UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended September 30, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 000-08193
 ARGON ST, INC.
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    38-1873250(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 12701 Fair Lakes Circle, Suite 800, Fairfax Virginia 22033
 (703) 322-0881
  Name of Exchange onTitle of Class
    
    Which RegisteredCommon Stock, par value $.01 per share
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
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DOCUMENTS INCORPORATED BY REFERENCE
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ARGON ST, INC. AND SUBSIDIARIES
 For the Fiscal Year Ended September 30, 2008
 
 TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    29Item 2. Properties
    
    
    29Item 3. Legal Proceedings
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Supplemental Item. Executive Officers of the Registrant
    
    
    31PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    32Item 6. Selected Financial Data
    
    
    33Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 8. Financial Statements and Supplementary Data
    
    
    49Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    76Item 9A. Controls and Procedures
    
    
    76Item 9B. Other Information
    
    
    76PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    77Item 11. Executive Compensation
    
    
    77Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    77Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    77Item 14. Principal Accounting Fees and Services
    
    
    77PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    78Signatures
    
    
    80Exhibits
    
    
    78
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PART I
 
 ITEM 1. BUSINESS
 Business Description.
   
    
    Signals Intelligence (SIGINT):Collecting information and producing intelligence
from the detection, interception and evaluation of signals, including communication
signals (COMINT) and electromagnetic signals, such as radar (ELINT).
    
    Electronic Warfare (EW):Detecting, identifying and countering adversary forces,
weapons and sensors through collection of adversary signals. Measures include
launching deceptive signals and electronic counter-measures and using electronic
support measures (ESM) to identify and locate emitters on both platforms and weapons.
    
    Information Operations (IO):Employment of non-lethal measures to exploit,
influence and manipulate an enemys C5ISR processes, including radio and network
communications and measures, to protect own force and friendly information and
sensors.
    
    Acoustic Operations:Employment of acoustic sensors and signals to detect, identify
and counter undersea threats including, but not limited to, enemy torpedoes.
    
    Threat Simulation:The use of computer and virtual based replication of signals and
sensors for training and analysis of adversary capabilities.
    
    Imaging:Production and analysis of information from light spectrum sources,
including multispectral, hyperspectral, infra-red, electro-optical and visible light.
    
    Tactical Communications and Networking:Deployment of mobile, terrestrial, and
satellite radio receivers and transmitters, to include point to point links and
extensive networks, supporting tactical operations, intelligence production and
dissemination, movement of data and information, and management of the radio frequency
spectrum.
    
    Services:The provision of material, training and support engineering expertise to
enable and sustain readiness, systems operations and mission success.
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Available Information
 http://www.argonst.com. http://www.sec.gov.
 Corporate History
     5




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Recent Developments
  Investment in the Integration of Recent Acquisitions and in New Business Pipeline
 
    
    Integration of acquisitions and streamlining of operations. Over the past
few years, we have made several acquisitions, each having different infrastructures and
resource planning systems. During 2008, we evaluated and invested in resources to
optimize our project management and financial systems. During the integration period,
we faced challenges in integrating the operations and in establishing and optimizing
the alignment of our programs. We believe that these efforts will provide us more
visibility into our operations, allow for easier movement of people and resources
across programs as demand for work evolves, and will result in the realization of
efficiencies in systems maintenance and operations. As of the end of fiscal 2008, the
integration and the systems consolidation is substantially complete.
    
    Significant Proposal Efforts. During 2008, we continued to invest in
enhancing and developing new business by engaging in significant business development
and business proposal activities. These and other efforts are critical to the
continued growth of the Company.
 Customer and Product Diversification
 
    
    ORBCOMM Generation Two (OG2) Payload Program. During fiscal 2008, we were
awarded a $45 million fixed price subcontract to the prime contractor for the ORBCOMM Generation Two (OG2)
payload program. Under this program, we will work with a team of several other
companies to design, develop and deliver an enhanced communications payload which will
implement technological and cost advantages over the RF systems typically used in space
systems.
    
    Global Data Solutions. Our global data solutions operations are designed to
develop and distribute telematics systems to end users. The telematics systems will
include a combination of products designed to collect information and services designed
to using existing telecommunications technology to distribute the collected information
to appropriate users. During 2008 we signed an exclusive supply agreement with ULD
Logistics, LLC to provide telematics systems to the commercial air freight shipping
container market. Additionally, in September 2008, we agreed to a firm commitment to
provide telematics products and services to Cartasite, Inc. Under these
agreements, we will supply satellite radios and application services under an existing
reseller agreement with ORBCOMM. These programs are in early stages; however, these
agreements represent a significant milestone in the expansion of our telematics
business and open a new market to us.
 Significant Developments in our Core Technologies and Customers
 
    
    Tactical Communications and Networking Systems. In prior years, we were
awarded an important option under the Operational Test-Tactical Engagement System
(OT-TES) Communications Upgrade program. In fiscal 2008, we booked and began
integration and test activities under the program, and the U.S. Army increased the
ceiling of this contract from $100 million to $251 million in preparation for the
production needs of this and closely related programs. OT-TES provides a mobile,
high-fidelity, tactical engagement simulation and field instrumentation system that
collects and reports real-time casualty assessment and other required data.
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OT-TES is capable of supporting operational testing and evaluation of Army
weapon systems, doctrine and tactics. We believe that our advances in this market
will provide synergies in other tactical communications markets that we serve.We also booked our first production orders for the Common Range Integrated
Instrumentations System rapid prototype initiative (CRIIS RPI). These systems
provide networked mobile field instrumentation to support the testing and evaluation
of advanced weapon systems on our nations test and training ranges. We expect to
see additional scope added to these efforts in the period of 2009 to 2013 as we
continue production orders, and commence installation and field support activities.
    
    Ships Signals Exploitation Equipment (SSEE) Increments E and F. This
program, under which we design and develop Information Operation systems for the U.S.
Navy, was first awarded to us following a competitive procurement process in 2001. Our
partnership with the U.S. Navy grew stronger with the approval of additional SSEE
Increment E systems over the years, and in 2006 with our competitive win of the
contract to develop the next generation of these shipboard systems, known as SSEE
Increment F. In 2008, we continued the production and delivery of our SSEE Increment E
systems and were near the completion of the hardware and software development for the
SSEE Increment F systems, we entered the integration and test on the program in 2008.
    
    Maritime Market. Our surface ship torpedo defense (SSTD) systems continue
to be deployed in both the U.S. market and overseas. We continue production deliveries
under option orders to upgrade the 25A configuration to the 25C configuration, which
has been approved for operational deployment. We anticipate an award for the research
and development work on engineering development to complete the 25D baseline.
 Segments
  Technology and Applications
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Customers
   Years Ended September 30,2008
    
    2007
    
    2006United States Navy
    
    
    55
    %
    
    
    61
    %
    
    
    59
    %United States Army
    
    
    10
    %
    
    
    11
    %
    
    
    6
    %Other U.S. government agencies
    
    
    22
    %
    
    
    22
    %
    
    
    25
    %Foreign
    
    
    8
    %
    
    
    5
    %
    
    
    9
    %Commercial and other
    
    
    5
    %
    
    
    1
    %
    
    
    1
    %
 Government Contracts
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Bidding Process
  
    
    Sole-source contracts.The U.S. government awards sole-source contracts when it
determines that a single contractor has an expertise or technology that is superior to
that of other available contractors. Sole-source contracts are awarded without a formal
competition. Potential suppliers compete informally for sole-source contracts through
research and development investment and marketing efforts. To obtain a sole-source
contract, a contractor must identify the governments requirements early and
demonstrate a distinguishing expertise or technology promptly after the government has
identified a requirement.
    
    Competitive-bid contracts.The U.S. government awards competitive-bid contracts
based on proposal evaluation criteria established by the procuring agency.
Competitive-bid contracts are awarded after a formal bid and proposal competition among
providers. Interested contractors prepare a bid and proposal in response to the
agencys request for proposal or request for information. A bid and proposal is usually
prepared in a short time period in response to a deadline, and requires the extensive
involvement of numerous technical and administrative personnel. Following award,
competitive-bid contracts may be challenged by unsuccessful bidders in a variety of
ways.
  Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2008
    
    September 30, 2007
    
    September 30, 2006Sole Source Contracts
    
    
    52
    %
    
    
    55
    %
    
    
    51
    %Competitive Contracts
    
    
    48
    %
    
    
    45
    %
    
    
    49
    %
 Material Government Contract Provisions
   
    
    terminate existing contracts for convenience, which affords the U.S. government the
right to terminate the contract in whole or in part anytime it wants for any reason or
no reason, as well as for default;
    
    reduce or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
    
    cancel or reduce multi-year contracts and related orders, if funds for contract
performance for any subsequent year become unavailable;
    
    claim rights in products and systems produced by its contractors and subcontractors;
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
    
    adjust reimbursable contract costs and fees on the basis of audits completed by its
agencies through exercise of its oversight rights;
    
    suspend or debar a contractor from doing business with the U.S. government; and
    
    control or prohibit the export of products.
  Government Contract Categories
  Fixed-price.
 Cost reimbursable.
 
    
    Cost-plus-fixed fee contracts are cost reimbursable contracts that provide for
payment to us of a negotiated fee that is fixed at the inception of the contract. This
fixed fee does not vary with actual cost of the contract, but may be adjusted as a
result of changes in the work to be performed under the contract. This contract poses
less risk than a fixed-price contract, but our ability to win future contracts from the
procuring agency may be adversely affected if we fail to perform within the maximum
cost set forth in the contract.
    
    A cost-plus-award fee contract is a cost reimbursable contract that provides for a
fee consisting of a base amount (which may be zero) fixed at inception of the contract
and an award amount, based upon the governments satisfaction with our performance
under the contract. With this type of contract, we assume the risk that we may not
receive the award fee, or only a portion of it, if we do not perform satisfactorily.
    
    A cost-plus-incentive fee contract is a cost reimbursable contract that provides for
an initially negotiated fee to be adjusted later by a formula based on the relationship
of total allowable costs to total target costs.
  Time and materials.
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Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2008
    
    September 30, 2007
    
    September 30, 2006Fixed-price contracts
    
    
    58
    %
    
    
    60
    %
    
    
    65
    %Cost reimbursable contracts
    
    
    38
    %
    
    
    35
    %
    
    
    25
    %Time and materials contracts
    
    
    4
    %
    
    
    5
    %
    
    
    10
    %
 Regulation
   Subcontracts
  Backlog
  (Amounts
in thousands)
    
    2008
    
    
    2007
    
    
    2006Funded
    
    $
    272,620
    
    
    $
    246,571
    
    
    $
    162,796Unfunded
    
    
    54,672
    
    
    
    58,279
    
    
    
    62,373Total
    
    $
    327,292
    
    
    $
    304,850
    
    
    $
    225,169
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Research and Development
    (Amounts
in thousands)
    
    2008
    
    
    2007
    
    
    2006Internal research and development
    
    $
    6,656
    
    
    $
    7,035
    
    
    $
    6,286Customer-funded research and development
    
    
    80,005
    
    
    
    73,397
    
    
    
    50,130Total
    
    $
    86,661
    
    
    $
    80,432
    
    
    $
    56,416
 Competition
   Environmental
  Employees
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Industry Overview
 Government Spending
  
    
    Department of Defense Budgets.As compared to the 2008 levels of Department of
Defense spending, including defense spending for procurement and research and
development, the 2009 Department of Defense budget is expected to decrease to
approximately $518.2 billion from $568.2 billion. The most significant decrease in the
Department of Defense budget is attributable to a $35.4 billion decrease in Army
spending, primarily attributable to decreases in Army operations and maintenance
spending. Budgets for the Navy and Air Force, one of which represents our most
significant customer, are expected to increase approximately 2% over the next few years
to a combined budget of $292.7 billion. From 2009 to 2014, the currently projected
budgets are anticipated to increase at a compounded rate of approximately 2% to 3%.
    
    C5ISR Spending.Consistent with the expected short-term decreases in the overall
Department of Defense budgets, spending on C5ISR is expected to decrease slightly from
2008 to 2014. The highest priorities for C5ISR spending is expected in the
interoperability of current systems, increased bandwidth for mobile units, and
space-based command, control, surveillance and reconnaissance systems.
    
    United States Government Changes and Economic Conditions.The change in
administrations as a result of the Presidential election and the impacts of
Congressional turnover, as well as the recent economic downturn of the global economy
and the worsening condition in the U.S. and global financial and credit markets may
have a significant effect on the U.S. defense and other related spending.
    
    Iraq and Afghanistan Theatres of Operation.The conflicts in Iraq and Afghanistan
and their escalation or de-escalation may have a significant impact on U.S. defense and
other related spending.
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Significant Industry Trends
  
    
    Changing Communications Intelligence Needs.Communications Intelligence (COMINT)
continues to be the premier source of information for supporting strategic decision
makers and tactical commanders. With the transition from a monolithic enemy in the
Cold War to the dispersed collection of possible enemies in asymmetric warfare, both
the nature of the target and the COMINT requirements have changed. Communications
equipment targeted by COMINT systems is no longer limited to long term, state
developed, military systems and now represents the latest technology readily available
in the commercial communications market, (for example, cell phones). Geolocation is no
longer limited to the location of major enemy forces and strategic weapons, but now
includes an individual or specific computer. These realities of modern defense and
security radically change the requirements for COMINT systems. Todays successful
COMINT systems and designs must be dynamic, reprogrammable within a single mission and
accommodating of new technology as it becomes available, with minimum impact and costs.
Modern COMINT systems need to provide essential information within the tempo of modern
warfare.
    
    Electronic Warfare/Information Operations.Information operations and electronic
warfare have never been more important to warfighters and offer powerful new options to
commanders. Electronic Attack (EA) is increasingly becoming a weapon of choice for
both conflict management and non-lethal attack. We believe the trend towards the
weaponization of SIGINT will increase the priority for systems which can offer both
traditional ISR and EA. We also expect the need for brute force and smart jamming
against Improvised Explosive Devices (IED) to continue to be a critical requirement
anywhere the United States has military or civilian personnel in place.
    
    Multi-Intelligence Systems Integration.Dating from the Cold War era, intelligence
systems were single discipline based and stood on their own individual merit.
Information and data analysis across disciplines was performed by examining the end
conclusions of these single discipline systems. Factors such as the need for
information inside the decision cycle of todays pace of warfare, ready use and
dissemination of information from previously restricted sources, a proliferation of
sensors, and improvements in making information available create a compelling case for
the integration of information at the first possible opportunity. Warfighters today
need What is it, and where is it? answered rapidly with clear information integrated
from all useful sources. Meeting this demand has a profound impact on ISR system
design. Modern ISR systems must develop and present accurate, reliable information in
forms that can be readily combined with information from other types of sensors and
systems. We expect that the trend of intelligence integration will continue and will
have three important effects. First, modern ISR systems must automatically derive
intelligence quickly from detectable external signal characteristics and combine this
information at the raw observable level. To satisfy this requirement, newer systems
must be able to provide geolocational information on all new energy detections.
Second, intelligence must be delivered in an actionable form to discreet personal
devices in the hands of individual warfighters. Third, we believe the pace of war and
volume of intelligence data may result in the need to execute decisions, including the
use of lethal force, on the basis of machine-generated information without the benefit
of human analysis. These trends will continue to place increasingly difficult demands
on the accuracy, reliability, and data integrity of ISR systems.
    
    Network-Centric Warfare.The military is rapidly moving towards network-centric
warfare, which seeks to deliver the warfighter real-time, executable battlefield
information from multiple platforms and sources. Modern warfare requires coordinating
multiple ground troops, land vehicles and aircraft (both manned and unmanned), ships
and submarines. Network-centric warfare involves shared data, shared sensors, shared
tasking and joint operations among multiple
combat platforms and personnel and requires increasingly sophisticated,
complementary and flexible C5ISR systems.
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
    
    Outsourcing of Support Services.A number of factors have converged to create an
environment in which government is now outsourcing an increasing percentage of work
previously done by the military or government civilians. The trend is pervasive across
nearly all functional areas except combat forces. The nature of the work ranges from
acquisition management to manning positions in intelligence and analytical operations.
A continuing manpower shortage in the military, increasingly complex systems and the
need to retrain system operators and maintenance personnel on rapidly changing hardware
and software all point to even more outsourcing. The trend enables companies to
provide the government with critical services and expertise, while they remain current
with operational needs and challenges.
 Business Strategies
  
    
    Continuing and Extending Business with our Current Customers.We adhere strongly to
the belief that our current customer is our best customer. Our intention is to extend
current contracts into additional capabilities and services for our existing customers.
Additionally, as new technology is developed or available, we will endeavor to modify
existing systems to take advantage of this new technology in the face of dynamic
threats.
    
    Expanding our Customer Base for our Existing Capabilities.The software product
line and other capabilities constituting our current products could offer additional
customers the same compelling advantages experienced by our current customers. We
intend to extend our customer set for our current and evolving products and services.
We believe the adaptability and flexibility of our SIGINT and other products make them
attractive in joint or coalition warfare environments.
    
    Developing New Products,Services and Customers.We believe a combination of our
highly-skilled staff and leading edge technology offers opportunities into new markets.
In addition, we believe that we have developed a favorable reputation for taking on
and solving the most challenging technical and engineering problems. We intend to
combine the results of customer funded research with internally funded technology
development to develop new customers through focused marketing initiatives led by our
internal professional staff, complemented by selective outside experts.
    
    Attracting and Developing Highly Skilled Personnel.Our success depends on the
continued contributions of our engineers, system designers and managers. We intend to
continue to hire and develop the highly-skilled professionals needed for our work. We
seek to recruit exceptional recent college graduates and former key personnel from the
intelligence community and Department of Defense. We believe that our managements
success in creating and maintaining a challenging and stimulating work environment has
contributed to our low engineering staff turnover over the last twelve months. We
believe we can continue to attract, develop and retain employees by offering
competitive compensation, challenging engineering assignments and opportunities for
career and management growth.
    
    Leveraging Research and Development into Production Contracts.Many of our current
systems were developed through our research and development activities. Much of our
research and development is funded through research and development contracts with the
U.S. government. While these contracts are generally small and have lower profit
margins, we have often been successful in expanding these activities into full
production contracts. We believe our involvement in all stages of a systems life cycle
provides us opportunities to be the preferred or sole-source
provider for certain systems. We intend to continue to identify and pursue programs
where we can expand research and development efforts into full production contracts.
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
    
    Migrating our Multi-Intelligence Capabilities to Additional Platforms.Defense and
intelligence customers now require C5ISR systems that integrate multiple intelligence
gathering and processing capabilities. Our multi-intelligence systems have combined
communications and electronic intelligence capabilities on ships, submarines and
aircraft, and have combined radar and infra-red sensor capabilities for border patrols.
We believe our experience and capabilities position us to win contracts to develop and
produce multi-intelligence systems.
    
    Expanding our Role to Provide Support Services.We plan to continue to build on the
expertise developed from supporting and servicing our rapidly expanding inventory of
deployed systems, by providing those same services to similar systems. Our current
infrastructure can be adapted to meet the growing requirements created by the
government trend to outsource key engineering and support services.
 
 ITEM 1A. RISK FACTORS
  Risks Related to Our Business and Operations
 We rely heavily on sales to the U.S. government, particularly to agencies of the Department of
Defense.
  Multi-year U.S. government programs are generally not fully funded at inception, and funding may be
terminated or reduced at any time.
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From time to time, we depend on revenues from a few significant contracts, and any loss or
cancellation of, or any reduction or delay in, any of these contracts could significantly harm our
business.
  Our U.S. government contracts generally may be terminated at the governments convenience or for
our default.
  As a U.S. government contractor, we are subject to a number of procurement and operational rules
and regulations with respect to federal contracts.
  
    
    require certification and disclosure of all cost and pricing data in connection with
contract negotiations;
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
    
    impose accounting rules that define allowable and unallowable costs and otherwise
govern our right to reimbursement under certain cost-based U.S. government contracts;
and
    
    restrict the use and dissemination of information classified for national security
purposes and the exportation of certain products and technical data.
  Our U.S. government contracts contain provisions that may be unfavorable to us.
  
    
    unilaterally suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
    
    reduce the value of existing contracts;
    
    issue modifications to a contract;
    
    control and potentially prohibit the export of our products and services and
associated materials; and
    
    claim rights in products and systems produced by us.
 
 Our business could be adversely affected by a negative audit by the U.S. government.
  Our senior management is important to our customer relationships and overall business.
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We must recruit and retain highly skilled employees to succeed in our competitive and
labor-intensive business.
  Our business is dependent upon our employees obtaining and maintaining required security
clearances.
  Cost over-runs on our contracts could subject us to losses or adversely affect our future business.
  Our quarterly operating results may vary widely.
  
    
    fluctuations in revenues derived from fixed-price contracts and contracts with a
performance-based fee structure;
    
    commencement, completion or termination of contracts during any particular quarter;
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
    
    personnel changes among senior U.S. government officials that affect the timing of
technology procurement;
    
    changes in policy or budgetary measures that adversely affect government contracts
in general; and
    
    increased purchase requests from customers for equipment and materials in connection
with the U.S. governments fiscal year end, which may affect our fiscal fourth quarter
operating results.
  Our earnings and profit margins may vary based on the mix of our contracts and programs and other
factors related to our contracts.
  We derive significant revenues from contracts awarded through a competitive bidding process.
  
    
    the need to bid on programs in advance of the completion of their design, which may
result in unforeseen technological difficulties and cost over-runs;
    
    the substantial cost and managerial time and effort that we spend to prepare bids
and proposals for contracts that may not be awarded to us;
    
    the need to accurately estimate the resources and cost structure that will be
required to service any contract we are awarded; and
    
    the expense and delay that may arise if our competitors protest or challenge
contract awards made to us pursuant to competitive bidding, and the risk that any such
protest or challenge could result in the resubmission of bids on modified
specifications, or in termination, reduction or modification of the awarded contract.
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We face competition from other firms, many of which have substantially greater resources.
  Our business depends upon our relationships with, and the performance of, our prime contractors.
   If our subcontractors or suppliers fail to perform their contractual obligations, our contract
performance and our ability to obtain future business could be materially and adversely affected.
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Our employees or subcontractors may engage in misconduct or other improper activities.
  If we are unable to manage our growth, our business could be adversely affected.
  Our international business poses potentially greater risks than our domestic business.
  We may not be able to receive or retain the necessary licenses or authorizations required to sell
our systems and provide services overseas.
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Our systems and products may be rendered obsolete if we are unable to adapt to the rapid
technological changes in our industry.
  We rely on a limited number of suppliers and manufacturers for specific components, and if our
supplies are interrupted, we may not be able to obtain substitute suppliers and manufacturers on
terms that are as favorable to us.
  
    
    delays in delivery or shortages in components or licensed technology could interrupt
and delay production and result in cancellations of orders for our systems;
    
    alternative suppliers could increase component prices significantly; and
    
    we may not be able to develop alternative sources for the components or licensed
technology.
 Our system design and development activities rely on extensive use of advanced components
for hardware and software.
   Our future success will depend in part on our ability to meet the changing needs of our customers.
  23




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We may be liable for system and service failures.
  
    
    lose revenues due to adverse customer reaction;
    
    be required to provide additional services to a customer at no charge;
    
    receive negative publicity, which could damage our reputation and adversely affect
our ability to attract or retain customers; or
    
    suffer claims for substantial damages.
   Security breaches by us could adversely affect our business.
  Developing new technologies entails significant risks and uncertainties that may not be covered by
indemnity or insurance.
  24




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Our failure to protect our proprietary technology may adversely affect our business and impair our
ability to compete effectively.
  The U.S. governments right to use technology developed by us limits our intellectual property
rights.
  We may be affected by intellectual property infringement claims.
  
    
    cease selling or using products or services that incorporate the challenged software
or technology;
    
    obtain a license or additional licenses involving additional costs for use; or
    
    redesign systems and products that rely on the challenged software or technology.
 Risks Related to Accounting Matters and Our Internal Control over Financial Reporting
 If we fail to comply with requirements relating to internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act, our business could be harmed and our stock price could
decline.
 25




---



##### 



We may incur material impairment charges related to mergers and acquisitions.
  We may be required to reduce our profit margins on contracts on which we use the
percentage-of-completion accounting method.
  Additional Risks Related to Our Commercial Business and Operations
  Our commercial business is in its infancy.
  26




---



##### 



Our company is structured primarily for doing government business.
  Our commercial customers and contracts are fewer, therefore our performance for them is more
critical in the commercial marketplace.
  Our commercial contracts may contain provisions that are unfavorable to us.
  Commercial work is highly dependent upon customer demand.
  Commercial work is highly dependent upon the business plans and financial health of the companies
who contract with us.
  27




---



##### 



Commercial work in our industry is based upon rapidly changing technology.
  Risks Related to Acquisitions
 We intend to continue to pursue selective acquisitions, which may prove difficult in the current
acquisition environment for defense and intelligence businesses.
 .
 Acquisitions involve costs and other risks, and may not have the benefits we expect.
  
    
    diversion of managements attention from existing operations;
    
    potential loss of key employees or customers of acquired companies;
    
    exposure to unforeseen liabilities of acquired companies; and
    
    financial reporting irregularities as a result of deficient internal controls and
disclosure controls and procedures of acquired companies.
  
    
    the integration of personnel with disparate business backgrounds;
 28




---



##### 




    
    the transition to new information systems;
    
    the coordination of geographically dispersed organizations;
    
    the reconciliation of different corporate cultures, pay structures and benefits
plans; and
    
    the synchronization of disclosure and financial reporting controls of acquired
companies with our controls and, where applicable, improvement of the acquired
companys controls.
  Acquisitions may require us to incur debt or issue dilutive equity.
  Risk Related to Ownership of Our Common Stock
 Our current and former executive officers, whose interests may not be aligned with yours, may be
able to control the vote on matters requiring stockholder approval.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  29




---



##### 



EstimatedSquare
    
    
    
    
    
    PrincipalAddress
    
    Feet
    
    Lease Term
    
    Description
    
    Activity12701 Fair Lakes CircleFairfax, VA 22033
    
    165,000
    
    Leased, Expiration Date: 2/28/2015
    
    Multi-floor tenant in ten-story
office building.
    
    Engineering/ Administration99 Spruce St
Windber, PA 15963
    
    90,000
    
    Leased, Expiration Date: 9/30/2012
    
    One-story facility
    
    Engineering/ Production/ Administration8419
Terminal Road 
Newington, VA 22122
    
    67,220
    
    Leased, Expiration Date: 6/30/2014
    
    Two one-story and one partial
two-story adjacent block buildings in an industrial park.
    
    Engineering/ Production/ Administration90 Laurel
View Drive
 Smithfield, PA 15478
    
    66,000
    
    Leased, Expiration Date: 9/15/2013
    
    One-story facility.
    
    Engineering/ Production/ AdministrationMesa Ridge RoadSan Diego, CA 92121
    
    39,939
    
    Leased, Expiration Date: 8/31/2010
    
    Two-story facilities.
    
    Engineering/ Administration1386-1390
Connellsville Rd 
Lemont Furnace, PA 15456
    
    30,000
    
    Leased, Expiration Date: 4/1/2014
    
    One-story facility.
    
    Engineering/ Production
  
    
    Ventura, California;
    
    Orlando, Ft Walton Beach, Largo, and Tampa, Florida;
    
    Annapolis Junction and Lexington Park, Maryland;
    
    Ann Arbor, Michigan;
    
    Camden, New Jersey;
    
    Doylestown, Pennsylvania; and
    
    Copperas Cove and San Antonio, Texas.
 30




---



##### 



ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    Position with RegistrantTerry L. Collins,
Ph.D.
    
    
    63
    
    
    Chairman of the Board, Chief Executive Officer and
PresidentVictor F. Sellier
    
    
    59
    
    
    Executive Vice PresidentKerry M. Rowe
    
    
    49
    
    
    Vice President, Chief Operating OfficerAaron N. Daniels
    
    
    47
    
    
    Vice President, Chief Financial Officer and Treasurer
 31




---



##### 



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
   High
    
    LowFiscal 2008Fourth Quarter
    
    $
    27.78
    
    
    $
    22.65Third Quarter
    
    
    25.94
    
    
    
    16.38Second Quarter
    
    
    18.75
    
    
    
    15.26First Quarter
    
    
    22.11
    
    
    
    17.50Fiscal 2007Fourth Quarter
    
    $
    23.73
    
    
    $
    15.18Third Quarter
    
    
    29.44
    
    
    
    19.95Second Quarter
    
    
    26.63
    
    
    
    21.14First Quarter
    
    
    25.00
    
    
    
    18.70
  Dividend Policy
  Equity Compensation Plan Information
  Number of
    
    
    Weightedsecurities to be
    
    
    average exerciseissued upon
    
    
    price of
    
    
    Number ofexercise of
    
    
    Outstanding
    
    
    securitiesoutstanding
    
    
    options,
    
    
    remainingoptions, warrants
    
    
    warrants and
    
    
    available forPlan category
    
    and rights
    
    
    rights
    
    
    future issuanceEquity compensation
plans approved by
security holders
    
    
    1,495,375
    
    
    $
    18.33
    
    
    
    2,712,019Equity compensation
plans not approved
by security holders
(1)
    
    
    572,567
    
    
    
    8.62
    
    
    
    Total
    
    
    2,067,942
    
    
    $
    15.64
    
    
    
    2,712.019
 
 (1)
    
    Consists entirely of shares of common stock issuable upon exercise of options
under the Argon Engineering Associates, Inc. Stock Plan. There will be no further
options or common stock granted under this plan. 32




---



##### 



Common Stock Performance Graph
  
 PERFORMANCE GRAPH TABLEAs of September 30, (in dollars)2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Argon ST Stock
    
    $
    100
    
    
    $
    177
    
    
    $
    185
    
    
    $
    151
    
    
    $
    125
    
    
    $
    148Russell 2000 Index
    
    
    100
    
    
    
    117
    
    
    
    137
    
    
    
    149
    
    
    
    165
    
    
    
    139BB&T Defense Electronics Index
    
    
    100
    
    
    
    139
    
    
    
    142
    
    
    
    155
    
    
    
    218
    
    
    
    175
  
 ITEM 6. SELECTED FINANCIAL DATA
   33




---



##### 



Years Ended September 302008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Contract revenues
    
    $
    340,934
    
    
    $
    282,209
    
    
    $
    258,835
    
    
    $
    271,754
    
    
    $
    129,184Cost of revenues
    
    
    279,932
    
    
    
    229,767
    
    
    
    206,023
    
    
    
    222,792
    
    
    
    107,307General and adminstrative expenses
    
    
    22,432
    
    
    
    17,342
    
    
    
    15,926
    
    
    
    10,586
    
    
    
    4,604Research and development expenses
    
    
    6,656
    
    
    
    7,035
    
    
    
    6,286
    
    
    
    3,992
    
    
    
    1,301Impairment of intangible assets
    
    
    
    
    
    
    6,748
    
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    
    31,914
    
    
    
    21,317
    
    
    
    30,600
    
    
    
    34,384
    
    
    
    15,972Other income, net
    
    
    615
    
    
    
    1,318
    
    
    
    1,180
    
    
    
    698
    
    
    
    154Income before income taxes
    
    
    32,529
    
    
    
    22,635
    
    
    
    31,780
    
    
    
    35,082
    
    
    
    16,126Provision for income taxes
    
    
    (12,256
    )
    
    
    (7,933
    )
    
    
    (12,385
    )
    
    
    (13,301
    )
    
    
    (6,177
    )Net income
    
    $
    20,273
    
    
    $
    14,702
    
    
    $
    19,395
    
    
    $
    21,781
    
    
    $
    9,949Earnings per shareBasic
    
    $
    0.94
    
    
    $
    0.66
    
    
    $
    0.90
    
    
    $
    1.10
    
    
    $
    0.81Diluted
    
    $
    0.92
    
    
    $
    0.65
    
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    0.74
 34




---



##### 



Years Ended September 302008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands)Balance sheet dataCash and cash equivalents
    
    $
    15,380
    
    
    $
    22,965
    
    
    $
    14,800
    
    
    $
    4,064
    
    
    $
    29,732Total assets
    
    $
    340,338
    
    
    $
    329,645
    
    
    $
    313,531
    
    
    $
    249,834
    
    
    $
    221,741Total debt
    
    $
    100
    
    
    $
    218
    
    
    $
    86
    
    
    $
    11,138
    
    
    $
    282Stockholders Equity
    
    $
    292,444
    
    
    $
    274,836
    
    
    $
    265,696
    
    
    $
    192,013
    
    
    $
    160,925Other dataBacklog (unaudited)
    
    $
    322,868
    
    
    $
    304,850
    
    
    $
    225,169
    
    
    $
    271,107
    
    
    $
    228,819Dividends
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,851
  
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Statements
  Overview
 General
  35




---



##### 



Segments
  Revenues
       Fiscal Year EndedSeptember 30,
    
    Fiscal Year Ended
    
    Fiscal Year EndedContract Type
    
    2008
    
    September 30, 2007
    
    September 30, 2006Fixed-price contracts
    
    
    58
    %
    
    
    60
    %
    
    
    65
    %Cost reimbursable contracts
    
    
    38
    %
    
    
    35
    %
    
    
    25
    %Time and materials contracts
    
    
    4
    %
    
    
    5
    %
    
    
    10
    %
 36




---



##### 



Backlog
     (In
thousands)
    
    2008
    
    
    2007
    
    
    2006Funded
    
    $
    272,620
    
    
    $
    246,571
    
    
    $
    162,796Unfunded
    
    
    54,672
    
    
    
    58,279
    
    
    
    62,373Total
    
    $
    327,292
    
    
    $
    304,850
    
    
    $
    225,169
  Cost of Revenues
  General and Administrative Expenses
  37




---



##### 



Research and Development
   (In
thousands)
    
    2008
    
    
    2007
    
    
    2006Internal research and development
    
    $
    6,656
    
    
    $
    7,035
    
    
    $
    6,286Customer-funded research and development
    
    
    80,005
    
    
    
    73,397
    
    
    
    50,130Total
    
    $
    86,661
    
    
    $
    80,432
    
    
    $
    56,416
  Interest Income, net
  Critical Accounting Policies and Estimates
 General
  Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
 38




---



##### 



Indirect Rate Variance
  Award Fee Recognition
  Goodwill
 Goodwill and Other Intangible Assets
 39




---



##### 



Long-Lived Assets (Excluding Goodwill)
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Accounts Receivable
  Stock-Based Compensation
 Share-Based Payment
 Fair Value Determination
   Expected Volatility.
 Risk-free Interest Rate.
 40




---



##### 



Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
 Historical Operating Results
 Fiscal year ended September 30, 2008 compared to fiscal year ended September 30, 2007
  IncreaseSeptember 30,
    
    September 30,
    
    (Decrease) 2007(Amounts
in thousands)
    
    2008
    
    2007
    
    Compared to 2006Contract revenues
    
    $
    340,934
    
    
    $
    282,209
    
    
    $
    58,725Cost of revenues
    
    
    279,932
    
    
    
    229,767
    
    
    
    50,165General and administrative
expenses
    
    
    22,432
    
    
    
    17,342
    
    
    
    5,090Research and development
expenses
    
    
    6,656
    
    
    
    7,035
    
    
    
    (379
    )Impairment of intangible assets
    
    
    
    
    
    
    6,748
    
    
    
    (6,748
    )Interest income and interest
expense
    
    
    615
    
    
    
    1,318
    
    
    
    (703
    )Provision for income taxes
    
    
    12,256
    
    
    
    7,933
    
    
    
    4,323Net income
    
    
    20,273
    
    
    
    14,702
    
    
    
    5,571
 Contract Revenues:
  41




---



##### 



Cost of Revenues:
  General and Administrative Expenses:
  Research and Development Expenses:
  Impairment of Intangible Assets:
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 Interest Income and Interest Expense:
  42




---



##### 



Provision for Income Taxes:
  Net Income:
  Fiscal year ended September 30, 2007 compared to fiscal year ended September 30, 2006
  IncreaseSeptember 30,
    
    September 30,
    
    (Decrease) 2007(Amounts
in thousands)
    
    2007
    
    2006
    
    Compared to 2006Contract revenues
    
    $
    282,209
    
    
    $
    258,835
    
    
    $
    23,374Cost of revenues
    
    
    229,767
    
    
    
    206,023
    
    
    
    23,744General and administrative expenses
    
    
    17,342
    
    
    
    15,926
    
    
    
    1,416Research and development expenses
    
    
    7,035
    
    
    
    6,286
    
    
    
    749Impairment of intangible assets
    
    
    6,748
    
    
    
    
    
    
    
    6,748Interest income and interest expense
    
    
    1,318
    
    
    
    1,180
    
    
    
    138Provision for income taxes
    
    
    7,933
    
    
    
    12,385
    
    
    
    (4,452
    )Net income
    
    
    14,702
    
    
    
    19,395
    
    
    
    (4,693
    )
 Contract Revenues:
  Cost of Revenues:
  43




---



##### 



General and Administrative Expenses:
  Research and Development Expenses:
  Impairment of Intangible Assets:
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 Interest Income and Interest Expense:
  Provision for Income Taxes:
  44




---



##### 



Net Income:
  Analysis of Liquidity and Capital Resources
  Cash
  Line of Credit
    Cash Flows
  45




---



##### 



Contractual Obligations and Commitments
  Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in(In thousands)
    
    Total
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterCapital leases
    
    $
    113
    
    
    $
    66
    
    
    $
    33
    
    
    $
    14
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    $
    40,363
    
    
    $
    8,279
    
    
    $
    7,626
    
    
    $
    6,832
    
    
    $
    6,607
    
    
    $
    6,516
    
    
    $
    4,503Earn-out obligation (a)
    
    
    3,200
    
    
    
    3,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    43,676
    
    
    $
    11,545
    
    
    $
    7,659
    
    
    $
    6,846
    
    
    $
    6,607
    
    
    $
    6,516
    
    
    $
    4,503
 
 (a)
    
    Under the Coherent purchase agreement, as amended, we have agreed to pay shareholders of
Coherent an additional $3.2 million in cash in the event that certain bookings targets are met as
of July 2009. 46




---



##### 



(in
thousands)
    
    Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    2,076
    
    
    $
    2,076
    
    
    
    
 Contingent income tax obligations .
  Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115
 Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities
 Business Combinations Business Combinations
 47




---



##### 



Determination of the Useful
Life of Intangible Assets
 Market Risks
  Cash and Cash Equivalents:
  Interest Rates:
  Foreign Currency:
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  48




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    50Consolidated Balance Sheets
As of September 30, 2008 and 2007
    
    
    52Consolidated Statements of Earnings
For the years ended September 30, 2008, 2007 and 2006
    
    
    53Consolidated Statements of Stockholders Equity
For the years ended September 30, 2008, 2007 and 2006
    
    
    54Consolidated Statements of Cash Flows
For the years ended September 30, 2008, 2007 and 2006
    
    
    55Notes to Consolidated Financial Statements
    
    
    56
 49




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework
 50




---



##### 



/s/ Grant Thornton LLP


McLean, Virginia
December 4, 2008
 51




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
 September 30,2008
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    15,380
    
    
    $
    22,965Accounts receivable, net
    
    
    104,859
    
    
    
    95,639Inventory, net
    
    
    3,757
    
    
    
    2,927Income taxes receivable
    
    
    360
    
    
    
    759Deferred project costs
    
    
    3,412
    
    
    
    662Deferred income tax asset
    
    
    4,534
    
    
    
    3,218Prepaids and other
    
    
    1,644
    
    
    
    1,733TOTAL CURRENT ASSETS
    
    
    133,946
    
    
    
    127,903Property, equipment and software, net
    
    
    27,558
    
    
    
    22,822Restricted cash
    
    
    
    
    
    
    1,800Goodwill
    
    
    173,948
    
    
    
    170,192Intangibles, net
    
    
    4,055
    
    
    
    5,760Other assets
    
    
    831
    
    
    
    1,168TOTAL ASSETS
    
    $
    340,338
    
    
    $
    329,645LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    29,133
    
    
    $
    23,796Accrued salaries and related expenses
    
    
    10,283
    
    
    
    12,899Deferred revenue
    
    
    4,361
    
    
    
    12,651Capital lease obligations, current portion
    
    
    56
    
    
    
    112Deferred rent, current portion
    
    
    76
    
    
    
    569TOTAL CURRENT LIABILITIES
    
    
    43,909
    
    
    
    50,027Deferred income tax liability, long-term
    
    
    1,900
    
    
    
    1,794Deferred rent, net of current portion
    
    
    1,383
    
    
    
    1,082Capital lease obligations, net of current portion
    
    
    44
    
    
    
    106Other long-term liabilities
    
    
    658
    
    
    
    1,800Commitments and contingenciesSTOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares
authorized, 22,775,423 and 22,561,639 shares
issued at September 30, 2008 and 2007,
respectively
    
    
    228
    
    
    
    226Additional paid in capital
    
    
    222,349
    
    
    
    217,038Treasury stock at cost:1,126,245 and 674,145 shares at
September 30, 2008 and 2007, respectively
    
    
    (18,425
    )
    
    
    (10,527
    )Retained earnings
    
    
    88,292
    
    
    
    68,099TOTAL STOCKHOLDERS EQUITY
    
    
    292,444
    
    
    
    274,836TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    340,338
    
    
    $
    329,645
  52




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 
 (In thousands, except per share and share amounts)
 For the Year Ended September 30,2008
    
    
    2007
    
    
    2006CONTRACT REVENUES
    
    $
    340,934
    
    
    $
    282,209
    
    
    $
    258,835COST OF REVENUES
    
    
    279,932
    
    
    
    229,767
    
    
    
    206,023GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    22,432
    
    
    
    17,342
    
    
    
    15,926RESEARCH AND DEVELOPMENT
EXPENSES
    
    
    6,656
    
    
    
    7,035
    
    
    
    6,286IMPAIRMENT OF INTANGIBLE ASSETS
    
    
    
    
    
    
    6,748
    
    
    
    INCOME FROM OPERATIONS
    
    
    31,914
    
    
    
    21,317
    
    
    
    30,600INTEREST INCOME, NET
    
    
    615
    
    
    
    1,318
    
    
    
    1,180INCOME BEFORE INCOME TAXES
    
    
    32,529
    
    
    
    22,635
    
    
    
    31,780PROVISION FOR INCOME TAXES
    
    
    12,256
    
    
    
    7,933
    
    
    
    12,385NET INCOME
    
    $
    20,273
    
    
    $
    14,702
    
    
    $
    19,395EARNINGS PER SHARE (BASIC)
    
    $
    0.94
    
    
    $
    0.66
    
    
    $
    0.90EARNINGS PER SHARE (DILUTED)
    
    $
    0.92
    
    
    $
    0.65
    
    
    $
    0.87WEIGHTED-AVERAGE SHARES OUTSTANDINGBasic
    
    
    21,682,069
    
    
    
    22,318,245
    
    
    
    21,659,606Diluted
    
    
    22,086,981
    
    
    
    22,767,826
    
    
    
    22,255,467
  53




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 
 (In thousands, exept share amounts)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Common Stock
    
    
    Additional Paid in
    
    
    
    
 
    
    
    

 
    
    Comprehensive
    
    
    StockholdersNumber of Shares
    
    
    Par Value
    
    
    Capital
    
    
    Treasury Stock
    
    
    Retained Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, September 30, 2005
    
    
    20,153,878
    
    
    
    202
    
    
    
    158,458
    
    
    
    (534
    )
    
    
    34,002
    
    
    
    (115
    )
    
    
    192,013Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,395
    
    
    
    
    
    
    
    19,395Realized loss on foreign
currency exchange contracts,
expensed to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    115Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,510Shares issued upon exercise
of stock options
    
    
    375,849
    
    
    
    4
    
    
    
    2,568
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,572Secondary offering,
net of expenses
    
    
    1,725,000
    
    
    
    17
    
    
    
    46,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,768Employee stock purchase plan
    
    
    33,002
    
    
    
    
    
    
    
    897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,921Tax benefit on stock option
exercises
    
    
    
    
    
    
    
    
    
    
    2,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,015Other
    
    
    25,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2006
    
    
    22,313,709
    
    
    
    223
    
    
    
    212,610
    
    
    
    (534
    )
    
    
    53,397
    
    
    
    
    
    
    
    265,696Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,702
    
    
    
    
    
    
    
    14,702Shares issued upon exercise
of stock options
    
    
    214,450
    
    
    
    2
    
    
    
    1,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,029Employee stock purchase plan
    
    
    33,480
    
    
    
    1
    
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,149Tax benefit on stock option
exercises
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,993
    )
    
    
    
    
    
    
    
    
    
    
    (9,993
    )Balance, September 30, 2007
    
    
    22,561,639
    
    
    
    226
    
    
    
    217,038
    
    
    
    (10,527
    )
    
    
    68,099
    
    
    
    
    
    
    
    274,836Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,273
    
    
    
    
    
    
    
    20,273Shares issued upon exercise
of stock options
    
    
    188,061
    
    
    
    2
    
    
    
    1,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022Employee stock purchase plan
    
    
    25,723
    
    
    
    
    
    
    
    510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    510Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,307Tax benefit on stock option
exercises
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,898
    )
    
    
    
    
    
    
    
    
    
    
    (7,898
    )Adoption of FIN 48 -
unrecognized tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )Balance, September 30, 2008
    
    
    22,775,423
    
    
    $
    228
    
    
    $
    222,349
    
    
    $
    (18,425
    )
    
    $
    88,292
    
    
    $
    
    
    
    $
    292,444
  54




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Years Ended September 30,2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    20,273
    
    
    $
    14,702
    
    
    $
    19,395Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    8,150
    
    
    
    7,561
    
    
    
    5,625Amortization of deferred costs
    
    
    168
    
    
    
    
    
    
    
    Impairment of intangible assets
    
    
    
    
    
    
    6,748
    
    
    
    Deferred income tax (benefit) provision
    
    
    (870
    )
    
    
    (2,174
    )
    
    
    (677
    )Stock-based compensation
    
    
    3,548
    
    
    
    2,149
    
    
    
    1,921Loss on disposal of property
    
    
    9
    
    
    
    
    
    
    
    165Bad debt expense
    
    
    
    
    
    
    95
    
    
    
    80Change in:Accounts receivable
    
    
    (9,234
    )
    
    
    (8,714
    )
    
    
    19,685Inventory
    
    
    (830
    )
    
    
    1,323
    
    
    
    (2,788
    )Prepaids and other
    
    
    89
    
    
    
    (74
    )
    
    
    (254
    )Deferred project costs
    
    
    (2,750
    )
    
    
    4,935
    
    
    
    (5,534
    )Accounts payable and accrued expenses
    
    
    4,777
    
    
    
    1,766
    
    
    
    (8,830
    )Accrued salaries and related expenses
    
    
    (2,616
    )
    
    
    1,433
    
    
    
    732Deferred revenue
    
    
    (8,810
    )
    
    
    (1,441
    )
    
    
    5,914Income taxes
    
    
    737
    
    
    
    (475
    )
    
    
    2,570Deferred rent
    
    
    (192
    )
    
    
    (311
    )
    
    
    40Net cash provided by (used in) operating activities
    
    
    12,449
    
    
    
    27,523
    
    
    
    38,044Cash flows from investing activities (See Note A)Acquisitions of property, equipment and software
    
    
    (10,838
    )
    
    
    (10,030
    )
    
    
    (4,437
    )Increases (decreases) in restricted cash and cash held in escrow
    
    
    1,800
    
    
    
    (1,800
    )
    
    
    10,900Purchases of investments
    
    
    
    
    
    
    (72,700
    )
    
    
    (90,300
    )Sales of investments
    
    
    
    
    
    
    87,500
    
    
    
    75,500Business acquisitions, net of cash acquired
    
    
    (5,300
    )
    
    
    (18,079
    )
    
    
    (56,670
    )Other activity
    
    
    314
    
    
    
    (391
    )
    
    
    409Net cash used in investing activities
    
    
    (14,024
    )
    
    
    (15,500
    )
    
    
    (64,598
    )Cash flows from financing activitiesAdvances (repayments) on line of credit
    
    
    
    
    
    
    
    
    
    
    (11,000
    )Payment on note payable
    
    
    
    
    
    
    
    
    
    
    (56
    )Tax benefit on stock option exercises
    
    
    474
    
    
    
    550
    
    
    
    2,015Proceeds from exercise of stock options
    
    
    1,022
    
    
    
    1,029
    
    
    
    2,572Proceeds from employee stock purchase plan exercises
    
    
    510
    
    
    
    703
    
    
    
    897Principal repayments on capital lease obligations
    
    
    (118
    )
    
    
    (45
    )
    
    
    (8
    )Proceeds from secondary offering, net of expenses
    
    
    
    
    
    
    
    
    
    
    46,768Purchase of treasury stock
    
    
    (7,898
    )
    
    
    (9,993
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (6,010
    )
    
    
    (7,756
    )
    
    
    41,188Net increase (decrease) in cash and cash equivalents
    
    
    (7,585
    )
    
    
    4,267
    
    
    
    14,634Cash and cash equivalents, beginning of year
    
    
    22,965
    
    
    
    18,698
    
    
    
    4,064Cash and cash equivalents, end of year
    
    $
    15,380
    
    
    $
    22,965
    
    
    $
    18,698Supplemental disclosureIncome taxes paid, net of refunds
    
    
    (11,912
    )
    
    
    (10,032
    )
    
    
    (8,479
    )Interest expense paid
    
    
    (27
    )
    
    
    (8
    )
    
    
    (166
    )Assets acquired under capital leases
    
    
    
    
    
    
    55
    
    
    
    13
  55




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, expect per share and share amounts)
 Note 1  Summary of Significant Accounting Policies
 Nature of Business
  Principles of Consolidation
  Revenue and Cost Recognition
 Accounting for Performance of Construction-Type and
Production-Type Contracts
  Fiscal Years Ended September 30,2008
    
    2007
    
    2006Fixed-price contracts
    
    
    58
    %
    
    
    60
    %
    
    
    65
    %Cost reimbursable contracts
    
    
    38
    %
    
    
    35
    %
    
    
    25
    %Time and materials contracts
    
    
    4
    %
    
    
    5
    %
    
    
    10
    %
   56




---



##### 



Research and Development
 Accounting for Research and
Development Costs
  Indirect Rate Variance
  Reclassification
  57




---



##### 



Cash and Cash Equivalents
  Accounts Receivable
  Inventories
  2008
    
    
    2007Raw Materials
    
    $
    2,920
    
    
    $
    1,451Component parts, work in process
    
    $
    812
    
    
    $
    1,223Finished component parts
    
    $
    410
    
    
    $
    394$
    4,142
    
    
    $
    3,068Reserve
    
    
    (385
    )
    
    
    (141
    )Total
    
    $
    3,757
    
    
    $
    2,927
 Deferred Project Costs
  Long-Lived Assets (Excluding Goodwill)
 Accounting for the Impairment or Disposal
of Long-Lived Assets
 Goodwill
 Goodwill and Other Intangible Assets
 58




---



##### 



Intangibles
   WeightedAverage Life ofEstimated
    
    RemainingEconomic Life
    
    ValueCustomer related
    
    3.0  8.3 years
    
    7.0 yearsDeveloped technology
    
    3  5 years
    
    3.7 yearsTotal intangible assets
    
    
    
    
    
    6.3 years
 Property, Equipment and Software
  Stock-Based Compensation
 Share-Based Payment
 Fair Value Determination
   59




---



##### 



Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
  2008
    
    2007
    
    2006Volatility
    
    
    33.8% - 35.9
    %
    
    
    33.7% - 34.0
    %
    
    
    34.4% - 36.0
    %Risk free rate
    
    
    4.6% - 4.8
    %
    
    
    4.4% - 4.6
    %
    
    
    4.5% - 5.0
    %Exercise factor
    
    
    1.2
    
    
    
    1.6 - 1.8
    
    
    
    1.7 - 4.6
  2008Volatility
    
    
    36.8
    %Risk free rate
    
    
    2.7
    %Exercise factor
    
    
    1.2
  Income Taxes
  60




---



##### 



Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
    Use of Estimates
  Operating Cycle
  Recently Issued Accounting Pronouncements
 Fair
Value Measurements
 61




---



##### 



The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115
 Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities
 Business Combinations Business Combinations
 Determination of the Useful
Life of Intangible Assets
 Earnings Per Share
  62




---



##### 



2008
    
    
    2007
    
    
    2006Net Income
    
    $
    20,304
    
    
    $
    14,702
    
    
    $
    19,395Weighted Average Shares Outstanding  Basic
    
    
    21,682,069
    
    
    
    22,318,245
    
    
    
    21,659,606Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock
Options
    
    
    404,912
    
    
    
    449,581
    
    
    
    595,861Weighted Average Shares Outstanding  Diluted
    
    
    22,086,981
    
    
    
    22,767,826
    
    
    
    22,255,467Basic Earnings per Share
    
    $
    0.94
    
    
    $
    0.66
    
    
    $
    0.90Diluted Earnings per Share
    
    $
    0.92
    
    
    $
    0.65
    
    
    $
    0.87
  63




---



##### 



Note 2  Acquisitions and Mergers
 Year Ended September 30, 2007
 Coherent Systems International, LLC
 Business Combinations
   Tangible assetsCurrent assets
    
    $
    3,208Property, plant and equipment
    
    
    530Deferred tax assets
    
    
    340Other assets
    
    
    20Intangible assetsIntangible assets
    
    
    1,700Goodwill
    
    
    23,927Total assets acquired
    
    $
    29,725Total liabilities assumed
    
    $
    5,892Total purchase price
    
    $
    23,833
 Year Ended September 30, 2006
 San Diego Research Center, Inc.
  64




---



##### 



Radix Technologies, Inc.
  ProDesign Solutions, LLC
  Innovative Research, Ideas, and Services Corporation
  Note 3  Goodwill and Intangible Assets
 Goodwill
  September 30,2008
    
    
    2007Beginning balance
    
    $
    170,192
    
    
    $
    148,719Goodwill acquired during the year
    
    
    
    
    
    
    20,170Contingent consideration earned and paid
    
    
    5,000
    
    
    
    400Net asset adjustment to purchase price, net of
adjustments to indemnification clause
    
    
    (1,150
    )
    
    
    Adjustments in the fair value of assets
acquired and liabilities assumed
    
    
    (94
    )
    
    
    903Ending Balance
    
    $
    173,948
    
    
    $
    170,192
  65




---



##### 



Intangibles
  Accounting for the Impairment or Disposal of
Long-Lived Assets
  September 30, 2008Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    8,347
    
    
    $
    5,113
    
    
    $
    3,234Developed technology
    
    
    1,980
    
    
    
    1,159
    
    
    
    821Total intangible assets
    
    $
    10,327
    
    
    $
    6,272
    
    
    $
    4,055
 September 30, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    8,347
    
    
    $
    3,915
    
    
    $
    4,432Developed technology
    
    
    1,980
    
    
    
    652
    
    
    
    1,328Total intangible assets
    
    $
    10,327
    
    
    $
    4,567
    
    
    $
    5,760
  AmortizationYear Ending September 30,
    
    Expense2009
    
    $
    1,3022010
    
    
    1,1542011
    
    
    4512012
    
    
    3832013
    
    
    383Thereafter
    
    
    382Total
    
    $
    4,055
 66




---



##### 



Note 4  Customer Concentrations of Credit and Other Business Risks
 Customer Concentrations
  Years Ended September 30,2008
    
    2007
    
    2006U.S. Navy
    
    
    55
    %
    
    
    61
    %
    
    
    59
    %U.S. Army
    
    
    10
    %
    
    
    11
    %
    
    
    6
    %Other U.S. government agencies
    
    
    22
    %
    
    
    22
    %
    
    
    25
    %Foreign and other
    
    
    13
    %
    
    
    6
    %
    
    
    10
    %
  Years Ended September 30,2008
    
    2007
    
    2006Direct Purchases
    
    
    76
    %
    
    
    83
    %
    
    
    74
    %Subcontracts
    
    
    24
    %
    
    
    17
    %
    
    
    26
    %
 Cash Balances
  Note 5  Accounts Receivable
  September 30,2008
    
    
    2007Billed and billable
    
    $
    42,794
    
    
    $
    37,235Unbilled costs and fees
    
    
    54,838
    
    
    
    54,523Retainages
    
    
    7,438
    
    
    
    4,092Reserves
    
    
    (211
    )
    
    
    (211
    )$
    104,859
    
    
    $
    95,639
    67




---



##### 



Note 6  Property, Equipment and Software
  September 30,2008
    
    
    2007Computer, machinery and test equipment
    
    $
    27,549
    
    
    $
    23,838Leasehold improvements
    
    
    10,947
    
    
    
    9,651Computer software
    
    
    4,926
    
    
    
    3,687Furniture and fixtures
    
    
    1,726
    
    
    
    1,643Equipment under capital lease
    
    
    337
    
    
    
    344Construction in process
    
    
    10,478
    
    
    
    6,00055,963
    
    
    
    45,163Less Accumulated depreciation and amortization
    
    
    (28,405
    )
    
    
    (22,342
    )$
    27,558
    
    
    $
    22,822
   Note 7  Revolving Line of Credit
    68




---



##### 



Note 8  Stock-Based Benefit Plans
  Stock Compensation Expense
  Years Ended September 30,2008
    
    
    2007
    
    
    2006Cost of revenues
    
    $
    2,537
    
    
    $
    1,494
    
    
    $
    907General and administrative expense
    
    
    1,011
    
    
    
    655
    
    
    
    1,014Total pre-tax stock-based compensation included
in income from operations
    
    
    3,548
    
    
    
    2,149
    
    
    
    1,921Income tax expense (benefit) recognized for
stock-based compensation
    
    
    (782
    )
    
    
    (388
    )
    
    
    (416
    )Total stock-based compensation expense, net of tax
    
    $
    2,766
    
    
    $
    1,761
    
    
    $
    1,505
  Stock Option Activity
  69




---



##### 



AggregateIntrinsicWeighted-
    
    Weighted-
    
    ValueNumber of
    
    Average
    
    Average
    
    (inShares
    
    Exercise Price
    
    Contractual Term
    
    thousands)Shares under option,
September 30, 2007
    
    
    1,869,243
    
    
    $
    17.33Options granted
    
    
    7,000
    
    
    $
    20.69Options exercised
    
    
    (167,061
    )
    
    $
    6.12
    
    
    
    
    
    
    $
    2,673Options
cancelled and
expired
    
    
    (85,215
    )
    
    $
    23.34Shares under option,
September 30, 2008
    
    
    1,623,967
    
    
    $
    18.18
    
    
    
    5.9
    
    
    $
    8,623Options vested at September
30, 2008
    
    
    1,035,298
    
    
    $
    16.16
    
    
    
    5.3
    
    
    $
    7,589As of September 30, 2008,
options that are vested and
expected to vest prior to
expiration
    
    
    1,316,899
    
    
    $
    16.95
    
    
    
    5.6
    
    
    $
    8,613Shares reserved for equity
awards at September 30, 2008
    
    
    2,712,019
   Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Outstanding
    
    Contractual Life
    
    Exercise Price$0.10  $4.11
    
    
    241,727
    
    
    3.51 years
    
    $
    2.79$4.20  $6.88
    
    
    212,340
    
    
    4.60 years
    
    
    5.44$7.54  $20.40
    
    
    350,300
    
    
    4.70 years
    
    
    15.82$21.00  $28.10
    
    
    403,960
    
    
    7.91 years
    
    
    24.46$28.47  $34.92
    
    
    415,640
    
    
    7.19 years
    
    
    29.541,623,967
 Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Exercisable
    
    Contractual Life
    
    Exercise Price$0.10  $4.11
    
    
    169,727
    
    
    3.26 years
    
    $
    2.23$4.20  $6.88
    
    
    159,340
    
    
    4.43 years
    
    
    5.36$7.54  $20.40
    
    
    349,300
    
    
    4.67 years
    
    
    15.81$21.00  $28.10
    
    
    144,151
    
    
    7.12 years
    
    
    25.91$28.47  $34.92
    
    
    212,780
    
    
    7.18 years
    
    
    29.321,035,298
 70




---



##### 



Stock Appreciation Rights Activity
  Restricted Stock Activity
  Number of
    
    Weighted-Restricted
    
    Average GrantStock
    
    Date FairAwards
    
    ValueNon-vested at September 30, 2007
    
    
    59,950
    
    
    $
    23.24Granted
    
    
    260,200
    
    
    $
    21.71Vested
    
    
    (21,000
    )
    
    $
    21.39Forfeited
    
    
    (7,175
    )
    
    $
    22.89Non-vested at September 30, 2008
    
    
    291,975
    
    
    $
    22.01
  Employee Stock Purchase Plan
  Note 9  Retirement Plans
  71




---



##### 



Note 10  Income Taxes
  Years Ended September 30,2008
    
    
    2007
    
    
    2006CurrentFederal
    
    $
    10,846
    
    
    $
    8,471
    
    
    $
    11,044State
    
    
    2,280
    
    
    
    1,636
    
    
    
    2,018Total current
    
    
    13,126
    
    
    
    10,107
    
    
    
    13,062DeferredFederal
    
    
    (559
    )
    
    
    (1,664
    )
    
    
    (727
    )State
    
    
    (311
    )
    
    
    (510
    )
    
    
    50Total deferred
    
    $
    (870
    )
    
    $
    (2,174
    )
    
    $
    (677
    )Income tax expense
    
    $
    12,256
    
    
    $
    7,933
    
    
    $
    12,385
  As of September 30,2008
    
    
    2007Total deferred tax assets
    
    $
    5,272
    
    
    $
    4,722Total deferred tax liabilities
    
    
    (2,638
    )
    
    
    (3,298
    )Net deferred tax asset (liability)
    
    $
    2,634
    
    
    $
    1,424
  As of September 30,2008
    
    
    2007Property, equipment and software
    
    $
    (1,064
    )
    
    $
    (1,670
    )Accrued vacation
    
    
    1,947
    
    
    
    1,546Deferred rent
    
    
    570
    
    
    
    643Net operating losses and tax credits
    
    
    619
    
    
    
    1,257Intangibles
    
    
    (731
    )
    
    
    (1,366
    )Deferred compensation
    
    
    117
    
    
    
    82Uncollectible accounts
    
    
    83
    
    
    
    30Stock-based compensation
    
    
    1,302
    
    
    
    828Other, net
    
    
    (209
    )
    
    
    74Net deferred tax asset (liability)
    
    $
    2,634
    
    
    $
    1,424
   72




---



##### 



Balance, October 1, 2007
    
    $
    338Increases (decreases)
    
    
    Settlements and lapse of applicable statute of limitations
    
    
    Balance, September 30, 2008
    
    $
    338
  Years Ended September 30,2008
    
    2007
    
    2006Statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal benefit
    
    
    4.1
    
    
    
    3.4
    
    
    
    4.2Stock-based compensation
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.0Tax exempt interest
    
    
    (0.1
    )
    
    
    (1.5
    )
    
    
    (1.1
    )Qualified manufacturing activity deduction
    
    
    (2.1
    )
    
    
    (1.1
    )
    
    
    (0.5
    )Research and development credit
    
    
    (0.5
    )
    
    
    (1.2
    )
    
    
    Under (over) accrual of prior year taxes
    
    
    (0.5
    )
    
    
    (1.5
    )
    
    
    0.2Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.237.7
    %
    
    
    35.0
    %
    
    
    39.0
    %
   Note 11  Leases, Commitments and Contingencies
 Leases
  73




---



##### 



Operating LeasesFuture MinimumYear Ending September 30,
    
    Payments2009
    
    $
    8,2792010
    
    
    7,6262011
    
    
    6,8322012
    
    
    6,6072013
    
    
    6,516Thereafter
    
    
    4,503Total
    
    $
    40,363
  Capital LeasesFutureMinimumYear Ending September 30,
    
    Payments2009
    
    
    662010
    
    
    332011
    
    
    14Total
    
    $
    113Less amount representing interest
    
    
    (13
    )Present value of future lease payments
    
    $
    100
 Legal matters
  Note 12  Fair Value of Financial Instruments
  Note 13  Capital Stock
 Common Stock
  Treasury Stock
  74




---



##### 



Note 14  Segment Reporting
  Note 15  Quarterly Financial Information (Unaudited)
  2008
    
    
    2007December 30,
    
    
    March 30,
    
    
    June 29,
    
    
    September 30,
    
    
    December 31,
    
    
    April 1,
    
    
    July 1,
    
    
    September 30,2007
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2007(unaudited)
    
    
    (unaudited)(In thousands, except per share data)
    
    
    (In thousands, except per share data)Contract revenues
    
    $
    74,266
    
    
    $
    88,449
    
    
    $
    83,165
    
    
    $
    95,054
    
    
    $
    60,405
    
    
    $
    64,310
    
    
    $
    73,660
    
    
    $
    83,834Direct and allocable contract costs,
exclusive of impairment charges
    
    
    67,494
    
    
    
    79,486
    
    
    
    75,327
    
    
    
    86,713
    
    
    
    52,697
    
    
    
    57,809
    
    
    
    67,230
    
    
    
    76,407Impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,748Income from
Operations
    
    
    6,772
    
    
    
    8,963
    
    
    
    7,838
    
    
    
    8,341
    
    
    
    7,708
    
    
    
    6,501
    
    
    
    6,430
    
    
    
    679Other Income
(Expense), Net
    
    
    120
    
    
    
    35
    
    
    
    444
    
    
    
    16
    
    
    
    330
    
    
    
    267
    
    
    
    341
    
    
    
    380Income before
Income Taxes
    
    
    6,892
    
    
    
    8,998
    
    
    
    8,282
    
    
    
    8,357
    
    
    
    8,038
    
    
    
    6,768
    
    
    
    6,771
    
    
    
    1,059Provision for Income
Taxes
    
    
    2,609
    
    
    
    3,492
    
    
    
    3,103
    
    
    
    3,052
    
    
    
    2,855
    
    
    
    2,605
    
    
    
    2,485
    
    
    
    (11
    ) (a)Net Income
    
    $
    4,283
    
    
    $
    5,506
    
    
    $
    5,179
    
    
    
    5,305
    
    
    
    5,183
    
    
    $
    4,163
    
    
    $
    4,286
    
    
    $
    1,070Earnings Per ShareBasic
    
    $
    0.20
    
    
    $
    0.25
    
    
    $
    0.24
    
    
    
    0.25
    
    
    
    0.23
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.05Diluted
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    0.24
    
    
    
    0.23
    
    
    
    0.23
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.05
 
 (a)
    
    The provision for income taxes in the fourth quarter of fiscal year 2007 reflects a tax
benefit recognized for additional costs estimated to be included in a research and development tax
credit and an increase in the Companys estimate of a deduction for the domestic production
allowance. 75




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal
Control  Integrated Framework Internal Control  Integrated
Framework
 Change in Internal Controls
  
 ITEM 9B. OTHER INFORMATION.
  76




---



##### 



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  77




---



##### 



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 Financial Statements Schedules
  
 Exhibits
 ExhibitNumber
    
    Description of Exhibit2.1
    
    Agreement and Plan of Merger dated as of June 7, 2004, by
and between Sensytech, Inc. and Argon Engineering
Associates, Inc. (incorporated by reference to Exhibit 2.1
of the Companys Registration Statement on Form S-4 filed
on July 16, 2004, Registration Statement No. 333-117430)2.2
    
    Agreement and Plan of Merger, Dated as of June 9, 2006, by
and among Argon ST, Inc., Argon ST Merger Sub, Inc., San
Diego Research Center, Incorporated, Lindsay McClure,
Thomas Seay and Harry B. Lee, Trustee of the HBL and BVL
Trust (incorporated by reference to the Companys Current
Report on Form 8-K, filed June 14, 2006)2.3
    
    Equity Purchase Agreement by and among Argon ST, Inc., CSIC
Holdings LLC, Coherent Systems International, Corp., the
Stockholders of Coherent Systems International, Corp. and
Richard S. Ianieri, as Seller Representative (Incorporated
by reference to Exhibit 2.1 to the Companys Current Report
on Form 8-K, filed August 16, 2007)3.1
    
    Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (Registration
Statement No. 333-98757) filed on August 26, 2002)3.1.1
    
    Amendment, dated September 28, 2004, to the Companys
Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 the Companys
Current Report on Form 8-K filed October 5, 2004 covering
Items 2.01, 5.01, 5.02, 8.01 and 9.01 of Form 8-K).3.1.2
    
    Amendment, dated March 15, 2005 to the Companys Amended
and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1.2 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended April 5,
2005, filed May 11, 2005)3.2
    
    Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys Report on Form
8-k, filed May 12, 2008)4.1
    
    Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.3 to the Companys Registration Statement on
Form S-3 (Registration Statement No. 333-128211) filed on
September 9, 2005)10.1
    
    Second Amended and Restated Line of Credit Agreement with
Bank of America (incorporated by reference to Exhibit 10.1
of the Companys Registration Statement on Form S-1
(Registration Statement No. 333-98757) filed on August 27,
2002)10.1.1
    
    Sixth Amendment to Second Amended and Restated Financing
and Security Agreement, dated as of February 28, 2008
(incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed April 6, 2006)10.2+
    
    Argon ST, Inc. 2002 Stock Incentive Plan, as amended
(incorporated by reference to Appendix A to the Companys
definitive proxy statement on Schedule 14A for its 2006
annual meeting of stockholders, filed January 27, 2006)10.2.1
    
    Form of Stock Option Agreement under Argon ST 2002 Stock
Incentive Plan (incorporated by reference to Exhibit 10.2.1
to the Companys Annual Report on Form 10-K for the fiscal
year ended September 30, 2005, filed December 14, 2005)
 78




---



##### 



ExhibitNumber
    
    Description of Exhibit10.3+
    
    Argon Engineering Associates, Inc. Stock Plan (incorporated by
reference to Exhibit 10.3 to the Companys Annual Report on Form 10-K
for the fiscal year ended September 30, 2004, filed December 14,
2004)10.4
    
    2008 Argon Equity Incentive Plan (incorporated by reference to
Appendix A to the Registrants definitive proxy statement on Schedule
14A for its 2008 Annual Meeting of Stockholders, filed January 25,
2008)21.1*
    
    Subsidiaries of the Company23.1*
    
    Consent of Grant Thornton LLP31.1*
    
    Certification of the Companys Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act31.2*
    
    Certification of the Companys Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act32.1**
    
    Certification pursuant to Rule 13a-14(b)/15d-14(b) under the
Securities Exchange Act and Section 1350 of Chapter 63 of Title 8 of
the United States Code
 
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates management contract or compensatory plan or arrangement 79




---



##### 



SIGNATURES
  ARGON ST, INC.(Registrant)By:
    
    /s/ Terry L. CollinsTerry L. Collins, Ph.D.Chairman, Chief Executive Officer and President
   Signature
    
    Title/s/ Terry L. Collins

Terry L. Collins 
Date:  December 5, 2008
    
    Chairman, Chief Executive Officer and President
(Principal Executive Officer)/s/ Victor F. Sellier

Victor F. Sellier
Date:  December 5, 2008
    
    Executive Vice President and Director/s/ Aaron N. Daniels

Aaron N. Daniels
Date:  December 5, 2008
    
    Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)/s/ S. Kent Rockwell

S. Kent Rockwell
Date:  December 5, 2008
    
    Vice Chairman and Director/s/ Thomas E. Murdock

Thomas E. Murdock
Date:  December 5, 2008
    
    Director/s/ David C. Karlgaard

David C. Karlgaard
Date:  December 5, 2008
    
    Director/s/ Peter A. Marino

Peter A. Marino
Date:  December 5, 2008
    
    Director/s/ Robert McCashin

Robert McCashin
Date:  December 5, 2008
    
    Director/s/ John Irvin

John Irvin
Date:  December 5, 2008
    
    Director/s/ Lloyd A. Semple

Lloyd A. Semple
Date:  December 5, 2008
    
    Director/s/ Maureen Baginski

Maureen Baginski
Date:  December 5, 2008
    
    Director/s/ Delores M. Etter

Delores M. Etter
Date:  December 5, 2008
    
    Director
 80