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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[X] |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended September 30, 2003

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

For the transition period from __________
to ___________

Commission File Number 000-08193

SENSYTECH, INC.




(Exact Name of Registrant as Specified in its Charter)


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

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

Registrants telephone number, including area code (703) 550-7000

Securities registered pursuant to Section 12(b) of the Act:

|                                       |  |                        |  | 
|-------------------------------------- |  | ---------------------- |  | 
|                                       |  | Name of Exchange on   
|                                       |  | Which Registered      
|Title of Class                         |  |                       
|Common Stock, par value $.01 per share |  | NASDAQ National Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|        |  |         
|------- |  | --------
|Yes [X] |  | No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in

Part III of the Form 10-K or any amendment to this
Form 10-K. [   ]

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

|          |  |       
|--------- |  | ------
|Yes
[   ] |  | No [X]



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As of December 12, 2003, there were 6,498,178 shares of the Registrants
Common Stock, par value $.01 per share, outstanding. The aggregate market value
of the voting and non-voting shares of the Common Stock held by non-affiliates
as of March 31, 2003, (the last business day of registrants second quarter of
fiscal 2003) was approximately $46,694,000 based on the closing price on that
date for the registrants common stock on the Nasdaq National Market.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report incorporates by reference specific portions of the
Registrants Proxy Statement relating to the Annual Meeting of Stockholders to
be held on February 17, 2004.

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SENSYTECH, INC. AND SUBSIDIARIES

For the Fiscal Year Ended September 30, 2003______________

TABLE OF CONTENTS

|    |  |                                                                                                |  |   
|--- |  | ---------------------------------------------------------------------------------------------- |  | --
|    |  | PART I                                                                                         |  |   
|1.  |  | Business                                                                                       |  | 4 
|2.  |  | Properties                                                                                     |  | 9 
|3.  |  | Legal Proceedings                                                                              |  | 10
|4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 10
|    |  | Supplemental Item. Executive Officers of the Registrant                                        |  | 10
|    |  | PART II                                                                                        |  |   
|5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 10
|6.  |  | Selected Financial Data                                                                        |  | 11
|7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 13
|7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 21
|8.  |  | Financial Statements and Supplementary Data                                                    |  | 22
|9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 45
|9A. |  | Controls and Procedures                                                                        |  | 45
|    |  | PART III                                                                                       |  |   
|10. |  | Directors and Executive Officers of the Registrant                                             |  | 45
|11. |  | Executive Compensation                                                                         |  | 45
|12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 46
|13. |  | Certain Relationships and Related Transactions                                                 |  | 46
|14. |  | Principal Accountant Fees and Services                                                         |  | 46
|    |  | PART IV                                                                                        |  |   
|15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 46
|    |  | Signatures                                                                                     |  | 47
|    |  | Certifications                                                                                 |  |   

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PART I

ITEM 1. BUSINESS

We are a Delaware corporation, which resulted from the merger of Daedalus
Enterprises, Inc., which was organized in 1968, and S.T. Research Corporation,
which was organized in 1972. These two corporations merged on June 9, 1998,
thus creating our company.

We are a designer, developer and manufacturer of electronics and
technology products for the defense and intelligence markets. Specifically, we
specialize in integrated passive surveillance, communications and data links,
electronic countermeasures and threat simulator systems, and airborne imaging
and scanning systems. Our customers include the U.S. Department of Defense,
other U.S. federal government agencies, major domestic prime defense
contractors (such as Lockheed Martin Corporation and L-3 Communications
Corporation), foreign governments and agencies and foreign defense contractors.
Many of our products are used in national defense programs for the U.S. federal
government intelligence community and approved international customers. As a
result, approximately 80.7% of our revenues for the year ended September 30,
2003 were derived from U.S. federal agencies.

Our products can be found on virtually every U.S. Navy surface and
sub-surface combatant, as well as certain international surface combatants.
These include major military platforms such as the SSN-688 Los Angeles class,
SSN-21 Seawolf class and SSN-774 Virginia class submarines, all U.S. aircraft
carriers, MK-V patrol boats, Cyclone class coastal patrol boats, certain U.S.
Coast Guard vessels, NASA U-2 aircraft and U.S. special missions aircraft. Our
reputation for engineering excellence has allowed us to develop long-term
relationships across the defense and intelligence markets. As a result, for
the year ended September 30, 2003, approximately 87.2% of our revenues were
generated from contracts for which we are the prime contractor, while
approximately 44.9% of our revenues were generated from sole or single source
contracts. Single source contracts are contracts under which the purchaser
purchases products only from us, although other suppliers exist, while sole
source contracts are contracts under which the purchaser purchases products
from us that only we can supply.

At September 30, 2003, we employed approximately 220 people, 143 of whom
held security clearances and 73 of whom were engineers. For the fiscal year
ended September 30, 2003, we generated revenues of $53,183,000 and net income
of $4,052,000. For the year ended September 30, 2002, we generated revenues of
$32,290,000 and net income of $2,189,000. Our total funded backlog
remained relatively constant from $29,571,000 at September 30, 2002 to
$29,341,000 at September 30, 2003.

On November 22, 2002, the Company sold 2 million shares of common stock
for net proceeds after costs and underwriters commissions of $14,235,000. On
December 12, 2002, the underwriters exercised their overallotment option, which
provided net proceeds to the Company of $2,232,000 from the sale of an
additional 300,000 shares.

The Company operates through three business segments described below.

DEFENSE SYSTEMS GROUP

This group designs, develops, manufactures and supports products which
intercept, analyze, classify, identify, locate and track microwave signals from
radars and weapons which may originate from potentially hostile sources. It
provides communication data links and remote targeting systems and provides
equipment and systems, that are used to carry out defensive measures against
hostile signals or their sources to protect high value assets. The groups
systems are used on military platforms, such as ships, submarines, patrol
aircraft, as well as at ground installations. For the fiscal year ended
September 30, 2003, approximately 57.5 % of our revenues came from this group,
while for the year ended September 30, 2002, approximately 55.9% of our
revenues came from this group.

COMMUNICATIONS GROUP

This group designs, develops, manufactures and supports products which
intercept signals and analyze communications in a variety of transmission
media, and then identify and locate the sources of these signals and
communications. These systems are generally used by operators on board
aircraft, ships and ground installations to intercept various kinds of
transmissions over

4



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established communications networks. For the fiscal year
ended September 30, 2003, approximately 34.3% of our revenues came from this
group, while for the year ended September 30, 2002, approximately 32.5% of our
revenues came from this group.

IMAGING GROUP

This group designs, develops, manufactures and supports products that are
installed on special purpose aircraft and land vehicles and use multispectral,
infrared, and light imaging systems to perform remote surveys. Applications of
this technology include environmental pollution, facility inspection, utility
monitoring, surface mineral exploration and other special purpose inspections
where on-site inspections are not possible or desirable. For the fiscal year
ended September 30, 2003, approximately 8.2% of our revenues came from this
group, while for the year ended September 30, 2002, approximately 11.6% of our
revenues came from this group.

Research and Development

We believe that our continued success depends, in a large part, on our
ability to develop new technology and apply new technology developed by others
to solve the problems of our customers. Funding for the development of new or
improved products and systems comes in part from internally sponsored research,
with the majority of this funding coming from specifically designated
development contracts. Our total research and development expenditures consist
of the following for the years ended September 30:

|                                  |       |   |           |           |      |   |         |           |  |   |           |           | 
|--------------------------------- | ----- | - | --------- | --------- | ---- | - | ------- | --------- |  | - | --------- | --------- | 
|                                  |       |   | 2003      |           | 2002 |   | 2001   
|                                  |       |   |           |           |      |   |        
|Internal research and development |       | $ | 1,019,000 |           |      | $ | 794,000 |           |  | $ | 892,000   |          
|Customer-funded development       |       |   | 3,444,000 |           |      |   | 620,000 |           |  |   | 7,958,000 |          
|                                  |       |   |           |           |      |   |         |           |  |   |           |          
|                                  | Total |   | $         | 4,463,000 |      |   | $       | 1,414,000 |  |   | $         | 8,850,000 | 
|                                  |       |   |           |           |      |   |         |           |  |   |           |          

Backlog

Our backlog consists of the following for years ended September 30:

|         |       |   |            |            |      |   |            |            |  |   |           |           | 
|-------- | ----- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | --------- | --------- | 
|         |       |   | 2003       |            | 2002 |   | 2001      
|         |       |   |            |            |      |   |           
|Funded   |       | $ | 29,341,000 |            |      | $ | 29,571,000 |            |  | $ | 5,547,000 |          
|Unfunded |       |   |           |            |      |   |           |            |  |   | 337,000   |          
|         |       |   |            |            |      |   |            |            |  |   |           |          
|         | Total |   | $          | 29,341,000 |      |   | $          | 29,571,000 |  |   | $         | 5,884,000 | 
|         |       |   |            |            |      |   |            |            |  |   |           |          

We define backlog as the funded and unfunded amount provided in our
contracts less previously recognized revenue. Contract options are estimated
separately and not included in backlog. Backlog does not include the value of
contracts where we have been given permission by the customer to begin or
continue working, but where a formal contract or contract extension has not yet
been signed.

Our funded backlog does not include the full value of our contracts,
because Congress often appropriates funds for a particular program or contract
on a yearly or quarterly basis, even though the contract may call for
performance that is expected to take a number of years.

Changes in the amount of our backlog and funded backlog may vary as a
result of the execution of new contracts or the extension of existing
contracts, exercise of options, reductions from contracts that end or are
completed, reductions from the early termination of contracts, and adjustments
to estimates of previously included contracts, including the effect of change
orders. Changes in the amount of our funded backlog are also affected by the
funding cycles of the government. For the same reasons, we believe that
period-to-period comparisons of backlog and funded backlog are not necessarily
indicative of future revenues that we may receive.

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Some of our contracts can be extended or increased at the option of the
customer. As of September 30, 2003, the potential value of these options, if
exercised by the customer, is approximately $41,887,000. We anticipate that a
portion of the options will be exercised during the calendar years 2004 through
2008. However, we have no way of knowing whether any of the options will be
exercised, or if they are exercised, what the value of any additional order
would be.

Government Contracts

During the fiscal year ended September 30, 2003, approximately 80.7% of
our revenues were attributable to contracts with various departments and
agencies of the U.S. federal government or subcontracts with its prime
contractors. The funding of government programs is subject to Congressional
appropriations. Although multi-year contracts may be authorized in connection
with major procurements, Congress generally appropriates funds on a fiscal year
basis, even though a program may continue for many years. Consequently,
programs are often only partially funded initially, and additional funds are
committed only as Congress makes further appropriations.

Generally, government contracts are subject to oversight audits by
government representatives. Provisions in these contracts permit termination,
in whole or in part, without prior notice, at the governments convenience.
Compensation in the event of a termination is limited to work completed at the
time of termination. In the event of termination, the contractor will receive
a certain allowance for profit on the work performed. In addition, all
contracts with the federal government contain provisions, and are subject to
laws and regulations, that give the government rights and remedies not
typically found in commercial contracts, including rights that allow the
government to:



| |  |  | terminate existing contracts for convenience, which affords the
federal 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 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 us;                                                                                                                                                            
|
| |  |  | adjust contract costs and fees on the basis of audits completed by its agencies;                                                                                                                                
|
| |  |  | suspend or debar us from doing business with the U.S. federal government; and                                                                                                                                   
|
| |  |  | control or prohibit the export of our products.                                                                                                                                                                 

Our U.S. federal government contracts include fixed-price contracts, cost
reimbursement contracts, including, cost-plus-fixed-fee, cost-plus-award fee,
and cost-plus-incentive fee, and time and material contracts.



| |  |  | Fixed-price.These contracts are not subject to adjustment by
reason of costs incurred in the performance of the contract. With this
type of contract, we assume the risk that we will be able to perform at
a cost below the fixed-price, except for costs incurred because of
contract changes ordered by the customer.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Cost-reimbursement.                                                                                                                                                                                                                                                                                                     

|
|
|
|
|

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| |   |  | 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 be awarded the award fee, or only
a portion of it, if we do not perform satisfactorily.                                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A cost-plus-incentive-fee contract is a
cost-reimbursement 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. As
is the case with all cost-reimbursement contracts, we assume the risk
that, if our costs are not allowable under the terms of the contract
or applicable regulations, we may not be able to recover these
costs.
|

| |  |  | Time-and-Materials.These contracts require us to deliver services
on the basis of direct labor hours at specified fixed hourly rates that
include all our direct and indirect costs, such as wages, overhead,
general and administrative expenses, and profit, and other materials at
cost. With respect to these contracts, we assume the risk that we will
be able to perform these contracts at these negotiated hourly rates.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are subject to various statutes and regulations governing government
contracts generally and defense contracts specifically. These statutes and
regulations carry substantial penalty provisions including suspension or
debarment from government contracting or subcontracting for a period of time,
if we are found to have violated any of these regulations. Among the causes
for debarment are violations of various statutes, including those related to
procurement integrity, export control, government security regulations,
employment practices, the protection of the environment, the accuracy of
records, and the recording of costs. We carefully monitor all of our contracts
and contractual efforts to minimize the possibility of any violation of these
regulations.

As a government contractor, we are subject to government audits, inquiries
and investigations. We have experienced minimal audit adjustments over the past
ten years. The Defense Contract Audit Agency has completed its audit of our
contracts through the fiscal year ended September 30, 1999. We are still
subject to adjustment on our performance during subsequent years.

We believe that the passive surveillance markets in which we participate
will continue to be important in future years, as the military branches and
intelligence agencies continue to rely upon technological advances for defense
and intelligence purposes. We cannot assure you, however, that federal
appropriations will continue to exist at their current levels or that our
products will be utilized in the future.

Competitive Strengths

We believe we are well-positioned to address the requirements of our
customers in the intelligence community and Department of Defense because we
possess the following key competitive strengths:



| |  |  | Significant Supplier to Domestic and Allied Intelligence Agencies.
Approximately 10.8% of our revenues for the year ended September 30,
2003 were derived from classified programs of the U.S. federal
government and U.S. approved international customers. These programs
tend to have higher margins and are generally awarded to a small group
of suppliers. Given our expertise and track record with these
customers, we believe we are well-positioned to take advantage of the
heightened awareness and continued spending for intelligence activities
in the wake of the war on terrorism.                                                                                                                                                                                                                                                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Employees with Security Clearances.The strict security clearance
requirements for personnel who work on classified programs for the
intelligence community and Department of Defense severely limits the
number of suppliers that are allowed to bid on those types of programs.
Companies wishing to bid on such programs must have employees who have
completed the lengthy process necessary to obtain a security clearance.
This process requires a candidate to be sponsored by the government
for a particular purpose, entails extensive background investigations
that typically take between six months to a year and, for restricted
access clearance, may require successful completion of polygraph
testing. As of September 30, 2003, 143 of our 220 employees have
government security clearances, with approximately 20% holding Top
Secret/ Sensitive Compartmented Information (TS/SCI) security
clearances.

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| |  |  | Engineering and Design Expertise.We have a successful track record
of providing our customer needs as demonstrated by our long-term
relationships with many of our largest customers. Our predecessor
companies and we have provided high quality technical solutions in the
intelligence gathering and electronic warfare areas for the Navy and
other defense departments for over 25 years. At September 30, 2003, we
employed 73 engineers, who represented approximately 33% of our
workforce. Since October 1, 1998, we have spent approximately $34.3
million in both customer funded as well as independent research and
development.                                                                                                                                                                                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Established Sole-Source Contract Relationships.We received
approximately 44.9% of our revenues for the year ended September 30,
2003 from sole or single source contract relationships. These
relationships provide us with
opportunities to proactively prepare for and develop follow-on program
opportunities through upgrades, new versions of products and additional
product sales. We also believe these sole or single source relationships
create significant advantages in technology, time to market and start-up
costs. This affords us market protection relative to new entrants or
competitors. Most of our sole source relationships exist with agencies
or departments of the U.S. federal government, so the terms of those
contracts are consistent with normal federal government procurement,
including provisions for termination for convenience, which allows the
U.S. federal government to terminate the contracts at any time for any
reason.
|
| |  |  | Experienced Management Team.Our executives provide us with
extensive experience in supporting the intelligence community and
Department of Defense. Each of our executive officers has more than 20
years experience in the intelligence and Department of Defense
marketplace. With their knowledge, valued relationships and
reputations, our management plays a key role in building and sustaining
our customer base.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Business Strategy

Our objective is to profitably grow our business as a premier provider of
high quality and state of the art intelligence gathering and electronic warfare
technology, products and systems. Our strategies for achieving this objective
include:



| |  |  | Expanding Our Customer Base.We intend to capitalize on our
long-term relationships with our customers and our reputation within
the intelligence community and Department of Defense to attract new
customers within those communities. We believe we have a successful
performance record and demonstrated technical expertise that gives us
credibility with prospective customers and enhances our ability to be
successful in bidding on follow-on contracts. As our revenues base
grows through internal growth as well as acquisitions, we intend to
seek larger contracts, which have historically been awarded to larger
suppliers.     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Targeting High Growth Segments of the Market.We believe the
projected growth in government intelligence gathering and electronic
warfare technology products and services spending will offer
opportunities for development and delivery of advanced technology
solutions for defense and intelligence agencies. We intend to expand
our product and service offerings in these areas, particularly where
there is a possibility for significant long-term sales. We believe
that friendly foreign governments would like to increase their
capabilities in these areas, as the events of September 11, 2001, have
global security implications.
|
| |  |  | Attracting and Retaining Highly Skilled Personnel.We intend to
continue to attract and retain skilled professionals to ensure we have
the capabilities to fulfill our customers requirements. We target
candidates who have served in the military or as civilian experts in
the intelligence community and Department of Defense, and believe we
can continue to retain our employees by offering competitive
compensation and by providing opportunities for career growth through
company-supported education programs and involvement in diverse and
challenging engineering developments.                                                 
|
| |  |  | Leveraging Customer Funded Research and Development.Many of our
products were or are being developed through funding provided by the
customer in the form of research and development contracts. While
these contracts tend to be relatively small, they contain provisions
for the customer to exercise multi-year options that increase the
values of these programs significantly should the customer decide to go
into full production. Since October 1, 1998, the U.S. federal
government has provided us with approximately $29.8 million under such
development contracts.                                                               

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| |   |  | Some of our contracts can be extended or
increased at the option of the customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Pursuing Strategic Acquisitions.We plan to enhance our internal
growth by selectively pursuing strategic acquisitions of businesses
that can cost-effectively broaden our technology expertise and our
product offerings. We are primarily focused on acquiring businesses
that provide value-added solutions for the intelligence community and
Department of Defense, but will also consider opportunities to acquire
other businesses where we can utilize our reputation and experienced
management team to expand our core business areas.

Export Sales

Export sales are not a significant part of our revenues at this time, but
it is our intention to try to expand them. However,
because most of our products are classified to one degree or another, we
must obtain export licenses from the U.S. federal government to be able to sell
them outside of the United States, even to close allies. The granting of the
export licenses is solely at the discretion of the U.S. federal government,
which can also cancel them at any time. Thus, our ability to expand export
sales is partly dependent upon the willingness of the U.S. federal government
to grant export licenses for our products as we request them.

Employees

At September 30, 2003, we employed 220 people, 73 of whom have engineering
degrees while 143 have security clearances. Our continued success depends upon
our ability to attract and retain highly skilled employees. We believe we are
successful in retaining our employees by offering a competitive salary
structure, attractive incentive compensation and benefits programs, career
growth opportunities, flexible work assignments and the opportunity to perform
mission-critical services, often in classified environments. Our current
employees are offered an opportunity to respond to new job opportunities before
we pursue external recruiting. We consider our relations with employees to be
good, and we have never had a work stoppage.

Environmental

We have incurred no material costs in the past two years related to
environmental issues.

ITEM 2. PROPERTIES

We believe that our leased facilities are suitable for the operations we
have in each of them. Each facility is well maintained and capable of
supporting higher levels of revenue. The table below sets forth certain
information about our principal facilities.

|                                               |  |             |         |            |  |                                     |  |                                                                                                    |  |                                          
|---------------------------------------------- |  | ----------- | ------- | ---------- |  | ----------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|                                               |  | Estimated   |         |            |  |                                     |  | Principal                                                                                         
|Address                                        |  | Square Feet |         | Lease Term |  | Description                         |  | Activity                                                                                          
|                                               |  |             |         |            |  |                                     |  |                                                                                                   
|8419 Terminal Road
Newington, VA 22122         |  |             | 67,220  |            |  | Leased,
Expiration Date:
6/30/2014  |  | Two 1-story and one
partial 2-story adjacent
block buildings. Buildings
are in an industrial park. |  | Engineering/Manufacturing/
Administration
|                                               |  |             |         |            |  |                                     |  |                                                                                                    |  |                                          
|300 Parkland Plaza
Ann Arbor, MI 48103         |  |             | 12,419  |            |  | Leased,
Expiration Date:
11/30/2008 |  | One-story facility
in a research park.                                                             |  | Engineering/Manufacturing/
Administration
|                                               |  |             |         |            |  |                                     |  |                                                                                                    |  |                                          
|100 Central Avenue
Farmingdale, NJ 07727       |  |             | 147,000 |            |  | Leased,
Expiration Date:
1/31/2004  |  | One-story facility
in an industrial park.                                                          |  | Engineering/Manufacturing/
Administration
|                                               |  |             |         |            |  |                                     |  |                                                                                                    |  |                                          
|3883 Via Pescador,
Suite D
Camarillo, CA 93012 |  |             | 5,318   |            |  | Leased,
Expiration Date:
12/31/2003 |  | One-story facility
in an industrial park.                                                          |  | Engineering/Manufacturing/
Administration

9



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|                                    |  |             |        |            |  |                                     |  |                    |  |                                          
|----------------------------------- |  | ----------- | ------ | ---------- |  | ----------------------------------- |  | ------------------ |  | -----------------------------------------
|                                    |  | Estimated   |        |            |  |                                     |  | Principal         
|Address                             |  | Square Feet |        | Lease Term |  | Description                         |  | Activity          
|                                    |  |             |        |            |  |                                     |  |                   
|847 Airport Road
Dunbar, PA         |  |             | 8,900  |            |  | Leased,
Expiration Date:
4/21/2007  |  | One-story facility |  | Engineering/Manufacturing/
Administration
|                                    |  |             |        |            |  |                                     |  |                    |  |                                          
|90 Laurel View Drive
Smithfield, PA |  |             | 60,000 |            |  | Leased, 
Expiration Date:
9/15/2013 |  | One-story facility |  | Engineering/Manufacturing/
Administration

Our facilities in
  Newington, Virginia; Ann Arbor, Michigan; Camarillo, California; Farmingdale,
  New Jersey; Dunbar, Pennsylvania and Smithfield, Pennsylvania are equipped with
  equipment used for the design, development and manufacture of our products.
  Our facilities in Newington include a sensitive compartmented information facility,
  anechoic chamber, secure test areas, environmental equipment, antennas, as well
  as general-purpose equipment required to manufacture and test our products.
  We believe our facilities are adequate for our current business activities and
  will remain so for the foreseeable future.

The
Communications Group manufactures in its Newington, VA facility. The Defense System
Group manufactures in its Newington, VA, Camarillo, CA, Smithfield, PA and Farmindale,
NJ facilities. The Imaging Group products are manufactured in the Ann Arbor, MI
facility.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to, nor is any of its property the subject of
any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holder during the
fourth quarter of the Companys fiscal year ended September 30, 2003.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the Executive Officers of the Registrant,
including their names, ages and offices held, as of December 12, 2003.

|                 |  |     |    |                          |  |                                                                         |  | 
|---------------- |  | --- | -- | ------------------------ |  | ----------------------------------------------------------------------- |  | 
|Name             |  | Age |    | Position with Registrant
|                 |  |     |    |                         
|S. Kent Rockwell |  |     | 59 |                          |  | Chairman of the Board since 2000 and Chief Executive Officer since 1998
|Donald F. Fultz  |  |     | 50 |                          |  | Vice President, Chief Financial Officer and Treasurer since 2000       
|Delano Esguerra  |  |     | 63 |                          |  | Vice President of Business Development since 2001                      
|James D. Ross    |  |     | 41 |                          |  | Vice President of the Communications Group since 2000                  

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Effective November 20, 2002, the Companys common stock is traded on The
Nasdaq National Market under the symbol STST. Prior to that time, it was
traded on the Nasdaq SmallCap Market.

The following table sets forth the range of high and low actual sales
prices of our common stock for the periods indicated.

|            |                |  |      |       |     |  |  |       | 
|----------- | -------------- |  | ---- | ----- | --- |  |  | ----- | 
|            |                |  | High |       | Low
|            |                |  |      |       |    
|Fiscal 2003 |                |  |      |       |     |  |  |      
|            | Fourth Quarter |  |      | 20.45 |     |  |  | 13.25 | 
|            | Third Quarter  |  |      | 14.74 |     |  |  | 9.52  | 
|            | Second Quarter |  |      | 12.43 |     |  |  | 9.11  | 
|            | First Quarter  |  |      | 12.02 |     |  |  | 6.93  | 
|Fiscal 2002 |                |  |      |       |     |  |  |      
|            | Fourth Quarter |  |      | 10.12 |     |  |  | 6.81  | 
|            | Third Quarter  |  |      | 10.46 |     |  |  | 8.00  | 
|            | Second Quarter |  |      | 9.49  |     |  |  | 5.85  | 
|            | First Quarter  |  |      | 9.23  |     |  |  | 5.35  | 

There were 207 registered holders of our common stock on December 12,
2003. On December 12, 2003, the closing sale price of our common stock on The
NASDAQ National Market was $14.35 per share.

10



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Dividend Policy

We have not paid any dividends on our common stock during the last two
fiscal years or during the current fiscal year. Our line of credit prohibits
us from paying cash dividends to holders of our common stock. Further, we
currently intend to retain any earnings of our company for the future operation
and growth of our business. Therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. However our board
of directors, in its discretion, may decide to declare a dividend at an
appropriate time in the future. A decision to pay a dividend would depend,
among other factors, upon our results of operations, financial condition and
cash requirements and the terms of our credit facility and other financing
agreements at the time such a payment is considered.

Equity Compensation Plan Information

|                                                           |       |                     |                      |            |                   |                     |                     |      |  |  |         |         | 
|---------------------------------------------------------- | ----- | ------------------- | -------------------- | ---------- | ----------------- | ------------------- | ------------------- | ---- |  |  | ------- | ------- | 
|                                                           |       |                     | Number of securities |            | Weighted average  |                     |                     |      | 
|                                                           |       |                     | to be issued upon    |            | exercise price of |                     | Number of          
|                                                           |       |                     | exercise of          |            | outstanding       |                     | securities         
|                                                           |       |                     | outstanding options, |            | options, warrants |                     | remaining available
|Plan category                                              |       | warrants and rights |                      | and rights |                   | for future issuance
|                                                           |       |                     |                      |            |                   |                    
|                                                           |       |                     | (a)                  |            | (b)               |                     | ( c)               
|Equity compensation
plans approved by
security holders     |       |                     | 487,100              |            |                   | $                   | 5.74                |      |  |  | 830,600 |        
|Equity compensation
plans not approved
by security holders |       |                     | None                 |            |                   |                     | n/a                 |      |  |  | None    |        
|                                                           | Total |                     |                      | 487,100    |                   |                     | $                   | 5.74 |  |  |         | 830,600 | 

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the selected consolidated statement of
earnings data and balance sheet data for each of the periods indicated. The
selected financial data for the years ended September 30, 2003, 2002, 2001,
2000, and 1999 are derived from our audited consolidated financial statements
and related notes.

The selected financial data is presented below and should be read in
conjunction with our consolidated financial statements and the notes to our
consolidated financial statements and Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K.

11



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##### 



|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |        |        | 
|---------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------------ | ------ | ---- | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                         |                                     |                          |        | Years Ended September 30
|                                         |                                     |                          |        |                         
|                                         |                                     |                          |        | 2003                     |        | 2002 |        | 2001                                  |        | 2000 |        | 1999  
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |       
|                                         |                                     |                          |        |                          |        |      |        | (in thousands, except per share data) |        |      |        |       
|Consolidated Statement of Earnings Data: |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Contract revenues                        |                                     | $                        | 53,183 |                          |        | $    | 32,290 |                                       |        | $    | 16,391 |        |        | $ | 22,706 |        |        | $ | 26,424 |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Costs and expenses                       |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                         | Cost of revenues                    |                          |        | 40,614                   |        |      |        | 24,855                                |        |      |        | 11,744 |        |   |        | 16,195 |        |   |        | 19,237 |       
|                                         | General and administrative expenses |                          |        | 5,876                    |        |      |        | 3,782                                 |        |      |        | 2,901  |        |   |        | 3,974  |        |   |        | 4,251  |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                         |                                     | Total costs and expenses |        |                          | 46,490 |      |        |                                       | 28,637 |      |        |        | 14,645 |   |        |        | 20,169 |   |        |        | 23,488 | 
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Income from operations                   |                                     |                          | 6,693  |                          |        |      | 3,653  |                                       |        |      | 1,746  |        |        |   | 2,537  |        |        |   | 2,936  |       
|Other income (expenses)                  |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                         | Interest (expense) income, net      |                          |        | 72                       |        |      |        | (4                                    | )      |      |        | 141    |        |   |        | 116    |        |   |        | (40    | )     
|                                         | Other income, net                   |                          |        | 22                       |        |      |        | 60                                    |        |      |        | 116    |        |   |        | 39     |        |   |        |       |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Income before income taxes               |                                     |                          | 6,787  |                          |        |      | 3,709  |                                       |        |      | 2,003  |        |        |   | 2,692  |        |        |   | 2,896  |       
|Income tax provision                     |                                     |                          | (2,735 | )                        |        |      | (1,520 | )                                     |        |      | (779   | )      |        |   | (1,026 | )      |        |   | (1,207 | )     
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Net income                               |                                     | $                        | 4,052  |                          |        | $    | 2,189  |                                       |        | $    | 1,224  |        |        | $ | 1,666  |        |        | $ | 1,689  |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Earnings per share                       |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                         | Basic                               |                          | $      | 0.66                     |        |      | $      | 0.54                                  |        |      | $      | 0.31   |        |   | $      | 0.42   |        |   | $      | 0.42   |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                         | Diluted                             |                          | $      | 0.65                     |        |      | $      | 0.52                                  |        |      | $      | 0.30   |        |   | $      | 0.40   |        |   | $      | 0.40   |       
|                                         |                                     |                          |        |                          |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       

|                            |  |                     |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|--------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                            |  | As of
September 30,
|                            |  |                    
|                            |  | 2003                |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                            |  |                     |        |      |  |      |        |      |  |     
|Consolidated Balance Sheet: |  |                     |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents   |  | $                   | 13,445 |      |  | $    | 700    |      |  | $    | 4,362  |  |  | $ | 1,512  |  |  | $ | 3,076  | 
|Total assets                |  | $                   | 44,438 |      |  | $    | 25,852 |      |  | $    | 13,766 |  |  | $ | 14,384 |  |  | $ | 13,787 | 
|Total debt                  |  | $                   |       |      |  | $    | 2,900  |      |  |      |       |  |  | $ | 38     |  |  | $ | 111    | 
|Stockholders equity        |  | $                   | 35,933 |      |  | $    | 14,666 |      |  | $    | 11,986 |  |  | $ | 10,754 |  |  | $ | 9,112  | 

|                       |            |  |                     |        |      |  |      |        |      |  |      |       |  |  |   |       |  |  |   |        | 
|---------------------- | ---------- |  | ------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                       |            |  | As of
September 30,
|                       |            |  |                    
|                       |            |  | 2003                |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                       |            |  |                     |        |      |  |      |        |      |  |     
|Other Data (unaudited) |            |  |                     |        |      |  |      |        |      |  |      |       |  |  |   |       |  |  |   |       
|                       | Backlog(1) |  | $                   | 29,341 |      |  | $    | 29,571 |      |  | $    | 5,884 |  |  | $ | 7,033 |  |  | $ | 17,106 | 



| | 1) |  | We define backlog as the funded and unfunded amounts provided in our
contracts, less previously recognized revenue.
| | -- |  | -------------------------------------------------------------------------------------------------------------------

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| | 1) |  | We define backlog as the funded and unfunded amounts provided in our
contracts, less previously recognized revenue.
| | -- |  | -------------------------------------------------------------------------------------------------------------------

ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward-looking Statements

Statements in this filing which are not historical facts are
forward-looking statements under the provision of the Private Securities
Litigation Reform Act of 1955. All forward-looking statements involve risks
and uncertainties. These statements are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions or results may materially differ from the anticipated events,
transactions or results described in such statements. The Companys ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. In addition to those specifically mentioned
above, such risks and uncertainties include, but are not limited to, the
existence of demand for, and acceptance of the Companys products and services,
regulatory approvals, export approvals, economic conditions both domestically
and internationally, the impact of competition and pricing, results of
financing efforts and other factors affecting the Companys business that are
beyond the Companys control. All of the forward-looking statements should be
considered in light of these factors. You should not put undue reliance on any
forward-looking statements. The Company undertakes no obligation to update
these forward-looking statements to reflect new information, future events or
otherwise, except as provided by law.

Overview

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

A substantial portion of the Companys revenues is derived from contracts
with the U.S. federal government. For the fiscal years ended September 30, 2003
and 2002, approximately 80.7% and 80.4%, respectively, of its revenues were
derived from contracts with the U.S. federal government. For these same
periods, approximately 87.2% and 80.0%, respectively, of its revenues were
generated from contracts for which the Company was the prime contractor, and
approximately 44.9% and 62.1%, respectively, of its revenues were generated
from sole or single source contracts. Single source contracts are contracts
under which the purchaser purchases products only from the Company, although
other suppliers exist, while sole source contracts are contracts under which
the purchaser purchases products from the Company that only it can supply. The
percentage reduction in sole or single source contracts is the result of
classifying all revenues of ST Production Systems, Inc., as derived from
competitive contracts. All of these contracts were acquired in
February 2002 as part of the assets acquired from FEL Corporation.  In addition during these time periods, approximately
10.8% and 26.7%, respectively, of the Companys revenues were generated from
contracts relating to classified programs of the U.S. federal government and
select international contracts.

To estimate revenues for performance under U.S. federal government
fixed-price and cost-reimbursement contracts, including customer-funded
research and development, the Company uses the percentage of completion method
of accounting under which estimated revenues are determined on the basis of
completion to date (i.e., the total contract amount multiplied by percent of
performance to date less revenue value recognized in previous periods). The
Company records revenues under cost-reimbursement contracts as costs are
incurred and it includes estimated earned fees in the proportion that costs
incurred to date bear to total estimated costs. The Company increases or
decreases fees under certain U.S. federal government contracts in accordance
with cost or performance incentive provisions which measure actual performance
against established targets or other criteria.

13



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The Company includes such
incentive fee awards or penalties, which historically are not material, in
revenues at the time the amounts can be reasonably determined. The Company
recognizes anticipated probable losses at the time they become known.
The Companys future operating results may be affected if actual contract
costs incurred differ from its current estimates of total contract costs.

The Companys revenues are primarily derived from fixed-price contracts,
under which it performs specific tasks for a fixed price. Under fixed-price
contracts the Company assumes the risk of cost overruns, assuming no change
orders can be negotiated, and receives the benefit of cost savings. All of the
Companys U.S. federal government contracts, whether it is the prime contractor
or a subcontractor, are subject to audit and cost controls. As a result, the
U.S. federal government contracting authorities typically have the right to
object to the Companys costs as not allowable or as unreasonable, which can
result in it bearing all or a portion of these costs itself rather than
recovering them from the U.S. federal government. The Defense Contract Audit
Agency has completed its audit of our contracts through the fiscal year ended
September 30, 1999. We are still subject to adjustment on our performance
during subsequent years.

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

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

Year Ended September 30, 2003 Compared to Year Ended September 30, 2002

Revenues:

Revenues increased $20,893,000, or 64.7%, to $53,183,000 for the year
ended September 30, 2003 from $32,290,000 for the year ended September 30,
2002. The increase was due primarily to new contract awards or modifications of
existing contracts in the Communications Group, the Imaging Group and the
Defense Systems Group of approximately $7,760,000, $584,000 and $12,549,000,
respectively. For the year ended September 30, 2003 the Company derived,
directly or indirectly, 80.7% of its revenue from federal agencies in the
intelligence community and the Department of Defense, compared to 80.4% for the
year ended September 30, 2002. For the year ended September 30, 2003, the
Companys four largest non-classified revenue producing contracts were the
AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A Radio Terminal
Set, the AN/DPT 2-B Based Payload for Lead In Fighter Hawk Radar Emulator, and
Hyperspectral Imaging System, which collectively contributed 35.5% of revenue.

Customer funded development, which is included in revenue, increased
$2,824,000 or over 100% to $3,444,000 for the year ended September 30, 2003
from $620,000 for the year ended September 30, 2002. Major increases for the
year came from the MIL-ADF program and the Surface Ship Torpedo Defense Systems
program, which represents approximately 61% of the customer funded
development in fiscal year 2003.

For the year ended September 30, 2003, the Company derived approximately
13.8% of its revenues from contracts with U.S. approved foreign
countries, of which no country represented 10% or more of the revenues. The Companys
foreign sales contracts require payment in US dollars, so those sales are not
affected by foreign currency fluctuations. The Company intends to increase the
amount of foreign sales it makes in the future.

14



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Cost of Revenues:

Cost of revenues increased $15,759,000, or 63.4%, to $40,614,000 for the
year ended September 30, 2003 from $24,855,000 for the year ended September 30,
2002. This was primarily attributed to an increase in labor of $3,274,000 and
an increase in materials of $8,975,000 to support the increase in production
activities, which was a significant part of the growth in revenues.
The Company recorded an inventory write down of $1,074,000 in 2003
for certain component parts in inventory, no such write down was
incurred in 2002.  Additionally, fringe benefits, occupancy costs and depreciation increased by
$1,846,000 mainly as a result of a full year of use of the Companys NJ
facility, which began its operations in February 2002. Cost of revenues as a
percentage of revenues decreased to 76.4% for the year ended September 30, 2003
from 77.0% for the year ended September 30, 2002.

General and Administrative Expenses:

General and administrative expenses increased $2,094,000, or 55.4%, to
$5,876,000 for the year ended September 30, 2003 from $3,782,000 for the year
ended September 30, 2002. The increase was due principally to the additional
salaries and benefits of $783,000 and other related expenses of new and
existing employees and to an increased internal research and development
expense of $225,000.

For the year ended September 30, 2003, internal research and development
was $1,019,000 compared to $794,000 for the year ended September 30, 2002 and
represented 17.3% and 21.0% of general and administrative expense,
respectively.

Interest Income and Interest Expense:

Interest income increased $86,000, or over 100%, to $122,000 for the year
ended September 30, 2003 from $36,000 for the year ended September 30, 2002.
The increase was primarily the result of the income earned on a higher invested
balance of excess cash during the period. Interest expense increased $10,000,
or 25%, to $50,000 for the year ended September 30, 2003 from $40,000 for the
year ended September 30, 2002. The increase was primarily due to interest
expense incurred during the first three months of fiscal year 2003.

Other Income and Other Expenses:

Net other income decreased $38,000, or 63.3%, to $22,000 for the year
ended September 30, 2003. The decrease was primarily due to sublease income of
$17,000 in fiscal 2003 compared to $78,000 in fiscal 2002.

Income Tax Expense:

Income tax expense consists of federal and state income taxes. Income tax
expense increased $1,215,000, or 80.0%, to $2,735,000 for the year ended
September 30, 2003, from $1,520,000 for the year ended September 30, 2002. The
increase was primarily due to increased and improved profitability in 2003.
The Companys effective tax rates were approximately 40.3% and
41.0% for the years ended
September 30, 2003 and 2002, respectively, and varies from the federal
statutory rate primarily due to state taxes and certain nondeductible
expenses. The Companys new Pennsylvania production facility is
within the Keystone Opportunity Zone.  The Company is exempt from
Pennsylvania state and local taxes for a period of ten years.  As a
result, the Company believes its effective tax rate will be reduced by
approximately 1-2% in 2004.

Net Income:

Net income increased $1,863,000, or 85.1%, to 4,052,000 for the year ended
September 30, 2003 from $2,189,000 for the year ended September 30, 2002. The
increase is due primarily to an increase in revenues and increased cost
performance during the year. Net income as a percentage of revenue was 7.6%
and 6.8% for the years ended September 30, 2003 and 2002, respectively.

Year Ended September 30, 2002 Compared to Year Ended September 30, 2001

Revenues:

Revenues increased $15,899,000, or 97.0%, to $32,290,000 for the year
ended September 30, 2002 from $16,391,000 for the year ended September 30,
2001. The increase was due primarily to new contract awards in the
Communications Group and the Imaging Group of approximately $9,184,000, in
addition to revenues attributable to ST Production Systems, Inc., the
subsidiary that holds the assets we acquired from FEL Corporation and which we
include as part of our Defense Systems Group, of approximately $10,896,000
since the date of the FEL asset acquisition. This increase was partially
offset by a decrease in other Defense Systems Group revenue of $4,181,000.

15



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For
the year ended September 30, 2002 we derived, directly or indirectly, 80.4% of
our revenue primarily from federal agencies in the intelligence community and
the Department of Defense, compared to 88.9% for the year ended September 30,
2001. For the year ended September 30, 2002, our four largest revenue producing
contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the
AN/SLQ-4A Radio Terminal Set, the AN/BLQ-10 (V)1 and (V)2, and Hyperspectral
Imaging System, which contributed 36.4% of revenue.

Customer funded development, which is included in revenue, decreased
$7,338,000, or 92.2%, to $620,000 for the year ended September 30, 2002 from
$7,958,000 for the year ended September 30, 2001. The decrease resulted from
the U.S. Navy cancellation of the Advanced Integrated Electronic Warfare
System, for which Lockheed Martin was the prime contractor. Consistent with
U.S. Navy direction, all subcontractors to Lockheed Martin for this program
were, in turn, cancelled to achieve an orderly shut down of the program. Our
subcontract with Lockheed Martin for development of portions of the system was
cancelled at this time.

For the year ended September 30, 2002, we derived approximately 15.7% of
our revenues from contracts with U.S. approved foreign countries. Our foreign
sales contracts require payment in US dollars, so we are not affected by
foreign currency fluctuations. We intend to increase the amount of foreign
sales we make in the future.

Cost of Revenues:

Cost of revenues increased $13,111,000, or 111.6%, to $24,855,000 for the
year ended September 30, 2002 from $11,744,000 for the year ended September 30,
2001. The increase was attributed to costs associated with the revenues
generated by ST Production Systems, Inc., which has higher associated costs
than the revenues generated in our Communications and Imaging Groups. Cost of
revenues as a percentage of revenues increased to 77.0% for the year ended
September 30, 2002 from 71.6% for the year ended September 30, 2001.

General and Administrative Expenses:

General and administrative expenses increased $881,000, or 30.4%, to
$3,782,000 for the year ended September 30, 2002 from $2,901,000 for the year
ended September 30, 2001. The increase was due principally to the added
salaries and related benefits of new employees hired for ST Production Systems,
Inc. of approximately $291,000 and to increases in salaries and benefits to our
existing employees.

For the year ended September 30, 2002, internal research and development
was $794,000 compared to $892,000 for the year ended September 30, 2001 and
represented 21.0% and 30.7% of general and administrative expense,
respectively.

Interest Income and Interest Expense:

Net interest income decreased $143,000, or 101.4%, to net interest expense
of $4,000 for the year ended September 30, 2002 from $141,000 of net interest
income for the year ended September 30, 2001. The decrease was the result of
lower invested balances, lower rates of return on investments during 2002 and
interest expense of $32,000 incurred on our line of credit.

Other Income:

Other income decreased $56,000, or 48.3%, to $60,000 for the year ended
September 30, 2001. The decrease was primarily due to sublease income of
$78,000 in fiscal 2002 compared to $112,000 in fiscal 2001.

Income Tax Expense:

Income tax expense consists of federal and state income taxes. Income tax
expense increased $741,000, or 95.1%, to $1,520,000 for the year ended September
30, 2002, from $779,000 for the year ended September 30, 2001. The increase was
primarily due to increased and improved profitability in 2002. Our effective
tax rates were 41% and 38.9% for the years ended September 30, 2002 and 2001,
respectively. Our effective tax rate varies from the federal statutory rate
primarily due to state taxes and certain nondeductible expenses.

16



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Net Income:

Net income increased $965,000, or 78.8% to $2,189,000 for the year ended
September 30, 2002 from $1,224,000 for the year ended September 30, 2001. The
increase was the result of an increase in revenues that was partially offset by
an increase in costs and expenses.

Liquidity and Capital Resources

Historically, the Companys primary source of liquidity is cash provided
by operations and its line of credit. The Companys liquidity requirements
depend on a number of factors, including the timing of production under its
federal government and foreign sales contracts. On November 22, 2002, the
Company sold 2 million shares of common stock for net proceeds, after costs and
underwriters commissions, of $14,235,000. On December 12, 2002, the
underwriters exercised their overallotment option , which provided net proceeds
to the Company of $2,232,000 from the sale of an additional 300,000 shares. The
Company used a portion of the proceeds to pay off the line of credit and has
not had a need to borrow since that date. The Company had cash and cash
equivalents of $13,445,000 at September 30, 2003, as compared to $700,000 at
September 30, 2002. The increase was primarily due to the net proceeds of
$16,467,000 received from the sale of 2.3 million shares of common stock and
cash provided by operating activities. The increase was partially offset by
cash used in investing activities and the repayment of the line of credit.

Cash provided by operating activities was approximately $774,000 for the
year ended September 30, 2003, compared to cash used in operating activities of
approximately $3,347,000 for the year ended September 30, 2002, an increase of
approximately $4,121,000. The primary reasons for this increase were an
increase in net income, a net decrease in unbilled accounts
receivable, a decrease in inventories, and an increase in accounts payable and
other accrued expenses. The increase was offset in part by an increase in
accounts receivable and a decrease in billing in excess of costs and income
taxes payable.

Cash used in operating activities was approximately $3,447,000 for the
year ended September 30, 2002, compared to cash provided by operating
activities of approximately $3,292,000 for the year ended September 30, 2001, a
decrease of approximately $6,723,000. The primary reasons for this decrease
were changes in working capital. The changes in working capital was largely a
result of an increase in billed and unbilled accounts receivables and an
increase in inventory. The decrease was partially offset by increases in
accounts payable, other accrued expenses and billing in excess of cost.

Cash used in investing activities was approximately $1,878,000, $3,447,000
and $290,000 for the years ended September 30, 2003, 2002 and 2001,
respectively. Cash used in 2002 included the acquisition of certain assets of
FEL Corporation compared to only capital expenditures for property and
equipment for 2003 and 2001.

The
Companys budget for capital expenditures in 2004 is
approximately $2,800,000, exclusive of any potential acquisition of
businesses. The Company continues to seek complimentary businesses to
acquire. There can be no assertions that such acquisitions will occur
in 2004.

Cash provided by financing activities was approximately $13,849,000 during
the year ended September 30, 2003, compared to cash provided by financing
activities of approximately $3,132,000 for the year ended September 30, 2002,
an increase of $10,717,000. The increase was primarily due to the net proceeds
of $16,467,000 received from the sale of 2.3 million shares of common stock.
The increase was partially offset by cash used for the repayment of the line of
credit.

Cash provided by financing activities was approximately $3,132,000 during
the year ended September 30, 2002, compared to cash used in financing
activities of approximately $152,000 for the year ended September 30, 2001, an
increase of $3,368,000. The increase primarily resulted from the net draws and
repayments on the Companys line of credit of approximately $2,900,000 and
receipt of proceeds from stock option exercises of approximately $316,000. In
fiscal 2001, cash used in financing activities was primarily the result of
payments for the purchase of treasury stock.

The Company entered into a line of credit and related note payable with
Bank of America in February 2001. Effective February 2002, the Company renewed
the line of credit and the amount available under the line of credit was
increased from $5,000,000 to $10,000,000. Effective February 28, 2003, the
Company renewed its line of credit and increased the availability to
$15,000,000. The line of credit is for one year and is set to expire on
February 28, 2004. The total borrowing base generally cannot exceed the sum of
90% of qualified government accounts receivable and 80% of qualified
non-government accounts receivable. Total letters of credit at September 30,
2003 were $1,180,000.

17



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The line of credit is available to
finance the performance of government contracts, to support the issuance of stand-by
letters of credit, and for short-term working capital purposes. At September
30, 2003, there were no borrowings under the line of credit. The borrowing base
at September 30, 2003 was $9,663,000.

The bank agreement establishes the interest rate at the LIBOR plus 200 to

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

Related Party Transactions

The Company has entered into an agreement with Rockwell Venture Capital, Inc, a
privately owned company controlled by S. Kent Rockwell, to rent an aircraft
used for Company business. The Company believes that the terms of the rental
agreement are at least as favorable as those it could obtain from an unrelated
third party. For the year ended September 30, 2003, the Company recorded
expenses of $169,000 for the use of the aircraft of which $51,000 was unpaid
as of the end of the year.

Market Risks

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

Cash and Cash Equivalents:

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

Interest Rates:

The Companys line of credit financing provides available borrowing to it
at variable interest rates. There were no outstanding borrowings at September
30, 2003. Accordingly, the Company does not believe that any movement in
interest rates would have a material impact on future earnings or cash flows.
However, if the Company were to significantly increase borrowing under the
current line of credit agreement, future interest rate changes could
potentially have a material impact.

Foreign Currency:

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

Contractual Obligations and Commitments

Contractual Cash Obligations:

|                 |  |       |            |      |  |        |           |        |  |        |           |        |  |            |           |  |  |   |           |  |  |   |           |  |  |   |           | 
|---------------- |  | ----- | ---------- | ---- |  | ------ | --------- | ------ |  | ------ | --------- | ------ |  | ---------- | --------- |  |  | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                 |  |       |            |      |  | Due in |           | Due in |  | Due in |           | Due in |  | Due in     |           |  |  |  
|                 |  | Total |            | 2004 |  | 2005   |           | 2006   |  | 2007   |           | 2008   |  | Thereafter
|                 |  |       |            |      |  |        |           |        |  |        |           |        |  |           
|Operating leases |  | $     | 11,591,000 |      |  | $      | 1,151,000 |        |  | $      | 1,037,000 |        |  | $          | 1,018,000 |  |  | $ | 1,031,000 |  |  | $ | 1,039,000 |  |  | $ | 6,315,000 | 
|Line of credit   |  |       |           |      |  |        |          |        |  |        |          |        |  |            |          |  |  |   |          |  |  |   |          |  |  |   |          | 
|                 |  |       |            |      |  |        |           |        |  |        |           |        |  |            |           |  |  |   |           |  |  |   |           |  |  |   |           | 
|                 |  | $     | 11,591,000 |      |  | $      | 1,151,000 |        |  | $      | 1,037,000 |        |  | $          | 1,018,000 |  |  | $ | 1,031,000 |  |  | $ | 1,039,000 |  |  | $ | 6,315,000 | 
|                 |  |       |            |      |  |        |           |        |  |        |           |        |  |            |           |  |  |   |           |  |  |   |           |  |  |   |           | 

18



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Other Commercial Commitments:

|                  |  |       |           |                  |  |           |         |  |  |   |           | 
|----------------- |  | ----- | --------- | ---------------- |  | --------- | ------- |  |  | - | --------- | 
|                  |  | Total |           | Less than 1 Year |  | 1-3 Years
|                  |  |       |           |                  |  |          
|Letters of credit |  | $     | 1,180,000 |                  |  | $         | 135,000 |  |  | $ | 1,045,000 | 
|                  |  |       |           |                  |  |           |         |  |  |   |           | 

Cost Associated with Exit Activity

On July 15, 2003, the Company announced its intention to close the facility in
Farmingdale, New Jersey and move these operations to Uniontown, Pennsylvania.
In September 2003, the Company signed a lease for a 60,000 square foot facility
for its Uniontown, Pennsylvania operations. The term of the lease is for ten
years with two five year options. The Company anticipates this move to be
completed by February 2004. Employees not transferring from the New Jersey
location will receive severance pay and/or retention bonuses, providing they
leave the Company in accordance with the Companys transition plan. The cost
associated with the severance and retention plan is estimated to be
approximately $269,000. The severance cost expensed and accrued for the year ended
September 30, 2003 is $123,000. Other exit costs associated with the
transition are estimated to be $893,000. Other costs consist of
principally training, relocation and
moving costs. Other exit costs in the amount of
$139,000 were expensed for the year ended September 30, 2003. The cost of the
severance and retention plan and the other exit costs are reported in the cost
of revenues and general and administrative expense line items of the
Consolidated Statement of Income.

Critical Accounting Policies and Estimates

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

Revenue Recognition:

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

The Company is currently recording the AN/SLQ-25A Surface Ship Torpedo
Defense System contract at zero gross margin. Revenue from this contract
amounted to 21.8% in 2003 and 18.8% in 2002 of the Companys revenues. This
contract was acquired as part of the acquisition of certain assets of FEL
Corporation and was performing at a potential loss at the date of acquisition.
The Company has favorably performed under the contract since the date of
acquisition and management has worked with the customer to reduce any potential
loss through change orders approved to date. While management currently
estimates that the contract will be profitable, the profitability is dependent
upon change orders, expected by management, but that have not yet been
finalized.

19



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Change orders are under continuous negotiation with the customer.
When these change orders are received, the Company will reassess the contract
based on current estimates, and such reassessments are currently expected to
result in increases to the margins recorded on the contract. Such increases
would impact operations in the period such change orders are finalized as well
as future periods. If such change orders are not finalized under currently
expected terms, or if the Company does not perform as expected under the
contract, contract losses may be required to be accrued. Management expects
the change orders to be received in 2004 and the first half of 2005.

Accounts Receivable :

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

Inventories :

The Company records its inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, the Company is required to
make judgments as to future demand requirements and compare these with the
current or committed inventory levels. Inventory is generally purchased to
fulfill a specific contract commitment. During the year ended September 30,
2003, the Company wrote down inventory by $1,074,000. The inventory was
purchased, built and configured for a specific project, and such project has been
delayed and has not yet been
awarded. As a result, the Company wrote down the inventory based on expected uses in
the next twelve months. The Company has allocated and
will continue to allocate this inventory to other business objectives when given the
opportunity.

Income Taxes:

The Company currently has deferred tax assets resulting from net operating
loss carryforwards, which will reduce taxable income in future periods. The utilization of the
net operating loss carryforward is limited by Internal Revenue Service guidelines to an
annual maximum amount. At
September 30, 2003 and 2002, the Company did not provide a valuation allowance
as it believed it was more likely than not that the remaining net deferred tax
assets will be realized, principally based on forecasted taxable income.

Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No.146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No.146 nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,
under which a liability for an exit cost was recognized at the date of an
entitys commitment to an exit plan. SFAS No.146 requires that a liability for
a cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred. The provisions of the statement are effective
for exit or disposal activities that are initiated after December 31, 2002.

In November 2002, the FASB issued Interpretation No. 45, (FIN 45)
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on disclosures
to be made by a guarantor in its annual financial statements about its
obligations under certain guarantees that it has issued It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantors recognized liability over the term of
the related guarantee. This interpretation also incorporates, without change,
the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees
of Indebtedness of Others, which is being superseded. The initial recognition
and initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 and
the disclosure requirements in this interpretation are effective for financial
statements of annual periods ending after December 15, 2002.

20



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

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

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

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

The
information called for by this item is provided under Item 7   
Managements Discussion and Analysis of Financial Conditional and Results of
Operations.

21



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                              |  |  |    | 
|------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of PricewaterhouseCoopers LLP, Independent Accountants                                                 |  |  | 23 | 
|Consolidated Balance Sheets

       As of September 30, 2003 and 2002                                         |  |  | 24 | 
|Consolidated Income Statements

       For the years ended September 30, 2003, 2002 and 2001                  |  |  | 25 | 
|Consolidated Statements of Stockholders Equity

       For the years ended September 30, 2003, 2002 and 2001 |  |  | 26 | 
|Consolidated Statements of Cash Flows

       For the years ended September 30, 2003, 2002 and 2001           |  |  | 27 | 
|Notes to Consolidated Financial Statements                                                                    |  |  | 28 | 

22



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##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of
Sensytech, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders equity and cash flows
present fairly, in all material respects, the financial position of Sensytech,
Inc. and its subsidiaries at September 30, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2003 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
December 16, 2003

23



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SENSYTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | ---------- | ---- | - | ---------- | --------- | -
|                                                 |                                                                                                                                                  |   | September 30,
|                                                 |                                                                                                                                                  |   |              
|                                                 |                                                                                                                                                  |   | 2003          |            | 2002
|                                                 |                                                                                                                                                  |   |               |            |     
|ASSETS                                           |                                                                                                                                                  |   |               |            |      |   |            |          
|CURRENT ASSETS                                   |                                                                                                                                                  |   |               |            |      |   |            |          
|                                                 | Cash and cash equivalents (Note 1)                                                                                                               |   | $             | 13,445,000 |      |   | $          | 700,000   |  
|                                                 | Accounts receivable, net of allowance for
doubtful accounts of $200,000 in 2003 and 2002                                                         |   |               | 15,916,000 |      |   |            | 8,880,000 |  
|                                                 | Unbilled contract costs, net (Note 3)                                                                                                            |   |               | 8,486,000  |      |   |            | 8,820,000 |  
|                                                 | Inventories                                                                                                                                      |   |               | 1,690,000  |      |   |            | 3,168,000 |  
|                                                 | Deferred income taxes (Note 11)                                                                                                                  |   |               | 793,000    |      |   |            | 411,000   |  
|                                                 | Other current assets                                                                                                                             |   |               | 328,000    |      |   |            | 272,000   |  
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|TOTAL CURRENT ASSETS                             |                                                                                                                                                  |   | 40,658,000    |            |      |   | 22,251,000 |          
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|PROPERTY AND EQUIPMENT (Note 4)                  |                                                                                                                                                  |   | 3,350,000     |            |      |   | 2,608,000  |          
|OTHER ASSETS                                     |                                                                                                                                                  |   |               |            |      |   |            |          
|                                                 | Deferred income taxes (Note 11)                                                                                                                  |   |               | 224,000    |      |   |            | 260,000   |  
|                                                 | Intangibles, net (Note 2)                                                                                                                        |   |               | 133,000    |      |   |            | 400,000   |  
|                                                 | Other assets                                                                                                                                     |   |               | 73,000     |      |   |            | 333,000   |  
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|TOTAL ASSETS                                     |                                                                                                                                                  | $ | 44,438,000    |            |      | $ | 25,852,000 |          
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY             |                                                                                                                                                  |   |               |            |      |   |            |          
|CURRENT LIABILITIES                              |                                                                                                                                                  |   |               |            |      |   |            |          
|                                                 | Line of credit (Note 5)                                                                                                                          |   | $             |           |      |   | $          | 2,900,000 |  
|                                                 | Accounts payable                                                                                                                                 |   |               | 3,780,000  |      |   |            | 2,916,000 |  
|                                                 | Accrued salaries, benefits, and related expenses                                                                                                 |   |               | 2,628,000  |      |   |            | 2,093,000 |  
|                                                 | Other accrued expenses                                                                                                                           |   |               | 862,000    |      |   |            | 438,000   |  
|                                                 | Billings in excess of costs (Note 3)                                                                                                             |   |               | 1,172,000  |      |   |            | 2,342,000 |  
|                                                 | Income taxes payable                                                                                                                             |   |               | 63,000     |      |   |            | 497,000   |  
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|TOTAL CURRENT LIABILITIES                        |                                                                                                                                                  |   | 8,505,000     |            |      |   | 11,186,000 |          
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|Commitments and contingencies (Notes 2, 3 and 7) |                                                                                                                                                  |   |               |            |      |   |            |          
|STOCKHOLDERS EQUITY (Note 9)                    |                                                                                                                                                  |   |               |            |      |   |            |          
|                                                 | Common stock, $.01 par value; 25,000,000 shares authorized,
6,617,223 and 4,239,223 shares issued and
outstanding at September 30, 2003 and 2002 |   |               | 66,000     |      |   |            | 42,000    |  
|                                                 | Additional paid-in capital                                                                                                                       |   |               | 25,172,000 |      |   |            | 7,972,000 |  
|                                                 | Treasury
stock, at cost, 126,245 shares at September 30, 2003
and 125,245 shares at September 30, 2002 (Note 10)                                 |   |               | (534,000   | )    |   |            | (525,000  | )
|                                                 | Retained earnings                                                                                                                                |   |               | 11,229,000 |      |   |            | 7,177,000 |  
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|TOTAL STOCKHOLDERS EQUITY                       |                                                                                                                                                  |   | 35,933,000    |            |      |   | 14,666,000 |          
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                  | $ | 44,438,000    |            |      | $ | 25,852,000 |          
|                                                 |                                                                                                                                                  |   |               |            |      |   |            |           |  

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

24



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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |            |  
|------------------------------ | ----------------------------------- | ------------------------ | ---------- | ------------------ | ---------- | ---- | ---------- | ---------- | ---------- | - | --------- | ---------- | ---------- | -
|                               |                                     |                          |            | For the Year Ended
|                               |                                     |                          |            | September 30,     
|                               |                                     |                          |            |                   
|                               |                                     |                          |            | 2003               |            | 2002 |            | 2001      
|                               |                                     |                          |            |                    |            |      |            |           
|REVENUES                       |                                     |                          |            |                    |            |      |            |            |            |   |           |           
|                               | Contract revenues                   |                          | $          | 53,183,000         |            |      | $          | 32,290,000 |            |   | $         | 16,391,000 |           
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|COSTS AND EXPENSES             |                                     |                          |            |                    |            |      |            |            |            |   |           |           
|                               | Cost of revenues                    |                          |            | 40,614,000         |            |      |            | 24,855,000 |            |   |           | 11,744,000 |           
|                               | General and administrative expenses |                          |            | 5,876,000          |            |      |            | 3,782,000  |            |   |           | 2,901,000  |           
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|                               |                                     | Total costs and expenses |            |                    | 46,490,000 |      |            |            | 28,637,000 |   |           |            | 14,645,000 |  
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|INCOME FROM OPERATIONS         |                                     |                          | 6,693,000  |                    |            |      | 3,653,000  |            |            |   | 1,746,000 |           
|OTHER INCOME (EXPENSES)        |                                     |                          |            |                    |            |      |            |            |            |   |           |           
|                               |                                     | Interest income          |            |                    | 122,000    |      |            |            | 36,000     |   |           |            | 155,000    |  
|                               |                                     | Interest expense         |            |                    | (50,000    | )    |            |            | (40,000    | ) |           |            | (14,000    | )
|                               |                                     | Other income             |            |                    | 32,000     |      |            |            | 73,000     |   |           |            | 116,000    |  
|                               |                                     | Other expenses           |            |                    | (10,000    | )    |            |            | (13,000    | ) |           |            |           |  
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|INCOME BEFORE INCOME TAXES     |                                     |                          | 6,787,000  |                    |            |      | 3,709,000  |            |            |   | 2,003,000 |           
|INCOME TAX PROVISION (Note 11) |                                     |                          | (2,735,000 | )                  |            |      | (1,520,000 | )          |            |   | (779,000  | )         
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|NET INCOME                     |                                     | $                        | 4,052,000  |                    |            | $    | 2,189,000  |            |            | $ | 1,224,000 |           
|                               |                                     |                          |            |                    |            |      |            |            |            |   |           |            |           
|PER SHARE AMOUNT (Note 1)      |                                     |                          |            |                    |            |      |            |            |            |   |           |           
|                               | Basic earnings per share            |                          | $          | 0.66               |            |      | $          | 0.54       |            |   | $         | 0.31       |           
|                               | Diluted earnings per share          |                          | $          | 0.65               |            |      | $          | 0.52       |            |   | $         | 0.30       |           

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

25



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##### 



SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |        |         |   |  |   |          |   |  |       |            |  |  |   |            |  
|---------------------------------------------------------------------------------- |  | ------------ | --------- | ------- |  | ----------- | ------ | ------------ |  | ---------- | ---------- | ------------- |  | ------ | ------- | - |  | - | -------- | - |  | ----- | ---------- |  |  | - | ---------- | -
|                                                                                   |  |              |           |         |  |             |        |              |  | Additional |            | Unearned      |  |        |         |   |  |   |          |   |  | Total
|                                                                                   |  | Common Stock |           | Paid-in |  | Stock-based |        | Treasury     |  | Retained   |            | Stockholders
|                                                                                   |  | Shares       |           | Amount  |  | Capital     |        | Compensation |  | Stock      |            | Earnings      |  | Equity
|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |       
|BALANCE AT SEPTEMBER 30, 2000                                                      |  |              | 4,021,347 |         |  | $           | 40,000 |              |  | $          | 7,290,000  |               |  | $      | (55,000 | ) |  | $ | (285,000 | ) |  | $     | 3,764,000  |  |  | $ | 10,754,000 |  
|Net income                                                                         |  |              |          |         |  |             |       |              |  |            |           |               |  |        |        |   |  |   |         |   |  |       | 1,224,000  |  |  |   | 1,224,000  |  
|Stock grant                                                                        |  |              | 10,000    |         |  |             |       |              |  |            | 36,000     |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 36,000     |  
|Exercise of stock options                                                          |  |              | 53,700    |         |  |             | 1,000  |              |  |            | 125,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 126,000    |  
|Tax benefit on stock option exercises                                              |  |              |          |         |  |             |       |              |  |            | 36,000     |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 36,000     |  
|Amortization of stock-based compensation,
net of forfeitures of $5,000             |  |              |          |         |  |             |       |              |  |            | (5,000     | )             |  |        | 55,000  |   |  |   |         |   |  |       |           |  |  |   | 50,000     |  
|Purchase of treasury shares                                                        |  |              |          |         |  |             |       |              |  |            |           |               |  |        |        |   |  |   | (240,000 | ) |  |       |           |  |  |   | (240,000   | )
|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |        |         |   |  |   |          |   |  |       |            |  |  |   |            |  
|BALANCE AT SEPTEMBER 30, 2001                                                      |  |              | 4,085,047 |         |  | $           | 41,000 |              |  | $          | 7,482,000  |               |  | $      |        |   |  | $ | (525,000 | ) |  | $     | 4,988,000  |  |  | $ | 11,986,000 |  
|Net income                                                                         |  |              |          |         |  |             |       |              |  |            |           |               |  |        |        |   |  |   |         |   |  |       | 2,189,000  |  |  |   | 2,189,000  |  
|Exercise of stock options and
issuance of stock-based
compensation (Notes 8 and 9) |  |              | 154,176   |         |  |             | 1,000  |              |  |            | 315,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 316,000    |  
|Tax benefit on stock option exercises                                              |  |              |          |         |  |             |       |              |  |            | 175,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 175,000    |  
|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |        |         |   |  |   |          |   |  |       |            |  |  |   |            |  
|BALANCE AT SEPTEMBER 30, 2002                                                      |  |              | 4,239,223 |         |  | $           | 42,000 |              |  | $          | 7,972,000  |               |  | $      |        |   |  | $ | (525,000 | ) |  | $     | 7,177,000  |  |  | $ | 14,666,000 |  
|Net income                                                                         |  |              |          |         |  |             |       |              |  |            |           |               |  |        |        |   |  |   |         |   |  |       | 4,052,000  |  |  |   | 4,052,000  |  
|Stock offering                                                                     |  |              | 2,300,000 |         |  |             | 23,000 |              |  |            | 16,444,000 |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 16,467,000 |  
|Purchase of treasury shares                                                        |  |              |          |         |  |             |       |              |  |            |           |               |  |        |        |   |  |   | (9,000   | ) |  |       |           |  |  |   | (9,000     | )
|Non-employee stock-based
compensation                                              |  |              |          |         |  |             |       |              |  |            | 220,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 220,000    |  
|Exercise of stock options and
issuance of stock-based
compensation (Notes 8 and 9) |  |              | 78,000    |         |  |             | 1,000  |              |  |            | 290,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 291,000    |  
|Tax benefit on stock option exercises                                              |  |              |          |         |  |             |       |              |  |            | 246,000    |               |  |        |        |   |  |   |         |   |  |       |           |  |  |   | 246,000    |  
|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |        |         |   |  |   |          |   |  |       |            |  |  |   |            |  
|BALANCE AT SEPTEMBER 30, 2003                                                      |  |              | 6,617,223 |         |  | $           | 66,000 |              |  | $          | 25,172,000 |               |  | $      |        |   |  | $ | (534,000 | ) |  | $     | 11,229,000 |  |  | $ | 35,933,000 |  
|                                                                                   |  |              |           |         |  |             |        |              |  |            |            |               |  |        |         |   |  |   |          |   |  |       |            |  |  |   |            |  

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

26



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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |            |  
|----------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------- | ------------------ | ---------- | ---- | ---------- | ---------- | ---------- | - | --------- | --------- | ---------- | -
|                                                      |                                                                                             |                                                           |            | For the Year Ended
|                                                      |                                                                                             |                                                           |            | September 30,     
|                                                      |                                                                                             |                                                           |            |                   
|                                                      |                                                                                             |                                                           |            | 2003               |            | 2002 |            | 2001      
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |           
|Cash flows from operating activities:                 |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |          
|                                                      | Net income                                                                                  |                                                           | $          | 4,052,000          |            |      | $          | 2,189,000  |            |   | $         | 1,224,000 |           
|                                                      | Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      |                                                                                             | Depreciation and amortization                             |            |                    | 1,403,000  |      |            |            | 947,000    |   |           |           | 488,000    |  
|                                                      |                                                                                             | Stock-based compensation expense                          |            |                    | 220,000    |      |            |            |           |   |           |           |           |  
|                                                      |                                                                                             | Inventory writedown                                       |            |                    | 1,074,000  |      |            |            |           |   |           |           |           |  
|                                                      |                                                                                             | Provision (credit) for doubtful accounts                  |            |                    |           |      |            |            |           |   |           |           | (15,000    | )
|                                                      |                                                                                             | Amortization of deferred compensation                     |            |                    |           |      |            |            |           |   |           |           | 50,000     |  
|                                                      |                                                                                             | Deferred taxes                                            |            |                    | (346,000   | )    |            |            | 94,000     |   |           |           | 240,000    |  
|                                                      | Cash provided (used) by assets and liabilities, net of asset acquired                       |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      |                                                                                             | Accounts receivable                                       |            |                    | (7,036,000 | )    |            |            | (5,175,000 | ) |           |           | 2,384,000  |  
|                                                      |                                                                                             | Unbilled contract costs                                   |            |                    | 334,000    |      |            |            | (5,103,000 | ) |           |           | 62,000     |  
|                                                      |                                                                                             | Inventories                                               |            |                    | 404,000    |      |            |            | (2,754,000 | ) |           |           | (6,000     | )
|                                                      |                                                                                             | Other assets                                              |            |                    | 204,000    |      |            |            | (109,000   | ) |           |           | (60,000    | )
|                                                      |                                                                                             | Refundable, prepaid income taxes and income taxes payable |            |                    | (188,000   | )    |            |            | 1,064,000  |   |           |           | 737,000    |  
|                                                      |                                                                                             | Accounts payable                                          |            |                    | 864,000    |      |            |            | 1,957,000  |   |           |           | (438,000   | )
|                                                      |                                                                                             | Other accrued expenses                                    |            |                    | 959,000    |      |            |            | 1,346,000  |   |           |           | (1,034,000 | )
|                                                      |                                                                                             | Billing in excess of costs                                |            |                    | (1,170,000 | )    |            |            | 2,197,000  |   |           |           | (340,000   | )
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | Net cash provided by (used in) operating activities                                         |                                                           |            | 774,000            |            |      |            | (3,347,000 | )          |   |           | 3,292,000 |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Cash flows from investing activities:                 |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |          
|                                                      | Net acquisition of property and equipment                                                   |                                                           |            | (1,878,000         | )          |      |            | (1,425,000 | )          |   |           | (290,000  | )         
|                                                      | Acquisition of FEL Corporation assets                                                       |                                                           |            |                   |            |      |            | (2,022,000 | )          |   |           |          |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | Net cash used in investing activities                                                       |                                                           |            | (1,878,000         | )          |      |            | (3,447,000 | )          |   |           | (290,000  | )         
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Cash flows from financing activities:                 |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |          
|                                                      | Stock issuance cost                                                                         |                                                           |            | (1,933,000         | )          |      |            | (84,000    | )          |   |           |          |           
|                                                      | Proceeds from line of credit                                                                |                                                           |            | 2,055,000          |            |      |            | 4,650,000  |            |   |           |          |           
|                                                      | Repayments of line of credit                                                                |                                                           |            | (4,955,000         | )          |      |            | (1,750,000 | )          |   |           |          |           
|                                                      | Principal payments on capital lease obligations                                             |                                                           |            |                   |            |      |            |           |            |   |           | (38,000   | )         
|                                                      | Proceeds from stock issuance                                                                |                                                           |            | 18,400,000         |            |      |            |           |            |   |           |          |           
|                                                      | Proceeds from disposal of property and equipment                                            |                                                           |            |                   |            |      |            |           |            |   |           |          |           
|                                                      | Proceeds of stock option exercises                                                          |                                                           |            | 291,000            |            |      |            | 316,000    |            |   |           | 126,000   |           
|                                                      | Payments on purchase of Treasury Stock                                                      |                                                           |            | (9,000             | )          |      |            |           |            |   |           | (240,000  | )         
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |            |  
|Net cash provided (used in) financing activities      |                                                                                             |                                                           | 13,849,000 |                    |            |      | 3,132,000  |            |            |   | (152,000  | )        
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Net increase (decrease) in cash and cash equivalents  |                                                                                             |                                                           | 12,745,000 |                    |            |      | (3,662,000 | )          |            |   | 2,850,000 |          
|Cash and cash equivalents, beginning of period        |                                                                                             |                                                           | 700,000    |                    |            |      | 4,362,000  |            |            |   | 1,512,000 |          
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Cash and cash equivalents, end of period              |                                                                                             | $                                                         | 13,445,000 |                    |            | $    | 700,000    |            |            | $ | 4,362,000 |          
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Supplemental disclosure of cash flow information:     |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |          
|                                                      | Cash received for income taxes                                                              |                                                           | $          |                   |            |      | $          |           |            |   | $         | 162,000   |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | Cash paid for interest                                                                      |                                                           | $          | 50,000             |            |      | $          | 37,000     |            |   | $         | 20,000    |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | Cash paid for income taxes                                                                  |                                                           | $          | 3,270,000          |            |      | $          | 362,000    |            |   | $         |          |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|Non-cash investing activity and financing activities: |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |          
|                                                      | Tax benefit on stock option exercises included in prepaid taxes                             |                                                           | $          | 246,000            |            |      | $          | 175,000    |            |   | $         | 36,000    |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | Stock issuance costs included in accounts payable                                           |                                                           | $          |                   |            |      | $          | 79,000     |            |   | $         |          |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           
|                                                      | FEL acquisition costs included in accounts payable                                          |                                                           | $          |                   |            |      | $          | 26,000     |            |   | $         |          |           
|                                                      |                                                                                             |                                                           |            |                    |            |      |            |            |            |   |           |           |           

27



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##### 



SENSYTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies

Business Activities:

Sensytech, Inc. and subsidiaries (the Company) is a designer, developer
and manufacturer of electronics and technology products for the defense and
intelligence markets. Specifically, the Company specializes in integrated
passive surveillance, communications and data links, electronic countermeasures
and threat simulator systems, and airborne imaging and scanning systems. Our
customers include the U.S. Department of Defense, other U.S. federal government
agencies, major domestic prime defense contractors (such as Lockheed Martin
Corporation and L-3 Communications Corporation), foreign governments and
agencies and foreign defense contractors. Many of our products are used in
national defense programs for the U.S. federal government intelligence
community and approved international customers.

Principles of Consolidation:

The consolidated financial statements include the accounts of Sensytech,
Inc. and its wholly owned subsidiaries, Daedalus Enterprises Export
Corporation, ST Production Systems, Inc. and Sensytech Financial Services, Inc.
All intercompany transactions and balances have been eliminated in
consolidation.

Reclassifications:

Certain reclassifications were made to conform the priors years financial
statements to the presentation adopted in the 2003 consolidated financial
statements.

Cash and Cash Equivalents:

The Company considers all unrestricted highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.

Inventories:

Inventories are stated at the lower of cost or market, determined on the
first-in, first-out basis. Inventories consist of component parts work in
process, raw materials and finished component parts. Inventories consist of
the following at September 30:

|                                 |  |      |           |      |  |   |           | 
|-------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                 |  | 2003 |           | 2002
|                                 |  |      |           |     
|Raw materials                    |  | $    | 515,000   |      |  | $ | 721,000   | 
|Component parts, work in process |  |      | 1,141,000 |      |  |   | 2,272,000 | 
|Finished component parts         |  |      | 34,000    |      |  |   | 175,000   | 
|                                 |  |      |           |      |  |   |           | 
|                                 |  | $    | 1,690,000 |      |  | $ | 3,168,000 | 
|                                 |  |      |           |      |  |   |           | 

Property and Equipment:

Property and equipment are recorded at cost and are depreciated over
estimated useful lives ranging from three to eight years using straight-line
and double-declining balance methods. Leasehold improvements are amortized over
the life of the improvement or length of lease term, whichever is shorter,
using the straight-line method. Amortization of leasehold improvements and
capital lease obligations are included in depreciation expense. The cost and
accumulated depreciation or amortization of assets sold or retired are removed
from the respective accounts and any gain or loss is reflected in other income
(expenses).

28



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##### 



The Company reviews the carrying value of property, plant and equipment
for impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized equal to an amount by which the carrying value
exceeds the fair value of assets.

Revenue Recognition:

The estimated revenue for performance under Government fixed-price and
cost-type contracts, including customer-funded research and development, is
recognized under the percentage of completion method of accounting where the
estimated revenue is determined on the basis of completion to date (the total
contract amount multiplied by percent of performance to date less revenue
recognized in previous periods). Each quarter, management prepares, by cost
elements, the estimated cost to complete for all major contracts. Percentage
of completion is computed based on costs incurred to date divided by total
estimated costs, which includes updated estimated cost to complete (i.e., cost
to cost method). Revenues under
cost-reimbursement contracts are recorded as costs are incurred and include
estimated earned fees in the proportion that costs incurred to date bear to
total estimated costs. The fees under certain Government contracts may be
increased or decreased in accordance with cost or performance incentive
provisions which measure actual performance against established targets or
other criteria. Such incentive fee awards or penalties, which historically are
not material, are included in revenue at the time the amounts can be reasonably
determined. Anticipated losses are recognized at the time they become known and
considered probable. It is reasonably possible that future operating results
may be affected if actual contract costs incurred differ from total contract
costs currently estimated by management. Revenue under time and material
contracts is based on hours incurred multiplied by approved loaded labor rates plus
other costs incurred and allocated.

Research and Development:

Internally funded research and development costs are included in general
and administrative expenses in the consolidated income statements. The amount
of internally funded research and development costs expensed during 2003, 2002,
and 2001 was $1,019,000, $794,000 and $892,000, respectively.

Intangibles:

Intangible assets consist of the value of contracts acquired in connection
with the acquisition of FEL (see Note 2). Intangibles are amortized on the
straight-line method over the life of the underlying agreements or the
estimated useful lives, currently 18 to 36 months. Accumulated amortization
was approximately $467,000 at September 30, 2003.

Insurance:

The Company is self insured for its medical and dental coverage and
carries individual and aggregate stop loss insurance. A provision for
outstanding medical claims is provided for reported claims, claims incurred but
not reported and claims settlement expense at each balance sheet date. Such
losses are based on managements estimate of the ultimate cost of settlement of
claims. Accrued liabilities are not discounted since the contracts are of
short duration. Actual liabilities may differ from estimated amounts. Any
changes in estimated losses and settlements are reflected in current earnings.

Income Taxes:

Deferred tax assets and liabilities have been established for the
temporary differences between financial statement and tax bases of assets and
liabilities existing at the balance sheet date using expected tax rates. A
valuation allowance is recorded to reduce deferred income taxes to that portion
that is expected to more likely than not be realized.

Use of Estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and

29



---



##### 



liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Accordingly, actual results could differ from those
estimates.

Operating Cycle:

In accordance with industry practice, the Company classifies as current
assets amounts relating to long-term contracts which may have terms extending
beyond one year but are expected to be realized during the normal operating
cycle of the Company. The liabilities in the accompanying balance sheets which
have been classified as current liabilities are those expected to be satisfied
by the use of assets classified as current assets, all within the next twelve
months.

Earnings Per Share:

Basic earnings per share is computed using the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
computed using the weighted average number of common and common equivalent
shares outstanding during each period. The following summary is presented for
the years ended September 30:

|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|-------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                   |  | 2003 |           | 2002 |  | 2001
|                                                   |  |      |           |      |  |     
|Net income                                         |  | $    | 4,052,000 |      |  | $    | 2,189,000 |  |  | $ | 1,224,000 | 
|Weighted average shares outstanding  basic        |  |      | 6,104,000 |      |  |      | 4,054,000 |  |  |   | 3,985,000 | 
|Basic earnings per share                           |  | $    | .66       |      |  | $    | .54       |  |  | $ | .31       | 
|Effect of dilutive securities:                     |  |      |           |      |  |      |           |  |  |   |           | 
|Net shares issuable upon exercise of stock
Options |  |      | 158,000   |      |  |      | 126,000   |  |  |   | 42,000    | 
|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|Weighted average shares outstanding  diluted      |  |      | 6,262,000 |      |  |      | 4,180,000 |  |  |   | 4,027,000 | 
|Diluted earnings per share                         |  | $    | .65       |      |  | $    | .52       |  |  | $ | .30       | 

Stock Option Compensation

The Company continues to account for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations using
the intrinsic value method, which resulted in compensation cost for options
granted of $220,000 for year ended September 30, 2003. No compensation
expense was recorded for the years ended September 30, 2002 and 2001. Had
compensation expense for the Companys four stock-based compensation plans been
determined based upon fair values at the grant dates for awards under those
plans in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the Companys net income and earnings per share would have been
reduced to the pro forma amounts indicated below.

|                                                                                                                                    |  |      |           |      |  |      |           |  |  |   |           | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                                                                                                    |  | 2003 |           | 2002 |  | 2001
|                                                                                                                                    |  |      |           |      |  |     
|Net income, as reported                                                                                                             |  | $    | 4,052,000 |      |  | $    | 2,189,000 |  |  | $ | 1,224,000 | 
|Less: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects |  |      | 287,000   |      |  |      | 467,000   |  |  |   | 120,000   | 
|                                                                                                                                    |  |      |           |      |  |      |           |  |  |   |           | 
|Pro forma net income                                                                                                                |  | $    | 3,765,000 |      |  | $    | 1,722,000 |  |  | $ | 1,104,000 | 
|                                                                                                                                    |  |      |           |      |  |      |           |  |  |   |           | 
|Earnings per share:                                                                                                                 |  |      |           |      |  |      |           |  |  |   |           | 
|Basic  as reported                                                                                                                 |  | $    | .66       |      |  | $    | .54       |  |  | $ | .31       | 
|Basic  pro forma                                                                                                                   |  | $    | .62       |      |  | $    | .42       |  |  | $ | .28       | 
|Diluted  as reported                                                                                                               |  | $    | .65       |      |  | $    | .52       |  |  | $ | .30       | 
|Diluted  pro forma                                                                                                                 |  | $    | .60       |      |  | $    | .41       |  |  | $ | .27       | 

30



---



##### 



Note 2  Acquisitions

On October 3, 2001, the Company purchased certain assets used in the
California business of FEL Corporation (FEL) for $400,000. The Company also
assumed five executory contracts pertaining to leases of real and personal
property used in this business and hired all eleven employees of this business.
The acquisition was recorded under the purchase method of accounting and, accordingly, the
results of operations since October 3, 2001 have been included in the
consolidated financial statements. The allocation of the purchase price to the
fair value of assets acquired resulted in $400,000 of fixed assets. Had the
acquisition
occurred at the beginning of fiscal year 2001, historical results of operations
of the Company would not have been materially different.

On February 1, 2002, the Company acquired, through its wholly-owned
subsidiary ST Production Systems, Inc. (STPSI), certain assets related to the
government contract business of FEL for approximately $1,850,000 in cash and
$198,000 of expenses related to the acquisition. The acquisition related
expenses consist of legal, accounting, and other professional services and
fees. The acquisition was recorded under the purchase method of accounting
and, accordingly, the results of operations of STPSI since February 1, 2002
have been included in the consolidated financial statements.

The Company has utilized the guidance of Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets, which were issued in June 2001. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and that goodwill, as well as any
intangible assets believed to have an indefinite useful life, shall not be
amortized for financial reporting purposes. The adoption of SFAS No. 142 on
October 1, 2001 had no impact on the financial statements as the Company had no
goodwill or intangible assets. In connection with the acquisition, $600,000 of
intangible assets were identified, related to acquired contracts, and were
determined to have estimated lives of eighteen to thirty-six months. The
Company has recognized no goodwill in connection with the acquisition.
Amortization expense was $267,000 for the year ended September 30, 2003 and is
expected to approximate $100,000 in 2004 and $33,000 in 2005.

The Company has made an allocation of the purchase price to the fair value
of assets and liabilities acquired, as follows:

|                                                |  |   |           |  
|----------------------------------------------- |  | - | --------- | -
|Assets:                                         |  |   |           |  
|Accounts receivable                             |  | $ | 614,000   |  
|Inventories and unbilled contract costs         |  |   | 538,000   |  
|Intangible assets                               |  |   | 600,000   |  
|Equipment                                       |  |   | 501,000   |  
|Other assets                                    |  |   | 120,000   |  
|Liabilities:                                    |  |   |           |  
|Accrued expenses                                |  |   | (325,000  | )
|                                                |  |   |           |  
|Purchase price and
acquisition-related expenses |  | $ | 2,048,000 |  
|                                                |  |   |           |  

31



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##### 



The following condensed proforma results of operations reflect the proforma
combination of the Company and the acquired FEL business as if the combination
occurred at the beginning of the periods presented, compared with the actual
results of operations for Sensytech for the twelve months ended September 30,
2002 are as follows:

|                           |  |                     |            |          |  |   |            | 
|-------------------------- |  | ------------------- | ---------- | -------- |  | - | ---------- | 
|                           |  | Twelve Months Ended
|                           |  | September 30, 2002 
|                           |  | Historical          |            | Proforma
|                           |  |                     |            |         
|Revenues                   |  | $                   | 32,290,000 |          |  | $ | 36,314,000 | 
|Income from operations     |  |                     | 3,653,000  |          |  |   | 3,635,000  | 
|Net Income                 |  |                     | 2,189,000  |          |  |   | 2,155,820  | 
|Basic earnings per share   |  |                     | .54        |          |  |   | .53        | 
|Diluted earnings per share |  |                     | .52        |          |  |   | .52        | 

For the purpose of preparing the proforma information, the twelve months
ended September 30, 2002 results include four months of FELs government
contract business for its fiscal year ended December 31, 2001. Proforma
adjustments included the amortization of intangible assets over an 18 to 36
month period, the reduction of interest income for cash used for the
acquisition, and depreciation for acquired equipment using a three year life.

The Company has incurred no material costs in the past three years related
to environmental issues. On February 1, 2002, the Company purchased the assets
and assumed certain government contracts of FEL in Farmingdale, New Jersey. It
also signed a two-year lease for a building at the former FEL facility in
Farmingdale. There is known chemical contamination in the soil at other parts
of the industrial park where the building is located as a result of the former
operations of FEL. This contamination must be remediated pursuant to New
Jersey law.

The Company entered into an agreement with the New Jersey Department of
Environmental Protection, or NJDEP, under which it agreed to make a payment of
$280,000, in addition to an environmental protection premium of $10,000, in
settlement of potential liability to NJDEP for contamination existing at the
site prior to February 1, 2002. In return, the NJDEP signed a covenant not to
sue the Company for any environmental claims at this site and the landlord
agreed to reduce future lease payments by $280,000. For this covenant to
remain valid, the Company must cease operations at this site by July 31, 2004.
The Company plans to cease operations at the site before that date. The
landlord at this site has agreed to hold the Company harmless from any claims
based on prior environmental contamination at the site. The $280,000 payment is
accounted for as prepaid rent and is being ratably amortized
through September 30, 2003. Neither the agreement with the landlord nor the
settlement with the NJDEP shields the Company from potential claims by the
United States Environmental Protection Agency. To the Companys knowledge, no
such claim has been asserted or threatened.

Note 3  Unbilled Contract Costs, Net

The status of accumulated costs incurred plus estimated earnings, net of
contractual payments, and government progress billings for the twelve months
ended September 30 are as follows.

|                                                                           |  |      |              |      |  |   |              |  
|-------------------------------------------------------------------------- |  | ---- | ------------ | ---- |  | - | ------------ | -
|                                                                           |  | 2003 |              | 2002
|                                                                           |  |      |              |     
|Accumulated costs incurred and
estimated earnings on uncompleted
contracts |  | $    | 152,546,000  |      |  | $ | 116,347,000  |  
|Progress billings and advances on
uncompleted contracts                    |  |      | (145,232,000 | )    |  |   | (109,869,000 | )
|                                                                           |  |      |              |      |  |   |              |  
|Total                                                                      |  | $    | 7,314,000    |      |  | $ | 6,478,000    |  
|                                                                           |  |      |              |      |  |   |              |  

32



---



##### 



The amounts below are included in the balance sheet at September 30.
Below is the detail of the unbilled contract costs as of September 30:

|                                                                          |  |      |            |      |  |   |            |  
|------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                          |  | 2003 |            | 2002
|                                                                          |  |      |            |     
|Unbilled contract costs                                                   |  | $    | 8,486,000  |      |  | $ | 8,820,000  |  
|Billings in excess of costs and estimated
earnings on completed contracts |  |      | (1,172,000 | )    |  |   | (2,342,000 | )
|                                                                          |  |      |            |      |  |   |            |  
|Total                                                                     |  | $    | 7,314,000  |      |  | $ | 6,478,000  |  
|                                                                          |  |      |            |      |  |   |            |  

Unbilled costs and accrued profit on contracts in progress comprise
principally amounts of revenue recognized on contracts for which billings had
not been presented to the customer because the amounts were not billable at the
balance sheet date. It is anticipated such unbilled amounts receivable at
September 30, 2003 will be billed over the next 270 days as products and/or
services are delivered.

Receivables under certain Government contracts are based on provisional
rates that permit recovery of overhead not exceeding certain limits. These
overhead rates are subject to audit on an annual basis by the Defense Contract
Audit Agency (DCAA). When final determination and approval of the allowable
rates have been made, receivables may be adjusted accordingly. In managements
opinion, any adjustments will not be material. The DCAA has completed their
audit of the rates through the fiscal year ended September 30, 1999.

Note 4  Property and Equipment

Property and equipment are summarized as follows at September 30:

|                                               |          |   |            |           |      |   |            |           | 
|---------------------------------------------- | -------- | - | ---------- | --------- | ---- | - | ---------- | --------- | 
|                                               |          |   | 2003       |           | 2002
|                                               |          |   |            |           |     
|Furniture and fixtures                         |          | $ | 472,000    |           |      | $ | 290,000    |          
|Machinery and equipment                        |          |   | 6,273,000  |           |      |   | 5,115,000  |          
|Leasehold improvements                         |          |   | 1,728,000  |           |      |   | 1,286,000  |          
|Equipment capitalized under capital
leases     |          |   |           |           |      |   | 143,000    |          
|                                               |          |   |            |           |      |   |            |          
|                                               | Subtotal |   |            | 8,473,000 |      |   |            | 6,834,000 | 
|Less accumulated depreciation and
amortization |          |   | (5,123,000 | )         |      |   | (4,226,000 | )        
|                                               |          |   |            |           |      |   |            |          
|Total                                          |          | $ | 3,350,000  |           |      | $ | 2,608,000  |          
|                                               |          |   |            |           |      |   |            |          

Depreciation and amortization expense was approximately $1,136,000,
$747,000 and $488,000 for the years ended September 30, 2003, 2002 and 2001,
respectively.

Note 5  Note Payable  Line of Credit

The Company entered into a line of credit and related note payable with
Bank of America in February 2001. Effective February 2002, the Company renewed
the line of credit and the amount available under the line of credit was
increased from $5,000,000 to $10,000,000. Effective February 28, 2003, the
Company renewed its line of credit and increased the availability to
$15,000,000, which expires on February 28, 2004. However, the total borrowing
base generally cannot exceed the sum of 90% of qualified government accounts
receivable and 80% of qualified non-government accounts receivable. Total
letters of credit at September 30, 2003 were $1,180,000. The line of credit is
available to finance the performance of government contracts, to support the
issuance of stand-by letters of credit, and for short-term working capital
purposes. A standby letter of credit is issued to certain foreign customers in
lieu of posting a performance bond. Letters of credit are also used to cover
certain contract prepayments

33



---



##### 



received from foreign customers. At September 30, 2003,
there were no borrowings under the line of credit. The borrowing base at
September 30, 2003 was $9,663,000.

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

Note 6  Employee Benefit Plans

At September 30, 2003, the Companys sole qualified deferred compensation
plan (the Plan) consisted of two components. The Plan is comprised of a
401(k) plan and a profit sharing plan. In June 1998, the Plan was amended to
allow for self-direction of investment of profit sharing contributions.

To participate in the Plan, eligible employees must have attained 21 years
of age. Eligible employees may elect to participate in the Companys 401(k)
plan on January 1 and July 1. For the years ended September 30, 2003, 2002 and
2001, the Company matched 50% of the first six percent of employee
contributions, which match amounted to $312,000, $234,000 and $131,000,
respectively.

The total number of Company shares allocated to participants under the
profit sharing plan at September 30, 2003, 2002 and 2001 were 374,132, 367,293
and 387,801, respectively.

Note 7  Lease Commitments

The principal facilities of the Company are generally leased under
non-cancelable operating leases for periods of five to fifteen years. The
Company also leases various equipment under non-cancelable operating leases.

Rent expense for the years ended September 30, 2003, 2002 and 2001 was
$1,339,000, $1,134,000 and $879,000, respectively. At September 30, 2003,
minimum rental payments under operating leases for facilities and equipment are
as follows:

|          |  |   |            | 
|--------- |  | - | ---------- | 
|2004      |  | $ | 1,151,000  | 
|2005      |  |   | 1,037,000  | 
|2006      |  |   | 1,018,000  | 
|2007      |  |   | 1,031,000  | 
|2008      |  |   | 1,039,000  | 
|Remainder |  |   | 6,315,000  | 
|          |  |   |            | 
|Total     |  | $ | 11,591,000 | 
|          |  |   |            | 

The Company sub-leased to a third party a portion of its facility at its
principal location in Virginia in 2002 and 2001. Sub-lease income for the
years ended September 30, 2003, 2002 and 2001 was $17,000, $78,000 and
$112,000, respectively. There are no minimum rentals to be received under the
sub-lease agreement as of September 30, 2003.

Note 8  Stock Options

On May 30, 2002, the shareholders approved a proposal to adopt the 2002
Stock Incentive Plan (the 2002 Plan), which provides for the granting of
options, restricted stock and/or performance awards to key employees and
outside members of the board of directors. Upon approval of the 2002 Plan,
authority to grant options under the Long-Term Incentive Plan expired. As of
September 30, 2003, there were 67,667 exercisable options under the 2002 Stock
Incentive Plan.

The Long-Term Incentive Plan and the Non-Employee Director Stock Option
Plan (collectively, the 1995 Plans) have 285,100 exercisable options at
September 30, 2003. The Company also has a 1991 Stock Option (the 1991
Plan) and a 1996

34



---



##### 



Stock Option Plan (the 1996 Plan). Both the 1991 Plan and
the 1996 Plan had no exercisable options outstanding at September 30, 2003.

Options under all of the aforementioned Plans generally vest over a one to
five year period and expire after 10 years.

Stock option activity is summarized as follows:

|                              |           |  |         |         |                  |   |      |      |                  |  |         |         |   |   |      |      | 
|----------------------------- | --------- |  | ------- | ------- | ---------------- | - | ---- | ---- | ---------------- |  | ------- | ------- | - | - | ---- | ---- | 
|                              |           |  | 1995    |         | Weighted Average |   | 2002 |      | Weighted Average
|                              |           |  | Plans   |         | Exercise Price   |   | Plan |      | Exercise Plan   
|                              |           |  |         |         |                  |   |      |      |                 
|Balance at September 30, 2000 |           |  | 216,000 |         |                  | $ | 3.15 |      |                  |  |         |         |   |   |      |     
|                              | Exercised |  |         | (13,700 | )                |   |      | 2.91 |                  |  |         |         |   |   |      |      | 
|                              | Granted   |  |         | 223,000 |                  |   |      | 4.18 |                  |  |         |         |   |   |      |      | 
|                              | Expired   |  |         |        |                  |   |      |     |                  |  |         |         |   |   |      |      | 
|                              | Forfeited |  |         | (8,400  | )                |   |      | 4.03 |                  |  |         |         |   |   |      |      | 
|                              |           |  |         |         |                  |   |      |      |                  |  |         |         |   |   |      |     
|Balance at September 30, 2001 |           |  | 416,900 |         |                  | $ | 3.74 |      |                  |  |         |         |   |   |      |     
|                              | Exercised |  |         | (84,500 | )                |   |      | 3.51 |                  |  |         |         |   |   |      |      | 
|                              | Granted   |  |         | 113,000 |                  |   |      | 7.67 |                  |  |         |         |   |   |      |      | 
|                              | Expired   |  |         |        |                  |   |      |     |                  |  |         |         |   |   |      |      | 
|                              | Forfeited |  |         | (18,900 | )                |   |      | 3.95 |                  |  |         |         |   |   |      |      | 
|                              |           |  |         |         |                  |   |      |      |                  |  |         |         |   |   |      |     
|Balance at September 30, 2002 |           |  | 426,500 |         |                  | $ | 4.81 |      |                  |  |         |         |   |   |      |     
|                              | Exercised |  |         | (51,400 | )                |   |      | 3.82 |                  |  |         | (800    | ) |   |      | 9.02 | 
|                              | Granted   |  |         |        |                  |   |      |     |                  |  |         | 119,000 |   |   |      | 8.39 | 
|                              | Expired   |  |         |        |                  |   |      |     |                  |  |         |        |   |   |      |     | 
|                              | Forfeited |  |         | (6,800  | )                |   |      | 4.92 |                  |  |         | (2,400  | ) |   |      | 9.17 | 
|                              |           |  |         |         |                  |   |      |      |                  |  |         |         |   |   |      |     
|Balance at September 30, 2003 |           |  | 368,300 |         |                  | $ | 4.94 |      |                  |  | 115,800 |         |   | $ | 8.37 |     
|                              |           |  |         |         |                  |   |      |      |                  |  |         |         |   |   |      |     

|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |      | 
|----------------------------- | --------- |  | ------ | ------- | ---------------- | - | ---- | ---- | ---------------- |  | ------ | ------- | - | - | ---- | ---- | 
|                              |           |  | 1991   |         | Weighted Average |   | 1996 |      | Weighted Average
|                              |           |  | Plan   |         | Exercise Price   |   | Plan |      | Exercise Price  
|                              |           |  |        |         |                  |   |      |      |                 
|Balance at September 30, 2000 |           |  | 25,800 |         |                  | $ | 0.75 |      |                  |  | 25,800 |         |   | $ | 3.37 |     
|                              | Exercised |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Granted   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Expired   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Forfeited |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     
|Balance at September 30, 2001 |           |  | 25,800 |         |                  | $ | 0.75 |      |                  |  | 25,800 |         |   | $ | 3.37 |     
|                              | Exercised |  |        | (25,800 | )                |   | $    | 0.75 |                  |  |        |        |   |   |      |     | 
|                              | Granted   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Expired   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Forfeited |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     
|Balance at September 30, 2002 |           |  | -0-    |         |                  |   | -0-  |      |                  |  | 25,800 |         |   | $ | 3.37 |     
|                              | Exercised |  |        | -0-     |                  |   |      | -0-  |                  |  |        | (25,800 | ) |   |      | 3.37 | 
|                              | Granted   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Expired   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Forfeited |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     
|Balance at September 30, 2003 |           |  | -0-    |         |                  | $ | -0-  |      |                  |  | -0-    |         |   | $ | -0-  |     
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     

Total shares of common stock reserved pursuant to the aforementioned plans
and the non-qualified options were 487,100 at September 30, 2003.

The weighted average grant date fair value of options granted for the 1995
Plans was $7.67 and $4.18 during fiscal year 2002 and 2001, respectively.
Total shares exercisable for the 1995 Plans at September 30, 2003, 2002 and 2001 were 285,100,
240,300 and 83,900, with a weighted average exercise price of $3.90 and $3.17,
respectively.

During fiscal year 2001, 40,000 options were exercised under a
non-qualified stock option plan. At September 30, 2003 and 2002, 3,000 options
were outstanding and exercisable under this plan. The weighted average exercise
price was $2.25 per share.

35



---



##### 



The Black-Scholes model was used to estimate the fair value of the
options. The expected life is equal to the term of the options. The following
assumptions were used in the pricing calculation for fiscal years 2003, 2002
and 2001:

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2003 |      | 2002 |  | 2001
|                        |  |      |      |      |  |     
|Risk free interest rate |  |      | 1.2  | %    |  |      | 2.5  | % |  |  | 3.5  | %
|Expected volatility     |  |      | 51.1 | %    |  |      | 68.8 | % |  |  | 65.4 | %

The following summarizes information about stock options outstanding at
September 30, 2003:

|                   |  |             |         |                  |  |                  |      |           |  |           |  | 
|------------------ |  | ----------- | ------- | ---------------- |  | ---------------- | ---- | --------- |  | --------- |  | 
|                   |  | 2003        |         |                  |  |                  |      |           |  |          
|                   |  | Number      |         | Range of         |  | Weighted Average
|                   |  | Outstanding |         | Exercises Prices |  | Remaining Life  
|                   |  |             |         |                  |  |                 
|Non-Qualified Plan |  |             | 3,000   |                  |  | $                | 2.25 |           |  | 3.2 years
|1995 Option Plan   |  |             | 100,100 |                  |  | $2.25 to $3.00   |      | 4.8 years
|1995 Option Plan   |  |             | 152,600 |                  |  | $3.63 to $5.00   |      | 7.6 years
|1995 Option Plan   |  |             | 115,600 |                  |  | $5.25 to $10.25  |      | 8.3 years
|2002 Option Plan   |  |             | 115,800 |                  |  | $7.51 to $11.37  |      | 9.0 years
|                   |  |             |         |                  |  |                  |      |          
|                   |  |             | 487,100 |                  |  | $2.25 to $11.37  |      | 7.5 years
|                   |  |             |         |                  |  |                  |      |          

Note 9  Stock Purchase Plan and Unearned Compensation

The Company adopted an incentive compensation plan that provides for a
portion of the annual award to be paid in the form of stock of the Company
subject to vesting requirements. The Company had a portion of the 2001 annual award paid in the
form of shares of stock. In 2002, upon the completion of the vesting
period of one year, 43,876 shares, net of forfeitures of 2,416 shares, were
issued. Unearned stock-based compensation consists of the remaining
unamortized portion of such stock award. The Company amortized $50,000 in 2001.
Pursuant to this plan, in November 2000, the Company made a stock grant of
10,000 shares to its former president as payment of the bonus earned by him
prior to his leaving the Company. At the date of issue the market price of the
stock was $3.625 per share. No amounts under this plan have been paid in shares since the 2001 award.

Note 10  Treasury Stock

During 2000, the Company began acquiring shares of its common stock in
connection with a stock repurchase program announced in May, 2000. That program
authorizes the Company to purchase up to 500,000 common shares from time to
time on the open market. The Company purchased 1,000 shares, -0- shares and
53,245 shares during the years ended September 30, 2003, 2002 and 2001,
respectively, at an aggregate cost of $534,000. The purpose of the stock
repurchase is to help the Company achieve its goal of enhancing stockholder
value.

Note 11  Income Taxes

The income tax provision for the years ended September 30 consisted of the
following:

|          |         |   |           |           |      |   |           |           |  |   |         |         | 
|--------- | ------- | - | --------- | --------- | ---- | - | --------- | --------- |  | - | ------- | ------- | 
|          |         |   | 2003      |           | 2002 |   | 2001     
|          |         |   |           |           |      |   |          
|CURRENT:  |         |   |           |           |      |   |           |           |  |   |         |        
|          | Federal |   | $         | 2,540,000 |      |   | $         | 1,286,000 |  |   | $       | 455,000 | 
|          | State   |   |           | 541,000   |      |   |           | 208,000   |  |   |         | 84,000  | 
|DEFERRED: |         |   |           |           |      |   |           |           |  |   |         |        
|          | Federal |   |           | (254,000) |      |   |           | 17,000    |  |   |         | 202,000 | 
|          | State   |   |           | (92,000)  |      |   |           | 9,000     |  |   |         | 38,000  | 
|          |         |   |           |           |      |   |           |           |  |   |         |        
|          |         | $ | 2,735,000 |           |      | $ | 1,520,000 |           |  | $ | 779,000 |        
|          |         |   |           |           |      |   |           |           |  |   |         |        

36



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The Companys deferred tax assets at September 30 are as follows:

|        |  |      |           |      |  |   |         | 
|------- |  | ---- | --------- | ---- |  | - | ------- | 
|        |  | 2003 |           | 2002
|        |  |      |           |     
|Federal |  | $    | 861,000   |      |  | $ | 607,000 | 
|State   |  |      | 156,000   |      |  |   | 64,000  | 
|        |  |      |           |      |  |   |         | 
|Total   |  | $    | 1,017,000 |      |  | $ | 671,000 | 
|        |  |      |           |      |  |   |         | 

Deferred tax assets consist of the following at September 30:

|                                     |  |      |           |      |  |   |         |  
|------------------------------------ |  | ---- | --------- | ---- |  | - | ------- | -
|                                     |  | 2003 |           | 2002
|                                     |  |      |           |     
|Inventory                            |  | $    | 172,000   |      |  | $ |        |  
|Accrued vacation                     |  |      | 171,000   |      |  |   | 144,000 |  
|Stock-based compensation             |  |      | 84,000    |      |  |   |        |  
|Net operating losses and tax
credits |  |      | 236,000   |      |  |   | 265,000 |  
|Uncollectible accounts               |  |      | 76,000    |      |  |   | 76,000  |  
|Warranty reserve                     |  |      | 152,000   |      |  |   | 105,000 |  
|Depreciation                         |  |      | (101,000  | )    |  |   | (39,000 | )
|Amortization                         |  |      | 90,000    |      |  |   | 63,000  |  
|Other, net                           |  |      | 137,000   |      |  |   | 57,000  |  
|                                     |  |      |           |      |  |   |         |  
|                                     |  | $    | 1,017,000 |      |  | $ | 671,000 |  
|                                     |  |      |           |      |  |   |         |  

37



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A reconciliation of the Companys effective tax rate to the federal
statutory rate for the years ended September 30 was as follows:

|                                               |  |  |      |   |      |  |      |   |  |  |      |   | 
|---------------------------------------------- |  |  | ---- | - | ---- |  | ---- | - |  |  | ---- | - | 
|                                               |  |  | 2003 |   | 2002 |  | 2001
|                                               |  |  |      |   |      |  |     
|Federal statutory rate                         |  |  | 34.0 | % |      |  | 34.0 | % |  |  | 34.0 | %
|State income taxes, net of federal tax benefit |  |  | 4.2  |   |      |  | 4.0  |   |  |  | 4.0  |  
|Other, net                                     |  |  | 2.1  |   |      |  | 3.0  |   |  |  | 0.9  |  
|                                               |  |  |      |   |      |  |      |   |  |  |      |  
|                                               |  |  | 40.3 | % |      |  | 41.0 | % |  |  | 38.9 | %
|                                               |  |  |      |   |      |  |      |   |  |  |      |  

The net operating loss carryforwards (NOLs) expire principally in 2011,
2012, and 2013. The NOLs were acquired in the acquisition of Daedalus
Enterprises, Inc. (the Acquisition) in 1998 and are subject to limitations as
to their utilization under the Internal Revenue Code. As a result of
uncertainties as to the Companys ability to generate sufficient taxable income
in future periods, the Company provided a valuation allowance on the opening
balance sheet for a portion of the NOLs acquired in the Acquisition. To the
extent that these NOLs become realized, or that the valuation allowance on
these NOLs is reduced, the corresponding tax benefits are first used to reduce
goodwill to zero and thereafter will serve to reduce any provision for income
taxes.

Note 12  Product Warranty

The Company records estimated warranty costs on the accrual basis of
accounting. These reserves are based on the expected cost of providing
materials and service within the agreed upon period. Activity in the warranty
accrual for the years ended September 30 is as follows:

|                                               |  |      |          |      |  |   |         |  
|---------------------------------------------- |  | ---- | -------- | ---- |  | - | ------- | -
|                                               |  | 2003 |          | 2002
|                                               |  |      |          |     
|Balance  beginning of year                    |  | $    | 276,000  |      |  | $ | 12,000  |  
|Accruals for warranties issued during the year |  |      | 287,000  |      |  |   | 296,000 |  
|Settlements during the year                    |  |      | (150,000 | )    |  |   | (32,000 | )
|                                               |  |      |          |      |  |   |         |  
|Balance  end of year                          |  | $    | 413,000  |      |  | $ | 276,000 |  
|                                               |  |      |          |      |  |   |         |  

Note 13  Concentrations of Credit and Other Business Risk

As of September 30, 2003 and 2002, the Company had funds on deposit in
excess of the federally insured amount with a bank. Approximately 80.7% of the
Companys revenues are generated from contracts with U.S. Government agencies
or U.S. Government contractors. During the years ended September 30, 2003, 2002
and 2001, the Company recorded revenues from certain significant contracts.
For fiscal year 2003, those contracts included the AN/SLQ-25A Surface Ship
Torpedo Defense System, the AN/SLQ-4A Radio Terminal Set, the AN/DPT 2-B Based
Payload for Lead In Fighter Hawk Radar Emulator, and the Hyperspectral Imaging
System. Revenues from these contracts amounted to 21.8%, 7.7%, 3.0% and 3.0%
of fiscal year 2003 total revenue. For fiscal year 2002, those contracts
included the AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A
Radio Terminal Set, the AN/BLQ-10 (V)1 and (V)2, and the Hyperspectral Imaging
Systems. Revenues from these contracts amounted to 18.8%, 6.8%, 5.7% and 5.1%
of fiscal year 2002 total revenue. For fiscal year 2001, those contracts
include the U.S. Navy Integrated Electronic Warfare Systems (AIEWS) subcontract
from Lockheed Martin Corporation, the U.S. Navy AN/BLQ-10 (V)1 and (V)2
contract, and the U.S. Navy Bobcat Systems contract. Revenues from these
contracts amounted to 38.0%, 13.0% and 5.0% of fiscal year 2001 total revenue.

The Company is currently recording the AN/SLQ-25A Surface Torpedo Defense
System contract at zero gross margin. Revenue from this contract amounted to
21.8% in 2003 and 18.8% in 2002 of the Companys revenue. This contract was
acquired as part of the acquisition of certain assets of FEL Corporation and
was performing at a potential loss at the date of acquisition. The Company has
favorably performed under the contract since the date of acquisition and
management has worked with the customer to reduce any potential loss through
change orders approved to date. While management currently estimates that the
contract will be profitable, the profitability is dependent upon change orders,
expected by management, but that have not

38



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yet been finalized. Change orders
are under continuous negotiation with the customer. When these change orders
are received, the Company will reassess the contract based on current
estimates, and such reassessments are currently expected to result in
increases to the margins recorded on the contract. Such increases would
impact operations in the period such change orders are finalized as well as
future periods. If such change orders are not finalized under currently
expected terms, or if the Company does not perform as expected under the
contract, contract losses may be required to be accrued. Management expects
the change orders to be received in 2004 and the first half of 2005.

Companies which are engaged in the supply of defense-related equipment to
the Government are subject to certain business risks, some of which are
peculiar to that industry. Among these are: the cost of obtaining trained and
skilled employees; the uncertainty and instability of prices for raw materials
and supplies; the problems associated with advanced designs, which may result
in unforeseen technological difficulties and cost overruns; and the intense
competition and the constant necessity for improvement in facilities and
personnel training. Sales to the Government may be affected by changes in
procurement policies, budget considerations, changing concepts of national
defense, social and economic developments abroad and other factors.

Note 14  New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No.146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No.146 nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs of Exiting an Activity,
under which a liability for an exit cost was recognized at the date of an
entitys commitment to an exit plan. SFAS No.146 requires that a liability for
a cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred. The provisions of the statement are effective
for exit or disposal activities that are initiated after December 31, 2002.

In
November 2002, the FASB issued Interpretation No. 45, (FIN
45)
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on disclosures
to be made by a guarantor in its annual financial statements about its
obligations under certain guarantees that it has issued It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantors recognized liability over the term of
the related guarantee. This interpretation also incorporates, without change,
the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees
of Indebtedness of Others, which is being superseded. The initial recognition
and initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 and
the disclosure requirements in this interpretation are effective for financial
statements of annual periods ending after December 15, 2002. FIN 45 does not
have any impact on the consolidated financial statements or disclosures of the
Company as it is not a guarantor.

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

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

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

39



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##### 



Note 15  Segments Information

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



| |  |  | Defense Systems (DS) Group designs, develops, manufactures, and
supports products which intercept, analyze, classify, identify, locate
and track microwave signals from radars and weapons, which may
originate from potentially hostile sources. It provides communication
data links and remote targeting systems and provides equipment and
systems, that are used to carry out defensive measures against hostile
signals or their sources to protect high value assets. The groups
systems are used on military platforms, such as ships, submarines,
patrol aircraft, as well as at ground installations
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Communication (Comms) Group designs, develops, manufactures, and
supports products which intercept signals and analyze communications in
a variety of transmission media, and then identify and locate the
sources of these signals and communication. These systems are
generally used by operators on board aircraft, ships and ground
installations to intercept various kinds of transmissions over
established communications networks.                                                                                                                                                                   
|
| |  |  | Imaging Group designs, develops, manufactures and supports products
that are installed on special purpose aircraft and land vehicles and
use multispectral, infrared, and light imaging systems to perform
remote surveys. Applications of this technology include environmental
pollution, facility inspection, utility monitoring, surface mineral
exploration and other special purpose inspections where on-site
inspections are not possible or desirable.                                                                                                                                                

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

The
Communications Group manufactures in its Newington, VA
facility. The Defense Systems Group manufactures in its Newington,
VA,
Camarillo, CA, Fairchance, PA and Smithfield, NJ facilities. The Imaging
Group products are manufactured in the Ann Arbor, MI, facility.

The Company does not have a significant amount of inter-segment revenue
and evaluates segment performance based upon revenue and income from operations
by group. The combined segments income from operations equals the income from
operations as reported in the Consolidated Income Statements of the Company.
The Company does not allocate interest, other income and expenses or income
taxes to the three segments and does not produce separate balance sheet
information for each segment. The revenue and income from operations by segment
for the years ended September 30 are as follows:

|                               |         |  |      |            |      |  |      |            |  |  |   |            | 
|------------------------------ | ------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                               |         |  | 2003 |            | 2002 |  | 2001
|                               |         |  |      |            |      |  |     
|Revenue:                       |         |  |      |            |      |  |      |            |  |  |   |           
|                               | DS      |  | $    | 30,606,000 |      |  | $    | 18,057,000 |  |  | $ | 11,342,000 | 
|                               | Comms   |  |      | 18,239,000 |      |  |      | 10,479,000 |  |  |   | 3,640,000  | 
|                               | Imaging |  |      | 4,338,000  |      |  |      | 3,754,000  |  |  |   | 1,409,000  | 
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|                               | Total   |  | $    | 53,183,000 |      |  | $    | 32,290,000 |  |  | $ | 16,391,000 | 
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|Income (Loss) From
Operations: |         |  |      |            |      |  |      |            |  |  |   |           
|                               | DS      |  | $    | 930,000    |      |  | $    | 490,000    |  |  | $ | 949,000    | 
|                               | Comms   |  |      | 5,166,000  |      |  |      | 2,454,000  |  |  |   | 611,000    | 
|                               | Imaging |  |      | 597,000    |      |  |      | 709,000    |  |  |   | 186,000    | 
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|                               | Total   |  | $    | 6,693,000  |      |  | $    | 3,653,000  |  |  | $ | 1,746,000  | 
|                               |         |  |      |            |      |  |      |            |  |  |   |           

40



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Approximately, 100% of long-lived assets are located in the United States.

Note 16  Fair Value of Financial Instruments

Based on existing rate, economic conditions and short maturities, the
carrying amounts of all the financial instruments at September 30, 2003 and
2002 are reasonable estimates of their fair values. The Companys financial
instruments include cash
and cash equivalents, accounts receivable, and accounts payable.

41



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##### 



Note 17  Quarterly Financial Data (Unaudited)

|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |        |  
|---------------------------------------- | ----------------------------------- | ------- | ------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | - | ------ | ------ | - | - | ------ | ------ | -
|                                         |                                     |         | First                                 |         | Second |         | Third  |         | Fourth
|2003                                     |                                     | Quarter |                                       | Quarter |        | Quarter |        | Quarter
|                                         |                                     |         |                                       |         |        |         |        |        
|                                         |                                     |         | (in thousands, except per share data)
|Consolidated Statement of Earnings Data: |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Contract revenues                        |                                     | $       | 11,723                                |         |        | $       | 12,853 |         |        | $ | 13,100 |        |   | $ | 15,507 |       
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Costs and expenses                       |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|                                         | Cost of revenues                    |         |                                       | 9,251   |        |         |        | 9,488   |        |   |        | 9,704  |   |   |        | 12,171 |  
|                                         | General and administrative expenses |         |                                       | 1,063   |        |         |        | 1,559   |        |   |        | 1,645  |   |   |        | 1,609  |  
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|                                         | Total costs and expenses            |         |                                       | 10,314  |        |         |        | 11,047  |        |   |        | 11,349 |   |   |        | 13,780 |  
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Income from operations                   |                                     |         | 1,409                                 |         |        |         | 1,806  |         |        |   | 1,751  |        |   |   | 1,727  |       
|Other income (expenses)                  |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|                                         | Interest income                     |         |                                       | 5       |        |         |        | 38      |        |   |        | 36     |   |   |        | 43     |  
|                                         | Interest expense                    |         |                                       | (45     | )      |         |        | (3      | )      |   |        | (1     | ) |   |        | (1     | )
|                                         | Other income                        |         |                                       | 4       |        |         |        | 3       |        |   |        | 5      |   |   |        | 20     |  
|                                         | Other expense                       |         |                                       | (10     | )      |         |        |        |        |   |        |       |   |   |        |       |  
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Income before income taxes               |                                     |         | 1,363                                 |         |        |         | 1,844  |         |        |   | 1,791  |        |   |   | 1,789  |       
|Income tax provision                     |                                     |         | (559                                  | )       |        |         | (757   | )       |        |   | (733   | )      |   |   | (686   | )     
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Net income                               |                                     | $       | 804                                   |         |        | $       | 1,087  |         |        | $ | 1,058  |        |   | $ | 1,103  |       
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|Earnings per share                       |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|                                         | Basic                               |         | $                                     | 0.16    |        |         | $      | 0.17    |        |   | $      | 0.16   |   |   | $      | 0.17   |  
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       
|                                         | Diluted                             |         | $                                     | 0.16    |        |         | $      | 0.16    |        |   | $      | 0.16   |   |   | $      | 0.17   |  
|                                         |                                     |         |                                       |         |        |         |        |         |        |   |        |        |   |   |        |       

42



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##### 



|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |        |  
|---------------------------------------- | ----------------------------------- | ------- | ------------------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | - | ----- | ----- | - | - | ------ | ------ | -
|                                         |                                     |         | First                                 |         | Second |         | Third |         | Fourth
|2002                                     |                                     | Quarter |                                       | Quarter |        | Quarter |       | Quarter
|                                         |                                     |         |                                       |         |        |         |       |        
|                                         |                                     |         | (in thousands, except per share data)
|Consolidated Statement of Earnings Data: |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Contract revenues                        |                                     | $       | 4,409                                 |         |        | $       | 7,069 |         |        | $ | 9,031 |       |   | $ | 11,781 |       
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Costs and expenses                       |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|                                         | Cost of revenues                    |         |                                       | 2,993   |        |         |       | 5,176   |        |   |       | 7,165 |   |   |        | 9,521  |  
|                                         | General and administrative expenses |         |                                       | 772     |        |         |       | 1,062   |        |   |       | 724   |   |   |        | 1,224  |  
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|                                         | Total costs and expenses            |         |                                       | 3,765   |        |         |       | 6,238   |        |   |       | 7,889 |   |   |        | 10,745 |  
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Income from operations                   |                                     |         | 644                                   |         |        |         | 831   |         |        |   | 1,142 |       |   |   | 1,036  |       
|Other income (expenses)                  |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|                                         | Interest income                     |         |                                       | 20      |        |         |       | 11      |        |   |       | 2     |   |   |        | 3      |  
|                                         | Interest expense                    |         |                                       | (2      | )      |         |       |        |        |   |       | (7    | ) |   |        | (31    | )
|                                         | Other income                        |         |                                       | 37      |        |         |       | 30      |        |   |       | 10    |   |   |        | (4     | )
|                                         | Other expense                       |         |                                       | (11     | )      |         |       |        |        |   |       |      |   |   |        | (2     | )
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Income before income taxes               |                                     |         | 688                                   |         |        |         | 872   |         |        |   | 1,147 |       |   |   | 1,002  |       
|Income tax provision                     |                                     |         | (275                                  | )       |        |         | (358  | )       |        |   | (477  | )     |   |   | (410   | )     
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Net income                               |                                     | $       | 413                                   |         |        | $       | 514   |         |        | $ | 670   |       |   | $ | 592    |       
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|Earnings per share                       |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|                                         | Basic                               |         | $                                     | 0.10    |        |         | $     | 0.13    |        |   | $     | 0.16  |   |   | $      | 0.14   |  
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       
|                                         | Diluted                             |         | $                                     | 0.10    |        |         | $     | 0.12    |        |   | $     | 0.16  |   |   | $      | 0.14   |  
|                                         |                                     |         |                                       |         |        |         |       |         |        |   |       |       |   |   |        |       

43



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##### 



Note 18  Cost Associated with Exit Activity

On July 15, 2003, the Company announced its intention to close the
facility in Farmingdale, New Jersey and move these operations to Uniontown,
Pennsylvania. In September 2003, the Company signed a lease for a 60,000
square foot facility for its Uniontown, Pennsylvania operations. The term of
the lease is for ten years with two five year options. The Company anticipates
this move to be completed by February 2004. Employees not transferring from
the New Jersey location will receive severance pay and/or retention bonuses,
providing they leave the Company in accordance with the Companys transition
plan. The cost associated with the severance and retention plan is estimated
to be approximately $269,000. The severance cost expensed for the year ended
September 30, 2003 is $123,000. Other exit costs associated with the
transition are estimated to be $893,000. Other costs consist of
principally training, relocation and moving costs. Other exit costs in the amount of
$139,000 were expensed for the year ended September 30, 2003. The cost of the
severance and retention plan and the other exit costs are reported in the cost
of revenues and general and administrative expense line items of the
Consolidated Statement of Income.

Note 19  Related Party Transactions

The Company has entered into an agreement with Rockwell Venture Capital, Inc, a
privately owned company controlled by S. Kent Rockwell, to rent an aircraft
used for Company business. The Company believes that the terms of the rental
agreement are at least as favorable as those it could obtain from an unrelated
third party. For the year ended September 30, 2003, the Company recorded
expenses of $169,000 for the use of the aircraft of which $51,000 was unpaid
as of the end of the year.

44



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##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in the Companys independent public accountants
or disagreements with such accountants on accounting principles or practices or
financial statement disclosures.

ITEM 9A. CONTROLS AND PROCEDURES



| | (a) |  | Our management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered
by this Annual Report on Form 10-K. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | During the last quarter, there were no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation of these controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors of the Company, the Audit Committee
Financial Expert and the Companys code of ethics is incorporated by reference
from the registrants definitive proxy statement for its annual meeting of
stockholders to be filed not later than 120 days after September 30, 2003, with
the Securities and Exchange Commission pursuant to Regulation 14A (the Proxy
Statement). Certain information relating to Executive Officers of the Company
appears on page 11 of this Form 10-K Annual Report.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item is incorporated by reference from
the Proxy Statement.

45



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##### 



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information with respect to this item is incorporated by reference from
the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item is incorporated by reference from
the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect to Principal Accounting Fees and Services is
contained under the caption Principal Accounting Fees and Services in the
Companys Proxy Statement and such information is incorporated herein by
reference.

PART IV

ITEM 15. EXHIBITS, FINANCIALS STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements Schedules
All of the financial statements filed as part of the Annual report on Form 10-K
are included in Item 8.

|         |  |                                                                                                                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                    
|21*      |  | List of Subsidiaries                                                                                                                                                                               
|         |  |                                                                                                                                                                                                    
|23*      |  | Consent of Independent Accountants                                                                                                                                                                 
|         |  |                                                                                                                                                                                                    
|31.1*    |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                
|         |  |                                                                                                                                                                                                    
|31.2*    |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                
|         |  |                                                                                                                                                                                                    
|32.1*    |  | Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished but not
filed as an exhibit to this report of Form 10-K.



---

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

Reports on Form 8-K
A Form 8K was filed on August 14, 2003 providing information under Item 12.

46



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##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

| |  |                                                               
| |  | --------------------------------------------------------------
| |  | SENSYTECH, INC.                                               
| |  | (Registrant)                                                  
| |  |                                                               
| |  | By: /s/ S. Kent Rockwell                                      
| |  |                                                               
| |  | S. Kent Rockwell                                              
| |  | Chairman of the Board of Directors and Chief Executive Officer

Date: December 22, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                        |  |                                           
|----------------------- |  | ------------------------------------------
|Signature               |  | Title                                     
|                        |  |                                           
|/s/ S. Kent Rockwell    |  |                                           
|                        |  | Director and Chief Executive Officer      
|S. Kent Rockwell        |  | (Principal Executive Officer)             
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ Donald F. Fultz     |  |                                           
|                        |  | Vice President and Chief Financial Officer
|Donald F. Fultz         |  | (Principal Financial & Accounting Officer)
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ S. R. Perrino       |  |                                           
|                        |  | Director                                  
|S. R. Perrino           |  |                                           
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ Charles W. Bernard  |  |                                           
|                        |  | Director                                  
|Charles W. Bernard      |  |                                           
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ Philip H. Power     |  |                                           
|                        |  | Director                                  
|Philip H. Power         |  |                                           
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ John D. Sanders     |  |                                           
|                        |  | Director                                  
|John D. Sanders         |  |                                           
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ John Irvin          |  |                                           
|                        |  | Director                                  
|John Irvin              |  |                                           
|Date: December 22, 2003 |  |                                           
|                        |  |                                           
|/s/ Lloyd A. Semple     |  |                                           
|Lloyd A. Semple         |  | Director                                  
|Date: December 22, 2003 |  |                                           

47