##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended September 30, 2005
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from ___to ___
 Commission File Number 000-08193
 ARGON ST, INC.
 )
 Delaware
    
    38-1873250(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 12701 Fair Lakes Circle, Suite 800, Fairfax Virginia 22033
 (703) 322-0881
   Title of Class
    
    Name of Exchange on
Which RegisteredCommon Stock, par value $.01 per share
    
    NASDAQ National Market
 o þ
 o þ
  R £
 o þ
 £
  R £
  DOCUMENTS INCORPORATED BY REFERENCE




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ARGON ST, INC. AND SUBSIDIARIES
 For the Fiscal Year Ended September 30, 2005  ______________
 TABLE OF CONTENTS
 PART I1. Business
    
    
    32. Properties
    
    
    253. Legal Proceedings
    
    
    274. Submission of Matters to a Vote of Security Holders
    
    
    27Supplemental Item. Executive Officers of the Registrant
    
    
    27PART II5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    286. Selected Financial Data
    
    
    297. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    317A. Quantitative and Qualitative Disclosures About Market Risks
    
    
    448. Financial Statements and Supplementary Data
    
    
    459. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    669A. Controls and Procedures
    
    
    679B. Other Information
    
    
    67PART III10. Directors and Executive Officers of the Registrant
    
    
    6811. Executive Compensation
    
    
    6812. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    6813. Certain Relationships and Related Transactions
    
    
    6814. Principal Accountant Fees and Services
    
    
    68PART IV15. Exhibits and Financial Statement Schedules
    
    
    69Signatures
    
    
    71Exhibits
    
    
    72-79
 2




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PART I
 ITEM 1. BUSINESS
 Business Description.
  
    
    Signals Intelligence (SIGINT):gathering intelligence from the detection,
interception and evaluation of signals, including communication signals (COMINT) and
electromagnetic signals, such as radar (ELINT);
    
    Electronic Warfare (EW):launching deceptive signals and electronic counter-measures
to defend customer platforms and to disrupt and jam adversary communications and sensor
systems, including using electronic support measures (ESM) to identify and locate
sources of potential threats and detect enemy targeting of customer platforms;
    
    Information Operations (IO):using a variety of methods to exploit, influence and
manipulate an enemys C4ISR processes, including enemy radio and network
communications;
    
    Acoustic Operations:using acoustic sensors and signals to detect, identify and
counter undersea threats, including enemy torpedoes;
    
    Threat Simulation:simulating signals and sensors of enemy platforms for training
purposes; and
    
    Imaging:gathering and analyzing strategic intelligence from a variety of light
spectrum sources, including multispectral, hyperspectral, infra-red, electro-optical
and visible light.
    3




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Available Information
 http://www.argonst.com www.sec.gov.
 Corporate History
    Recent Developments
   4




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##### 



Segments
  Technology and Applications
     Customers
  5




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##### 



Years Ended September 30,2005
    
    2004
    
    2003United States Navy
    
    
    69
    %
    
    
    77
    %
    
    
    68
    %Other U.S. government agencies
    
    
    20
    %
    
    
    11
    %
    
    
    26
    %Foreign
    
    
    11
    %
    
    
    12
    %
    
    
    6
    %
 Government Contracts
  Bidding Process
  
    
    Sole-source contracts.The U.S. government awards sole-source contracts when it
determines that a single contractor has an expertise or technology that is superior to
that of other available contractors. Sole-source contracts are awarded without a formal
competition. Potential suppliers compete informally for sole-source contracts through
research and development investment and marketing efforts. To obtain a sole-source
contract, a contractor must identify the governments requirements early and
demonstrate a distinguishing expertise or technology promptly after the government has
identified a requirement.
    
    Competitive-bid contracts.The U.S. government awards competitive-bid contracts
based on proposal evaluation criteria established by the procuring agency.
Competitive-bid contracts are awarded after a formal bid and proposal competition among
providers. Interested contractors prepare a bid and proposal in response to the
agencys request for proposal or request for information. A bid and proposal is usually
prepared in a short time period in response to a deadline, and requires the extensive
involvement of numerous technical and administrative personnel. Following award,
competitive-bid contracts may be challenged by unsuccessful bidders in a variety of
ways.
  Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2005
    
    September 30, 2004
    
    September 30, 2003Sole Source Contracts
    
    
    54
    %
    
    
    55
    %
    
    
    48
    %Competitive Contracts
    
    
    46
    %
    
    
    45
    %
    
    
    52
    %
 6




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Material Government Contract Provisions
   
    
    terminate existing contracts for convenience, which affords the U.S. government the
right to terminate the contract in whole or in part anytime it wants for any reason or
no reason, as well as for default;
    
    reduce or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
    
    cancel multi-year contracts and related orders, if funds for contract performance
for any subsequent year become unavailable;
    
    claim rights in products and systems produced by its contractor;
    
    adjust contract costs and fees on the basis of audits completed by its agencies;
    
    suspend or debar a contractor from doing business with the U.S. government; and
    
    control or prohibit the export of products.
  Government Contract Categories
  Fixed-price.
 Cost reimbursable.
 
    
    Cost-plus-fixed fee contracts are cost reimbursable contracts that provide for
payment to us of a negotiated fee that is fixed at the inception of the contract. This
fixed fee does not vary with actual cost of the contract, but may be adjusted as a
result of changes in the work to be performed under
 7




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the contract. This contract poses less risk than a fixed-price contract, but our
ability to win future contracts from the procuring agency may be adversely affected
if we fail to perform within the maximum cost set forth in the contract.
    
    A cost-plus-award fee contract is a cost reimbursable contract that provides for a
fee consisting of a base amount (which may be zero) fixed at inception of the contract
and an award amount, based upon the governments satisfaction with our performance
under the contract. With this type of contract, we assume the risk that we may not
receive the award fee, or only a portion of it, if we do not perform satisfactorily.
    
    A cost-plus-incentive fee contract is a cost reimbursable contract that provides for
an initially negotiated fee to be adjusted later by a formula based on the relationship
of total allowable costs to total target costs.
  Time and materials.
  Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2005
    
    September 30, 2004
    
    September 30, 2003Fixed-price contracts
    
    
    79
    %
    
    
    71
    %
    
    
    46
    %Cost reimbursable contracts
    
    
    16
    %
    
    
    19
    %
    
    
    51
    %Time and materials contracts
    
    
    5
    %
    
    
    10
    %
    
    
    3
    %
 Regulation
   Subcontracts
  8




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##### 



Backlog
  2005
    
    
    2004
    
    
    2003Funded
    
    $
    199,543,000
    
    
    $
    222,222,000
    
    
    $
    146,418,000Unfunded
    
    
    71,564,000
    
    
    
    6,597,000
    
    
    
    10,652,000Total
    
    $
    271,107,000
    
    
    $
    228,819,000
    
    
    $
    157,070,000
      Research and Development
   9




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##### 



2005
    
    
    2004
    
    
    2003Internal research and
development
    
    $
    3,992,000
    
    
    $
    1,301,000
    
    
    $
    2,187,000Customer-funded research
and development
    
    
    50,009,000
    
    
    
    47,673,000
    
    
    
    37,007,000Total
    
    $
    54,001,000
    
    
    $
    48,974,000
    
    
    $
    39,194,000
 Competition
   Environmental
  Employees
   Industry Overview
 Government Spending
  10




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##### 




    
    Department of Defense Budgets.Department of Defense spending, including defense
spending for procurement and research and development, is projected to continue to
increase through 2011 according to the Presidents fiscal year 2006 budget request. For
fiscal year 2006, the President has requested $419.3 billion in defense spending,
reflecting a 4.8% increase over the $400.1 billion defense budget in fiscal 2005. This
budget request projected the defense budget to grow to over $500 billion by 2011.
Additionally, the U.S. defense budget has been augmented by a number of wartime
supplemental appropriations since September 11, 2001, including supplemental
appropriations in the amounts of $29.4 billion in 2002, $78.5 billion in 2003, $87.0
billion in 2004 and $81.4 billion in 2005.
    
    C4ISR Spending.The C4ISR market is growing substantially as a result of the events
of September 11, 2001, current defense and intelligence operations such as the conflict
in Iraq, and other defense and intelligence initiatives related to modern threats and
warfare. In a September 2004 report, Frost & Sullivan estimated C4ISR spending at
approximately $19.0 billion for 2003, and projected C4ISR spending to increase at a
6.2% compounded annual growth rate to $29.0 billion in 2010.
 Significant Industry Trends
  
    
    Changing Communications Intelligence Needs.In the past, military intelligence
depended mainly on the interception of military radio transmissions and imagery from
satellites and high-altitude aircraft, and was focused primarily on identifying
strategic bases, missile launch sites and troop movements. In todays changing military
and intelligence environment, enemy communication is often conducted through diverse
methods, including cell phones, satellite communication devices and electronic
messages, rather than traditional military radios. As a result, modern intelligence
systems need to collect and process information in a timely manner from a wide variety
of communication sources.
    
    Electronic Warfare/Information Operations.The military is increasing its use of
electronic interference to disrupt the enemys sensor systems, communications systems,
command and control and other networks. To be effective, this interference must be
performed nearly simultaneous with detection of the enemy system or signals and
consequently interference capabilities are best integrated within sensor systems.
Electronic interference has the capability to disable critical enemy functions without
the permanent destruction caused by traditional weapons, thereby preserving potentially
important intelligence from the enemy system and reducing post-conflict reconstruction
costs.
    
    Multi-Intelligence Systems Integration.Defense and intelligence customers
increasingly require systems that combine and integrate multiple intercept, collection
and processing capabilities to provide more timely and complete intelligence to
tactical and strategic decision makers. These systems detect and process information
from a variety of energy sources, including infra-red, visual, micro-wave, radar,
communications and acoustic energy. In the past, these capabilities were provided by
separate systems and their functions were integrated by large-scale platform
integrators, such as aircraft and ship manufacturers. The decrease in size of modern
sensors favors their integration at the system level rather than the platform level and
presents opportunities for multi-intelligence system suppliers to provide a larger
portion of the users C4ISR requirements.
    
    Network-Centric Warfare.The military is rapidly moving towards network-centric
warfare, which seeks to deliver the warfighter real-time, executable battlefield
information from multiple
 11




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platforms and sources. Modern warfare requires coordinating multiple ground troops,
land vehicles and aircraft (both manned and unmanned), ships and submarines.
Network-centric warfare involves shared data, shared sensors, shared tasking and
joint operations among multiple combat platforms and personnel and requires
increasingly sophisticated, complementary and flexible C4ISR systems.
    
    Personnel Protection.The conflict in Iraq has highlighted the need for personnel
protection against the improvised explosive device (IED). IEDs are explosive weapons
that are being built, deployed and activated in a variety of non-traditional ways and
are difficult to detect or counter. Systems that detect and protect against IEDs are a
critical need and require development of advanced sensor and jamming technologies.
 Business Strategies
  
    
    Capitalizing on Opportunities to Expand our Customer Base.We believe there are
significant opportunities to increase the work we do for our larger customers and for
customers for whom we currently perform limited work. We have opportunities to expand
our business with the U.S. Navy through different, new or follow-on programs. We intend
to aggressively grow our relationships with other agencies within the Department of
Defense and certain intelligence agencies. We believe that our performance record,
demonstrated expertise and industry reputation give us the credibility necessary to
increase our reach into the defense and intelligence markets. We believe the growth of
our company and our expanded capabilities position us to better leverage relationships
and to pursue new business.
    
    Attracting and Developing Highly Skilled Personnel.Our success depends on the
continued contributions of our engineers, system designers and managers. We intend to
continue to hire and develop the highly-skilled professionals needed for our work. We
seek to recruit exceptional recent college graduates and former key personnel from the
intelligence community and Department of Defense. We believe that our managements
success in creating and maintaining a challenging and stimulating work environment has
contributed to our low engineering staff turnover of approximately 7% over the last
twelve months. We believe we can continue to attract, develop and retain employees by
offering competitive compensation, challenging engineering assignments and
opportunities for career and management growth.
    
    Leveraging Research and Development into Production Contracts.Many of our current
systems were developed through our research and development activities. Much of our
research and development is funded through research and development contracts with the
U.S. government. While these contracts are generally small and have lower profit
margins, we have often been successful in expanding these activities into full
production contracts. We believe our involvement in all stages of a systems life cycle
provides us opportunities to be the preferred or sole-source provider for certain
systems. We intend to continue to identify and pursue programs where we can expand
research and development efforts into full production contracts.
    
    Migrating our Multi-Intelligence Capabilities to Additional Platforms.Defense and
intelligence customers now require C4ISR systems that integrate multiple intelligence
gathering and processing capabilities. Our multi-intelligence systems have combined
communications and electronic intelligence capabilities on ships, submarines and
aircraft, and have combined radar and infra-red sensor capabilities for border patrols.
We believe our experience and capabilities position us to win contracts to develop and
produce multi-intelligence systems.
    
    Pursuing Strategic Acquisitions.We plan to complement our internal growth with
strategic acquisitions that add to our defense and intelligence customer base,
technology expertise or system offerings. While we intend to focus acquisitions within
our core business, we may also acquire
 12




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complementary businesses that are consistent with our research and development and
engineering culture and the experience and competencies of our management team.
 Business Risks
  Risks Related to Our Business and Operations
 We rely heavily on sales to the U.S. government, particularly to agencies of the Department of
Defense.
  U.S. government contracts are generally not fully funded at inception, and funding may be
terminated or reduced at any time.
   From time to time, we depend on revenues from a few significant contracts, and any loss or
cancellation of, or any reduction or delay in, any of these contracts could significantly harm our
business.
  13




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We have received a stop-work order under one of our subcontracts, and our work on the related
program may be terminated or modified unfavorably.
   Our U.S. government contracts generally may be terminated at the governments convenience or for
our default.
  14




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As a U.S. government contractor, we are subject to a number of procurement rules and regulations
with respect to negotiated contracts.
  
    
    require certification and disclosure of all cost and pricing data in connection with
contract negotiations;
    
    impose accounting rules that define allowable and unallowable costs and otherwise
govern our right to reimbursement under certain cost-based U.S. government contracts;
and
    
    restrict the use and dissemination of information classified for national security
purposes and the exportation of certain products and technical data.
  Our U.S. government contracts contain provisions that may be unfavorable to us.
  
    
    allow the government to unilaterally suspend us from receiving new contracts pending
resolution of alleged violations of procurement laws or regulations;
    
    reduce the value of existing contracts;
    
    issue modifications to a contract;
    
    control and potentially prohibit the export of our products and services and
associated materials; and
    
    claim rights in products and systems produced by us.
  Our business could be adversely affected by a negative audit by the U.S. government.
  15




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Our senior management is important to our customer relationships and overall business.
  We must recruit and retain highly skilled employees to succeed in our competitive and
labor-intensive business.
  Our business is dependent upon our employees obtaining and maintaining required security
clearances.
  Cost over-runs on our contracts could subject us to losses or adversely affect our future business.
  16




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Our quarterly operating results may vary widely.
  
    
    fluctuations in revenues derived from fixed-price contracts and contracts with a
performance-based fee structure;
    
    commencement, completion or termination of contracts during any particular quarter;
    
    changes in Congress and Presidential administrations and senior U.S. government
officials that affect the timing of technology procurement;
    
    changes in policy or budgetary measures that adversely affect government contracts
in general; and
    
    increased purchase requests from customers for equipment and materials in connection
with the U.S. governments fiscal year end, which may affect our fiscal fourth quarter
operating results.
  Our earnings and profit margins may vary based on the mix of our contracts and programs and
other factors related to our contracts.
  We derive significant revenues from contracts awarded through a competitive bidding process.
  
    
    the need to bid on programs in advance of the completion of their design, which may
result in unforeseen technological difficulties and cost over-runs;
    
    the substantial cost and managerial time and effort that we spend to prepare bids
and proposals for contracts that may not be awarded to us;
 17




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
    
    the need to accurately estimate the resources and cost structure that will be
required to service any contract we are awarded; and
    
    the expense and delay that may arise if our competitors protest or challenge
contract awards made to us pursuant to competitive bidding, and the risk that any such
protest or challenge could result in the resubmission of bids on modified
specifications, or in termination, reduction or modification of the awarded contract.
  We face competition from other firms, many of which have substantially greater resources.
  Our business depends upon our relationships with, and the performance of, our prime
contractors.
   18




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##### 



If our subcontractors or suppliers fail to perform their contractual obligations, our contract
performance and our ability to obtain future business could be materially and adversely affected.
  Our employees or subcontractors may engage in misconduct or other improper activities.
  If we are unable to manage our growth, our business could be adversely affected.
  Our international business poses potentially greater risks than our domestic business.
  We may not be able to receive or retain the necessary licenses or authorizations required to sell
our systems and provide services overseas.
  19




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Our systems and products may be rendered obsolete if we are unable to adapt to the rapid
technological changes in our industry.
  We rely on a limited number of suppliers and manufacturers for specific components, and if our
supplies are interrupted, we may not be able to obtain substitute suppliers and manufacturers on
terms that are as favorable to us.
  
    
    delays in delivery or shortages in components could interrupt and delay production
and result in cancellations of orders for our systems;
    
    alternative suppliers could increase component prices significantly; and
    
    we may not be able to develop alternative sources for the components.
 Our system design and development activities rely on extensive use of commercial-off-the-shelf
(COTS) hardware and software.
   Our future success will depend in part on our ability to meet the changing needs of our
customers.
  20




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##### 



We may be liable for system and service failures.
  
    
    lose revenues due to adverse customer reaction;
    
    be required to provide additional services to a customer at no charge;
    
    receive negative publicity, which could damage our reputation and adversely affect
our ability to attract or retain customers; or
    
    suffer claims for substantial damages.
   Security breaches by us could adversely affect our business.
  Developing new technologies entails significant risks and uncertainties that may not be
covered by indemnity or insurance.
  21




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Our failure to protect our proprietary technology may adversely affect our business and impair our
ability to compete effectively.
  The U.S. governments right to use technology developed by us limits our intellectual property
rights.
  We may be affected by intellectual property infringement claims.
  
    
    cease selling or using products or services that incorporate the challenged software
or technology;
    
    obtain a license or additional licenses involving additional costs for use; or
    
    redesign systems and products that rely on the challenged software or technology.
 Risks Related to Accounting Matters and Our Internal Control over Financial Reporting
 If we fail to comply with requirements relating to internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act, our business could be harmed and our stock price could
decline.
  22




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We may incur material goodwill impairment charges related to the merger of Argon Engineering and
Sensytech.
  We may be required to reduce our profit margins on contracts on which we use the
percentage-of-completion accounting method.
  Changes in stock option accounting rules may adversely impact our operating results prepared in
accordance with generally accepted accounting principles.
  23




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Risks Related to Acquisitions
 We intend to pursue selective acquisitions, which may prove difficult in the current acquisition
environment for defense and intelligence businesses.
  Acquisitions involve costs and other risks, and may not have the benefits we expect.
  
    
    diversion of managements attention from existing opertions;
    
    potential loss of key employees or customers of acquired companies;
    
    exposure to unforeseen liabilities of acquired companies; and
    
    financial reporting irregularities as a result of deficient internal controls and
disclosure controls and procedures of acquired companies.
  
    
    the integration of personnel with disparate business backgrounds;
 24




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
    
    the transition to new information systems;
    
    the coordination of geographically dispersed organizations;
    
    the reconciliation of different corporate cultures; and
    
    the synchronization of disclosure and financial reporting controls of acquired
companies with our controls and, where applicable, improvement of the acquired
companys controls.
  Acquisitions may require us to incur debt or issue dilutive equity.
  Risks Related to Ownership of Our Common Stock
 Our management, whose interests may not be aligned with yours, is able to control the vote on all
matters requiring stockholder approval.
  ITEM 2. PROPERTIES
   25




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EstimatedSquare
    
    
    
    
    
    PrincipalAddress
    
    Feet
    
    Lease Term
    
    Description
    
    Activity12701 Fair Lakes Circle
Fairfax, VA 22033
    
    
    153,000
    
    
    Leased,
Expiration Date:
    
    Multifloor tenant in
ten-story office building.
    
    Engineering/
Administration5/31/20098419 Terminal Road
Newington, VA 22122
    
    
    67,220
    
    
    Leased,
Expiration Date:
6/30/2014
    
    Two one-story and one
partial two-story adjacent
block buildings in an
industrial park.
    
    Engineering/Production/
Administration300 Parkland Plaza
Ann Arbor, MI 48106
    
    
    12,419
    
    
    Leased, Expiration Date:
11/30/2008
    
    One-story facility in a
research park.
    
    Engineering/Production/
Administration800 Calle Plano
Camarillo, CA 93012
    
    
    8,802
    
    
    Leased,
Expiration Date:
1/31/2007
    
    One-story facility in an
industrial park.
    
    Engineering/Production/
Administration925 South Semoran Blvd
Winter Park, FL 32792
    
    
    6,620
    
    
    Leased,
Expiration Date:
2/28/2006
    
    One-story facility.
    
    Engineering/
Production90 Laurel View Drive
Smithfield, PA 15478
    
    
    60,000
    
    
    Leased,
Expiration Date:
9/15/2013
    
    One-story facility.
    
    Engineering/Production/
Administration1386-1390 Connellsville Rd
North Union Township, PA
    
    
    40,000
    
    
    Leased,
Expiration Date:
4/1/2014
    
    One-story facility.
    
    Engineering/
Production329 North Bernardo Ave
Mountain View, CA 94043
    
    
    26,328
    
    
    Leased,
Expiration Date:
    
    One-story facility.
    
    Engineering/
Production10/31/2010
 26




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##### 



ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    Position with RegistrantTerry L. Collins, Ph.D.
    
    
    60
    
    
    Chairman of the Board, Chief Executive
Officer and PresidentS. Kent Rockwell
    
    
    61
    
    
    Vice Chairman of the Board and Vice
President, Corporate DevelopmentVictor F. Sellier
    
    
    56
    
    
    Vice President, Business Operations,
Chief Financial Officer and TreasurerThomas E. Murdock
    
    
    63
    
    
    Vice President, Information DominanceKerry M. Rowe
    
    
    46
    
    
    Vice President, Reconnaissance SystemsW. Joseph Carlin
    
    
    42
    
    
    Vice President, EngineeringRobert S. Tamaru
    
    
    50
    
    
    Vice President, Advanced Systems
 27




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##### 



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   High
    
    
    LowFiscal 2005Fourth Quarter
    
    $
    36.72
    
    
    $
    28.08Third Quarter
    
    
    37.00
    
    
    
    25.32Second Quarter
    
    
    38.39
    
    
    
    31.76First Quarter
    
    
    37.35
    
    
    
    22.65Fiscal 2004Fourth Quarter
    
    $
    29.43
    
    
    $
    18.80Third Quarter
    
    
    24.97
    
    
    
    15.52Second Quarter
    
    
    15.87
    
    
    
    13.45First Quarter
    
    
    17.27
    
    
    
    11.91
  Dividend Policy
   Equity Compensation Plan Information
  Number of
    
    
    Weightedsecurities to be
    
    
    average exerciseissued upon exercise
    
    
    price of
    
    
    Number ofof outstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    remaining availablePlan category
    
    and rights
    
    
    and rights
    
    
    for future issuance(a)
    
    
    (b)
    
    
    ( c)Equity compensation
plans approved by
security holders
    
    
    447,200
    
    
    $
    14.194
    
    
    
    508,272Equity compensation
plans not approved
by security holders
(1)
    
    
    1,293,927
    
    
    $
    6.874
    
    
    
    Total
    
    
    1,741,127
    
    
    $
    8.754
    
    
    
    508,272
 28




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##### 



(1)
    
    Consists entirely of shares of common stock issuable upon exercise of options
under the Argon Engineering Associates, Inc. Stock Plan. There will be no further
options or common stock granted under this plan.  
 ITEM 6. SELECTED FINANCIAL DATA
     29




---



##### 



Years Ended September 302005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands, except per share data)Contract revenues
    
    $
    271,754
    
    
    $
    129,184
    
    
    $
    79,349
    
    
    $
    61,759
    
    
    $
    41,396Cost of revenues
    
    
    222,792
    
    
    
    107,307
    
    
    
    65,271
    
    
    
    51,034
    
    
    
    35,169General and adminstrative expenses
    
    
    14,578
    
    
    
    5,905
    
    
    
    5,844
    
    
    
    5,181
    
    
    
    3,101Income from operations
    
    
    34,384
    
    
    
    15,972
    
    
    
    8,234
    
    
    
    5,544
    
    
    
    3,126Interest income, net
    
    
    698
    
    
    
    154
    
    
    
    31
    
    
    
    62
    
    
    
    42Income before income taxes
    
    
    35,082
    
    
    
    16,126
    
    
    
    8,265
    
    
    
    5,606
    
    
    
    3,168Provision for income taxes
    
    
    (13,301
    )
    
    
    (6,177
    )
    
    
    (2,696
    )
    
    
    (2,021
    )
    
    
    (1,139
    )Net income
    
    $
    21,781
    
    
    $
    9,949
    
    
    $
    5,569
    
    
    $
    3,585
    
    
    $
    2,029Earnings per shareBasic
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47
    
    
    $
    0.32
    
    
    $
    0.21Diluted
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44
    
    
    $
    0.29
    
    
    $
    0.16
 Years Ended September 302005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Balance sheet dataCash and cash equivalents
    
    $
    4,064
    
    
    $
    29,732
    
    
    $
    4,100
    
    
    $
    5,231
    
    
    $
    4,215Total assets
    
    $
    249,834
    
    
    $
    221,741
    
    
    $
    23,736
    
    
    $
    20,090
    
    
    $
    15,163Total debt
    
    $
    138
    
    
    $
    282
    
    
    $
    34
    
    
    $
    172
    
    
    $
    309Stockholders Equity
    
    $
    192,013
    
    
    $
    160,925
    
    
    $
    11,010
    
    
    $
    7,944
    
    
    $
    4,323Other dataBacklog (unaudited)
    
    $
    271,107
    
    
    $
    228,819
    
    
    $
    157,070
    
    
    $
    96,799
    
    
    $
    76,380Dividends
    
    $
    
    
    
    $
    7,851
    
    
    $
    2,462
    
    
    $
    
    
    
    $
    
 30




---



##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-looking Statements
  Overview
 General
  Basis of Discussion/Acquisition
   31




---



##### 



Segments
  Revenues
     Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedContract Type
    
    September 30, 2005
    
    September 30, 2004
    
    September 30, 2003Fixed-price contracts
    
    
    79
    %
    
    
    71
    %
    
    
    46
    %Cost reimbursable contracts
    
    
    16
    %
    
    
    19
    %
    
    
    51
    %Time and materials contracts
    
    
    5
    %
    
    
    10
    %
    
    
    3
    %
  32




---



##### 



Backlog
      2005
    
    
    2004
    
    
    2003Funded
    
    $
    199,543,000
    
    
    $
    222,222,000
    
    
    $
    146,418,000Unfunded
    
    
    71,564,000
    
    
    
    6,597,000
    
    
    
    10,652,000Total
    
    $
    271,107,000
    
    
    $
    228,819,000
    
    
    $
    157,070,000
    Cost of Revenues
  33




---



##### 



General and Administrative Expenses
  Interest Income, net
 3
  Income Taxes
  Research and Development
   2005
    
    
    2004
    
    
    2003Internal research and
development
    
    $
    3,992,000
    
    
    $
    1,301,000
    
    
    $
    2,187,000Customer-funded research
and development
    
    
    50,009,000
    
    
    
    47,673,000
    
    
    
    37,007,000Total
    
    $
    54,001,000
    
    
    $
    48,974,000
    
    
    $
    39,194,000
  34




---



##### 



Critical Accounting Practices and Estimates
 General
  Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
  Indirect rate variance
 interim
  35




---



##### 



AN/SLQ-25A Contract
  Award Fee Recognition
  Goodwill
  36




---



##### 



Accounts Receivable
  Historical Operating Results
 Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004
  September 30,
    
    September 30,
    
    Increase 20052005
    
    2004
    
    Compared to 2004Contract revenues
    
    $
    271,754,000
    
    
    $
    129,184,000
    
    
    $
    142,570,000Cost of revenues
    
    
    222,792,000
    
    
    
    107,307,000
    
    
    
    115,485,000General and administrative expenses
    
    
    14,578,000
    
    
    
    5,905,000
    
    
    
    8,673,000Provision for income taxes
    
    
    13,301,000
    
    
    
    6,177,000
    
    
    
    7,124,000Net income
    
    
    21,781,000
    
    
    
    9,949,000
    
    
    
    11,832,000
 Revenues:
    37




---



##### 



Cost of Revenues:
  General and Administrative Expenses:
  Interest Income and Interest Expense:
  Income Tax Expense:
  Net Income:
  Fiscal year ended September 30, 2004 compared to fiscal year ended September 30, 2003
  38




---



##### 



September 30,
    
    September 30,
    
    Increase 20042004
    
    2003
    
    Compared to 2003Contract revenues
    
    $
    129,184,000
    
    
    $
    79,349,000
    
    
    $
    49,835,000Cost of revenues
    
    
    107,307,000
    
    
    
    65,271,000
    
    
    
    42,036,000General and
administrative expenses
    
    
    5,905,000
    
    
    
    5,844,000
    
    
    
    61,000Provision for income taxes
    
    
    6,177,000
    
    
    
    2,696,000
    
    
    
    3,481,000Net income
    
    
    9,949,000
    
    
    
    5,569,000
    
    
    
    4,380,000
 Revenues:
    Cost of Revenues:
  General and Administrative Expenses:
  Interest Income and Interest Expense:
  39




---



##### 



Income Tax Expense:
  Net Income:
  Pro forma Financial Results of Operations
   Twelve Months Ended September 30,2004
    
    
    
    
    
    2003Historical
    
    Pro forma
    
    Historical
    
    Pro formaRevenue
    
    $
    129,184,000
    
    
    $
    189,792,000
    
    
    $
    79,349,000
    
    
    $
    132,532,000Income from operations
    
    
    15,972,000
    
    
    
    23,132,000
    
    
    
    8,234,000
    
    
    
    13,874,000Net income
    
    
    9,949,000
    
    
    
    14,386,000
    
    
    
    5,569,000
    
    
    
    8,979,000Basic earnings per share
    
    $
    0.81
    
    
    $
    0.76
    
    
    $
    0.47
    
    
    $
    0.50Diluted earnings per
share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.44
    
    
    $
    0.48Basic wt average shares
    
    
    12,308,000
    
    
    
    18,914,000
    
    
    
    11,770,000
    
    
    
    17,874,000Diluted wt average
shares
    
    
    13,367,000
    
    
    
    20,156,000
    
    
    
    12,620,000
    
    
    
    18,882,000
  Analysis of Liquidity and Capital Resources
 Cash
  40




---



##### 



Line of Credit
    41




---



##### 



Cash Flows
    Contractual Obligations and Commitments
  Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due inTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterCapital leases
    
    $
    82,000
    
    
    $
    19,000
    
    
    $
    20,000
    
    
    $
    21,000
    
    
    $
    20,000
    
    
    $
    2,000
    
    
    
    Operating leases
    
    $
    25,247,000
    
    
    $
    5,390,000
    
    
    $
    5,313,000
    
    
    $
    5,312,000
    
    
    $
    3,214,000
    
    
    $
    1,321,000
    
    
    $
    4,697,000Note payable
    
    $
    56,000
    
    
    
    56,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Line of credit
    
    $
    11,000,000
    
    
    $
    11,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    36,385,000
    
    
    $
    16,465,000
    
    
    $
    5,333,000
    
    
    $
    5,333,000
    
    
    $
    3,234,000
    
    
    $
    1,323,000
    
    
    $
    4,697,000
  Total
    
    
    Less Than 1 Year
    
    
    1-3 YearsLetters of credit
    
    $
    1,516,000
    
    
    $
    1,516,000
    
    
    
    
  42




---



##### 



Recent Accounting Pronouncements
    Market Risks
  Cash and Cash Equivalents:
  Interest Rates:
  Foreign Currency:
  43




---



##### 



Recent Developments
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  44




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    46Consolidated Balance Sheets
As of September 30, 2005 and 2004
    
    
    47Consolidated Income Statements
For the years ended September 30, 2005, 2004 and 2003
    
    
    48Consolidated Statements of Stockholders Equity
For the years ended September 30, 2005, 2004 and 2003
    
    
    49Consolidated Statements of Cash Flows
For the years ended September 30, 2005, 2004 and 2003
    
    
    50Notes to Consolidated Financial Statements
    
    
    51
 45




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     .
  
 46




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,2005
    
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    4,064,000
    
    
    $
    29,732,000Accounts receivable, net
    
    
    103,577,000
    
    
    
    59,716,000Inventory
    
    
    1,166,000
    
    
    
    1,574,000Income taxes receivable
    
    
    2,464,000
    
    
    
    Deferred income tax asset
    
    
    1,742,000
    
    
    
    4,822,000Prepaids and other
    
    
    888,000
    
    
    
    1,288,000TOTAL CURRENT ASSETS
    
    
    113,901,000
    
    
    
    97,132,000Property, equipment and software, net
    
    
    14,896,000
    
    
    
    13,949,000Advances and cash held in escrow
    
    
    10,900,000
    
    
    
    Goodwill
    
    
    107,956,000
    
    
    
    107,776,000Intangibles, net
    
    
    1,219,000
    
    
    
    2,190,000Other assets
    
    
    962,000
    
    
    
    694,000TOTAL ASSETS
    
    $
    249,834,000
    
    
    $
    221,741,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESLine of Credit
    
    $
    11,000,000
    
    
    $
    Accounts payable and accrued expenses
    
    
    26,857,000
    
    
    
    12,727,000Accrued salaries and related expenses
    
    
    8,848,000
    
    
    
    10,606,000Deferred revenue
    
    
    7,139,000
    
    
    
    28,336,000Notes payable  current portion
    
    
    56,000
    
    
    
    226,000Capital lease obligations  current
    
    
    19,000
    
    
    
    Income taxes payable
    
    
    
    
    
    
    5,810,000Deferred rent
    
    
    61,000
    
    
    
    200,000TOTAL CURRENT LIABILITIES
    
    
    53,980,000
    
    
    
    57,905,000Deferred income tax liability, long term
    
    
    1,979,000
    
    
    
    1,901,000Notes payable, net of current portion
    
    
    
    
    
    
    56,000Deferred rent
    
    
    1,799,000
    
    
    
    954,000Capital lease obligations, net of current
    
    
    63,000
    
    
    
    Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par
Value, 100,000,000 and 25,000,000 shares
authorized, 20,153,878 and 19,468,734 shares
issued at September 30, 2005 and 2004
    
    
    202,000
    
    
    
    195,000Additional paid in capital
    
    
    158,458,000
    
    
    
    149,043,000Treasury stock at cost, 126,245 shares
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    34,002,000
    
    
    
    12,221,000Accumulated other comprehensive loss
    
    
    (115,000
    )
    
    
    TOTAL STOCKHOLDERS EQUITY
    
    $
    192,013,000
    
    
    $
    160,925,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    249,834,000
    
    
    $
    221,741,000
  47




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 For the Year Ended September 30,2005
    
    
    2004
    
    
    2003CONTRACT REVENUES
    
    $
    271,754,000
    
    
    $
    129,184,000
    
    
    $
    79,349,000COST OF REVENUES
    
    
    222,792,000
    
    
    
    107,307,000
    
    
    
    65,271,000GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    14,578,000
    
    
    
    5,905,000
    
    
    
    5,844,000INCOME FROM OPERATIONS
    
    
    34,384,000
    
    
    
    15,972,000
    
    
    
    8,234,000OTHER INCOME (EXPENSE)Interest income
    
    
    711,000
    
    
    
    167,000
    
    
    
    35,000Interest expense
    
    
    (13,000
    )
    
    
    (13,000
    )
    
    
    (4,000
    )698,000
    
    
    
    154,000
    
    
    
    31,000INCOME BEFORE INCOME TAXES
    
    
    35,082,000
    
    
    
    16,126,000
    
    
    
    8,265,000PROVISION FOR INCOME TAXES
    
    
    13,301,000
    
    
    
    6,177,000
    
    
    
    2,696,000NET INCOME
    
    $
    21,781,000
    
    
    $
    9,949,000
    
    
    $
    5,569,000EARNINGS PER SHARE (BASIC)
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47EARNINGS PER SHARE (DILUTED)
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    19,738,367
    
    
    
    12,308,412
    
    
    
    11,769,788Diluted
    
    
    20,616,024
    
    
    
    13,366,916
    
    
    
    12,620,308
  48




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalAdditional Paid
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersNumber of Shares
    
    
    Par Value
    
    
    in Capital
    
    
    Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, September 30, 2002
    
    $
    11,664,570
    
    
    $
    117,000
    
    
    $
    31,000
    
    
    $
    
    
    
    $
    7,796,000
    
    
    
    
    
    
    $
    7,944,000Shares issued upon exercise
of stock options
    
    
    666,792
    
    
    
    7,000
    
    
    
    71,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,000Retirement of shares
    
    
    (25,400
    )
    
    
    (1,000
    )
    
    
    (11,000
    )
    
    
    
    
    
    
    (107,000
    )
    
    
    
    
    
    
    (119,000
    )Dividend declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,462,000
    )
    
    
    
    
    
    
    (2,462,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,569,000
    
    
    
    
    
    
    
    5,569,000Balance, September 30, 2003
    
    
    12,305,962
    
    
    
    123,000
    
    
    
    91,000
    
    
    
    
    
    
    
    10,796,000
    
    
    
    
    
    
    
    11,010,000Shares issued upon exercise
of stock options
    
    
    514,356
    
    
    
    6,000
    
    
    
    306,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,000Retirement of shares
    
    
    (120,320
    )
    
    
    (1,000
    )
    
    
    (11,000
    )
    
    
    
    
    
    
    (673,000
    )
    
    
    
    
    
    
    (685,000
    )Dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,851,000
    )
    
    
    
    
    
    
    (7,851,000
    )Issuance of shares in
connection with merger
    
    
    6,768,736
    
    
    
    67,000
    
    
    
    148,657,000
    
    
    
    (534,000
    )
    
    
    
    
    
    
    
    
    
    
    148,190,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,949,000
    
    
    
    
    
    
    
    9,949,000Balance, September 30, 2004
    
    
    19,468,734
    
    
    $
    195,000
    
    
    $
    149,043,000
    
    
    $
    (534,000
    )
    
    $
    12,221,000
    
    
    
    
    
    
    $
    160,925,000Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,781,000
    
    
    
    
    
    
    
    21,781,000Unrealized loss on foreign
currency exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,000
    )
    
    
    (115,000
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,666,000Shares issued upon exercise
of stock options
    
    
    639,450
    
    
    
    6,000
    
    
    
    4,447,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,453,000Employee Stock Purchase
Plan
    
    
    45,694
    
    
    
    1,000
    
    
    
    1,170,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171,000Tax Benefit on Stock
Option exercises
    
    
    
    
    
    
    
    
    
    
    3,798,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,798,000Balance, September 30, 2005
    
    
    20,153,878
    
    
    $
    202,000
    
    
    $
    158,458,000
    
    
    $
    (534,000
    )
    
    $
    34,002,000
    
    
    $
    (115,000
    )
    
    $
    192,013,000
  49




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended September 30,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet income
    
    $
    21,781,000
    
    
    $
    9,949,000
    
    
    $
    5,569,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    4,493,000
    
    
    
    1,317,000
    
    
    
    1,065,000Deferred income tax provision (benefit)
    
    
    3,532,000
    
    
    
    (4,700,000
    )
    
    
    1,478,000Change in:Billed accounts receivable
    
    
    (23,820,000
    )
    
    
    (13,334,000
    )
    
    
    (795,000
    )Unbilled accounts receivable
    
    
    (19,033,000
    )
    
    
    (627,000
    )
    
    
    (4,212,000
    )Inventory
    
    
    60,000
    
    
    
    20,000
    
    
    
    Income taxes receivable
    
    
    (2,464,000
    )
    
    
    705,000
    
    
    
    (705,000
    )Prepaids and other
    
    
    167,000
    
    
    
    (219,000
    )
    
    
    153,000Accounts payable and accrued expenses
    
    
    13,151,000
    
    
    
    2,378,000
    
    
    
    1,343,000Accrued salaries and related expenses
    
    
    (1,758,000
    )
    
    
    1,732,000
    
    
    
    874,000Deferred revenue
    
    
    (21,197,000
    )
    
    
    23,969,000
    
    
    
    (1,203,000
    )Income taxes payable
    
    
    (2,012,000
    )
    
    
    6,808,000
    
    
    
    (643,000
    )Deferred rent
    
    
    321,000
    
    
    
    1,119,000
    
    
    
    (70,000
    )Net cash (used in) provided by operating activities
    
    
    (26,779,000
    )
    
    
    29,117,000
    
    
    
    2,854,000Cash flows from investing activitiesNet cash acquired in merger
    
    
    
    
    
    
    6,952,000
    
    
    
    Acquisitions of property, equipment and software
    
    
    (4,370,000
    )
    
    
    (2,460,000
    )
    
    
    (1,344,000
    )Advances and cash held in escrow
    
    
    (10,900,000
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (15,270,000
    )
    
    
    4,492,000
    
    
    
    (1,344,000
    )Cash flows from financing activitiesAdvance on Line of Credit
    
    
    11,000,000
    
    
    
    
    
    
    
    Payment on note payable
    
    
    (226,000
    )
    
    
    (204,000
    )
    
    
    (138,000
    )Retirement of common stock
    
    
    
    
    
    
    (234,000
    )
    
    
    (118,000
    )Proceeeds from exercise of stock options
    
    
    4,453,000
    
    
    
    312,000
    
    
    
    77,000Proceeds from Employee Stock Purchase Plan
    
    
    1,171,000
    
    
    
    
    
    
    
    Principal repayments on capital lease obligations
    
    
    (17,000
    )
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    (7,851,000
    )
    
    
    (2,462,000
    )Net cash provided by (used in) financing activities
    
    
    16,381,000
    
    
    
    (7,977,000
    )
    
    
    (2,641,000
    )Net (decrease) increase in cash and cash equivalents
    
    
    (25,668,000
    )
    
    
    25,632,000
    
    
    
    (1,131,000
    )Cash and cash equivalents, beginning of year
    
    
    29,732,000
    
    
    
    4,100,000
    
    
    
    5,231,000Cash and cash equivalents, end of year
    
    $
    4,064,000
    
    
    $
    29,732,000
    
    
    $
    4,100,000Supplemental disclosureIncome taxes paid
    
    $
    (14,212,000
    )
    
    $
    (3,275,000
    )
    
    $
    (1,813,000
    )Interest expense paid
    
    $
    (11,000
    )
    
    $
    (13,000
    )
    
    $
    (7,000
    )Note payable issued for stock redemption
    
    $
    
    
    
    $
    451,000
    
    
    $
    Assets acquired under capital leases
    
    $
    99,000
    
    
    $
    
    
    
    $
    Tax benefit on stock options exercises included in Income taxes
receivables
    
    $
    3,798,000
    
    
    $
    
    
    
    $
    
  50




---



##### 



Note 1  Summary of Significant Accounting Policies
 Nature of Business
  Principles of Consolidation
  Basis of Presentation
     Revenue and Cost Recognition
 Accounting for Performance of Construction-Type and
Production-Type Contracts
 51




---



##### 



Fiscal Years Ended September 30,2005
    
    2004
    
    2003Fixed-price contracts
    
    
    79
    %
    
    
    71
    %
    
    
    46
    %Cost reimbursable contracts
    
    
    16
    %
    
    
    19
    %
    
    
    51
    %Time and materials contracts
    
    
    5
    %
    
    
    10
    %
    
    
    3
    %
    Indirect rate variance
    52




---



##### 



Cash and Cash Equivalents
  Accounts Receivable
  Inventories
  2005
    
    
    2004Raw Materials
    
    $
    720,000
    
    
    $
    1,149,000Component parts, work in process
    
    $
    355,000
    
    
    $
    311,000Finished component parts
    
    $
    91,000
    
    
    $
    114,000$
    1,166,000
    
    
    $
    1,574,000
 Property, Equipment and Software
  Stock-Based Compensation
  53




---



##### 



Years Ended September 30,2005
    
    
    2004
    
    
    2003Net income as reported
    
    $
    21,781,000
    
    
    $
    9,949,000
    
    
    $
    5,569,000Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    
    
    
    
    
    
    
    
    Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
    
    
    1,360,000
    
    
    
    172,000
    
    
    
    135,000Pro forma net income
    
    $
    20,421,000
    
    
    $
    9,777,000
    
    
    $
    5,434,000
 Years Ended September 30,2005
    
    2004
    
    2003Earnings per share:Basic  as reported
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47Basic  pro forma
    
    $
    1.03
    
    
    $
    0.79
    
    
    $
    0.46Diluted  as reported
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44Diluted  pro forma
    
    $
    0.99
    
    
    $
    0.73
    
    
    $
    0.43
  2004
    
    2003Risk-fee interest rate
    
    
    3.19%  4.14
    %
    
    
    2.95
    %Expected life in years
    
    
    1  5
    
    
    
    5Expected volatility
    
    
    .010  .498
    
    
    
    .010Expected dividends
    
    
    
    
    
    
    
 Intangibles
  Goodwill
  54




---



##### 



Income Taxes
  Comprehensive Income
  Use of Estimates
  Operating Cycle
  Recently Issued Accounting Pronouncements
    55




---



##### 



Notes to Consolidated Financial Statements
 Earnings Per Share:
  2005
    
    
    2004
    
    
    2003Net Income
    
    $
    21,781,000
    
    
    $
    9,949,000
    
    
    $
    5,569,000Weighted Average Shares Outstanding  Basic
    
    
    19,738,367
    
    
    
    12,308,412
    
    
    
    11,769,788Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock
Options
    
    
    877,657
    
    
    
    1,058,504
    
    
    
    850,520Weighted Average Shares Outstanding  Diluted
    
    
    20,616,024
    
    
    
    13,366,916
    
    
    
    12,620,308Basic Earnings per Share
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47Diluted Earnings per Share
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44
 Note 2  Merger
   56




---



##### 



Twelve Months Ended September 30,2004
    
    
    2003Historical
    
    
    Pro forma
    
    
    Historical
    
    
    Pro formaRevenue
    
    $
    129,184,000
    
    
    $
    189,792,000
    
    
    $
    79,349,000
    
    
    $
    132,532,000Income from operations
    
    
    15,972,000
    
    
    
    23,132,000
    
    
    
    8,234,000
    
    
    
    13,874,000Net income
    
    
    9,949,000
    
    
    
    14,386,000
    
    
    
    5,569,000
    
    
    
    8,979,000Basic earnings per share
    
    $
    0.81
    
    
    $
    0.76
    
    
    $
    0.47
    
    
    $
    0.50Diluted earnings per
share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.44
    
    
    $
    0.48Basic wt average shares
    
    
    12,308,000
    
    
    
    18,914,000
    
    
    
    11,770,000
    
    
    
    17,874,000Diluted wt average
shares
    
    
    13,367,000
    
    
    
    20,156,000
    
    
    
    12,620,000
    
    
    
    18,882,000
 .
 Note 3  Customer Concentrations of Credit and Other Business Risks
 Customer Concentrations
  Years Ended September 30,2005
    
    2004
    
    2003U.S. Navy
    
    
    69
    %
    
    
    77
    %
    
    
    68
    %Other U.S. government agencies
    
    
    20
    %
    
    
    11
    %
    
    
    26
    %Foreign
    
    
    11
    %
    
    
    12
    %
    
    
    6
    %
  Years Ended September 30,2005
    
    2004
    
    2003Direct Purchases
    
    
    78
    %
    
    
    87
    %
    
    
    69
    %Subcontracts
    
    
    22
    %
    
    
    13
    %
    
    
    31
    %
 AN/SLQ-25A Contract
  57




---



##### 



Cash Balances
  Note 4  Accounts Receivable
  September 30,2005
    
    
    2004Billed and Billable
    
    $
    59,676,000
    
    
    $
    35,856,000Unbilled Costs and Fees
    
    
    43,141,000
    
    
    
    23,062,000Retainages
    
    
    960,000
    
    
    
    998,000Reserves
    
    
    (200,000
    )
    
    
    (200,000
    )$
    103,577,000
    
    
    $
    59,716,000
    58




---



##### 



Note 5  Property, Equipment and Software
  September 30,2005
    
    
    2004Computer, Machinery and Test Equipment
    
    $
    17,101,000
    
    
    $
    14,606,000Leasehold Improvements
    
    
    7,168,000
    
    
    
    4,023,000Computer Software
    
    
    2,435,000
    
    
    
    1,932,000Furniture and Fixtures
    
    
    1,224,000
    
    
    
    1,191,000Equipment under Capital Lease
    
    
    99,000
    
    
    
    Construction in process
    
    
    152,000
    
    
    
    1,958,00028,179,000
    
    
    
    23,710,000Less Accumulated Depreciation and Amortization
    
    
    13,283,000
    
    
    
    9,761,000$
    14,896,000
    
    
    $
    13,949,000
  Note 6  Revolving Line of Credit
   Note 7  Stock Option Plans
  59




---



##### 



Number of
    
    
    Range of
    
    
    Weighted-AverageOptions
    
    
    Exercise Prices
    
    
    Exercise PriceBalance, September 30, 2002
    
    1,732,816
    
    
    $
    0.04$ 0.91
    
    
    $
    0.29Granted
    
    471,500
    
    
    $
    4.11$ 4.11
    
    
    $
    4.11Exercised
    
    (666,782
    )
    
    $
    0.04$ 0.91
    
    
    $
    0.12Canceled
    
    (47,400
    )
    
    $
    0.10$ 4.11
    
    
    $
    1.52Balance, September 30, 2003
    
    1,490,134
    
    
    $
    0.04$ 4.11
    
    
    $
    1.53Granted
    
    790,400
    
    
    $
    5.69$28.10
    
    
    $
    13.85Exercised
    
    (514,356
    )
    
    $
    0.04$ 4.13
    
    
    $
    0.58Canceled
    
    (36,881
    )
    
    $
    0.10$ 5.69
    
    
    $
    3.46Assumed in merger
    
    689,300
    
    
    $
    2.25$ 17.63
    
    
    $
    10.47Balance, September 30, 2004
    
    2,418,597
    
    
    $
    0.04$28.10
    
    
    $
    8.27Exercised
    
    (639,450
    )
    
    $
    0.04$20.40
    
    
    $
    6.96Canceled
    
    (38,020
    )
    
    $
    0.90$22.68
    
    
    $
    8.89Balance, September 30, 2005
    
    1,741,127
    
    
    $
    0.10$28.10
    
    
    $
    8.75
  60




---



##### 



Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    of Options
    
    
    Life (Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$ 0.10    $ 0.90
    
    
    353,527
    
    
    
    5.51
    
    
    $
    0.57
    
    
    
    238,207
    
    
    $
    0.52$ 2.25    $ 4.63
    
    
    425,780
    
    
    
    6.61
    
    
    $
    4.04
    
    
    
    135,236
    
    
    $
    3.89$ 5.00    $ 6.88
    
    
    348,320
    
    
    
    8.03
    
    
    $
    5.70
    
    
    
    54,880
    
    
    $
    5.79$ 7.51    $ 14.22
    
    
    150,000
    
    
    
    7.05
    
    
    $
    9.94
    
    
    
    150,000
    
    
    $
    9.94$ 17.63  $ 28.10
    
    
    463,500
    
    
    
    8.84
    
    
    $
    21.24
    
    
    
    412,000
    
    
    $
    21.34Total
    
    
    1,741,127
    
    
    
    7.30
    
    
    $
    8.75
    
    
    
    990,323
    
    
    $
    11.36
  2004
    
    2003Risk-fee interest rate
    
    3.19%  4.14%
    
    2.95%Expected life in years
    
    1  5
    
    5Expected volatility
    
    .010  .498
    
    .010Expected dividends
    
    
    
    
  Note 8  Retirement Plans
  61




---



##### 



Note 9  Income Taxes
  Years Ended September 30,2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    8,353,000
    
    
    $
    9,119,000
    
    
    $
    951,000State
    
    
    1,416,000
    
    
    
    1,758,000
    
    
    
    267,000Total Current
    
    
    9,769,000
    
    
    
    10,877,000
    
    
    
    1,218,000DeferredFederal
    
    
    2,962,000
    
    
    
    (3,975,000
    )
    
    
    1,256,000State
    
    
    570,000
    
    
    
    (725,000
    )
    
    
    222,000Total Deferred
    
    $
    3,532,000
    
    
    
    (4,700,000
    )
    
    
    1,478,000Income Tax Expense
    
    $
    13,301,000
    
    
    $
    6,177,000
    
    
    $
    2,696,000
  As of September 30,2005
    
    
    2004Total Deferred Tax Assets
    
    $
    2,412,000
    
    
    $
    8,432,000Total Deferred Tax Liabilities
    
    
    (2,649,000
    )
    
    
    (5,511,000
    )Valuation Allowance
    
    
    
    
    
    
    Net Deferred Tax (Liability) Asset
    
    $
    (237,000
    )
    
    $
    2,921,000
  As of September 30,2005
    
    
    2004Unbilled Receivables
    
    $
    
    
    
    $
    (2,983,000
    )Deferred Revenues
    
    
    
    
    
    
    6,706,000Property, Equipment and Software
    
    
    (2,338,000
    )
    
    
    (1,791,000
    )Accrued Vacation
    
    
    1,011,000
    
    
    
    706,000Deferred Rent
    
    
    560,000
    
    
    
    449,000Net Operating Losses & Tax Credits
    
    
    183,000
    
    
    
    207,000Warranty
    
    
    37,000
    
    
    
    127,000Intangibles
    
    
    (311,000
    )
    
    
    (737,000
    )Deferred Compensation
    
    
    374,000
    
    
    
    Uncollectible Accounts
    
    
    78,000
    
    
    
    76,000Stock-Based Compensation
    
    
    18,000
    
    
    
    86,000Other, net
    
    
    151,000
    
    
    
    75,000Net Deferred Tax Asset
(Liability)
    
    $
    (237,000
    )
    
    $
    2,921,000
  62




---



##### 



Years Ended September 30,2005
    
    
    2004
    
    
    2003Statutory
Federal Rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    34.0
    %State Income
Taxes, Net of Federal Benefit
    
    
    3.8
    %
    
    
    3.9
    %
    
    
    4.0
    %Research and
Development Tax Credit
    
    
    (1.0
    )%
    
    
    (1.9
    )%
    
    
    (4.1
    )%Other
    
    
    .1
    %
    
    
    1.3
    %
    
    
    (1.3
    )%37.9
    %
    
    
    38.3
    %
    
    
    32.6
    %
  Note 10  Leases
   OperatingLeases FutureMinimumYear Ending September 30,
    
    Payments2006
    
    
    5,390,0002007
    
    
    5,313,0002008
    
    
    5,312,0002009
    
    
    3,214,0002010
    
    
    1,321,000Thereafter
    
    
    4,697,000Total
    
    $
    25,247,000
  Capital LeasesFutureMinimumYear Ending September 30,
    
    Payments2006
    
    
    22,0002007
    
    
    22,0002008
    
    
    22,0002009
    
    
    21,0002010
    
    
    2,000Thereafter
    
    
    Total
    
    $
    90,000Less amount representing interest
    
    
    (8,000
    )Present value of future lease payments
    
    $
    82,000
 63




---



##### 



Note 11  Research and Development Expenses
  Note 12  Fair Value of Financial Instruments
  Note 13 Related Party Transactions
  Note 14  Treasury Stock
  Note 15  Segment Reporting
  Note 16  Foreign Currency Exchange Contracts
 Accounting for Derivative Instruments and Hedging Activities,
 Note 17  Advances and Cash Held in Escrow
  64




---



##### 



Note 18  Subsequent Events
 Radix Technologies, Inc. Merger
   Current Assets
    
    $
    2,614,000Property, plant and equipment
    
    
    600,000Other assets
    
    
    40,000Other intangibles
    
    
    1,066,000Goodwill
    
    
    7,411,000Total assets acquired
    
    
    11,731,000Liabilities assumed
    
    
    831,000Total purchase price
    
    $
    10,900,000
  Secondary Stock Offering
  Note 19  Quarterly Financial Information (Unaudited)
  65




---



##### 



2005
    
    
    2004January 2,
    
    
    April 3,
    
    
    July 3,
    
    
    September 30,
    
    
    December 28,
    
    
    March 28,
    
    
    June 27,
    
    
    September 30,2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2004
    
    
    2004(unaudited)
    
    
    
    
    
    
    
    
    
    
    (unaudited)(In thousands, except per share data)
    
    
    (In thousands, except per share data)Contract Revenues
    
    $
    56,510
    
    
    $
    55,952
    
    
    $
    75,611
    
    
    $
    83,681
    
    
    $
    27,293
    
    
    $
    22,683
    
    
    $
    39,050
    
    
    $
    40,158Direct and Allocable
Contract Costs
    
    
    48,673
    
    
    
    48,137
    
    
    
    66,029
    
    
    
    74,531
    
    
    
    24,993
    
    
    
    19,631
    
    
    
    33,653
    
    
    
    34,935Income from
Operations
    
    
    7,837
    
    
    
    7,815
    
    
    
    9,582
    
    
    
    9,150
    
    
    
    2,300
    
    
    
    3,052
    
    
    
    5,397
    
    
    
    5,223Other Income
(Expense), Net
    
    
    138
    
    
    
    198
    
    
    
    192
    
    
    
    170
    
    
    
    8
    
    
    
    38
    
    
    
    34
    
    
    
    74Income before
Income Taxes
    
    
    7,975
    
    
    
    8,013
    
    
    
    9,774
    
    
    
    9,320
    
    
    
    2,308
    
    
    
    3,090
    
    
    
    5,431
    
    
    
    5,297Provision for Income
Taxes
    
    
    3,055
    
    
    
    3,069
    
    
    
    3,919
    
    
    
    3,258
    
    
    
    851
    
    
    
    1,141
    
    
    
    2,004
    
    
    
    2,181Net Income
    
    $
    4,920
    
    
    $
    4,944
    
    
    $
    5,855
    
    
    $
    6,062
    
    
    $
    1,457
    
    
    $
    1,949
    
    
    $
    3,427
    
    
    $
    3,116Earnings Per ShareBasic
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.12
    
    
    $
    0.16
    
    
    $
    0.28
    
    
    $
    0.25Diluted
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.29
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.26
    
    
    $
    0.23
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     66




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##### 



ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  Change in Internal Controls
  ITEM 9B. OTHER INFORMATION.
  67




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##### 



PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  ITEM 11. EXECUTIVE COMPENSATION
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  68




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##### 



PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements Schedules
 Exhibits
 ExhibitNumber
    
    Description of Exhibit2.1
    
    Agreement and Plan of Merger dated as of June 7, 2004, by and between
Sensytech, Inc. and Argon Engineering Associates, Inc. (incorporated
by reference to Exhibit 2.1 of the Companys Registration Statement on
Form S-4 filed on July 16, 2004, Registration Statement No.
333-117430)3.1
    
    Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Companys
Registration Statement on Form S-1(Registration Statement No.
333-98757) filed on August 26, 2002)3.1.1
    
    Amendment to the Companys Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 the Companys
Current Report on Form 8-K filed October 5, 2004 covering Items 2.01,
5.01, 5.02, 8.01 and 9.01 of Form 8-K).3.1.2
    
    Amendment, dated March 15, 2005 to the Companys Amended and Restated
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.2 to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended April 5, 2005, filed May 11, 2005)3.2
    
    Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 13(a)(i) of the Companys Annual Report on Form 10-KSB for
the fiscal year ended September 30, 2001)4.1
    
    Form of Common Stock Certificate (incorporated by reference to Exhibit
4.3 to the Companys Registration Statement on Form S-3 (Registration
Statement No. 333-128211) filed on September 9, 2005)10.1
    
    Amended and Restated Line of Credit Agreement with Bank of America
(incorporated by reference to Exhibit 10.1 of the Companys
Registration Statement on Form S-1 (Registration Statement No.
333-98757) filed on August 26, 2002,10.1.1
    
    Third Amendment to Second Amended and Restated Financing and Security
Agreement (incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004,
Commission File No. 000-08193)10.2+
    
    Argon ST, Inc. 2002 Stock Incentive Plan (incorporated by reference to
the Companys Schedule 14A filed with the Commission on April 22,
2002, Commission File No. 000-08193)10.2.1*
    
    Form of Stock Option Agreement under Argon ST 2002 Stock Incentive Plan10.3+
    
    Argon Engineering Associates, Inc. Stock Plan (incorporated by
reference to Exhibit 10.3 to the Companys Annual Report on Form 10-K
for the fiscal year ended September 30, 2004, filed December 14, 2004)10.4+
    
    Retention Agreement dated February 17, 2004, by and between the
Company and Donald F. Fultz (incorporated by reference to Exhibit 10.3
of the Companys Registration Statement on Form S-4 (Registration
Statement No. 333-117430) filed on July 16, 2004)10.5+
    
    Retention Agreement dated February 17, 2004, by and between the
Company and S. Kent Rockwell (incorporated by reference to Exhibit
10.4 of the Companys Registration Statement on Form S-4 (Registration
Statement No. 333-117430) filed on July 16, 2004016.1
    
    Letter of PricewaterhouseCoopers LLP regarding change in certifying
accountant (incorporated by reference to Exhibit 16.1 to the Companys
Current Report on Form 8-K covering Items 4.01 and 9.01 of Form 8-K,
filed October 5, 2004)16.2
    
    Letter of Watkins, Meegan, Drury & Company, L.L.C. regarding change in
certifying accountant (incorporated by reference to Exhibit 16.2 to
the Companys Current Report on Form 8-K covering Items 4.01 and 9.01
of Form 8-K, filed October 5, 2004)
 69




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##### 



ExhibitNumber
    
    Description of Exhibit21.1*
    
    Subsidiaries of the Company23.1*
    
    Consent of Grant Thornton LLP31.1*
    
    Certification of the Companys Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act31.2*
    
    Certification of the Companys Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act32.1**
    
    Certification pursuant to Rule 13a-14(b)/15d-14(b) under the
Securities Exchange Act and Section 1350 of Chapter 63 of Title 8 of
the United States Code
 
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates management contract or compensatory plan or arrangement 70




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##### 



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

Terry L. Collins
    
    Chairman, Chief Executive Officer and PresidentDate: December 14, 2005/s/ S. Kent Rockwell

S. Kent Rockwell
    
    Vice Chairman and Vice President, Corporate DevelopmentDate: December 14, 2005/s/ Victor F. Sellier

Victor F. Sellier
    
    Vice President, Business Operations, Chief Financial Officer,
Treasurer and Director (Principal Financial and Accounting Officer)Date: December 14, 2005/s/ Thomas E. Murdock

Thomas E. Murdock
    
    Vice President, Information Dominance and DirectorDate: December 14, 2005/s/ David C. Karlgaard

David C. Karlgaard
    
    DirectorDate: December 14, 2005/s/ Peter A. Marino

Peter A. Marino
    
    DirectorDate: December 14, 2005/s/ Robert McCashin

Robert McCashin
    
    DirectorDate: December 14, 2005/s/ John Irvin

John Irvin
    
    DirectorDate: December 14, 2005/s/ Lloyd A. Semple

Lloyd A. Semple
    
    DirectorDate: December 14, 2005
 71