9. RECENTLY ISSUED ACCOUNTING STANDARDS

     FASB Interpretation No.46 (FIN 46), “Consolidation of Variable Interest Entities,” addresses consolidation and disclosure by business enterprises of variable interest entities. The consolidation requirements of FIN46 apply to existing variable interest entities in the first fiscal year or interim period beginning after June 15, 2003. FIN 46 does not have any impact on the consolidated financial statements or disclosures of the Company as it does not have any variable interest entities.

     In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The provisions of SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. SFAS No. 149 is not expected to have any impact on the consolidated financial statements or disclosures of the Company as it does not have any derivative instruments or hedging activities.

     In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. At present, the Company has not issued financial instruments with characteristics of both liabilities and equity.

10. SUBSEQUENT EVENT

     On July 15, 2003, the Company announced its intention to close the facility in Farmingdale, New Jersey and move its operations to Uniontown, Pennsylvania. The Company is currently negotiating a lease of approximately 60,000 square feet for its Uniontown, Pennsylvania operations. The term of the lease will be ten years with two five year options, and an expected inception date of  September 15, 2003. The Company anticipates this move to occur within the six month period ending December 31, 2003. Employees not transferring from New Jersey will receive severance pay, providing they leave the Company in accordance with the Company’s transition plan. The cost associated with the severance pay under the transition plan is currently not determinable.

Item 2. 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.

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Forward-looking Statements

     Statements in this filing which are not historical facts are forward-looking statements under the provision 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 to be accurate. Actual events, transactions or results may materially differ from the anticipated 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 and uncertainties include, but are not limited to, the existence of demand for, and acceptance of the Company’s products and services, policy decisions of the federal government, particularly in the defense area, regulatory approvals, export 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 its 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

     The Company is a designer, developer and manufacturer of electronics, communications and technology products for the defense and intelligence markets. Specifically, it specializes in integrated passive surveillance, communications and data links, electronic countermeasures and threat simulators, and airborne imaging and scanning systems. Its 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 government agencies, and civilian agencies.

     To record revenues for performance under U.S. federal government fixed-price and cost-reimbursement contracts, including customer-funded research and development, the Company uses the percentage of completion method of accounting under which 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). The Company records revenues under cost-reimbursement contracts as costs are incurred and it includes earned fees in the proportion that costs incurred to date bear to total estimated costs. It increases or decreases 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. It includes such incentive fee awards or penalties, which historically are not material, in revenues at the time the amounts can be determined reasonably. It recognizes anticipated losses at the time they become known. Its future operating results may be affected if actual contract costs incurred differ from its current estimates of total contract costs.

     Its revenues are primarily derived from fixed-price contracts, under which it performs specific tasks for a fixed price. Under fixed-price contracts the Company assumes the risk of cost overruns and receives the benefit of cost savings. All of its U.S. federal government contracts, whether the Company is 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 its costs as not allowable or as unreasonable, which can result in its bearing all or a portion of these costs itself rather than recovering them from the U.S. federal government.

     The Company expenses 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.

     Its results of operations, particularly its 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,

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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 it has been awarded, foreign budget reallocations, currency fluctuations, and general political and economic conditions. Because a significant portion of its 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 its revenues and operating results may not be meaningful.

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Revenues:

     Revenues increased $4,069,000, or 45.1% to $13,100,000 for the three months ended June 30, 2003 from $9,031,000 for the three months ended June 30, 2002. The increase was due primarily to increased revenue in the Communications Group of approximately $1,674,000, in addition to revenues attributable to ST Production Systems, Inc., which is included as part of its Defense Systems Group, of approximately $1,442,000. The remaining increase is attributed to other Defense Systems revenue partially offset by a decline in the Imaging Group revenues. During the three months ended June 30, 2003, the four largest non-classified revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A Radio Terminal Set, the RWB Production-Lockheed and AN/SLQ-25A Shipsets, which contributed 36.6% of revenues.

     The total amount of negotiated backlog, including both unfilled firm orders for the Company’s products for which funding had been authorized and appropriated by the customer and firm orders for which funding had not been appropriated as of June 30, 2003 and 2002, was $35,898,000 and $24,400,000, respectively.

Cost of Revenues:

     Cost of revenues increased $2,539,000, or 35.4%, to $9,704,000 for the three months ended June 30, 2003 from $7,165,000 for the three months ended June 30, 2002. The increase was primarily attributed to costs associated with the increased production which was a significant part of the growth in revenues for the period. During the three month period ended June 30, 2003, the Company experienced a loss on a fixed-price contract in the Defense Systems Group in the amount of $573,000. Cost of revenues as a percentage of revenues decreased to 74.1% for the three months ended June 30, 2003 from 79.3% for the three months ended June 30, 2002. The decrease in cost of revenues as a percentage of revenues is attributed primarily to the profitability of the Communications Group.

General and Administrative Expenses:

     General and administrative expenses increased $921,000, or 127.2%, to $1,645,000 for the three months ended June 30, 2003 from $724,000 for the three months ended June 30, 2002. The increase was due principally to additional salaries, benefits and other related expenses of new and existing employees and an increase in internal research and development expense.

     For the three months ended June 30, 2003, internal research and development was $712,000 compared to $58,000 for the three months ended June 30, 2002 and represented 43.3% and 8.0% of general and administrative expense, respectively.

Interest Income:

     Interest income increased $34,000 or over 100% to $36,000 for the three months ended June 30, 2003 from $2,000 for the three months ended June 30, 2002. The increase was primarily the result of the income earned on a higher

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invested balance of excess cash during the period.

Other Income and Other Expenses:

     Other income decreased $5,000 to $5,000 for the three months ended June 30, 2003 from $10,000 for the three months ended June 30, 2002. The decrease was due to a reduction in sublease income.

Income Tax Expense:

     Income tax expense consists of federal and state income taxes. Income tax expense increased $256,000 or 53.7% to $733,000 for the three months ended June 30, 2003, from $477,000 for the three months ended June 30, 2002. The increase was primarily due to increased and improved profitability during the three month period ended June 30, 2003. The Company’s effective tax rate was 41% for the three months ended June 30, 2003 and 2002 and varies from the federal statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

     Net income increased $388,000 or 57.9% to $1,058,000 for the three months ended June 30, 2003, from $670,000 for the three months ended June 30, 2002. The increase is due primarily to an increase in revenues and improved profitability on certain Communications Group contracts. Net income as a percentage of revenue was 8.1% for the three months ended June 30, 2003 compared to 7.4% for the three months ended June 30, 2002, which is consistent with the trend described above.

Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

Revenues:

     Revenues increased $17,167,000, or 83.7% to $37,676,000 for the nine months ended June 30, 2003 from $20,509,000 for the nine months ended June 30, 2002. The increase was due primarily to increased revenue in the Communications Group and the Imaging Group of approximately $6,364,000 in addition to revenues attributable to ST Production Systems, Inc., which is included as part of its Defense Systems Group, of approximately $8,703,000. The remaining increase is attributed to other Defense Systems revenue. During the nine months ended June 30, 2003, the four largest non-classified revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A Radio Terminal Set, the Hyperspectral Imaging System, and the AN/DPT-2B Based Payload for Lead In Fighter Hawk Radar Emulator, which contributed 37.1% of revenues.

Cost of Revenues:

     Cost of revenues increased $13,080,000, or 85.1%, to $28,443,000 for the nine months ended June 30, 2003 from $15,363,000 for the nine months ended June 30, 2002. The increase was primarily attributed to cost associated with the increased production which was a significant part of the growth in revenues for the nine month period. During the nine month period ended June 30, 2003, the Company experienced a loss on a fixed-price contract in the Defense Systems Group in the amount of $850,000. Cost of revenues as a percentage of revenues increased to 75.5% for the nine months ended June 30, 2003 from 74.9% for the nine months ended June 30, 2002. The increase was primarily attributed to costs associated with the revenues generated by ST Production Systems, Inc. This subsidiary operates in a price sensitive market, which results in lower gross margins. However, this was offset in part by higher profit margins on Communications Group contracts.

General and Administrative Expenses:

     General and administrative expenses increased $1,738,000, or 68.7%, to $4,267,000 for the nine months ended

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June 30, 2003 from $2,529,000 for the nine months ended June 30, 2002. The increase was due principally to additional salaries, benefits and other related expenses of new and existing employees and to an increase in internal research and development expense.

     For the nine months ended June 30, 2003, internal research and development was $1,344,000 compared to $678,000 for the nine months ended June 30, 2002 and represented 31.5% and 26.8% of general and administrative expense, respectively.

Interest Income and Interest Expense:

     Interest income increased $46,000 or over 100% to $79,000 for the nine months ended June 30, 2003 from $33,000 for the nine months ended June 30, 2002. The increase was primarily the result of the income earned on a higher invested balance of excess cash during the period. Interest expense increased $40,000 or over 100% to $49,000 for the nine months ended June 30, 2003 from $9,000 for the nine months ended June 30, 2002. The increase was primarily due to interest expense incurred during the first three months of fiscal year 2003.

Other Income and Other Expenses:

     Other income decreased $65,000 to $12,000 for the nine months ended June 30, 2003 from $77,000 for the nine months ended June 30, 2002. The decrease was due to a reduction in sublease income.

Income Tax Expense:

     Income tax expense consists of federal and state income taxes. Income tax expense increased $939,000 or 84.6% to $2,049,000 for the nine months ended June 30, 2003, from $1,110,000 for the nine months ended June 30, 2002. The increase was primarily due to increased and improved profitability during the nine month period ended June 30, 2003. The Company’s effective tax rate was 41% for the nine months ended June 30, 2003 and 2002 and varies from the federal statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

     Net income increased $1,352,000 or 84.7% to $2,949,000 for the nine months ended June 30, 2003, from $1,597,000 for the nine months ended June 30, 2002. The increase is due primarily to an increase in revenues during the period. Net income as a percentage of revenue was 7.8% for the nine months ended June 30, 2003 and June 30, 2002, respectively.

Liquidity and Capital Resources

     Historically, the Company’s primary source of liquidity is cash provided by operations and its line of credit. The Company’s liquidity requirements depend on a number of factors, including the timing of production under its federal government and foreign sales contracts. On November 22, 2002, the Company sold 2 million shares of common stock for net proceeds, after costs and underwriters commissions, of $14,235,000. 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. The Company had cash and cash equivalents of $18,769,000 at June 30, 2003, as compared to $700,000 at September 30, 2002. The increase was primarily due to the net proceeds of $16,467,000 received from the sale of 2.3 million shares of common stock and cash provided by operating activities. The increase was partially offset by cash used in investing activities and the repayment of the line of credit.

     Cash provided by operating activities was approximately $5,107,000 for the nine months ended June 30, 2003, compared to cash used in operating activities of approximately $2,918,000 for the nine months ended June 30, 2002, an increase of approximately $8,025,000. The primary reasons for this increase were an increase in net income, a net

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decrease in billed and unbilled accounts receivables, a decrease in inventories and a decrease in other assets. The increase was offset in part by a decrease in accounts payable, billing in excess of costs and income taxes payable.

     Cash used in investing activities was approximately $837,000 during the nine months ended June 30, 2003, compared to approximately $2,701,000 for the nine months ended June 30, 2002, a decrease of approximately $1,864,000. The primary reason for the decrease were the acquisition of FEL Corporation assets during the nine months ended June 30, 2002 compared to only capital expenditures for property and equipment in 2003.

     Cash provided by financing activities was approximately $13,799,000 during the nine months ended June 30, 2003, compared to cash provided by financing activities of approximately $1,445,000 for the nine months ended June 30, 2002, an increase of $12,354,000. The increase was primarily due to the net proceeds of $16,467,000 received from the sale of 2.3 million shares of common stock. The increase was partially offset by cash used for the repayment of the line of credit.

     The Company has a $15,000,000 line of credit with Bank of America which expires on February 28, 2004. The line of credit is available to finance the performance of government contracts, to support the issuance of stand-by letters of credit, and for short-term working capital purposes. Prior to renewal of its line of credit, the Company had a $10,000,000 line that expired on February 28, 2003. The bank agreement establishes the interest rate at the London Interbank Offering Rate (LIBOR) plus 200 to 285 basis points, determined by the Company ratio of funded debt to earnings before interest, taxes, depreciation and amortization. Under the line of credit, the total borrowing base generally cannot exceed the sum of 90% of qualified government accounts receivable and 80% of qualified non-government accounts receivable. The borrowing base art June 30, 2003 was $5,723,000. As of June 30, 2003, there were no borrowings under its line of credit. The Company has given the lender a security interest in substantially all of its assets to secure the debt under its credit facility.

     The Company believes its existing funds, cash generated by operations, and amounts available for borrowings under its line of credit will be sufficient to meet its current working capital requirements

Market Risks

     In addition to the risks inherent in its operations, the Company is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding its exposure to credit, interest rates and foreign exchange rates.

Cash and Cash Equivalents:

     All unrestricted, highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. It believes that any credit risk related to these cash and cash equivalents is minimal.

Interest Rates:

     The Company’s line of credit financing provides available borrowing to it at variable interest rates. There were no outstanding borrowings at June 30, 2003. Accordingly, the Company does not believe that any movement in interest rates would have a material impact on future earnings or cash flows. However, if the Company were to significantly increase borrowing under the current line of credit agreement, future interest rate changes could potentially have a material impact.

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Foreign Currency:

     The Company has contracts to provide services to U.S. approved foreign countries. Its foreign sales contracts require payment in U.S. dollars, so it is not affected by foreign currency fluctuations.

Contractual Obligations and Commitments

     The Company’s line of credit balance was $2,900,000 as of September 30, 2002. All outstanding borrowings under the line of credit were paid off in the first fiscal quarter of 2003 with proceeds of the sale of common stock. There were no outstanding borrowings under the line of credit at June 30, 2003.

     In connection with the February 2003 line of credit renewal, the letters of credit were revised. Total letters of credit at June 30, 2003 were $1,656,000. Letters of credit of $1,015,000 expire in less than one year and $641,000 expire in one to three years.

      On July 15, 2003, the Company announced its intention to close the facility in Farmingdale, New Jersey and move its operations to Uniontown, Pennsylvania. The Company is currently negotiating a lease of approximately 60,000 square feet for its Uniontown, Pennsylvania operations. The term of the lease will be ten years with two five year options, and an expected inception date of  September 15, 2003.

Critical Accounting Policies and Estimates

     There have been no material changes in the Company’s critical accounting policies and estimates during the nine months ended June 30, 2003, except as noted below. A complete description of the Company’s critical accounting policies and estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002.

Inventories:

     The Company is required to state its inventories at the lower of cost or market. In assessing the ultimate realization of inventories, it is 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. At June 30, 2003, it had $854,000 in inventory related to a program for the Egyptian Navy. While the inventory was purchased, built and configured for the project, the Company has allocated and will continue to allocate inventory to other business objectives. Although the Company has no reason to believe this contract is in jeopardy, given the delays experienced, it cannot, with any certainty, plan on a contract notice to proceed until sometime after August 2004.

Research and Development:

     The Company includes internally funded research and development costs in general and administrative expenses in its consolidated income statements. Its applied research and development during the nine months ended June 30, 2003 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. It expensed $712,000 and $58,000 of internally funded research and development costs during the three months ended June 30, 2003 and 2002, respectively. It expensed $1,344,000 and $678,000 of internally funded research and development costs during the nine months ended June 30, 2003 and 2002, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The information called for by this item is provided under Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

(a)

The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective based on their evaluations of these controls, which was done

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			within the last 90 days.
	(b)		During the last quarter, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the evaluation of these controls.

PART II – OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 6. Exhibits and Reports on Form 8-K

	(a)		Exhibits
	31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished but not filed as an exhibit to this report on Form 10-Q.
	(b)		Reports on Form 8-K
			A Form 8-K was filed on May 14, 2003 providing information under Item 12.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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