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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, 2006
 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
  Name of Exchange onTitle of Class
    
    Which RegisteredCommon Stock, par value $.01 per share
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 þ
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DOCUMENTS INCORPORATED BY REFERENCE
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ARGON ST, INC. AND SUBSIDIARIES
 For the Fiscal Year Ended September 30, 2006
 
 TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    4Item 1A. Business Risks
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    27Item 2. Properties
    
    
    27Item 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
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures About Market Risks
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    45Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    72PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    73Item 11. Executive Compensation
    
    
    73Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    73Item 13. Certain Relationships and Related Transactions
    
    
    73Item 14. Principal Accounting Fees and Services
    
    
    73PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    74Signatures
    
    
    76Exhibits
    
    
    77-81
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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 C4ISR 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.
    
    Communications: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 www.sec.gov .
 Corporate History
     5




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Recent Developments
  
    
    Mergers and Acquisitions.In 2006, we acquired three leading edge companies which
complement our existing capabilities in customer base and add diversity within our
addressable market. Radix Technologies, Inc. provides complementary signal processing
capabilities that we believe will create new business opportunities for the combined
entity. The San Diego Research Center, Inc. is a well recognized and admired company
which adds a wealth of communications, network operations and management, technical
innovation, particularly in the defense wireless communications sector. Innovative
Research, Ideas and Services Corporation brings to our offering a critical enabling
capability for the realization of data fusion across sensors and data. In addition, we
acquired certain assets of ProDesign Solutions, LLC that we believe will enhance our
ability to adapt and protect our systems in a wide variety of environmental conditions.
    
    CMMI Level 3 Certification.The Capability Maturity Model Integration (CMMI) was
established by the Software Engineering Institute as a set of process improvement
models for software and systems engineering. We achieved this certification in the
summer of 2006 through the exemplary efforts of our staff. We believe the
certification will enable us to compete for contracts across a wider range of size and
complexity and will underscore our credibility as a first tier contractor with current
and potential customers. While the process taxed resources across our entire company,
including substantial time from key personnel, we attained CMMI Level 3 without a delay
in any program.
    
    Ships Signals Exploitation Equipment (SSEE) Increments E and F.This program, to
design and develop Information Operation systems for the U.S. Navy, was first awarded
to Argon ST following a competitive procurement process in 2001. Our partnership with
the U.S. Navy grew stronger with the approval of additional SSEE Increment E system in
February 2006 and 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
Argon STs position as a dominant supplier of surface ship cryptologic systems to our
Navy. In addition, the awards have led to opportunities with the U.S. Coast Guard and
international customers.
    
    Major Program Success.STAKECLAIM, a land based cryptologic system required by the
government, was our largest and most complex undertaking of all systems developed under
the LIGHTHOUSE architecture (LIGHTHOUSE is our collection of software assets developed
around a software product line concept). We believe that STAKECLAIMs acceptance by
the government and implementation in a demanding operational environment improves our
ability to increase business in this system area.
    
    Aerial Common Sensor (ACS).We believe that our development work to provide COMINT
systems for the Armys ACS program was highly respected by the prime contractor and by
the government customer. In addition, our involvement in ACS, represented expansion of
LIGHTHOUSE systems to the Army airborne community. The ACS program was cancelled in
January 2006 due to concerns about the suitability of the proposed aircraft platform.
This cancellation removed approximately $61 million from our backlog. While we were
able to add additional revenue from the airborne market in 2006, the ACS cancellation
negatively affected our 2006 revenue and slowed our plans to institute LIGHTHOUSE as
the common airborne architecture across the cryptologic community and international
market.
 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, our 2006 revenue from the
submarine market
decreased in 2006 over 2005 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. While we were successful in winning a
contract with the Navy in November 2006 to upgrade the AN/SLQ-25A SSTD system, delays
in the acquisition process had a negative effect on our expected fiscal 2006 financial
results.
 Segments
  Technology and Applications
     7




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Customers
   Years Ended September 30,2006
    
    2005
    
    2004United States Navy
    
    
    59
    %
    
    
    69
    %
    
    
    77
    %Other U.S. government agencies
    
    
    31
    %
    
    
    20
    %
    
    
    11
    %Foreign and other
    
    
    10
    %
    
    
    11
    %
    
    
    12
    %
 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.
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Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2006
    
    September 30, 2005
    
    September 30, 2004Sole Source Contracts
    
    
    51
    %
    
    
    54
    %
    
    
    55
    %Competitive Contracts
    
    
    49
    %
    
    
    46
    %
    
    
    45
    %
  Material Government Contract Provisions
   
    
    terminate existing contracts for convenience, which affords the U.S. government the
right to terminate the contract in whole or in part anytime it wants for any reason or
no reason, as well as for default;
    
    reduce or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
    
    cancel multi-year contracts and related orders, if funds for contract performance
for any subsequent year become unavailable;
    
    claim rights in products and systems produced by its contractor;
    
    adjust contract costs and fees on the basis of audits completed by its agencies;
    
    suspend or debar a contractor from doing business with the U.S. government; and
    
    control or prohibit the export of products.
  Government Contract Categories
  Fixed-price.
 9




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Cost reimbursable.
 
    
    Cost-plus-fixed fee contracts are cost reimbursable contracts that provide for
payment to us of a negotiated fee that is fixed at the inception of the contract. This
fixed fee does not vary with actual cost of the contract, but may be adjusted as a
result of changes in the work to be performed under the contract. This contract poses
less risk than a fixed-price contract, but our ability to win future contracts from the
procuring agency may be adversely affected if we fail to perform within the maximum
cost set forth in the contract.
    
    A cost-plus-award fee contract is a cost reimbursable contract that provides for a
fee consisting of a base amount (which may be zero) fixed at inception of the contract
and an award amount, based upon the governments satisfaction with our performance
under the contract. With this type of contract, we assume the risk that we may not
receive the award fee, or only a portion of it, if we do not perform satisfactorily.
    
    A cost-plus-incentive fee contract is a cost reimbursable contract that provides for
an initially negotiated fee to be adjusted later by a formula based on the relationship
of total allowable costs to total target costs.
  Time and materials.
  Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedSeptember 30, 2006
    
    September 30, 2005
    
    September 30, 2004Fixed-price contracts
    
    
    65
    %
    
    
    79
    %
    
    
    71
    %Cost reimbursable contracts
    
    
    25
    %
    
    
    16
    %
    
    
    19
    %Time and materials contracts
    
    
    10
    %
    
    
    5
    %
    
    
    10
    %
 Regulation
  10




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Subcontracts
  Backlog
  2006
    
    
    2005
    
    
    2004Funded
    
    $
    162,796,000
    
    
    $
    199,543,000
    
    
    $
    222,222,000Unfunded
    
    
    62,373,000
    
    
    
    71,564,000
    
    
    
    6,597,000Total
    
    $
    225,169,000
    
    
    $
    271,107,000
    
    
    $
    228,819,000
     Research and Development
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2006
    
    
    2005
    
    
    2004Internal research and
development
    
    $
    6,286,000
    
    
    $
    3,992,000
    
    
    $
    1,301,000Customer-funded research
and development
    
    
    50,130,000
    
    
    
    50,009,000
    
    
    
    47,673,000Total
    
    $
    56,416,000
    
    
    $
    54,001,000
    
    
    $
    48,974,000
 Competition
   Environmental
  Employees
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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 $440 billion in FY07 to over $504 billion by 2011.
Additionally, the U.S. defense budget has been augmented by a number of wartime
supplemental appropriations since September 11, 2001, including supplemental
appropriations in the amounts of $29.4 billion in 2002, $78.5 billion in 2003, $87.0
billion in 2004, $81.4 billion in 2005 and $65.8 billion in 2006.
    
    C4ISR Spending.The C4ISR market is growing substantially as a result of the events
of September 11, 2001, current defense and intelligence operations such as those in the
Middle East and the conflict in Iraq, and other defense and intelligence initiatives
related to modern threats and warfare. We expect C4ISR spending to continue to increase
substantially for the foreseeable future.
 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.
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
    
    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 creditability 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 C4ISR systems.
    
    Personnel Protection.The conflict in Iraq has highlighted the need for personnel
protection against the improvised explosive device (IED). IEDs are explosive weapons
that are being built, deployed and activated in a variety of non-traditional ways and
are difficult to detect or counter. Systems that detect and protect against IEDs are a
critical need and require development of advanced sensor and jamming technologies.
    
    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.
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
    
    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.
    
    Migrating our Multi-Intelligence Capabilities to Additional Platforms.Defense and
intelligence customers now require C4ISR systems that integrate multiple intelligence
gathering and processing capabilities. Our multi-intelligence systems have combined
communications and electronic intelligence capabilities on ships, submarines and
aircraft, and have combined radar and infra-red sensor capabilities for border patrols.
We believe our experience and capabilities position us to win contracts to develop and
produce multi-intelligence systems.
    
    Expanding our Role in Providing Support Services.We plan 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.
 
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ITEM 1A. BUSINESS RISKS
  Risks Related to Our Business and Operations
 We rely heavily on sales to the U.S. government, particularly to agencies of the Department of
Defense.
  U.S. government contracts are generally not fully funded at inception, and funding may be
terminated or reduced at any time.
   From time to time, we depend on revenues from a few significant contracts, and any loss or
cancellation of, or any reduction or delay in, any of these contracts could significantly harm our
business.
  16




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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.
  We must recruit and retain highly skilled employees to succeed in our competitive and
labor-intensive business.
  18




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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;
    
    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.
  19




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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.
  We face competition from other firms, many of which have substantially greater resources.
  20




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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.
  Our employees or subcontractors may engage in misconduct or other improper activities.
  21




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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.
  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.
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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;
    
    receive negative publicity, which could damage our reputation and adversely affect
our ability to attract or retain customers; or
    
    suffer claims for substantial damages.
   23




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##### 



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.
  The U.S. governments right to use technology developed by us limits our intellectual property
rights.
  24




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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.
   We may incur material goodwill impairment charges related to mergers and acquisitions.
  25




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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.
  
    
    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.
 26




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##### 




    
    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 management, whose interests may not be aligned with yours, is able to control the vote on all
matters requiring stockholder approval.
  ITEM 1B. UNRESOLVED STAFF COMMENTS
  ITEM 2. PROPERTIES
  27




---



##### 



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/
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/
Administration300 Parkland Plaza 
Ann Arbor, MI 48106
    
    
    12,419
    
    
    Leased, Expiration
Date:
11/30/2008
    
    One-story facility
in a research park.
    
    Engineering/Production/
Administration4220 Varsity Drive, Suite E 
Ann Arbor, MI 48108
    
    
    10,845
    
    
    Leased,
Expiration
Date: 11/30/2007
    
    One-story facility.
    
    Engineering800 Calle Plano 
Camarillo, CA 93012
    
    
    8,802
    
    
    Leased,
Expiration Date:
1/31/2007
    
    One-story facility
in an industrial
park.
    
    Engineering/Production/
Administration12600 Challenger Parkway 
Suite 125
Orlando, FL 32826
    
    
    13,281
    
    
    Leased,
Expiration Date:
12/31/2011
    
    One-story facility.
    
    Engineering/
Production90 Laurel View Drive 
Smithfield, PA 15478
    
    
    60,000
    
    
    Leased,
Expiration Date:
9/15/2013
    
    One-story facility.
    
    Engineering/Production/
Administration1386-1390 Connellsville Rd 
Lemont Furnace, PA 15456
    
    
    40,000
    
    
    Leased,
Expiration Date:
4/1/2014
    
    One-story facility.
    
    Engineering/
Production329 North Bernardo Ave 
Mountain View, CA 94043
    
    
    26,328
    
    
    Leased,
Expiration
Date: 10/31/2010
    
    One-story facility.
    
    Engineering/
Production6730 Mesa Ridge Road 
San Diego, CA 92121
    
    
    19,719
    
    
    Leased, Expiration
Date:
6/30/2010
    
    One-story facility.
    
    Engineering/
Administration
 28




---



##### 



EstimatedSquare
    
    
    
    
    
    PrincipalAddress
    
    Feet
    
    Lease Term
    
    Description
    
    Activity6696 Mesa Ridge Road 
San Diego, CA 92121
    
    
    20,220
    
    
    Leased, Expiration
Date:
8/31/2010
    
    One-story facility.
    
    Engineering/
Administration435B & 437B Carlisle Drive 
Herndon, VA 20170
    
    
    2,580
    
    
    Leased,
Expiration
Date:
4/30/2007
    
    Office suite in
multi-tenant
facility
    
    Engineering5545
Fredericksburg Road 
Suite 240
San Antonio, TX 78229
    
    
    706
    
    
    Leased,
Expiration
Date:
7/31/2008
    
    Office suite in
multi-tenant
facility
    
    Engineering/
Administration4835 University Square 
Huntsville, AL 35816
    
    
    1,803
    
    
    Leased,
Expiration
Date:
9/30/2008
    
    Office suite in
multi-tenant
facility
    
    Engineering/
Administration
 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.
    
    
    61
    
    
    Chairman of the Board, Chief Executive Officer and
PresidentS. Kent Rockwell
    
    
    62
    
    
    Vice Chairman of the Board and Vice President,
Corporate DevelopmentVictor F. Sellier
    
    
    57
    
    
    Vice President, Business Operations, Chief
Financial Officer and TreasurerThomas E. Murdock
    
    
    64
    
    
    Vice President, Strategic Program DevelopmentKerry M. Rowe
    
    
    47
    
    
    Vice President, Chief Operating OfficerW. Joseph Carlin
    
    
    43
    
    
    Vice President, Information DominanceRobert S. Tamaru
    
    
    51
    
    
    Vice President, Technology and Strategic Development
 29




---



##### 



PART II
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
   High
    
    LowFiscal 2006Fourth Quarter
    
    $
    28.38
    
    
    $
    20.95Third Quarter
    
    
    35.45
    
    
    
    25.08Second Quarter
    
    
    34.06
    
    
    
    27.07First Quarter
    
    
    32.38
    
    
    
    25.64Fiscal 2005Fourth Quarter
    
    $
    36.72
    
    
    $
    28.08Third Quarter
    
    
    37.00
    
    
    
    25.32Second Quarter
    
    
    38.39
    
    
    
    31.76First Quarter
    
    
    37.35
    
    
    
    22.65
  Dividend Policy
   Equity Compensation Plan Information
  Number ofsecurities to beissued upon
    
    Weighted averageexercise of
    
    exercise price of
    
    Number ofoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    remaining availablePlan category
    
    and rights
    
    and rights
    
    for future issuance(a)
    
    (b)
    
    ( c)Equity compensation
plans approved by
security holders
    
    
    869,350
    
    
    $
    23.139
    
    
    
    987,160Equity compensation
plans not approved
by security holders
(1)
    
    
    989,738
    
    
    $
    7.444
    
    
    
    Total
    
    
    1,859,088
    
    
    $
    14.783
    
    
    
    987,160
 
 (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




---



##### 



ITEM 6. SELECTED FINANCIAL DATA
     31




---



##### 



Years Ended September 302006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except per share data)Contract revenues
    
    $
    258,835
    
    
    $
    271,754
    
    
    $
    129,184
    
    
    $
    79,349
    
    
    $
    61,759Cost of revenues
    
    
    206,023
    
    
    
    222,792
    
    
    
    107,307
    
    
    
    65,271
    
    
    
    51,034General and adminstrative expenses
    
    
    22,212
    
    
    
    14,578
    
    
    
    5,905
    
    
    
    5,844
    
    
    
    5,181Income from operations
    
    
    30,600
    
    
    
    34,384
    
    
    
    15,972
    
    
    
    8,234
    
    
    
    5,544Other income, net
    
    
    1,180
    
    
    
    698
    
    
    
    154
    
    
    
    31
    
    
    
    62Income before income taxes
    
    
    31,780
    
    
    
    35,082
    
    
    
    16,126
    
    
    
    8,265
    
    
    
    5,606Provision for income taxes
    
    
    (12,385
    )
    
    
    (13,301
    )
    
    
    (6,177
    )
    
    
    (2,696
    )
    
    
    (2,021
    )Net income
    
    $
    19,395
    
    
    $
    21,781
    
    
    $
    9,949
    
    
    $
    5,569
    
    
    $
    3,585Earnings per shareBasic
    
    $
    0.90
    
    
    $
    1.10
    
    
    $
    0.81
    
    
    $
    0.47
    
    
    $
    0.32Diluted
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    0.74
    
    
    $
    0.44
    
    
    $
    0.29
 Years Ended September 302006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands)Balance sheet dataCash and cash equivalents
    
    $
    33,498
    
    
    $
    4,064
    
    
    $
    29,732
    
    
    $
    4,100
    
    
    $
    5,231Total assets
    
    $
    313,531
    
    
    $
    249,834
    
    
    $
    221,741
    
    
    $
    23,736
    
    
    $
    20,090Total debt
    
    $
    86
    
    
    $
    11,138
    
    
    $
    282
    
    
    $
    34
    
    
    $
    172Stockholders Equity
    
    $
    265,696
    
    
    $
    192,013
    
    
    $
    160,925
    
    
    $
    11,010
    
    
    $
    7,944Other dataBacklog (unaudited)
    
    $
    225,169
    
    
    $
    271,107
    
    
    $
    228,819
    
    
    $
    157,070
    
    
    $
    96,799Dividends
    
    $
    
    
    
    $
    
    
    
    $
    7,851
    
    
    $
    2,462
    
    
    $
    
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  32




---



##### 



Forward-looking Statements
  Overview
 General
  Basis of Discussion/Acquisition
   Segments
  33




---



##### 



Revenues
     Fiscal Year Ended
    
    Fiscal Year Ended
    
    Fiscal Year EndedContract Type
    
    September 30, 2006
    
    September 30, 2005
    
    September 30, 2004Fixed-price contracts
    
    
    65
    %
    
    
    79
    %
    
    
    71
    %Cost reimbursable contracts
    
    
    25
    %
    
    
    16
    %
    
    
    19
    %Time and materials contracts
    
    
    10
    %
    
    
    5
    %
    
    
    10
    %
   Backlog
  34




---



##### 



2006
    
    
    2005
    
    
    2004Funded
    
    $
    162,796,000
    
    
    $
    199,543,000
    
    
    $
    222,222,000Unfunded
    
    
    62,373,000
    
    
    
    71,564,000
    
    
    
    6,597,000Total
    
    $
    225,169,000
    
    
    $
    271,107,000
    
    
    $
    228,819,000
    Cost of Revenues
  General and Administrative Expenses
  35




---



##### 



Interest Income, net
  Research and Development
   2006
    
    
    2005
    
    
    2004Internal research and
development
    
    $
    6,286,000
    
    
    $
    3,992,000
    
    
    $
    1,301,000Customer-funded research
and development
    
    
    50,130,000
    
    
    
    50,009,000
    
    
    
    47,673,000Total
    
    $
    56,416,000
    
    
    $
    54,001,000
    
    
    $
    48,974,000
  Critical Accounting Practices and Estimates
 General
  Revenue and Cost Recognition
 General
 Accounting for Performance of Construction-Type and Production-Type Contracts.
 36




---



##### 



Indirect Rate Variance
  Award Fee Recognition
  Goodwill
  Accounts Receivable
  37




---



##### 



Stock-Based Compensation
   Historical Operating Results
 Fiscal year ended September 30, 2006 compared to fiscal year ended September 30, 2005
  September 30
    
    September 30
    
    Increase (Decrease) 20062006
    
    2005
    
    Compared to 2005Contract revenues
    
    $
    258,835,000
    
    
    $
    271,754,000
    
    
    $
    (12,919,000
    )Cost of revenues
    
    
    206,023,000
    
    
    
    222,792,000
    
    
    
    (16,769,000
    )General and
administrative expenses
    
    
    22,212,000
    
    
    
    14,578,000
    
    
    
    7,634,000Interest income and
interest expense
    
    
    1,180,000
    
    
    
    698,000
    
    
    
    482,000Provision for income taxes
    
    
    12,385,000
    
    
    
    13,301,000
    
    
    
    (916,000
    )Net income
    
    
    19,395,000
    
    
    
    21,781,000
    
    
    
    (2,386,000
    )
 Contract Revenues:
  Cost of Revenues:
  38




---



##### 



General and Administrative Expenses:
  Interest Income and Interest Expense:
  Provision for Income Taxes:
  Net Income:
  Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004
  39




---



##### 



September 30,
    
    September 30,
    
    Increase 20052005
    
    2004
    
    Compared to 2004Contract revenues
    
    $
    271,754,000
    
    
    $
    129,184,000
    
    
    $
    142,570,000Cost of revenues
    
    
    222,792,000
    
    
    
    107,307,000
    
    
    
    115,485,000General and administrative expenses
    
    
    14,578,000
    
    
    
    5,905,000
    
    
    
    8,673,000Interest income and interest expense
    
    
    698,000
    
    
    
    154,000
    
    
    
    544,000Provision for income taxes
    
    
    13,301,000
    
    
    
    6,177,000
    
    
    
    7,124,000Net income
    
    
    21,781,000
    
    
    
    9,949,000
    
    
    
    11,832,000
 Revenues:
    Cost of Revenues:
  General and Administrative Expenses:
  40




---



##### 



Interest Income and Interest Expense:
  
 Income Tax Expense:
  Net Income:
  Analysis of Liquidity and Capital Resources
 Cash
    41




---



##### 



Line of Credit
    Cash Flows
     42




---



##### 



Contractual Obligations and Commitments
  Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due inTotal
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterCapital leases
    
    $
    86,000
    
    
    $
    36,000
    
    
    $
    25,000
    
    
    $
    23,000
    
    
    $
    2,000
    
    
    
    
    
    
    
    Operating leases
    
    $
    27,733,000
    
    
    $
    7,362,000
    
    
    $
    7,534,000
    
    
    $
    5,151,000
    
    
    $
    2,385,000
    
    
    $
    1,831,000
    
    
    $
    3,470,000Total
    
    $
    27,819,000
    
    
    $
    7,398,000
    
    
    $
    7,559,000
    
    
    $
    5,174,000
    
    
    $
    2,387,000
    
    
    $
    1,831,000
    
    
    $
    3,470,000
  Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    1,394,000
    
    
    $
    1,394,000
    
    
    
    
  Recent Accounting Pronouncements
 Fair Value Measurements
 Financial Statements  Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
 Market Risks
  Cash and Cash Equivalents:
  43




---



##### 



Interest Rates:
  Foreign Currency:
  Recent Developments:
    ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  44




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    46Consolidated Balance Sheets
As of September 30, 2006 and 2005
    
    
    48Consolidated Statements of Earnings
For the years ended September 30, 2006, 2005 and 2004
    
    
    49Consolidated Statements of Stockholders Equity
For the years ended September 30, 2006, 2005 and 2004
    
    
    50Consolidated Statements of Cash Flows
For the years ended September 30, 2006, 2005 and 2004
    
    
    51Notes to Consolidated Financial Statements
    
    
    52
 45




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      46




---



##### 



.
  
 47




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    33,498,000
    
    
    $
    4,064,000Accounts receivable, net
    
    
    86,842,000
    
    
    
    103,577,000Inventory
    
    
    3,954,000
    
    
    
    1,166,000Income taxes receivable
    
    
    23,000
    
    
    
    2,464,000Deferred project costs
    
    
    5,597,000
    
    
    
    Deferred income tax asset
    
    
    2,083,000
    
    
    
    1,742,000Prepaids and other
    
    
    1,481,000
    
    
    
    888,000TOTAL CURRENT ASSETS
    
    
    133,478,000
    
    
    
    113,901,000Property, equipment and software, net
    
    
    16,726,000
    
    
    
    14,896,000Advances and cash held in escrow
    
    
    
    
    
    
    10,900,000Goodwill
    
    
    148,719,000
    
    
    
    107,956,000Intangibles, net
    
    
    13,200,000
    
    
    
    1,219,000Other assets
    
    
    1,408,000
    
    
    
    962,000TOTAL ASSETS
    
    $
    313,531,000
    
    
    $
    249,834,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESLine of Credit
    
    $
    
    
    
    $
    11,000,000Accounts payable and accrued expenses
    
    
    19,124,000
    
    
    
    26,857,000Accrued salaries and related expenses
    
    
    10,678,000
    
    
    
    8,848,000Deferred revenue
    
    
    13,053,000
    
    
    
    7,139,000Notes payable  current portion
    
    
    
    
    
    
    56,000Capital lease obligations  current
    
    
    33,000
    
    
    
    19,000Deferred rent
    
    
    419,000
    
    
    
    61,000TOTAL CURRENT LIABILITIES
    
    
    43,307,000
    
    
    
    53,980,000Deferred income tax liability, long term
    
    
    2,937,000
    
    
    
    1,979,000Deferred rent
    
    
    1,538,000
    
    
    
    1,799,000Capital lease obligations, net of current
    
    
    53,000
    
    
    
    63,000Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares
authorized, 22,313,709 and
20,153,878 shares
issued at September 30, 2006 and 2005
    
    
    223,000
    
    
    
    202,000Additional paid in capital
    
    
    212,610,000
    
    
    
    158,458,000Treasury stock at cost, 126,245 shares
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    53,397,000
    
    
    
    34,002,000Accumulated other comprehensive loss
    
    
    
    
    
    
    (115,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    265,696,000
    
    
    
    192,013,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    313,531,000
    
    
    $
    249,834,000
  48




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 For the Year Ended September 30,2006
    
    
    2005
    
    
    2004CONTRACT REVENUES
    
    $
    258,835,000
    
    
    $
    271,754,000
    
    
    $
    129,184,000COST OF REVENUES
    
    
    206,023,000
    
    
    
    222,792,000
    
    
    
    107,307,000GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    22,212,000
    
    
    
    14,578,000
    
    
    
    5,905,000INCOME FROM OPERATIONS
    
    
    30,600,000
    
    
    
    34,384,000
    
    
    
    15,972,000INTEREST INCOME, NET
    
    
    1,180,000
    
    
    
    698,000
    
    
    
    154,000INCOME BEFORE INCOME TAXES
    
    
    31,780,000
    
    
    
    35,082,000
    
    
    
    16,126,000PROVISION FOR INCOME TAXES
    
    
    12,385,000
    
    
    
    13,301,000
    
    
    
    6,177,000NET INCOME
    
    $
    19,395,000
    
    
    $
    21,781,000
    
    
    $
    9,949,000EARNINGS PER SHARE (BASIC)
    
    $
    0.90
    
    
    $
    1.10
    
    
    $
    0.81EARNINGS PER SHARE (DILUTED)
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    0.74WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    21,659,606
    
    
    
    19,738,367
    
    
    
    12,308,412Diluted
    
    
    22,255,467
    
    
    
    20,616,024
    
    
    
    13,366,916
  49




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Common Stock
    
    
    Additional Paid
    
    
    
    
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersNumber of Shares
    
    
    Par Value
    
    
    in Capital
    
    
    Treasury Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, September 30, 2003
    
    
    12,305,962
    
    
    $
    123,000
    
    
    $
    91,000
    
    
    $
    0
    
    
    $
    10,796,000
    
    
    $
    0
    
    
    $
    11,010,000Shares issued upon exercise
of stock options
    
    
    514,356
    
    
    
    6,000
    
    
    
    306,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,000Retirement of shares
    
    
    (120,320
    )
    
    
    (1,000
    )
    
    
    (11,000
    )
    
    
    
    
    
    
    (673,000
    )
    
    
    
    
    
    
    (685,000
    )Dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,851,000
    )
    
    
    
    
    
    
    (7,851,000
    )Issuance of shares in
connection with merger
    
    
    6,768,736
    
    
    
    67,000
    
    
    
    148,657,000
    
    
    
    (534,000
    )
    
    
    
    
    
    
    
    
    
    
    148,190,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,949,000
    
    
    
    
    
    
    
    9,949,000Balance, September 30, 2004
    
    
    19,468,734
    
    
    
    195,000
    
    
    
    149,043,000
    
    
    
    (534,000
    )
    
    
    12,221,000
    
    
    
    
    
    
    
    160,925,000Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,781,000
    
    
    
    
    
    
    
    21,781,000Unrealized loss on foreign
currency exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,000
    )
    
    
    (115,000
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,666,000Shares issued upon exercise
of stock options
    
    
    639,450
    
    
    
    6,000
    
    
    
    4,447,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,453,000Employee
Stock Purchase Plan
    
    
    45,694
    
    
    
    1,000
    
    
    
    1,170,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171,000Tax Benefit on Stock
Option exercises
    
    
    
    
    
    
    
    
    
    
    3,798,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,798,000Balance, September 30, 2005
    
    
    20,153,878
    
    
    
    202,000
    
    
    
    158,458,000
    
    
    
    (534,000
    )
    
    
    34,002,000
    
    
    
    (115,000
    )
    
    
    192,013,000Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,395,000
    
    
    
    
    
    
    
    19,395,000Realized loss on foreign
currency exchange contracts,
expensed to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,000
    
    
    
    115,000Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,510,000Shares issued upon exercise
of stock options
    
    
    375,849
    
    
    
    4,000
    
    
    
    2,568,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,572,000Secondary offering,
net of expenses
    
    
    1,725,000
    
    
    
    17,000
    
    
    
    46,751,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,768,000Employee stock purchase plan
    
    
    33,002
    
    
    
    
    
    
    
    897,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,921,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,921,000Tax benefit
on stock option exercises
    
    
    
    
    
    
    
    
    
    
    2,015,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,015,000Other
    
    
    25,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2006
    
    
    22,313,709
    
    
    $
    223,000
    
    
    $
    212,610,000
    
    
    $
    (534,000
    )
    
    $
    53,397,000
    
    
    $
    0
    
    
    $
    265,696,000
  50




---



##### 



ARGON ST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended September 30,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    19,395,000
    
    
    $
    21,781,000
    
    
    $
    9,949,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    5,625,000
    
    
    
    4,493,000
    
    
    
    1,317,000Deferred income tax (benefit) provision
    
    
    (677,000
    )
    
    
    3,532,000
    
    
    
    (4,700,000
    )Stock-based compensation
    
    
    1,921,000
    
    
    
    
    
    
    
    Loss on disposal of property
    
    
    165,000
    
    
    
    
    
    
    
    Bad debt expense
    
    
    80,000
    
    
    
    
    
    
    
    Change in:Billed accounts receivable
    
    
    18,082,000
    
    
    
    (23,820,000
    )
    
    
    (13,334,000
    )Unbilled accounts receivable
    
    
    1,603,000
    
    
    
    (19,033,000
    )
    
    
    (627,000
    )Inventory
    
    
    (2,788,000
    )
    
    
    60,000
    
    
    
    20,000Prepaids and other
    
    
    (254,000
    )
    
    
    400,000
    
    
    
    (206,000
    )Deferred project costs
    
    
    (5,534,000
    )
    
    
    
    
    
    
    Accounts payable and accrued expenses
    
    
    (8,830,000
    )
    
    
    13,151,000
    
    
    
    2,378,000Accrued salaries and related expenses
    
    
    732,000
    
    
    
    (1,758,000
    )
    
    
    1,732,000Deferred revenue
    
    
    5,914,000
    
    
    
    (21,197,000
    )
    
    
    23,969,000Income taxes
    
    
    2,570,000
    
    
    
    (8,274,000
    )
    
    
    7,513,000Deferred rent
    
    
    40,000
    
    
    
    321,000
    
    
    
    1,119,000Tax benefit of option exercises
    
    
    
    
    
    
    3,798,000
    
    
    
    Net cash provided by (used in) operating activities
    
    
    38,044,000
    
    
    
    (26,546,000
    )
    
    
    29,130,000Cash flows from investing activitiesNet cash acquired in merger
    
    
    
    
    
    
    
    
    
    
    6,952,000Acquisitions of property, equipment and software
    
    
    (3,795,000
    )
    
    
    (4,370,000
    )
    
    
    (2,460,000
    )Advances and cash held in escrow
    
    
    10,900,000
    
    
    
    (10,900,000
    )Deposits and other assets
    
    
    (233,000
    )
    
    
    (233,000
    )
    
    
    (13,000
    )Business acquisitions, net of cash acquired
    
    
    (56,670,000
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (49,798,000
    )
    
    
    (15,503,000
    )
    
    
    4,479,000Cash flows from financing activitiesAdvances (repayments) on line of credit
    
    
    (11,000,000
    )
    
    
    11,000,000
    
    
    
    Payment on note payable
    
    
    (56,000
    )
    
    
    (226,000
    )
    
    
    (204,000
    )Retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (234,000
    )Tax benefit on stock option exercises
    
    
    2,015,000
    
    
    
    
    
    
    
    Proceeeds from exercise of stock options
    
    
    2,572,000
    
    
    
    4,453,000
    
    
    
    312,000Proceeds from employee stock purchase plan exercises
    
    
    897,000
    
    
    
    1,171,000
    
    
    
    Principal repayments on capital lease obligations
    
    
    (8,000
    )
    
    
    (17,000
    )
    
    
    Proceeds from secondary offering, net of expenses
    
    
    46,768,000
    
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    
    
    
    
    (7,851,000
    )Net cash provided by (used in) financing activities
    
    
    41,188,000
    
    
    
    16,381,000
    
    
    
    (7,977,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    29,434,000
    
    
    
    (25,668,000
    )
    
    
    25,632,000Cash and cash equivalents, beginning of year
    
    
    4,064,000
    
    
    
    29,732,000
    
    
    
    4,100,000Cash and cash equivalents, end of year
    
    $
    33,498,000
    
    
    $
    4,064,000
    
    
    $
    29,732,000Supplemental disclosureIncome taxes paid, net of refunds
    
    $
    (8,479,000
    )
    
    $
    (14,212,000
    )
    
    $
    (3,275,000
    )Interest expense paid
    
    $
    (166,000
    )
    
    $
    (11,000
    )
    
    $
    (13,000
    )Note payable issued for stock redemption
    
    $
    
    
    
    $
    
    
    
    $
    451,000Assets acquired under capital leases
    
    $
    13,000
    
    
    $
    99,000
    
    
    $
    
  51




---



##### 



Note 1  Summary of Significant Accounting Policies
 Nature of Business
  Principles of Consolidation
  Basis of Presentation
    Revenue and Cost Recognition
 Accounting for Performance of Construction-Type and
Production-Type Contracts
 52




---



##### 



Fiscal Years Ended September 30,2006
    
    2005
    
    2004Fixed-price contracts
    
    
    65
    %
    
    
    79
    %
    
    
    71
    %Cost reimbursable contracts
    
    
    25
    %
    
    
    16
    %
    
    
    19
    %Time and materials contracts
    
    
    10
    %
    
    
    5
    %
    
    
    10
    %
    Indirect Rate Variance
  Reclassification
  Cash and Cash Equivalents
  53




---



##### 



Accounts Receivable
  Inventories
  2006
    
    
    2005Raw Materials
    
    $
    1,940,000
    
    
    $
    720,000Component parts, work in process
    
    $
    1,919,000
    
    
    $
    355,000Finished component parts
    
    $
    137,000
    
    
    $
    91,000$
    3,996,000
    
    
    $
    1,166,000Reserve
    
    
    (42,000
    )
    
    
    Total
    
    $
    3,954,000
    
    
    $
    1,166,000
 Deferred Project Costs
   Long-Lived Assets (Excluding Goodwill)
  Goodwill
  54




---



##### 



Intangibles
   Estimated
    
    WeightedEconomic Life
    
    Average LifeCustomer related
    
    2.625  8.250 years
    
    7.29 yearsDeveloped technology
    
    1  5 years
    
    4.26 yearsTotal intangible assets
    
    
    
    
    
    7.30 years
 Property, Equipment and Software
  Stock-Based Compensation
    55




---



##### 



Year Ended
    
    
    Year EndedSeptember 30, 2005
    
    
    September 30, 2004Net Income
    
    $
    21,781,000
    
    
    $
    9,949,000Add: Stock-based employee compensation expense
included
    
    
    
    
    
    
    In reported net income, net of related tax effectsLess: Total stock-based employee compensation
expense determined under fair value method of all
awards, net of related tax effects
    
    
    1,584,000
    
    
    
    198,000Pro forma net income
    
    $
    20,197,000
    
    
    $
    9,751,000Earnings per share:Basic  as reported
    
    $
    1.10
    
    
    $
    0.81Basic  pro forma
    
    $
    1.02
    
    
    $
    0.79Earnings per share:Diluted  as reported
    
    $
    1.06
    
    
    $
    0.74Diluted  pro forma
    
    $
    0.98
    
    
    $
    0.73
 Income Taxes
  Comprehensive Income
  Use of Estimates
  Operating Cycle
  Recently Issued Accounting Pronouncements
 Fair Value Measurements
 56




---



##### 



Financial Statements  Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes.
 Earnings Per Share:
  2006
    
    
    2005
    
    
    2004Net Income
    
    $
    19,395,000
    
    
    $
    21,781,000
    
    
    $
    9,949,000Weighted Average Shares Outstanding  Basic
    
    
    21,659,606
    
    
    
    19,738,367
    
    
    
    12,308,412Effect of Dilutive Securities:Net Shares Issuable Upon Exercise of Stock Options
    
    
    595,861
    
    
    
    877,657
    
    
    
    1,058,504Weighted Average Shares Outstanding  Diluted
    
    
    22,255,467
    
    
    
    20,616,024
    
    
    
    13,366,916Basic Earnings per Share
    
    $
    0.90
    
    
    $
    1.10
    
    
    $
    0.81Diluted Earnings per Share
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    0.74
  Note 2  Acquisitions and Mergers
 Year Ended September 30, 2006
 San Diego Research Center, Inc.
  57




---



##### 



Current assets
    
    $
    2,322,000Property, plant and equipment
    
    
    1,073,000Other assets
    
    
    2,534,000Intangibles  customer related
    
    
    10,667,000Intangibles-technology
    
    
    593,000Goodwill
    
    
    30,596,000Total assets acquired
    
    
    47,785,000Liabilities assumed
    
    
    (6,096,000
    )Net purchase price
    
    $
    41,689,000
 Other Acquisitions
 Radix Technologies, Inc.
   58




---



##### 



ProDesign Solutions, LLC
  Innovative Research, Ideas, and Services Corporation
     Current assets
    
    $
    2,735,000Property, plant and equipment
    
    
    1,158,000Other assets
    
    
    1,918,000Intangibles  customer related
    
    
    1,803,000Intangibles  technology
    
    
    510,000Goodwill
    
    
    10,167,000Total assets acquired
    
    
    18,291,000Liabilities assumed
    
    
    (1,884,000
    )Net purchase price
    
    $
    16,407,000
 Pro Forma Information (Unaudited)
  59




---



##### 



September 30,2006
    
    2005Revenue
    
    $
    271,919,000
    
    
    $
    295,455,000Net income
    
    
    15,876,000
    
    
    
    20,850,000Earnings per shareBasic
    
    $
    0.73
    
    
    $
    1.05Diluted
    
    $
    0.71
    
    
    $
    1.01
 Note 3  Goodwill and Intangible Assets
 Goodwill
  September 30,2006
    
    
    2005Beginning balance
    
    $
    107,956,000
    
    
    $
    107,776,000Goodwill acquired during the year
    
    
    40,763,000
    
    
    
    Adjustments due to change in the fair value
of assets acquired and liabilities assumed
    
    
    
    
    
    
    180,000Impairment losses
    
    
    
    
    
    
    Ending Balance
    
    $
    148,719,000
    
    
    $
    107,956,000
 Intangibles
   September 30, 2006Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    14,408,000
    
    
    $
    2,235,000
    
    
    $
    12,173,000Developed technology
    
    
    1,355,000
    
    
    
    328,000
    
    
    
    1,027,000Total intangible assets
    
    $
    15,763,000
    
    
    $
    2,563,000
    
    
    $
    13,200,000
 September 30, 2005Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer related
    
    $
    1,938,000
    
    
    $
    719,000
    
    
    $
    1,219,000Developed technology
    
    
    252,000
    
    
    
    252,000
    
    
    
    Total intangible assets
    
    $
    2,190,000
    
    
    $
    971,000
    
    
    $
    1,219,000
 60




---



##### 



AmortizationYear Ending September 30,
    
    Expense2007
    
    
    2,324,0002008
    
    
    2,330,0002009
    
    
    1,770,0002010
    
    
    1,520,0002011
    
    
    1,378,000Thereafter
    
    
    3,878,000Total
    
    $
    13,200,000
 Note 4  Customer Concentrations of Credit and Other Business Risks
 Customer Concentrations
  Years Ended September 30,2006
    
    2005
    
    2004U.S. Navy
    
    
    59
    %
    
    
    69
    %
    
    
    77
    %Other U.S. government agencies
    
    
    31
    %
    
    
    20
    %
    
    
    11
    %Foreign
    
    
    10
    %
    
    
    11
    %
    
    
    12
    %
  Years Ended September 30,2006
    
    2005
    
    2004Direct Purchases
    
    
    74
    %
    
    
    78
    %
    
    
    87
    %Subcontracts
    
    
    26
    %
    
    
    22
    %
    
    
    13
    %
 Cash Balances
  61




---



##### 



Note 5  Accounts Receivable
  September 30,2006
    
    
    2005Billed and Billable
    
    $
    43,314,000
    
    
    $
    59,676,000Unbilled Costs and Fees
    
    
    42,583,000
    
    
    
    43,141,000Retainages
    
    
    1,225,000
    
    
    
    960,000Reserves
    
    
    (280,000
    )
    
    
    (200,000
    )$
    86,842,000
    
    
    $
    103,577,000
    Note 6  Property, Equipment and Software
  September 30,2006
    
    
    2005Computer, Machinery and Test Equipment
    
    $
    20,788,000
    
    
    $
    17,101,000Leasehold Improvements
    
    
    8,472,000
    
    
    
    7,168,000Computer Software
    
    
    3,233,000
    
    
    
    2,435,000Furniture and Fixtures
    
    
    1,534,000
    
    
    
    1,224,000Equipment under Capital Lease
    
    
    148,000
    
    
    
    99,000Construction in process
    
    
    2,000
    
    
    
    152,00034,177,000
    
    
    
    28,179,000Less Accumulated Depreciation and Amortization
    
    
    17,451,000
    
    
    
    13,283,000$
    16,726,000
    
    
    $
    14,896,000
  62




---



##### 



Note 7  Revolving Line of Credit
    Note 8  Stock-Based Benefit Plans
   63




---



##### 



Adoption of SFAS No. 123R
     Fair Value Determination
   Expected Volatility.
 Risk-free Interest Rate.
 Dividend Yield.
 Expected Term.
 64




---



##### 



Exercise Factor.
 Post-vest Percentage.
  2004
    
    
    2006Volatility
    
    
    1.0%  49.8%
    
    
    34.4%  36.0%Risk free rate
    
    
    3.19%  4.14%
    
    
    4.5%  5.0%Exercise factor
    
    
    N/A
    
    
    1.7024  4.5967
 Stock Compensation Expense
    Stock Option Activity
  65




---



##### 



AggregateIntrinsicNumber
    
    Weighted-Average
    
    Valueof Shares
    
    Exercise Price
    
    (in thousands)Shares under option, September 30, 2005
    
    
    1,741,127
    
    
    $
    8.75Options granted
    
    
    553,300
    
    
    $
    29.11Options exercised
    
    
    (375,849
    )
    
    $
    6.84
    
    
    $
    8,455Options cancelled and expired
    
    
    (59,490
    )
    
    $
    21.72Shares under option, September 30, 2006
    
    
    1,859,088
    
    
    $
    14.78
    
    
    $
    25,246Options exercisable at September 30, 2006
    
    
    898,162
    
    
    $
    11.10
    
    
    $
    15,502Shares reserved for equity awards at
September 30, 2006
    
    
    985,472
   Weighted-AverageOptions
    
    Remaining
    
    Weighted-AverageRange of Exercise Price
    
    Outstanding
    
    Contractual Life
    
    Exercise Price$  0.10  $  0.90
    
    
    220,068
    
    
    4.6 years
    
    $
    0.66$  2.25  $  4.63
    
    
    324,970
    
    
    5.7
    
    
    4.05$  5.00  $  6.88
    
    
    287,800
    
    
    7.0
    
    
    5.70$  7.54  $17.63
    
    
    205,500
    
    
    6.5
    
    
    12.28$20.40  $29.87
    
    
    820,750
    
    
    8.4
    
    
    26.631,859,088
 Weighted-AverageRemaining
    
    Weighted-AverageRange of Exercise Price
    
    Options Exercisable
    
    Contractual Life
    
    Exercise Price$  0.10  $  0.90
    
    
    220,068
    
    
    4.6 years
    
    $
    0.66$  2.25  $  4.63
    
    
    110,234
    
    
    4.8
    
    
    3.93$  5.00  $  6.88
    
    
    75,160
    
    
    6.9
    
    
    5.73$  7.54  $17.63
    
    
    205,500
    
    
    6.5
    
    
    12.28$20.40  $29.87
    
    
    287,200
    
    
    7.1
    
    
    22.41898,162
 Employee Stock Purchase Plan
  66




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##### 



Note 9  Retirement Plans
  Note 10  Income Taxes
  Years Ended September 30,2006
    
    
    2005
    
    
    2004CurrentFederal
    
    $
    11,044,000
    
    
    $
    8,353,000
    
    
    $
    9,119,000State
    
    
    2,018,000
    
    
    
    1,416,000
    
    
    
    1,758,000Total Current
    
    
    13,062,000
    
    
    
    9,769,000
    
    
    
    10,877,000DeferredFederal
    
    
    (727,000
    )
    
    
    2,962,000
    
    
    
    (3,975,000
    )State
    
    
    50,000
    
    
    
    570,000
    
    
    
    (725,000
    )Total Deferred
    
    $
    (677,000
    )
    
    $
    3,532,000
    
    
    
    (4,700,000
    )Income Tax Expense
    
    $
    12,385,000
    
    
    $
    13,301,000
    
    
    $
    6,177,000
  As of September 30,2006
    
    
    2005Total Deferred Tax Assets
    
    $
    6,380,000
    
    
    $
    2,412,000Total Deferred Tax Liabilities
    
    
    (7,234,000
    )
    
    
    (2,649,000
    )Valuation Allowance
    
    
    
    
    
    
    Net Deferred Tax Liability
    
    $
    (854,000
    )
    
    $
    (237,000
    )
  As of September 30,2006
    
    
    2005Property, Equipment and Software
    
    
    (2,175,000
    )
    
    
    (2,338,000
    )Accrued Vacation
    
    
    1,283,000
    
    
    
    1,011,000Deferred Rent
    
    
    734,000
    
    
    
    560,000Net Operating Losses & Tax Credits
    
    
    3,616,000
    
    
    
    183,000Warranty
    
    
    4,000
    
    
    
    37,000Intangibles
    
    
    (5,045,000
    )
    
    
    (311,000
    )Deferred Compensation
    
    
    
    
    
    
    374,000Uncollectible Accounts
    
    
    109,000
    
    
    
    78,000Stock-Based Compensation
    
    
    436,000
    
    
    
    18,000Other, net
    
    
    184,000
    
    
    
    151,000Net Deferred Tax Liability
    
    $
    (854,000
    )
    
    $
    (237,000
    )
 67




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##### 



Years Ended September 30,2006
    
    2005
    
    2004Statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0State income taxes, net of federal benefit
    
    
    4.2
    
    
    
    3.8
    
    
    
    3.9Stock-based compensation
    
    
    1.0
    
    
    
    
    
    
    
    Tax exempt interest
    
    
    (1.1
    )
    
    
    
    
    
    
    Qualified manufacturing activity deduction
    
    
    (.5
    )
    
    
    
    
    
    
    Research and development credit
    
    
    
    
    
    
    (1.0
    )
    
    
    (1.9
    )Under (over) accrual of prior year taxes
    
    
    .2
    
    
    
    (.1
    )
    
    
    1.0Other
    
    
    .2
    
    
    
    .2
    
    
    
    .339.0
    %
    
    
    37.9
    %
    
    
    38.3
    %
  Note 11  Leases and Other Commitments
 Leases
   OperatingLeases FutureMinimumYear Ending September 30,
    
    Payments2007
    
    
    7,362,0002008
    
    
    7,534,0002009
    
    
    5,151,0002010
    
    
    2,385,0002011
    
    
    1,831,000Thereafter
    
    
    3,470,000Total
    
    $
    27,733,000
 68




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##### 



Capital LeasesFutureMinimumYear Ending September 30,
    
    Payments2007
    
    
    40,0002008
    
    
    27,0002009
    
    
    23,0002010
    
    
    2,000Total
    
    $
    92,000Less amount representing interest
    
    
    (6,000
    )Present value of future lease payments
    
    $
    86,000
 Employment Agreements
  Note 12  Research and Development Expenses
  Note 13  Fair Value of Financial Instruments
  Note 14  Capital Stock
 Common Stock
   Treasury Stock
  69




---



##### 



Note 15  Segment Reporting
  Note 16  Foreign Currency Exchange Contracts
 Accounting for Derivative Instruments and Hedging Activities,
 Note 17  Advances and Cash Held in Escrow
  Note 18  Subsequent Events
   Note 19  Quarterly Financial Information (Unaudited)
  70




---



##### 



2006
    
    
    2005April 2,
    
    
    July 2,
    
    
    September 30,
    
    
    
    
    
    
    April 3,
    
    
    July 3,
    
    
    September 30,January 1, 2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    January 2, 2005
    
    
    2005
    
    
    2005
    
    
    2005(unaudited)
    
    
    (unaudited)(In thousands, except per share data)
    
    
    (In thousands, except per share data)Contract Revenues
    
    $
    68,107
    
    
    $
    55,681
    
    
    $
    68,902
    
    
    $
    66,145
    
    
    $
    56,510
    
    
    $
    55,952
    
    
    $
    75,611
    
    
    $
    83,681Direct and Allocable
Contract Costs
    
    
    58,860
    
    
    
    48,782
    
    
    
    61,043
    
    
    
    59,550
    
    
    
    48,673
    
    
    
    48,137
    
    
    
    66,029
    
    
    
    74,531Income from
Operations
    
    
    9,247
    
    
    
    6,899
    
    
    
    7,859
    
    
    
    6,595
    
    
    
    7,837
    
    
    
    7,815
    
    
    
    9,582
    
    
    
    9,150Other Income
(Expense), Net
    
    
    
    
    
    
    355
    
    
    
    544
    
    
    
    281
    
    
    
    138
    
    
    
    198
    
    
    
    192
    
    
    
    170Income before
Income Taxes
    
    
    9,247
    
    
    
    7,254
    
    
    
    8,403
    
    
    
    6,876
    
    
    
    7,975
    
    
    
    8,013
    
    
    
    9,774
    
    
    
    9,320Provision for Income
Taxes
    
    
    3,644
    
    
    
    2,732
    
    
    
    3,237
    
    
    
    2,772
    
    
    
    3,055
    
    
    
    3,069
    
    
    
    3,919
    
    
    
    3,258Net Income
    
    $
    5,603
    
    
    $
    4,522
    
    
    $
    5,166
    
    
    $
    4,104
    
    
    $
    4,920
    
    
    $
    4,944
    
    
    $
    5,855
    
    
    $
    6,062Earnings Per ShareBasic
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.30
    
    
    $
    0.30Diluted
    
    $
    0.27
    
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.18
    
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.29
 71




---



##### 



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.
  72




---



##### 



PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  ITEM 11. EXECUTIVE COMPENSATION
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  73




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##### 



PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements Schedules
  Exhibits
 ExhibitNumber
    
    Description of Exhibit2 .1
    
    Agreement and Plan of Merger dated as of June 7,
2004, by and between Sensytech, Inc. and Argon
Engineering Associates, Inc. (incorporated by
reference to Exhibit 2.1 of the Companys
Registration Statement on Form S-4 filed on July
16, 2004, Registration Statement No. 333-117430)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)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)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)10 .3+
    
    Argon Engineering Associates, Inc. Stock Plan
(incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the fiscal
year ended September 30, 2004, filed December 14,
2004)10 .4+
    
    Retention Agreement dated February 17, 2004, by and
between the Company and S. Kent Rockwell
(incorporated by reference to Exhibit 10.4 of the
Companys Registration Statement on Form S-4
(Registration Statement No. 333-117430) filed on
July 16, 2004021 .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 74




---



##### 



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

Terry L. Collins
    
    Chairman, Chief Executive Officer and PresidentDate: December 14, 2006/s/ S. Kent Rockwell

S. Kent Rockwell
    
    Vice Chairman and Vice President, Corporate DevelopmentDate: December 14, 2006/s/ Victor F. Sellier

Victor F. Sellier
    
    Vice President, Business Operations, Chief Financial Officer, Treasurer and Director (Principal Financial and Accounting Officer)Date: December 14, 2006/s/ Thomas E. Murdock

Thomas E. Murdock
    
    Vice President, Strategic Program Development and DirectorDate: December 14, 2006/s/ David C. Karlgaard

David C. Karlgaard
    
    DirectorDate: December 14, 2006/s/ Peter A. Marino

Peter A. Marino
    
    DirectorDate: December 14, 2006/s/ Robert McCashin

Robert McCashin
    
    DirectorDate: December 14, 2006/s/ John Irvin

John Irvin
    
    DirectorDate: December 14, 2006/s/ Lloyd A. Semple

Lloyd A. Semple
    
    DirectorDate: December 14, 2006/s/ Maureen Baginski

Maureen Baginski
    
    DirectorDate: December 14, 2006
 75