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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-K

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

For the Fiscal Year Ended September 30, 2002

[  ] 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   
|Title of Class                         |  | Which Registered      
|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 ü      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





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definitive proxy or information statements incorporated by reference in
Part III of the Form 10-K or any amendment to this
Form 10-K.[ ]

As of December 16, 2002, there were 6,418,478 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 December 16, 2002, was approximately $42,938,110.

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 18, 2003.





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SENSYTECH, INC. AND SUBSIDIARIES

For the Fiscal Year Ended September 30, 2002______

TABLE OF CONTENTS

|    |  |                                                                                     |  |  |    |  |  | 
|--- |  | ----------------------------------------------------------------------------------- |  |  | -- |  |  | 
|    |  | PART I                                                                              |  |  |    | 
|    |  |                                                                                     |  |  |    |  |  | 
|1.  |  | Business                                                                            |  |  | 4  | 
|    |  |                                                                                     |  |  |    |  |  | 
|2.  |  | Properties                                                                          |  |  | 12 | 
|    |  |                                                                                     |  |  |    |  |  | 
|3.  |  | Legal Proceedings                                                                   |  |  | 13 | 
|    |  |                                                                                     |  |  |    |  |  | 
|4.  |  | Submission
          of Matters to a Vote of Security Holders                       |  |  | 13 | 
|    |  | Supplemental
          Item. Executive Officers of the Registrant                   |  |  | 13 | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  | PART II                                                                             |  |  |    | 
|    |  |                                                                                     |  |  |    |  |  | 
|5.  |  | Market for
          the Registrant's Common Equity and Related Stockholder Matters |  |  | 14 | 
|    |  |                                                                                     |  |  |    |  |  | 
|6.  |  | Selected
          Financial Data                                                   |  |  | 15 | 
|    |  |                                                                                     |  |  |    |  |  | 
|7.  |  | Managements
          Discussion and Analysis of Financial Condition and           |  |  |    | 
|    |  | Results
          of Operations                                                     |  |  | 17 | 
|    |  |                                                                                     |  |  |    |  |  | 
|8.  |  | Financial
          Statements and Supplementary Data                               |  |  | 26 | 
|    |  |                                                                                     |  |  |    |  |  | 
|9.  |  | Changes
          in and Disagreements with Accountants on Accounting and           |  |  |    | 
|    |  | Financial
          Disclosure                                                      |  |  | 51 | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  | PART III                                                                            |  |  |    | 
|    |  |                                                                                     |  |  |    |  |  | 
|10. |  | Directors
          and Executive Officers of the Registrant                        |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|11. |  | Executive
          Compensation                                                    |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|12. |  | Security
          Ownership of Certain Beneficial Owners and Management and        |  |  |    | 
|    |  | Related
          Stockholder Matters                                               |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|13. |  | Certain
          Relationships and Related Transactions                            |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|14. |  | Controls
          and Procedures                                                   |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  | PART IV                                                                             |  |  |    | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  |                                                                                     |  |  |    |  |  | 
|15. |  | Exhibits,
          Financial Statement Schedules, and Reports on Form 8-K          |  |  | 52 | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  | Signatures                                                                          |  |  | 54 | 
|    |  |                                                                                     |  |  |    |  |  | 
|    |  | Certifications
          Pursuant to Rules 13a-14 and 15d-14                        |  |  |    | 
|    |  | of the Securities
          Exchange Act of 1934                                    |  |  | 55 | 





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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. On October 3,2001 we acquired certain assets of
FEL Corporation for $400,000, and on February 1, 2002, our wholly-owned
subsidiary, ST Production Systems, Inc. acquired the operating assets and
assignment of certain defense contracts of FEL Corporation for an aggregate
purchase price of approximately $2,050,000.

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 80.4% of our revenues for the year ended September 30,
2002 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, 2002, approximately 80.0% of our revenues were
generated from contracts for which we are the prime contractor, while
approximately 62.1% 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, 2002, we employed approximately 201 people, 149 of whom
held security clearances and 69 of whom were engineers. For the fiscal year
ended September 30, 2001, we generated revenues of $16,391,000 and net income
of $1,224,000. 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 has increased significantly over the past
year from $5,547,000 at September 30, 2001 to $29,571,000 at September 30,
2002.

On November 22, 2002, the Company sold 2 million shares of common stock
for net proceeds after costs and underwriters commissions of $14,520,000. 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.

4



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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. Included in this group are the
programs acquired through our February 2002 acquisition of the operating assets
of FEL Corporation, which we operate through our ST Production Systems, Inc.
subsidiary. For the fiscal year ended September 30, 2001, approximately 69.2%
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 established communications networks. For the fiscal year
ended September 30, 2001, approximately 22.2% 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, 2001, approximately 8.6% 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:

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|                                  |       |   |         |           |      |   |           |           |  |   |            |            | 
|--------------------------------- | ----- | - | ------- | --------- | ---- | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                  |       |   | 2002    |           | 2001 |   | 2000     
|                                  |       |   |         |           |      |   |          
|Internal research
and development |       | $ | 794,000 |           |      | $ | 892,000   |           |  | $ | 932,000    |           
|Customer-funded
development       |       |   | 620,000 |           |      |   | 7,958,000 |           |  |   | 10,364,000 |           
|                                  |       |   |         |           |      |   |           |           |  |   |            |           
|                                  | Total |   | $       | 1,414,000 |      |   | $         | 8,850,000 |  |   | $          | 11,296,000 | 
|                                  |       |   |         |           |      |   |           |           |  |   |            |           

Presently our customer-funded program is for the development of the
MIL-ADF Submarine Antenna System.

Backlog

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

|         |       |   |            |            |      |   |           |           |  |   |           |           | 
|-------- | ----- | - | ---------- | ---------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|         |       |   | 2002       |            | 2001 |   | 2000     
|         |       |   |            |            |      |   |          
|Funded   |       | $ | 29,571,000 |            |      | $ | 5,547,000 |           |  | $ | 5,550,000 |          
|Unfunded |       |   |           |            |      |   | 337,000   |           |  |   | 1,483,000 |          
|         |       |   |            |            |      |   |           |           |  |   |           |          
|         | Total |   | $          | 29,571,000 |      |   | $         | 5,884,000 |  |   | $         | 7,033,000 | 
|         |       |   |            |            |      |   |           |           |  |   |           |          

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. 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.

Some of our contracts can be extended or increased at the option of the
customer. As of September 30, 2002, the potential value of these options, if
exercised by the customer, is approximately $13,050,000. We anticipate that a
portion of the options will be exercised during the calendar years 2003 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.

6



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Government Contracts

During the fiscal year ended September 30, 2002, approximately 80.4% 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  |                    
| | - |  | -------------------
|
| |  |  | Cost-reimbursement.
|

| |  |  | Cost-plus-fixed-fee contracts are cost-reimbursement
contracts that provide for payment to us of a negotiated fee
that is fixed at the inception of the contract. This fixed fee
does not vary with actual cost of the contract, but may be
adjusted as a result of changes in the work to be performed
under the contract. This contract poses less risk than a fixed
price contract, but our ability to win future contracts from the
procuring agency may be adversely affected if we fail to perform
within the maximum cost set forth in the contract.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A cost-plus-award-fee contract is a cost
reimbursement contract that provides for a fee consisting of a
base amount (which may be zero) fixed at inception of the
contract and an award amount, based upon the governments
satisfaction with our performance under the contract. With this
type of contract, we assume the risk that we may not 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, 1998. We are still
subject to adjustment on our performance during subsequent years.

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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 26.7% of our revenues for the year ended September 30,
2002 was 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 expected increase in spending for intelligence
activities in the wake of the September 11 attacks.                                                                                                                                                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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, 2002, 149 of our 201 employees
have government security clearances, with approximately 20% holding Top
Secret/ Sensitive Compartmented Information (TS/SCI) security
clearances.
|
| |  |  | 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, 2002, we
employed 69 engineers, who represented approximately 34% of our
workforce. Since October 1, 1998, we have spent approximately $29.8 million in both customer funded
as well as independent research and development.                                                                                                                                                                                                                                                                                

9



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| |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Established Sole-Source Contract Relationships.We received
approximately 62.1% of our revenues for the year ended September 30,
2002 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 have global
security implications.  

10



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| |  |  | 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 $26.4 million under such
development contracts. 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, 2002, we employed 201 people, 69 of whom have engineering
degrees while 149 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. The former FEL Corporation employees were represented by a
union, which has asked our subsidiary in Farmingdale, New Jersey to negotiate a
contract. Our subsidiary is considering the request. However, we do not
believe that the outcome of any discussion with the union will have a
materially adverse impact on us.

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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.

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|                                              |  |             |  |            |  |             |  |                                     |  |                                                                                                   |  |                                                               
|--------------------------------------------- |  | ----------- |  | ---------- |  | ----------- |  | ----------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------
|                                              |  | 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:
11/30/2003 |  | 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                     
|                                              |  |             |  |            |  |             |  |                                     |  |                                                                                                   |  |                                                               
|847 Airport Road
Dunbar, PA                   |  |             |  |            |  | 8,900       |  | Leased,
Expiration Date:
4/21/2007  |  | One-story facility                                                                                |  | Engineering/Manufacturing/
Administration                     

Our facilities in Newington, Virginia; Ann Arbor, Michigan; Camarillo,
California; Farmingdale, New Jersey; and Dunbar, 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.

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, 2002.

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 16, 2002.

|                 |  |     |    |                          |  |                                                                        
|---------------- |  | --- | -- | ------------------------ |  | -----------------------------------------------------------------------
|Name             |  | Age |    | Position with Registrant
|                 |  |     |    |                         
|S. Kent Rockwell |  |     | 58 |                          |  | Chairman of the Board since 2000 and Chief Executive
Officer since 1998
|David A. Smith   |  |     | 50 |                          |  | President and Chief Operating Officer since June, 2002                 
|Donald F. Fultz  |  |     | 49 |                          |  | Vice President, Chief Financial Officer and Treasurer
since 2000       
|Delano Esguerra  |  |     | 62 |                          |  | Vice President of Business Development since 2001                      
|Jack Sweet       |  |     | 63 |                          |  | Vice President of Customer Relations since February, 2002              
|James D. Ross    |  |     | 40 |                          |  | Vice President of the Communications Group since 2000                  

13



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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 on The Nasdaq SmallCap Market for the periods
indicated.

|            |                |  |      |       |     |  |   |      | 
|----------- | -------------- |  | ---- | ----- | --- |  | - | ---- | 
|            |                |  | High |       | Low
|            |                |  |      |       |    
|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 | 
|            |                |  |      |       |     |  |   |     
|Fiscal 2001 |                |  |      |       |     |  |   |     
|            | Fourth Quarter |  | $    | 7.55  |     |  | $ | 3.97 | 
|            | Third Quarter  |  |      | 4.50  |     |  |   | 3.00 | 
|            | Second Quarter |  |      | 5.00  |     |  |   | 3.25 | 
|            | First Quarter  |  |      | 4.50  |     |  |   | 3.25 | 

There were 228 registered holders of our common stock on December 16,
2002. On December 16, 2002, the closing sale price of our common stock on The
Nasdaq National Market was $9.40 per share.

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.

14



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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the selected consolidated statement of
earnings data, balance sheet data for each of the periods indicated. The
selected financial data for the years ended September 30, 2002, 2001, 2000,
1999, and 1998 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
10K.

15



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##### 



|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |        |        | 
|---------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | ---- | ------ | -------- | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                         |                                     |                          |        | Years Ended September 30             
|                                         |                                     |                          |        |                                      
|                                         |                                     |                          |        | 2002                                  |        | 2001 |        | 2000   |        | 1999 |        | 1998 (2)
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |         
|                                         |                                     |                          |        | (in thousands, except per share data)
|Consolidated Statement of Earnings Data: |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Contract revenues                        |                                     | $                        | 32,290 |                                       |        | $    | 16,391 |        |        | $    | 22,706 |          |        | $ | 26,424 |        |        | $ | 21,927 |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Costs and expenses                       |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         | Cost of revenues                    |                          |        | 24,855                                |        |      |        | 11,744 |        |      |        | 16,195   |        |   |        | 19,237 |        |   |        | 18,522 |       
|                                         | General and administrative expenses |                          |        | 3,782                                 |        |      |        | 2,901  |        |      |        | 3,974    |        |   |        | 4,251  |        |   |        | 3,424  |       
|                                         | Restructuring
costs (1)             |                          |        |                                      |        |      |        |       |        |      |        |         |        |   |        |       |        |   |        | 1,096  |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     | Total costs and expenses |        |                                       | 28,637 |      |        |        | 14,645 |      |        |          | 20,169 |   |        |        | 23,488 |   |        |        | 23,042 | 
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Income (loss) from operations            |                                     |                          | 3,653  |                                       |        |      | 1,746  |        |        |      | 2,537  |          |        |   | 2,936  |        |        |   | (1,115 | )     
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Other income (expenses)                  |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         | Interest (expense) income, net      |                          |        | (4                                    | )      |      |        | 141    |        |      |        | 116      |        |   |        | (40    | )      |   |        | (197   | )     
|                                         | Other income, net                   |                          |        | 60                                    |        |      |        | 116    |        |      |        | 39       |        |   |        |       |        |   |        |       |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Income (loss) before income taxes        |                                     |                          | 3,709  |                                       |        |      | 2,003  |        |        |      | 2,692  |          |        |   | 2,896  |        |        |   | (1,312 | )     
|Income tax (provision) benefit           |                                     |                          | (1,520 | )                                     |        |      | (779   | )      |        |      | (1,026 | )        |        |   | (1,207 | )      |        |   | 490    |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Net income (loss)                        |                                     | $                        | 2,189  |                                       |        | $    | 1,224  |        |        | $    | 1,666  |          |        | $ | 1,689  |        |        | $ | (822   | )     
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|Earnings (loss) per share                |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         | Basic                               |                          | $      | 0.54                                  |        |      | $      | 0.31   |        |      | $      | 0.42     |        |   | $      | 0.42   |        |   | $      | (0.27  | )     
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       
|                                         | Diluted                             |                          | $      | 0.52                                  |        |      | $      | 0.30   |        |      | $      | 0.40     |        |   | $      | 0.40   |        |   | $      | (0.27  | )     
|                                         |                                     |                          |        |                                       |        |      |        |        |        |      |        |          |        |   |        |        |        |   |        |       

|                                         |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|---------------------------------------- |  | ------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                         |  | As of Septemer 30,
|                                         |  |                   
|                                         |  | 2002               |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                         |  |                    |        |      |  |      |        |      |  |     
|Consolidated Statement of Earnings Data: |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|                                         |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                |  | $                  | 700    |      |  | $    | 4,362  |      |  | $    | 1,512  |  |  | $ | 3,076  |  |  | $ | 112    | 
|Total assets                             |  | $                  | 25,852 |      |  | $    | 13,766 |      |  | $    | 14,384 |  |  | $ | 13,787 |  |  | $ | 14,424 | 
|Total debt                               |  | $                  | 2,900  |      |  |      |       |      |  | $    | 38     |  |  | $ | 111    |  |  | $ | 2,426  | 
|Stockholders equity                     |  | $                  | 14,666 |      |  | $    | 11,986 |      |  | $    | 10,754 |  |  | $ | 9,112  |  |  | $ | 7,307  | 

|           |             |  |                    |        |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |       
|---------- | ----------- |  | ------------------ | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ------ |  |  | - | ------
|           |             |  | As of Septemer 30,
|           |             |  |                   
|           |             |  | 2002               |        | 2001 |  | 2000 |       | 1999 |  | 1998
|           |             |  |                    |        |      |  |      |       |      |  |     
|Other Data |             |  |                    |        |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |       
|           | Backlog
(3) |  | $                  | 29,571 |      |  | $    | 5,884 |      |  | $    | 7,033 |  |  | $ | 17,106 |  |  | $ | 22,600



|1) |  | During fiscal 1998, we recorded restructuring charges of $1,096,000 in
connection with ongoing operations. The restructuring combined,
integrated and reengineered our processes, policies and procedures. Costs
incurred consisted primarily of severance cost and other employee benefit,
professional fees and relocation expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | On June 9, 1998, ST Research acquired Daedalus Enterprises in an
acquisition whereby the outstanding ST Research shares were converted into
approximately 86.5% of the issued and outstanding shares of Daedalus
Enterprises. As part of this overall transaction, Daedalus Enterprises
changed its name to Sensytech, Inc. While Daedalus Enterprises was the
legal acquirer, the acquisition was accounted for as a reverse acquisition
whereby ST Research was deemed to have acquired Daedalus Enterprises for
financial accounting purposes. The operations of the former Daedalus
Enterprises business were included in the financial statements from the
date of acquisition. In connection with the acquisition, we changed our
fiscal year end from July 31 to September 30, which was the fiscal year
end of ST Research.

16



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|3) |  | 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 provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. These statements are based upon numerous assumptions about future conditions that could prove not be accurate. Actual 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 are uncertainties include, but are not limited to, the existence
of demand for, and acceptance of the Companys projects and services, regulatory approvals, expert 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
forward-looking statements should be considered in light of these factors. You should not put undue reliance on any forward-looking
statements The Company undertakes no obligation to update these forward-looking statements to reflect new information, future events or
otherwise, except as provided by law.

Overview

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

A substantial portion of our revenues is derived from contracts with the
U.S. federal government. For the fiscal years ended September 30, 2002, and
September 30, 2001, approximately 80.4% and 88.9%, respectively, of our
revenues were derived from contracts with the U.S. federal government. For
these same periods, approximately 80.0% and 44.1%, respectively, of our
revenues were generated from contracts for which we were the prime contractor,
and approximately 62.1% and 97.3%, respectively, 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. The percentage
reduction in sole or single source contracts is the result of classifying all
revenues of ST Production Systems, Inc., which is our subsidiary that holds the
assets we acquired from FEL Corporation in February 2002, as derived from
competitive contracts. In addition during these time periods, approximately
26.7% and 21.2%, respectively, of our 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, we use 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). We
record revenues under cost-reimbursement contracts as costs are incurred and we
include estimated earned fees in the proportion that costs incurred to date
bear to total estimated costs. We increase or decrease fees under certain U.S.
federal government contracts in accordance with cost or performance incentive
provisions which measure actual performance against established targets or
other criteria. We include such incentive fee awards or penalties, which
historically are not material, in
revenues at the time the amounts can be determined reasonably. We
recognize anticipated losses at the time they become known. Our future
operating results may be affected if actual contract costs incurred differ from
our current estimates of total contract costs.

17



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##### 



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

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

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

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. 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% 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.

18



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##### 



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 espense.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 rate was 41%
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 other nondeductible expenses.

19



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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.

Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

Revenue. Revenue decreased $6,315,000, or 27.8%, to $16,391,000 for the year
ended September 30, 2001 from $22,706,000 for the year ended September 30,
2000. The decrease primarily resulted from the completion of two significant
production contracts, and the delay in receipt of planned international
contracts for the Defense Systems, Communications and Imaging Groups.

Customer-funded development, which is included in revenue, decreased
$2,406,000, or 23.2%, to $7,958,000 for the year ended September 30, 2001 from
$10,364,000 for the year ended September 30, 2000. The decrease in
customer-funded development was consistent with the reduction in revenues
experienced in fiscal 2001. The customer-funded development resulted primarily
from the U.S. Navy Integrated Electronic Warfare System subcontract from
Lockheed Martin Corporation and other government agency contract efforts.

Cost of revenues. Cost of revenues decreased $4,451,000, or 27.5%, to
$11,744,000 for the year ended September 30, 2001 from $16,195,000 for the year
ended September 30, 2000. The decrease was a result of a reduction in variable
costs consistent with the reduction in revenue. As a percentage of revenues,
cost of revenues increased to 71.6% for the year ended September 30, 2001 from
71.3% for the year ended September 30, 2000.

General and administrative expenses. General and administrative expenses
decreased $1,073,000, or 27.0%, to $2,901,000 for the year ended September 30,
2001 from $3,974,000 for the year ended September 30, 2000. The decrease was
due principally to a one-time accrual for severance pay of $734,000 accrued in
fiscal 2000 payable to our former president and by efficiencies gained in
automating infrastructure support tools, which facilitated staff reductions
begun in fiscal 2000. As a percentage of revenue, general and administrative
expenses increased to 17.7% for the year ended September 30, 2001 from 17.5%
for the year ended September 30, 2000.

For the year ended September 30, 2001, internal research and development was
$892,000 compared to $932,000 for the year ended September 30, 2000 and
represent 30.7% and 23.4% of general and administrative expenses, respectively.
During 2001, major research efforts included: (a) application of processing
techniques and lowcost antenna technologies to derive highly accurate direction
measurements on received signals; (b) state of the art electronic developments
to perform ELINT data collection and processing; and (c) advancement in
software radio technology used within our core intercept equipment.

20



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Net interest income. Net interest income increased $25,000, or 21.6%, to
$141,000 for the year ended September 30, 2001 from $116,000 for the year ended
September 30, 2000. The increase was due primarily to improved cash flow from
operations and substantially improved cash collection activity resulting in
lower accounts receivable and higher daily-invested balances.

Other income. Other income increased $77,000, or 197.4%, to $116,000 for the
year ended September 30, 2001 from $39,000 for the year ended September 30,
2000. The increase was due to sub-lease income of $112,000 received for twelve
months in fiscal 2001 compared to only $29,000 for four months in fiscal 2000.

Income tax expense. Income tax expense decreased $247,000, or 24.1%, to
$779,000 for the year ended September 30, 2001 from $1,026,000 for the year
ended September 30, 2000. Our effective income tax rate was 38.9% for the year
ended September 30, 2001 and 38.1% for the year ended September 30, 2000. The
rate varied from the statutory rate in fiscal 2001 primarily due to state
taxes.

Net income. Net income decreased $442,000, or 26.5%, to $1,224,000 for the
year ended September 30, 2001 from $1,666,000 for the year ended September 30,
2000. The decrease was the result of decreased revenues partially offset by
gains in operating efficiency and interest income in fiscal 2001.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by operations and our
line of credit. Our liquidity requirements depend on a number of factors,
including the timing of production under our federal government and foreign
sales contracts. We had cash and cash equivalents of $700,000 at September 30,
2002, as compared to $4,362,000 at September 30, 2001. The decrease was
primarily due to a shift to commercial contracts, a build-up in inventory in anticipation of contracts awards
and accounts receivable during fiscal 2002.

Cash used in operating activities was approximately
$3,347,000 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 (1) an increase for our commercial contracts, which provide for
billing only at the completion and delivery of those products, and government
processing delays at our subsidiary ST Production Systems, Inc., which,
together, resulted in an increase in unbilled receivables of approximately
$5,103,000 and billed accounts receivable of $5,175,000 for the 2002 period
over the comparable 2001 period, and (2) institution of an inventory program to
take advantage of quantity discounts on components and to identify and order
items requiring a longer lead time for anticipated contract awards, which
resulted in an increase in inventory of approximately $2,754,000 for the 2002
period over the comparable 2001 period. We have no reason to believe that these unbilled
receivables will not be paid. The decrease was partially offset by increases
in accounts payable of $2,036,000 and billings in excess of cost of $2,197,000
for the 2002 period over the comparable 2001 period. The increase in inventory
includes $1,566,000 for a program for the Egyptian Navy, for which Lockheed
Martin Corporation is our prime contractor. Negotiations with Lockheed Martin
Corporation on the terms and price for this contract have been completed. We
are awaiting formal authorization to proceed from Lockheed Martin Corporation,
which authorization must originate with the Egyptian government. We had been
advised that final approval to proceed would be received by September 1, 2002,
but this date has now been revised to December 31, 2002. Although we have no
reason to believe that the contract is in jeopardy, given the delays
experienced, we cannot, with any certainty, plan on a contract notice to
proceed until sometime after December 31, 2002.

21



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The remainder of the increase in the inventory is comprised of the
following: (a) two WBR-2000 threat warning system components of $833,000, (b)
other long lead time materials and components of $415,000, and (c) a decrease
of $60,000 of the inventory related to contracts acquired from FEL, which is
reported under cash used in investing activities. The acquisition of FEL
materially affected the inventory at September 30, 2002, but we do not
anticipate a material build-up as a result of the acquisition in the future.

Cash provided by operating activities for the year ended September 30,
2001 was $3,292,000, while for the year ended September 30, 2000 cash used in
operating activities was $544,000. For the year ended September 30, 2001, cash
provided by operating activities was generated primarily from net income of
$1,224,000 and a decrease in receivables and unbilled contract costs of
$2,446,000. For the year ended September 30, 2000, the cash used in operating
activities was primarily the result of an increase in receivables, net of
unbilled amounts, of $850,000 and an overdeposit of federal and state income
taxes of $1,412,000, offset by net income of $1,666,000.

Cash used in investing activities was approximately $3,447,000 during the
year ended September 30, 2002, compared to approximately $290,000 for the year
ended September 30, 2001, an increase of approximately $3,157,000. The primary
reasons for the increase were the acquisition of the government contracting
business of FEL Corporation and acquisition related expenses of approximately
$2,022,000 and the acquisition of other property and equipment for
approximately $1,425,000. Cash used in investing activities for the year ended
September 30, 2000 was $784,000. For fiscal 2001 and fiscal 2000, investing
activity related to the acquisition of property and equipment.

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 our line of credit of approximately $2,900,000 and receipt of
proceeds from stock option exercises of approximately $316,000. Cash used in
financing activities for year ended 2000 was $236,000. In fiscal 2001 and
fiscal 2000, cash used in financing activities was primarily the result of
payments for the purchase of treasury stock.

22



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We entered into a line of credit and related note payable with Bank of
America on February 28, 2001. The line of credit was originally for a one-year
term and was for $5,000,000. Prior to its expiration, we renewed the line of
credit and the amount available under the line of credit was increased to
$10,000,000. The line of credit is available to us to finance the performance
of government contracts, to support the issuance of stand-by letters of credit,
and for short-term working capital purposes. The line of credit bears interest
at either Bank of Americas base interest rate or the London Interbank Offering
Rate (LIBOR) plus 225 basis points and matures on February 28, 2003. The line
of credit was increased to $10,000,000 to accommodate stand-by letters of
credit for anticipated international contracts. Under the line of credit, we
may borrow the lesser of a defined percentage of accounts receivable under
ninety days or $10,000,000. As of November 30, 2002, there was $4,955,000
outstanding under our line of credit. We have given the lender a security
interest in substantially all of our assets to secure the debt under our credit
facility. If the lender declares amounts outstanding under the credit facility
to be due, the lender could proceed against those assets.

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

On November 22, 2002 the Company sold 2 million shares of common stock for net
proceeds after costs and underwriters commissions of $14,520,000. On December
12, 2002 the underwriters exercised their overallotment option which provided
net proceeds to the Company of $2,232,000 from the sale of an additional 300,000 shares.

23



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Contractual Obligations and Commitments

Contractual Cash Obligations (in thousands)

|                 |  |       |        |      |  |        |       |        |  |        |     |        |  |            |     |  |  |   |     |  |  |   |     |  |  |   |       | 
|---------------- |  | ----- | ------ | ---- |  | ------ | ----- | ------ |  | ------ | --- | ------ |  | ---------- | --- |  |  | - | --- |  |  | - | --- |  |  | - | ----- | 
|                 |  |       |        |      |  | Due in |       | Due in |  | Due in |     | Due in |  | Due in     |     |  |  |  
|                 |  | Total |        | 2003 |  | 2004   |       | 2005   |  | 2006   |     | 2007   |  | Thereafter
|                 |  |       |        |      |  |        |       |        |  |        |     |        |  |           
|Operating leases |  | $     | 7,266  |      |  | $      | 906   |        |  | $      | 665 |        |  | $          | 537 |  |  | $ | 541 |  |  | $ | 539 |  |  | $ | 4,078 | 
|Line of credit   |  |       | 2,900  |      |  |        | 2,900 |        |  |        |    |        |  |            |    |  |  |   |    |  |  |   |    |  |  |   |      | 
|                 |  |       |        |      |  |        |       |        |  |        |     |        |  |            |     |  |  |   |     |  |  |   |     |  |  |   |       | 
|                 |  | $     | 10,166 |      |  | $      | 3,806 |        |  | $      | 665 |        |  | $          | 537 |  |  | $ | 541 |  |  | $ | 539 |  |  | $ | 4,078 | 
|                 |  |       |        |      |  |        |       |        |  |        |     |        |  |            |     |  |  |   |     |  |  |   |     |  |  |   |       | 

Other Commercial Commitments (in thousands)

|                  |  |       |       |                  |  |           |     |  |  |   |       | 
|----------------- |  | ----- | ----- | ---------------- |  | --------- | --- |  |  | - | ----- | 
|                  |  | Total |       | Less than 1 Year |  | 1-3 Years
|                  |  |       |       |                  |  |          
|Letters of credit |  | $     | 2,930 |                  |  | $         | 930 |  |  | $ | 2,000 | 
|                  |  |       |       |                  |  |           |     |  |  |   |       | 

Critical Accounting Policies and Estimates

Our consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
affect our financial position and results of operations.

Revenue recognition
Most of our 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, we
make important judgments in estimating revenue, cost and progress towards
completion. We have an internal process where we monitor 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 our 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, we record 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. We have no contracts for which we
currently anticipate losses. At September 30, 2002, there was an increase in
costs and estimated earnings in excess of billings (unbilled contract costs) on
uncompleted contracts. We have no reason to believe that these amounts are not
realizable.

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

24



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Inventories
We are required to state our inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare these with the current
or committed inventory levels. Inventory is generally purchased to fulfill a
specific contract commitment. As discussed in the Liquidity and Capital
Resources section of MD&A, at September 30, 2002, we had a $1,566,000 increase
in inventory related to a program for the Egyptian Navy. Although we have no
reason to believe this contract is in jeopardy, given the delays experienced,
we cannot, with any certainty, plan on a contract notice to proceed until
sometime after December 31, 2002.

Income taxes
We currently have deferred tax assets resulting from net operating loss
carryforwards, which will reduce taxable income in future periods. At
September 30, 2002 and 2001, we did not provide a valuation allowance as we
believed it was more likely than not that the remaining net deferred tax assets
will be realized, principally based on forecasted taxable income.

Research and development
We include internally funded research and development costs are included in
general and administrative expenses in our consolidated income statements. Our
applied research and development during the year ended September 30, 2002
focused on advanced scanning capabilities, an upgrade to a digital receiver and
upgraded pulse analyzer; all of which are expected to assist in anticipated
future contracts. We expensed $794,000 and $892,000 of internally funded
research and development costs during the year ended September 30, 2002 and
2001, respectively.

Accounting Pronouncements

In July 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations(SFAS No. 143). SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred, if a reasonable estimate of fair value can be
made. The associated asset retirement cost would be capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143
to have an impact on our consolidated financial position or results of operations.

In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS No. 144), which supercedes
SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.

In November 2001, the Emerging Issues Task Force (EITF) issued Issue
01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred.EITF No. 01-14 requires that companies
report reimbursements received for out-of-pocket expenses incurred as revenue,
rather than as a reduction of expenses. The provisions of EITF No. 01-14 are
effective for financial statements issued for fiscal years beginning after
December 15,2001. As we have historically accounted for reimbursements of
out-of-pocket expenses in the manner provided for under EITF No. 01-14. The adoption of the provision
of EITF No. 01-14 did not have an impact on our consolidated financial position
or results of operations.

25



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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
Emergency 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                              |                                                       |  |       |  | 
|------------------------------------------------------------- | ----------------------------------------------------- |  | ----- |  | 
|Report of PricewaterhouseCoopers LLP, Independent Accountants |                                                       |  | 27    | 
|Consolidated Balance Sheets                                   |                                                       |  | 28-29 | 
|                                                              | As of September 30, 2002 and 2001                     |  |       |  | 
|Consolidated Income Statements                                |                                                       |  | 30    | 
|                                                              | For the years ended September 30, 2002, 2001 and 2000 |  |       |  | 
|Consolidated Statements of Stockholders Equity               |                                                       |  | 31    | 
|                                                              | For the years ended September 30, 2002, 2001 and 2000 |  |       |  | 
|Consolidated Statements of Cash Flows                         |                                                       |  | 32    | 
|                                                              | For the years ended September 30, 2002, 2001 and 2000 |  |       |  | 
|Notes to Consolidated Financial Statements                    |                                                       |  | 33-51 | 

26



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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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002 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 12, 2002

27



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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                |                                                                                          |                      |           |              |            |      |           |           |            | 
|------------------------------- | ---------------------------------------------------------------------------------------- | -------------------- | --------- | ------------ | ---------- | ---- | --------- | --------- | ---------- | 
|                                |                                                                                          |                      |           | September 30
|                                |                                                                                          |                      |           |             
|                                |                                                                                          |                      |           | 2002         |            | 2001
|                                |                                                                                          |                      |           |              |            |     
|CURRENT ASSETS                  |                                                                                          |                      |           |              |            |      |           |          
|                                | Cash and cash equivalents (Note 1)                                                       |                      | $         | 700,000      |            |      | $         | 4,362,000 |           
|                                | Accounts receivable, net of allowance for
doubtful accounts of $200,000 in 2002 and 2001 |                      |           | 8,880,000    |            |      |           | 3,091,000 |           
|                                | Unbilled contract costs, net (Note 3)                                                    |                      |           | 8,820,000    |            |      |           | 3,563,000 |           
|                                | Refundable and prepaid income taxes                                                      |                      |           |             |            |      |           | 392,000   |           
|                                | Inventories                                                                              |                      |           | 3,168,000    |            |      |           | 30,000    |           
|                                | Deferred income taxes (Note 11)                                                          |                      |           | 411,000      |            |      |           | 341,000   |           
|                                | Other current assets                                                                     |                      |           | 272,000      |            |      |           | 139,000   |           
|                                |                                                                                          |                      |           |              |            |      |           |           |           
|                                |                                                                                          |                      |           |              |            |      |           |          
|                                |                                                                                          | TOTAL CURRENT ASSETS |           |              | 22,251,000 |      |           |           | 11,918,000 | 
|                                |                                                                                          |                      |           |              |            |      |           |          
|PROPERTY AND EQUIPMENT (Note 4) |                                                                                          |                      | 2,608,000 |              |            |      | 1,429,000 |          
|                                |                                                                                          |                      |           |              |            |      |           |          
|OTHER ASSETS                    |                                                                                          |                      |           |              |            |      |           |          
|                                | Deferred income taxes (Note 11)                                                          |                      |           | 260,000      |            |      |           | 304,000   |           
|                                | Intangibles, net (Note 2)                                                                |                      |           | 400,000      |            |      |           |          |           
|                                | Other assets                                                                             |                      |           | 333,000      |            |      |           | 115,000   |           
|                                |                                                                                          |                      |           |              |            |      |           |           |           
|                                |                                                                                          |                      |           |              |            |      |           |          
|                                |                                                                                          | TOTAL ASSETS         |           | $            | 25,852,000 |      |           | $         | 13,766,000 | 
|                                |                                                                                          |                      |           |              |            |      |           |           |           

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

28



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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, continued

LIABILITIES AND STOCKHOLDERS EQUITY

|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | --------- | ---- | - | ---------- | --------- | -
|                                           |                                                                                                                                                                                                                        |   | September 30,
|                                           |                                                                                                                                                                                                                        |   |              
|                                           |                                                                                                                                                                                                                        |   | 2002          |           | 2001
|                                           |                                                                                                                                                                                                                        |   |               |           |     
|CURRENT LIABILITIES                        |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|                                           | Line of credit (Note 5)                                                                                                                                                                                                |   | $             | 2,900,000 |      |   | $          |          |  
|                                           | Accounts payable                                                                                                                                                                                                       |   |               | 2,916,000 |      |   |            | 450,000   |  
|                                           | Accrued salaries, benefits, and related expenses                                                                                                                                                                       |   |               | 2,093,000 |      |   |            | 822,000   |  
|                                           | Accrued severance pay                                                                                                                                                                                                  |   |               |          |      |   |            | 290,000   |  
|                                           | Other accrued expenses                                                                                                                                                                                                 |   |               | 438,000   |      |   |            | 73,000    |  
|                                           | Billings in excess of costs (Note 3)                                                                                                                                                                                   |   |               | 2,342,000 |      |   |            | 145,000   |  
|                                           | Income taxes payable                                                                                                                                                                                                   |   |               | 497,000   |      |   |            |          |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|TOTAL CURRENT LIABILITIES                  |                                                                                                                                                                                                                        |   | 11,186,000    |           |      |   | 1,780,000  |          
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|                                           | Commitments and contingencies (Notes 2, 3 and 7)                                                                                                                                                                       |   |               |          |      |   |            |          |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|STOCKHOLDERS EQUITY (Notes 9 and 17)      |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|                                           | Common Stock, $.01 par value; 25,000,000 shares authorized,
September 30, 2002 and 5,000,000 shares authorized,
September 30, 2001; 4,239,223 and 4,085,047
shares issued and outstanding, September 30, 2002 and 2001 |   |               | 42,000    |      |   |            | 41,000    |  
|                                           | Additional paid-in capital                                                                                                                                                                                             |   |               | 7,972,000 |      |   |            | 7,482,000 |  
|                                           | Treasury stock, at cost, 125,245 shares
at September 30, 2002 and 2001 (Note 10)                                                                                                                                       |   |               | (525,000  | )    |   |            | (525,000  | )
|                                           | Retained earnings                                                                                                                                                                                                      |   |               | 7,177,000 |      |   |            | 4,988,000 |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|TOTAL STOCKHOLDERS EQUITY                 |                                                                                                                                                                                                                        |   | 14,666,000    |           |      |   | 11,986,000 |          
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                        | $ | 25,852,000    |           |      | $ | 13,766,000 |          
|                                           |                                                                                                                                                                                                                        |   |               |           |      |   |            |           |  

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

29



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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |            |  
|------------------------------ | ----------------------------------- | ------------------------ | ---------- | ------------------ | ---------- | ---- | --------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                               |                                     |                          |            | For the Year Ended
|                               |                                     |                          |            | September 30,     
|                               |                                     |                          |            |                   
|                               |                                     |                          |            | 2002               |            | 2001 |           | 2000      
|                               |                                     |                          |            |                    |            |      |           |           
|REVENUES                       |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|                               | Contract revenues                   |                          | $          | 32,290,000         |            |      | $         | 16,391,000 |            |   | $          | 22,706,000 |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|COSTS AND EXPENSES             |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|                               | Cost of revenues                    |                          |            | 24,855,000         |            |      |           | 11,744,000 |            |   |            | 16,195,000 |           
|                               | General and administrative expenses |                          |            | 3,782,000          |            |      |           | 2,901,000  |            |   |            | 3,974,000  |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|                               |                                     | Total costs and expenses |            |                    | 28,637,000 |      |           |            | 14,645,000 |   |            |            | 20,169,000 |  
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|INCOME FROM OPERATIONS         |                                     |                          | 3,653,000  |                    |            |      | 1,746,000 |            |            |   | 2,537,000  |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|OTHER INCOME (EXPENSES)        |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|                               |                                     | Interest income          |            |                    | 36,000     |      |           |            | 155,000    |   |            |            | 123,000    |  
|                               |                                     | Interest expense         |            |                    | (40,000    | )    |           |            | (14,000    | ) |            |            | (7,000     | )
|                               |                                     | Other income             |            |                    | 73,000     |      |           |            | 116,000    |   |            |            | 50,000     |  
|                               |                                     | Other expenses           |            |                    | (13,000    | )    |           |            |           |   |            |            | (11,000    | )
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|INCOME BEFORE INCOME TAXES     |                                     |                          | 3,709,000  |                    |            |      | 2,003,000 |            |            |   | 2,692,000  |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|INCOME TAX PROVISION (Note 11) |                                     |                          | (1,520,000 | )                  |            |      | (779,000  | )          |            |   | (1,026,000 | )         
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|NET INCOME                     |                                     | $                        | 2,189,000  |                    |            | $    | 1,224,000 |            |            | $ | 1,666,000  |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |            |           
|                               |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|PER SHARE AMOUNT (Note 1)      |                                     |                          |            |                    |            |      |           |            |            |   |            |           
|                               | Basic earnings per share            |                          | $          | 0.54               |            |      | $         | 0.31       |            |   | $          | 0.42       |           
|                               | Diluted earnings per share          |                          | $          | 0.52               |            |      | $         | 0.30       |            |   | $          | 0.40       |           

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

30



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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, 1999                                                        |                               |          | 3,987,940 |              |  |         | 40,000 |             |  |              | 7,099,000 |            |  |               | (125,000 | )      |  |   |         |   |  |   | 2,098,000 |       |  |   | 9,112,000  |  
|Net income                                                                           |                               |          |          |              |  |         |       |             |  |              |          |            |  |               |         |        |  |   |         |   |  |   | 1,666,000 |       |  |   | 1,666,000  |  
|Employee stock purchase                                                              |                               |          | 9,927     |              |  |         |       |             |  |              | 42,000    |            |  |               |         |        |  |   |         |   |  |   |          |       |  |   | 42,000     |  
|Exercise of stock options                                                            |                               |          | 23,480    |              |  |         |       |             |  |              | 80,000    |            |  |               |         |        |  |   |         |   |  |   |          |       |  |   | 80,000     |  
|Stock 
based compensation granted                                                   |                               |          |          |              |  |         |       |             |  |              | 110,000   |            |  |               | (110,000 | )      |  |   |         |   |  |   |          |       |  |   |           |  
|                                                                                     |                               | (Note 9) |           |              |  |         |        |             |  |              |           |            |  |               |          |        |  |   |          |   |  |   |           |       |  |   |            |   |  | 
|Amortization of stock  based compensation,                                          |                               |          |          |              |  |         |       |             |  |              |          |            |  |               | 139,000  |        |  |   |         |   |  |   |          |       |  |   | 139,000    |  
|                                                                                     | net of forfeitures of $11,000 |          |           |              |  |         |        |             |  |              |           |            |  |               |          |        |  |   |          |   |  |   |           |       |  |   |            |   | 
|Forfeiture of stock options                                                          |                               |          |          |              |  |         |       |             |  |              | (41,000   | )          |  |               | 41,000   |        |  |   |         |   |  |   |          |       |  |   |           |  
|Purchase of treasury shares                                                          |                               |          |          |              |  |         |       |             |  |              |          |            |  |               |         |        |  |   | (285,000 | ) |  |   |          |       |  |   | (285,000   | )
|                                                                                     |                               |          |           |              |  |         |        |             |  |              |           |            |  |               |          |        |  |   |          |   |  |   |           |       |  |   |            |  
|                                                                                     |                               |          |           |              |  |         |        |             |  |              |           |            |  |               |          |        |  |   |          |   |  |   |           |       |  |   |            |  
|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 |  
|                                                                                     |                               |          |           |              |  |         |        |             |  |              |           |            |  |               |          |        |  |   |          |   |  |   |           |       |  |   |            |  

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

31



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##### 



SENSYTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------- | ------------------------ | ---------- | ---- | --------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                                     |                                                                                             |                                                           |            | Year Ended September 30,
|                                                     |                                                                                             |                                                           |            |                         
|                                                     |                                                                                             |                                                           |            | 2002                     |            | 2001 |           | 2000     
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |          
|Cash flows from operating activities:                |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|                                                     | Net income                                                                                  |                                                           | $          | 2,189,000                |            |      | $         | 1,224,000 |            |   | $          | 1,666,000 |           
|                                                     | Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     |                                                                                             | Depreciation and amortization                             |            |                          | 947,000    |      |           |           | 488,000    |   |            |           | 576,000    |  
|                                                     |                                                                                             | Provision (credit) for doubtful accounts                  |            |                          |           |      |           |           | (15,000    | ) |            |           | (96,000    | )
|                                                     |                                                                                             | Amortization of deferred compensation                     |            |                          |           |      |           |           | 50,000     |   |            |           | 139,000    |  
|                                                     |                                                                                             | Deferred taxes                                            |            |                          | 94,000     |      |           |           | 240,000    |   |            |           | 11,000     |  
|                                                     | Cash provided (used) by assets and liabilities, net of asset acquired                       |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     |                                                                                             | Accounts receivable                                       |            |                          | (5,175,000 | )    |           |           | 2,384,000  |   |            |           | (2,149,000 | )
|                                                     |                                                                                             | Unbilled contract costs                                   |            |                          | (5,103,000 | )    |           |           | 62,000     |   |            |           | 1,299,000  |  
|                                                     |                                                                                             | Inventories                                               |            |                          | (2,754,000 | )    |           |           | (6,000     | ) |            |           | 1,000      |  
|                                                     |                                                                                             | Other assets                                              |            |                          | (109,000   | )    |           |           | (60,000    | ) |            |           | 32,000     |  
|                                                     |                                                                                             | Refundable, prepaid income taxes and income taxes payable |            |                          | 1,064,000  |      |           |           | 737,000    |   |            |           | (1,412,000 | )
|                                                     |                                                                                             | Accounts payable                                          |            |                          | 1,957,000  |      |           |           | (438,000   | ) |            |           | (598,000   | )
|                                                     |                                                                                             | Other accrued expenses                                    |            |                          | 1,346,000  |      |           |           | (1,034,000 | ) |            |           | (38,000    | )
|                                                     |                                                                                             | Billing in excess of costs                                |            |                          | 2,197,000  |      |           |           | (340,000   | ) |            |           | 19,000     |  
|                                                     |                                                                                             | Other                                                     |            |                          |           |      |           |           |           |   |            |           | 6,000      |  
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Net cash (used in) provided by operating activities                                         |                                                           |            | (3,347,000               | )          |      |           | 3,292,000 |            |   |            | (544,000  | )         
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|Cash flows from investing activities:                |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|                                                     | Net acquisition of property and equipment                                                   |                                                           |            | (1,425,000               | )          |      |           | (290,000  | )          |   |            | (784,000  | )         
|                                                     | Acquisition of FEL Corporation assets                                                       |                                                           |            | (2,022,000               | )          |      |           |          |            |   |            |          |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Net cash used in investing activities                                                       |                                                           |            | (3,447,000               | )          |      |           | (290,000  | )          |   |            | (784,000  | )         
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|Cash flows from financing activities:                |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|                                                     | Stock
issuance cost                                                                         |                                                           |            | (84,000                  | )          |      |           |          |            |   |            |          |           
|                                                     | Proceeds from line of credit                                                                |                                                           |            | 4,650,000                |            |      |           |          |            |   |            |          |           
|                                                     | Repayments of line of credit                                                                |                                                           |            | (1,750,000               | )          |      |           |          |            |   |            |          |           
|                                                     | Principal payments on capital lease obligations                                             |                                                           |            |                         |            |      |           | (38,000   | )          |   |            | (73,000   | )         
|                                                     | Proceeds from employee stock purchases                                                      |                                                           |            |                         |            |      |           |          |            |   |            | 42,000    |           
|                                                     | Proceeds of stock option exercises                                                          |                                                           |            | 316,000                  |            |      |           | 126,000   |            |   |            | 80,000    |           
|                                                     | Payments on purchase of Treasury Stock                                                      |                                                           |            |                         |            |      |           | (240,000  | )          |   |            | (285,000  | )         
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Net
cash provided (used in) financing activities                                            |                                                           |            | 3,132,000                |            |      |           | (152,000  | )          |   |            | (236,000  | )         
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|Net increase (decrease) in cash and cash equivalents |                                                                                             |                                                           | (3,662,000 | )                        |            |      | 2,850,000 |           |            |   | (1,564,000 | )        
|Cash and cash equivalents, beginning of period       |                                                                                             |                                                           | 4,362,000  |                          |            |      | 1,512,000 |           |            |   | 3,076,000  |          
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|Cash and cash equivalents, end of period             |                                                                                             | $                                                         | 700,000    |                          |            | $    | 4,362,000 |           |            | $ | 1,512,000  |          
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|Supplemental disclosure of cash flow information:    |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|                                                     | Cash received for income taxes                                                              |                                                           | $          |                         |            |      | $         | 162,000   |            |   | $          | 7,000     |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Cash paid for interest                                                                      |                                                           | $          | 37,000                   |            |      | $         | 20,000    |            |   | $          | 5,000     |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Cash paid for income taxes                                                                  |                                                           | $          | 362,000                  |            |      | $         |          |            |   | $          | 2,435,000 |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|Non-cash
investing and financing activities:         |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |          
|                                                     | Tax benefit on stock option exercises included in prepaid taxes                             |                                                           | $          | 175,000                  |            |      | $         | 36,000    |            |   | $          |          |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | Stock
issuance costs included in accounts payable                                           |                                                           | $          | 79,000                   |            |      | $         |          |            |   | $          |          |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           
|                                                     | FEL
acquisition costs included in accounts payable                                          |                                                           | $          | 26,000                   |            |      | $         |          |            |   | $          |          |           
|                                                     |                                                                                             |                                                           |            |                          |            |      |           |           |            |   |            |           |           

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

32



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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) primarily designs,
develops and manufactures systems and equipment for integrated passive
surveillance systems, electronic countermeasures, and simulator systems for
military and commercial customers.

Principles of Consolidation:

The consolidated financial statements include the accounts of Sensytech,
Inc. and its wholly owned subsidiaries, Daedalus Enterprises Export Corporation
and ST Production Systems, Inc. All intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications were made to
conform the prior years financial statements to the presentation adopted in
the 2002 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:

|                                 |  |      |           |      |  |   |        | 
|-------------------------------- |  | ---- | --------- | ---- |  | - | ------ | 
|                                 |  | 2002 |           | 2001
|                                 |  |      |           |     
|Raw materials                    |  | $    | 989,000   |      |  | $ |       | 
|Component parts, work in process |  |      | 2,004,000 |      |  |   |       | 
|Finished component parts         |  |      | 175,000   |      |  |   | 30,000 | 
|                                 |  |      |           |      |  |   |        | 
|                                 |  | $    | 3,168,000 |      |  | $ | 30,000 | 
|                                 |  |      |           |      |  |   |        | 

33



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##### 



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).

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). If estimated cost to complete exceeds the value of the
contract, a reserve for estimated loss is recognized. 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. It
is reasonably possible that future operating results may be effected if actual
contract costs incurred differ from total contract costs currently estimated by
management. Revenue under time and material contracts is based on hours
incurred times approved loaded labor rates plus other costs incurred plus
general and administrative expense allocated to other costs incurred.

34



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##### 



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 2002, 2001,
and 2000 was $794,000, $892,000 and $932,000, 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 $200,000 at September 30,
2002.

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 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

35



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##### 



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. At September 30, 2002 and 2001, substantially all
contracts in progress are expected to be completed within the next 12 months.
Therefore, substantially all current assets and current liabilities as of this
date are expected to be turned over in the next 12 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:

|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|-------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                   |  | 2002 |           | 2001 |  | 2000
|                                                   |  |      |           |      |  |     
|Net income                                         |  | $    | 2,189,000 |      |  | $    | 1,224,000 |  |  | $ | 1,666,000 | 
|Weighted average shares outstanding  basic        |  |      | 4,054,000 |      |  |      | 3,985,000 |  |  |   | 3,997,000 | 
|Basic earnings per share                           |  | $    | .54       |      |  | $    | .31       |  |  | $ | .42       | 
|Effect of dilutive securities:                     |  |      |           |      |  |      |           |  |  |   |           | 
|Net shares issuable upon exercise of stock
options |  |      | 126,000   |      |  |      | 42,000    |  |  |   | 148,000   | 
|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|Weighted average shares outstanding  diluted      |  |      | 4,180,000 |      |  |      | 4,027,000 |  |  |   | 4,145,000 | 
|Diluted earnings per share                         |  | $    | .52       |      |  | $    | .30       |  |  | $ | .40       | 

Note 2  Acquisitions

On October 3, 2001, the Company purchased certain assets used in the California
business of FEL Corporation 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
has been recorded under the purchase method 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, results of operations 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 Corporation (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 has been recorded under the purchase method of
accounting and, accordingly, the results of operations of STPSI since February
1, 2002 have been included in the consolidated financial statements.

36



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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 $200,000 for the year ended September
30, 2002 and is expected to approximate $265,000 in 2003, $100,000 in 2004, and
$35,000 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 |  
|                                                |  |   |           |  

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
are as follows:

|                           |  |                     |            |                     |  |            |            |          |  |   |            |  |  |   |            | 
|-------------------------- |  | ------------------- | ---------- | ------------------- |  | ---------- | ---------- | -------- |  | - | ---------- |  |  | - | ---------- | 
|                           |  | Twelve Months Ended |            | Twelve Months Ended
|                           |  | September 30, 2002  |            | September 30, 2001 
|                           |  | Historical          |            | Proforma            |  | Historical |            | Proforma
|                           |  |                     |            |                     |  |            |            |         
|Revenues                   |  | $                   | 32,290,000 |                     |  | $          | 36,314,000 |          |  | $ | 16,391,000 |  |  | $ | 28,464,000 | 
|Income from operations     |  |                     | 3,653,000  |                     |  |            | 3,635,000  |          |  |   | 1,746,000  |  |  |   | 1,101,000  | 
|Net Income                 |  |                     | 2,189,000  |                     |  |            | 2,155,820  |          |  |   | 1,224,000  |  |  |   | 740,000    | 
|Basic earnings per share   |  |                     | .54        |                     |  |            | .53        |          |  |   | .31        |  |  |   | .19        | 
|Diluted earnings per share |  |                     | .52        |                     |  |            | .52        |          |  |   | .30        |  |  |   | .18        | 

37



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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 the most recent fiscal year ended December 31, 2001. The proforma
information for the twelve months ended September 30, 2001 includes twelve
months of FELs most recent results for the FELs year ended December 31, 2001.
Information for FEL for periods prior to January 1, 2001 was not available.
Proforma adjustments included the amortization of intangible assets over a 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 over the two-year
term of the lease. As of September 30, 2002, the unamortized balance of the
payment was $187,000. 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 years ended
September 30 are as follows:

|                                                                           |  |      |              |      |  |   |              |  
|-------------------------------------------------------------------------- |  | ---- | ------------ | ---- |  | - | ------------ | -
|                                                                           |  | 2002 |              | 2001
|                                                                           |  |      |              |     
|Accumulated costs incurred and estimated
earnings on uncompleted contracts |  | $    | 154,568,000  |      |  | $ | 122,278,000  |  
|                                                                           |  |      |              |      |  |   |              |  
|Progress billings and advances on uncompleted
contracts                    |  |      | (148,090,000 | )    |  |   | (118,860,000 | )
|                                                                           |  |      |              |      |  |   |              |  
|                                                                           |  |      |              |      |  |   |              |  
|Total                                                                      |  | $    | 6,478,000    |      |  | $ | 3,418,000    |  
|                                                                           |  |      |              |      |  |   |              |  

38



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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:

|                                                                                                      |  |      |           |      |  |   |           | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                                      |  | 2002 |           | 2001
|                                                                                                      |  |      |           |     
|Costs and estimated earnings in excess
of billings (unbilled contract costs) on
uncompleted contracts |  | $    | 6,478,000 |      |  | $ | 3,418,000 | 
|                                                                                                      |  |      |           |      |  |   |           | 
|Billings in excess of costs and estimated
earnings on uncompleted contracts                           |  |      | 2,342,000 |      |  |   | 145,000   | 
|                                                                                                      |  |      |           |      |  |   |           | 
|                                                                                                      |  |      |           |      |  |   |           | 
|Total                                                                                                 |  | $    | 8,820,000 |      |  | $ | 3,563,000 | 
|                                                                                                      |  |      |           |      |  |   |           | 

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, 2002 will be billed over the next 270 days as products and/or
services are delivered. Retainages, which approximate $143,000 at September 30,
2002, will be billed and collected as contracts are finalized with the
customer. At September 30, 2002 and 2001, there are no significant unrecovered
costs or estimated profits subject to future negotiation.

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, 1998.

At September 30, 1999, the allowance for doubtful accounts was $312,000.
During 2000 and 2001, we reevaluated our estimates of collectability and
reduced our reserve by $97,000 and $15,000, respectively.The Company made no
change in the allowance for year ended September 30, 2002.

Note 4  Property and Equipment

Property and equipment are summarized as follows at September 30:

|                                               |          |   |            |           |      |   |            |           | 
|---------------------------------------------- | -------- | - | ---------- | --------- | ---- | - | ---------- | --------- | 
|                                               |          |   | 2002       |           | 2001
|                                               |          |   |            |           |     
|Furniture and fixtures                         |          | $ | 290,000    |           |      | $ | 137,000    |          
|Machinery and equipment                        |          |   | 5,115,000  |           |      |   | 3,665,000  |          
|Leasehold improvements                         |          |   | 1,286,000  |           |      |   | 963,000    |          
|Equipment capitalized under capital
leases     |          |   | 143,000    |           |      |   | 143,000    |          
|                                               |          |   |            |           |      |   |            |          
|                                               | Subtotal |   |            | 6,834,000 |      |   |            | 4,908,000 | 
|Less accumulated depreciation and
amortization |          |   | (4,226,000 | )         |      |   | (3,479,000 | )        
|                                               |          |   |            |           |      |   |            |          
|Total                                          |          | $ | 2,608,000  |           |      | $ | 1,429,000  |          
|                                               |          |   |            |           |      |   |            |          

39



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Depreciation and amortization expense was approximately $747,000, $488,000
and $560,000 for the years ended September 30, 2002, 2001 and 2000,
respectively.

Note 5  Note Payable  Line of Credit

The Company entered into a line of credit and related note payable with
its bank on February 28, 2001. The line of credit was originally for a one-year
term and was for $5,000,000. Effective February 22, 2002, the Company renewed
the line of credit and the amount available under the line of credit was
increased to $10,000,000. However, the total borrowing base generally cannot
exceed the sum of 90% of qualified government accounts receivable and 80% of
qualified non-government accounts receivable. The line of credit matures on
February 28, 2003.

The bank agreement establishes the interest rate at the LIBOR rate plus
225 to 275 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 and the performance of the Companys obligations under
the line of credit agreement are collateralized by the Companys accounts
receivable, equipment, contracts, and general intangibles. The agreement also
contains various covenants as to dividend restrictions, working capital,
tangible net worth, earnings and debt-to-equity ratios. At September 30, 2002,
$2,900,000 was outstanding. The interest rate on the line of credit was 4.08%
as of September 30, 2002. At September 30, 2001, there was no outstanding
balance. Unused commitment fees of one quarter of one percent per annum are
required.

Note 6  Employee Benefit Plans

At September 30, 2002, 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 of 1998, the Plan was amended to
allow for self-direction investments 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. In 2002, 2001 and 2000, the Company matched 50%
of the first six percent of employee contributions, which match amounted to
$234,000, $131,000 and $132,000, respectively.

40



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The total number of Company shares allocated to participants under the
profit sharing plan at September 30, 2002, 2001 and 2000 were 367,293, 387,801,
and 408,612, respectively.

Note 7  Lease Commitments

The principal facilities of the Company are generally leased under
non-cancellable 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, 2002, 2001 and 2000 was
$1,134,000, $879,000 and $897,000, respectively. At September 30, 2002,
minimum rental payments under operating leases for facilities and equipment are
as follows:

|          |  |   |           | 
|--------- |  | - | --------- | 
|2003      |  | $ | 906,000   | 
|2004      |  |   | 665,000   | 
|2005      |  |   | 537,000   | 
|2006      |  |   | 541,000   | 
|2007      |  |   | 539,000   | 
|Remainder |  |   | 4,078,000 | 
|          |  |   |           | 
|Total     |  | $ | 7,266,000 | 
|          |  |   |           | 

The Company sub-leases to a third party a portion of its facility at its
principal location in Virginia. Sub-lease income for the years ended September
30, 2002, 2001 and 2000 was $78,000, $112,000, and $29,000, respectively. There
are no minimum rentals to be received under the sub-lease agreement as of
September 30, 2002.

Note 8  Stock Options

The Company has a Long-Term Incentive Plan and a Non-Employee Director
Stock Option Plan established in 1995 (collectively the 1995 Plans). The
Long-Term Incentive Plan provides for the granting of options, restricted stock
and/or performance awards to key employees and the Non-Employee Director Stock
Option Plan provides for the granting of options to outside members of the
Board of Directors to purchase common stock of the Company at the fair market
value at the date of the grant. There were 269,100 exercisable options
outstanding at September 30, 2002 under the Long-Term Incentive Plan. The
Non-Employee Director Stock Option Plan was amended to prohibit future granting
of options.

The Company also has a 1991 Stock Option Plan, the (1991 Plan) and a
1996 Stock Option Plan, the (1996 Plan). The 1991 Plan had no exercisable
option outstanding at September 30, 2002. The 1996 Plan had 25,800 exercisable
options that are outstanding at September 30, 2002.

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

41



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##### 



Stock option activity is summarized as follows:

|                              |           |  |         |          |                  |   |      |      | 
|----------------------------- | --------- |  | ------- | -------- | ---------------- | - | ---- | ---- | 
|                              |           |  | 1995    |          | Weighted Average
|                              |           |  | Plans   |          | Exercise Price  
|                              |           |  |         |          |                 
|Balance at September 30, 1999 |           |  | 351,700 |          |                  | $ | 3.02 |     
|                              | Exercised |  |         | (8,000   | )                |   |      | 2.91 | 
|                              | Granted   |  |         | 30,500   |                  |   |      | 4.58 | 
|                              | Expired   |  |         |         |                  |   |      |     | 
|                              | Forfeited |  |         | (158,200 | )                |   |      | 3.15 | 
|                              |           |  |         |          |                  |   |      |     
|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 |     
|                              |           |  |         |          |                  |   |      |     

|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |      | 
|----------------------------- | --------- |  | ------ | ------- | ---------------- | - | ---- | ---- | ---------------- |  | ------ | ------- | - | - | ---- | ---- | 
|                              |           |  | 1991   |         | Weighted Average |   | 1996 |      | Weighted Average
|                              |           |  | Plan   |         | Exercise Price   |   | Plan |      | Exercise Price  
|                              |           |  |        |         |                  |   |      |      |                 
|Balance at September 30, 1999 |           |  | 25,800 |         |                  | $ | 0.75 |      |                  |  | 41,280 |         |   | $ | 3.37 |     
|                              | Exercised |  |        |        |                  |   |      |     |                  |  |        | (15,480 | ) |   |      | 3.37 | 
|                              | Granted   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Expired   |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              | Forfeited |  |        |        |                  |   |      |     |                  |  |        |        |   |   |      |     | 
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     
|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 |     
|                              |           |  |        |         |                  |   |      |      |                  |  |        |         |   |   |      |     

Total shares of common stock reserved pursuant to the aforementioned plans
and the non-

42



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##### 



qualified options are 455,300 at September 30, 2002.

The weighted average grant date fair value of options granted for the 1995
Plans was $7.67, $4.18 and $4.58 during 2002, 2001 and 2000, respectively.
Total shares exercisable at September 30, 2002, 2001 and 2000 were 240,300,
83,900 and 57,600 with a weighted average exercise price of $3.90, $3.17 and
$2.47, respectively.

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

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 2002, 2001 and 2000:

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2002 |      | 2001 |  | 2000
|                        |  |      |      |      |  |     
|Risk free interest rate |  |      | 2.5  | %    |  |      | 3.5  | % |  |  | 6.0  | %
|Expected volatility     |  |      | 68.8 | %    |  |      | 65.4 | % |  |  | 67.8 | %

The following summarizes information about stock options outstanding at
September 30, 2002:

|                             |  |             |         |                  |  |                           |  |           |  |  |  | 
|---------------------------- |  | ----------- | ------- | ---------------- |  | ------------------------- |  | --------- |  |  |  | 
|                             |  | 2002        |         |                  |  |                           |  |           |  | 
|                             |  | Number      |         | Range of         |  | Weighted Average         
|                             |  | Outstanding |         | Exercises Prices |  | Remaining Life           
|                             |  |             |         |                  |  |                          
|Non-Qualified
          Plan |  |             | 3,000   |                  |  | $2.25                     |  | 4.2 years
|1995
          Option Plan   |  |             | 114,000 |                  |  | $2.25 to
          $3.00  |  | 6.0 years
|1995
          Option Plan   |  |             | 193,500 |                  |  | $3.63 to
          $5.00  |  | 8.4 years
|1995
          Option Plan   |  |             | 119,000 |                  |  | $5.25 to
          $10.25 |  | 8.4 years
|1996
          Option Plan   |  |             | 25,800  |                  |  | $3.37                     |  | 4.2 years
|                             |  |             |         |                  |  |                           |  |          
|                             |  |             | 455,300 |                  |  | $2.25 to
          $10.25 |  | 7.8 years
|                             |  |             |         |                  |  |                           |  |          

The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees, under which no compensation cost
for stock options is recognized for stock option awards granted at or above
fair market value. 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 for the years
ended September 30, 2002, 2001 and 2000.

43



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##### 



|            |  |            |           |           |  |                |     |                  |  |   |     | 
|----------- |  | ---------- | --------- | --------- |  | -------------- | --- | ---------------- |  | - | --- | 
|            |  |            |           |           |  | Basic Earnings |     | Diluted Earnings
|            |  | Net Income |           | Per Share |  | Per Share     
|            |  |            |           |           |  |               
|2002        |  |            |           |           |  |                |     |                  |  |   |     | 
|As reported |  | $          | 2,189,000 |           |  | $              | .54 |                  |  | $ | .52 | 
|Pro forma   |  | $          | 1,722,000 |           |  | $              | .42 |                  |  | $ | .41 | 
|            |  |            |           |           |  |                |     |                  |  |   |     | 
|2001:       |  |            |           |           |  |                |     |                  |  |   |     | 
|As reported |  | $          | 1,224,000 |           |  | $              | .31 |                  |  | $ | .30 | 
|Pro forma   |  | $          | 1,104,000 |           |  | $              | .28 |                  |  | $ | .27 | 
|            |  |            |           |           |  |                |     |                  |  |   |     | 
|2000:       |  |            |           |           |  |                |     |                  |  |   |     | 
|As reported |  | $          | 1,666,000 |           |  | $              | .42 |                  |  | $ | .40 | 
|Pro forma   |  | $          | 1,571,000 |           |  | $              | .39 |                  |  | $ | .38 | 

Note 9  Stock Purchase Plan and Unearned Compensation

The Company reserved 100,000 shares of common stock for sale to eligible
employees through payroll deductions over six month periods pursuant to the
1983 Employee Stock Purchase Plan (the Purchase Plan). The purchase price is
the lower of 90% of the fair market value of the stock on the first or last day
of the purchase period. Under the Purchase Plan, 9,927 were issued in 2000, at
an average price of $4.13. At September 30, 2000, there were 40,272 shares
available for future purchase. There were no shares issued during the years ended
September 30, 2002 and September 30, 2001.

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. In 2000, 46,292 shares were granted at a
weighted average fair market value of $3.63 per share.
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 $139,000 and $50,000 in 2001 and 2000, respectively.
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.

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 53,245 shares and 72,000 shares
during the years ended September 30, 2001 and 2000, respectively, at an
aggregate cost of $525,000. No shares were purchased during the year ended
September 30, 2002. The purpose of the stock repurchase is to help the Company
achieve its goal of enhancing stockholder value.

44



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##### 



Note 11  Income Taxes

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

|          |         |   |           |           |      |   |         |         |  |   |           |         | 
|--------- | ------- | - | --------- | --------- | ---- | - | ------- | ------- |  | - | --------- | ------- | 
|          |         |   | 2002      |           | 2001 |   | 2000   
|          |         |   |           |           |      |   |        
|CURRENT:  |         |   |           |           |      |   |         |         |  |   |           |        
|          | Federal |   | $         | 1,286,000 |      |   | $       | 455,000 |  |   | $         | 831,000 | 
|          | State   |   |           | 208,000   |      |   |         | 84,000  |  |   |           | 184,000 | 
|DEFERRED: |         |   |           |           |      |   |         |         |  |   |           |        
|          | Federal |   |           | 17,000    |      |   |         | 202,000 |  |   |           | 6,000   | 
|          | State   |   |           | 9,000     |      |   |         | 38,000  |  |   |           | 5,000   | 
|          |         |   |           |           |      |   |         |         |  |   |           |        
|          |         |   |           |           |      |   |         |         |  |   |           |        
|          |         | $ | 1,520,000 |           |      | $ | 779,000 |         |  | $ | 1,026,000 |        
|          |         |   |           |           |      |   |         |         |  |   |           |        

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

|        |  |      |         |      |  |   |         | 
|------- |  | ---- | ------- | ---- |  | - | ------- | 
|        |  | 2002 |         | 2001
|        |  |      |         |     
|Federal |  | $    | 607,000 |      |  | $ | 590,000 | 
|State   |  |      | 64,000  |      |  |   | 55,000  | 
|        |  |      |         |      |  |   |         | 
|        |  |      |         |      |  |   |         | 
|Total   |  | $    | 671,000 |      |  | $ | 645,000 | 
|        |  |      |         |      |  |   |         | 

Deferred tax assets
consist of the following at September 30:

|                                     |  |      |          |      |  |   |         | 
|------------------------------------ |  | ---- | -------- | ---- |  | - | ------- | 
|                                     |  | 2002 |          | 2001
|                                     |  |      |          |     
|Accrued vacation                     |  | $    | 144,000  |      |  | $ | 121,000 | 
|Accrued severance                    |  |      |         |      |  |   | 110,000 | 
|Net operating losses and tax
credits |  |      | 265,000  |      |  |   | 294,000 | 
|Uncollectible accounts               |  |      | 76,000   |      |  |   | 76,000  | 
|Warranty reserve                     |  |      | 105,000  |      |  |   |        | 
|Depreciation                         |  |      | (39,000) |      |  |   |        | 
|Amortization                         |  |      | 63,000   |      |  |   |        | 
|Other, net                           |  |      | 57,000   |      |  |   | 44,000  | 
|                                     |  |      |          |      |  |   |         | 
|                                     |  | $    | 671,000  |      |  | $ | 645,000 | 
|                                     |  |      |          |      |  |   |         | 

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

|                              |                     |  |      |   |      |  |      |   |  |  |      |   | 
|----------------------------- | ------------------- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | - | 
|                              |                     |  | 2002 |   | 2001 |  | 2000
|                              |                     |  |      |   |      |  |     
|Federal statutory rate        |                     |  | 34.0 | % |      |  | 34.0 | % |  |  | 34.0 | %
|State income taxes, net of    |                     |  | 4.0  |   |      |  | 4.0  |   |  |  | 4.6  |  
|                              | federal tax benefit |  |      |   |      |  |      |   |  |  |      |   | 
|Change in valuation allowance |                     |  |     |   |      |  |     |   |  |  | (7.2 | )
|Prior year items              |                     |  |     |   |      |  |     |   |  |  | 6.2  |  
|Other, net                    |                     |  | 3.0  |   |      |  | 0.9  |   |  |  | 0.5  |  
|                              |                     |  |      |   |      |  |      |   |  |  |      |  
|                              |                     |  | 41.0 | % |      |  | 38.9 | % |  |  | 38.1 | %
|                              |                     |  |      |   |      |  |      |   |  |  |      |  

45



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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.

During 2000, the Company reduced the valuation allowance by $320,000. The
reduction in the valuation allowance resulted from changes in the uncertainties
surrounding the Companys ability to generate future taxable income based on
the Companys sustained profitability in 2000 and 1999 and future projections
of taxable income.

The reduction in the valuation allowance in 2000 of $125,000 was used to
reduce goodwill recorded in the Acquisition to zero. The remaining reduction in
the valuation allowance in 2000 of $195,000 served to reduce income tax
expense.

Note 12  Concentrations of Credit and Other Business Risk

As of September 30, 2002 and 2001, the Company had funds on deposit in
excess of the federally insured amount with a bank. Approximately 80.4% 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, 2002, 2001
and 2000, the Company recorded revenues from four significant contracts. For
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 System. Revenues from these contracts amounted to 18.8%,
6.8%, 5.7% and 5.1% of fiscal year 2002 total revenue. For 2001 and 2000,
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, respectively, and 25.0%, 8.0% and 15.0% of fiscal year 2000
total revenue, respectively.

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

46



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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 13  New Accounting Pronouncements

In July 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations(SFAS No. 143). SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred, if a reasonable estimate of fair value can be
made. The associated asset retirement cost would be capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002. We do not expect the
adoption of SFAS No. 143 to have an impact on our consolidated financial
position or results of operations.

In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS No. 144), which supercedes
SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.

In November 2001, the Emerging Issues Task Force (EITF) issued Issue
01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred.EITF No. 01-14 requires that companies
report reimbursements received for out-of-pocket expenses incurred as revenue,
rather than as a reduction of expenses. The provisions of EITF No. 01-14 are
effective for financial statements issued for fiscal years beginning after
December 15,2001. As we have historically accounted for reimbursements of
out-of-pocket expenses in the manner provided for under EITF
No. 01-14. The adoption of the provision of EITF No. 01-14 did
not have an impact on our consolidated financial position or results
of operations.

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
Emergency 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.

47



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Note 14  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. Included in this group are the programs acquired
through our February 2002 acquisition of the operating assets of FEL
Corporation, which we operate through our ST Productions Systems,
Inc. subsidiary.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Communication (Comms) Group designs, develops, manufactures,
and supports products which intercept signals and analyze
communications in a variety of transmission media, and then identify
and locate the sources of these signals and communication. These
systems are generally used by operators on board aircraft, ships and
ground installations to intercept various kinds of transmissions
over established communications networks.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Imaging Group designs, develops, manufactures and supports
products that are installed on special purpose aircraft and land
vehicles and use multispectral, infrared, and light imaging systems
to perform remote surveys. Applications of this technology include
environmental pollution, facility inspection, utility monitoring,
surface mineral exploration and other special purpose inspections
where on-site inspections are not possible or desirable.                                                                                                                                                                                                                                                                                                                                                          

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

Manufacturing of the Communications Group and is accomplished in
Newington, Virginia. The Defense Systems Group manufactures in both its
Newington, VA and Farmingdale, NJ facilities. The Imaging Group products are
manufactured in the Ann Arbor, Michigan, facility.

48



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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:

|                               |         |  |      |            |      |  |      |            |  |  |   |            |  
|------------------------------ | ------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | -
|                               |         |  | 2002 |            | 2001 |  | 2000
|                               |         |  |      |            |      |  |     
|Revenue:                       |         |  |      |            |      |  |      |            |  |  |   |           
|                               | DS      |  | $    | 18,057,000 |      |  | $    | 11,342,000 |  |  | $ | 16,333,000 |  
|                               | Comms   |  |      | 10,479,000 |      |  |      | 3,640,000  |  |  |   | 4,491,000  |  
|                               | Imaging |  |      | 3,754,000  |      |  |      | 1,409,000  |  |  |   | 1,882,000  |  
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|                               | Total   |  | $    | 32,290,000 |      |  | $    | 16,391,000 |  |  | $ | 22,706,000 |  
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|Income (Loss) From
Operations: |         |  |      |            |      |  |      |            |  |  |   |           
|                               | DS      |  | $    | 490,000    |      |  | $    | 949,000    |  |  | $ | 2,167,000  |  
|                               | Comms   |  |      | 2,454,000  |      |  |      | 611,000    |  |  |   | 667,000    |  
|                               | Imaging |  |      | 709,000    |      |  |      | 186,000    |  |  |   | (297,000   | )
|                               |         |  |      |            |      |  |      |            |  |  |   |           
|                               | Total   |  | $    | 3,653,000  |      |  | $    | 1,746,000  |  |  | $ | 2,537,000  |  
|                               |         |  |      |            |      |  |      |            |  |  |   |           

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

Note 15  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, 2002 and
2001 are reasonable estimates of their fair values. The Companys financial
instruments include cash and cash equivalents, accounts receivable, line of
credit borrowings, capital leases and accounts payable.

Note 16  Quarterly Financial Data (Unaudited)

49



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|                                         |                                     |                          |       |                                       |       |         |       |         |       |   |       |       |       |   |        |       |        | 
|---------------------------------------- | ----------------------------------- | ------------------------ | ----- | ------------------------------------- | ----- | ------- | ----- | ------- | ----- | - | ----- | ----- | ----- | - | ------ | ----- | ------ | 
|2002                                     |                                     | First                    |       | Second                                |       | Third   |       | Fourth 
|                                         |                                     | 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  |       
|                                         |                                     |                          |       |                                       |       |         |       |         |       |   |       |       |       |   |        |      

50



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|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |       |       | 
|---------------------------------------- | ----------------------------------- | ------------------------ | ----- | ------------------------------------- | ----- | ------- | ----- | ------- | ----- | ------ | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                         |                                     |                          |       | First                                 |       | Second  |       | Third   |       | Fourth
|2001                                     |                                     | Quarter                  |       | Quarter                               |       | Quarter |       | Quarter
|                                         |                                     |                          |       |                                       |       |         |       |        
|                                         |                                     |                          |       | (in thousands, except per share data)
|Consolidated Statement of Earnings Data: |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Contract revenues                        |                                     | $                        | 4,265 |                                       |       | $       | 4,188 |         |       | $      | 4,140 |       |       | $ | 3,798 |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Costs and expenses                       |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         | Cost of revenues                    |                          |       | 3,270                                 |       |         |       | 3,133   |       |        |       | 2,831 |       |   |       | 2,510 |      
|                                         | General and administrative expenses |                          |       | 526                                   |       |         |       | 832     |       |        |       | 836   |       |   |       | 707   |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     | Total costs and expenses |       |                                       | 3,796 |         |       |         | 3,965 |        |       |       | 3,667 |   |       |       | 3,217 | 
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Income from operations                   |                                     |                          | 469   |                                       |       |         | 223   |         |       |        | 473   |       |       |   | 581   |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Other income (expenses)                  |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         | Interest income                     |                          |       | 15                                    |       |         |       | 48      |       |        |       | 49    |       |   |       | 43    |      
|                                         | Interest expense                    |                          |       |                                      |       |         |       | (2      | )     |        |       | (2    | )     |   |       | (10   | )    
|                                         | Other income                        |                          |       | 28                                    |       |         |       | 38      |       |        |       | 29    |       |   |       | 21    |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Income before income taxes               |                                     |                          | 512   |                                       |       |         | 307   |         |       |        | 549   |       |       |   | 635   |      
|Income tax provision                     |                                     |                          | (205  | )                                     |       |         | (131  | )       |       |        | (225  | )     |       |   | (218  | )    
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Net income                               |                                     | $                        | 307   |                                       |       | $       | 176   |         |       | $      | 324   |       |       | $ | 417   |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|Earnings per share                       |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         | Basic                               |                          | $     | 0 .08                                 |       |         | $     | 0.04    |       |        | $     | 0.08  |       |   | $     | 0.11  |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      
|                                         | Diluted                             |                          | $     | 0 .08                                 |       |         | $     | 0.04    |       |        | $     | 0.08  |       |   | $     | 0.10  |      
|                                         |                                     |                          |       |                                       |       |         |       |         |       |        |       |       |       |   |       |      

Note 17  Subsequent Events

On November 22, 2002, the Company sold 2 million shares of common stock
for net proceeds after costs and underwriters commissions of $14,520,000. 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.

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.

51



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##### 



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors of the Company 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,
2002, 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 13 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.

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. CONTROLS AND PROCEDURES



| | (a) |  | The Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures
are effective based on their evaluations of these controls, which was
done within the last 90 days.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | During the last quarter, there were no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the evaluation of
these controls.                          

PART IV

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

52



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##### 



Exhibits
None.

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

Reports on Form 8-K
No reports on Form 8-K were required to be filed during the three months ended
September 30, 2002.

53



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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 23, 2002 |  |                                                                                                          

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 RockwellS. Kent Rockwell
Date:  December 23, 2002     |  | Director and Chief Executive Officer
(Principal Executive Officer)                   
|                                                                 
|/s/ David A. SmithDavid A. Smith
Date:  December 23, 2002         |  | President and Chief Operating Officer                                                
|                                                                 
|/s/ Donald F. FultzDonald F. Fultz
Date:  December 23, 2002       |  | Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer)
|                                                                 
|/s/ S. R. PerrinoS. R. Perrino
Date:  December 23, 2002           |  | Director                                                                             
|                                                                 
|/s/ Charles W. BernardCharles W. Bernard
Date:  December 23, 2002 |  | Director                                                                             
|                                                                 
|/s/ Philip H. PowerPhilip H. Power
Date:  December 23, 2002       |  | Director                                                                             
|                                                                 
|/s/ John D. SandersJohn D. Sanders
Date:  December 23, 2002       |  | Director                                                                             
|                                                                 
|/s/ John IrvinJohn Irvin
Date:   December 23, 2002                |  | Director                                                                             

54



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##### 



FORM OF CERTIFICATION

I, S. Kent Rockwell, certify that:



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



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



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



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

55



---



##### 





|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                              
|----------------------- |  | -------------------------------------------------------------
|Date: December 23, 2002 |  |                                                              
|                       
|                        |  | /s/ S. Kent Rockwell
S. Kent Rockwell
Chief Executive Officer

56



---



##### 



FORM OF CERTIFICATION

I, Donald F. Fultz, certify that:



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



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



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



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

57



---



##### 





|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                             
|----------------------- |  | ------------------------------------------------------------
|Date: December 23, 2002 |  |                                                             
|                       
|                        |  | /s/ Donald F. Fultz

Donald F. Fultz
Chief Financial Officer

58