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

FORM 10-K

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

For the Fiscal Year Ended September 30, 2002

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

For the transition period from ______to ______

Commission File Number 000-08193

            SENSYTECH, INC.            
(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

Yes   ü        No      

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in

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

     As of December 16, 2002, there were 6,418,478 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding. The aggregate market value of the voting and non-voting shares of the Common Stock held by non-affiliates as of December 16, 2002, was approximately $42,938,110.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this report incorporates by reference specific portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on February 18, 2003.

SENSYTECH, INC. AND SUBSIDIARIES

For the Fiscal Year Ended September 30, 2002
______

TABLE OF CONTENTS

ITEM 1. BUSINESS

     We are a Delaware corporation, which resulted from the merger of Daedalus Enterprises, Inc., which was organized in 1968, and S.T. Research Corporation, which was organized in 1972. These two corporations merged on June 9, 1998, thus creating our company. On October 3, 2001 we acquired certain assets of FEL Corporation for $400,000, and on February 1, 2002, our wholly-owned subsidiary, ST Production Systems, Inc. acquired the operating assets and assignment of certain defense contracts of FEL Corporation for an aggregate purchase price of approximately $2,050,000.

     We are a designer, developer and manufacturer of electronics and technology products for the defense and intelligence markets. Specifically, we specialize in integrated passive surveillance, communications and data links, electronic countermeasures and threat simulator systems, and airborne imaging and scanning systems. Our customers include the U.S. Department of Defense, other U.S. federal government agencies, major domestic prime defense contractors (such as Lockheed Martin Corporation and L-3 Communications Corporation), foreign governments and agencies and foreign defense contractors. Many of our products are used in national defense programs for the U.S. federal government intelligence community and approved international customers. As a result, approximately 80.4% of our revenues for the year ended September 30, 2002 were derived from U.S. federal agencies.

     Our products can be found on virtually every U.S. Navy surface and sub-surface combatant, as well as certain international surface combatants. These include major military platforms such as the SSN-688 Los Angeles class, SSN-21 Seawolf class and SSN-774 Virginia class submarines, all U.S. aircraft carriers, MK-V patrol boats, Cyclone class coastal patrol boats, certain U.S. Coast Guard vessels, NASA U-2 aircraft and U.S. special missions aircraft. Our reputation for engineering excellence has allowed us to develop long-term relationships across the defense and intelligence markets. As a result, for the year ended September 30, 2002, approximately 80.0% of our revenues were generated from contracts for which we are the prime contractor, while approximately 62.1% of our revenues were generated from sole or single source contracts. Single source contracts are contracts under which the purchaser purchases products only from us, although other suppliers exist, while sole source contracts are contracts under which the purchaser purchases products from us that only we can supply.

     At September 30, 2002, we employed approximately 201 people, 149 of whom held security clearances and 69 of whom were engineers. For the fiscal year ended September 30, 2001, we generated revenues of $16,391,000 and net income of $1,224,000. For the year ended September 30, 2002, we generated revenues of $32,290,000 and net income of $2,189,000. Our total funded backlog has increased significantly over the past year from $5,547,000 at September 30, 2001 to $29,571,000 at September 30, 2002.

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

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The Company operates through three business segments described below.

DEFENSE SYSTEMS GROUP

This group designs, develops, manufactures and supports products which intercept, analyze, classify, identify, locate and track microwave signals from radars and weapons which may originate from potentially hostile sources. It provides communication data links and remote targeting systems and provides equipment and systems, that are used to carry out defensive measures against hostile signals or their sources to protect high value assets. The group’s systems are used on military platforms, such as ships, submarines, patrol aircraft, as well as at ground installations. Included in this group are the programs acquired through our February 2002 acquisition of the operating assets of FEL Corporation, which we operate through our ST Production Systems, Inc. subsidiary. For the fiscal year ended September 30, 2001, approximately 69.2% of our revenues came from this group, while for the year ended September 30, 2002, approximately 55.9% of our revenues came from this group.

COMMUNICATIONS GROUP

This group designs, develops, manufactures and supports products which intercept signals and analyze communications in a variety of transmission media, and then identify and locate the sources of these signals and communications. These systems are generally used by operators on board aircraft, ships and ground installations to intercept various kinds of transmissions over established communications networks. For the fiscal year ended September 30, 2001, approximately 22.2% of our revenues came from this group, while for the year ended September 30, 2002, approximately 32.5% of our revenues came from this group.

IMAGING GROUP

This group designs, develops, manufactures and supports products that are installed on special purpose aircraft and land vehicles and use multispectral, infrared, and light imaging systems to perform remote surveys. Applications of this technology include environmental pollution, facility inspection, utility monitoring, surface mineral exploration and other special purpose inspections where on-site inspections are not possible or desirable. For the fiscal year ended September 30, 2001, approximately 8.6% of our revenues came from this group, while for the year ended September 30, 2002, approximately 11.6% of our revenues came from this group.

Research and Development

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

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

Backlog

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

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

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

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

     Some of our contracts can be extended or increased at the option of the customer. As of September 30, 2002, the potential value of these options, if exercised by the customer, is approximately $13,050,000. We anticipate that a portion of the options will be exercised during the calendar years 2003 through 2008. However, we have no way of knowing whether any of the options will be exercised, or if they are exercised, what the value of any additional order would be.

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Government Contracts

     During the fiscal year ended September 30, 2002, approximately 80.4% of our revenues were attributable to contracts with various departments and agencies of the U.S. federal government or subcontracts with its prime contractors. The funding of government programs is subject to Congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations.

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

	•		terminate existing contracts for convenience, which affords the federal government the right to terminate the contract in whole or in part anytime it wants for any reason or no reason, as well as for default;
	•		reduce or modify contracts or subcontracts, if its requirements or budgetary constraints change;
	•		cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable;
	•		claim rights in products and systems produced by us;
	•		adjust contract costs and fees on the basis of audits completed by its agencies;
	•		suspend or debar us from doing business with the U.S. federal government; and
	•		control or prohibit the export of our products.

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

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

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	•		Cost-reimbursement.

	•		Cost-plus-fixed-fee contracts are cost-reimbursement contracts that provide for payment to us of a negotiated fee that is fixed at the inception of the contract. This fixed fee does not vary with actual cost of the contract, but may be adjusted as a result of changes in the work to be performed under the contract. This contract poses less risk than a fixed price contract, but our ability to win future contracts from the procuring agency may be adversely affected if we fail to perform within the maximum cost set forth in the contract.
	•		A cost-plus-award-fee contract is a cost reimbursement contract that provides for a fee consisting of a base amount (which may be zero) fixed at inception of the contract and an award amount, based upon the government’s satisfaction with our performance under the contract. With this type of contract, we assume the risk that we may not be awarded the award fee, or only a portion of it, if we do not perform satisfactorily.
	•		A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. As is the case with all cost-reimbursement contracts, we assume the risk that, if our costs are not allowable under the terms of the contract or applicable regulations, we may not be able to recover these costs.

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

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

     As a government contractor, we are subject to government audits, inquiries and investigations. We have experienced minimal audit adjustments over the past ten years. The Defense Contract Audit Agency has completed its audit of our contracts through the fiscal year ended September 30, 1998. We are still subject to adjustment on our performance during subsequent years.

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

Competitive Strengths

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

	•		Significant Supplier to Domestic and Allied Intelligence Agencies. Approximately 26.7% of our revenues for the year ended September 30, 2002 was derived from classified programs of the U.S. federal government and U.S. approved international customers. These programs tend to have higher margins and are generally awarded to a small group of suppliers. Given our expertise and track record with these customers, we believe we are well-positioned to take advantage of the heightened awareness and expected increase in spending for intelligence activities in the wake of the September 11 attacks.
	•		Employees with Security Clearances. The strict security clearance requirements for personnel who work on classified programs for the intelligence community and Department of Defense severely limits the number of suppliers that are allowed to bid on those types of programs. Companies wishing to bid on such programs must have employees who have completed the lengthy process necessary to obtain a security clearance. This process requires a candidate to be sponsored by the government for a particular purpose, entails extensive background investigations that typically take between six months to a year and, for restricted access clearance, may require successful completion of polygraph testing. As of September 30, 2002, 149 of our 201 employees have government security clearances, with approximately 20% holding Top Secret/ Sensitive Compartmented Information (TS/SCI) security clearances.
	•		Engineering and Design Expertise. We have a successful track record of providing our customer needs as demonstrated by our long-term relationships with many of our largest customers. Our predecessor companies and we have provided high quality technical solutions in the intelligence gathering and electronic warfare areas for the Navy and other defense departments for over 25 years. At September 30, 2002, we employed 69 engineers, who represented approximately 34% of our workforce. Since October 1, 1998, we have spent approximately $29.8 million in both customer funded as well as independent research and development.

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	•		Established Sole-Source Contract Relationships. We received approximately 62.1% of our revenues for the year ended September 30, 2002 from sole or single source contract relationships. These relationships provide us with opportunities to proactively prepare for and develop follow-on program opportunities through upgrades, new versions of products and additional product sales. We also believe these sole or single source relationships create significant advantages in technology, time to market and start-up costs. This affords us market protection relative to new entrants or competitors. Most of our sole source relationships exist with agencies or departments of the U.S. federal government, so the terms of those contracts are consistent with normal federal government procurement, including provisions for termination for convenience, which allows the U.S. federal government to terminate the contracts at any time for any reason.
	•		Experienced Management Team. Our executives provide us with extensive experience in supporting the intelligence community and Department of Defense. Each of our executive officers has more than 20 years experience in the intelligence and Department of Defense marketplace. With their knowledge, valued relationships and reputations, our management plays a key role in building and sustaining our customer base.

Business Strategy

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

	•		Expanding Our Customer Base. We intend to capitalize on our long-term relationships with our customers and our reputation within the intelligence community and Department of Defense to attract new customers within those communities. We believe we have a successful performance record and demonstrated technical expertise that gives us credibility with prospective customers and enhances our ability to be successful in bidding on follow-on contracts. As our revenues base grows through internal growth as well as acquisitions, we intend to seek larger contracts, which have historically been awarded to larger suppliers.
	•		Targeting High Growth Segments of the Market. We believe the projected growth in government intelligence gathering and electronic warfare technology products and services spending will offer opportunities for development and delivery of advanced technology solutions for defense and intelligence agencies. We intend to expand our product and service offerings in these areas, particularly where there is a possibility for significant long-term sales. We believe that friendly foreign governments would like to increase their capabilities in these areas, as the events of September 11 have global security implications.

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	•		Attracting and Retaining Highly Skilled Personnel. We intend to continue to attract and retain skilled professionals to ensure we have the capabilities to fulfill our customers’ requirements. We target candidates who have served in the military or as civilian experts in the intelligence community and Department of Defense, and believe we can continue to retain our employees by offering competitive compensation and by providing opportunities for career growth through company-supported education programs and involvement in diverse and challenging engineering developments.
	•		Leveraging Customer Funded Research and Development. Many of our products were or are being developed through funding provided by the customer in the form of research and development contracts. While these contracts tend to be relatively small, they contain provisions for the customer to exercise multi-year options that increase the values of these programs significantly should the customer decide to go into full production. Since October 1, 1998, the U.S. federal government has provided us with approximately $26.4 million under such development contracts. Some of our contracts can be extended or increased at the option of the customer.
	•		Pursuing Strategic Acquisitions. We plan to enhance our internal growth by selectively pursuing strategic acquisitions of businesses that can cost-effectively broaden our technology expertise and our product offerings. We are primarily focused on acquiring businesses that provide value-added solutions for the intelligence community and Department of Defense, but will also consider opportunities to acquire other businesses where we can utilize our reputation and experienced management team to expand our core business areas.

Export Sales

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

Employees

     At September 30, 2002, we employed 201 people, 69 of whom have engineering degrees while 149 have security clearances. Our continued success depends upon our ability to attract and retain highly skilled employees. We believe we are successful in retaining our employees by offering a competitive salary structure, attractive incentive compensation and benefits programs, career growth opportunities, flexible work assignments and the opportunity to perform mission-critical services, often in classified environments. Our current employees are offered an opportunity to respond to new job opportunities before we pursue external recruiting. We consider our relations with employees to be good, and we have never had a work stoppage. The former FEL Corporation employees were represented by a union, which has asked our subsidiary in Farmingdale, New Jersey to negotiate a contract. Our subsidiary is considering the request. However, we do not believe that the outcome of any discussion with the union will have a materially adverse impact on us.

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Environmental

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

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

There were no matters submitted to a vote of security holder during the fourth quarter of the Company’s fiscal year ended September 30, 2002.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the Executive Officers of the Registrant, including their names, ages and offices held, as of December 16, 2002.

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PART II

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

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

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

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

DIVIDEND POLICY

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

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ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth the selected consolidated statement of earnings data, balance sheet data for each of the periods indicated. The selected financial data for the years ended September 30, 2002, 2001, 2000, 1999, and 1998 are derived from our audited consolidated financial statements and related notes.

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

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

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3)

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

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

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

Forward-looking Statements

     Statements in this filing which are not historical facts are forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. These statements are based upon numerous assumptions about future conditions that could prove not be accurate. Actual events, transactions or results described in such statements. The Company’s ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. In addition to those specifically mentioned above, such risks are uncertainties include, but are not limited to, the existence of demand for, and acceptance of the Company’s projects and services, regulatory approvals, expert approvals, economic conditions both domestically and internationally, the impact of competition and pricing, results of financing efforts and other factors affecting the Company’s business that are beyond the Company’s control. All of forward-looking statements should be considered in light of these factors. You should not put undue reliance on any forward-looking statements The Company undertakes no obligation to update these forward-looking statements to reflect new information, future events or otherwise, except as provided by law.

Overview

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

     A substantial portion of our revenues is derived from contracts with the U.S. federal government. For the fiscal years ended September 30, 2002, and September 30, 2001, approximately 80.4% and 88.9%, respectively, of our revenues were derived from contracts with the U.S. federal government. For these same periods, approximately 80.0% and 44.1%, respectively, of our revenues were generated from contracts for which we were the prime contractor, and approximately 62.1% and 97.3%, respectively, of our revenues were generated from sole or single source contracts. Single source contracts are contracts under which the purchaser purchases products only from us, although other suppliers exist, while sole source contracts are contracts under which the purchaser purchases products from us that only we can supply. The percentage reduction in sole or single source contracts is the result of classifying all revenues of ST Production Systems, Inc., which is our subsidiary that holds the assets we acquired from FEL Corporation in February 2002, as derived from competitive contracts. In addition during these time periods, approximately 26.7% and 21.2%, respectively, of our revenues were generated from contracts relating to classified programs of the U.S. federal government and select international contracts.

     To estimate revenues for performance under U.S. federal government fixed-price and cost-reimbursement contracts, including customer-funded research and development, we use the percentage of completion method of accounting under which estimated revenues are determined on the basis of completion to date (i.e., the total contract amount multiplied by percent of performance to date less revenue value recognized in previous periods). We record revenues under cost-reimbursement contracts as costs are incurred and we include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. We increase or decrease fees under certain U.S. federal government contracts in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. We include such incentive fee awards or penalties, which historically are not material, in revenues at the time the amounts can be determined reasonably. We recognize anticipated losses at the time they become known. Our future operating results may be affected if actual contract costs incurred differ from our current estimates of total contract costs.

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

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

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

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

Revenues. Revenues increased $15,899,000, or 97.0% to $32,290,000 for the year ended September 30, 2002 from $16,391,000 for the year ended September 30, 2001. The increase was due primarily to new contract awards in the Communications Group and the Imaging Group of approximately $9,184,000, in addition to revenues attributable to ST Production Systems, Inc., the subsidiary that holds the assets we acquired from FEL Corporation and which we include as part of our Defense Systems Group, of approximately $10,896,000 since the date of the FEL asset acquisition. This increase was partially offset by a decrease in other Defense Systems Group revenue of $4,181,000. For the year ended September 30, 2002 we derived, directly or indirectly, 80.4% of our revenue primarily from federal agencies in the intelligence community and the Department of Defense, compared to 88.9% year ended September 30, 2001. For the year ended September 30, 2002, our four largest revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A Radio Terminal Set, the AN/BLQ-10 (V)1 and (V)2, and Hyperspectral Imaging System which contributed 36.4% of revenue.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

     Cash used in operating activities was approximately $3,347,000 for the year ended September 30, 2002, compared to cash provided by operating activities of approximately $3,292,000 for the year ended September 30, 2001, a decrease of approximately $6,723,000. The primary reasons for this decrease were (1) an increase for our commercial contracts, which provide for billing only at the completion and delivery of those products, and government processing delays at our subsidiary ST Production Systems, Inc., which, together, resulted in an increase in unbilled receivables of approximately $5,103,000 and billed accounts receivable of $5,175,000 for the 2002 period over the comparable 2001 period, and (2) institution of an inventory program to take advantage of quantity discounts on components and to identify and order items requiring a longer lead time for anticipated contract awards, which resulted in an increase in inventory of approximately $2,754,000 for the 2002 period over the comparable 2001 period. We have no reason to believe that these unbilled receivables will not be paid. The decrease was partially offset by increases in accounts payable of $2,036,000 and billings in excess of cost of $2,197,000 for the 2002 period over the comparable 2001 period. The increase in inventory includes $1,566,000 for a program for the Egyptian Navy, for which Lockheed Martin Corporation is our prime contractor. Negotiations with Lockheed Martin Corporation on the terms and price for this contract have been completed. We are awaiting formal authorization to proceed from Lockheed Martin Corporation, which authorization must originate with the Egyptian government. We had been advised that final approval to proceed would be received by September 1, 2002, but this date has now been revised to December 31, 2002. Although we have no reason to believe that the contract is in jeopardy, given the delays experienced, we cannot, with any certainty, plan on a contract notice to proceed until sometime after December 31, 2002.

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

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

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

     Cash provided by financing activities was approximately $3,132,000 during the year ended September 30, 2002, compared to cash used in financing activities of approximately $152,000 for the year ended September 30, 2001, an increase of $3,368,000. The increase primarily resulted from the net draws and repayments on our line of credit of approximately $2,900,000 and receipt of proceeds from stock option exercises of approximately $316,000. Cash used in financing activities for year ended 2000 was $236,000. In fiscal 2001 and fiscal 2000, cash used in financing activities was primarily the result of payments for the purchase of treasury stock.

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

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

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

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Contractual Obligations and Commitments

Contractual Cash Obligations (in thousands)

Other Commercial Commitments (in thousands)

Critical Accounting Policies and Estimates

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

Revenue recognition
Most of our sales are generated under U.S. Federal government fixed-price and cost-type contracts, which require revenue recognition judgments. Revenues are primarily recognized on the percentage of completion basis. In doing so, we make important judgments in estimating revenue, cost and progress towards completion. We have an internal process where we monitor contract performance and cost on a monthly basis. Each quarter, management reviews, among other items, progress against schedule, project staffing, risks and issues, subcontract management, incurred and estimated costs, and disposition of prior action items. These judgments underlie our determinations regarding overall contract value, contract profitability, and timing of revenue recognition. Revenue and cost estimates are revised periodically based on changes in circumstances. To the extent that a revised estimate affects contract profit or revenue previously recognized, we record the effect of the revision in the period in which the facts requiring the revision become known. If the estimated cost to complete exceeds the value of the contract, a reserve for estimated loss is recognized immediately. We have no contracts for which we currently anticipate losses. At September 30, 2002, there was an increase in costs and estimated earnings in excess of billings (unbilled contract costs) on uncompleted contracts. We have no reason to believe that these amounts are not realizable.

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

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

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

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

     Accounting Pronouncements

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

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT ACCOUNTANTS

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

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Sensytech, Inc. and its subsidiaries at September 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
December 12, 2002

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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

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

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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, continued

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

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SENSYTECH, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS