for the 2003 fiscal year:

|                      |  |                           |        |           |  |                        |       | 
|--------------------- |  | ------------------------- | ------ | --------- |  | ---------------------- | ----- | 
|                      |  |                           |        |           |  | Abstentions and Broker
|Number of Votes For |  | Number of Votes Against |        | Non-Votes
|                      |  |                           |        |          
|5,231,062             |  |                           | 21,510 |           |  |                        | 3,226 | 

17



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##### 



Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits                                               
| | --- |  | -------------------------------------------------------
|
| |     |  | Item 99. Additional Exhibit.
Section 906 Certification.



| | (b) |  | Reports on Form 8-K                                                                           
| | --- |  | ----------------------------------------------------------------------------------------------
|
| |     |  | The Company did not file any Reports on Form 8-K during the three
months ended March 31, 2003.

18



---



##### 



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.
| | ---------------



|May 14, 2003; | By: /s/ S. Kent
Rockwell
      S. Kent Rockwell
      Chairman and Chief Executive Officer
|------------- | ------------------------------------------------------------------------------------------



|May 14, 2003 | By: /s/ Donald F.
Fultz
      Donald F. Fultz
      Vice President and Chief Financial Officer
|------------ | ----------------------------------------------------------------------------------------------

19



---



##### 



FORM OF CERTIFICATION

I, S. Kent Rockwell, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Sensytech, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                  
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize, and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                         



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 14, 2003

/s/ S. Kent
Rockwell

S. Kent Rockwell
Chief Executive Officer

20



---



##### 



FORM OF CERTIFICATION

I, Donald F. Fultz, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Sensytech, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                  
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize, and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                         



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 14, 2003

/s/ Donald F.
Fultz

Donald F. Fultz
Chief Financial Officer

21