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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, 2007
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 12701 Fair Lakes Circle, Suite 800, Fairfax Virginia 22033
 (703) 322-0881
  Title of Class
    
    Name of Exchange onWhich RegisteredCommon Stock, par value $.01 per share
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 þ
  o þ o
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DOCUMENTS INCORPORATED BY REFERENCE
  2




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ARGON ST, INC. AND SUBSIDIARIES
 For the Fiscal Year Ended September 30, 2007
 
 TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    4Item 1A.
    
    Risk Factors
    
    16Item 1B.
    
    Unresolved Staff Comments
    
    28Item 2.
    
    Properties
    
    28Item 3.
    
    Legal Proceedings
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    29Supplemental Item. Executive Officers of the Registrant
    
    29PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    30Item 6.
    
    Selected Financial Data
    
    32Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    33Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    46Item 8.
    
    Financial Statements and Supplementary Data
    
    47Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    73Item 9A.
    
    Controls and Procedures
    
    73Item 9B.
    
    Other Information
    
    73PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    74Item 11.
    
    Executive Compensation
    
    74Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    74Item 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    74Item 14.
    
    Principal Accounting Fees and Services
    
    74PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    75Signatures
    
    77Exhibits
    
    77
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PART I
 
 ITEM 1. BUSINESS
 Business Description.
   
    
    Signals Intelligence (SIGINT):Collecting information and producing intelligence from
the detection, interception and evaluation of signals, including communication signals
(COMINT) and electromagnetic signals, such as radar (ELINT).
    
    Electronic Warfare (EW):Detecting, identifying and countering adversary forces, weapons
and sensors through collection of adversary signals. Measures include launching deceptive
signals and electronic counter-measures and using electronic support measures (ESM) to
identify and locate emitters on both platforms and weapons.
    
    Information Operations (IO):Employment of non-lethal measures to exploit, influence
and manipulate an enemys C5ISR processes, including radio and network communications and
measures, to protect own force and friendly information and sensors.
    
    Acoustic Operations:Employment of acoustic sensors and signals to detect, identify and
counter undersea threats including, but not limited to, enemy torpedoes.
    
    Threat Simulation:The use of computer and virtual based replication of signals and
sensors for training and analysis of adversary capabilities.
    
    Imaging:Production and analysis of information from light spectrum sources, including
multispectral, hyperspectral, infra-red, electro-optical and visible light.
    
    Tactical Communications and Networking:Deployment of mobile, terrestrial, and satellite
radio receivers and transmitters, to include point to point links and extensive networks,
supporting tactical operations, intelligence production and dissemination, movement of data
and information, and management of the radio frequency spectrum.
    
    Services:The provision of material, training and support engineering expertise to enable
and sustain readiness, systems operations and mission success.
   4




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Available Information
 http://www.argonst.com http://www.sec.gov.
 Corporate History
     5




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##### 



Recent Developments
  
    
    Mergers and Acquisitions.In 2007, we acquired certain assets and liabilities of Coherent
Systems International Corp. in a transaction in which we purchased 100% of the equity of CSIC
Holdings, LLC, (Coherent) a 100% owned entity of Coherent systems International Corp., a
leader in niche defense electronics markets which develops, integrates and fields complete
systems for mission critical, command, control, communications, electronic warfare, and
facility security solutions. Coherent has utilized its competencies in engineering, software
development and systems integration, and its intimate knowledge of the conditions faced by
at-war forces, to deploy advanced command and control solutions, precision targeting systems,
mobile communication gateways, high-performance electronic warfare systems, and aircraft
sensor solutions. It has built loyal customer support for its rapidly-fielded products among
the United States Marine Corp, the United States Air Force, the United States Special
Operations Forces, the United States Navy, and allied nations, such as the United Arab
Emirates. We believe synergies with CSI will provide customers significant additional
opportunities to leverage complementary technologies, programs and products to improve
tactical operations.
    
    Tactical Communications and Networking Systems. We were awarded an important option under
the Operational Test-Tactical Engagement System (OT-TES) Communications Upgrade program
bringing the total value of this contract to over $54 million. OT-TES provides a mobile,
high-fidelity, tactical engagement simulation and field instrumentation system that collects
and reports real-time casualty assessment and other required data. OT-TES is capable of
supporting operational testing and evaluation of Army weapon systems, doctrine and tactics.
The modification to the contract includes numerous updates to the technical baseline to
better support future operational testing activities at Fort Hood, Texas. We believe our work
and this award position us well for future competitions in the training and test
communications markets. In addition, we believe that our advances in this market will
provide synergies in the ground mobile gateway and other tactical communications markets that
we serve.
    
    Airborne Reconnaissance. In June 2007, we were awarded an important contract serving the
Navys surveillance aircraft capabilities. This contract will provide key upgrades to current
systems consistent with our widely deployed system architecture. We believe this contract
award continues to improve our position in the airborne reconnaissance C5ISR markets by
providing new war fighting and reconnaissance options. We also believe that this contract
continues to position us favorably for future airborne reconnaissance modernization efforts,
including the anticipated competitions for the EPX and Aerial Common Sensor programs.
    
    Ships Signals Exploitation Equipment (SSEE) Increments E and F.This program, under
which we design and develop Information Operation systems for the U.S. Navy, was first
awarded to us following a competitive procurement process in 2001. Our partnership with the
U.S. Navy grew stronger with the approval of additional SSEE Increment E systems over the
years, and in 2007 our competitive win of the contract to develop the next generation of
these
shipboard systems, known as SSEE Increment F. We believe these awards solidify our
position as a dominant supplier of surface ship cryptologic systems to the United States
Navy. In addition, the awards have led to opportunities with the U.S. Coast Guard and
international customers.
 6




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
    
    Submarine Programs.We have successfully provided ESM and cryptologic support systems on
U.S. and U.K. submarines since 1999. However, revenue from the submarine market has
decreased in 2007 and 2006 because our existing contracts fully satisfy the inventory
requirements of available platforms. While our plans call for periodic updates and technical
refresh of all these systems, their architecture remains state-of-the-art, and therefore we
do not anticipate near-term increases in revenue in this area.
    
    Surface Ship Torpedo Defense.Our surface ship torpedo defense (SSTD) systems continue
to be deployed in both the U.S. market and overseas. We believe the challenge that diesel
electric submarines present to U.S. and partner nations will amplify the need for a viable
torpedo defense systems. We were successful in winning a contract with the Navy in November
2006 to upgrade the AN/SLQ-25A SSTD system.
    
    Transition to Gen 5 from Gen 4.Within our SIGINT capabilities, we have successfully
transitioned from our widely deployed Generation 4 (Gen 4) SIGINT platform to the latest
version, Generation 5 (Gen 5). The research and development was company-funded and
represents a significant improvement in performance over the prior platform. We believe the
technological and performance improvements that Gen 5 offers will increase acceptance of this
new platform for existing customers and potential new users. In addition to the increased
performance, new software and firmware is available to increase the SIGINT mission that Gen 5
can perform. We believe this transition provides significant new opportunities for growth in
the SIGINT area.
    
    Mobile Systems Business Area Investment and Opportunity.Our mobile systems capability
addresses ground transportable SIGINT primarily for defense applications for both the U.S.
and international markets. We are currently developing two major ground transportable
systems under separate contracts, each of which represents a significant investment and
opportunity. In the first program, we are evolving the next generation Lighthouse
architecture which includes the use of Field Programmable Gate Array (FPGA) devices to
enable significant improvements in signal collection density and a reduction in overall
system size. The second program represents an entrée into the Distributed Common Ground
Station (DCGS) environment and the development of a DCGS compliant sensor system. During
2007 we invested profit dollars to ensure a superior solution delivery to our customers. We
believe that continued investment in these technologies, capabilities and platforms position
us well for future contract competitions and awards serving these markets.
 Segments
  Technology and Applications
  7




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Customers
   Years Ended September 30,2007
    
    2006
    
    2005United States Navy
    
    
    61
    %
    
    
    59
    %
    
    
    69
    %United States Army
    
    
    11
    %
    
    
    6
    %
    
    
    7
    %Other U.S. government agencies
    
    
    22
    %
    
    
    25
    %
    
    
    13
    %Foreign and other
    
    
    6
    %
    
    
    10
    %
    
    
    11
    %
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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, 2007
    
    September 30, 2006
    
    September 30, 2005Sole Source Contracts
    
    
    55
    %
    
    
    51
    %
    
    
    54
    %Competitive Contracts
    
    
    45
    %
    
    
    49
    %
    
    
    46
    %
 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;
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
    
    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 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.
  10




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Time and materials.
  Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2007
    
    September 30, 2006
    
    September 30, 2005Fixed-price contracts
    
    
    60
    %
    
    
    65
    %
    
    
    79
    %Cost reimbursable contracts
    
    
    35
    %
    
    
    25
    %
    
    
    16
    %Time and materials contracts
    
    
    5
    %
    
    
    10
    %
    
    
    5
    %
 Regulation
   Subcontracts
  Backlog
  (Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Funded
    
    $
    246,571
    
    
    $
    162,796
    
    
    $
    199,543Unfunded
    
    
    58,279
    
    
    
    62,373
    
    
    
    71,564Total
    
    $
    304,850
    
    
    $
    225,169
    
    
    $
    271,107
  11




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Research and Development
    (Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Internal research and development
    
    $
    7,035
    
    
    $
    6,286
    
    
    $
    3,992Customer-funded research and development
    
    
    73,397
    
    
    
    50,130
    
    
    
    50,009Total
    
    $
    80,432
    
    
    $
    56,416
    
    
    $
    54,001
 Competition
   12




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Environmental
  Employees
   Industry Overview
 Government Spending
  
    
    Department of Defense Budgets.Department of Defense spending, including defense
spending for procurement and research and development, is projected to increase from
over $460 billion in FY08 to over $516 billion by 2012. 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, $81.4 billion in 2005
$65.8 billion in 2006, and $153.6 billion in 2007. The emergency supplemental
appropriation has not yet been approved for FY 2008 but is expected to be over $190.0
billion.
    
    C5ISR Spending.A strong consensus among many seniors in the Department of Defense
increasingly attributes C5ISR as the pivotal driving force in the current combat
operations in Iraq and Afghanistan. Additionally, there is a strong movement within
the community to expand C5ISR use to law enforcement operations. We believe that C5ISR
spending will increase because of its role in support tactical operations, its role in
the traditional strategic intelligence support of the Global War on Terror, and its
expanded importance in support to federal, state and city law enforcement needs. We
expect C5ISR spending to continue to increase substantially for the foreseeable future.
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Significant Industry Trends
  
    
    Changing Communications Intelligence Needs.Communications Intelligence (COMINT)
continues to be the premier source of information for supporting strategic decision
makers and tactical commanders. With the transition from a monolithic enemy in the Cold
War to the dispersed collection of possible enemies in asymmetric warfare, both the
nature of the target and the COMINT requirements have changed. Communications equipment
targeted by COMINT systems is no longer limited to long term, state developed, military
systems and now is the latest technology readily available in the commercial
communications market, (for example, cell phones). Geolocation is no longer limited to
the location of major enemy forces and strategic weapons, but now includes an individual
or specific computer. These realities of modern defense and security radically change
the requirements for a COMINT system. Todays successful COMINT systems and designs must be as dynamic as
those found in the commercial communications market, reprogrammable within a single
mission and accommodating of new technology as it becomes available with minimum
impact and costs. Modern COMINT systems need to provide essential information within
the tempo of modern warfare. Commanders want to know what and where in time to
impact decisions with analytical insight added when time and opportunity are
available.
    
    Electronic Warfare/Information Operations.Information operations and electronic
warfare have never been more important to warfighters and offer powerful new options to
commanders. Electronic Attack (EA) is increasingly becoming a weapon of choice for
both conflict management and non-lethal attack. We believe the trend towards the
weaponization of SIGINT will increase the priority for systems which can offer both
traditional ISR and EA. We also expect the need for brute force and smart jamming
against Improvised Explosive Devices (IED) to continue to be a critical requirement
anywhere the United States has military or civilian personnel in place. We believe the
technology foundation of EA systems can impact the IED challenge.
    
    Multi-Intelligence Systems Integration.Dating from the Cold War era, intelligence
systems were single discipline (e.g. COMINT) based and stood on their own individual
merit. Information and data analysis across disciplines was performed by examining the
end conclusions of these single discipline systems. The credibility of any single
discipline was frequently assigned based upon user bias or previous experience. Factors
such as the need for information inside the decision cycle of todays pace of warfare,
ready use and dissemination of information from previously restricted sources, a
proliferation of sensors, and improvements in making information available make a
compelling case for the integration of information at the first possible opportunity.
Warfighters today want What is it, and where is it? answered rapidly with clear
information integrated from all useful sources. Meeting this demand has a profound
impact on ISR system design. Modern ISR systems must develop and present extremely
accurate, reliable information in forms that can be readily combined with information
from other types of sensors and systems. We expect that the trend of intelligence
integration will continue and will have three important effects. First, modern ISR
systems must automatically derive intelligence from quickly detectable external signal
characteristics and combine this information at the raw observable level. To satisfy
this requirement, newer systems must be able to provide geolocational information on all
new energy detections. Second, intelligence must be delivered in an actionable form to
discreet personal devices in the hands of individual warfighters. Third, we believe the
pace of war and volume of intelligence data may result in the need to execute decisions,
including the use of lethal force, on the basis of machine-generated information without
the benefit of human analysis. These trends will continue to place increasingly
difficult demands on the systems accuracy, reliability, and data integrity of ISR
systems.
    
    Network-Centric Warfare.The military is rapidly moving towards network-centric
warfare, which seeks to deliver the warfighter real-time, executable battlefield
information from multiple platforms and sources. Modern warfare requires coordinating
multiple ground troops, land vehicles and aircraft (both manned and unmanned), ships and
submarines. Network-centric warfare involves shared data, shared sensors, shared tasking
and joint operations among multiple combat platforms and personnel and requires
increasingly sophisticated, complementary and flexible C5ISR systems.
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
    
    Personnel Protection.The conflict in Iraq has highlighted the need for personnel
protection against the 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.
    
    Outsourcing of Support Services.A number of factors have converged to create an
environment in which government is now outsourcing an increasing percentage of work
previously done by the military or government civilians. The trend is pervasive across
nearly all functional areas except combat forces. The nature of the work ranges from
acquisition management to manning positions in intelligence and analytical operations.
A continuing manpower shortage in the military, increasingly complex systems and the
need to retrain system operators and maintainers on rapidly changing hardware and
software all point to even more outsourcing. The trend enables companies to provide the
government with critical services and expertise, while they remain current with
operational needs and challenges.
 Business Strategies
  
    
    Continuing and Extending Business with our Current Customers.We adhere strongly to
the belief that our current customer is our best customer. Our intention is to extend
current contracts into additional capabilities and services for our existing customers.
Additionally, as new technology is developed or available, we will endeavor to modify
existing systems to take advantage of this new technology in the face of dynamic
threats.
    
    Expanding our Customer Base for our Existing Capabilities.The software product
line and other capabilities constituting our current products could offer additional
customers the same compelling advantages experienced by our current customers. We
intend to extend our customer set for our current and evolving products and services.
We believe the adaptability and flexibility of our SIGINT and other products make them
attractive in joint or coalition warfare environments.
    
    Developing New Products,Services and Customers.We believe a combination of our
highly-skilled staff and leading edge technology offers opportunities into new markets.
In addition, we believe that we have developed a favorable reputation for taking on and
solving the most challenging technical and engineering problems. We intend to combine
the results of customer funded research with internally funded technology development to
develop new customers through focused marketing initiatives led by our internal
professional staff, complemented by selective outside experts.
    
    Attracting and Developing Highly Skilled Personnel.Our success depends on the
continued contributions of our engineers, system designers and managers. We intend to
continue to hire and develop the highly-skilled professionals needed for our work. We
seek to recruit exceptional recent college graduates and former key personnel from the
intelligence community and Department of Defense. We believe that our managements
success in creating and maintaining a challenging and stimulating work environment has
contributed to our low engineering staff turnover over the last twelve months. We
believe we can continue to attract, develop and retain employees by offering competitive
compensation, challenging engineering assignments and opportunities for career and
management growth.
    
    Leveraging Research and Development into Production Contracts.Many of our current
systems were developed through our research and development activities. Much of our
research and development is funded through research and development contracts with the
U.S. government. While these contracts are generally small and have lower profit
margins, we have often been successful in expanding these activities into full
production contracts. We believe our involvement in all stages of a systems life cycle
provides us opportunities to be the preferred or sole-source provider for certain
systems. We intend to continue to identify and pursue programs where we can expand
research and development efforts into full production contracts.
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
    
    Migrating our Multi-Intelligence Capabilities to Additional Platforms.Defense and
intelligence customers now require C5ISR systems that integrate multiple intelligence
gathering and processing capabilities. Our multi-intelligence systems have combined
communications and electronic intelligence capabilities on ships, submarines and
aircraft, and have combined radar and infra-red sensor capabilities for border patrols.
We believe our experience and capabilities position us to win contracts to develop and
produce multi-intelligence systems.
    
    Expanding our Role in Providing Support Services.We plan to continue to build on
the expertise developed from supporting and servicing our rapidly expanding inventory of
deployed systems, by providing those same services to similar systems. Our current
infrastructure can be adapted to meet the growing requirements created by the government
trend to outsource key engineering and support services.
 
 ITEM 1A. RISK FACTORS
  Risks Related to Our Business and Operations
 We rely heavily on sales to the U.S. government, particularly to agencies of the Department of
Defense.
  U.S. government contracts are generally not fully funded at inception, and funding may be
terminated or reduced at any time.
  16




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##### 



From time to time, we depend on revenues from a few significant contracts, and any loss or
cancellation of, or any reduction or delay in, any of these contracts could significantly harm our
business.
  Our U.S. government contracts generally may be terminated at the governments convenience or for
our default.
  As a U.S. government contractor, we are subject to a number of procurement 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.
 17




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##### 



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.
  Our senior management is important to our customer relationships and overall business.
  18




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##### 



We must recruit and retain highly skilled employees to succeed in our competitive and
labor-intensive business.
  Our business is dependent upon our employees obtaining and maintaining required security
clearances.
  Cost over-runs on our contracts could subject us to losses or adversely affect our future business.
  Our quarterly operating results may vary widely.
  
    
    fluctuations in revenues derived from fixed-price contracts and contracts with a
performance-based fee structure;
    
    commencement, completion or termination of contracts during any particular quarter;
    
    changes in Congress and Presidential administrations and senior U.S. government
officials that affect the timing of technology procurement;
 19




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##### 




    
    changes in policy or budgetary measures that adversely affect government contracts in
general; and
    
    increased purchase requests from customers for equipment and materials in connection
with the U.S. governments fiscal year end, which may affect our fiscal fourth quarter
operating results.
  Our earnings and profit margins may vary based on the mix of our contracts and programs and other
factors related to our contracts.
  We derive significant revenues from contracts awarded through a competitive bidding process.
  
    
    the need to bid on programs in advance of the completion of their design, which may
result in unforeseen technological difficulties and cost over-runs;
    
    the substantial cost and managerial time and effort that we spend to prepare bids and
proposals for contracts that may not be awarded to us;
    
    the need to accurately estimate the resources and cost structure that will be
required to service any contract we are awarded; and
    
    the expense and delay that may arise if our competitors protest or challenge contract
awards made to us pursuant to competitive bidding, and the risk that any such protest or
challenge could result in the resubmission of bids on modified specifications, or in
termination, reduction or modification of the awarded contract.
  20




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##### 



We face competition from other firms, many of which have substantially greater resources.
  Our business depends upon our relationships with, and the performance of, our prime contractors.
   If our subcontractors or suppliers fail to perform their contractual obligations, our contract
performance and our ability to obtain future business could be materially and adversely affected.
  21




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##### 



Our employees or subcontractors may engage in misconduct or other improper activities.
  If we are unable to manage our growth, our business could be adversely affected.
  Our international business poses potentially greater risks than our domestic business.
  We may not be able to receive or retain the necessary licenses or authorizations required to sell
our systems and provide services overseas.
  Our systems and products may be rendered obsolete if we are unable to adapt to the rapid
technological changes in our industry.
  22




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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 advanced components for
hardware and software.
   Our future success will depend in part on our ability to meet the changing needs of our customers.
  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;
 23




---



##### 




    
    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.
   Our failure to protect our proprietary technology may adversely affect our business and impair our
ability to compete effectively.
  24




---



##### 



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




---



##### 



We may incur material impairment charges related to mergers and acquisitions.
  We may be required to reduce our profit margins on contracts on which we use the
percentage-of-completion accounting method.
  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.
  26




---



##### 




    
    diversion of managements attention from existing operations;
    
    potential loss of key employees or customers of acquired companies;
    
    exposure to unforeseen liabilities of acquired companies; and
    
    financial reporting irregularities as a result of deficient internal controls and
disclosure controls and procedures of acquired companies.
  
    
    the integration of personnel with disparate business backgrounds;
    
    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 current and former executive officers, whose interests may not be aligned with yours, may be
able to control the vote on matters requiring stockholder approval.
  27




---



##### 



ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   EstimatedSquare
    
    
    
    
    
    PrincipalAddress
    
    Feet
    
    Lease Term
    
    Description
    
    Activity12701 Fair Lakes Circle
Fairfax, VA 22033
    
    
    164,000
    
    
    Leased,
Expiration Date:
5/31/2009
    
    Multifloor tenant
in ten-story office
building.
    
    Engineering/
Administration99 Spruce St
Windber, PA 15963
    
    
    90,000
    
    
    Leased,
Expiration
Date:
9/30/2012
    
    One-story facility
    
    Engineering/Production/
Administration8419 Terminal Road
Newington, VA 22122
    
    
    67,220
    
    
    Leased,
Expiration Date:
6/30/2014
    
    Two one-story and
one partial
two-story adjacent
block buildings in
an industrial park.
    
    Engineering/Production/
Administration90 Laurel View Drive
Smithfield, PA 15478
    
    
    66,000
    
    
    Leased,
Expiration Date:
9/15/2013
    
    One-story facility.
    
    Engineering/Production/
AdministrationMesa Ridge Road
San Diego, CA 92121
    
    
    39,939
    
    
    Leased, Expiration
Date:
8/31/2010
    
    Two-story
facilities.
    
    Engineering/
Administration1386-1390
Connellsville Rd
Lemont Furnace, PA 
15456
    
    
    30,000
    
    
    Leased,
Expiration Date:
4/1/2014
    
    One-story facility.
    
    Engineering/
Production329 North Bernardo Ave
Mountain View, CA 94043
    
    
    26,328
    
    
    Leased,
Expiration
Date:
10/31/2010
    
    One-story facility.
    
    Engineering/
Production2810 Bunsen Ave
Ventura, CA 93003
    
    
    25,950
    
    
    Leased,
Expiration Date:
1/31/2012
    
    Two-story facility
in an industrial
park.
    
    Engineering/Production/
Administration
 28




---



##### 




    
    Huntsville, Alabama;
    
    Redlands, California;
    
    Orlando, Ft Walton Beach, Largo, and Tampa, Florida;
    
    Annapolis Junction and Lexington Park, Maryland;
    
    Ann Arbor, Michigan;
    
    Camden, New Jersey;
    
    Doylestown, Pennsylvania; and
    
    San Antonio, Texas.
 
 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.
    
    
    62
    
    
    Chairman of the Board, Chief Executive
Officer and PresidentVictor F. Sellier
    
    
    58
    
    
    Vice President, Business Operations,
Chief Financial Officer and TreasurerKerry M. Rowe
    
    
    48
    
    
    Vice President, Chief Operating Officer
 29




---



##### 



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
   High
    
    LowFiscal 2007Fourth Quarter
    
    $
    23.73
    
    
    $
    15.18Third Quarter
    
    
    29.44
    
    
    
    19.95Second Quarter
    
    
    26.63
    
    
    
    21.14First Quarter
    
    
    25.00
    
    
    
    18.70Fiscal 2006Fourth Quarter
    
    $
    28.38
    
    
    $
    20.95Third Quarter
    
    
    35.45
    
    
    
    25.08Second Quarter
    
    
    34.06
    
    
    
    27.07First Quarter
    
    
    32.38
    
    
    
    25.64
  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 issuanceEquity compensation
plans approved by
security holders
    
    
    1,193,045
    
    
    $
    21.97
    
    
    
    668,125Equity compensation
plans not approved
by security holders
(1)
    
    
    736,148
    
    
    
    8.40
    
    
    
    Total
    
    
    1,929,193
    
    
    $
    16.79
    
    
    
    668,125
 
 (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. 30




---



##### 



Stock Repurchases
  Total Number of
    
    
    Approximate NumberTotal Number
    
    
    Average
    
    
    Shares Purchased as
    
    
    of Shares that Mayof Shares
    
    
    Price Paid
    
    
    Part of Publicly
    
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    
    per Share
    
    
    Announced Plan
    
    
    Under the PlanSeptember 1, 2007 to September
30, 2007
    
    
    547,900
    
    
    $
    18.24
    
    
    
    547,900
    
    
    
    1,452,100Fourth quarter 2007 totals
    
    
    547,900
    
    
    $
    18.24
    
    
    
    547,900
    
    
    
    1,452,100
 Common Stock Performance Graph
  
 PERFORMANCE GRAPH TABLEAs of September 30, (in dollars)2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007Argon ST Stock
    
    $
    100
    
    
    $
    176
    
    
    $
    312
    
    
    $
    326
    
    
    $
    266
    
    
    $
    220Russell 2000 Index
    
    
    100
    
    
    
    135
    
    
    
    158
    
    
    
    184
    
    
    
    200
    
    
    
    222BB&T Defense Electronics Index
    
    
    100
    
    
    
    101
    
    
    
    140
    
    
    
    132
    
    
    
    138
    
    
    
    195
 31




---



##### 



ITEM 6. SELECTED FINANCIAL DATA
     32




---



##### 



Years Ended September 302007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Contract revenues
    
    $
    282,209
    
    
    $
    258,835
    
    
    $
    271,754
    
    
    $
    129,184
    
    
    $
    79,349Cost of revenues
    
    
    229,767
    
    
    
    206,023
    
    
    
    222,792
    
    
    
    107,307
    
    
    
    65,271General and adminstrative expenses
    
    
    17,342
    
    
    
    15,926
    
    
    
    10,586
    
    
    
    4,604
    
    
    
    3,657Research and development expenses
    
    
    7,035
    
    
    
    6,286
    
    
    
    3,992
    
    
    
    1,301
    
    
    
    2,187Impairment of intangible assets
    
    
    6,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    
    21,317
    
    
    
    30,600
    
    
    
    34,384
    
    
    
    15,972
    
    
    
    8,234Other income, net
    
    
    1,318
    
    
    
    1,180
    
    
    
    698
    
    
    
    154
    
    
    
    31Income before income taxes
    
    
    22,635
    
    
    
    31,780
    
    
    
    35,082
    
    
    
    16,126
    
    
    
    8,265Provision for income taxes
    
    
    (7,933
    )
    
    
    (12,385
    )
    
    
    (13,301
    )
    
    
    (6,177
    )
    
    
    (2,696
    )Net income
    
    $
    14,702
    
    
    $
    19,395
    
    
    $
    21,781
    
    
    $
    9,949
    
    
    $
    5,569Earnings per shareBasic
    
    $
    0.66
    
    
    $
    0.90
    
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47Diluted
    
    $
    0.65
    
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44
 Years Ended September 302007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Balance sheet dataCash and cash equivalents
    
    $
    22,965
    
    
    $
    33,498
    
    
    $
    4,064
    
    
    $
    29,732
    
    
    $
    4,100Total assets
    
    $
    329,645
    
    
    $
    313,531
    
    
    $
    249,834
    
    
    $
    221,741
    
    
    $
    23,736Total debt
    
    $
    218
    
    
    $
    86
    
    
    $
    11,138
    
    
    $
    282
    
    
    $
    34Stockholders Equity
    
    $
    274,836
    
    
    $
    265,696
    
    
    $
    192,013
    
    
    $
    160,925
    
    
    $
    11,010Other dataBacklog (unaudited)
    
    $
    304,850
    
    
    $
    225,169
    
    
    $
    271,107
    
    
    $
    228,819
    
    
    $
    157,070Dividends
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,851
    
    
    $
    2,462
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Statements
  33




---



##### 



Overview
 General
  Segments
  Revenues
    34




---



##### 



Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedContract Type
    
    September 30, 2007
    
    September 30, 2006
    
    September 30, 2005Fixed-price contracts
    
    60%
    
    65%
    
    79%Cost reimbursable contracts
    
    35%
    
    25%
    
    16%Time and materials contracts
    
    5%
    
    10%
    
    5%
   Backlog
     35




---



##### 



(In thousands)
    
    2007
    
    
    2006
    
    
    2005Funded
    
    $
    246,571
    
    
    $
    162,796
    
    
    $
    199,543Unfunded
    
    
    58,279
    
    
    
    62,373
    
    
    
    71,564Total
    
    $
    304,850
    
    
    $
    225,169
    
    
    $
    271,107
   Cost of Revenues
  General and Administrative Expenses
  Research and Development
   (In thousands)
    
    2007
    
    
    2006
    
    
    2005Internal research and development
    
    $
    7,035
    
    
    $
    6,286
    
    
    $
    3,992Customer-funded research and development
    
    
    73,397
    
    
    
    50,130
    
    
    
    50,009Total
    
    $
    80,432
    
    
    $
    56,416
    
    
    $
    54,001
 36




---



##### 



Interest Income, net
  Critical Accounting Policies and Estimates
 General
  Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
  37




---



##### 



Indirect Rate Variance
  Award Fee Recognition
  Goodwill
 Goodwill and Other Intangible Assets
 Long-Lived Assets (Excluding Goodwill)
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Accounts Receivable
  38




---



##### 



Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees
  Fair Value Determination
   Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
 39




---



##### 



Historical Operating Results
 Fiscal year ended September 30, 2007 compared to fiscal year ended September 30, 2006
  Increase (Decrease)2007(Amounts in thousands)
    
    September 30, 2007
    
    September 30, 2006
    
    Compared to 2006Contract revenues
    
    $
    282,209
    
    
    $
    258,835
    
    
    $
    23,374Cost of revenues
    
    
    229,767
    
    
    
    206,023
    
    
    
    23,744General and administrative expenses
    
    
    17,342
    
    
    
    15,926
    
    
    
    1,416Research and development expenses
    
    
    7,035
    
    
    
    6,286
    
    
    
    749Impairment of intangible assets
    
    
    6,748
    
    
    
    
    
    
    
    6,748Interest income and interest expense
    
    
    1,318
    
    
    
    1,180
    
    
    
    138Provision for income taxes
    
    
    7,933
    
    
    
    12,385
    
    
    
    (4,452
    )Net income
    
    
    14,702
    
    
    
    19,395
    
    
    
    (4,693
    )
 Contract Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Research and Development Expenses:
  40




---



##### 



Impairment of Intangible Assets:
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 Interest Income and Interest Expense:
  Provision for Income Taxes:
  Net Income:
  Fiscal year ended September 30, 2006 compared to fiscal year ended September 30, 2005
  Increase (Decrease)2006(In thousands)
    
    September 30, 2006
    
    September 30, 2005
    
    Compared to 2005Contract revenues
    
    $
    258,835
    
    
    $
    271,754
    
    
    $
    (12,919
    )Cost of revenues
    
    
    206,023
    
    
    
    222,792
    
    
    
    (16,769
    )General and administrative expenses
    
    
    15,926
    
    
    
    10,586
    
    
    
    5,340Research and development expenses
    
    
    6,286
    
    
    
    3,992
    
    
    
    2,294Interest income and interest expense
    
    
    1,180
    
    
    
    698
    
    
    
    482Provision for income taxes
    
    
    12,385
    
    
    
    13,301
    
    
    
    (916
    )Net income
    
    
    19,395
    
    
    
    21,781
    
    
    
    (2,386
    )
 41




---



##### 



Contract Revenues:
  Cost of Revenues:
  General and Administrative Expenses:
  Research and Development Expenses:
  Interest Income and Interest Expense:
  Provision for Income Taxes:
  Net Income:
  42




---



##### 



Analysis of Liquidity and Capital Resources
 Cash
    Line of Credit
    Cash Flows
  43




---



##### 



Contractual Obligations and Commitments
  Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in(In thousands)
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterCapital leases
    
    $
    235
    
    
    $
    112
    
    
    $
    65
    
    
    $
    33
    
    
    $
    25
    
    
    
    
    
    
    
    Operating leases
    
    $
    23,011
    
    
    $
    8,261
    
    
    $
    5,798
    
    
    $
    2,961
    
    
    $
    2,261
    
    
    $
    1,767
    
    
    $
    1,963Total
    
    $
    23,246
    
    
    $
    8,373
    
    
    $
    5,863
    
    
    $
    2,994
    
    
    $
    2,286
    
    
    $
    1,767
    
    
    $
    1,963
  (in thousands)
    
    Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    1,308
    
    
    $
    1,308
    
    
    
    
  Recent Accounting Pronouncements
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 44




---



##### 



Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 The Fair Value
Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No.
115 ,
 Market Risks
  Cash and Cash Equivalents:
  45




---



##### 



Interest Rates:
  Foreign Currency:
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  46




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    48Consolidated Balance Sheets
    
    
    49As of September 30, 2007 and 2006Consolidated Statements of Earnings
    
    
    50For the years ended September 30, 2007, 2006 and 2005Consolidated Statements of Stockholders Equity
    
    
    51For the years ended September 30, 2007, 2006 and 2005Consolidated Statements of Cash Flows
    
    
    52For the years ended September 30, 2007, 2006 and 2005Notes to Consolidated Financial Statements
    
    
    53
 47




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
 48




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share and share amounts)
 September 30,2007
    
    
    2006ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    22,965
    
    
    $
    33,498Accounts receivable, net
    
    
    95,639
    
    
    
    86,842Inventory,
net
    
    
    2,927
    
    
    
    3,954Income taxes receivable
    
    
    759
    
    
    
    23Deferred project costs
    
    
    662
    
    
    
    5,597Deferred income tax asset
    
    
    3,218
    
    
    
    2,083Prepaids and other
    
    
    1,733
    
    
    
    1,481TOTAL CURRENT ASSETS
    
    
    127,903
    
    
    
    133,478Property, equipment and software, net
    
    
    22,822
    
    
    
    17,368Restricted cash
    
    
    1,800
    
    
    
    Goodwill
    
    
    170,192
    
    
    
    148,719Intangibles, net
    
    
    5,760
    
    
    
    13,200Other assets
    
    
    1,168
    
    
    
    766TOTAL ASSETS
    
    $
    329,645
    
    
    $
    313,531LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    23,796
    
    
    $
    19,124Accrued salaries and related expenses
    
    
    12,899
    
    
    
    10,678Deferred revenue
    
    
    12,651
    
    
    
    13,053Capital lease obligations, current portion
    
    
    112
    
    
    
    33Deferred rent, current portion
    
    
    569
    
    
    
    419TOTAL CURRENT LIABILITIES
    
    
    50,027
    
    
    
    43,307Deferred income tax liability, long-term
    
    
    1,794
    
    
    
    2,937Deferred rent, net of current portion
    
    
    1,082
    
    
    
    1,538Capital lease obligations, net of current portion
    
    
    106
    
    
    
    53Other long-term liabilities
    
    
    1,800
    
    
    
    Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares
authorized, 22,561,639 and 22,313,709 shares
issued at September 30, 2007 and 2006,
respectively
    
    
    226
    
    
    
    223Additional paid in capital
    
    
    217,038
    
    
    
    212,610Treasury stock at cost:674,145 and 126,245 shares at
September 30, 2007 and 2006, respectively
    
    
    (10,527
    )
    
    
    (534
    )Retained earnings
    
    
    68,099
    
    
    
    53,397Accumulated other comprehensive loss
    
    
    
    
    
    
    TOTAL STOCKHOLDERS EQUITY
    
    
    274,836
    
    
    
    265,696TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    329,645
    
    
    $
    313,531
  49




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF EARNINGS
 (In thousands, except per share and share amounts)
 For the Year Ended September 30,2007
    
    
    2006
    
    
    2005CONTRACT REVENUES
    
    $
    282,209
    
    
    $
    258,835
    
    
    $
    271,754COST OF REVENUES
    
    
    229,767
    
    
    
    206,023
    
    
    
    222,792GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    17,342
    
    
    
    15,926
    
    
    
    10,586RESEARCH AND DEVELOPMENT
EXPENSES
    
    
    7,035
    
    
    
    6,286
    
    
    
    3,992IMPAIRMENT OF INTANGIBLE ASSETS
    
    
    6,748
    
    
    
    
    
    
    
    INCOME FROM OPERATIONS
    
    
    21,317
    
    
    
    30,600
    
    
    
    34,384INTEREST INCOME, NET
    
    
    1,318
    
    
    
    1,180
    
    
    
    698INCOME BEFORE INCOME TAXES
    
    
    22,635
    
    
    
    31,780
    
    
    
    35,082PROVISION FOR INCOME TAXES
    
    
    7,933
    
    
    
    12,385
    
    
    
    13,301NET INCOME
    
    $
    14,702
    
    
    $
    19,395
    
    
    $
    21,781EARNINGS PER SHARE (BASIC)
    
    $
    0.66
    
    
    $
    0.90
    
    
    $
    1.10EARNINGS PER SHARE (DILUTED)
    
    $
    0.65
    
    
    $
    0.87
    
    
    $
    1.06WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    22,318,245
    
    
    
    21,659,606
    
    
    
    19,738,367Diluted
    
    
    22,767,826
    
    
    
    22,255,467
    
    
    
    20,616,024
 50




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (In thousands, exept share amounts)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Common Stock
    
    
    Additional Paid in
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    StockholdersNumber of Shares
    
    
    Par Value
    
    
    Capital
    
    
    Treasury Stock
    
    
    Retained Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, September 30, 2004
    
    
    19,468,734
    
    
    $
    195
    
    
    $
    149,043
    
    
    $
    (534
    )
    
    $
    12,221
    
    
    $
    
    
    
    $
    160,925Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,781
    
    
    
    
    
    
    
    21,781Unrealized loss on foreign
currency exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    (115
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,666Shares issued upon exercise
of stock options
    
    
    639,450
    
    
    
    6
    
    
    
    4,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,453Employee Stock Purchase
Plan
    
    
    45,694
    
    
    
    1
    
    
    
    1,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171Tax Benefit on Stock
Option exercises
    
    
    
    
    
    
    
    
    
    
    3,798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,798Balance, September 30, 2005
    
    
    20,153,878
    
    
    
    202
    
    
    
    158,458
    
    
    
    (534
    )
    
    
    34,002
    
    
    
    (115
    )
    
    
    192,013Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,395
    
    
    
    
    
    
    
    19,395Realized loss on foreign
currency exchange contracts,
expensed to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    115Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,510Shares issued upon exercise
of stock options
    
    
    375,849
    
    
    
    4
    
    
    
    2,568
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,572Secondary offering,
net of expenses
    
    
    1,725,000
    
    
    
    17
    
    
    
    46,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,768Employee stock purchase plan
    
    
    33,002
    
    
    
    
    
    
    
    897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,921Tax benefit on stock option
exercises
    
    
    
    
    
    
    
    
    
    
    2,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,015Other
    
    
    25,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2006
    
    
    22,313,709
    
    
    
    223
    
    
    
    212,610
    
    
    
    (534
    )
    
    
    53,397
    
    
    
    
    
    
    
    265,696Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,702
    
    
    
    
    
    
    
    14,702Shares issued upon exercise
of stock options
    
    
    214,450
    
    
    
    2
    
    
    
    1,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,029Employee stock purchase plan
    
    
    33,480
    
    
    
    1
    
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,149Tax benefit on stock option
exercises
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,993
    )
    
    
    
    
    
    
    
    
    
    
    (9,993
    )Balance, September 30, 2007
    
    
    22,561,639
    
    
    $
    226
    
    
    $
    217,038
    
    
    $
    (10,527
    )
    
    $
    68,099
    
    
    $
    
    
    
    $
    274,836
  51




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Years Ended September 30,2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    14,702
    
    
    $
    19,395
    
    
    $
    21,781Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    7,561
    
    
    
    5,625
    
    
    
    4,493Impairment of intangible assets
    
    
    6,748
    
    
    
    
    
    
    
    Deferred income tax (benefit) provision
    
    
    (2,174
    )
    
    
    (677
    )
    
    
    3,532Stock-based compensation
    
    
    2,149
    
    
    
    1,921
    
    
    
    Loss on disposal of property
    
    
    
    
    
    
    165
    
    
    
    Bad debt expense
    
    
    95
    
    
    
    80
    
    
    
    Tax benefit of option exercises
    
    
    
    
    
    
    
    
    
    
    3,798Change in:Accounts receivable
    
    
    (8,714
    )
    
    
    19,685
    
    
    
    (42,853
    )Inventory
    
    
    1,323
    
    
    
    (2,788
    )
    
    
    60Prepaids and other
    
    
    (74
    )
    
    
    (254
    )
    
    
    400Deferred project costs
    
    
    4,935
    
    
    
    (5,534
    )
    
    
    Accounts payable and accrued expenses
    
    
    1,766
    
    
    
    (8,830
    )
    
    
    13,151Accrued salaries and related expenses
    
    
    1,433
    
    
    
    732
    
    
    
    (1,758
    )Deferred revenue
    
    
    (1,441
    )
    
    
    5,914
    
    
    
    (21,197
    )Income taxes
    
    
    (475
    )
    
    
    2,570
    
    
    
    (8,274
    )Deferred rent
    
    
    (311
    )
    
    
    40
    
    
    
    321Net cash provided by (used in) operating activities
    
    
    27,523
    
    
    
    38,044
    
    
    
    (26,546
    )Cash flows from investing activitiesAcquisitions of property, equipment and software
    
    
    (10,030
    )
    
    
    (4,437
    )
    
    
    (4,370
    )Advances and cash held in escrow
    
    
    (1,800
    )
    
    
    10,900
    
    
    
    (10,900
    )Deposits and other assets
    
    
    (391
    )
    
    
    409
    
    
    
    (233
    )Business acquisitions, net of cash acquired
    
    
    (18,079
    )
    
    
    (56,670
    )
    
    
    Net cash used in investing activities
    
    
    (30,300
    )
    
    
    (49,798
    )
    
    
    (15,503
    )Cash flows from financing activitiesAdvances (repayments) on line of credit
    
    
    
    
    
    
    (11,000
    )
    
    
    11,000Payment on note payable
    
    
    
    
    
    
    (56
    )
    
    
    (226
    )Tax benefit on stock option exercises
    
    
    550
    
    
    
    2,015
    
    
    
    Proceeeds from exercise of stock options
    
    
    1,029
    
    
    
    2,572
    
    
    
    4,453Proceeds from employee stock purchase plan exercises
    
    
    703
    
    
    
    897
    
    
    
    1,171Principal repayments on capital lease obligations
    
    
    (45
    )
    
    
    (8
    )
    
    
    (17
    )Proceeds from secondary offering, net of expenses
    
    
    
    
    
    
    46,768
    
    
    
    Purchase of treasury stock
    
    
    (9,993
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (7,756
    )
    
    
    41,188
    
    
    
    16,381Net increase (decrease) in cash and cash equivalents
    
    
    (10,533
    )
    
    
    29,434
    
    
    
    (25,668
    )Cash and cash equivalents, beginning of year
    
    
    33,498
    
    
    
    4,064
    
    
    
    29,732Cash and cash equivalents, end of year
    
    $
    22,965
    
    
    $
    33,498
    
    
    $
    4,064Supplemental disclosureIncome taxes paid, net of refunds
    
    
    (10,032
    )
    
    
    (8,479
    )
    
    
    (14,212
    )Interest expense paid
    
    
    (8
    )
    
    
    (166
    )
    
    
    (11
    )Assets acquired under capital leases
    
    
    55
    
    
    
    13
    
    
    
    99
  52




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, expect per share and share amounts)
 Note 1  Summary of Significant Accounting Policies
 Nature of Business
  Principles of Consolidation
  Revenue and Cost Recognition
 Accounting for Performance of Construction-Type and
Production-Type Contracts
  Fiscal Years Ended September 30,2007
    
    2006
    
    2005Fixed-price contracts
    
    
    60
    %
    
    
    65
    %
    
    
    79
    %Cost reimbursable contracts
    
    
    35
    %
    
    
    25
    %
    
    
    16
    %Time and materials contracts
    
    
    5
    %
    
    
    10
    %
    
    
    5
    %
  53




---



##### 



Research and Development
 Accounting for Research and
Development Costs
  Indirect Rate Variance
  Reclassification
  Cash and Cash Equivalents
  Accounts Receivable
  54




---



##### 



Inventories
  2007
    
    
    2006Raw Materials
    
    $
    1,451
    
    
    $
    1,940Component parts, work in process
    
    $
    1,223
    
    
    $
    1,919Finished component parts
    
    $
    394
    
    
    $
    137$
    3,068
    
    
    $
    3,996Reserve
    
    
    (141
    )
    
    
    (42
    )Total
    
    $
    2,927
    
    
    $
    3,954
 Deferred Project Costs
   Long-Lived Assets (Excluding Goodwill)
 Accounting for the Impairment or Disposal
of Long-Lived Assets
 Goodwill
 Goodwill and Other Intangible Assets
 Intangibles
  55




---



##### 



Estimated
    
    WeightedEconomic Life
    
    Average LifeCustomer related
    
    3.0  8.3 years
    
    6.5 yearsDeveloped technology
    
    3  5 years
    
    3.6 yearsTotal intangible assets
    
    
    
    5.8 years
 Property, Equipment and Software
  Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees
   Fair Value Determination
   56




---



##### 



Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 Exercise Factor.
 Post-vest Percentage.
  2007
    
    2006Volatility
    
    
    33.7%  34.0
    %
    
    
    34.4%  36.0
    %Risk free rate
    
    
    4.4%  4.6
    %
    
    
    4.5%  5.0
    %Exercise factor
    
    
    1.6  1.8
    
    
    
    1.7  4.6
  Year EndedSeptember 30, 2005Net Income
    
    $
    21,781Add: 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 of all awards, net of
related tax effects
    
    
    1,584Pro forma net income
    
    $
    20,197Earnings per share:Basic  as reported
    
    $
    1.10Basic  pro forma
    
    $
    1.02Earnings per share:Diluted  as reported
    
    $
    1.06Diluted  pro forma
    
    $
    0.98
 57




---



##### 



Income Taxes
  Use of Estimates
  Operating Cycle
  Recently Issued Accounting Pronouncements
 Accounting Changes and Error Corrections Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements
 Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 58




---



##### 



Fair Value Measurements
 The Fair Value
Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No.
115
 Earnings Per Share
  2007
    
    
    2006
    
    
    2005Net Income
    
    $
    14,702
    
    
    $
    19,395
    
    
    $
    21,781Weighted Average Shares Outstanding  Basic
    
    
    22,318,245
    
    
    
    21,659,606
    
    
    
    19,738,367Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock
Options
    
    
    449,581
    
    
    
    595,861
    
    
    
    877,657Weighted Average Shares Outstanding  Diluted
    
    
    22,767,826
    
    
    
    22,255,467
    
    
    
    20,616,024Basic Earnings per Share
    
    $
    0.66
    
    
    $
    0.90
    
    
    $
    1.10Diluted Earnings per Share
    
    $
    0.65
    
    
    $
    0.87
    
    
    $
    1.06
  59




---



##### 



Note 2  Acquisitions and Mergers
 Year Ended September 30, 2007
 CSIC Holdings LLC.
 Business Combinations
   Tangible assetsCurrent assets
    
    $
    2,775Property, plant and equipment
    
    
    530Other assets
    
    
    20Intangible assetsIntangible assets
    
    
    1,700Goodwill
    
    
    20,170Total assets acquired
    
    $
    25,195Total liabilities assumed
    
    $
    4,862Total purchase price
    
    $
    20,333
 60




---



##### 



Year Ended September 30, 2006
 San Diego Research Center, Inc.
   Radix Technologies, Inc.
  ProDesign Solutions, LLC
  Innovative Research, Ideas, and Services Corporation
   Pro Forma Information (Unaudited)
  61




---



##### 



September 30,2007
    
    2006Revenue
    
    $
    308,346
    
    
    $
    298,406Net income
    
    
    12,563
    
    
    
    17,313Earnings per shareBasic
    
    $
    0.56
    
    
    $
    0.80Diluted
    
    $
    0.55
    
    
    $
    0.78
 Note 3  Goodwill and Intangible Assets
 Goodwill
  September 30,2007
    
    
    2006Beginning balance
    
    $
    148,719
    
    
    $
    107,956Goodwill acquired during the year
    
    
    20,170
    
    
    
    40,763Contingent consideration earned and paid
    
    
    400
    
    
    
    Adjustments in the fair value of assets
acquired and liabilities assumed
    
    
    903
    
    
    
    Ending Balance
    
    $
    170,192
    
    
    $
    148,719
 Intangibles
  Accounting for the Impairment or Disposal of
Ling-Lived Assets
 62




---



##### 



September 30, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    8,347
    
    
    $
    3,915
    
    
    $
    4,432Developed technology
    
    
    1,980
    
    
    
    652
    
    
    
    1,328Total intangible assets
    
    $
    10,327
    
    
    $
    4,567
    
    
    $
    5,760
 September 30, 2006Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    14,408
    
    
    $
    2,235
    
    
    $
    12,173Developed technology
    
    
    1,355
    
    
    
    328
    
    
    
    1,027Total intangible assets
    
    $
    15,763
    
    
    $
    2,563
    
    
    $
    13,200
  AmortizationYear Ending September 30,
    
    Expense2008
    
    
    1,6982009
    
    
    1,3022010
    
    
    1,1542011
    
    
    4592012
    
    
    383Thereafter
    
    
    764Total
    
    $
    5,760
 Note 4  Customer Concentrations of Credit and Other Business Risks
 Customer Concentrations
  Years Ended September 30,2007
    
    2006
    
    2005U.S. Navy
    
    
    61
    %
    
    
    59
    %
    
    
    69
    %U.S. Army
    
    
    11
    %
    
    
    6
    %
    
    
    7
    %Other U.S. government agencies
    
    
    22
    %
    
    
    25
    %
    
    
    13
    %Foreign
    
    
    6
    %
    
    
    10
    %
    
    
    11
    %
 63




---



##### 



Years Ended September 30,2007
    
    2006
    
    2005Direct Purchases
    
    
    83
    %
    
    
    74
    %
    
    
    78
    %Subcontracts
    
    
    17
    %
    
    
    26
    %
    
    
    22
    %
 Cash Balances
  Note 5  Accounts Receivable
  September 30,2007
    
    
    2006Billed and billable
    
    $
    37,235
    
    
    $
    43,314Unbilled costs and fees
    
    
    54,523
    
    
    
    42,583Retainages
    
    
    4,092
    
    
    
    1,225Reserves
    
    
    (211
    )
    
    
    (280
    )$
    95,639
    
    
    $
    86,842
    64




---



##### 



Note 6  Property, Equipment and Software
  September 30,2007
    
    
    2006Computer, machinery and test equipment
    
    $
    23,838
    
    
    $
    20,788Leasehold improvements
    
    
    9,651
    
    
    
    8,472Computer software
    
    
    3,687
    
    
    
    3,233Furniture and fixtures
    
    
    1,643
    
    
    
    1,534Equipment under capital lease
    
    
    344
    
    
    
    148Construction in process
    
    
    6,000
    
    
    
    64445,163
    
    
    
    34,819Less Accumulated depreciation and amortization
    
    
    (22,342
    )
    
    
    (17,451
    )$
    22,822
    
    
    $
    17,368
   Note 7  Revolving Line of Credit
    Note 8  Stock-Based Benefit Plans
  65




---



##### 



Stock Compensation Expense
  Years Ended September 30,2007
    
    
    2006Cost of revenues
    
    $
    1,494
    
    
    $
    907General and administrative expense
    
    
    655
    
    
    
    1,014Total pre-tax stock-based compensation included
in income from operations
    
    
    2,149
    
    
    
    1,921Income tax expense (benefit) recognized for
stock-based compensation
    
    
    (388
    )
    
    
    (416
    )Total stock-based compensation expense, net of tax
    
    $
    1,761
    
    
    $
    1,505
   Stock Option Activity
  66




---



##### 



AggregateIntrinsicNumber
    
    
    Weighted-Average
    
    Weighted-Average
    
    Valueof Shares
    
    
    Exercise Price
    

Contractual
Term

    
    (in thousands)Shares under option, September 30, 2006
    
    
    1,859,088
    
    
    $
    14.78Options granted
    
    
    337,875
    
    
    $
    23.93Options exercised
    
    
    (214,450
    )
    
    $
    4.80
    
    
    
    
    $
    3,217Options cancelled and expired
    
    
    (113,270
    )
    
    $
    18.94Shares under option, September 30, 2007
    
    
    1,869,243
    
    
    $
    17.33
    
    
    6.8
    
    $
    4,617Options vested at September 30, 2007
    
    
    967,990
    
    
    $
    14.54
    
    
    5.7
    
    $
    5,092As of September 30, 2007, options that
are vested and expected to vest prior to
expiration
    
    
    1,243,876
    
    
    $
    16.52
    
    
    6.7
    
    $
    4,080Shares reserved for equity awards at
September 30, 2007
    
    
    668,125
   Weighted-AverageOptions
    
    
    Remaining
    
    
    Weighted-AverageRange of Exercise Price
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price$0.10  $4.11
    
    
    345,588
    
    
    4.33 years
    
    $
    2.84$4.20  $6.88
    
    
    255,660
    
    
    5.68 years
    
    
    5.48$7.54  $20.40
    
    
    395,300
    
    
    5.70 years
    
    
    16.25$21.00  $28.10
    
    
    423,725
    
    
    8.93 years
    
    
    24.48$28.47  $34.92
    
    
    448,970
    
    
    8.17 years
    
    
    29.431,869,243
 67




---



##### 



Weighted-AverageOptions
    
    
    Remaining
    
    
    Weighted-AverageRange of Exercise Price
    
    Exercisable
    
    
    Contractual Life
    
    
    Exercise Price$0.10  $4.11
    
    
    208,800
    
    
    3.82 years
    
    $
    2.00$4.20  $6.88
    
    
    136,860
    
    
    5.32 years
    
    
    5.31$7.54  $20.40
    
    
    390,400
    
    
    5.69 years
    
    
    16.20$21.00  $28.10
    
    
    80,000
    
    
    7.12 years
    
    
    27.66$28.47  $34.92
    
    
    151,930
    
    
    8.14 years
    
    
    28.94967,990
 Stock Award Activity
   Employee Stock Purchase Plan
  Note 9  Retirement Plans
  68




---



##### 



Note 10  Income Taxes
  Years Ended September 30,2007
    
    
    2006
    
    
    2005CurrentFederal
    
    $
    8,471
    
    
    $
    11,044
    
    
    $
    8,353State
    
    
    1,636
    
    
    
    2,018
    
    
    
    1,416Total current
    
    
    10,107
    
    
    
    13,062
    
    
    
    9,769DeferredFederal
    
    
    (1,664
    )
    
    
    (727
    )
    
    
    2,962State
    
    
    (510
    )
    
    
    50
    
    
    
    570Total deferred
    
    $
    (2,174
    )
    
    $
    (677
    )
    
    $
    3,532Income tax expense
    
    $
    7,933
    
    
    $
    12,385
    
    
    $
    13,301
  As of September 30,2007
    
    
    2006Total deferred tax assets
    
    $
    4,722
    
    
    $
    6,380Total deferred tax liabilities
    
    
    (3,298
    )
    
    
    (7,234
    )Net deferred tax asset (liability)
    
    $
    1,424
    
    
    $
    (854
    )
  As of September 30,2007
    
    
    2006Property, equipment and software
    
    
    (1,670
    )
    
    
    (2,175
    )Accrued vacation
    
    
    1,546
    
    
    
    1,283Deferred rent
    
    
    643
    
    
    
    734Net operating losses and tax credits
    
    
    1,257
    
    
    
    3,616Intangibles
    
    
    (1,366
    )
    
    
    (5,045
    )Deferred compensation
    
    
    82
    
    
    
    Uncollectible accounts
    
    
    30
    
    
    
    109Stock-based compensation
    
    
    828
    
    
    
    436Other, net
    
    
    74
    
    
    
    188Net deferred tax asset (liability)
    
    $
    1,424
    
    
    $
    (854
    )
   69




---



##### 



Years Ended September 30,2007
    
    2006
    
    2005Statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal benefit
    
    
    3.4
    
    
    
    4.2
    
    
    
    3.8Stock-based compensation
    
    
    1.7
    
    
    
    1.0
    
    
    
    Tax exempt interest
    
    
    (1.5
    )
    
    
    (1.1
    )
    
    
    Qualified manufacturing activity deduction
    
    
    (1.1
    )
    
    
    (0.5
    )
    
    
    Research and development credit
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.0
    )Under (over) accrual of prior year taxes
    
    
    (1.5
    )
    
    
    0.2
    
    
    
    (.1
    )Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.235.0
    %
    
    
    39.0
    %
    
    
    37.9
    %
  Note 11  Leases and Other Commitments
 Leases
   Operating LeasesFuture MinimumYear Ending September 30,
    
    Payments2008
    
    $
    8,2612009
    
    
    5,7982010
    
    
    2,9612011
    
    
    2,2612012
    
    
    1,767Thereafter
    
    
    1,963Total
    
    $
    23,011
 70




---



##### 



Capital LeasesFutureMinimumYear Ending September 30,
    
    Payments2008
    
    $
    1122009
    
    
    652010
    
    
    332011
    
    
    25Total
    
    $
    235Less amount representing interest
    
    
    17Present value of future lease payments
    
    $
    218
 Employment Agreements
  Legal matters
  Note 12  Fair Value of Financial Instruments
  Note 13  Capital Stock
 Common Stock
   Treasury Stock
   71




---



##### 



Note 14  Segment Reporting
  Note 15  Restricted Cash
  Note 16  Quarterly Financial Information (Unaudited)
  2007
    
    
    2006December 31,
    
    
    April 1,
    
    
    July 1,
    
    
    September 30,
    
    
    
    
    
    
    April 2,
    
    
    July 2,
    
    
    September 30,2006
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    January 1, 2006
    
    
    2006
    
    
    2006
    
    
    2006(unaudited)
    
    
    (unaudited)(In thousands, except per share data)
    
    
    (In thousands, except per share data)Contract revenues
    
    $
    60,405
    
    
    $
    64,310
    
    
    $
    73,660
    
    
    $
    83,834
    
    
    $
    68,107
    
    
    $
    55,681
    
    
    $
    68,902
    
    
    $
    66,145Direct and allocable contract costs,
exclusive of impairment charges
    
    
    52,697
    
    
    
    57,809
    
    
    
    67,230
    
    
    
    76,407
    
    
    
    58,860
    
    
    
    48,782
    
    
    
    61,043
    
    
    
    59,550Impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from
Operations
    
    
    7,708
    
    
    
    6,501
    
    
    
    6,430
    
    
    
    679
    
    
    
    9,247
    
    
    
    6,899
    
    
    
    7,859
    
    
    
    6,595Other Income
(Expense), Net
    
    
    330
    
    
    
    267
    
    
    
    341
    
    
    
    380
    
    
    
    
    
    
    
    355
    
    
    
    544
    
    
    
    281Income before
Income Taxes
    
    
    8,038
    
    
    
    6,768
    
    
    
    6,771
    
    
    
    1,059
    
    
    
    9,247
    
    
    
    7,254
    
    
    
    8,403
    
    
    
    6,876Provision for Income
Taxes
    
    
    2,855
    
    
    
    2,605
    
    
    
    2,485
    
    
    
    (11
    )(a)
    
    
    3,644
    
    
    
    2,732
    
    
    
    3,237
    
    
    
    2,772Net Income
    
    $
    5,183
    
    
    $
    4,163
    
    
    $
    4,286
    
    
    $
    1,070
    
    
    $
    5,603
    
    
    $
    4,522
    
    
    $
    5,166
    
    
    $
    4,104Earnings Per ShareBasic
    
    $
    0.23
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.19Diluted
    
    $
    0.23
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.18
 
 (a)
    
    The provision for income taxes in the fourth quarter of fiscal year 2007 reflects a tax benefit recognized for additional
costs estimated to be included in a research and development tax credit and an increase in the Companys
estimate of a deduction for the domestic production allowance. 72




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
 Internal
Control  Integrated Framework Internal Control  Integrated
Framework
  Change in Internal Controls
  
 ITEM 9B. OTHER INFORMATION.
  73




---



##### 



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  74




---



##### 



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 Financial Statements Schedules
  
 Exhibits
 ExhibitNumber
    
    Description of Exhibit2.1
    
    Agreement and Plan of Merger dated as of June 7, 2004, by and
between Sensytech, Inc. and Argon Engineering Associates, Inc.
(incorporated by reference to Exhibit 2.1 of the Companys
Registration Statement on Form S-4 filed on July 16, 2004,
Registration Statement No. 333-117430)2.2
    
    Agreement and Plan of Merger, Dated as of June 9, 2006, by and
among Argon ST, Inc., Argon ST Merger Sub, Inc., San Diego
Research Center, Incorporated, Lindsay McClure, Thomas Seay and
Harry B. Lee, Trustee of the HBL and BVL Trust (incorporated by
reference to the Companys Current Report on Form 8-K, filed June
14, 2006)2.3
    
    Equity Purchase Agreement by and among Argon ST, Inc., CSIC
Holdings LLC, Coherent Systems International, Corp., the
Stockholders of Coherent Systems International, Corp. and Richard
S. Ianieri, as Seller Representative (Incorporated by reference to
Exhibit 2.1 to the Companys Current Report on Form 8-K, filed
August 16, 2007)3.1
    
    Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Companys
Registration Statement on Form S-1 (Registration Statement No.
333-98757) filed on August 26, 2002)3.1.1
    
    Amendment, dated September 28, 2004, to the Companys Amended and
Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 the Companys Current Report on Form 8-K filed
October 5, 2004 covering Items 2.01, 5.01, 5.02, 8.01 and 9.01 of
Form 8-K).3.1.2
    
    Amendment, dated March 15, 2005 to the Companys Amended and
Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1.2 to the Companys Quarterly Report on Form 10-Q
for the quarterly period ended April 5, 2005, filed May 11, 2005)3.2
    
    Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 13(a)(i) of the Companys Annual Report on
Form 10-KSB for the fiscal year ended September 30, 2001)3.2.1
    
    Amendment, dated as of February 28, 2007, to the Companys Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
the Companys Current Report on Form 8-K, filed March 6, 2007)4.1
    
    Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.3 to the Companys Registration Statement on Form S-3
(Registration Statement No. 333-128211) filed on September 9,
2005)10.1
    
    Second Amended and Restated Line of Credit Agreement with Bank of
America (incorporated by reference to Exhibit 10.1 of the
Companys Registration Statement on Form S-1 (Registration
Statement No. 333-98757) filed on August 27, 2002,10.1.1
    
    Fifth Amendment to Second Amended and Restated Financing and
Security Agreement, dated as of March 31, 2006 (incorporated by
reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed April 6, 200610.2+
    
    Argon ST, Inc. 2002 Stock Incentive Plan, as amended (incorporated
by reference to Appendix A to the Companys definitive proxy
statement on Schedule 14A for its 2006 annual meeting of
stockholders, filed January 27, 200610.2.1
    
    Form of Stock Option Agreement under Argon ST 2002 Stock Incentive
Plan (incorporated by reference to Exhibit 10.2.1 to the Companys
Annual Report on Form 10-K for the fiscal year ended September 30,
2005, filed December 14, 2005)
 75




---



##### 



ExhibitNumber
    
    Description of Exhibit10.3+
    
    Argon Engineering Associates, Inc. Stock Plan (incorporated by
reference to Exhibit 10.3 to the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2004, filed December
14, 2004)21.1*
    
    Subsidiaries of the Company23.1*
    
    Consent of Grant Thornton LLP31.1*
    
    Certification of the Companys Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act31.2*
    
    Certification of the Companys Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act32.1**
    
    Certification pursuant to Rule 13a-14(b)/15d-14(b) under the
Securities Exchange Act and Section 1350 of Chapter 63 of Title 8
of the United States Code
 
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates management contract or compensatory plan or arrangement 76




---



##### 



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
    
    Chairman, Chief Executive Officer and PresidentTerry L. CollinsDate: November 30, 2007/s/ Victor F. Sellier

Victor F. Sellier
    
    Executive Vice PresidentDate: November 30, 2007/s/ Aaron N. Daniels

Aaron N. Daniels
    
    Vice President, Chief Financial
Officer and Treasurer(Principal Financial and Accounting Officer)Date: November 30, 2007/s/ S. Kent Rockwell

S. Kent Rockwell
    
    Vice Chairman and DirectorDate: November 30, 2007/s/ Thomas E. Murdock

Thomas E. Murdock
    
    DirectorDate: November 30, 2007/s/ David C. Karlgaard

David C. Karlgaard
    
    DirectorDate: November 30, 2007/s/ Peter A. Marino

Peter A. Marino
    
    DirectorDate: November 30, 2007/s/ Robert McCashin

Robert McCashin
    
    DirectorDate: November 30, 2007/s/ John Irvin

John Irvin
    
    DirectorDate: November 30, 2007/s/ Lloyd A. Semple

Lloyd A. Semple
    
    DirectorDate: November 30, 2007/s/ Maureen Baginski

Maureen Baginski
    
    DirectorDate: November 30, 2007
 77