UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended October 3, 2004

OR

For the transition period from                     to                    

Commission file number 0-21682

SPARTA, Inc.

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 or 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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 3, 2004 the registrant had 5,125,223 shares of common stock, $.01 par value per share, issued and outstanding.

SPARTA, Inc.

QUARTERLY REPORT FOR THE PERIOD ENDED OCTOBER 3, 2004

INDEX

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PART I

Item 1 Financial Statements

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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)

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

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

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

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

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

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SPARTA, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note A — Basis of Presentation

     The accompanying financial information has been prepared in accordance with the instructions to Form 10-Q and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

     The Company’s fiscal year is the 52 or 53-week period ending on the Sunday closest to December 31. Fiscal year 2004 comprises the 53-week period ending January 2, 2005, whereas fiscal year 2003 comprised the 52-week period ended December 28, 2003. The third quarter of fiscal 2004 ended October 3, 2004, whereas the corresponding third quarter in fiscal 2003 ended on September 28, 2003. The nine month period ending October 3, 2004 was comprised of 40 weeks whereas the corresponding period in fiscal 2003 was comprised of 39 weeks. To aid the reader of the financial statements, the year-end has been presented as December 31, 2003 and the three-month and nine-month period ends have been presented as September 30, 2004 and September 30, 2003.

     In the opinion of management, the unaudited financial information for the three-month and nine-month periods ended September 30, 2004 and September 30, 2003 reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation thereof. Certain reclassifications have been made to the 2003 financial statements to conform to 2004 presentation.

Note B — Income Taxes

     Income taxes for interim periods are computed using the estimated annual effective rate method. During the three-month and nine-month periods ended September 30, 2004, the Company recorded reductions to the income tax provision of $0.1 million and $0.7 million, respectively. The reductions were the result of the reversal of previously accrued taxes, primarily related to a favorable audit of the Company’s tax returns.

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Note C – Computation of Earnings Per Share

Note D – Accounting for Stock-Based Compensation

     The Company accounts for employee stock-based compensation in accordance with the intrinsic value method described in Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations. Had compensation expense for these plans been determined in accordance with the fair value method described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), the Company’s net income and net income per share would have been reduced to the pro forma amounts in the following table.

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Note E – Stockholders’ Equity

     For the nine months ended September 30, 2004, proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $8.4 million. In addition, the Company repurchased a total of 717,744 common shares at their current fair value totaling approximately $21.2 million. Of this total, the Company repurchased $16.3 million for cash, and $4.9 million by delivery of promissory notes. The promissory notes provide for principal payments over periods ranging from two to seven years, plus interest.

     Treasury stock is shown at cost, and consisted of 2,138,553 shares and 1,420,809 shares of common stock at September 30, 2004 and December 31, 2003, respectively. Repurchase of outstanding stock by the Company in exercise of its right of repurchase upon termination of employment (as defined) are made at estimated fair value. The stock price is calculated quarterly by the Company using a formula approved by the Board of Directors (which the Company believes estimates fair value). The stock price formula is evaluated annually by reference to discounted cash flow analysis and other financial valuation techniques.

     Certain employees are eligible to participate in a program whereby they may exercise certain stock options by delivery of a note payable to the Company. The notes are full recourse, are secured by the underlying shares of common stock, bear interest at prime plus 0.5%, and are repaid through payroll deductions over a period of less than one year. At September 30, 2004 and December 31, 2003, the outstanding principal balances of these notes were $868,000 and $560,000, respectively, and are included as an offset to additional paid-in capital.

Note F – Commitments and Contingencies

     The Company has no material investigations, claims, or lawsuits arising out of its business, nor any known to be pending. The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the ultimate outcome of such matters will not have a material impact on the Company’s financial position, results of operations or cash flows.

     During the third quarter of 2004, the U.S. government terminated for its convenience several task orders on one contract. The contract value of the terminated task orders totaled $23 million; however, approximately $9 million of the total termination amount was incurred prior to the effective date of the termination and has been, or is expected to be, paid to the Company. As of September 30, 2004, the Company was unable to bill approximately $2 million of costs incurred on the terminated task orders. These costs were incurred prior to the effective date of the termination. The Company believes that the delay in its ability to bill these costs is temporary and that these costs will ultimately be paid by the U.S. government. The Company believes that this termination will not have a material effect on the Company’s financial condition or results of operations.

Note G – Recent Accounting Pronouncements

     In January 2003, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after December 15, 2003. Adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

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     In December 2003, the FASB replaced FIN 46 with FIN 46R to clarify the application of Accounting Research Bulletin Number 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R was effective for all public entities that have interest in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. Adoption of this statement did not have a material effect on the Company’s financial position and/or results of operations.

     In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting guidance on derivative instruments and hedging activities. In May 2003, the FASB issued SFAS 150, which addresses accounting for certain financial instruments that have characteristics of both liabilities and equity. The Company has not entered into derivative instruments covered by SFAS 149 or financial instruments covered by SFAS 150. Adoption of these statements therefore did not have a material effect on the Company’s financial position or results of operations.

     In March 2004, the EITF reached a consensus on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). EITF 03-01 provides guidance to determine when an investment is considered to be impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also requires disclosure related to unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance was effective for other-than-temporary impairment evaluations in the third quarter of 2004 and did not have a material impact to the Company’s consolidated financial position, results of operations or cash flows. The other provisions of EITF 03-01, which principally consist of disclosure requirements, are not expected to have a material impact to the Company’s consolidated financial position, results of operations or cash flows.

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

     The Company’s fiscal year is the 52 or 53-week period ending on the Sunday closest to December 31. Fiscal year 2004 comprises the 53-week period ending January 2, 2005, whereas fiscal year 2003 comprised the 52 week period ended December 28, 2003. The nine-month period ending October 3, 2004 was comprised of 40 weeks whereas the corresponding period in 2003 comprised 39 weeks.

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     The following tables present certain key operating data for the periods indicated:

(1)

Under SEC regulations, data derived from consolidated financial information but not required by GAAP to be presented in the financial statements are considered “non-GAAP financial measures”. Gross profit, as defined, and gross profit as a percentage of costs are non-GAAP financial measures. The Company defines gross profit as sales less contract costs. Contract costs are all costs that are allowable for and allocable to contracts under government procurement regulations. As such, gross profit excludes certain unallowable expenses. Management considers gross profit, and gross profit as a percentage of costs, to be key measures of the Company’s contract performance. They should also be considered in conjunction with income from operations, net income, and other measures of financial performance. The following presents a reconciliation of gross profit to income from operations (amounts in thousands):

     The Company’s sales for the three-month period ended September 30, 2004 increased 34%, from $49.4 million for the third quarter of 2003 to $66.4 million for the third quarter of 2004. Year-to-date sales for 2004 are $185.9 million, an increase of 26% above the first three quarters of 2003. The most significant contributor to the Company’s revenue growth was other DoD programs, where revenues increased 35%, from $24.2 million for the three-month period ended September 30, 2003 to $32.5 million for the corresponding period in 2004. Similarly, year-to-date revenue on other DoD programs increased 31%, from $71.5 million in 2003 to $93.7 million in 2004. The increase in other DoD revenues was primarily due to revenue growth on training and range management programs for the U.S. Army, on engineering support programs for the U.S. Army and U.S. Air Force, and on composite production for unmanned air vehicle components for a variety of military customers. In addition, other DoD revenues increased due to increased revenue on programs for a variety of intelligence agencies as a result of the government’s increased focus on intelligence in response to the terrorist attacks of September 11. Revenue on BMD programs increased 20%, from $26.6 million during the third quarter of 2003 to $31.8 million for the third quarter of 2004. Year-to-date, BMD program revenue increased 22%, from $71.1 million in 2003 to $86.6 million in 2004. In addition to continuing its work on BMD systems engineering and technical analysis, the Company has generated growth in its BMD business base through penetration of other BMD program elements.

     The gross profit rate (gross profit as a percentage of contract costs) increased from 10.2% in the third quarter of 2003 to 11.4% in the third quarter of 2004. Year-to-date gross profit increased from 10.1% for the nine months ended September 30, 2003 to 11.6% for the nine months ended September 30,

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2004. The increase in the gross profit rate is primarily attributable to the mix of contract types, as the Company has continued to experience a decline in the percentage of revenues derived from cost reimbursable contracts. During the three-month and nine-month periods ended September 30, 2004, time and material and fixed price contracts comprised 43% and 42%, respectively, of total sales, compared with 36% and 35% of total sales in the corresponding periods in 2003. The Company generally earns higher profits on time and material and fixed price contracts than it does on cost reimbursable contracts, due to the greater risk associated with such contract types.

     The Company earned net interest income during the third quarters of 2004 and 2003 and for the nine-month periods ended September 30, 2004 and 2003. The increase in net interest income for the three- and nine-month periods in 2004, compared to the corresponding periods in 2003, is primarily attributable to higher average levels of invested cash and lower average debt levels in 2004. Both the Company’s investments in cash equivalents and the Company’s long-term debt are floating rate. Accordingly, the change in average short- and medium-term interest rates from 2003 to 2004 had a minimal effect on net interest.

     The Company’s effective income tax rate was 38% and 41% during the third quarter of 2004 and 2003, respectively, and 36% and 41% for the corresponding nine-month periods. The decrease in the effective tax rate in 2004 is primarily attributable to a reduction in the income tax provision during the second and third quarters. The reduction, which totaled $0.7 million, was the result of the reversal of previously accrued taxes, primarily related to a favorable audit of the Company’s tax returns. The decrease in the effective tax rate in 2004 is also attributable to a decline in the Company’s effective state tax rate.

Backlog

     Funded annualized contract backlog represents all current contracts on which the Company expects to perform during the next 12 months for which the Company has received funding from its customer. Unfunded annualized contract backlog includes the expected value during the next 12 months of future incremental funding on existing contracts and on certain proposals where the Company expects a high probability of winning the procurement. Multi-year contract backlog represents total funded and unfunded contract backlog, without regard to when the relevant contracts will be performed.

     Historically, the Company’s end-of-year annualized contract backlog has generally been indicative of its revenues in the following year. For example, annualized contract backlog as a percentage of the following year’s sales was 86%, 88%, and 96%, in 2003, 2002, and 2001, respectively. Although the Company’s backlog has historically been indicative of its future revenues, there can be no assurance that this will continue. The Company’s backlog is typically subject to variations from year to year as contracts are completed, major existing contracts are renewed, or major new contracts are awarded. Additionally, all U.S. Government contracts included in backlog, whether or not funded, may be terminated at the convenience of the U.S. Government. Moreover, U.S. Government contracts are conditioned upon the continuing availability of congressional appropriations. New presidential administrations, changes in the composition of Congress, and disagreement or significant delay between Congress and the Administration in reaching a defense budget accord can all significantly affect the timing of funding on the Company’s contract backlog. Delays in contract funding resulting from these factors may have a significant adverse effect on the Company’s financial position and results of operations.

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     The following table compares the Company’s contract backlog as of the dates indicated:

     The annualized contract backlog increased from $203.1 million at the end of 2003 to $223.1 million as of September 30, 2004, an increase of 10%. BMD contract backlog increased $10.0 million, or 11%, during the first nine months of 2004, as the Company continued to expand its BMD engineering support provided to both the Missile Defense Agency and the U.S. Army. Other DoD contract backlog increased $9.9 million, or 9% during the first nine months of 2004, primarily in intelligence programs for the national and military intelligence communities and in training and range support programs for the U.S. Army. Non-DoD contract backlog increased $0.1 million, or 1%, during the first nine months of 2004.

     In the third quarter of 2004, the Company had eight significant competitive contract/task-order wins and ten significant competitive contract/task-order losses. In the Missile Defense Sector, the Space and Missile Defense Operation (SMDO), as a subcontractor to Lockheed Martin, won a competitive contract from the U.S. Strategic Command for the Integrated Systems Planning and Analysis Network. This is an $8 million contract over a period of ten years, with the potential to evolve into a $20 million effort. The Advanced Systems Technology Operation (ASTO) won a competitive contract with the Joint Single Integrated Air Picture Systems Engineering Organization for the Integrated Air and Missile Defense (IAMD) program. This is a $3.2 million effort over two years. ASTO also won a role as a subcontractor to Schafer Corporation on a Multiple Award Task Order Contract for the Office of Naval Research. The Company anticipates revenues on this Indefinite Delivery/Indefinite Quantity (IDIQ) contract of $1.0 million over five years.

     In the Mission Systems Sector, the Defense Systems and Technology Operation (DSTO) won a role as a subcontractor on two Systems Engineering and Technical Assistance (SETA) contracts from the Space and Naval Warfare Systems Command. The Company is a subcontractor to Tri Star Engineering, Inc. on the Small SETA Multiple Award Contract and a subcontractor to Science Applications International Corporation (SAIC) on the Large SETA Multiple Award Contract. Both awards are four-year IDIQ contracts with large ceilings. The Company anticipates revenues totaling $4 million on each contract.

     In the National Systems Security Sector, the Applied Communications and Technology Operation (ACTO) won a classified contract from the Defense Advanced Research Projects Agency (DARPA) valued at $1.75 million over nine months. As a subcontractor to the QSS Group, Inc., the Information Systems and Security Operation (ISSO) won a task on the National Security Agency’s (NSA) ATLAS – HIGHSTREET IDIQ contract valued at $2.5 million over five years.

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     Finally as the prime contractor, the Military Systems Operation (MSO) won the Offensive Missile Systems contract from the Missile and Space Intelligence Center, a $43 million effort over five years.

     In the third quarter, ASTO had three competitive losses. The first was as a subcontractor to Coleman Technologies, Inc. for a SETA bid to the Missile Defense Agency QS organization. The subcontract to Sparta was valued at $2 million over four years. The second was as a subcontractor to Draper Laboratories for a bid to DARPA on the Joint Unmanned Combat Air Systems program. The value of this effort was $2.5 million over five years. The third, as a subcontractor to Anteon Corporation, was a SETA bid to the Joint Theater Air and Missile Defense Organization. The value of this subcontract to SPARTA was $12.5 million over a five-year period. The Defense Program Operation (DPO) lost a bid to DARPA for the Real Time Adversarial Intelligence and Decision program. DPO bid the effort as the prime contractor, and the value was $8 million over three years. As a subcontractor to Booz Allen Hamilton, the Technical and Acquisition Support Operation (TASO) lost a competitive bid for the Operations Planning Training and Resource Support Services contract from the U.S. Army at Fort Hood, Texas. The value of this effort was $32 million over five years.

     Bidding as the prime contractor, DSTO lost the DARPA Terahertz Imaging Focal Plane Array Technology contract, valued at $3 million over eighteen months. As a subcontractor to Alion Science and Technology Corporation, DSTO also lost a role on the SETA contract for the Joint Program Executive Office for Chemical and Biological Defense, an effort valued at $20 million over five years. DSTO also lost a bid to the Defense Threat Reduction Agency on their Global Strike program, a $3.6 million four-year effort. DSTO was a subcontractor to Cubic Corporation on this effort.

     Finally, ISSO lost two competitive bids to the NSA. The first was for the Engineering Technical Support II – Computer Network Defense and Response Systems program where the Company was a subcontractor to Titan Corporation. This contract was valued at $2 million over three years. The second was for the Defense Against Cyber Attacks on Mobile Ad Hoc Networks where the Company bid as a subcontractor to the Johns Hopkins University. This was a $2 million contract over three years.

Liquidity and Capital Resources

     The following tables sets forth, for the periods indicated, selected financial information:

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Overview

     The Company’s principal sources of capital for funding its operations are funds generated by ongoing business activities and proceeds from the exercise of stock options and the issuance of common stock. These sources may be augmented, if necessary, by borrowings under the Company’s bank line of credit. The principal uses of capital are for the repurchase of common stock, repayments of amounts borrowed under the bank line of credit, principal payments on subordinated promissory notes, and capital expenditures.

     U.S. Government contracts are conditioned upon the continuing availability of congressional appropriations. Congress usually appropriates funds on a fiscal year basis, even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually partially funded and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future years. These appropriations are therefore subject to changes as a result of increases or decreases in the overall budget. New presidential administrations, change in the composition of Congress, and disagreement or significant delay between Congress and the Administration in reaching a defense budget accord can all significantly affect the timing of funding on the Company’s contract backlog. Delays in contract funding resulting from these factors may have a significant adverse effect on the Company’s liquidity and days sales outstanding (DSO).

     The Company’s bank line of credit provides for borrowings of up to $6.0 million, and matures July 2, 2007. Borrowings under the line of credit agreement are secured by accounts receivable and certain equipment and improvements, and bear interest at the prime rate. The line of credit agreement prohibits the payment of dividends by the Company without the bank’s prior consent and requires the Company to maintain certain financial ratios. The Company was in compliance with all such requirements at September 30, 2004. The Company believes that, as in the past, it will be able to renew its banking agreement under similar terms. There were no amounts outstanding under the bank line of credit at September 30, 2004.

     Generally, the Company limits its stockholders to current employees and directors of the Company. Accordingly, the Company’s Amended and Restated Certificate of Incorporation places restrictions on the transferability of the Company’s common stock and grants the Company the right, but not the obligation, to repurchase the shares held by any stockholder whose association with the Company terminates. Although not obligated to do so, the Company generally exercises its right to repurchase the stockholdings of all individuals terminating their association with the Company, so as to retain all stockholdings among active employees and directors. As of September 30, 2004, the percentage of the Company’s outstanding common stock held by former employees totaled approximately 3.5%.

     In addition to repurchasing the stockholdings of terminated employees, the Company has established and maintains a program that periodically permits the Company’s stockholders to offer shares for sale to the Company. The Company’s repurchase program, which is conducted on a quarterly basis, is a voluntary program on the part of the Company, and the Company’s stockholders therefore have no right to compel the Company to repurchase any of the stockholders’ shares. There can be no assurance that the Company will continue its voluntary repurchase program. Moreover, the number of shares that the Company may repurchase is subject to legal restrictions imposed by applicable corporate law affecting the ability of corporations generally to repurchase shares of their capital stock. In addition, the number of shares which the Company may repurchase is subject to a self-imposed quarterly repurchase limitation which is designed to ensure that the Company’s repurchase of its shares does not materially impair the Company’s liquidity or financial condition. The Board of Directors may approve waivers to the self-imposed quarterly repurchase limitation.

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Cash Flow Information

     During the nine months ended September 30, 2004 the Company’s cash balances declined $0.2 million compared with the prior year end.

     Operating activities generated $12 million in cash during the first nine months of 2004. The Company generated $11.4 million in net income through the nine months ended September 30, 2004. Non-cash expenses totaled $8.5 million, of which $6.7 million related to the Company’s practice of issuing shares of common stock in connection with certain compensation and benefit plans. The Company expects to continue to follow this practice for the foreseeable future. The Company also generated cash flow (in the form of a reduction in its income tax liabilities) of $2.5 million as a result of the income tax benefit relating to its stock compensation plans.

     The Company used $10.3 million in cash for working capital during the first three quarters of 2004, principally to reduce income taxes payable and to fund an increase in accounts receivable. Year-to-date sales through September 30, 2004 increased 26% in comparison with the corresponding period in 2003, and accounts receivable increased 23% from $37.6 million at December 31, 2003 to $46.3 million at September 30, 2004. Average year-to-date DSO of 62 days as of September 30, 2004 is unchanged from 62 days as of December 31, 2003, but decreased slightly from 63 days as of September 30, 2003. The relatively constant DSO resulted in an increase in accounts receivable commensurate with the increase in sales. The Company continues to emphasize rapid billing and collection of its receivables, however, there can be no assurance that the Company will be able to reduce, or maintain, its average DSO.

     Approximately 25% of the increase in accounts receivable stems from a delay in the Company’s ability to bill approximately $2 million in costs incurred on certain task orders (on one contract) that were terminated for the convenience of the U.S. government during the third quarter of 2004. The unbilled costs related to the terminated task orders were incurred prior to the effective date of the termination. The Company believes that the delay in its ability to bill these costs is temporary and the costs will ultimately be paid by the U.S. government. The Company believes that this termination will not have a material effect on the Company’s financial condition or results of operations.

     Through the nine months ended September 30, 2004 the Company’s capital expenditures totaled approximately $2.4 million, an increase of $1.2 million over the corresponding period in 2003. The increase in capital expenditures is primarily attributable to growth in the number of employees, requiring investment in computer equipment, software, and improvements to leased facilities. The Company currently does not expect a significant change in its level of capital expenditures.

     In connection with the aforementioned stock repurchase policies; during the nine months ended September 30, 2004, the Company repurchased a total of 717,744 common shares totaling approximately $21.2 million of which $11.3 million was repurchased during the third quarter. Of the year–to-date total, $4.9 million was repurchased in exchange for promissory notes and $16.3 million was repurchased for cash. Year-to-date principal payments on promissory notes as of the end of the third quarter of 2004 totaled $1.8 million. Proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $8.4 million.

     The Company anticipates that its existing capital resources and access to its line of credit will be sufficient to fund planned operations for the next year and for the foreseeable future.

     The Company’s significant contractual obligations relate to subordinated promissory notes and operating lease commitments. As of September 30, 2004 the Company has no significant commercial

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commitments, nor significant commitments for capital expenditures. As of September 30, 2004 contractual obligations are payable as follows:

Recent Accounting Pronouncements

     In January 2003, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after December 15, 2003. Adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

     In December 2003, the FASB replaced FIN 46 with FIN 46R to clarify the application of Accounting Research Bulletin Number 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R was effective for all public entities that have interest in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. Adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

     In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting guidance on derivative instruments and hedging activities. In May 2003, the FASB issued SFAS 150, which addresses accounting for certain financial instruments that have characteristics of both liabilities and equity. The Company has not entered into derivative instruments covered by SFAS 149 or financial instruments covered by SFAS 150. Adoption of these statements therefore did not have a material effect on the Company’s financial position or results of operations.

     In March 2004, the EITF reached a consensus on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). EITF 03-01 provides guidance to determine when an investment is considered to be impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also requires disclosure related to unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance was effective for other-than-temporary impairment evaluations in the third quarter of 2004 and did not have a material impact to the Company’s consolidated financial position, results of operations or cash flows. The other provisions of EITF 03-01, which principally consist of disclosure requirements, are not expected to have a material impact to the Company’s consolidated financial position, results of operations or cash flows.

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Effects of Federal Funding for Defense Programs

     The Company continues to derive over 95% of its revenues from contracts with U.S. government agencies. The Company’s government contracts may be terminated, in whole or in part, at the convenience of the customer (as well as in the event of default). In the event of a termination for convenience, the customer is generally obligated to pay the costs incurred by the Company under the contract plus a fee based upon work completed. During the third quarter of 2004, the U.S. government terminated for its convenience several task orders on one contract. The contract value of the terminated task orders totaled $23 million, however, approximately $9 million of the total termination amount was incurred prior to the effective date of the termination and has been, or is expected to be, paid to the Company. As of September 30, 2004, the Company was unable to bill approximately $2 million of costs incurred on the terminated task orders. These costs were incurred prior to the effective date of the termination. The Company believes that the delay in its ability to bill these costs is temporary and that these costs will ultimately be paid by the U.S. government. The Company believes that this termination will not have a material effect on the Company’s financial condition or results of operations. The Company does not anticipate any additional termination of programs or contracts in 2004. However, no assurances can be given that such events will not occur.

     In addition to the right of the U.S. government to terminate contracts for convenience, U.S. government contracts are conditioned upon the continuing availability of congressional appropriations. These appropriations are therefore subject to changes as a result of increases or decreases in the overall budget. New presidential administrations, change in the composition of Congress, and disagreement or significant delay between Congress and the Administration in reaching a defense budget accord can all significantly affect the timing of funding on the Company’s contract backlog. Delays in contract funding resulting from these factors may have a significant adverse effect on the Company’s revenue recognition, liquidity, and DSO.

Forward-Looking Statements

     All statements in this report that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent the Company’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, many of which are outside the Company’s control. These factors could cause our actual results, performance, achievements or industry results to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements. These factors are described in more detail in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003, and such other filings that the Company makes with the SEC from time to time. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

Item 3 Quantitative and Qualitative Disclosures about Market Risk

Refer to item 7A in the Company’s Annual Report on Form 10-K for the year ended December 28, 2003.

Item 4 Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

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     Management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of October 3, 2004. Based on the results of this evaluation, management believes that such controls and procedures are operating effectively.

(b)

Changes in Internal Controls

     There has been no change in the Company’s internal control over financial reporting that occurred in the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Part II OTHER INFORMATION

Item 1 Legal Proceedings

     The Company has no material investigations, claims, or lawsuits arising out of its business, nor any known to be pending. The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the ultimate outcome of such matters will not have a material impact on the Company’s financial position, results of operations or cash flows.

Item 2 Changes in Securities and Use of Proceeds

     Not Applicable

Item 3 Defaults Upon Senior Securities

     Not Applicable

Item 4 Submission of Matters to a Vote of Security Holders

     Not Applicable

Item 5 Other Information

     Not Applicable

Item 6 Exhibits and Reports on Form 8-K

  (a) Exhibits

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(b)		Reports on Form 8-K
		On July 22, 2004, SPARTA, Inc issued a memorandum to its stockholders and its employees dated July 21, 2004 regarding “Second Quarter 2004 Report and Stock Price Evaluation” reporting (1) the establishment of the price of its common stock at $31.16 per share, and (2) revenues and net income for the fiscal quarter ended July 4, 2004. Pursuant to the Commission’s regulations, the foregoing information was disclosed on Form 8-K filed July 28, 2004.

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Signature

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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