UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the Quarterly Period Ended March 31, 2004

or

For the Transition period from                     to                    

Commission File Number 000-08193

SENSYTECH, INC.

8419 Terminal Road, Newington, Virginia 22122-1430

Issuer’s telephone number (703)550-7000

     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, and (2) has been subject to such filing requirements for the past 90 days.

Yes [ü]         No [  ]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes [  ]      No [ü]

     As of May 5, 2004, there were 6,553,712 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

SENSYTECH, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT

FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

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SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

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

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SENSYTECH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

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

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SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

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

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SENSYTECH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair presentation have been included. Operating results for the six-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. Inter-company accounts and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and footnotes thereto included in Sensytech, Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

2. RECLASSIFICATIONS

     Certain reclassifications, including segment information discussed in Note 6, were made to conform the prior year financial statements to the presentation adopted in the 2004 consolidated financial statements.

3. INVENTORIES

     Inventories consist of the following:

4. EARNINGS PER SHARE

     Basic earnings per share is computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during each period. The following summary is presented for the three month and six month periods ended March 31:

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5. STOCK OPTION COMPENSATION

     The Company continues to account for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations using the intrinsic value method, which resulted in compensation cost for options granted of $144,000 for the three and six month periods ended March 31, 2004. Compensation expense of $91,000 was recorded for the three and six months ended March 31, 2003. Had compensation expense for the Company’s four stock-based compensation plans been determined based upon fair values at the grant dates for awards under those plans in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share for the three and six months ended March 31, would have been reduced to the pro forma amounts indicated below.

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6. SEGMENT INFORMATION

     The Company operates in the passive surveillance and countermeasures market for domestic and international clients. The Company’s systems are globally applicable to the defense markets and their allied information agencies for land, air, and sea-based applications. The Company believes that its passive surveillance and countermeasures products and services are among the best in the world. The Company’s goal is to provide its customers with total system surveillance solutions across the electromagnetic spectrum, using products manufactured by it and by others. The Company elected to merge the Communications and Imaging Groups and form the Surveillance Technology Group for fiscal year 2004. Accordingly, information from prior years has been restated to reflect that change. The Company is customer-focused and provides tailored, solution-based systems through the following groups:

•		Defense Systems (DS) 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, which 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.
•		Surveillance Technology (Surveillance) 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 communication. These systems are generally used by operators on board aircraft, ships and ground installations to intercept various kinds of transmissions over established communications networks. Surveillance also 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.

     Both business segments offer applicable system engineering services which provide concept studies, system definition and services to aid in specification of customer requirements. These activities are performed for either present or prospective customers and are principally undertaken to assist the customer in the procurement of major integrated passive surveillance systems and where applicable, active electronic countermeasures.

     The Surveillance Group manufactures in its Newington, Virginia and Ann Arbor, Michigan facilities. The Defense Systems Group manufactures in its Newington, Virginia; Camarillo, California; Smithfield, Pennsylvania and Farmingdale, New Jersey facilities.

     The Company does not have a significant amount of inter-segment revenue and evaluates segment performance based upon revenue and income from operations by group. The combined segments income from operations equals the income from operations as reported in the Consolidated Income Statements of the Company. The Company does not allocate interest, other income and expenses or

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income taxes to the two segments and does not produce separate balance sheet information for each segment. The revenue and income from operations by segment for the three and six months ended March 31 are as follows:

7. NOTE PAYABLE – LINE OF CREDIT

     The Company entered into a line of credit and related note payable with Bank of America in February 2001. Effective February 2004, the company renewed its $15,000,000 line of credit, which expires on February 28, 2005. 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 at March 31, 2004 was $10,863,000. 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. At March 31, 2004, there were no borrowings under the line of credit. A stand-by letter of credit is issued to certain foreign customers in lieu of posting a performance bond. Letters of credit are also used to cover certain contract prepayments received from foreign customers. Total letters of credit at March 31, 2004 were $1,180,000.

     The bank agreement establishes the interest rate at the LIBOR plus 200 to 285 basis points, determined by the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization. All borrowings under the line of credit are collateralized by the Company’s account receivable, equipment, contracts, and general intangibles. The agreement also contains various covenants as to dividend restrictions, working capital, tangible net worth, earnings and debt-to-equity ratios. Unused commitment fees of one quarter of one percent per annum are required.

8. RECENTLY ISSUED ACCOUNTING STANDARD

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation and disclosure by business enterprises of variable interest entities. The consolidated requirements of FIN 46 apply to existing variable interest entities in the first fiscal year or interim period beginning after December 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.

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9. PRODUCT WARRANTY

     The Company records estimated warranty costs on the accrual basis of accounting. These reserves are based on the expected cost of providing materials and service within the agreed upon period. Activity in the warranty accrual is as follow:

10. COST ASSOCIATED WITH EXIT ACTIVITY

     On July 15, 2003, the Company announced its intention to close its facility in Farmingdale, New Jersey and move these operations to Smithfield, Pennsylvania. In September 2003, the Company signed a lease for a 60,000 square foot facility for its Smithfield, Pennsylvania operations. The term of the lease is for ten years with two five year options. As of March 31, 2004, the Company has completed its move to the new facility. The employees that did not transfer to the new location and left the Company in accordance with the Company’s transition plan received severance pay and/or retention bonuses. The cost associated with the severance and retention plan was $287,000, of which $17,000 and $164,000 were expensed during the three and six months ended March 31, 2004, respectively. Severance and retention bonuses of $13,000 remain accrued but unpaid as of March 31, 2004.

     Other exit costs associated with the transition are estimated to total $875,000. These costs consist principally of training, employee relocation, and moving costs. To date, $695,000 of these costs have been expensed of which $291,000 and $556,000 were expensed during the three month and six month periods ended March 31, 2004, respectively. The remaining estimated other exit costs include employee relocation costs and clean up cost related to the closed facility in New Jersey. These remaining costs will be expensed as incurred. The costs of the severance and retention plan and the other exit costs are reported in the cost of revenues and general and administrative expense line items of the Consolidated Statements of Income.

11. RELATED PARTY TRANSACTIONS

     The Company has entered into an agreement with Rockwell Venture Capital, Inc, a privately owned company controlled by S. Kent Rockwell, the Company’s Chief Executive Officer, to rent an aircraft from time to time to be used for Company business. The Company believes that the terms of the rental agreement are at least as favorable as those it could obtain from an unrelated third party. For the three months and six months ended March 31, 2004, the Company recorded expenses of $69,000 and $185,000 for the use of the aircraft of which $51,000 was unpaid as of March 31, 2004. For the three months and six months ended March 31, 2003, the Company recorded expenses of $26,000 and $47,000.

12. SUBSEQUENT EVENT

     On April 14, 2004, the Company acquired all of the outstanding stock of Imaging Sensors and Systems, Inc., which is headquartered in Winter Park, Florida. The purchase price consisted of cash of $2,000,000 and 67,077 shares of Sensytech stock.

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Additional payments up to $3,000,000 will be due the sellers, if certain future performance goals are met.

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.

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, 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 our 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, the Company 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 and civilian agencies.

     The Company’s 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 the Company’s U.S. federal government contracts, whether it 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 the Company’s costs as not allowable or as unreasonable, which can result in it bearing all or a portion of these costs itself rather than recovering them from the U.S. federal government.

     To estimate 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 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). The Company records revenues under cost-reimbursement contracts as costs are incurred and it includes estimated earned fees in the proportion that costs incurred to date bear to total estimated costs.

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The Company 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. The Company includes such incentive fee awards or penalties, which historically are not material, in revenues at the time the amounts can be determined reasonably. The Company recognizes anticipated probable losses at the time they become known. The Company’s future operating results may be affected if actual contract costs incurred differ from our current estimates of total contract costs.

     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.

     The Company’s 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, the timing of customer orders and billing of other direct costs, timing of receipt of significant change orders, 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 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 its revenues and operating results may not be meaningful.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenues:

     Revenues increased $1,166,000, or 9.1%, to $14,019,000 for the three months ended March 31, 2004 from $12,853,000 for the three months ended March 31, 2003. The increase was due primarily to new contract awards or modifications of existing contracts in the Defense Systems Group of $2,137,000 offset by a decrease in the Surveillance Technology Group of $971,000. During the three months ended March 31, 2004, the four largest non-classified revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the Alliant Missile System, MIL-ADF Antenna Assembly and the AN/SLQ-25A Engineering R&D, which contributed 39.5% 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 March 31, 2004 and 2003, was $24,638,000 and $29,574,000, respectively.

Cost of Revenues:

     Cost of revenues increased $358,000, or 3.8%, to $9,846,000 for the three months ended March 31, 2004 from $9,488,000 for the three months ended March 31, 2003. Cost of revenues as a percentage of revenues decreased to 70.2% for the three months ended March 31, 2004 from 73.8% for the three months ended March 31, 2003 due to improved profit margins in the Defense Systems Group.

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General and Administrative Expenses:

     General and administrative expenses increased $967,000, or 62.0%, to $2,526,000 for the three months ended March 31, 2004 from $1,559,000 for the three months ended March 31, 2003. The increase was due principally to an increase in bid & proposal and internal research and development of $620,000. The remaining increase is due to higher salaries and benefits over the prior year.

     For the three months ended March 31, 2004, internal research and development was $589,000 compared to $477,000 for the three months ended March 31, 2003 and represented 23.3% and 30.6% of general and administrative expense, respectively.

Income Tax Expense:

     Income tax expense consists of federal and state income taxes. Income tax expense decreased $113,000 or 14.9% to $644,000 for the three months ended March 31, 2004, from $757,000 for the three months ended March 31, 2003. The decrease was primarily due to a reduction of income before income taxes and a reduction of the Company’s state income tax expense related to the operation in Pennsylvania. Our effective tax rate was 38.4% and 41.0% for the three months ended March 31, 2004 and 2003, respectively, and varies from the federal statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

     Net income decreased $56,000, or 5.2%, to $1,031,000 for the three months ended March 31, 2004 from $1,087,000 for the three months ended March 31, 2004. The decrease was the result of an increase in general and administrative expenses that was partially offset by an increase in revenues. Net income as a percentage of revenue was 7.4% and 8.5% for the three month periods ended March 31, 2004 and 2003, respectively.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Revenues:

     Revenues increased $2,108,000, or 8.6%, to $26,684,000 for the six months ended March 31, 2004 from $24,576,000 for the six months ended March 31, 2003. The increase was due primarily to new contract awards or modifications of existing contracts in the Defense Systems Group of $3,568,000, offset by a decrease in the Surveillance Technology Group of $1,460,000. During the six months ended March 31, 2004, the four largest non-classified revenue producing contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, Alliant Missile System, MIL-ADF Antenna Assembly, and the AN/SLQ-25A Engineering R&D, which contributed 34.2% of revenues.

Cost of Revenues:

     Cost of revenues increased $616,000, or 3.3%, to $19,355,000 for the six months ended March 31, 2004 from $18,739,000 for the six months ended March 31, 2003. Cost of revenues as a percentage of revenues decreased to 72.5% for the six months ended March 31, 2004 from 76.2% for the six months ended March 31, 2003 due to improved profit margins in the Defense Systems Group.

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General and Administrative Expenses:

     General and administrative expenses increased $1,602,000, or 61.1%, to $4,224,000 for the six months ended March 31, 2004 from $2,622,000 for the six months ended March 31, 2003. The increase was due principally to an increase in bid & proposal and internal research and development of $1,055,000. The remaining increase is due to higher salaries and benefits of approximately $177,000, customer relations of $200,000 and travel cost of $60,000.

     For the six months ended March 31, 2004, internal research and development was $1,083,000 compared to $631,000 for the six months ended March 31, 2003 and represented 25.6% and 24.1% of general and administrative expense, respectively.

Income Tax Expense:

     Income tax expense consists of federal and state income taxes. Income tax expense decreased $66,000 or 5.0% to $1,250,000 for the six months ended March 31, 2004, from $1,316,000 for the six months ended March 31, 2003. The decrease was primarily due to a reduction of income before income taxes and a reduction of the Company’s state income tax expense related to the operation in Pennsylvania. Our effective tax rate was 39.6% and 41.0% for the six months ended March 31, 2004 and 2003, respectively, and varies from the federal statutory rate primarily due to state taxes and other nondeductible expenses.

Net Income:

     Net income increased $13,000, or 0.7%, to $1,904,000 for the six months ended March 31, 2004 from $1,891,000 for the six months ended March 31, 2003. The increase was the result of an increase in revenues that was partially offset by an increase in costs and expenses. Net income as a percentage of revenue was 7.1% and 7.7% for the six month periods ended March 31, 2004 and 2003, respectively.

Liquidity and Capital Resources

     Historically, 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 $10,066,000 at March 31, 2004, as compared to $14,368,000 at March 31, 2003. The decrease was primarily due to cash used in operating activities and investing activities.

     Cash used in operating activities was approximately $1,467,000 for the six months ended March 31, 2004 compared to cash provided by operating activities of approximately $564,000 for the six months ended March 31, 2003, an increase of approximately $2,031,000. The primary reasons for this increase were an increase in general operating expenses and cash used to cover costs incurred during the transition from New Jersey to Pennsylvania.

     Cash used in investing activities was approximately $2,278,000 during the six months ended March 31, 2004 compared to approximately $572,000 for the six months ended March 31, 2003, an increase of approximately $1,706,000.

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The primary reason for this increase were property and equipment acquired for the new facility in Smithfield, Pennsylvania during the six months ended March 31, 2004.

     Cash provided by financing activities was approximately $366,000 during the six months ended March 31, 2004 compared to cash provided by financing activities of approximately $13,676,000 for the six months ended March 31, 2003, a decrease of $13,310,000. The primary reasons for this decrease was the net proceeds of $16,467,000 received from the sale of 2.3 million shares of common stock, which was partially offset by cash used for the repayment of the line of credit in 2003 compared to only proceeds from stock options exercises in 2004.

     The Company has a $15,000,000 line of credit with Bank of America. The line of credit is for one year and is set to expire on February 28, 2005. The total borrowing base generally cannot exceed the sum of 90% of qualified government accounts receivable and 80% of qualified non-government accounts receivable. Total letters of credit at March 31, 2004 were $1,180,000. 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. At March 31, 2004, there were no borrowings under the line of credit. The borrowing base at March 31, 2004 was $10,863,000.

     The bank agreement establishes the interest rate at the LIBOR plus 200 to 285 basis points, determined by the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization. All borrowings under the line of credit are collateralized by the Company’s accounts receivable, equipment, contracts, and general intangibles. The agreement also contains various covenants as to dividends restrictions, working capital, tangible net worth, earnings and debt-to-equity ratios. Unused commitment fees of one quarter of one percent per annum are required.

Market Risks

     In addition to the risks inherent in its operations, the Company is exposed to certain 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 at variable interest rates. There were no outstanding borrowings at March 31, 2004. 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:

     Contractual Cash Obligations:

          Other Commercial Commitments:

Cost Associated with Exit Activity

     On July 15, 2003, the Company announced its intention to close its facility in Farmingdale, New Jersey and move these operations to Smithfield, Pennsylvania. In September 2003, the Company signed a lease for a 60,000 square foot facility for its Smithfield, Pennsylvania operations. The term of the lease is for ten years with two five year options. As of March 31, 2004, the Company has completed its move to the new facility. The employees that did not transfer to the new location and left the Company in accordance with the Company’s transition plan received severance pay and/or retention bonuses. The cost associated with the severance and retention plan was $287,000, of which $17,000 and $164,000 were expensed during the three and six months ended March 31, 2004, respectively. Severance and retention bonuses of $13,000 remain accrued but unpaid as of March 31, 2004.

     Other exit costs associated with the transition are estimated to total $875,000. These costs consist principally of training, employee relocation, and moving costs. To date, $695,000 of these costs have been expensed, of which $291,000 and $556,000 were expensed during the three month and six month periods ending March 31, 2004, respectively. The remaining estimated other exit costs include employee relocation costs and clean up cost related to the closed facility in New Jersey. These remaining costs will be expensed as incurred. The costs of the severance and retention plan and the other exit costs are reported in the cost of revenues and general and administrative expense line items of the Consolidated Statements of income.

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Critical Accounting Policies and Estimates

     The Company’s consolidated financial statements are based on the application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are the critical judgment areas in the application of its accounting policies that affect its financial position and results of operations.

Revenue Recognition:

     Most of the Company’s 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, the Company makes important judgments in estimating revenue, cost and progress towards completion. The Company has an internal process where it monitors 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 the Company’s 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, the Company records 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. It is reasonably possible that future operating results may be affected if actual contract costs incurred differ from total contract costs currently estimated by management. Revenue under time and material contracts is based on hours incurred times approved loaded labor rates plus other cost incurred plus general and administrative expense allocated to other costs incurred. The Company has no reason to believe that cost and estimated earning in excess of billing on uncompleted contracts are not realizable.

Accounts Receivable:

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

Inventories:

     The Company records its inventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company is required to make judgments as to the future demand requirements and compare these with the current or committed inventory levels. Inventory is generally purchased to fulfill a specific contract commitment. In 2003, the Company wrote down a portion of its inventory that was purchased, built, and configured for a specific project which was ultimately delayed and not awarded. During the three months ended March 31, 2004, the Company was awarded a contract which enabled it to utilize this written down inventory and to utilize other components of its existing inventory.

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Income Taxes:

     The Company currently has deferred tax assets resulting from net operating loss carryforwards, which will reduce taxable income in future periods. At March 31, 2004 and 2003, the Company did not provide a valuation allowance as it believed it was more likely than not that the remaining net deferred tax assets will be realized, principally based on forecasted taxable income. The Company’s new Pennsylvania production facility is within the Keystone Opportunity Zone. As a result, income from that facility is exempt from state and local taxes for a period of ten years.

Recently Issued Accounting Standard

     See the notes accompanying the unaudited consolidated financial statements as of and for the three and six months ended March 31, 2004.

Item 3. Quantitative and Qualitative Disclosure 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)		Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
	(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

     During the period covered by this report, the Company filed with the Securities and Exchange Commission and delivered to its shareholders the Company’s Proxy Statement for its Annual Meeting of Stockholders held February 17, 2004.

	(a)		The company’s Annual Meeting of Stockholders was held on February 17, 2004.
	(b)		The nominees for the Board of Directors are identified below.

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(c)

The inspector of election tabulated the following votes for the election of directors:

Election of Directors

     The inspector of election tabulated the following votes for the ratification of the selection of PricewaterhouseCoopers LLP as the Company’s independent accountants for the 2004 fiscal year:

Item 6. Exhibits and Report on Form 8-K

Exhibits

•

Document filed herewith.

Reports on Form 8-K
A Form 8K was filed on December 18, 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.

	SENSYTECH, INC.
May 13, 2004	By:	/s/ S. Kent Rockwell
		S. Kent Rockwell
		Chairman and Chief Executive Officer

May 13, 2004	By:	/s/ Donald F. Fultz
		Donald F. Fultz
		Vice President and Chief Financial Officer

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