sv1

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o


	(1)	This amount represents the aggregate offering price of the securities registered hereunder to be sold by the Registrant and the selling stockholder. These figures are estimates solely for purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

	(2)	Includes shares of common stock subject to an option granted to the underwriters by the Registrant solely to cover over-allotments, if any. See “Underwriting.”

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

We are offering for sale shares of our common stock and the selling stockholder identified in this prospectus is offering for sale 20,000 shares of our common stock under this prospectus in a firm commitment underwriting. Our common stock is listed on The Nasdaq SmallCap Market under the symbol “STST.” The last reported sale price of our common stock on , 2002 was $ per share. In connection with this offering, we will apply to have our common stock listed on The Nasdaq National Market under the symbol “STST.” We will not receive any of the proceeds from the sale of any shares of common stock by our selling stockholder.

Investing in our common stock involves risks. See “Risk Factors‘ beginning on page 5 of this prospectus to read about the risks you should consider before buying shares of our common stock.


⁽¹⁾	Please see “Underwriting” for a discussion of underwriters’ compensation.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

We have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of additional shares of our common stock from us within 30 days following the date of this prospectus to cover over-allotments, if any.

The underwriters expect that the shares of our common stock offered by this prospectus will be ready for delivery to purchasers on or about , 2002.

Seven pictures of our products and platforms on which they are installed. These pictures include an active threat simulator; a surface ship torpedo defense system deployed from a ship; electronic support measures equipment; pictures of screens from the equipment in use; and pictures of various ships, a submarine and an airplane.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sales of our common stock.

This summary highlights information more fully described elsewhere in this prospectus and may not contain all the information that may be important to you. You should read the entire prospectus carefully, including the consolidated financial statements and related notes and other financial data included in this prospectus before making an investment decision. You should also carefully consider the information set forth under “Risk Factors‘ beginning on page 5. In addition, some statements included in this prospectus are forward-looking statements which involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” on page 16. Except as otherwise noted, all information in this prospectus assumes that the underwriters’ over-allotment option is not exercised. As used in this prospectus, the terms “Sensytech”, “we”, “us”, “our”, and “our company” mean Sensytech, Inc. and our subsidiaries, unless the context indicates otherwise.

We are a designer, developer and manufacturer of electronics, communications and technology products for the defense and intelligence markets. Specifically, we specialize in integrated passive surveillance, communications and data links, electronic countermeasures and threat simulators, and airborne imaging and scanning systems. Our products are developed for use primarily by U.S. federal government customers and U.S. approved foreign governments, including U.S. defense and intelligence agencies, foreign government agencies and civilian agencies. Our products can be found on virtually every U.S. Navy surface and sub-surface combat vessel as well as certain other U.S. combat platforms and certain international surface combat vessels. These include the SSN-688 Los Angeles class, SSN-21 Seawolf class and SSN-774 Virginia class submarines, all U.S. aircraft carriers, MK-V patrol boats, Cyclone class coastal patrol boats, certain U.S. Coast Guard vessels, NASA U-2 aircraft and U.S. special missions aircraft.

For the nine months ended June 30, 2002, approximately 76.8% of our revenues were generated from contracts for which we are the prime contractor, while approximately 69.8% of our revenues were generated from sole or single source contracts. In addition, approximately 29% of our revenues during this period were from classified programs. For the nine months ended June 30, 2002, we generated revenues of $20,509,000 and net income of $1,597,000. Our total funded backlog has increased significantly over the past year and was $24,482,000 on June 30, 2002, compared to $3,256,000 for the comparable period ended June 30, 2001.


	•	Defense Systems Group. This group designs, develops and manufactures products which intercept, analyze and track microwave signals from radars and weapons. It also provides equipment and systems used for remote targeting and communications and to carry out defensive measures against hostile signals or their sources to protect high value assets. This group’s systems are used on military platforms, such as ships, submarines and patrol aircraft, as well as at ground installations, to intercept, analyze and identify radar and weapons signals.

	•	Communications Group. This group designs, develops and manufactures products that intercept signals and analyze communications in a variety of transmission formats, and then identify and locate the involved parties. These systems are used by aircraft, ships, and ground installations to intercept various kinds of transmissions occurring over established communications networks.

	•	Imaging Group. This group designs, develops and manufactures multi-spectral, infrared, and visible light imaging systems that are used for remote surveys of environmental pollution, facility inspection, utility monitoring, and other inspections where on-site inspections are not possible or desirable.

The U.S. federal government is the largest purchaser of surveillance and electronic warfare products and solutions. The terrorist attacks on September 11, 2001 have led to an increase in spending in these areas. We believe that government spending in our industry will continue to increase due to several trends, which include:


	•	increasing defense spending focused on advanced defense and intelligence systems and communications activities;


	•	increasing emphasis on homeland defense systems that utilize electronic intelligence gathering systems and equipment;

	•	increasing spending on electronics systems and subsystems, including intelligence, surveillance, and reconnaissance; and

	•	increasing spending by friendly foreign governments, with the permission of the U.S. federal government, of U.S. technology in the areas of intelligence gathering, electronic warfare and defense.

We seek to address the requirements of our customers in the intelligence community and Department of Defense through our:


	•	expertise in the technology of intelligence gathering, electronic warfare and defense;

	•	approximately 120 employees with government security clearances, which are required for work on classified programs for the intelligence community and Department of Defense;

	•	proven track record of providing high quality products and services within the deadlines of our contracts, as demonstrated by our longstanding customer relationships in the intelligence community and with the Department of Defense; and

	•	management team’s extensive experience in supporting our customers in the intelligence community and with the Department of Defense.

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


	•	maintaining and expanding our customer base by capitalizing on our long-term relationships with our customers and our reputation with the intelligence community and Department of Defense;

	•	increasing profitability by targeting high growth segments of the market, particularly government intelligence gathering and electronic warfare, and expanding our product and service offerings in those areas;

	•	utilizing customer funded research and development to develop technologies and products that have the potential for sizeable and sustained multi-year production runs;

	•	continuing to attract and retain skilled professionals, including engineers, scientists, technicians, and support specialists to ensure we have the capabilities to fulfill our customers’ requirements; and

	•	pursuing strategic acquisitions of businesses that can cost-effectively broaden our technology expertise and our product offerings.

As part of your evaluation of us, you should take into account not solely our business approach and strategy, but also the special risks we face in our business. Because our business is substantially dependent upon contracts with the U.S. federal government, we are subject to a number of risks that arise from the way in which the U.S. federal government conducts business. For example, as a government contractor, our operations are subject to shifts in government spending priorities. Our business is also subject to complex government procurement laws and regulations and may be adversely affected by government imposed contract provisions that are more favorable to the government than those in normal commercial contracts. Also, our operations are subject to government audits. Because of the nature of our work, we must recruit and retain skilled employees, many of whom must obtain and maintain security clearances.


Our ability to grow our revenues is dependent on our ability to recruit and retain these employees. For more information about these and other risks, see “Risk Factors” beginning on page 5. You should carefully consider all of the risk factors together with all of the other information included in this prospectus when making a decision to invest in our company.

Our principal executive offices are located at 8419 Terminal Road, Newington, Virginia 22122-1430. Our telephone number at that address is (703) 550-7000. Our website can be visited at www.sensytech.com. Information contained on our website is not part of this prospectus.


(1)	shares if the underwriters exercise their over-allotment option in full.

(2)	Based on the number of shares outstanding as of July 25, 2002. This does not include shares of common stock that may be issued upon the exercise of currently outstanding options granted under our two employee option plans.

(3)	In connection with this offering, we will apply to have our common stock listed on The Nasdaq National Market under the symbol “STST”.

The summary financial data as of, and for the years ended September 30, 1997, 1998, 1999, 2000 and 2001 are derived from our audited consolidated financial statements. The summary financial data for the nine months ended June 30, 2001 and 2002 are derived from our unaudited consolidated financial statements, which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of results for the unaudited interim periods. The summary financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and notes thereto that are included in this prospectus beginning on page F-1.


(1)	During fiscal 1998, we recorded restructuring charges of $1,096,000 in connection with ongoing operations. The restructuring combined, integrated and reengineered our processes, policies and procedures. Costs incurred consisted primarily of severance costs and other employee benefits, professional fees and relocation expenses.

(2)	We define backlog as the funded and unfunded amounts provided in our contracts, less previously recognized revenue. As of June 30, 2002, the full amount of our backlog was funded.

(3)	On June 9, 1998, S.T. Research Corporation, or ST Research, acquired Daedalus Enterprises, Inc., or Daedalus Enterprises, in an acquisition whereby the outstanding ST Research shares were converted into approximately 86.5% of the issued and outstanding shares of Daedalus Enterprises. As part of this overall transaction, Daedalus Enterprises changed its name to Sensytech, Inc. While Daedalus Enterprises was the legal acquirer, the acquisition was accounted for as a reverse acquisition whereby ST Research was deemed to have acquired Daedalus Enterprises for financial accounting purposes. Consistent with the reverse acquisition accounting treatment, the historical financial statements presented for periods prior to the acquisition date are the financials of ST Research, except for stockholders’ equity, which was retroactively restated for the equivalent number of shares of the legal acquirer. An adjustment was also made to adjust the par value with an offset to additional paid-in capital. The operations of the former Daedalus Enterprises business were included in the financial statements from the date of acquisition. In connection with the acquisition, we changed our fiscal year end from July 31 to September 30, which was the fiscal year end of ST Research.

Before making an investment in our common stock you should carefully consider the risks described below, as well as the other information set forth in this prospectus, including our consolidated financial statements and related notes. Some of the following risks relate principally to the industry in which we operate and to our business. Other risks relate principally to the securities markets and ownership of our stock. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, may also impair our operations. Any of the risk factors described below could significantly and negatively affect our business, prospects, financial condition or operating results, which could cause the trading price of our common stock to decline and could cause you to lose all or part of your investment.

Any reduction in purchases of our products by the U.S. federal government could have a material adverse effect on our business because a significant portion of our revenues are derived, directly or indirectly, from contracts with the U.S. federal government. For the fiscal year ended September 30, 2001 and for the nine months ended June 30, 2002, we derived approximately 88.7% and 80.6%, respectively, of our revenue, directly or indirectly, from contracts with federal agencies in the intelligence community and Department of Defense. We expect that U.S. federal government contracts will continue to be the primary source of our revenues for the foreseeable future. If we were suspended or debarred from contracting with the U.S. federal government, if our reputation or relationship with individual federal agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results could be materially harmed.

Our business depends upon continued U.S. federal government expenditures on intelligence and defense. While spending authorizations for intelligence and defense-related programs by the U.S. federal government have increased in recent years, and in particular after the September 11, 2001 terrorist attacks, future levels of expenditures and authorizations for those programs may decrease or shift to programs in areas where we do not currently provide products or services. A significant decline in government expenditures, or a shift of expenditures away from programs that we support, could adversely affect our business, prospects, financial condition or operating results.

A significant portion of our revenues are derived directly or indirectly from U.S. federal government contracts. There are inherent risks in contracting with the U.S. federal government, including risks which are peculiar to the defense industry, which could have a material adverse effect on our business, prospects, financial condition or operating results. All contracts with the U.S. federal government contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to:


	•	terminate existing contracts for convenience, as well as for default;

	•	reduce or modify contracts or subcontracts if its requirements or budgetary constraints change;

	•	cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;

	•	claim rights in products and systems produced by us;

	•	adjust contract costs and fees on the basis of audits completed by its agencies;


	•	suspend or debar us from doing business with the U.S. federal government; and

	•	control or prohibit the export of our products.

If the U.S. federal government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Additionally, most of our backlog could be adversely affected by any modification or termination of contracts with the U.S. federal government or contracts the prime contractors have with the U.S. federal government.

As a contractor and subcontractor to the U.S. federal government, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. We are required to obtain and maintain material governmental authorizations and approvals to conduct our business as it is currently conducted. New or more stringent laws or governmental regulations concerning government contracts, if adopted and enacted, could have a material adverse effect on our business. Responding to governmental audits, inquiries or investigations may involve significant expense and divert the attention of our management. Also, an adverse finding in any such audit, inquiry or investigation could result in fines, injunctions or other sanctions.

We must also comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. federal government contracts, which affect how we do business with our U.S. federal government customers and which may impose added costs on our business. For example, we are subject to the Federal Acquisition Regulations and all supplements, which comprehensively regulate the formation, administration and performance of U.S. federal government contracts, and to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with U.S. federal government agencies, any of which could materially and adversely affect our business, prospects, financial condition or operating results. In addition, we are subject to industrial security regulations of the Department of Defense and other federal agencies that are designed to safeguard against foreigners’ access to classified information. If we were to come under foreign ownership, control or influence, our U.S. federal government customers could terminate, or decide not to renew, our contracts, and such a situation could also impair our ability to obtain new contracts. The government may also change its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair our ability to obtain new contracts.

The rapid development of technology continually affects our product applications and may directly impact the performance of our products. We can give you no assurances that we will successfully maintain or improve the effectiveness of our existing products, nor can we assure you that we will successfully identify new opportunities or that we will continue to have the needed financial resources to develop new products in a timely or cost-effective manner. In addition, products manufactured by others may render our products and systems obsolete or non-competitive. If any of these events occur, our business, prospects, financial condition and operating results will be materially and adversely affected.

On October 2, 2001 we purchased the assets of FEL Corporation’s ASD Division, and on February 1, 2002, our subsidiary ST Production Systems, Inc. purchased the operating assets, and assumed certain government contracts, of FEL Corporation. If we are unable to successfully integrate FEL Corporation with our business, we may be unable to realize the anticipated benefits of this acquisition. We may experience problems managing a manufacturing facility which is in another state from our headquarters, which could delay the integration of FEL Corporation’s business systems with ours. This could adversely affect our business, prospects, financial condition and operating results.

We intend in the future to pursue acquisitions of businesses, products and technologies. We review and actively pursue possible acquisitions on a continuous basis. We do not currently have any commitments, agreements or understandings to acquire any specific businesses or other material assets, and we may not be able to identify acquisitions at prices attractive to us or on terms that are otherwise satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. Negotiations of potential acquisitions and integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. In addition, we may need to record write downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Future acquisitions could result in potentially dilutive issuances of shares of common stock, the incurrence of debt and contingent liabilities, amortization of certain identifiable intangible assets, research and development write-offs and other acquisition related expenses. We cannot assure you that any future acquisition will be consummated or that, if consummated, we will be able to integrate such acquisition successfully without a material adverse effect on our business, prospects, financial condition or operating results.

Carrying out our plans for growth will place significant demands on our management, as well as on our administrative, operational and financial resources. For us to continue to manage our growth, we must continue to improve our operational, financial and management information systems and expand, motivate and manage our workforce. If we are unable to successfully manage our growth without compromising the quality of our products and services, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, prospects, financial condition or operating results could be adversely affected.

For the fiscal year ended September 30, 2001 and for the nine months ended June 30, 2002, we derived approximately 4.8% and 17.6%, respectively, of our revenues from contracts with foreign countries. We intend to increase the amount of foreign sales we make in the future. Foreign sales involve many of the risks described in this prospectus relating to sales to the U.S. federal government, as well as additional risks. These additional risks include:


	•	political and economic instability in foreign markets;

	•	restrictive trade policies of foreign governments;

	•	changes in leadership of foreign governments;

	•	economic conditions in local market;


	•	inconsistent product regulations by foreign agencies or governments, the imposition of product tariffs and the burdens of complying with a wide variety of international and U.S. export laws; and

	•	differing legal and regulatory requirements.

In addition, sales to foreign governments often are subject to longer payment cycles than domestic sales and also require performance guarantees or advance payment guarantees in the form of stand-by letters of credit. These stand-by letters of credit permit the customer to assess damages for a variety of contractual obligations that are not fulfilled, including warranty obligations. As of June 30, 2002, we had approximately $3.0 million in stand-by letters of credit in place to international customers. Further, it is often harder to collect payments from foreign sales, which, when taken together with longer payment cycles, can require additional financing to carry these receivables for a longer time. If we fail to increase our foreign sales, or in the event we increase our foreign sales and encounter any of the risks discussed herein, it could have a material adverse effect on our business, prospects, financial condition and operating results.

We operate in highly competitive markets and generally encounter intense competition to win contracts. We compete with many other firms, including large diversified firms, which have substantially greater financial, management and marketing resources than we do. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results. In addition, our competitors also have established or may establish relationships among themselves or with third parties to increase their ability to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge.

For the fiscal year ended September 30, 2001 and for the nine months ended June 30, 2002, we derived approximately 55.9% and 23.2%, respectively, of our revenues from contracts in which we acted as a subcontractor to other contractors. We expect to continue to depend on relationships with other contractors for a portion of our revenues in the foreseeable future. Our business, prospects, financial condition or operating results could be adversely affected if other contractors eliminate or reduce their subcontracts or joint venture relationships with us, either because they choose to establish relationships with our competitors or because they choose to directly offer similar products that compete with our business, or if the government terminates or reduces these other contractors’ programs or does not award them new contracts.

The maximum contract value specified under each government contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract. Because we may not receive the full amount we expect under a contract, we may not accurately estimate our backlog because the actual accrual of revenues on programs included in backlog may never occur or may change. Estimates of future revenues included in backlog are not necessarily precise and the receipt and timing of any of the revenues are subject to various contingencies, many of which are beyond our control. For a discussion of these contingencies see “Business — Backlog.” Also, some of our contracts can be extended or increased at the option of the customer. We publicly disclose the value of contract options under contracts we enter into. In the event that customers choose not to exercise such options, the total revenues we receive under such contracts will be less than the contract option value we disclose.

We enter into three types of U.S. federal government contracts for our systems and design engineering: fixed-price, cost-reimbursement and time-and-materials. For the nine months ended June 30, 2002, we derived approximately 96.0%, 3.0% and 1.0% of our revenues from fixed-price, cost-reimbursement and time-and-materials contracts, respectively. For the fiscal year ended September 30, 2001, we derived 46.3%, 51.3% and 2.4% of our revenues from fixed-price, cost reimbursement, and time-and-materials contracts, respectively. Under fixed-price contracts, we provide specified products and services for a fixed price. Compared to cost-reimbursement contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns and receive the benefit of cost savings. Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract. Under cost-reimbursement contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. To the extent that the actual costs incurred in performing a cost-reimbursement contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time-and-materials contracts because we assume the risk of performing those contracts at negotiated hourly rates. Our contract loss provisions may not be adequate to cover all actual losses that we may incur in the future.

The U.S. federal government audits and reviews our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. In addition, non-audit reviews by the U.S. federal government may still be conducted on a majority of our government contracts. An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our revenues because any costs found to be improperly allocated to a specific contract will not be reimbursed, and revenues we have already recognized may need to be refunded. If a U.S. federal government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us regardless of the merits of any such allegation.

We have experienced, and will likely in the future experience, some systems and service failures, schedule or delivery delays and other problems in connection with our work. If our solutions and products have significant defects or errors, are subject to delivery delays or fail to meet our customers’ expectations, we may:


	•	lose revenues due to adverse customer reaction;

	•	be required to provide additional services to a customer at no charge;

	•	receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain customers; or

	•	suffer claims for substantial damages against us.

In addition to any costs resulting from product warranties, contract performance or required corrective action, these failures may result in increased costs or loss of revenues, if they result in customers postponing subsequently scheduled work or canceling or failing to renew contracts.

While many of our contracts with the U.S. federal government limit our liability for damages that may arise from our negligence in providing products to our customers, we cannot be sure that these contractual provisions will protect us from liability for damages if we are sued. We do not have errors and omissions insurance, and we maintain products liability insurance only for our imaging group’s products. Furthermore, our imaging group’s product liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. The successful assertion of any large claim against us could materially harm our business. Even if not successful, any such claims could result in significant legal and other costs and may divert our management and other resources.

Many of the programs we support and systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other classified government functions. A security breach in one of these programs could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on critical classified programs for U.S. federal government customers.

Our quarterly revenues and operating results have in the past, and may in the future, fluctuate significantly. A number of factors cause our revenue, cash flow and operating results to vary from quarter to quarter, including:


	•	fluctuations in revenues earned and expenses incurred on fixed-price contracts and contracts with a performance-based fee structure;

	•	commencement, completion or termination of contracts during any particular quarter;

	•	variable purchasing patterns under government contracts, blanket purchase agreements and indefinite delivery, indefinite quantity contracts;

	•	changes in Presidential administrations and senior U.S. federal government officials that affect the timing of technology procurement;

	•	changes in policy or budgetary measures that adversely affect government contracts in general; and

	•	acquisitions of other technology systems providers.

Changes in the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We may incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and Presidential approval in a timely manner.

We believe that our success depends, in part, on the continued contributions of the chairman of our board of directors and chief executive officer S. Kent Rockwell, our president David A. Smith, our chief financial officer and treasurer Donald F. Fultz, and other members of our senior management. We rely on our executive officers and senior management to generate business and execute programs successfully. In addition, the relationships and reputations that members of our management team and board of directors have established and maintain with government and military personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. The loss of Mr. Rockwell or any other member of our senior management could impair our ability to identify and secure new contracts and otherwise to manage our business.

We believe that an integral part of our success is our ability to locate and hire employees who have advanced engineering and technical services skills and who work well with our customers in a government or defense-related environment. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be negatively impacted.

Most of our U.S. federal government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with Department of Defense requirements. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us, any customer whose work requires employees with security clearances could experience delays in the delivery of systems which could, in turn, jeopardize our ability to obtain future contracts. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and perform work with employees who hold specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts.

Our credit facility contains covenants that limit or restrict, among other things, our ability to borrow money outside of the amounts committed under the credit facility, make investments in our subsidiaries that are borrowers under the credit facility or in other entities not listed as borrowers under the credit facility, make other restricted payments, pay dividends on our common stock, sell or otherwise dispose of assets other than in the ordinary course of business, merge or consolidate, or make acquisitions, in each case without the prior written consent of our lenders. Our credit facility also requires us to comply with specified financial covenants relating to leasing, interest coverage, debt coverage, and minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization, or EBITDA. Our ability to satisfy these financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. Default under our credit facility could allow the lender to declare all amounts outstanding to be immediately due and payable. We have given the lender a security interest in substantially all of our assets to secure the debt under our credit facility. If the lender declares amounts outstanding under the credit facility to be due, the lender could proceed against those assets. Any event of default, therefore, could have a material adverse effect on our business if the lender determines to exercise its rights. We also may incur future debt obligations that might subject us to restrictive covenants that could affect our financial and operational flexibility, or subject us to other events of default. Any such restrictive covenants in any future debt obligations we incur could limit our ability to fund our businesses with equity investments, which would impede our ability to operate or expand our business.

From time to time we may require consents or waivers from our lender to permit actions that are prohibited by our credit facility. If in the future our lender refuses to provide any such required waivers of our credit facility’s restrictive covenants and/or financial ratios, then we may be in default under our credit facility, and we may be prohibited from undertaking actions that are necessary to maintain and expand our business.

We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include intentional failures to comply with U.S. federal government procurement regulations or failure to disclose unauthorized or unsuccessful activities to us. Employee misconduct could

also involve the improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses.

In order for us to export certain products, we are required to obtain a license from the U.S. federal government. Generally, in the case of certain sales of defense equipment to foreign governments, the U.S. federal government’s executive branch must notify Congress at least 15 to 30 days, depending on the location of the sale, prior to authorizing these sales. During this time, Congress may take action to block the proposed sale. We cannot be sure of our ability to obtain any licenses required to export our products or to receive authorization from the U.S. federal government for sales to foreign governments. Failure to receive required licenses or authorizations would hinder our ability to export our products.

Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from sales of equity or by borrowing money, for the future growth and development of our business or to fund our operations and inventory, particularly in the event of a market downturn. Although we currently have the ability to borrow additional sums under our line of credit, this facility contains a borrowing base provision and financial covenants which may limit the amount we can borrow thereunder or from other sources. Also, we may not be able to replace or renew our line of credit upon its expiration on terms that are favorable to us. In addition, a number of factors could affect our ability to access debt or equity financing, including:


	•	our financial condition, strength and credit rating;

	•	the financial market’s confidence in our management team and financial reporting;

	•	general economic conditions and the conditions in the defense sector; and

	•	capital market conditions.

Even if available, additional financing could be costly or have adverse consequences. If additional funds are raised through the issuance of stock, dilution to stockholders may result. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we are not successful in obtaining sufficient capital, it could reduce our sales and earnings and adversely impact our financial position and we may not be able to expand or operate our business as planned.

Our business operations rely on procuring and deploying intellectual property. Our employees develop some of the intellectual property that we incorporate into our products, but we also license technology from primary vendors. Typically, under U.S. federal government contracts, our government customers may claim rights in the intellectual property we develop, making it impossible for us to prevent their future use of our intellectual property. We may in the future be subject to claims from our employees or third parties who assert that intellectual property we use in our products infringes upon intellectual property rights of such employees or third parties. If our vendors, our employees or third parties assert claims that we, or our customers, are infringing on their intellectual property, we could incur substantial costs to defend these


	•	cease selling or using products that incorporate the challenged intellectual property;

	•	obtain a license or additional licenses from our vendors; or

	•	redesign our products so that they do not rely on the challenged intellectual property.

We incorporate software that we license from third parties in our products. If we lose or are unable to maintain any software licenses, we could incur additional costs or experience unexpected delays until equivalent software can be developed or licensed and integrated into our products.

Although we generally use standard parts and components in our products, we rely on non-affiliated suppliers for the supply of certain components that are incorporated in all of our products. If these suppliers or manufacturers experience financial, operational, manufacturing capacity or quality assurance difficulties, or if there is any other disruption in our relationships, we will be required to locate alternative sources of supply. Our inability to obtain sufficient quantities of these components, if and as required in the future entails the following risks:


	•	delays in delivery or shortages in components could interrupt and delay manufacturing and result in cancellations of orders for our products;

	•	alternative suppliers could increase component prices significantly and with immediate effect;

	•	we may not be able to develop alternative sources for product components; and

	•	we may be required to hold more inventory than we otherwise might in order to avoid problems from shortages or discontinuance.

Our operations are subject to U.S. federal, state and local environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes. New laws on contamination or the imposition of new clean-up requirements may require us to incur substantial costs in the future and could have a material adverse effect on our business, prospects, financial condition and operating results. Likewise, any violation of any of those laws and regulations could cause us to incur substantial liability to the Environmental Protection Agency, the state environmental agencies in any affected state or to any individuals affect by any such violation. Any such liability could have a material adverse effect on our business, prospects, financial condition and operating results.

On February 1, 2002, in connection with our acquisition of the operating assets of FEL Corporation, we signed a two-year lease for a building at the former FEL Corporation industrial park in Farmingdale, New Jersey. As a result of the former operations of FEL Corporation, both the soil and groundwater at other parts of the industrial park are known to be contaminated with chlorinated solvents at concentrations in excess of standards set by the New Jersey Department of Environmental Protection (“NJDEP”). Based on groundwater sampling conducted nearby but outside of the industrial park, it appears that this groundwater contamination has spread beyond the boundaries of the property.

As part of an agreement with the NJDEP in settlement of potential liability to NJDEP for contamination existing in the industrial park prior to February 1, 2002, the NJDEP signed a covenant not to sue us for any environmental claims relating to that contamination. For this covenant to remain valid,

we must cease operation at this site by July 31, 2004. In the event we do not comply with the terms of the agreement, we may be subject to substantial liability in connection with this site. In addition, the settlement with the NJDEP does not shield us from potential claims by the United States Environmental Protection Agency.

Our sales are generally made on the basis of individual purchase orders, which may also be later modified or canceled by the customer, rather than long-term commitments. We have historically been required to place firm orders for products with our suppliers up to twelve months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates, causing excess inventory to accrue or a lack of manufacturing capacity when needed. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all. As a result, we would have excess inventory, which would harm our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would lose revenue opportunities, lose market share, and damage our customer relationships. On occasion, we have been unable to adequately respond to customer required delivery dates in our contracts because of the lead time needed for us to obtain required materials.

Approximately 29% of our revenues for the nine month period ended June 30, 2002, result from contracts with the U.S. federal government which are classified for national defense reasons. In addition, certain aspects of our contracts may also be classified, even if the whole contract is not. As a result, of the regulations relating to classified contracts and work done under them, the underwriters and their counsel cannot review those contracts, talk with the people working on them or view the areas of our company where this work is done. Thus, they have not been able to perform the due diligence normally done in connection with the sale of common stock. Instead, they have had to rely upon information about the classified contracts given to them by our management. Although we believe the information contained in this prospectus about those contracts is complete and accurate, there is some risk to the purchaser of our common stock to the extent that the underwriters and their counsel have not been able to verify that information.

Because we are a manufacturer that employs fewer than 750 people, we qualify as a small business for government contracting purposes. As of June 30, 2002 we had 198 employees. If we grow to the size where we employ more than 750 people, or if the regulations governing small business qualifications were to change in a way that resulted in our no longer qualifying as a small business, we would be subject to additional, more burdensome requirements under the U.S. federal government’s cost accounting standards regulations. Compliance with those additional requirements could divert management’s attention from existing operations. In addition, our status as a small business makes us eligible for certain governmental contracting programs that are open only to small businesses. Over the past three years, none of our revenues have been generated from contracts awarded through this program. To the extent that our revenues may in the future be attributable to such programs, a loss of our small business status could have a negative effect on our business, prospects, financial condition and operating results.

S. Kent Rockwell, our chairman and chief executive officer, and S. R. Perrino, a director, currently beneficially own an aggregate of approximately 41.0% of our common stock and will beneficially own approximately . % of our common stock after this offering. In addition, our officers and directors, including Mr. Rockwell and Mr. Perrino, currently beneficially own an aggregate of approximately 46.9% of our common stock and will own an aggregate of approximately . % of our common stock after this offering. The ownership position of these persons may allow them to exert a significant influence over our management and affairs and over the approval of any proposed amendment to our certificate of incorporation, or over a merger or sale of all or substantially all of our assets. In addition, the interests of these persons may conflict with the interests of other holders of our common stock.

The price of our common stock after this offering may fluctuate widely, depending upon many factors, including:


	•	the market’s perception of our prospects, and the prospects of defense related companies in general;

	•	differences between our actual financial and operating results and those expected by investors and analysts;

	•	changes in analysts’ recommendations or projections;

	•	changes in general valuations for defense related companies; and

	•	changes in general economic or market conditions and broad market fluctuations.

In addition, the terrorist attacks of September 11, 2001, subsequent bioterrorism concerns, and various accounting related scandals have contributed to instability in the U.S. and other global financial equity markets. The armed hostilities that were initiated as a result of these attacks and future responses by the U.S. federal government may lead to further acts of terrorism in the United States or elsewhere, and such developments would likely cause further instability in financial markets. All of these factors subject our operations to increased risks and could have a material adverse effect on your investment in our common stock. As a result, our common stock may trade at prices significantly below the offering price.

We intend to use the net proceeds from this offering to repay borrowings under our line of credit, for working capital, to pursue possible acquisitions and for other general corporate purposes. We may not use the proceeds from this offering for every one of these purposes. Future events, including changes in competitive conditions, our ability to identify appropriate acquisition candidates, the availability of other financing and funds generated from operations and the status of our business from time to time, may lead us to change the allocation of the net proceeds of this offering among these possible uses. We will have broad discretion with respect to the use of these funds and the determination of the timing of expenditures. We cannot assure you that we will use these funds in a manner that you would approve of or that the allocations will be in the best interests of all of our stockholders.

Our certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a change in control of our company that stockholders may consider favorable. Our certificate of incorporation and bylaws:


	•	limit who may call special meetings of stockholders;

	•	establish advance notice requirements for nominating candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

	•	require that vacancies on our board of directors, including newly-created directorships, be filled only by a majority vote of directors then in office.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder. For more information, see “Description of Capital Stock, Certificate of Incorporation and Bylaws.”

After this offering is completed, our company will have approximately shares of common stock outstanding, assuming the underwriters do not exercise their overallotment option. As mentioned above, at that time approximately . % of our stock will be held by our officers and directors. Further, the trading volume of our stock prior to this offering has been relatively limited and we expect this to continue. Therefore, people who buy our stock in this offering may have difficulty selling their stock in the future or they may have to settle for a lower price than might be the case if our stock were traded more actively.

This prospectus includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. The statements contained in this prospectus that do not relate to historical fact may include forward-looking statements that involve a number of risks and uncertainties. We have used the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “could,” “may,” “project” and similar terms and phrases, including references to assumptions, in this prospectus to identify forward-looking statements. These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The factors discussed under the heading “Risk Factors”, as well as the demand for, and acceptance of, our products and services, regulatory approvals, export approvals, economic conditions both domestically and internationally, the impact of competition and pricing, and results of financing efforts, are among the factors that may cause actual results to differ materially from the forward-looking statements. 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. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events or otherwise, except as provided by law.

We estimate the net proceeds to us from the sale of our common stock in this offering to be approximately $ million, based on an assumed offering price of $ per share (the closing price of our common stock on The Nasdaq SmallCap Market on August , 2002). Net proceeds are what we expect to receive after deducting our estimated expenses related to this offering (none of which will be borne by the selling stockholder) and underwriting discounts and commissions. If the underwriters exercise the over-allotment in full, we estimate the net proceeds to us will be approximately $ million. We will not receive any proceeds from the sale of the shares to be sold by the selling stockholder in this offering.

We intend to use the net proceeds we receive, together with cash on hand, first to repay the amount outstanding under our revolving line of credit, which we expect to be approximately $2.9 million, for working capital needs and to fund all or a portion of the costs of any acquisitions of complementary businesses we determine to pursue in the future, although we cannot assure you that we will be able to successfully identify or consummate any such acquisitions. To the extent that we do not pursue or consummate any acquisitions, any remaining net proceeds to us will be used for general corporate purposes. Under our revolving line of credit, borrowings bear interest at a variable rate which is either Bank of America’s base interest rate or the London Interbank Offering Rate (LIBOR) plus 225 basis points at our discretion. Our line of credit is provided under an agreement with Bank of America, which expires on February 28, 2003 and can be repaid at any time. Pending the actual use of the proceeds, we may invest the net proceeds of this offering in short-term, investment grade, interest-bearing securities or guaranteed obligations of the United States or its agencies.

Our common stock is currently traded on The Nasdaq SmallCap Market under the symbol “STST”. In connection with this offering we will apply to have our common stock listed on The Nasdaq National Market under the symbol “STST”.

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

There were registered holders of our common stock on August , 2002. On August , 2002, the closing sale price of our common stock on The Nasdaq SmallCap Market was $ . per share.

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

The following table sets forth our actual capitalization at June 30, 2002 and as adjusted as of that date to give effect to the issuance and sale of shares of common stock offered by us hereby (at an assumed offering price of $ per share, the closing price of our common stock on The Nasdaq SmallCap Market on August 2002), and the application of the estimated net proceeds from this offering, assuming that the over-allotment option is not exercised. You should read this table in conjunction with our consolidated financial statements and notes to our consolidated financial statements included in this prospectus beginning on page F-1.


(1)	Excluding shares reserved for issuance under our employee stock option plans.

The following table sets forth the selected consolidated statement of earnings data, consolidated balance sheet data and other data for each of the periods indicated. The selected financial data for the years ended September 30, 1997, 1998, 1999, 2000, and 2001 are derived from our audited consolidated financial statements and related notes.

The selected financial data as of June 30, 2002 and for the nine months ended June 30, 2001 and 2002 are derived from our unaudited financial statements. Such financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. Operating results as of and for the nine months ended June 30, 2002 are not necessarily indicative of results that may be expected for the full fiscal year. You should not assume that the results below indicate results that we will achieve in the future. The operating data are derived from unaudited financial information that we compiled.

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


(1)	During fiscal 1998, we recorded restructuring charges of $1,096,000 in connection with ongoing operations. The restructuring combined, integrated and reengineered our processes, policies and procedures. Costs incurred consisted primarily of severance costs and other employee benefits, professional fees and relocation expenses.

(2)	On June 9, 1998, ST Research acquired Daedalus Enterprises in an acquisition whereby the outstanding ST Research shares were converted into approximately 86.5% of the issued and outstanding shares of Daedalus Enterprises. As part of this overall transaction, Daedalus Enterprises changed its name to Sensytech, Inc. While Daedalus Enterprises was the legal acquirer, the acquisition was accounted for as a reverse acquisition whereby ST Research was deemed to have acquired Daedalus Enterprises for financial accounting purposes. Consistent with the reverse acquisition accounting treatment, the historical financial statements presented for periods prior to the acquisition date are the financials of ST Research, except for stockholders’ equity, which was retroactively restated for the equivalent number of shares of the legal acquirer. An adjustment was also made to adjust the par value with an offset to additional paid-in capital. The operations of the former Daedalus Enterprises business were included in the financial statements from the date of acquisition. In connection with the acquisition, we changed our fiscal year end from July 31 to September 30, which was the fiscal year end of ST Research.

(3)	We define backlog as the funded and unfunded amounts provided in our contract, less previously recognized revenue. As of June 30, 2002, the full amount of our backlog was funded.

A substantial portion of our revenues is derived from contracts with the U.S. federal government. For the nine months ended June 30, 2002, and the fiscal year ended September 30, 2001, approximately 80.6% and 88.7%, respectively, of our revenues were derived from contracts with the U.S. federal government. For these same periods, approximately 76.8% and 44.1%, respectively, of our revenues were generated from contracts for which we were the prime contractor, and approximately 69.8% and 97.3%, respectively, of our revenues were generated from sole or single source contracts. Single source contracts are contracts under which the purchaser purchases products only from us, although other suppliers exist, while sole source contracts are contracts under which the purchaser purchases products from us that only we can supply. The percentage reduction in sole or single source contracts is the result of classifying all revenues of ST Production Systems, Inc., which is our subsidiary that holds the assets we acquired from FEL Corporation in February 2002, as derived from competitive contracts. In addition during these time periods, approximately 29.3% and 22.0%, respectively, of our revenues were generated from contracts relating to classified programs of the U.S. federal government and select international contracts.

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

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

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

Our results of operations, particularly our revenues, gross profit and cash flow, may vary significantly from period to period depending on a number of factors, including the progress of contract performance, revenues earned on contracts, the timing of customer orders and billing of other direct costs, the commencement and completion of contracts during any particular quarter, the timing of government

contract awards, the term of each contract that we have been awarded, foreign budget reallocations, currency fluctuations, and general political and economic conditions. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts commenced or completed during any period may cause significant variations in operating results. As a result of the factors above, period-to-period comparisons of our revenues and operating results may not be meaningful.

The following table sets forth, for each period indicated, certain financial data derived from our statement of operations expressed as a percentage of revenues. Any trends illustrated in the following table are not necessarily indicative of future results.

Revenues. Revenues increased $7,916,000, or 62.9%, to $20,509,000 for the nine months ended June 30, 2002 from $12,593,000 for the nine months ended June 30, 2001. The increase was due primarily to new contract awards in the Communications Group and the Imaging Group of approximately $5,951,000, in addition to revenues attributable to ST Production Systems, Inc., the subsidiary that holds the assets we acquired from FEL Corporation and which we include as part of our Defense Systems Group, of approximately $5,804,000 since the date of the FEL Corporation acquisition. This increase was partially offset by a decrease in other Defense Systems Group revenues of $3,839,000. For the nine months ended June 30, 2002 we derived, directly or indirectly, 80.6% of our revenues primarily from federal agencies in the intelligence community and the Department of Defense, compared to 94.1% for the nine months ended June 30, 2001. During the nine months ended June 30, 2002, our four largest revenue producing contracts were the Panther WBR-2000 System, the AN/SLQ-25A Surface Ship Torpedo Defense System, and two classified contracts, which contributed in the aggregate 32.7% of revenues.

For the nine months ended June 30, 2002, we derived approximately 17.6%, of our revenues from contracts with U.S. approved foreign countries. We intend to increase the amount of foreign sales we make in the future.

Cost of revenues. Cost of revenues increased $6,130,000, or 66.4%, to $15,363,000 for the nine months ended June 30, 2002 from $9,233,000 for the nine months ended June 30, 2001. The increase was attributed to costs associated with the revenues generated by ST Production Systems, Inc., which has

higher associated costs than the revenues generated in our Communications and Imaging Groups. Cost of revenues as a percentage of revenues increased to 74.9% for the nine months ended June 30, 2002 from 73.3% for the nine months ended June 30, 2001.

General and administrative expenses. General and administrative expenses increased $334,000, or 15.2%, to $2,529,000 for the nine months ended June 30, 2002 from $2,195,000 for the nine months ended June 30, 2001. The increase was due principally to the added salaries and related benefits of new employees hired for ST Production Systems, Inc. of approximately $182,000 and to increases in salaries and benefits to our existing employees.

Net interest income. Net interest income decreased $89,000, or 78.8%, to $24,000 for the nine months ended June 30, 2002, from $113,000 for the nine months ended June 30, 2001. The decrease was the result of lower invested balances, lower rates of return on investments during 2002 and interest expense of $10,000 incurred on our line of credit.

Income tax expense. Income tax expense consists of federal and state income taxes. Income tax expense increased $549,000, or 97.9%, to $1,110,000 for the nine months ended June 30, 2002, from $561,000 for the nine months ended June 30, 2001. The increase was primarily due to increased and improved profitability in 2002. Our effective tax rate was 41% for the nine months ended June 30, 2002 and 2001, respectively. Our effective tax rate varies from the federal statutory rate primarily due to state taxes and other nondeductible expenses.

Net income. Net income increased $790,000, or 97.9%, to $1,597,000 for the nine months ended June 30, 2002, from $807,000 for the nine months ended June 30, 2001. The increase was the result of an increase in revenues that was partially offset by an increase in costs and expenses.

Revenues. Revenues decreased $6,315,000, or 27.8%, to $16,391,000 for the year ended September 30, 2001 from $22,706,000 for the year ended September 30, 2000. The decrease primarily resulted from the completion of two significant production contracts, and the delay in receipt of planned international contracts for the Defense Systems, Communications and Imaging Groups. Customer-funded development, which is included in revenues, decreased $2,406,000, or 23.2%, to $7,958,000 for the year ended September 30, 2001 from $10,364,000 for the year ended September 30, 2000. The decrease in customer-funded development was consistent with the reduction in revenues experienced in fiscal 2001. The customer-funded development resulted primarily from the U.S. Navy Integrated Electronic Warfare System subcontract from Lockheed Martin Corporation and other government agency contract efforts.

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

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

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

Other income. Other income increased $77,000, or 197.4%, to $116,000 for the year ended September 30, 2001 from $39,000 for the year ended September 30, 2000. The increase was due to sub-lease income of $112,000 received for 12 months in fiscal 2001 compared to only $29,000 for four months in fiscal 2000.

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

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

Revenues. Revenues decreased $3,718,000, or 14.1%, to $22,706,000 for the year ended September 30, 2000 from $26,424,000 for the year ended September 30, 1999. The decrease primarily resulted from the substantial completion of two significant production contracts.

Customer-funded development, which is included in revenues, increased $2,670,000, or 34.7%, to $10,364,000 for the year ended September 30, 2000 from $7,694,000 for the year ended September 30, 1999. This increase resulted primarily from the U.S. Navy Integrated Electronic Warefare Systems subcontract from Lockheed Martin Corporation and other government agency contract efforts.

Cost of revenues. Cost of revenues decreased $3,042,000, or 15.8%, to $16,195,000 for the year ended September 30, 2000 from $19,237,000 for the year ended September 30, 1999. This decrease was attributable to our refocusing on international market penetration and staffing realignments. As a percentage of revenues, cost of revenues decreased to 71.3% for the year ended September 30, 2000 from 72.8% for the year ended September 30, 1999.

General and administrative expenses. General and administrative expenses decreased $277,000, or 6.5%, to $3,974,000 for the year ended September 30, 2000 from $4,251,000 for the year ended September 30, 1999. The decrease was due principally to a decrease in traditional general and administrative expenses resulting from efficiencies gained in automating infrastructure support tools and staffing realignment. As a percentage of revenue, general and administrative expenses increased to 17.5% for the year ended September 30, 2000 from 16.1% for the year ended September 30, 1999 due primarily to a one-time accrual for severance pay of $734,000 payable to our former president in fiscal 2000.

Net interest income. Net interest income increased $156,000, or 390.0%, to $116,000 in income for the year ended September 30, 2000 from $40,000 in expense for the year ended September 30, 1999. The increase was primarily due to the fact that, during fiscal 2000, we had no debt and invested our cash balances in interest-bearing cash equivalents.

Other income. Other income increased to $39,000 for the year ended September 30, 2000 from $0 for the year ended September 30, 1999. The increase was due to the subletting of one of our facilities during fiscal 2000.

Income tax expense. Income tax expense decreased $181,000, or 15.0%, to $1,026,000 for the year ended September 30, 2000 from $1,207,000 for the year ended September 30, 1999. Our effective income tax rate was 38.1% for the year ended September 30, 2000, and was 41.7% for the year ended September 30, 1999. Our rate varied from the statutory rate primarily due to certain non-deductible expenses, and a reduction in valuation allowance which resulted from changes in the estimated likelihood of our ability to generate future taxable income based on our sustained profitability in fiscal 2000 and fiscal 1999 and future projections of taxable income.

Net income. Net income decreased $23,000, or 1.4%, to $1,666,000 for the year ended September 30, 2000 from $1,689,000 for the year ended September 30, 1999. The decrease was the result of decreased revenues, partially offset by gains in operating efficiency and interest income in fiscal 2000.

Our primary sources of liquidity are 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 $188,000 at June 30, 2002, as compared to $4,362,000 at September 30, 2001. The decrease was primarily due to a shift to commercial products and an inventory buildup during fiscal 2002.

Cash used in operating activities was approximately $2,918,000 for the nine months ended June 20, 2002, compared to cash provided by operating activities of approximately $4,733,000 for the nine months ended June 30, 2001, a decrease of approximately $7,651,000. The primary reasons for this decrease were: (1) an increase in orders for our commercial products, which provide for billing only at the completion and delivery of those products, and government processing delays at our subsidiary ST Production Systems, Inc. which, together, resulted in an increase in unbilled receivables of approximately $6,142,000 for the 2002 period over the comparable 2001 period; and (2) institution of an inventory program to take advantage of quantity discounts on components and to identify and order items requiring a longer lead time for anticipated contract awards, which resulted in an increase in inventory of approximately $3,803,000 for the 2002 period over the comparable 2001 period. We have no reason to believe that these unbilled receivables will not be paid. The decrease was partially offset by increases in accounts payable of $1,713,000 and billings in excess of cost of $2,532,000 for the 2002 period over the comparable 2001 period. The increase in inventory includes $1,550,000 for a program for the Egyptian Navy, for which Lockheed Martin Corporation is our prime contractor. Negotiations with Lockheed Martin Corporation on the terms and price for this contract have been completed. We are awaiting formal authorization to proceed from Lockheed Martin Corporation, which authorization must originate with the Egyptian government. We had been advised that final approval to proceed would be received by September 1, 2002, but this date has now been revised to December 31, 2002. Although we have no reason to believe that the contract is in jeopardy, given the delays experienced, we cannot, with any certainty, plan on a contract notice to proceed until sometime after December 31, 2002.

Cash provided by operating activities for the years ended September 30, 2001 and 1999 were $3,292,000 and $4,193,000, respectively, while for the year ended September 30, 2000 cash used in operating activities was $544,000. For the year ended September 30, 2001, cash provided by operating activities was generated primarily from net income of $1,224,000 and a decrease in receivables and unbilled contract costs of $2,446,000. For the year ended September 30, 2000, the cash used in operating activities was primarily the result of an increase in receivables, net of unbilled amounts, of $850,000 and an overdeposit of federal and state income taxes of $1,412,000, offset by net income of $1,666,000. For the year ended September 30, 1999, cash was generated by net income of $1,689,000, a decrease of $870,000 in receivables, net of unbilled amounts, and a reduction in other current assets.

Cash used in investing activities was approximately $2,701,000 during the nine months ended June 30, 2002, compared to approximately $272,000 for the nine months ended June 30, 2001, an increase of approximately $2,429,000. The primary reasons for the increase were the acquisition of the government contracting business of FEL Corporation and acquisition related expenses of approximately $1,996,000 and the acquisition of other property and equipment for approximately $705,000. Cash used in investing activities for the years ended September 30, 2001 and 2000 was $290,000 and $784,000, respectively. Cash provided by investing activities for the year ended September 30, 1999 was $1,012,000. For fiscal 2001 and fiscal 2000, investing activity related to the acquisition of property and equipment. In fiscal 1999, investing activity included the purchase of property and equipment, offset by the proceeds from the sale and leaseback of our primary facility in Ann Arbor, MI.

Cash provided by financing activities was approximately $1,445,000 during the nine months ended June 30, 2002, compared to approximately $100,000 for the nine months ended June 30, 2001, an increase of $1,345,000. The increase primarily resulted from draws on our line of credit of approximately $1,250,000 and receipt of proceeds from stock option exercises of approximately $195,000. Cash used in financing activities for the years ended 2001, 2000, and 1999 were $152,000, $236,000, and $2,241,000, respectively. In fiscal 2001 and fiscal 2000, cash used in financing activities was primarily the result of payments for the purchase of treasury stock. In fiscal 1999, cash was used to pay off our line of credit of $2,049,000 and to retire the mortgage on our Newington, VA facility for $220,000.

We entered into a line of credit and related note payable with Bank of America on February 28, 2001. The line of credit was originally for a one-year term and was for $5,000,000. Prior to its expiration, we renewed the line of credit and the amount available under the line of credit was increased to $10,000,000. The line of credit is available to us to finance the performance of government contracts, to support the issuance of stand-by letters of credit, and for short-term working capital purposes. The line of credit bears interest at either Bank of America’s base interest rate or the London Interbank Offering Rate (LIBOR) plus 225 basis points and matures on February 28, 2003. The line of credit was increased to $10,000,000 to accommodate stand-by letters of credit for anticipated international contracts. Under the line of credit, we may borrow the lesser of a defined percentage of accounts receivable under ninety days or $10,000,000. As of July 31, 2002, there was $2,250,000 outstanding under our line of credit. We have given the lender a security interest in substantially all of our assets to secure the debt under our credit facility. If the lender declares amounts outstanding under the credit facility to be due, the lender could proceed against those assets.

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

We have incurred no material costs in the past three years related to environmental issues. On February 1, 2002, we purchased the assets and assumed certain government contracts of FEL in Farmingdale, New Jersey. We also signed a two-year lease for a building at the former FEL facility in Farmingdale. There is known chemical contamination in the soil at other parts of the industrial park where our building is located as a result of the former operations of FEL. This contamination must be remediated pursuant to New Jersey law.

We entered into an agreement with the New Jersey Department of Environmental Protection, or NJDEP, under which we agreed to make a payment of $280,000, in addition to an environmental protection premium of $10,000, in settlement of potential liability to NJDEP for contamination existing at the site prior to February 1, 2002. In return, the NJDEP signed a covenant not to sue us for any environmental claims at this site and the landlord agreed to reduce future lease payments. For this covenant to remain valid, we must cease operations at this site by July 31, 2004. We plan to cease operations at the site before that date. The landlord at this site has agreed to hold us harmless from any claims based on prior environmental contamination at the site. The $280,000 payment is accounted for as prepaid rent and is being ratably amortized over the two-year life of the lease. Neither the agreement with the landlord nor the settlement with the NJDEP shields us from potential claims by the United States Environmental Protection Agency. To our knowledge, no such claim has been asserted or threatened.

The following table shows our contractual cash obligations due in fiscal 2002–2006 and thereafter, and also shows our other commercial commitments due in less than one year and in the next one to three years.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Some of the most significant estimates used in preparing the financial statements relate to contract accounting, collectability of accounts receivable, environmental and tax matters, and accrued expenses.

Inventories are stated at the lower of cost or market, determined on the first-in, first-out basis. Inventories consist of component parts work in process, raw materials, and finished component parts, which are held for use in current and future anticipated contracts. The production of these components is expected to reduce the lead-time for certain contract deliverables.

Revenues are primarily recognized on the percentage of completion basis. We closely monitor contract performance and cost on a monthly cycle, and feel that our estimation processes are appropriate. We accrue revenue using the percentage of completion method, based on the ratio of costs incurred to date over total anticipated costs. We believe this is an accurate measure of the percentage completed on our contracts. Program estimates of costs to complete are processed and reviewed on a monthly basis. We have no contracts for which we currently anticipate losses. Revenues under cost reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs.

We include internally funded research and development costs in general and administrative expenses in our consolidated income statements. Our applied research and development during the nine months ended June 30, 2002 focused on advanced scanning capabilities, an upgrade to a digital receiver and upgraded pulse analyzer; all of which are expected to assist in anticipated future contracts. We expensed $678,000 and $605,000 of internally funded research and development costs during the nine month periods ended June 30, 2002 and 2001, respectively.

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS No. 141”). SFAS No. 141 requires that all business combinations be accounted for by the purchase method. SFAS No. 141 applies to all business combinations accounted for using the purchase method for which the date of

acquisition is July 1, 2001, or later. The adoption of the provisions of SFAS No. 141 did not have an impact on our consolidated financial position or results of operations.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 requires that, upon its adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment. The adoption of the provisions of SFAS No. 142 on October 1, 2001 had no impact on our consolidated financial position or results of operations as we had no goodwill or intangible assets.

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

In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), which supercedes SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. We have not yet completed our analysis of this new pronouncement and the impact it will have on the consolidated financial statements.

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

In June 2002, the FASB issued Statement of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 nullifies Emergency Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” under which a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of the statement are effective for exit or disposal activities that are initiated after December 31, 2002. We have not yet completed our analysis of this new pronouncement and the impact it will have on our consolidated financial statements.

We are a designer, developer and manufacturer of electronics and technology products for the defense and intelligence markets. Specifically, we specialize in integrated passive surveillance, communications and data links, electronic countermeasures and threat simulator systems, and airborne imaging and scanning systems. Our customers include the U.S. Department of Defense, other U.S. federal government agencies, major domestic defense contractors (such as Lockheed Martin Corporation and L-3 Communications Corporation), foreign governments and agencies and foreign defense contractors. Many of our products are used in critical national defense programs for the U.S. federal government intelligence community and approved international customers. As a result, approximately 29% of our revenues for the nine-month period ended June 30, 2002 were from classified programs.

Our products can be found on virtually every U.S. Navy surface and sub-surface combat vessel, on certain other U.S. combat platforms and on certain international surface combat vessels. These include major military platforms such as the SSN-688 Los Angeles class, SSN-21 Seawolf class and SSN-774 Virginia class submarines, all U.S. aircraft carriers, MK-V patrol boats, Cyclone class coastal patrol boats, certain U.S. Coast Guard vessels, NASA U-2 aircraft and U.S. special missions aircraft. Our reputation for engineering has allowed us to develop long-term relationships across the defense and intelligence markets. As a result, for the nine months ended June 30, 2002, approximately 76.8% of our revenues were generated from contracts for which we are the prime contractor, while approximately 69.8% of our revenues were generated from sole or single source contracts. Single source contracts are contracts under which the purchaser purchases products only from us, although other suppliers exist, while sole source contracts are contracts under which the purchaser purchases products from us that only we can supply.

As of June 30, 2002, we employed approximately 198 people, 120 of whom held security clearances and 66 of whom were engineers. For the fiscal year ended September 30, 2001, we generated revenues of $16,391,000 and net income of $1,224,000. For the nine-month period ended June 30, 2002, we generated revenues of $20,509,000 and net income of $1,597,000. Our total funded backlog has increased significantly over the past year and was $24,482,000 on June 30, 2002.


	•	Defense Systems Group. This group designs, develops, manufactures and supports products which intercept, analyze, classify, identify, locate and track microwave signals from radars and weapons. It provides communication data links and remote targeting systems and provides equipment and systems that are used to carry out defensive measures against hostile signals or their sources to protect high value assets. The group’s systems are used on military platforms, such as ships, submarines, patrol aircraft, as well as at ground installations. Included in this group are the programs acquired through our October 2001 acquisition of FEL Corporation’s ASD Division and our February 2002 acquisition of the operating assets of FEL Corporation, the latter which we operate through our ST Production Systems, Inc. subsidiary. For the fiscal year ended September 30, 2001, approximately 68.9% of our revenues came from this group, while for the nine months ended June 30, 2002, approximately 53.7% of our revenues came from this group.

	•	Communications Group. This group designs, develops, manufactures and supports products which intercept signals and analyze communications in a variety of transmission formats, and then identify and locate the sources of these signals and communications. These systems are generally used by operators on board aircraft, ships and ground installations to intercept various kinds of transmissions over established communications networks. For the fiscal year ended September 30, 2001, approximately 22.6% of our revenues came from this group, while for the nine months ended June 30, 2002, approximately 33.2% of our revenues came from this group.

	•	Imaging Group. This group designs, develops, manufactures and supports products that are installed on special purpose aircraft and land vehicles and use multispectral, infrared, and light imaging systems to perform remote surveys. Applications of this technology include environmental pollution


		monitoring, facility inspection, utility monitoring, surface mineral exploration and other special purpose inspections where on-site inspections are not possible or desirable. For the fiscal year ended September 30, 2001, approximately 8.5% of our revenues came from this group, while for the nine months ended June 30, 2002, approximately 13.1% of our revenues came from this group.

The U.S. federal government is the largest purchaser of surveillance and electronic warfare products and system solutions. The terrorist attacks of September 11, 2001 and renewed focus on modernizing U.S. Department of Defense inventories have led to an increase in spending in these areas. We believe that government spending in our industry will continue to increase due to several trends:

Increasing U.S. Department of Defense Budgets. As shown in the charts below, total Department of Defense spending as well as defense spending for procurement and research and development is projected to continue increasing through 2007. For fiscal year 2003, the President has requested $379.0 billion in defense spending, reflecting a 13.5% increase over the amended $334 billion fiscal year 2002 defense budget.

Department of Defense Procurement + Research, Development, Test and Evaluation Budget 1980 – 2007

The total defense budget is projected to grow under the President’s budget to $451.4 billion in fiscal year 2007, continuing to reverse the reductions in defense spending observed in the early to mid 1990’s. Of these amounts, $123 billion in fiscal year 2003 has been requested for procurement and research, development, test and evaluation, rising to $157 billion in fiscal year 2007.

Homeland Defense Programs. The Pentagon has stated that the military’s most urgent priority is to defend the United States from external attack. To accomplish this mission, we believe the U.S. federal government will use significant amounts of electronic intelligence gathering systems and equipment. On September 18, 2001, the President signed into law an emergency spending bill that provides $40.0 billion for homeland defense initiatives, $20.0 billion of which will be obligated for spending in the U.S. federal government’s fiscal year 2001 and $20.0 billion for fiscal year 2002. According to the Office of Management and Budget, of the $19.7 billion already obligated for spending under fiscal year 2001 programs, approximately $5.6 billion has been obligated to the Department of Defense for the war on terrorism and related initiatives. The 2002 defense appropriations bill, for which Congress has already authorized funding, provides an additional $20 billion for homeland defense initiatives, including $3.5 billion for the Department of Defense and $8.3 billion for non-Department of Defense homeland defense.

Spending on Electronics Systems and Subsystems. The Government Electronics and Information Technology Association estimates Department of Defense expenditures on electronics systems to grow to more than $81 billion in fiscal year 2007, a 29% increase from fiscal year 2002. The President’s fiscal 2003 budget seeks to invest $5.5 billion in creating an improved command, control, and communications infrastructure that facilitates the transfer of a high volume of information, recognizing that the United States will rely on its intelligence infrastructure and precision weapons to combat its enemies. We believe increased focus on intelligence surveillance and reconnaissance by the Bush administration will continue for the next several years.

Intelligence Spending. The budget for the intelligence community is coordinated under the Director of Central Intelligence and the Secretary of Defense. The intelligence community budget has traditionally been classified for national security reasons, but figures released to the public for the fiscal years 1997 and 1998 indicated annual budgets in excess of $26.0 billion. While budget numbers for subsequent years have not been released, according to the U.S. House of Representatives Appropriations Committee, the spending bill for the U.S. federal government’s fiscal year 2002 “adds significant funds in support of classified programs and also provides funding to accelerate and enhance U.S. military intelligence,

surveillance, and reconnaissance capabilities.” We believe that spending on advanced surveillance and electronic warfare will increase as the Department of Defense works to improve its intelligence infrastructure.

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


	•	*Significant Supplier to Domestic and Allied Intelligence Agencies.* Approximately 29% of our revenues for the nine month period ended June 30, 2002 was derived from classified programs of the U.S. federal government and U.S. approved international customers. These programs tend to have higher margins and are generally awarded to a small group of suppliers. Given our expertise and track record with these customers, we believe we are well-positioned to take advantage of the heightened awareness and expected increase in spending for intelligence activities in the wake of the September 11 attacks.

	•	*Employees with Security Clearances.* The strict security clearance requirements for personnel who work on classified programs for the intelligence community and Department of Defense severely limits the number of suppliers that are allowed to bid on those types of programs. Companies wishing to bid on such programs must have employees who have completed the lengthy process necessary to obtain a security clearance. This process requires a candidate to be sponsored by the government for a particular purpose, entails extensive background investigations that typically take between six months to a year and, for restricted access clearance, may require successful completion of polygraph testing. As of June 30, 2002, 120 of our 198 employees had government security clearances, with approximately 20% holding Top Secret/ Sensitive Compartmented Information (TS/SCI) security clearances.

	•	*Engineering and Design Expertise.* We have a successful track record of providing our customer needs as demonstrated by our long-term relationships with many of our largest customers. Our predecessor companies and we have provided high quality technical solutions in the intelligence gathering and electronic warfare areas for the Navy and other defense departments for over 25 years. At June 30, 2002, we employed 66 engineers, who represented approximately 33% of our workforce. Since October 1, 1998, we have spent approximately $29.4 million in both customer funded as well as independent research and development.

	•	*Established Sole-Source Contract Relationships.* We received approximately 69.8% of our revenues for the nine month period ended June 30, 2002 from sole or single source contract relationships. These relationships provide us with opportunities to proactively prepare for and develop follow-on program opportunities through upgrades, new versions of products and additional product sales. We also believe these sole or single source relationships create significant advantages in technology, time to market and start-up costs. This affords us market protection relative to new entrants or competitors.

	•	*Experienced Management Team.* Our executives provide us with extensive experience in supporting the intelligence community and Department of Defense. Each of our executive officers has more than 20 years experience in the intelligence and Department of Defense marketplace. With their knowledge, valued relationships and reputations, our management plays a key role in building and sustaining our customer base.


	•	*Maintaining and Expanding Our Customer Base.* We intend to capitalize on our long-term relationships with our customers and our reputation within the intelligence community and Department of Defense to attract new customers within those communities. We believe we have a successful performance record and demonstrated technical expertise that gives us credibility with prospective customers and enhances our ability to be successful in bidding on follow-on contracts. As our revenue base grows through internal growth as well as acquisitions, we intend to seek larger contracts, which have historically been awarded to larger suppliers.

	•	*Targeting High Growth Segments of the Market.* We believe the projected growth in government intelligence gathering and electronic warfare technology products and services spending will offer opportunities for development and delivery of advanced technology solutions for defense and intelligence agencies. We intend to expand our product and service offerings in these areas, particularly where there is a possibility for significant long-term sales. We believe that friendly foreign governments would like to increase their capabilities in these areas, as the events of September 11 have global security implications.

	•	*Leveraging Customer Funded Research and Development.* Many of our products were or are being developed through funding provided by the customer in the form of research and development contracts. Since October 1, 1998, the U.S. federal government has provided us with approximately $26.4 million under such development contracts or approximately 90% of our total research and development expenses since that date. While these contracts tend to be relatively small, many contain provisions for the customer to exercise multi-year options that increase the values of these programs significantly should the customer decide to go into full production. As of June 30, 2002, our customers held unexercised options for $21.7 million of current production and potential future production systems.

	•	*Attracting and Retaining Highly Skilled Personnel.* We intend to continue to attract and retain skilled professionals to ensure we have the capabilities to fulfill our customers’ requirements. We target candidates who have served in the military or as civilian experts in the intelligence community and Department of Defense, and believe we can continue to retain our employees by offering competitive compensation and by providing opportunities for career growth through company-supported education programs and involvement in diverse and challenging engineering developments.

	•	*Pursuing Strategic Acquisitions.* We plan to enhance our internal growth by selectively pursuing strategic acquisitions of businesses that can cost-effectively broaden our technology expertise and our product offerings. We are primarily focused on acquiring businesses that provide value-added solutions for the intelligence community and Department of Defense but will also consider opportunities to acquire other businesses where we can utilize our reputation and experienced management team to expand our core business areas.

We are a Delaware corporation, which resulted from the merger of Daedalus Enterprises, Inc., which was organized in 1968, and S.T. Research Corporation, which was organized in 1972. These two corporations merged on June 9, 1998, thus creating our company. On October 3, 2001 we acquired certain assets of FEL Corporation for $400,000, and on February 1, 2002, our wholly-owned subsidiary, ST Production Systems, Inc. acquired the operating assets and assignment of certain defense contracts of FEL Corporation for a purchase price of $2.1 million, which includes $250,000 of acquisition related expenses.

The following table outlines the products, programs, customers and applications for our Defense Systems Group.

The WBR-2000 is the successor to our High Probability of Intercept system, which is the primary electronic warfare system deployed on SSN-688 Los Angeles Class and SSN-21 Seawolf Class submarines, MK-V patrol boats and Cyclone class patrol boats. These systems provide operators with a sophisticated threat warning capability to detect and localize threat emitters from enemy platforms operating nearby. As the system operates in the “passive” mode, it can allow ships or aircraft to locate the enemy without using its own radar systems, which might also be exploited, thus allowing the operator to remain undetected or at least unidentified longer.

We acquired the AN/SLQ-25 product line through our acquisition of FEL Corporation in February 2002. Variations of the system have been deployed on U.S. surface ships and certain allied foreign ships for over 25 years. The AN/SLQ-25 system consists of a winch mounted on the ship and a towed body that trails behind the ship by cable. The towed body serves as a decoy target for torpedoes that may otherwise track and destroy the ship from which it is deployed.

The AN/SLQ-4A is the surface ship component to the Light Aircraft Multipurpose System (LAMPS) MK III. It is deployed on all LAMPS-capable U.S. surface ships and interfaces with LAMPS MK III capable SH-60 helicopters. In one potential use of the system, the SH-60 helicopter is deployed from the parent ship to classify, localize, and potentially attack when a suspected threat has been detected by the ship’s towed-array sonar, hull-mounted sonar, or by other internal or external sources. In other scenarios, the SH-60 helicopter can provide a mobile, elevated platform for observing, identifying, and localizing threat platforms beyond the parent ship’s radar and/or electronic support measure horizon.

When a suspected threat is detected, classification and targeting data is provided to the parent ship via the datalink to the AN/SLQ-4A for surface-to-surface weapon engagement.

The MK 65 is an aircraft delivered shallow water mine, more than 3000 of which have been deployed. It can be launched from such aircraft as the S-3 Viking, P-3 Orion, F/A-18 Hornet or the F-14 Tomcat. The successor to the MK 62, MK 63 and MK 64 mines, (500 lb., 1000 lb. and 2000 lb. warheads, respectively), the MK 65 contains a 2000 lb. warhead with improved threat detection capabilities. For example, sensor technologies currently under development include advanced signal processing techniques applied to sensor outputs to determine if a valid target is present, or if the detected signal is being generated by a countermeasure device and state-of-the-art, low power, microprocessor and gate array technologies employed for timing and control functions.

The Radar Simulator Pod can be deployed on either fleet aircraft or training aircraft to generate signals that provide training for a ship’s crew while at sea. A typical scenario would involve government contracted Learjets outfitted with our pod, flying certain profiles that might simulate a cruise missile flying toward a ship, while at the same time radiating from the pod signals associated with that particular cruise missile. The module provides virtually the same service as the pod, the main difference being the form factor of the product and method of installation.

Electronic Attack Pods and Modules are deployed in the same manner as Radar Simulator versions, but provide training against electronic counter-measures or jamming as opposed to specific threat emitters. They provide shipboard operators with the opportunity to develop the skills necessary to operate their detection equipment and discern specific threat radar signals in an active jamming environment.

Our Communications Group provides a number of classified products and services for U.S. and approved international agencies. These are outlined in the following table.

Over a decade ago, we designed and built our first satellite communications exploitation system. From that first delivered system until now, as communications technologies have improved, we have continually refined, improved, tested, added capability and increased the capacity of our products. We believe we have

We offer a family of state-of-the-art, turnkey systems for the collection, analysis, and location of certain satellite communications formats. Our systems are packaged in a variety of form factors, from portable systems to large, integrated satellite earth station configurations. We provide all of the equipment, software, and services to demonstrate, install, service, and maintain these systems.

The systems are built around our Generation 3 and Generation 4 digital radio hardware and associated high speed analog to digital converter. The flexibility of the design allows software-only upgrades, Ethernet command, control, and data dissemination, fixed programmable gate array hardware-based implementation of processor-intensive algorithms, and easy customization to customer specifications.

We have developed several products that address unclassified and classified mission requirements, including an audio phase shifter, satellite beacon receiver, and other products.


	•	The APSB-12 audio phase shifter is an unclassified audio masking device for use in conference rooms or other meeting areas. This device effectively eliminates an adaptive filtering attack against background audio thereby preventing eavesdropping.

	•	The 71222 Satellite Beacon Receiver, developed as an offshoot of our digital receiver development in the satellite communications exploitation line, is used for tracking beacon signals from satellites. Housed in a small 19” rack unit chassis, the unit is inexpensive, reliable, and versatile.

We provide a wide variety of quick reaction engineering services to many customers through several different contract vehicles. The nature of these efforts is typically focused on problem solving or proving the validity of concept ideas. We typically combine the latest integrated circuit technology with system level designs to provide working solutions to customers in very short periods of time. Our in-house engineering, drafting, and metal machine shop allow us to quickly implement solutions in digital, analog, and radio frequency disciplines.

Our multispectral and hyperspectral imaging systems are used to sample the electromagnetic spectrum reflections and emissions of target areas in order to determine the physical properties of those areas. In their most basic form, these systems are high performance cameras which provide high resolution monochrome images of a targeted area. More advanced multispectral systems will use additional channels in the visible and infrared portion of the electromagnetic spectrum in order to provide a color representation of the targeted area, while hyperspectral systems use as many as 120 channels to sample reflections far beyond the visible range, thus providing a significant amount of information as to the chemical composition and condition of the targeted area.

The following table outlines applications and platforms (products and services) for our Imaging Group.

These cameras are single channel (visible spectrum) imaging systems designed to acquire high spatial resolution monochrome images of the ground from specially adapted aircraft. Sample applications include pipeline and power line surveys by utilities.

These cameras provide a sample of up to five spectral channels in the visible and near infrared spectrum. They provide a color output for environmental and corridor monitoring applications.

This product is a special configuration of the more generic Airborne Hyperspectral Scanner described below. It is specially configured for geologic mapping as well as environmental, forestry and many other scientific studies.

This is our most advanced spectral scanner. It can simultaneously record up to 120 spectral bands in the visible and near-infrared, short wave infrared, long wave infrared, and ultraviolet ranges. Its configuration can be adapted to provide particular emphasis in any of these ranges. It is used for applications such as geologic mapping, forest inventory, fire mapping, oil spill detection, water chlorophyll studies, and agricultural studies.

This scanner provides the ability to scan 10 spectral channels and record any six channels at the user’s choice. It provides eight channels in the visible and near-infrared spectrum and a dual element thermal infrared detector in the short wave infrared spectrum and long wave infrared (or thermal) spectrum. It can be installed on various aircraft and used for applications such as forest inventory, fire mapping, oil spill detection and water chlorophyll studies.

This scanner is a two channel system used for applications such as maritime surveillance, pollution monitoring, and heat loss detection. It performs simultaneous scanning for thermal infrared (or long wave infrared) and a second choice of either short wave infrared, visible and near infrared or ultraviolet.

Historically, we have sold our products largely in the United States, although our foreign business is increasing. Our products face substantial competition from both domestic and foreign companies. These companies include very large, diversified firms with vastly greater resources than we have. In the United States market, our major competitors include Raytheon Company, Lockheed Martin Corporation, Northrop Grumman, Inc., EDO, Inc., and British Aerospace. In the foreign market, our competitors include, in addition to those named above, European Aeronautic Defense and Space Company EADS N.V., ELTA Electronics Industries LTD, and Thales Group. The size, reputation and funding of these companies gives them a significant advantage in competing for contracts. We compete on the basis of the quality of our engineering services, the quality of our products and systems, the capabilities of our products, our ability to meet contract deadlines, price, and pre- and post-sale customer service. We compete as a prime contractor in situations where we believe we have a superior solution to the customer’s problems. Otherwise, we team with our traditional partners among the large defense contractors.

Our operations primarily require electronic, optical, and mechanical components and supplies, which are generally available from several commercial sources. Although certain items are only available from limited sources of supply, we believe that the loss of any single supplier would not have a material adverse effect on our business.

We have not registered any trademarks. We hold several patents. However, we do not believe that the ownership of any of these patents is a significant factor in our business. Rather, we believe that our success depends primarily on innovative engineering skills, technical competence, and the ability to rapidly adapt commercially available new technology to the problems facing our customers. We believe that the loss of patent protection for any of our products would not materially adversely affect our business.

We employ a team-selling approach, where our senior management, business development staff and our program managers collaborate in identifying and developing business opportunities. As a result, more

than six engineers, five marketing and sales personnel and seven members of senior management are directly involved in our sales and marketing efforts. With this approach, we are able to assess opportunities quickly, drawing on the experience and perspective of senior personnel across our company, including those working closely with our customers.

In the domestic market, our products and services are marketed by our staff, who concentrate on developing an understanding of the customer’s particular problems and requirements and providing a solution to those problems and requirements which is satisfactory to the customer. Given the classified nature of much of our work, our marketing efforts are limited by the fact that only a very small number of people can be familiar with the prospective project. Thus, the reputation of our engineering staff, which will work on any given project, is one of our best marketing tools.

In the international market, our products and services are marketed in the same way as in the United States. However, we are assisted sometimes by a prime contractor on a particular project and have established an international sales representation force with reputable organizations. Our marketing of products and services to customers other than those in the United States is limited by the fact that sales of our products to governments or persons outside of our country must be approved by the U.S. Department of State or the Department of Commerce. This limits our marketing efforts outside of the country and may result in delay or cancellation of an order.

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

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

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

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

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

Some of our contracts can be extended or increased at the option of the customer. As of June 30, 2002, the potential value of these options, if exercised by the customer, is approximately $21,700,000. Our largest current potential option, with a potential value of $7.5 million, is with respect to a contract for engineering and production of components of the SLQ-25A Surface Ship Torpedo Defense System contract for the U.S. Navy and U.S. federal government-approved international navies. We anticipate that a portion of the options will be exercised during the calendar years 2003 through 2008. However, we have no way of knowing whether any of the options will be exercised, or if they are exercised, what the value of any additional order would be.

During the fiscal year ended September 30, 2001, approximately 89% of our revenues were attributable to contracts with various departments and agencies of the U.S. federal government or subcontracts with its prime contractors. The funding of government programs is subject to Congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations.

Generally, government contracts are subject to oversight audits by government representatives. Provisions in these contracts permit termination, in whole or in part, without prior notice, at the government’s convenience. Compensation in the event of a termination is limited to work completed at the time of termination. In the event of termination, the contractor will receive a certain allowance for profit on the work performed.

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


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

	•	Cost-reimbursement.


	•	Cost-plus-fixed-fee contracts are cost-reimbursement contracts that provide for payment to us of a negotiated fee that is fixed at the inception of the contract. This fixed fee does not vary with actual cost of the contract, but may be adjusted as a result of changes in the work to be performed under the contract. This contract poses less risk than a fixed price contract, but our ability to win future contracts from the procuring agency may be adversely affected if we fail to perform within the maximum cost set forth in the contract.

	•	A cost-plus-award-fee contract is a cost reimbursement contract that provides for a fee consisting of a base amount (which may be zero) fixed at inception of the contract and an award amount, based upon the government’s satisfaction with our performance under the contract. With this type of contract, we assume the risk that we may not be awarded the award fee, or only a portion of it, if we do not perform satisfactorily.


	•	A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. As is the case with all cost-reimbursement contracts, we assume the risk that, if our costs are not allowable under the terms of the contract or applicable regulations, we may not be able to recover these costs.


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

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

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

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

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

At June 30, 2002, we employed 198 people, 66 of whom have engineering degrees while 120 have security clearances. Our continued success depends upon our ability to attract and retain highly skilled employees. We believe we are successful in retaining our employees by offering a competitive salary structure, attractive incentive compensation and benefits programs, career growth opportunities, flexible work assignments and the opportunity to perform mission-critical services, often in classified environments. Our current employees are offered an opportunity to respond to new job opportunities before we pursue external recruiting. We consider our relations with employees to be good, and we have never had a work stoppage. The former FEL Corporation employees are represented by a union, which has asked our subsidiary in Farmingdale, New Jersey to negotiate a contract. Our subsidiary is considering the request. However, we do not believe that the outcome of any discussion with the union will have a materially adverse impact on us.

We have incurred no material costs in the past three years related to environmental issues. On February 1, 2002, in connection with our acquisition of the operating assets of FEL Corporation, we signed a two-year lease for a building at the former FEL Corporation industrial park in Farmingdale, New Jersey. As a result of the former operations of FEL Corporation, both the soil and groundwater at other parts of the industrial park are known to be contaminated with chlorinated solvents at concentrations in excess of standards set by the NJDEP. Based on groundwater sampling conducted nearby but outside of the industrial park, it appears that this groundwater contamination has spread beyond the boundaries of the property.

We have entered into an agreement with the NJDEP under which we made a payment of $280,000, in addition to an environmental protection premium of $10,000, in settlement of potential liability to NJDEP for contamination existing in the industrial park prior to February 1, 2002. In return, the NJDEP signed a covenant not to sue us for any environmental claims relating to that contamination. For this covenant to remain valid, we must cease operation at this site by July 31, 2004. We plan to cease operations at this site before that date. The landlord at this site has also agreed to hold us harmless from any claims based on prior environmental contamination at the site. Neither the agreement with the landlord nor the settlement with the NJDEP shields us from potential claims by the United States Environmental Protection Agency. To our knowledge, no such claims have been asserted or threatened.

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

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

The following table sets forth certain information regarding our directors, executive officers and key employees as of the date of this prospectus.

S. Kent Rockwell has served as chairman of our board of directors since 2000 and as our chief executive officer since 1998. Mr. Rockwell previously served as chairman of the board of directors, chief executive officer and president of Astrotech International Corporation, a supplier of products and services to the petroleum industry, from 1986 to 1997. Mr. Rockwell has also served as chairman of the board of directors of Rockwell Forest Products, Inc., a supplier of timber since 1983, Appalachian Timber Services, Inc., a supplier of timber to the mining industry since 1988, and chairman and president of Rockwell Venture Capital, Inc., a holding company for several investments of Mr. Rockwell’s since 1983. Mr. Rockwell previously served on the board of Rockwell International, Inc., a manufacturer of products for the aerospace industry from 1973 to 1983.

David A. Smith has served as our president since June 2002. Mr. Smith previously served as vice president and general manager of Quixote Corporation, a manufacturer of highway and transportation safety products, from 1999 to June 2002. Mr. Smith also served as vice president-operations of Amphenol Corporation, a manufacturer of electrical, electronic and fiber optic connectors and other interconnect systems, from 1996 to 1999.

Donald F. Fultz has served as our vice president, chief financial officer and treasurer since 2000. Mr. Fultz previously served as our director of business operations from 1996 to 2000. In addition, Mr. Fultz was a member of the senior staff of Booz, Allen, and Hamilton, a business consulting company from 1990 to 1996.

Delano Esguerra has served as our vice president of business development since 2001. Mr. Esguerra previously served as vice president of business development of Mnemonics, Inc., a company specializing in hardware and software design and development of computer and microprocessor-based systems, subsystems and associated equipment, from 1999 to 2001. He was also director of business development for Andrew SciComm, Inc., a supplier of signal intelligence and electronic warfare systems, from 1996 to 1999.

Jack Sweet has served as our vice president of customer relations since February 2002. Mr. Sweet previously served as vice president business development at FEL Corporation, a manufacturer of defense systems, from 1996 to 2002.

James D. Ross has served as our vice president of the Communications Group since May 2000. Mr. Ross previously was one of our program managers, providing management, business development, and

S. R. Perrino is a founder of our company and has served as a director since its inception in 1972. Mr. Perrino also served as chairman of the board, chief executive officer, and president of our company and its predecessor company from 1972 to 1998, when he retired. He continued to serve as chairman of the board of directors until 2000. Mr. Perrino worked as a consultant to the U.S. Navy for threat warning systems, and to various companies prior to founding our company. From 1960 through 1967, Mr. Perrino served as director of marketing/ project engineer for Radiation Systems, Inc. where he was one of the original founders.

Dr. Charles W. Bernard has served as one of our directors since 1995 and of Daedalus Enterprises, Inc., one of our predecessors before that. Dr. Bernard has served on the board of directors of Columbia Bay Company, a defense consulting group, from 1988 to the present. He has also served as a director of K&B Engineering Associates, an engineering consulting company, from 1995 to the present. Dr. Bernard is a co-founder of both of those companies. He was Director of Land Warfare on the staff of the Under Secretary of Defense for Research, Development and Acquisition from 1978 to 1988. Dr. Bernard also served on the boards of directors of the Naval Weapons Laboratory from 1969 to 1975, the Naval Ordnance Laboratory from 1975 to 1977, and the Naval Surface Weapons Center from 1975 to 1977.

Dr. John D. Sanders has served as one of our directors since 1995 and of Daedalus Enterprises, Inc., one of our predecessors before that. Dr. Sanders was chairman and chief executive officer of Tech News, Inc., a technology news publisher, from 1988 to 1996, until its sale to the Washington Post Company. Dr. Sanders serves on the boards of directors of Analex Corporation Inc., a provider of engineering, information, medical research and technical services to U.S. federal government agencies and defense contractors; ITC Learning Corporation, a developer and marketer of workplace training products for the process and manufacturing industries; and Comtex News Network, Inc., a business to business infomediary. Dr. Sanders is a strategic business consultant.

John Irvin has served as one of our directors, since 2000. Mr. Irvin has also served as president of Innovative Benefits Consulting, Inc., a benefits and insurance consulting firm, from 1996 to the present. He was vice chairman and co-founder of Mid Atlantic Capital Group and president of Mid Atlantic Insurance Corporation, which together serve the financial planning, asset management and insurance needs of high net worth individuals, from 1983 to 1993. He also chaired the committee which oversaw mergers, acquisitions and strategic planning for those companies. Mr. Irvin serves on the board of directors of Partners Financial, a national producer group.

Philip H. Power has served as one of our directors since 1998 and of Daedalus Enterprises, Inc., one of our predecessors, before that. Mr. Power is founder, chairman and owner of HomeTown Communications Network, Inc., a publisher of numerous daily and weekly newspapers and telephone directories. He is a regent emeritus of the University of Michigan.

Our board of directors currently has an audit committee and executive compensation/ stock option committee. Members serve on these committees for a one year term.

Generally, the audit committee recommends for approval by the board of directors the independent auditors for each fiscal year; reviews with the independent auditors the scope and results of the audit engagement, upon discussion with management and the independent auditors; recommends to the board of directors to include the audited financial statements in our annual report; and reviews any non-audit services to be performed by the independent auditors. The audit committee also examines the scope and results of our audit procedures, the adequacy of our system of internal accounting and financial controls, and evaluates the independence of our independent auditors and their fees for audit services. The members of our audit committee are Messrs. Irvin, Perrino, Power, Rockwell, and Sanders. All of the members of

The executive compensation/ stock option committee is responsible for reviewing the performance of, and recommending salaries and other compensation arrangements for our officers, as well as reviewing bonus, pension and other compensation plans prepared by management for consideration by the board of directors, and performing such other functions as may be delegated to it under the provisions of any bonus, stock option, pension or other compensation plans that we adopt. The members of the executive compensation/ stock option committee are Messrs. Bernard, Irvin, Power, and Sanders.

Effective February 12, 2002, outside directors receive $3,500 per quarter with an additional payment of $500 for each board or committee meeting in excess of one per quarter attended, and are reimbursed for travel expenses incurred in connection with their attendance at board and committee meetings. Employee directors do not receive directors’ fees.

The following table sets forth summary information concerning compensation paid or accrued by us, to or on behalf of, our chief executive officer and to each of our most highly compensated executive officers, other than the chief executive officer, during fiscal 2001.


(1)	Mr. Rockwell received compensation at an annual rate of $100,000 effective October 1, 1998, and $200,000 effective May 29, 2000.

(2)	Paid pursuant to our Incentive Compensation Plan.

(3)	Detail of amounts reported in the “Other Annual Compensation” column is provided in the following table.

(4)	Paid pursuant to our Incentive Compensation Plan. Shares vest upon one-year anniversary of the stock award.

The following table provides information regarding the Other Annual Compensation column of the Summary Compensation Table not properly categorized as salary or bonus.

The following table provides information concerning exercised and unexercised options to purchase our common stock as of September 30, 2001 under our Long-term Incentive Compensation Plan held by the executive officers named in the summary compensation table.

Aggregate Option Exercises In Fiscal Year 2001 And Fiscal Year-End Option Values

Our 2002 Stock Incentive Plan replaced our Long-Term Incentive Plan effective March 26, 2002. The 2002 Plan is administered by the compensation committee of the board, except that the board will have the authority to determine which directors shall receive awards under the plan and the terms and conditions of those awards. In addition, the committee may delegate to our chief executive officer the authority to grant awards to employees who are not subject to Section 16(a) of the Securities Exchange Act of 1934. Awards may be made to recipients, who must be employees of our company or a subsidiary, a director, a person who has agreed in writing to become an employee of our company or a subsidiary within 30 days or a consultant or advisor. Awards under the plan may include shares of common stock, restricted shares, stock options, performance shares, performance units and target awards. The committee may establish performance goals to be achieved within any performance period it may select using any measures of the performance of our company it may select as a condition to the receipt of the award. The

committee may also establish vesting schedules for awards under the plan. A total of 946,400 shares of our common stock are available for awards under the plan, subject to specified adjustments in the event of changes in the outstanding shares of our common stock.

We previously adopted the Long-Term Incentive Compensation Plan for all employees, including executive officers, under which performance targets were established for all employees for each fiscal year. Each employee earned an annual incentive compensation consisting of a combination of a cash payment and shares of our common stock based on whether he or she met the performance targets. This plan was terminated by the board on March 26, 2002. While options for 396,400 shares were outstanding under this plan at the time of its termination, no additional options have been or will be granted under this plan.

We have outstanding options that were granted to two persons who are directors or non-employee officers. One of these grants was made by Daedalus Enterprises, Inc., and one of them was made by ST Research, Inc. The grants were made before the merger of those two companies to form our company and were assumed by us as part of the merger. Both options were for 10 years, while one was for 3,000 shares at an exercise price of $2.25 per share and the other was for 25,800 shares at an exercise price of $3.37 per share.

The following table sets forth information as of July 31, 2002, regarding the beneficial ownership of our common stock prior to this offering, the shares of common stock to be offered by our selling stockholder and the beneficial ownership of our common stock after this offering (assuming no exercise of the underwriters’ over-allotment option) of:


	•	each person or group known to us who beneficially owns five percent or more of the outstanding shares of our common stock;

	•	each director and our executive officers named in the “Summary Compensation Table”;

	•	our executive officers and members of our board of directors as a group; and

	•	S. R. Perrino, the selling stockholder.

Beneficial ownership is determined under the rules of the Securities and Exchange Commission. These rules deem common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options or of a group of which the person is a member, but they do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person or group. To our knowledge, except under applicable community property laws, or as otherwise indicated, each person named in the table has sole voting and sole investment control with regard to all shares beneficially owned by such person.


(1)	The address of each stockholder is c/o Sensytech, Inc., 8419 Terminal Road, Newington, Virginia 22122-1430.

(2)	Shares held by Rockwell Holdings, Inc., over which Mr. Rockwell has sole voting and investment power.

(3)	Includes 67,276 shares held of record by our 401(k) Profit Sharing Plan over which Mr. Perrino has sole voting and investment power.

(4)	Includes 550 shares owned by Dr. Sanders’ spouse and 27,190 shares held in a profit sharing plan over which Dr. Sanders has sole voting and investment power.

(5)	Includes 34,000 shares issuable upon the exercise of options that are exercisable within 60 days of July 31, 2002.

(6)	Includes 34,000 shares issuable upon the exercise of options that are exercisable within 60 days of July 31, 2002.

Since the beginning of our last fiscal year, there were no transactions with any of our directors, executive officers or 5% or more stockholders (or members of the immediate family of such individuals), nor are there any transactions currently proposed with such individuals to which we are a party and in which the amounts involved exceed $60,000.

Based on shares outstanding as of July 31, 2002, upon completion of this offering, we will have shares of common stock outstanding (assuming no exercise of outstanding options and no exercise of the underwriters’ over-allotment option). The shares of common stock to be sold by us in this offering and all shares sold by the selling stockholder will be freely tradable without restriction or limitation under the Securities Act of 1933, as amended, except for any such shares held by our “affiliates,” as such term is defined under Rule 144 of the Securities Act. Shares of common stock held by our affiliates may be sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144.

In general, under Rule 144 under the Securities Act of 1933, as currently in effect, a person, or persons whose shares are aggregated, including an affiliate, who has beneficially owned restricted shares of our common stock for at least one year, would be entitled to sell within any three-month period, a number of shares that does not exceed the greater of:


	•	1% of the number of shares of our common stock, which will equal approximately shares immediately after the offering; or

	•	the reported average weekly trading volume of our common stock reported through the automated quotation system of Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 also are subject to certain requirements regarding the manner of sale, notice and availability of current public information about us.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Our executive officers and directors and their affiliates have entered into lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, including by way of any hedging or derivatives transaction, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, except for shares sold in this offering by the selling stockholder, for a period of 90 days after the date of this prospectus without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. Given these contractual restrictions, beginning 90 days after the closing of this offering, the shares of our common stock owned by these persons and the shares issuable upon the exercise of presently exercisable options and warrants owned by them would be available for sale in the public market, subject to the limitations of Rule 144. Friedman, Billings, Ramsey & Co., Inc. does not intend to release the executive officers, directors or their affiliates from the lock-up agreements; however, Friedman, Billings, Ramsey & Co., Inc., in its sole discretion, may release any of these persons or entities from the lock-up agreements prior to the expiration of the 90 day period without notice.

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.

We intend to file a registration statement(s) under the Securities Act covering the approximately 946,400 shares of common stock reserved for issuance under our 2002 Stock Incentive Plan. Accordingly, shares registered under these registration statements will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the contractual restrictions described above.

Our authorized capital stock consists of 25,000,000 shares of common stock, $0.01 par value per share. As of July 31, 2002, there were 4,083,978 shares of our common stock outstanding. In addition, an aggregate of 946,400 shares of our common stock are reserved for issuance under our 2002 Stock Incentive Plan. As of the date of this prospectus, there are shares of common stock issuable under options outstanding under our employee stock option plans.

Stockholders are entitled to one vote for each share of our common stock held of record on all matters on which stockholders are permitted and entitled to vote. Our common stock does not have cumulative voting rights in the election of directors. As a result, holders of a majority of our common stock voting for the election of directors can elect all the directors standing for election. Holders of our common stock are entitled to receive, when and if declared by the board of directors from time to time, such dividends and other distributions in cash, stock or property from our assets or funds legally available for such purposes. See “Dividend Policy.” The outstanding shares of our common stock are fully paid and nonassessable.

Nasdaq. Our common stock is quoted on The Nasdaq SmallCap Market under the symbol “STST.” In connection with this offering, we will apply to have our common stock listed on The Nasdaq National Market under the symbol “STST.”

Corporate Governance Provisions of Our Certificate of Incorporation and Bylaws

Advance Notice. Our bylaws require that advance written notice of all director nominations be given to our secretary not later than the close of business on the last day of October, for an annual meeting of stockholders, or for a special meeting of stockholders to elect directors by the close of business on the tenth day following the date on which notice of the meeting is first given to stockholders. Likewise, advance written notice of any other business matters proposed to be brought by a stockholder before an annual meeting of stockholders must be delivered to our secretary at our principal executive office no later than the close of business on the last business day of October, with respect to an annual meeting, or no later than the tenth calendar day following the date on which notice of a special meeting is first given to stockholders. These provisions may make it more difficult for stockholders to nominate or elect directors or take action opposed by our board.

Special Meetings. Our certificate of incorporation and bylaws provide that special meetings of the stockholders may be called by our secretary at the direction of:


	•	a written request of a majority of the board of directors;

	•	the chief executive officer; or

	•	the affirmative vote of a majority of the board of directors.

Indemnification of Directors and Officers. Our certificate of incorporation and bylaws provide a right to indemnification to the fullest extent permitted by the Delaware General Corporation Law for expenses, attorney’s fees, damages, punitive damages, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by any person whether or not the indemnified liability arises or arose from any threatened, pending or completed proceeding by or in our right by reason of the fact that he or she is or was our director or officer or while our director or officer, is or was serving at our request as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. Our certificate of incorporation and bylaws also provide for the advancement of expenses to an indemnified party. Additionally, we may indemnify any employee or agent of ours to the fullest extent

permitted by the Delaware General Corporation Law. Our bylaws authorize us to take steps to ensure that all persons entitled to the indemnification are properly indemnified, including, if the board of directors so determines, by purchasing and maintaining insurance.

We are subject to Section 203 of the Delaware general corporation law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the “business combination” or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation’s voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Our certificate of incorporation provides that none of the directors shall be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except liability for:


	•	any breach of the director’s duty of loyalty to us or our stockholders;

	•	acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

	•	the payment of unlawful dividends and certain other actions prohibited by Delaware General Corporation Law; and

	•	any transaction from which the director derived any improper personal benefits.

The effect of this provision of our certificate of incorporation is to eliminate our rights and the rights of our stockholders to recover monetary damages against a director for breach of the fiduciary duty of care as a director, including breaches resulting from negligent or grossly negligent behavior, except in the situations described above. This provision does not limit or eliminate our rights or the rights of any stockholder to seek non-monetary relief, such as an injunction or rescission in the event of a breach of a director’s duty of care.

The registrar and transfer agent for our common stock is American Stock Transfer, Inc., 6201 15th Avenue, Brooklyn, New York 11219.

This is a general summary of material U.S. federal income and estate tax considerations with respect to your acquisition, ownership and disposition of our common stock if you are a beneficial owner of shares other than:


	•	a citizen or resident of the United States;

	•	a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any political subdivision of the United States;

	•	an estate, the income of which is subject to U.S. federal income taxation regardless of its source;


	•	a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust; or

	•	a trust that existed on August 20, 1996, was treated as a U.S. person on August 19, 1996, and elected to be treated as a U.S. person.

This summary does not address all of the U.S. federal income and estate tax considerations that may be relevant to you in light of your particular circumstances or if you are a beneficial owner subject to special treatment under United States income tax laws such as a:


	•	controlled foreign corporation;

	•	passive foreign investment company;

	•	foreign personal holding company;

	•	company that accumulates earnings to avoid U.S. federal income tax;

	•	foreign tax-exempt organization;

	•	financial institution;

	•	a partnership or other pass through entity for U.S. federal income tax purposes;

	•	broker or dealer in securities; or

	•	former U.S. citizen or resident.

This summary does not discuss any aspect of state, local or non-United States taxation. This summary is based on current provisions of the Internal Revenue Code, Treasury regulations, judicial opinions, published positions of the U.S. Internal Revenue Service and all other applicable authorities, all of which are subject to change, possibly with retroactive effect. This summary is not intended as tax advice.

We urge prospective non-United States stockholders to consult their tax advisors regarding the United States federal, state, local and non-United States income and other tax considerations of acquiring, holding and disposing of shares of our common stock.

In general, and subject to the discussion in the next paragraph, any distributions we make to you with respect to your shares of our common stock that constitute dividends for U.S. federal income tax purposes will be subject to U.S. withholding tax at a rate of 30.0% of the gross amount, unless you are eligible for a reduced rate of withholding tax under an applicable income tax treaty and you provide proper certification of your eligibility for such reduced rate (usually on an IRS Form W-8BEN). A distribution will constitute a dividend for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits as determined under the Internal Revenue Code. Any distribution not constituting a dividend will be treated first as reducing your basis in your shares of our common stock and, to the extent it exceeds your basis, as gain from the disposition of your shares of our common stock.

Dividends we pay to you that are effectively connected with your conduct of a trade or business within the United States and, if certain income tax treaties apply, are attributable to a U.S. permanent establishment maintained by you, generally will not be subject to U.S. withholding tax if you comply with applicable certification and disclosure requirements. Instead, such dividends generally will be subject to U.S. federal income tax, net of certain deductions, at the same rates applicable to U.S. persons. If you are a corporation, effectively connected income may also be subject to a “branch profits tax” at a rate of 30.0%, or a lower rate specified by an applicable income tax treaty. Dividends that are effectively connected with your conduct of a trade or business but that under an applicable income tax treaty are not attributable to a U.S. permanent establishment maintained by you may be eligible for a reduced rate of

You generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of your shares of our common stock unless:


	•	the gain is effectively connected with your conduct of a trade or business within the United States and, under certain income tax treaties, is attributable to a U.S. permanent establishment you maintain;

	•	you are an individual, you hold your shares of our common stock as capital assets, you are present in the United States for 183 days or more in the taxable year of disposition and you meet other conditions, and you are not eligible for relief under an applicable income tax treaty; or

	•	we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes (which we believe we are not and have never been, and do not anticipate we will become) and you hold or have held, directly or indirectly, at any time within the shorter of the five-year period preceding disposition or your holding period for your shares of our common stock, more than 5.0% of our Class A common stock.

Gain that is effectively connected with your conduct of a trade or business within the United States generally will be subject to U.S. federal income tax, net of certain deductions, at the same rates applicable to U.S. persons. If you are a corporation, the branch profits tax, as discussed above, also may apply to such effectively connected gain. If the gain from the sale or disposition of your shares is effectively connected with your conduct of a trade or business in the United States but under an applicable income tax treaty is not attributable to a permanent establishment you maintain in the United States, your gain may be exempt from U.S. tax under the treaty. If you are described in the second bullet point above, you generally will be subject to U.S. tax at a rate of 30.0% on the gain realized, although the gain may be offset by some U.S. source capital losses realized during the same taxable year.

We must report annually to the IRS the amount of dividends or other distributions we pay to you on your shares of our common stock and the amount of tax we withhold on these distributions regardless of whether withholding is required. The IRS may make copies of the information returns reporting those dividends and amounts withheld available to the tax authorities in the country in which you reside pursuant to the provisions of an applicable income tax treaty or exchange of information treaty.

The United States imposes a backup withholding tax on dividends and certain other types of payments to U.S. persons at a rate of 30.0% (with scheduled reductions through 2006 and a scheduled increase to 31.0% in 2011) of the gross amount. You will not be subject to backup withholding tax on dividends you receive on your shares of our common stock if you provide proper certification (usually on an IRS Form W-8BEN) of your status as a non-U.S. person or you are a corporation or one of several types of entities and organizations that qualify for exemption.

Information reporting and backup withholding generally are not required with respect to the amount of any proceeds from the sale of your shares of our common stock outside the United States through a foreign office of a foreign broker that does not have certain specified connections to the United States. However, if you sell your shares of our common stock through the United States office of a U.S. broker or a foreign broker, the broker will be required to report to the IRS the amount of proceeds paid to you and also backup withhold at a rate of 30.0% (with scheduled reductions through 2006 and a scheduled increase to 31.0% in 2011) of that amount unless you provide appropriate certification (usually on an IRS Form W-8BEN) to the broker of your status as a non-U.S. person (and the broker does not have actual knowledge, or reason to know, that you are a U.S. person or that other requirements for exemption are not satisfied) or you are a corporation or one of several types of entities and organizations that qualify for

exemption. Information reporting, but not backup withholding, will apply if you sell your shares of our common stock through the non-U.S. office of a foreign broker deriving more than a specified percentage of its income from U.S. sources or having certain other connections to the United States or through the non-U.S. office of a U.S. broker, unless in either case, the broker has documentary evidence in its files that the owner is a non-U.S. holder and the broker has no knowledge, or reason to know, to the contrary.

Any amounts withheld with respect to your shares of our common stock under the backup withholding rules will be refunded to you or credited against your U.S. federal income tax liability, if any, by the IRS if the required information is furnished in a timely manner.

Shares of our common stock owned or treated as owned by an individual who is not a citizen or resident, as defined for U.S. federal tax purposes, of the United States at the time of his or her death will be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

Subject to the terms and conditions set forth in the underwriting agreement among us, the selling stockholder, and Friedman, Billings, Ramsey & Co., Inc., we and the selling stockholder, have agreed to sell to the underwriters, and the underwriters have agreed to purchase, the number of shares of common stock set forth opposite their names below.

We have granted the underwriters an option exercisable during the 30-day period after the date of this prospectus to purchase, at the initial offering price less underwriting discounts and commissions, up to an additional shares of common stock for the sole purpose of covering over-allotments, if any. To the extent that the underwriters exercise the option, each underwriter will be committed, subject to certain conditions, to purchase that number of additional shares of common stock that is proportionate to such underwriter’s initial commitment.

Under the terms and conditions of the underwriting agreement, the underwriters are committed to purchase all the common stock offered by this prospectus, other than the shares subject to the over-allotment option, if any is purchased. We and the selling stockholder have agreed to indemnify the underwriters against certain civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of such liabilities. We have also granted Friedman, Billings, Ramsey & Co., Inc. a right of first refusal to act as our underwriter, placement agent or financial advisor for all activities where such services are required, on reasonable and customary terms and conditions, for a period of one year following the closing of this offering.

The underwriters initially propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain dealers at such offering price less a concession not to exceed $ per share. The underwriters may allow, and such dealers may reallow, a concession not to exceed $ per share to certain other dealers. After the common stock is released for sale to the public, the underwriters may change the offering price and other selling terms.

The following table provides information regarding the per share and total underwriting discounts and commissions we and the selling stockholder will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional shares.

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ .

In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot this offering, creating a syndicate short position. In addition, the underwriters may bid for and purchase common stock in the open market to cover syndicate short positions or to stabilize the price of the

common stock. Finally, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. These transactions may be effected on The Nasdaq National Market or in the over-the-counter market or otherwise. The underwriters are not required to engage in these activities and may end any of these activities at any time.

The underwriters have informed us that they do not intend to confirm sales of the common stock offered by this prospectus to any accounts over which they exercise discretionary authority.

Our common stock is listed on The Nasdaq SmallCap Market under the symbol “STST.” In connection with this offering, we will apply to have our common stock listed on The Nasdaq National Market under the symbol “STST.”

We and our executive officers and directors will agree not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock, for a period of 90 days from the effective date of this prospectus, subject to certain exceptions. Friedman, Billings, Ramsey & Co., Inc., at any time and without notice, may release all or any portion of the common stock subject to the foregoing lock-up agreements.

The validity of the shares of common stock offered by us in this offering and the shares of common stock offered by the selling stockholder will be passed upon for us and the selling stockholder by Plummer, Harty & Owsiany LLP, Pittsburgh, Pennsylvania. Members of this firm own an aggregate of 10,000 shares of our common stock. Certain legal matters relating to this offering will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, Washington, D.C.

The consolidated financial statements of Sensytech, Inc. and its Subsidiary as of September 30, 2000 and 2001 and for each of the three years in the period ended September 30, 2001 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.

We have filed a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the common stock to be sold in the offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, or the exhibits and schedules that are part of the registration statement. Any statements made in this prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved, and each statement in this prospectus shall be deemed qualified in its entirety by this reference.

We file annual, quarterly and special reports, proxy statements and other material with the Securities and Exchange Commission. You may read and copy the registration statement for this offering and any other document we have filed with the Commission, at the Securities and Exchange Commission’s public reference room, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Our Securities and Exchange Commission filings are also available to the public from the Securities and Exchange

We will provide without charge to each person, including any beneficial owner, to whom a prospectus is delivered, on request of that person, a copy of any or all of the exhibits and schedules to the registration statement. Written requests should be addressed to:


	Chief Financial Officer, Sensytech, Inc.
	8419 Terminal Road
	Newington, VA 22122-1430.

You may direct telephone requests to our chief financial officer at (703) 550-7000.

Prior to this offering, our company has filed our annual and quarterly reports with the Securities and Exchange Commission on the forms provided for small issuers. However, subsequent to this offering, we will be filing our annual and quarterly reports on the regular forms specified by the Securities and Exchange Commission for those purposes.

In our opinion, the accompanying consolidated balance sheets and the related statements of income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Sensytech, Inc. and its subsidiary at September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

Sensytech, Inc. and subsidiary (the “Company”) primarily designs, develops and manufactures systems and equipment for integrated passive surveillance systems, electronic countermeasures, and simulator systems for military and commercial customers.

The consolidated financial statements include the accounts of Sensytech, Inc. and its wholly owned subsidiary, Daedalus Enterprises Export Corporation. All intercompany transactions and balances have been eliminated in consolidation.

For purposes of the statement of cash flows, the Company considers all unrestricted highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Inventories are stated at the lower of cost or market, determined on the first-in, first-out basis. Inventories consist of component parts.

Property and equipment are recorded at cost and are depreciated over estimated useful lives ranging from three to eight years using straight-line and double declining balance methods. Leasehold improvements are amortized over the life of the improvement or length of lease term, whichever is shorter, using the straight-line method. Amortization of leasehold improvements and capital lease obligations are included in depreciation expense. The cost and accumulated depreciation or amortization of assets sold or retired are removed from the respective accounts and any gain or loss is reflected in other income (expenses).

The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.

The estimated revenue for performance under Government fixed-price and cost-reimbursement contracts, including customer-funded research and development, is recognized under the percentage of completion method of accounting whereunder the estimated revenue is determined on the basis of completion to date (the total contract amount multiplied by percent of performance to date less revenue value recognized in previous periods). Revenues under cost-reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain Government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties, which historically are not material, are included in revenue at the time the amounts can be determined reasonably. Anticipated

losses are recognized at the time they become known. It is reasonably possible that future operating results may be effected if actual contract costs incurred differ from total contract costs currently estimated by management.

Internally funded research and development costs are included in general and administrative expenses in the consolidated income statements. The amount of internally funded research and development costs expensed during 1999, 2000, and 2001 was $540,000, $932,000 and $892,000, respectively.

Deferred tax assets and liabilities have been established for the temporary differences between financial statement and tax bases of assets and liabilities existing at the balance sheet date using expected tax rates. A valuation allowance is recorded to reduce deferred income taxes to that portion that is expected more likely than not to be realized.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Accordingly, actual results could differ from those estimates.

In accordance with industry practice, the Company classifies as current assets amounts relating to long-term contracts which may have terms extending beyond one year but are expected to be realized during the normal operating cycle of the Company. The liabilities in the accompanying balance sheets which have been classified as current liabilities are those expected to be satisfied by the use of assets classified as current assets. At September 30, 2000 and 2001, substantially all contracts in progress are expected to be completed within the next 12 months. Therefore, substantially all current assets and current liabilities as of this date are expected to be turned over in the next 12 months.

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 years ended September 30.

Certain amounts in the previously issued financial statements have been reclassified to conform to the presentation adopted in the 2001 consolidated financial statements.

On June 9, 1998, S.T. Research Corporation (“STR”) acquired Daedalus Enterprises, Inc. (“DEI”) in an acquisition whereby the outstanding STR shares were converted into approximately 86.5% of the issued and outstanding shares of DEI (the “Acquisition”). As part of this overall transaction, DEI changed its name to Sensytech, Inc. While DEI was the legal acquirer, the Acquisition was accounted for as a reverse acquisition whereby STR was deemed to have acquired DEI for financial reporting purposes.

At the Acquisition date, DEI had net operating loss carryforwards (NOLs) of approximately $2,575,000 and tax credits of approximately $40,000. The acquired NOLs and tax credits are limited as to use under the Internal Revenue Code. A portion of the NOLs were reserved through a recording of a valuation reserve at the acquisition date. To the extent that the remaining reserved NOLs were realized, the corresponding tax benefit was first used to reduce goodwill to zero and thereafter to reduce any provision for income taxes.

The Company recorded goodwill of $802,000 in connection with the acquisition. During fiscal year 1999, goodwill was reduced by $629,000 for the utilization of acquired net operating loss carryforwards (NOLs), the gain on the sale of the Michigan facility (Note 8) and the reversal of certain estimated liabilities recorded in connection with the Acquisition. During fiscal year 2000 goodwill was further reduced by $125,000 for the utilization of acquired NOLs and reversal of the valuation allowance on the acquired NOLs.

The status of accumulated costs incurred plus estimated earnings, net of contractual payments, and government progress billings for the years ended September 30 are as follows.

Unbilled costs and accrued profit on contracts in progress comprise principally amounts of revenue recognized on contracts for which billings had not been presented to the customer because the amounts were not billable at the balance sheet date. It is anticipated such unbilled amounts receivable at September 30, 2001 will be billed over the next 270 days as products and/or services are delivered. Retainages, which approximate $131,000 at September 30, 2001, will be billed and collected as contracts

are finalized with the customer. At September 30, 1999, 2000 and 2001, there are no significant unrecovered costs or estimated profits subject to future negotiation.

Receivables under certain Government contracts are based on provisional rates that permit recovery of overhead not exceeding certain limits. These overhead rates are subject to audit on an annual basis by the Defense Contract Audit Agency (DCAA). When final determination and approval of the allowable rates have been made, receivables may be adjusted accordingly. In management’s opinion, any adjustments will not be material. The DCAA has completed their audit of the rates through September 30, 1998.

At September 30, 1998 and 1999, the allowance for doubtful accounts was $0 and $312,000, respectively. During 1999, we established our allowance in the amount of $312,000. During 2000 and 2001, we reduced our reserve by $95,000 and $15,000, respectively, based upon additional information of collectability.

Depreciation and amortization expense was approximately $677,000, $560,000 and $488,000 for the years ended September 30, 1999, 2000 and 2001, respectively.

Effective February 28, 2001, the Company renewed its line of credit and related note payable with its bank. The agreement expires February 28, 2002, and provides a maximum available line of credit of $5,000,000. However, 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 bank agreement establishes the interest rate at the LIBOR rate plus 225 to 275 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 and the performance of the Company’s obligations under the line of credit agreement are collateralized by the Company’s accounts 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. At September 30, 2000 and 2001, no amounts were outstanding. Unused commitment fees of one quarter of one percent per annum are required.

The Company had a Non-Qualified Deferred Compensation Plan whereby certain employees may defer compensation with such deferrals taking the status of a general obligation of the Company. The

balance bears interest at prime plus one-half percent. Benefits under this plan were paid in full during 2000.

At September 30, 2000 and 2001, accrued severance pay relates to amounts payable to former officers of the Company. Such amounts are payable monthly through May 2002.

At September 30, 2001, the Company’s sole qualified deferred compensation plan (“the Plan”) consisted of two components. The Plan is comprised of a 401(k) plan and a profit sharing plan. In June of 1998, the Plan was amended to allow for self-direction investments of profit sharing contributions.

To participate in the Plan, eligible employees must have attained 21 years of age. Eligible employees may elect to participate in the Company’s 401(k) plan on January 1 and July 1. In 1999, 2000 and 2001, the Company matched 50% of the first six percent of employee contributions, which match amounted to $183,000, $132,000 and $131,000, respectively.

The total number of Company shares allocated to participants under the profit sharing plan at September 30, 1999, 2000 and 2001 were 514,888, 408,612, and 387,801, respectively.

On September 2, 1998, the Company entered into a sales agreement for a property held for sale in Michigan. The Company sold its Michigan facility on December 1, 1998. The Company entered into a five-year lease for a portion of the facility with the new owner. The Company, effective June 30, 1999, also signed a non-cancelable 15-year lease with a third party for the real estate at its principal location in Virginia.

The Company also leases various equipment under non-cancelable operating leases.

Rent expense for the years ended September 30, 1999, 2000 and 2001 was $835,000, $897,000 and $879,000, respectively, which included $314,000 in 1999 associated with leases from related parties. At September 30, 2001, minimum rental payments under operating leases for facilities and equipment are as follows:

The Company sub-leases to a third party a portion of its facility at its principal location in Virginia. Sub-lease income for the years ended September 30, 1999, 2000 and 2001 was $-0-, $29,000, $112,000, respectively. At September 30, 2001, minimum rentals to be received under the sub-lease through the expiration of the lease in fiscal year 2003 are $187,000.

The Company has an Incentive Stock Option Plan established in 1983 (“1983 Plan”), and a Long-Term Incentive Plan and a Non-Employee Director Stock Option Plan established in 1995 (collectively

the “1995 Plans”). The Long-Term Incentive Plan provides for the granting of options, restricted stock and/or performance awards to key employees and the Non-Employee Director Stock Option Plan provides for the granting of options to outside members of the Board of Directors to purchase common stock of the Company at the fair market value at the date of the grant. There were 138,500 exercisable options outstanding at September 30, 2001 under the Long-Term Incentive Plan. There are no options or stock appreciation rights outstanding under the 1983 Plan at September 30, 2000 or 2001 and no additional options can be granted under the 1983 Plan. The Non-Employee Director Stock Option Plan was amended to prohibit future granting of options.

The Company also has a 1991 Stock Option Plan, the (“1991 Plan”) and a 1996 Stock Option Plan, the (“1996 Plan”). The 1991 Plan and the 1996 Plan each have 25,800 exercisable options that are outstanding at September 30, 2001.

Options under all of the aforementioned Plans generally vest over a one to five year period and expire after 10 years.

Total shares of common stock reserved pursuant to the aforementioned plans and the non-qualified options are 471,500 at September 30, 2001.

The weighted average grant date fair value of options granted for the 1995 Plans was $2.47, $4.58 and $4.18 during fiscal 1999, 2000 and 2001, respectively. Total shares exercisable at September 30, 1999, 2000 and 2001 were 136,280, 57,600 and 83,900 with a weighted average exercise price of $2.45, $2.47 and $3.17, respectively.

During 2001, 40,000 options were exercised under a non-qualified stock option plan. At September 30, 2001, 3,000 options were outstanding and exercisable. The weighted average exercise price per share was $2.25 per share.

The Black-Scholes model was used to estimate the fair value of the options. Significant assumptions include a risk-free interest rate of 3.5%, a volatility rate of 65.4%, and an expected life equal to the term of the options.

The following summarizes information about stock options outstanding at September 30, 2001.

The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. Had compensation expense for the Company’s five 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 would have been reduced to the pro forma amounts indicated below for the years ended September 30, 1999, 2000 and 2001.

The Company reserved 100,000 shares of common stock for sale to eligible employees through payroll deductions over six month periods pursuant to the 1983 Employee Stock Purchase Plan (the “Purchase Plan”). The purchase price is the lower of 90% of the fair market value of the stock on the first or last day of the purchase period. Under the Purchase Plan, 9,927 shares of common stock were issued in fiscal 2000, at an average price of $4.13 per share. At September 30, 2000, there were 40,272 shares available for future purchase. This plan was inactive during the year ended September 30, 2001.

The Company adopted an incentive compensation plan that provides for a portion of the annual award to be paid in the form of stock of the Company subject to vesting requirements. In 2000, 46,292 shares were issued at a weighted average fair market value of $3.63 per share. These shares will be issued upon the completion of the vesting period. Unearned stock-based compensation consists of the remaining unamortized portion of such stock award. The Company amortized $42,000, $50,000 and $139,000 in the years ended September 30, 1999, 2000 and 2001, respectively.

During fiscal 2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in May 2000. That program authorizes the Company to purchase up to 500,000 common shares from time to time on the open market. The Company purchased 72,000 shares and 53,245 shares during the years ended September 30, 2000 and 2001, respectively, at an aggregate cost of $285,000 in 2000 and $240,000 in 2001. The purpose of the stock repurchase is to help the Company achieve its goal of enhancing stockholder value.

The income tax provision (benefit) for the years ended September 30 consisted of the following.

The Company’s deferred tax assets for the years ended September 30 are as follows.

A reconciliation of the Company’s effective tax rate to the federal statutory rate for the years ended September 30 was as follows.

The net operating loss carryforwards (NOLs) expire principally in 2011, 2012, and 2013. The NOLs were acquired in the Acquisition and are subject to limitations as to their utilization under the Internal Revenue Code. As a result of uncertainties as to the Company’s ability to generate sufficient taxable income in future periods, the Company provided a valuation allowance on the opening balance sheet for a portion of the NOLs acquired in the Acquisition. To the extent that these NOLs become realized, or that the valuation allowance on these NOLs is reduced, the corresponding tax benefits are first used to reduce goodwill to zero and thereafter will serve to reduce any provision for income taxes.

The reduction in the valuation allowance resulted from changes in the uncertainties surrounding the Company’s ability to generate future taxable income based on the Company’s sustained profitability in fiscal 1999 and fiscal 2000 and future projections of taxable income.

The change in the valuation allowance in fiscal 1999 and $125,000 of the change in fiscal 2000 was used to reduce goodwill to zero. The remaining change in the valuation allowance in fiscal 2000 of $195,000 served to reduce income tax expense. At September 30, 1998, 1999 and 2000, the valuation allowance was $388,000, $320,000 and $0 respectively.

As of September 30, 1999, 2000 and 2001, the Company had funds on deposit in excess of the federally insured amount with a bank. Approximately 90% of the Company’s revenues are generated from contracts with U.S. Government agencies or U.S. Government contractors. During the years ended September 30, 1999, 2000 and 2001, the Company recorded revenues from three significant contracts. For 1999, those contracts included the U.S. Navy Integrated Electronic Warfare System (AIEWS) subcontract from Lockheed Martin Corporation, the U.S. Navy ESM Receiver Systems contract, and the U.S. Navy Bobcat Systems contract. Revenues from these contracts amounted to 15%, 44%, and 28% of fiscal year 1999 total revenue, respectively. For 2000 and 2001, those contracts include the U.S. Navy Integrated Electronic Warfare Systems (AIEWS) subcontract from Lockheed Martin Corporation, the U.S. Navy AN/BLQ-10 (V)1 and (V)2 contract, and the U.S. Navy Bobcat Systems contract. Revenue from these contracts amounted to 25%, 8%, and 15% of fiscal year 2000 total revenue, respectively, and 38%, 13% and 5% of fiscal year 2001 revenue, respectively.

Companies which are engaged in the supply of defense-related equipment to the Government are subject to certain business risks, some of which are peculiar to that industry. Among these are: the cost of obtaining trained and skilled employees; the uncertainty and instability of prices for raw materials and supplies; the problems associated with advanced designs, which may result in unforeseen technological difficulties and cost overruns; and the intense competition and the constant necessity for improvement in facilities and personnel training. Sales to the Government may be affected by changes in procurement

policies, budget considerations, changing concepts of national defense, social and economic developments abroad and other factors.

The Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets,” in June 2001. SFAS No. 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. Management does not expect the implementation of these new pronouncements to have a significant impact on the Company’s financial position or its results of operation.

The FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” on August 15, 2001, and SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets,” on October 4, 2001. These pronouncements will be adopted in 2002, and management of the Company does not expect the implementation of these new pronouncements to materially impact the Company’s financial position or its results of operations.

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 is customer-focused by providing tailored solution-based systems as follows:


	•	Defense Systems (DS) Group designs, develops, and supports products which intercept, analyze, classify, identify, localize and track microwave signals from radars and weapons. The Company’s Electronic Support Measure (ESM) systems are used on military platforms, such as ships, submarines, patrol aircraft, and at ground installations, to intercept, analyze and identify radar/ weapon signals. Where the client desires to obtain electronic countermeasures for these potential threats, the Defense Systems Group provides integrated Electronic Countermeasures (ECM) systems for both tactical and training scenarios.

	•	Communication (Comms) Group designs, develops, and supports products which intercept signals, analyze the on-line communication, and identify and localize the involved parties. These systems are generally employed in aircraft, ships and ground installations to intercept transmissions occurring over established communications networks.

	•	Imaging Group designs, develops, and supports products for multispectral, infrared, and light imaging systems which are employed on land and on aircraft for the remote sensing of damage assessment, environmental pollution, facility inspection, utility monitoring, and situation awareness.

All three 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.

Manufacturing of the Communications Group and Defense Systems Group systems is accomplished from the Newington, Virginia facility. The Imaging Group products are manufactured in the Ann Arbor, Michigan, facility.

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 income taxes to the three segments and does not produce separate balance sheet information for each segment. In 1999 we operated in one segment and it was impracticable to obtain detailed information. The revenue and income from operations by segment for the years ended September 30 are as follows:

Based on existing rate, economic conditions and short maturities, the carrying amounts of all the financial instruments at September 30, 2000 and 2001 are reasonable estimates of their fair values. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and the capital lease obligation.

On October 3, 2001, the Company purchased certain assets used in the California operations of FEL Corporation for $400,000. The Company also assumed five executory contracts pertaining to the operating leases of real and personal property, and hired all eleven employees who were employed by FEL.


*	The year-end balance sheet data was summarized from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

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


*	The year-end balance sheet data was summarized from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

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

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

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

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information for commercial and industrial companies and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002. Inter-company accounts and transactions have been eliminated in consolidation. For further information, refer to Sensytech, Inc.’s Annual Report on Form 10-KSB for the year ended September 30, 2001.

The computation of net earnings per share is based on the weighted average number of shares of common stock outstanding during the periods presented. The weighted average number of shares used in the basic earnings per share calculation was 3,982,056 and 3,996,201 for the nine-month periods ended June 30, 2001 and 2002, respectively. The weighted average number of shares used in the diluted earnings per share calculation was 4,036,000 and 4,232,441 for the nine-month periods ended June 30, 2001 and 2002, respectively.

On February 1, 2002, the Company acquired, through its wholly-owned subsidiary ST Production Systems, Inc. (STPSI), certain assets related to the government contract business of FEL Corporation (FEL) for approximately $1,850,000 in cash and $250,000 of expenses related to the acquisition. The acquisition related expenses consist of legal, accounting, and other professional services and fees. The

acquisition has been recorded under the purchase method of accounting and, accordingly, the results of operations of STPSI business since February 1, 2002 have been included in the consolidated financial statements.

The Company has utilized the guidance of Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”, which were issued in June 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that goodwill, as well as any intangible assets believed to have an indefinite useful life, shall not be amortized for financial reporting purposes. The adoption of SFAS No. 142 on October 1, 2001 had no impact on the financial statements as the Company had no goodwill or intangible assets. In connection with the acquisition, $600,000 of intangible assets were identified and are related to acquired contracts, and were determined to have lives of eighteen to thirty-six months. The Company currently has recognized no goodwill in connection with the acquisition. Amortization expense is expected to approximate $265,000 in 2003, $100,000 in 2004, and $35,000 in 2005.

The Company has made a preliminary allocation of the purchase price to the fair value of assets and liabilities acquired. The allocation is subject to change based on final determination of the fair value of assets and liabilities acquired. The allocation is as follows.

The following condensed proforma results of operations reflect the proforma combinations of the Company and the acquired FEL business as if the combination occurred at the beginning of the periods presented, compared with the actual results of operations for Sensytech for the nine months ended June 30, 2002.

For the purpose of preparing the proforma information, the nine months ended June 30, 2001 results include nine months of FEL’s government contract business for the most recent fiscal year ended December 31, 2001. The proforma information for the nine months ended June 30, 2002 include four months of FEL’s most recent fiscal year ended December 31, 2001. FEL information for periods prior to January 1, 2001 was not available. Proforma adjustments included the amortization of intangible assets

over an eighteen to thirty-six month period, the reduction of interest income for cash used for the acquisition, and depreciation for acquired equipment using a three year life.

The Company has incurred no material costs in the past three years related to environmental issues. On February 1, 2002, the Company purchased the assets and assumed certain government contracts of FEL in Farmingdale, New Jersey. It also signed a two-year lease for a building at the former FEL facility in Farmingdale. There is known chemical contamination in the soil at other parts of the industrial park where our building is located as a result of the former operations of FEL. This contamination must be remediated pursuant to New Jersey law.

The Company entered into an agreement with the New Jersey Department of Environmental Protection, or NJDEP, under which it agreed to make a payment of $280,000, in addition to an environmental protection premium of $10,000, in settlement of potential liability to NJDEP for contamination existing at the site prior to February 1, 2002. In return, the NJDEP signed a covenant not to sue the Company for any environmental claims at this site and the landlord agreed to reduce future lease payments. For this covenant to remain valid, the Company must cease operations at this site by July 31, 2004. The Company plans to cease operations at the site before that date. The landlord at this site has agreed to hold the Company harmless from any claims based on prior environmental contamination at the site. The $280,000 payment is accounted for as prepaid rent and is being ratably amortized over the two-year life of the lease. Neither the agreement with the landlord nor the settlement with the NJDEP shields the Company from potential claims by the United States Environmental Protection Agency. To the Company’s knowledge, no such claim has been asserted or threatened.


	•	The Defense System Group (DSG) is comprised of the former EW Group (EWG) and STPSI. Defense Systems Group designs, develops, and supports products which intercept, analyze, classify, identify, localize and track microwave signals from radars and weapons. The Company’s Electronic Support Measure (ESM) systems are used on military platforms, such as ships, submarines, patrol aircraft, and at ground installations, to intercept, analyze and identify radar/ weapon signals. Where the client desires to obtain electronic countermeasures for these potential threats, the Defense Systems Group provides integrated Electronic Countermeasures (ECM) systems for both tactical and training scenarios. The Defense Systems Group manufactures airborne and surface ship communications and anti-torpedo defense systems for domestic and international clients.

	•	Communication Group (Comms) designs, develops, and supports products that intercept signals, analyze the on-line communication, and identify and localize the involved parties. These systems are generally employed in aircraft, ships and ground installations to intercept transmissions occurring over established communications networks.

	•	Imaging Group (Imaging) designs, develops, and supports products for multispectral, infrared, and light imaging systems which are employed on land and on aircraft for the remote sensing of damage assessment, environmental pollution, facility inspection, utility monitoring, and situation awareness.

the three segments and does not produce separate balance sheet information for such segment. The revenue and income from operations by segment for the nine months ended June 30, 2001 and 2002 are as follows:

In June 2002, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No.146 nullifies Emergency Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” under which a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS No.146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of the statement are effective for exit or disposal activities that are initiated after December 31, 2002. We have not yet completed our analysis of this new pronouncement and the impact it will have on the consolidated financial statements.

Ten pictures of our communications systems and imaging systems products. The seven communications systems pictures are of antennas, equipment and components of equipment. The three imaging pictures are of products and the images produced by the products.

The estimated expenses in connection with this offering (all of which will be borne by the Registrant), are as follows:

The Registrant is incorporated under the laws of the State of Delaware. Reference is made to Section 145 of the Delaware General Corporation Law, or DGCL, which generally provides that all directors and officers (as well as other employees and individuals) may be indemnified against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with certain specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation — a “derivative action”), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification extends only to expenses (including attorneys’ fees) actually and reasonably incurred in connection with defense or settlement of an action and the DGCL requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. Section 145 of the DGCL also provides that the rights conferred thereby are not exclusive of any other right which any person may be entitled to under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, and permits a corporation to advance expenses to or on behalf of a person to be indemnified upon receipt of an undertaking to repay the amounts advanced if it is determined that the person is not entitled to be indemnified.

The Registrant’s bylaws provide that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding by reason of the fact that he is or was a director or officer of the registrant (or is or was serving at the request of the registrant as director, officer, employee or agent of another entity), shall be indemnified and held harmless by the Registrant to the fullest extent authorized by the DGCL, as in effect (or to the extent that indemnification is broadened, as it may be amended), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Except with respect to actions initiated by an officer or director against the Registrant to recover the amount of an unpaid claim, the Registrant is required to indemnify an officer or director in connection with an action, suit or proceeding initiated by such person

only if such action, suit or proceeding was authorized by the board of directors of the registrant. The bylaws of the Registrant further provide that an officer or director may (60 days after a written claim has been received by the registrant) bring suit against the registrant to recover an unpaid claim and, if such suit is successful, the expense of bringing such suit. While it is a defense to such suit that the claimant has not met the applicable standards of conduct which make indemnification permissible under the DGCL, neither the failure of the board of directors to have made a determination that indemnification is proper, nor an actual determination that the claimant has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

The bylaws of the Registrant also provide that the rights conferred thereby are contract rights, that they are not exclusive of any other rights which an officer or director may have or hereafter acquire under any statute, any other provision of the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, and that they include the right to be paid by the registrant the expenses incurred in defending any specified action, suit or proceeding in advance of its final disposition provided that, if the DGCL so requires, such payment shall only be made upon delivery to the registrant by the officer or director of an undertaking to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under the bylaws or otherwise.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission

such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newington, Virginia, on August 22, 2002.


	By:	/s/ S. KENT ROCKWELL



	S. Kent Rockwell
	Chairman of the Board of Directors
	And Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on August 22, 2002. Each person whose signature appears below hereby constitutes and appoints S. Kent Rockwell and Donald F. Fultz, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name and on his behalf, in any and all capacities, this Registrant’s registration statement on Form S-1 relating to the common stock and any amendments thereto (and any additional registration statement related thereto permitted by Rule 462(b) promulgated under the Securities Act of 1933 (and all further amendments, including post-effective amendments thereto)), necessary or advisable to enable the registrant to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in respect thereof, in connection with the registration of the securities which are the subject of such registration statement, which amendments may make such changes in such registration statement as such attorney may deem appropriate, and with full power and authority to perform and do any and all acts and things whatsoever which any such attorney or substitute may deem necessary or advisable to be performed or done in connection with any or all of the above-described matters, as fully as each of the undersigned could do if personally present and acting, hereby ratifying and approving all acts of any such attorney or substitute.

II-4 EX-3.1 3 w62605exv3w1.txt CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION FIRST. The name of the corporation is Sensytech, Inc. SECOND. Its registered office in the State of Delaware is located at 1209 Orange Street, in the City of Washington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware. THIRD. The nature of the business and its purpose is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, including, without limitation, research, development and manufacturing. FOURTH. The total number of shares of Common Stock which the corporation shall have authority to issue is twenty-five million (25,000,000) and the par value of each of such shares is $0.01, amounting to two-hundred fifty thousand dollars ($250,000.00). FIFTH. [RESERVED] SIXTH. [RESERVED] SEVENTH. The corporation is to have perpetual existence. EIGHTH. The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. NINTH. In furtherance and not in limitation of the powers conferred by statue, the board of directors is expressly authorized. To make, alter or repeal the bylaws of the corporation. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any purpose and to abolish any such reserve in the manner in which it was created. By resolution passed by a majority of the whole board, to designate one or more committees, each committee to consist of two or more of the directors or the corporation, which to the extend provided in the resolution or in the bylaws of the corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committee shall have such name or names as may be stated in the bylaws of the corporation or as may be determined from time to time by resolution adopted by the board of directors. When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders meeting duly called for that purpose or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding to sell, lease or exchange all of the property and assets of the corporation and for such consideration, which may be in whole or in part shares of stock in and/or other securities of any other corporation or corporations, as its board of directors shall deem expedient and for the best interest of the corporation TENTH. Meetings of stockholders may be held outside the State of Delaware, if the by laws so provide. The books of the corporation may be kept (subject to any provision contained in the statues) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the bylaws of the corporation. Elections of directors need not be by ballot unless the bylaws of the corporation shall so provide. ELEVENTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statue, and all rights conferred upon stockholders herein are granted subject to this reservation. TWELFTH. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them and court of equitable jurisdiction within the State of Delaware may on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of tile 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 or tile 8 of the Delaware Code order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of this corporation as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation as the case may be, agree to any compromise or arrangements and to any reorganization of this corporation as consequence of such compromise or arrangements the said compromise or arrangement sand the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders of this corporation as the case may be and also on this corporation. THIRTEENTH. A Director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware as the same exists or hereafter may be amended, or (iv) for any transaction from which the Director derived an improper personal benefit. If the General Corporation Law of the State of Delaware hereafter is amend to authorize the further elimination or limitation of the liability of Directors, then the liability of a Director of the corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extend permitted by the amended Delaware General Corporation Law of the State of Delaware. Any repeal or modification of this Article THIRTEENTH by the stockholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a Director of the corporation existing at the time of such repeal or modification. EX-3.2 4 w62605exv3w2.txt AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 SENSYTECH, INC. (a Delaware Corporation) AMENDED AND RESTATED BYLAWS (as adopted on February 14, 2001) SENSYTECH, INC. AMENDED AND RESTATED BYLAWS ARTICLE 1: STOCKHOLDERS SECTION 1.1. ANNUAL MEETING. There shall be an annual meeting of the stockholders of Sensytech, Inc. (the "Corporation") no later than the last day of February of each year at 10:00 a.m. local time, or at such other date or time as shall be designated from time to time by the board of directors of the Corporation (the "Board of Directors") and stated in the notice of the meeting, for the election of directors and for the transaction of such other business as may come before the meeting. SECTION 1.2. SPECIAL MEETINGS. A special meeting of the stockholders of the Corporation may be called at any time by the Board of Directors, the Chief Executive Officer or by the written request of a majority of the members of the Board of Directors. Any call for a special meeting of the stockholders shall specify the purpose or purposes for which the meeting is being called. SECTION 1.3. NOTICE OF MEETINGS. Written notice of each meeting of stockholders, whether annual or special, stating the date, hour and place thereof, shall be served either personally or by mail, not less than ten nor more than sixty days before the meeting, upon each stockholder of record entitled to vote at such meeting and upon any other stockholder to whom the giving of notice of such a meeting may be required by law. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called and shall indicate that such notice is being issued by or at the direction of the Board of Directors. If, at any meeting, action is proposed to be taken that would, if taken, entitle stockholders to receive payment for their stock pursuant to the General Corporation Law of the State of Delaware, the notice of such meeting shall include a statement of that purpose and to that effect. If mailed, notice shall be deemed to be delivered when deposited in the United States mail or with any private document delivery service, postage or delivery fee prepaid, and shall be directed to each such stockholder at its address as it appears on the records of the Corporation or such other address as the stockholder shall designate in writing. SECTION 1.4. PLACE OF MEETING. The Board of Directors may designate any place, either in the State of Delaware or outside the State of Delaware, as the place a stockholder meeting shall be held for any annual meeting or any special meeting called by the Board of Directors. If no designation is made, the place of such meeting shall be the principal office of the Corporation. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 2 SECTION 1.5. FIXING DATE OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date which: (a) shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and (b) shall not be less than ten nor more than sixty days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date which: (a) shall not precede the date upon which the resolution fixing the record date is adopted, and (b) shall be not more than sixty days prior to such action. If no record date is fixed by the Board of Directors, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 1.6. INSPECTORS. At each meeting of the stockholders, the polls shall be opened and closed, the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided by one or more inspectors. Such inspectors shall be appointed by the Board of Directors before or at such meeting or, if no such appointment shall have been made, then by the presiding corporate officer at the meeting. If, for any reason, any of the inspectors previously appointed shall fail to attend the meeting or shall refuse or be unable to serve, inspectors in place of any inspectors so failing to attend or refusing or being unable to serve shall be appointed in like manner. SECTION 1.7. QUORUM. At any meeting of the stockholders, the holders of one-third of the outstanding shares of each class and series, if any, of the capital stock of the Corporation present in person or represented by proxy, shall constitute a quorum of the stockholders for all purposes, unless the representation of a larger number shall be required by law, in which case, the representation of the number so required shall constitute a quorum. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed in accordance with these Bylaws for an annual or special meeting, a majority in interest of the stockholders present in person or by proxy may adjourn, from time to time, without notice other than by announcement at the meeting, until the requisite holders of the amount of stock necessary to constitute a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 3 SECTION 1.8. BUSINESS. The chairman, if any, of the Board of Directors, or, in his absence the vice-chairman, if any, of the Board of Directors or the president of the Corporation or a vice-president of the Corporation, in the order named, shall call meetings of the stockholders to order and shall act as the chairman of such meeting. The secretary of the Corporation shall act as secretary at all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the presiding corporate officer may appoint any person to act as the secretary of the meeting. SECTION 1.9. STOCKHOLDER PROPOSALS. No proposal by a stockholder shall be presented for vote at an annual meeting of stockholders unless such stockholder shall, not later than the close of business on the last business day of the month of October, provide the Board of Directors or the secretary of the Corporation with written notice of its intention to present a proposal for action at the forthcoming meeting of stockholders. No proposal by a stockholder shall be presented for vote at a special meeting of stockholders unless such stockholder shall, not later than the close of business on the tenth calendar day following the date on which notice of such meeting is first given to stockholders, provide the Board of Directors or the secretary of the Corporation with written notice of its intention to present a proposal for action at the forthcoming special meeting of stockholders. Any such notice shall be given by personal delivery or shall be sent via first class certified mail, return receipt requested, postage prepaid and shall include the name and address of such stockholder, the number of voting securities that such stockholder holds of record and a statement that such stockholder holds beneficially (or if such stockholder of record does not own such shares beneficially, including the executed consent and authorization of the beneficial stockholder), the text of the proposal to be presented for vote at the meeting and a statement in support of the proposal. No new business proposed by a stockholder shall be acted upon at such annual or special meeting unless stated and filed as herein provided. Notwithstanding any other provision of these Bylaws, the Corporation shall be under no obligation to include any stockholder proposal in its proxy statement materials or otherwise present any such proposal to stockholders at a special or annual meeting of stockholders if the Board of Directors reasonably believes the proponents thereof have not complied with Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder; nor shall the Corporation be required to include any stockholder proposal not required to be included in its proxy materials to stockholders in accordance with any such section, rule or regulation. SECTION 1.10. VOTING; PROXIES. At all meetings of stockholders, a stockholder entitled to vote may vote either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the secretary of the Corporation at or before the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 4 SECTION 1.11. VOTING BY BALLOT. The votes for directors, and upon the demand of any stockholder or when required by law, the votes upon any question before the meeting, shall be by ballot. SECTION 1.12. VOTING LISTS. The corporate officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares of stock registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to such meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city in which such meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where such meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 1.13. VOTING OF STOCK OF CERTAIN HOLDERS. Shares of capital stock of the Corporation standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or in the absence of such provision, as the board of directors of such corporation may determine. Shares of capital stock of the Corporation standing in the name of a deceased person, a minor ward or an incompetent person may be voted by such person's administrator, executor, court-appointed guardian or conservator, either in person or by proxy, without a transfer of such stock into the name of such administrator, executor, court-appointed guardian or conservator. Shares of capital stock of the Corporation standing in the name of a trustee may be voted by such trustee, either in person or by proxy. Shares of capital stock of the Corporation standing in the name of a receiver may be voted by such receiver, either in person or by proxy, and stock held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in any appropriate order of the court by which such receiver was appointed. A stockholder whose stock is pledged shall be entitled to vote such stock, either in person or by proxy, until the stock has been transferred into the name of the pledgee; thereafter, the pledgee shall be entitled to vote, either in person or by proxy, the stock so transferred. Shares of its own capital stock belonging to the Corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares of capital stock at any given time; however, shares of the Corporation's own capital stock held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of shares of outstanding capital stock at any given time. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 5 ARTICLE 2: BOARD OF DIRECTORS SECTION 2.1. NUMBER AND TERM OF OFFICE. The business and the property of the Corporation shall be managed and controlled by the Board of Directors. The Board of Directors shall consist of no fewer than three directors and no more than ten directors. Within the limits above specified, the number of directors shall be determined by the Board of Directors pursuant to a resolution adopted by a majority of the directors then in office. Except as provided herein in these bylaws, directors shall be elected at the annual meeting of stockholders and each director shall serve for one year and until his or her successor shall be elected and quality. Directors need not be stockholders. SECTION 2.2. REMOVAL. Any director, any class of directors or the entire Board of Directors may be removed from office by stockholder vote at any time without regard to reason therefore, but only if the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of each class and series, if any, of the capital stock of the Corporation entitled to vote upon election of directors shall vote in favor of such removal. SECTION 2.3. VACANCIES. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled only by the affirmative vote a majority of the remaining directors then in office, although the same may represent less than a quorum; except that vacancies resulting from removal from office by a vote of the stockholders may be filled by the stockholders at the same meeting at which such removal occurs; provided, however, that the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of each class and series, if any, of the capital stock of the Corporation entitled to vote upon the election of directors shall vote for each replacement director. All directors elected to fill vacancies shall hold office for a term expiring at the time of the next annual meeting of stockholders and until his or her successor shall be elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of an incumbent director. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at any time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the Board of Directors (as constituted immediately prior to any applicable increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares of capital stock at the time outstanding, taken together as a class, having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. SECTION 2.4. PLACE OF MEETINGS, ETC. The Board of Directors may hold its meetings, and may have an office and keep the books of the Corporation (except as otherwise may be provided by law), in such place or places in the State of Delaware or outside of the State of Delaware, as the Board of Directors may determine from time to time. Any director may participate telephonically in any meeting of the Board of Directors in accordance with Section 2.14 and such participation shall be considered to be the same as his physical presence thereat. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 6 SECTION 2.5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held on the day of the annual meeting of stockholders after the adjournment thereof and at such other times and places as the Board of Directors may fix. No notice shall be required for any such regular meeting of the Board of Directors. SECTION 2.6. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by direction of the chairman of the Board of Directors, the Vice-Chairman of the Board of Directors, the president of the Corporation, a vice-president of the Corporation or of the directors then in office. The secretary or any assistant secretary of the Corporation shall give notice of each special meeting, stating the date, hour and place thereof, by delivering the same personally or by mail, at least five days before such meeting, to each director; however, such notice may be waived by any director. If mailed, notice shall be deemed to be delivered when deposited in the United States mail or with any private express document delivery service, postage or delivery fee prepaid. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every director shall be present, even though without any notice, any business may be transacted. SECTION 2.7. QUORUM; ACTIONS BY BOARD. A majority of the total number of directors then in office shall constitute a quorum for the transaction of business; however, if at any meeting of the Board of Directors there be less than a quorum present, a majority of those present may adjourn the meeting from time to time. At any meeting of the Board of Directors at which a quorum is present, action may be taken by the affirmative vote of at least a majority of the members of the Board of Directors in attendance at such meeting, unless otherwise set forth herein. SECTION 2.8. BUSINESS. Business shall be transacted at meetings of the Board of Directors in such order as the Board of Directors may determine. At all meetings of the Board of Directors, the chairman, if any, of the Board of Directors, or in his absence the vice-chairman, if any, of the Board of Directors, the president of the Corporation, or an executive vice-president of the Corporation, in the order named, shall preside. SECTION 2.9. CONTRACTS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the Corporation's directors or officers have a financial interest or are directors or officers, shall be void or voidable solely for this reason or solely because such director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes such contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts relating to such officer's or director's relationship or interest and relating to the contract or transaction are disclosed or are known to the Board of Directors or committee thereof, and the Board of Directors or committee thereof in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, although the disinterested directors may represent less than a quorum; or Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 7 (b) The material facts relating to such officer's or director's relationship or interest and relating to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) The contract or transaction is fair with respect to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. For purposes of the foregoing provisions, interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee thereof which authorizes such a contract or transaction. SECTION 2.10. COMPENSATION OF DIRECTORS. Each director of the Corporation who is not a salaried officer or employee of the Corporation or of a subsidiary of the Corporation shall receive such allowances for serving as a director and such fees for attendance at meetings of the Board of Directors, the executive committee or any other committee appointed by the Board of Directors as the Board of Directors may from time to time determine. SECTION 2.11. ELECTION OF OFFICERS AND COMMITTEES. At the first regular meeting of the Board of Directors held after each annual meeting of stockholders, the Board of Directors shall elect the officers of the Corporation and members of the executive committee, if there is one, as provided in Articles 3 and 4 of these Bylaws. The Board of Directors may designate such other committees with such power and authority (to the extent permitted by law, the Corporation's Certificate of Incorporation, as in effect, and these Bylaws), as may be provided by resolution of the Board of Directors. SECTION 2.12. NOMINATION. Subject to the rights of holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intention to make such nomination or nominations has been given, either by personal delivery or by United States first class certified mail, postage prepaid, return receipt requested, to the secretary of the Corporation not later than: (a) with respect to an election to be held at an annual meeting of stockholders, the close of business on the last day of the month of October, and (b) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the stockholder is a holder of record of capital stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 8 (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each such nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated by the Board of Directors; and (v) the consent of each such nominee to serve as a director of the Corporation if so elected. The presiding corporate officer at the meeting may refuse to permit the nomination of any person not made in compliance with the foregoing procedure. SECTION 2.13. ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing and such writing is filed with the minutes of the proceedings of the Board of Directors or the committee. SECTION 2.14. PARTICIPATION BY CONFERENCE TELEPHONE. Members of the Board of Directors or any committee thereof may participate in a regular or special meeting of the Board of Directors or committee thereof by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear one another and such participation shall constitute presence in person at such meeting. ARTICLE 3: EXECUTIVE COMMITTEE SECTION 3.1. NUMBER AND TERM OF OFFICE. The Board of Directors may, by resolution adopted by the affirmative vote of a majority of the members of the Board of Directors, create an executive committee and elect the members thereof from among the directors then in office. The executive committee shall consist of such number of members as may be fixed from time to time by resolution of the Board of Directors in accordance with and as permitted by applicable law. The Board of Directors by resolution shall appoint those directors who shall serve as members of the executive committee. Unless otherwise ordered by the Board of Directors, each elected member of the executive committee shall continue to be a member thereof until the expiration of his term of service as a director. SECTION 3.2. POWERS. The executive committee may, while the Board of Directors is not in session, exercise all or any of the powers of the Board of Directors in all cases in which specific directions shall not have been given by the Board of Directors; provided, however, that the executive committee shall not have the power or authority of the Board of Directors with respect to amending the Corporation's Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, amending the Bylaws, declaring a dividend, authorizing the issuance of stock or adopting a certificate of ownership and merger. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 9 SECTION 3.3. MEETINGS. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof by delivery of not less than five days notice, given in person, by mail, by telegraph or by facsimile (if allowed by law) to each member, stating the place, date and hour of the meeting, but such notice may be waived by any member of the executive committee. If mailed, notice shall be deemed to be delivered when deposited in the United States mail or with any private document delivery service, postage or delivery fee prepaid. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every member of the executive committee shall be present, in person or by telephone, even though without any notice, any business may be transacted. SECTION 3.4. PRESIDING OFFICER. At all meetings of the executive committee, the chairman of the executive committee, who shall be designated by the Board of Directors from among the members of the committee, shall preside, and the Board of Directors shall designate a member of such committee to preside in the absence of the chairman thereof. The Board of Directors may also similarly elect from its members one or more alternate members of the executive committee to serve at the meetings of such committee in the absence or disqualification of any regular member or members, and, in case more than one alternate is elected, shall designate at the time of election the priorities as between them. SECTION 3.5. VACANCIES. The Board of Directors, by the affirmative vote of a majority of the members of the Board of Directors then in office, shall fill vacancies in the executive committee by election from the directors. SECTION 3.6. RULES OF PROCEDURE; QUORUM. All action by the executive committee shall be reported to the Board of Directors at the next succeeding meeting of the Board of Directors after such action has been taken and shall be subject to revision or alteration by the Board of Directors; provided, however, that no rights or acts of third parties shall be affected by any such revision or alteration. The executive committee shall fix its own rules of procedure, and shall meet where and as provided by such rules or by resolution of the Board of Directors, but in every case the presence of a majority of the total number of members of the executive committee shall be necessary to constitute a quorum. In every case, the affirmative vote of a majority of all of the members of the executive committee present at the meeting shall be necessary for the adoption of any resolution. ARTICLE 4: OFFICERS SECTION 4.1. NUMBER AND TERM OF OFFICE. The officers of the Corporation shall be a president, a chief executive officer, one or more vice-presidents with such designations, if any, as may be determined by the Board of Directors, a chief financial officer, a secretary, a treasurer, and such other officers as may be elected or appointed from time to time by the Board of Directors, including such assistant secretaries and assistant treasurers as may be determined by the Board of Directors. In addition, the Board of Directors may elect a chairman thereof and Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 10 may also elect a vice-chairman as officers of the Corporation (each of whom shall be a director). Any two or more offices may be held by the same person, except that the offices of president and secretary, and president and vice president, may not be held by the same person. In its discretion, the Board of Directors may leave any office unfilled. The officers of the Corporation shall be elected or appointed annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. Each officer shall hold office until his or her successor shall have been duly elected or appointed, until his or her death or until he or she shall resign or shall have been removed by the Board of Directors. SECTION 4.2. VACANCIES. Vacancies or new offices may be filled at any time by the affirmative vote of a majority of the members of the Board of Directors. SECTION 4.3. REMOVAL. Any officer may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation would be served thereby. SECTION 4.4. THE CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman, if any, of the Board of Directors shall preside at all meetings of stockholders and of the Board of Directors and shall have such other authority and perform such other duties as are prescribed by law, by these Bylaws and by the Board of Directors. The Chairman may sign, with the secretary of the Corporation or an authorized assistant secretary, certificates for stock of the Corporation. The Board of Directors may designate the chairman thereof as chief executive officer, in which case he shall have such authority and perform such duties as are prescribed by these Bylaws and the Board of Directors for the chief executive officer. SECTION 4.5. THE VICE-CHAIRMAN OF THE BOARD OF DIRECTORS. The vice-chairman, if any, of the Board of Directors shall have such authority and perform such other duties as are prescribed by these Bylaws and by the Board of Directors. In the absence or inability to act of the chairman of the Board of Directors, the vice-chairman shall preside at the meetings of the stockholders and of the Board of Directors and shall have and exercise all of the powers and duties of the chairman of the Board of Directors. The Vice-Chairman may sign, with the secretary of the Corporation or an authorized assistant secretary, certificates for stock of the Corporation. The Board of Directors may designate the vice-chairman as chief executive officer, in which case he shall have such authority and perform such duties as are prescribed by these Bylaws and the Board of Directors for the chief executive officer. SECTION 4.6. THE PRESIDENT. The president of the Corporation shall have such authority and perform such duties as are prescribed by law, by these Bylaws, by the Board of Directors and by the chief executive officer (if the president is not the chief executive officer). If there is no chairman or vice-chairman, of the Board of Directors, or in the chairman's or vice-chairman's absence or the chairman's or vice-chairman's inability to act as the chairman of the Board of Directors, the president shall preside at all meetings of stockholders and of the Board of Directors. The president my sign, with the secretary of the Corporation or an authorized assistant secretary, certificates for stock of the Corporation. Unless the Board of Directors Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 11 designates the chairman of the Board of Directors or the vice-chairman as chief executive officer, the president shall be the chief executive officer, in which case he shall have such authority and perform such duties as are prescribed by these Bylaws and the Board of Directors for the chief executive officer. SECTION 4.7. THE CHIEF EXECUTIVE OFFICER. Unless the Board of Directors designates the chairman of the Board of Directors or the vice-chairman as chief executive officer, the president shall be the chief executive officer of the Corporation. Subject to the supervision and direction of the Board of Directors, the chief executive officer of the Corporation shall have general supervision of the business, property and affairs of the Corporation, including the power to appoint and discharge agents and employees, and the powers vested in him or her by the Board of Directors, by law or by these Bylaws or which usually attach or pertain to such office. SECTION 4.8. THE CHIEF FINANCIAL OFFICER. Subject to the direction and supervision of the chief executive officer and the Board of Directors, the Chief Financial Officer shall be primarily responsible for the financial and accounting affairs of the Corporation. In addition, he or she shall perform such other duties as may be assigned to him or her from time to time by the chairman of the Board of Directors, the president, the Board of Directors or these Bylaws. SECTION 4.9. THE VICE-PRESIDENTS. In the absence or inability or refusal to act of the chairman of the Board of Directors, if any, the president of the Corporation, and the vice-chairman, if any, of the Board of Directors, the vice-president of the Corporation (or in the event there is more than one vice-president of the Corporation, the vice-presidents thereof in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the chairman of the Board of Directors, of the president of the Corporation and of the vice-chairman of the Board of Directors, and when so acting, shall have all the powers of and be subject to all the restrictions upon the chairman of the Board of Directors, the president of the Corporation and the vice-chairman of the Corporation. The vice-presidents of the Corporation shall perform such duties as may be assigned to them from time to time by the chairman of the Board of Directors, the president, the vice-chairman, the Board of Directors, or these Bylaws. SECTION 4.10. THE TREASURER. Subject to the direction of the chief executive officer of the Corporation and the Board of Directors, the treasurer of the Corporation shall: (a) have charge and custody of all the funds and securities of the Corporation; (b) when necessary or proper, endorse for collection or cause to be endorsed on behalf of the Corporation, checks, notes and other obligations, and cause the deposit of the same to the credit of the Corporation in such bank or banks or depository as the Board of Directors may designate or as the Board of Directors by resolution may authorize; (c) sign all receipts and vouchers for payments made to the Corporation other than routine receipts and vouchers, the signing of which he or she may delegate; (d) sign all checks made by the Corporation (provided, however, that the Board of Directors may authorize and prescribe by resolution the manner in which checks drawn on banks or depositories shall be signed, including the use of facsimile signatures, and the manner in which officers, agents or employees shall be authorized to sign); (e) unless otherwise provided by resolution of the Board of Directors, sign with an officer-director all bills of exchange and Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 12 promissory notes of the Corporation; (f) if authorized by the Board of Directors, sign with the president or an executive vice-president all certificates representing shares of the capital stock; (g) whenever required by the Board of Directors, render a statement of his or her cash account; (h) enter regularly full and accurate account of the Corporation in books of the Corporation to be kept by the treasurer for that purpose; (i) exhibit, at all reasonable times, his or her books and accounts to any director of the Corporation upon application at the treasurer's office during regular business hours; and (j) perform all acts incident to the position of treasurer. If required by the Board of Directors, the treasurer of the Corporation shall give a bond for the faithful discharge of his or her duties in such sum as the Board of Directors may require. SECTION 4.11. THE SECRETARY. The secretary of the Corporation shall: (a) keep the minutes of all meetings of the Board of Directors, the minutes of all meetings of the stockholders and (unless otherwise directed by the Board of Directors) the minutes of all committees, in books provided for that purpose; (b) attend to the giving and serving of all notices of the Corporation; (c) sign with an officer or director or any other duly authorized person, in the name of the Corporation, all contracts authorized by the Board of Directors or by the executive committee, and, when so ordered by the Board of Directors or the executive committee, affix the seal of the Corporation thereto; (d) have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors or the executive committee may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the secretary's office during regular business hours; and (e) in general, perform all of the duties incident to the office of the secretary, subject to the control of the chief executive officer and the Board of Directors. SECTION 4.12. THE ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The assistant treasurers of the Corporation shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors may determine. The assistant secretaries of the Corporation as thereunto authorized by the Board of Directors may sign with the chairman of the Board of Directors, the president of the Corporation, the vice-chairman of the Board of Directors or a vice-president of the Corporation, certificates for stock of the Corporation, the issue of which shall have been authorized by a resolution of the Board of Directors. The assistant treasurers and assistant secretaries, in general, shall perform such duties as shall be assigned to them by the treasurer or the secretary, respectively, or chief executive officer, the Board of Directors, or these Bylaws. SECTION 4.13. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 13 SECTION 4.14. VOTING UPON STOCKS. Unless otherwise ordered by the Board of Directors or by the executive committee, any officer or any person or persons appointed in writing by any of them, shall have full power and authority on behalf of the Corporation to attend, to act and to vote at any meetings of stockholders of any Corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock, and which, as the owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors may confer like powers upon any other person or persons. ARTICLE 5: CONTRACTS AND LOANS SECTION 5.1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 5.2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. ARTICLE 6: CERTIFICATES FOR STOCK AND THEIR TRANSFER SECTION 6.1. CERTIFICATES FOR STOCK. Certificates representing shares of capital stock of the Corporation shall be in such form as may be determined by the Board of Directors. Such certificates shall be signed by the chairman of the Board of Directors, the president of the Corporation, the vice-chairman of the Board of Directors or a vice-president of the Corporation and by the secretary or an authorized assistant secretary and shall be sealed with the seal of the Corporation. The seal may be a facsimile. If a stock certificate is countersigned: (i) by a transfer agent other than the Corporation or its employee, or (ii) by a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In the event that any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. All certificates for capital stock shall be consecutively numbered or otherwise identified. The name of the person to whom the shares of capital stock represented thereby are issued, with the number of shares of capital stock and date of issue, shall be entered on the books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificates shall be issued until the former certificate for a like number of shares of capital stock shall have been surrendered and canceled, except that, in the event of a lost, destroyed or mutilated certificate, a new one may be issued therefor upon such terms and indemnity to the Corporation as the Chief Executive Officer may prescribe. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 14 SECTION 6.2. TRANSFERS OF STOCK. Transfers of capital stock of the Corporation shall be made only on the books of the Corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the Corporation, and on surrender for cancellation of the certificate for such capital stock. The person in whose name capital stock stands on the books of the Corporation shall be deemed to be the owner thereof for all purposes as regards the Corporation. ARTICLE 7: FISCAL YEAR SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of October in each year and end on the last day of September in each year. ARTICLE 8: SEAL SECTION 8.1. SEAL. The Board of Directors shall approve a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation. ARTICLE 9: WAIVER OF NOTICE SECTION 9.1. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of these Bylaws or under the provisions of the Certificate of Incorporation or under the provisions of the General Corporation Law of the State of Delaware, waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance of any person at a meeting for which any notice is required to be given under the provisions of these Bylaws, the Certificate of Incorporation or the General Corporation Law of the State of Delaware shall constitute a waiver of notice of such meeting except when the person attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any businesses because the meeting is not lawfully called or convened. ARTICLE 10: AMENDMENTS SECTION 10.1. AMENDMENTS. These Bylaws may be altered, amended or repealed and new Bylaws may be adopted at any meeting of the Board of Directors by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the members of the Board of Directors. Bylaws of Sensytech, Inc. (as adopted on February 14, 2001) Page 15 ARTICLE 11: INDEMNIFICATION AND ADVANCEMENT OF COSTS SECTION 11.1. INDEMNIFICATION AND ADVANCEMENT OF COSTS. The Corporation shall indemnify its officers, directors, employees and agents to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time; and the Corporation may advance costs incurred by officers, directors, employees and agents of the Corporation or another corporation, partnership, joint venture, trust or other enterprise, in their defenses of any civil, criminal, administrative or investigative action or proceeding asserted against one or more of them by reason of the fact of his, her, or their serving or having served in such capacity or capacities at the request of the Corporation and in advance of a final disposition of such action, suit or proceeding to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, provided that the terms and conditions of such advancement of costs is approved by the Board of Directors. Nothing herein is intended to limit the Corporation's authority to indemnify its officers, directors, employees and agents or to advance funds in connection therewith, under the General Corporation Law of the State of Delaware, as amended from time to time. EX-10.1 5 w62605exv10w1.txt FINANCING AND SECURITY AGREEMENT Exhibit 10.1 SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT THIS SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (this "Agreement") is made as of the 28th day of February, 2002, by and between SENSYTECH, INC., formerly known as Sensys Technologies Inc., a Delaware corporation, (the "Borrower") and BANK OF AMERICA, N. A., formerly known as NationsBank, N. A., a national banking association (the "Lender"). RECITALS A. The Borrower and the Lender have previously executed an Amended and Restated Financing and Security Agreement dated as of February 28, 1999, as modified by a First Amendment to Amended and Restated Financing and Security Agreement dated as of February 28, 2001 (collectively, the "Original Financing Agreement") pursuant to which the Lender has extended various credit facilities to the Borrower. B. The Borrower has requested that the Lender amend and restate the Original Financing Agreement and extend credit facilities consisting of a revolving credit facility in the maximum principal amount of $10,000,000 and a letter of credit facility, as part of that revolving credit facility. C. The Lender is willing to make the credit facilities available to the Borrower upon the terms and subject to the conditions set forth in this Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. As used in this Agreement, the terms defined in the Preamble and Recitals hereto shall have the respective meanings specified therein, and the following terms shall have the following meanings: "Account" individually and "Accounts" collectively mean all presently existing or hereafter acquired or created accounts, accounts receivable, health-care insurance receivables, contract rights, notes, drafts, instruments, acceptances, chattel paper, leases and writings evidencing a monetary obligation or a security interest in, or a lease of, goods, all rights to payment of a monetary obligation or other consideration under present or future contracts (including, without limitation, all rights (whether or not earned by performance) to receive payments under presently existing or hereafter acquired or created letters of credit), or by virtue of property that has been sold, leased, licensed, assigned or otherwise disposed of, services rendered or to be rendered, loans and advances made or other considerations given, by or set forth in or arising out of any present or future chattel paper, note, draft, lease, acceptance, writing, bond, insurance policy, instrument, document or general intangible, and all extensions and renewals of any thereof, all rights under or arising out of present or future contracts, agreements or general interest in goods which gave rise to any or all of the foregoing, including all commercial tort claims, other claims or causes of action now existing or hereafter arising in connection with or under any agreement or document or by operation of law or otherwise, all collateral security of any kind (including, without limitation, real property mortgages and deeds of trust) Supporting Obligations, letter-of-credit rights and letters of credit given by any Person with respect to any of the foregoing, all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing and all equipment and general intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all Proceeds of the foregoing. "Account Debtor" means any Person who is obligated on a Receivable and "Account Debtors" mean all Persons who are obligated on the Receivables. "ACH Transactions" means any cash management or related services including the automatic clearing house transfer of funds by the Lender for the account of the Borrower pursuant to agreement or overdrafts. "Adjustment Date" has the meaning described in Section 8.5 (Assignments by Lender). "Administrative Fees" has the meaning described in Section 2.3.3 (Administrative Fees). "Affiliate" means, with respect to any designated Person, any other Person, (a) directly or indirectly controlling, directly or indirectly controlled by, or under direct or indirect common control with the Person designated, (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in such designated Person, or (c) five percent (5%) or more of whose stock or other equity interest is directly or indirectly owned or held by such designated Person. For purposes of this definition, the term "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other equity interests or by contract or otherwise. "Agreement" means this Second Amended and Restated Financing and Security Agreement, as amended, restated, supplemented or otherwise modified in writing in accordance with the provisions of Section 8.2 (Amendments; Waivers). "Applicable Interest Rate" means (a) the Eurodollar Rate or (b) the Base Rate. "Applicable Margin" means the applicable rate per annum added, as set forth in Section 2.4.1 (Applicable Interest Rates), to the Eurodollar Base Rate or the Prime Rate. "Assets" means at any date all assets that, in accordance with GAAP consistently applied, should be classified as assets on a balance sheet of the Borrower. 2 "Assignee" means any Person to which the Lender assigns all or any portion of its interests under this Agreement, any Commitment, and any Loan, in accordance with the provisions of Section 8.5 (Assignments by Lender), together with any and all successors and assigns of such Person; "Assignees" means the collective reference to all Assignees. "Bankruptcy Code" means Title 11 of the United States Code, as amended from time to time, and any successor Laws. "Borrower" means the "Borrower" as defined in the preamble of this Agreement and each Additional Borrower. "Base Rate" the sum of (a) the Applicable Margin plus (b) the Prime Rate. "Base Rate Loan" means any Loan for which interest is to be computed with reference to the Base Rate. "Borrowing Base" has the meaning described in Section 2.1.3 (Borrowing Base). "Borrowing Base Deficiency" has the meaning described in Section 2.1.3 (Borrowing Base). "Borrowing Base Report" has the meaning described in Section 2.1.4 (Borrowing Base Report). "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State are authorized or required to close. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Lease" means with respect to any Person any lease of real or personal property, for which the related Lease Obligations have been or should be, in accordance with GAAP consistently applied, capitalized on the balance sheet of that Person.. "Cash Equivalents" means (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit with maturities of one (1) year or less from the date of acquisition of, or money market accounts maintained with, the Lender, any Affiliate of the Lender, or any other domestic commercial bank having capital and surplus in excess of One Hundred Million Dollars ($100,000,000.00) or such other domestic financial institutions or domestic brokerage houses to the extent disclosed to, and approved by, the Lender and (c) commercial paper of a domestic issuer rated at least either A-1 by Standard & Poor's Corporation (or its successor) or P-1 by Moody's Investors Service, Inc. (or its successor) with maturities of six (6) months or less from the date of acquisition. 3 "Chattel Paper" means a record or records (including, without limitation, electronic chattel paper) that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, or a lease of specific goods; all Supporting Obligations with respect thereto; any returned, rejected or repossessed goods and software covered by any such record or records and all proceeds (in any form including, without limitation, accounts, contract rights, documents, chattel paper, instruments and general intangibles) of such returned, rejected or repossessed goods; and all Proceeds of the foregoing. "Closing Date" means the Business Day, in any event not later than February 28, 2002, on which the Lender shall be satisfied that the conditions precedent set forth in Section 5.1 (Conditions to Initial Advance) have been fulfilled or otherwise waived by the Lender. "Collateral" means all property of the Borrower subject from time to time to the Liens of this Agreement, any of the Security Documents and/or any of the other Financing Documents, together with any and all Proceeds thereof. "Collateral Account" has the meaning described in Section 2.1.8 (The Collateral Account). "Collateral Disclosure List" has the meaning described in 0 (Collateral Disclosure List). "Collection" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Accounts or otherwise with respect to any Collateral, including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to an Account, and other proceeds of Collateral; and "Collections" means the collective reference to all of the foregoing. "Commitment" means the Revolving Credit Commitment. "Committed Amount" means the Revolving Credit Committed Amount. "Compliance Certificate" means a periodic Compliance Certificate described in Section 6.1.1 (Financial Statements). "Commonly Controlled Entity" means an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 414(b) or (c) of the Internal Revenue Code. "Copyrights" means and includes, in each case whether now existing or hereafter arising, all of the Borrower's rights, title and interest in and to (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations, copyright applications, and all renewals of any of the foregoing, (b) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past, current or future infringements of any of the foregoing, (c) the right to sue for past, present and future infringements of any of the foregoing, and (d) all rights corresponding to any of the foregoing throughout the world. 4 "Credit Facility" means the Revolving Credit Facility or the Letter of Credit Facility, as the case may be, and "Credit Facilities" means collectively the Revolving Credit Facility or the Letter of Credit Facility and any and all other credit facilities now or hereafter extended under or secured by this Agreement. "Default" means an event which, with the giving of notice or lapse of time, or both, could or would constitute an Event of Default under the provisions of this Agreement. "Documents" means all documents of title or receipts, whether now existing or hereafter acquired or created, and all Proceeds of the foregoing. "EBITDA" means as to the Borrower for any period of determination thereof, the sum of (a) the net profit (or loss) determined in accordance with GAAP, plus (b) interest and taxes for such period, plus (c) depreciation and amortization of assets for such period. "Eligible Receivable" and "Eligible Receivables" mean, at any time of determination thereof, the unpaid portion of each account (net of any returns, discounts, claims, credits, charges, accrued rebates or other allowances, offsets, deductions, counterclaims, disputes or other defenses and reduced by the aggregate amount of all reserves, limits and deductions provided for in this definition and elsewhere in this Agreement) receivable in United States Dollars by the Borrower, provided each account conforms and continues to conform to the following criteria to the satisfaction of the Lender: (a) the account arose in the ordinary course of the Borrower's business from services performed by the Borrower; (b) the account is a valid, legally enforceable obligation of the Account Debtor and requires no further act on the part of any Person under any circumstances to make the account payable by the Account Debtor; (c) the account is based upon an enforceable order or contract, written or oral, for services performed, and the same were performed in accordance with such order or contract; (d) if the account arises from the performance of services, such services have been fully rendered and do not relate to any warranty claim or obligation; (e) the account is evidenced by an invoice or other documentation in form acceptable to the Lender, dated no later than the date of shipment or performance and containing only terms normally offered by the Borrower; (f) the amount shown on the books of the Borrower and on any invoice, certificate, schedule or statement delivered to the Lender is owing to the Borrower and no partial payment has been received unless reflected with that delivery; 5 (g) the account is not outstanding more than ninety (90) days from the date of the invoice therefore or past due more than sixty (60) days after its due date, which shall not be later than thirty (30) days after the invoice date; (h) the account is not owing by any Account Debtor for which the Lender has deemed fifty percent (50%) or more of such Account Debtor's other accounts (or any portion thereof) due to the Borrower to be non-Eligible Receivables; (i) the Account Debtor has not returned, rejected or refused to retain, or otherwise notified the Borrower of any dispute concerning, or claimed nonconformity of, any services from the furnishing of which the account arose; (j) the account is not subject to any present or contingent (and no facts exist which are the basis for any future) offset, claim, deduction or counterclaim, dispute or defense in law or equity on the part of such Account Debtor, or any claim for credits, allowances, or adjustments by the Account Debtor because of unsatisfactory services, or for any other reason including, without limitation, those arising on account of a breach of any express or implied representation or warranty; (k) the Account Debtor is not a Subsidiary or Affiliate of the Borrower or an employee, officer, director or shareholder of the Borrower or any Subsidiary or Affiliate of the Borrower; (l) the Account Debtor is not incorporated or primarily conducting business or otherwise located in any jurisdiction outside of the United States of America unless the account receivable is supported by a letter of credit from a financial institution acceptable to the Lender; (m) the Account Debtor with respect to such account is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending; (n) the Borrower is not indebted in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by the Borrower in the ordinary course of its business; (o) the account does not arise from services under or related to any warranty obligation of the Borrower or out of service charges, finance charges or other fees for the time value of money; (p) the account is not evidenced by chattel paper or an instrument of any kind and is not secured by any letter of credit; 6 (q) the title of the Borrower to the account is absolute and is not subject to any prior assignment, claim, Lien, or security interest, except Permitted Liens; (r) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the performance of the Borrower or any other obligor in respect of any of the Borrower's agreements with the Account Debtor; (s) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the account and any of the Account Debtor's obligations in respect of the account; (t) the Borrower has the full and unqualified right and power to assign and grant a security interest in, and Lien on, the account to the Lender as security and collateral for the payment of the Obligations; (u) the account does not arise out of a contract with, or order from, an Account Debtor that, by its terms, forbids or makes void or unenforceable the assignment or grant of a security interest by the Borrower to the Lender of the account arising from such contract or order; (v) the account is subject to a Lien in favor of the Lender, which Lien is perfected as to the account by the filing of financing statements and which Lien upon such filing constitutes a first priority security interest and Lien; (w) no part of the account represents a retainage; (x) the Lender in the good faith exercise of its sole and absolute discretion has not deemed the account ineligible because of uncertainty as to the creditworthiness of the Account Debtor or because the Lender otherwise considers the collateral value of such account to the Lender to be impaired or its ability to realize such value to be insecure; and (y) the account does not constitute a final billing or close out billing relating to a completed contract with contingencies that remain to be satisfied. In the event of any dispute, under the foregoing criteria, as to whether an account is, or has ceased to be, an Eligible Receivable, the decision of the Lender in the good faith exercise of its sole and absolute discretion shall control. "Enforcement Costs" means all expenses, charges, costs and fees whatsoever (including, without limitation, reasonable outside and allocated in-house counsel attorney's fees and expenses) of any nature whatsoever paid or incurred by or on behalf of the Lender in connection with (a) any or all of the Obligations, this Agreement and/or any of the other Financing Documents, (b) the 7 creation, perfection, collection, maintenance, preservation, defense, protection, realization upon, disposition, sale or enforcement of all or any part of the Collateral, this Agreement or any of the other Financing Documents, including, without limitation, those costs and expenses more specifically enumerated in Section 3.6 (Costs) and/or Section 8.10 (Enforcement Costs), and (c) the monitoring, administration, processing and/or servicing of any or all of the Obligations, the Financing Documents, and/or the Collateral. "Equipment" means all equipment, machinery, computers, chattels, tools, parts, machine tools, furniture, furnishings, fixtures and supplies of every nature, presently existing or hereafter acquired or created and wherever located, whether or not the same shall be deemed to be affixed to real property, and all of such types of property leased by the Borrower and all of the Borrower's rights and interests with respect thereto under such leases (including, without limitation, options to purchase), together with all accessions, additions, fittings, accessories, special tools, and improvements thereto and substitutions therefore and all parts and equipment which may be attached to or which are necessary or beneficial for the operation, use and/or disposition of such personal property, all licenses, warranties, franchises and General Intangibles related thereto or necessary or beneficial for the operation, use and/or disposition of the same, together with all Accounts, Chattel Paper, Instruments and other consideration received by the Borrower on account of the sale, lease or other disposition of all or any part of the foregoing, and together with all rights under or arising out of present or future Documents and contracts relating to the foregoing and all Proceeds of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Base Rate" means with respect to any Eurodollar Loan, the fluctuating rate of interest (rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the one (1) month London interbank offered rate for deposits in United States Dollars at approximately 11:00 a.m. (London time) on the second preceding business day, as adjusted from time to time in Lender's sole discretion for then-applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. If for any reason such rate is not available, the term "Eurodollar Base Rate" shall mean the fluctuating rate of interest equal to the rate of interest (rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the one (1) month London interbank offered rate for deposits in United States Dollars at approximately 11:00 a.m. (London time) on the second preceding day, as adjusted from time to time in Lender's sole discretion for then-applicable reserve requirements, deposit insurance assessment rates and other regulatory costs; provided, however, if more than one rate is specified on Reuters Screen LIBO page, the applicable rate shall be the arithmetic mean of all such rates. "Eurodollar Business Day" means any Business Day on which dealings in United States Dollar deposits are carried out on the London interbank market and on which commercial banks are open for domestic and international business (including dealings in Dollar deposits) in London, England. "Eurodollar Loan" means any Loan for which interest is to be computed with reference to the Eurodollar Rate. 8 "Eurodollar Rate" means with respect to any Eurodollar Loan, (a) the Applicable Margin, plus (b) the per annum rate of interest calculated pursuant to the following formula: Eurodollar Base Rate 1.00 - Reserve Percentage "Event of Default" has the meaning described in ARTICLE VII (Default and Rights and Remedies). "Facilities" means the collective reference to the loan, letter of credit, interest rate protection, foreign exchange risk, cash management, and other credit facilities now or hereafter provided to the Borrower by the Lender or any of its Affiliates. "Fees" means the collective reference to each fee payable to the Lender under the terms of this Agreement or under the terms of any of the other Financing Documents. "Financing Documents" means at any time collectively this Agreement, the Notes, the Security Documents, the Letter of Credit Documents, and any other instrument, agreement or document previously, simultaneously or hereafter executed and delivered by the Borrower, any Guarantor and/or any other Person, singly or jointly with another Person or Persons, evidencing, securing, guarantying or in connection with this Agreement, any Note, any of the Security Documents, any of the Facilities, and/or any of the Obligations. "Funded Debt" of a Person means all outstanding liabilities for borrowed money and other interest-bearing liabilities, including current and long-term debt, issued letters of credit and Capitalized Leases less the non-current portion of Subordinated Liabilities. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "General Intangibles" means all general intangibles of every nature, whether presently existing or hereafter acquired or created, and without implying any limitation of the foregoing, further means all books and records, commercial tort claims, other claims (including without limitation all claims for income tax and other refunds), payment intangibles, Supporting Obligations, choses in action, claims, causes of action in tort or equity, contract rights, judgments, customer lists, software, Patents, Trademarks, licensing agreements, rights in intellectual property, goodwill (including goodwill of the Borrower's business symbolized by and associated with any and all Trademarks, trademark licenses, Copyrights and/or service marks), royalty payments, licenses, letter-of-credit rights, letters of credit, contractual rights, the right to receive refunds of unearned insurance premiums, rights as lessee under any lease of real or personal property, literary rights, Copyrights, service names, service marks, logos, trade secrets, amounts received as an award in or settlement of a suit in damages, deposit accounts, interests in joint ventures, general or limited partnerships, or limited liability companies or partnerships, rights in applications for any of the foregoing, books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing, all Supporting Obligations with respect to any of the foregoing, and all Equipment and General 9 Intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all Proceeds of the foregoing. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any department, agency or instrumentality thereof. "Government Contracts" means any contract with the United States or with any state or political subdivision thereof or any department, agency or instrumentality of the United States, or any state or political subdivision thereof. "Hazardous Materials" means (a) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any substance the presence of which on any property now or hereafter owned, acquired or operated by the Borrower is prohibited by any Law similar to those set forth in this definition; and (d) any other substance which by Law requires special handling in its collection, storage, treatment or disposal. "Hazardous Materials Contamination" means the contamination (whether presently existing or occurring after the date of this Agreement) by Hazardous Materials of any property owned, operated or controlled by the Borrower or for which the Borrower has responsibility, including, without limitation, improvements, facilities, soil, ground water, air or other elements on, or of, any property now or hereafter owned, acquired or operated by the Borrower, and any other contamination by Hazardous Materials for which the Borrower is, or is claimed to be, responsible. "Indebtedness" of a Person means at any date the total liabilities of such Person at such time determined in accordance with GAAP consistently applied. "Interest Rate Election Notice" has the meaning described in Section 2.4.2(e) (Selection of Interest Rate). "Instrument" means a negotiable instrument or any other writing which evidences a right to payment of a monetary obligation and is not itself a security agreement or lease and is of a type that in the ordinary course of business is transferred by delivery with any necessary endorsement or assignment, and all Supporting Obligations with respect to any of the foregoing and all Proceeds with respect to any of the foregoing. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the Income Tax Regulations issued and proposed to be issued thereunder. "Inventory" means all goods of the Borrower and all right, title and interest of the Borrower in and to all of its now owned and hereafter acquired goods and other personal property furnished under any contract of service or intended for sale or lease, including, without limitation, all raw materials, work-in-process, finished goods and materials and supplies of any 10 kind, nature or description which are used or consumed in the Borrower's business or are or might be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods and other personal property and all licenses, warranties, franchises, General Intangibles, personal property and all documents of title or documents relating to the same, together with all Accounts, Chattel Paper, Instruments and other consideration received by any Borrower on account of the sale, lease or other disposition of all or any part of the foregoing, and together with all rights under or arising out of present or future Documents and contracts relating to the foregoing and all Proceeds of the foregoing. "Investment Property" means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract or commodity account and all Proceeds of, and Supporting Obligations with respect to, the foregoing. "Item of Payment" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Receivables or otherwise with respect to any Collateral, including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to a Receivable, and other proceeds of Collateral; and "Items of Payment" means the collective reference to all of the foregoing. "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs, or decrees of any Governmental Authority. "Lease Obligations" of a Person means for any period the rental commitments of such Person for such period under leases for real and/or personal property (net of rent from subleases thereof, but including taxes, insurance, maintenance and similar expenses which such Person, as the lessee, is obligated to pay under the terms of said leases, except to the extent that such taxes, insurance, maintenance and similar expenses are payable by sublessees), including rental commitments under Capital Leases. "Letter of Credit" and "Letters of Credit" shall have the meanings described in Section 2.2.1 (Letters of Credit). "Letter of Credit Agreement" means the collective reference to each letter of credit application and agreement substantially in the form of the Lender's then standard form of application for letter of credit or such other form as may be approved by the Lender, executed and delivered by the Borrower in connection with the issuance of a Letter of Credit, as the same may from time to time be amended, restated, supplemented or modified and "Letter of Credit Agreements" means all of the foregoing in effect at any time and from time to time. "Letter of Credit Cash Collateral Account" has the meaning described in Section 2.2.3 (Terms of Letters of Credit). "Letter of Credit Documents" means any and all drafts under or purporting to be under a Letter of Credit, any Letter of Credit Agreement, and any other instrument, document or agreement executed and/or delivered by the Borrower or any other Person under, pursuant to or in connection with a Letter of Credit or any Letter of Credit Agreement. 11 "Letter of Credit Facility" means the facility established pursuant to Section 2.2 (Letter of Credit Facility). "Letter of Credit Fee" and "Letter of Credit Fees" have the meanings described in Section 2.2.2 (Letter of Credit Fees). "Letter of Credit Obligations" means all Obligations of the Borrower with respect to the Letters of Credit and the Letter of Credit Agreements. "Letter-of-credit right" means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. "Liabilities" means at any date all liabilities that in accordance with GAAP consistently applied should be classified as liabilities on a consolidated balance sheet of the Borrower and its Subsidiaries.. "Lien" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, lien, financing statement, hypothecation, provision in any instrument or other document for confession of judgment, cognovit or other similar right or other remedy, claim, charge, control over or interest of any kind in real or personal property securing any indebtedness, duties, obligations, and liabilities owed to, or claimed to be owed to, a Person, all whether perfected or unperfected, avoidable or unavoidable, based on the common law, statute or contract or otherwise, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction, excluding the precautionary filing of any financing statement by any lessor in a true lease transaction, by any bailor in a true bailment transaction or by any consignor in a true consignment transaction under the Uniform Commercial Code of any jurisdiction or the agreement to give any financing statement by any lessee in a true lease transaction, by any bailee in a true bailment transaction or by any consignee in a true consignment transaction. "Loan" means the Revolving Loan. "Loan Notice" has the meaning described in Section 2.1.2 (Procedure for Making Advances). "Lockbox" has the meaning described in Section 2.1.8 (The Collateral Account). "Multi-employer Plan" means a Plan that is a Multi-employer plan as defined in Section 4001(a)(3) of ERISA. "Net Worth" means as to the Borrower at any date the excess of (a) the Assets, over (b) the Liabilities less the non-current portion of Subordinated Indebtedness". 12 "Note" means the Revolving Credit Note, and "Notes" means collectively the Revolving Credit Note and any other promissory note which may from time to time evidence all or any portion of the Obligations. "Obligations" means all present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of the Borrower to the Lender under, arising pursuant to, in connection with and/or on account of the provisions of this Agreement, each Note, each Security Document, and/or any of the other Financing Documents, the Loan, any Swap Contract and/or any of the Facilities including, without limitation, the principal of, and interest on, each Note, late charges, the Fees, Enforcement Costs, and prepayment fees (if any), letter of credit reimbursement obligations, letter of credit fees or fees charged with respect to any guaranty of any letter of credit; also means all other present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of the Borrower to the Lender or its Affiliates of any nature whatsoever regardless of whether such indebtedness, duties, obligations and liabilities be direct, indirect, primary, secondary, joint, several, joint and several, fixed or contingent; and also means any and all renewals, extensions, substitutions, amendments, restatements and rearrangements of any such indebtedness, duties, obligations and liabilities. "Outstanding Letter of Credit Obligations" has the meaning described in Section 2.2.3 (Terms of Letters of Credit). "Patents" means and includes, in each case whether now existing or hereafter arising, all of the Borrower's rights, title and interest in and to (a) any and all patents and patent applications, (b) any and all inventions and improvements described and claimed in such patents and patent applications, (c) reissues, divisions, continuations, renewals, extensions and continuations-in-part of any patents and patent applications, (d) income, royalties, damages, claims and payments now or hereafter due and/or payable under and with respect to any patents or patent applications, including, without limitation, damages and payments for past and future infringements, (e) rights to sue for past, present and future infringements of patents, and (f) all rights corresponding to any of the foregoing throughout the world. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Liens" means: (a) Liens for Taxes which are not delinquent or which the Lender has determined in the exercise of its sole and absolute discretion (i) are being diligently contested in good faith and by appropriate proceedings, and such contest operates to suspend collection of the contested Taxes and enforcement of a Lien, (ii) the Borrower has the financial ability to pay, with all penalties and interest, at all times without materially and adversely affecting the Borrower, and (iii) are not, and will not be with appropriate filing, the giving of notice and/or the passage of time, entitled to priority over any Lien of the Lender; (b) deposits or pledges to secure obligations under workers' compensation, social security or similar laws, or under unemployment insurance in the ordinary course of business; (c) Liens securing the Obligations; (d) judgment Liens to the extent the entry of such judgment does not constitute a Default or an Event of Default under the terms of this Agreement or result in the sale or levy of, or execution on, any of the Collateral; and (e) such other Liens, if any, as are set forth on Schedule 4.1.19 attached hereto and made a part hereof. 13 "Permitted Uses" means to finance the performance of Borrower's Government Contracts, to support the issuance of commercial and standby letters of credit and for Borrower's short term working capital purposes. "Person" means and includes an individual, a corporation, a partnership, a joint venture, a limited liability company or partnership, a trust, an unincorporated association, a Governmental Authority, or any other organization or entity. "Plan" means any pension plan that is covered by Title IV of ERISA and in respect of which the Borrower or a Commonly Controlled Entity is an "employer" as defined in Section 3 of ERISA. "Post-Default Rate" means the Base Rate in effect from time to time, plus four percent (4%) per annum. "Post-Expiration Date Letter of Credit"and "Post-Expiration Date Letters of Credit" have the meanings described in Section 2.2.3 (Terms of Letters of Credit). "Prepayment" means a Revolving Loan Mandatory Prepayment, a Revolving Loan Optional Prepayment, as the case may be, and "Prepayments" mean collectively all Revolving Loan Mandatory Prepayments and all Revolving Loan Optional Prepayments. "Pricing Ratio" means the Funded Debt to EBITDA Ratio. "Prime Rate" means the floating and fluctuating per annum prime commercial lending rate of interest of the Lender, as established and declared by the Lender at any time or from time to time. The Prime Rate shall be adjusted automatically, without notice, as of the effective date of any change in such prime commercial lending rate. The Prime Rate does not necessarily represent the lowest rate of interest charged by the Lender to borrowers. "Proceeds" has the meaning described in the Uniform Commercial Code as in effect from time to time. "Receivable" means one of the Borrower's now owned and hereafter owned, acquired or created Accounts, Chattel Paper, General Intangibles and Instruments; and "Receivables" means all of the Borrower's now or hereafter owned, acquired or created Accounts, Chattel Paper, General Intangibles and Instruments, and all Proceeds thereof. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder. "Registered Organization" means an organization organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized. "Reserve Percentage" means, at any time, the then current maximum rate for which reserves (including any basic, special, supplemental, marginal and emergency reserves) are required to be maintained by member banks of the Federal Reserve System under Regulation D 14 of the Board of Governors of the Federal Reserve System against "Eurocurrency liabilities", as that term is defined in Regulation D. Without limiting the effect of the foregoing, the Reserve Percentage shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Percentage. "Responsible Officer" means the chief executive officer of the Borrower or the president of the Borrower or, with respect to financial matters, the chief financial officer of the Borrower. "Revolving Credit Commitment" means the agreement of the Lender relating to the making of the Revolving Loan and advances thereunder subject to and in accordance with the provisions of this Agreement. "Revolving Credit Commitment Period" means the period of time from the Closing Date to the Business Day preceding the Revolving Credit Termination Date. "Revolving Credit Committed Amount" has the meaning described in Section 2.1 (Revolving Credit Facility). "Revolving Credit Expiration Date" means February 28, 2003. "Revolving Credit Facility" means the facility established by the Lender pursuant to Section 2.1 (Revolving Credit Facility). "Revolving Credit Note" has the meaning described in Section 2.1.5 (Revolving Credit Note). "Revolving Credit Termination Date" means the earlier of (a) the Revolving Credit Expiration Date, or (b) the date on which the Revolving Credit Commitment is terminated pursuant to 7.1.18 (Remedies) or otherwise. "Revolving Credit Unused Line Fee" and "Revolving Credit Unused Line Fees" have the meanings described in Section 2.1.10 (Revolving Credit Unused Line Fee). "Revolving Loan" has the meaning described in Section 2.1 (Revolving Credit Facility). "Revolving Loan Account" has the meaning described in Section 2.1.9 (Revolving Loan Account). "Revolving Loan Mandatory Prepayment" and "Revolving Loan Mandatory Prepayments" have the meanings described in Section 2.1.6 (Mandatory Prepayments of Revolving Loan). "Revolving Loan Optional Prepayment" and "Revolving Loan Optional Prepayments" have the meanings described in Section 2.1.7 (Optional Prepayment of Revolving Loan). 15 "Security Documents" means collectively any assignment, pledge agreement, security agreement, mortgage, deed of trust, deed to secure debt, financing statement and any similar instrument, document or agreement under or pursuant to which a Lien is now or hereafter granted to, or for the benefit of, the Lender on any real or personal property of any Person to secure all or any portion of the Obligations, all as the same may from time to time be amended, restated, supplemented or otherwise modified. "Security Procedures" means the rules, policies and procedures adopted and implemented by the Lender and its Affiliates at any time and from time to time with respect to security procedures and measures relating to electronic funds transfers, all as the same may be amended, restated, supplemented, terminated, or otherwise modified at any time and from time to time by the Lender in its sole and absolute discretion. "State" means the Commonwealth of Virginia. "Subordinated Indebtedness" means all Indebtedness, incurred at any time by the Borrower, which is in amounts, subject to repayment terms, and subordinated to the Obligations, as set forth in one or more written agreements, all in form and substance satisfactory to the Lender in its sole and absolute discretion. "Subsidiary" means any corporation the majority of the voting shares of which at the time are owned directly by the Borrower and/or by one or more Subsidiaries of the Borrower. "Supporting Obligation" means a letter-of-credit right, secondary obligation or obligation of a secondary obligor or that supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument or investment property. "Swap Contract" means any document, instrument or agreement between Borrower and Lender or any affiliate of Lender, now existing or entered into in the future, relating to an interest rate swap transaction, forward rate transaction, interest rate cap, floor or collar transaction, any similar transaction, any option to enter into any of the foregoing, and any combination of the foregoing, which agreement may be oral or in writing, including, without limitation, any master agreement relating to or governing any or all of the foregoing and any related schedule or confirmation, each as amended from time to time. "Tangible Net Worth" means the value of Borrower's total assets (including leaseholds and leasehold improvements and reserves against assets but excluding goodwill, patents, trademarks, trade names, organization expense, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, and other like intangibles, and monies due from affiliates, officers, directors, employees, shareholders, members or managers of Borrower) less total liabilities, including but not limited to accrued and deferred income taxes, but excluding the non-current portion of Subordinated Liabilities. "Taxes" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed by any Governmental 16 Authority on the Borrower or any of its properties or assets or any part thereof or in respect of any of its franchises, businesses, income or profits. "Trademarks" means and includes in each case whether now existing or hereafter arising, all of the Borrower's rights, title and interest in and to (a) any and all trademarks (including service marks), trade names and trade styles, and applications for registration thereof and the goodwill of the business symbolized by any of the foregoing, (b) any and all licenses of trademarks, service marks, trade names and/or trade styles, whether as licensor or licensee, (c) any renewals of any and all trademarks, service marks, trade names, trade styles and/or licenses of any of the foregoing, (d) income, royalties, damages and payments now or hereafter due and/or payable with respect thereto, including, without limitation, damages, claims, and payments for past, present and future infringements thereof, (e) rights to sue for past, present and future infringements of any of the foregoing, including the right to settle suits involving claims and demands for royalties owing, and (f) all rights corresponding to any of the foregoing throughout the world. "Uniform Commercial Code" means, unless otherwise provided in this Agreement, the Uniform Commercial Code as adopted by and in effect from time to time in the State or in any other jurisdiction, as applicable. "Wholly Owned Subsidiary" means any domestic United States corporation all the shares of stock of all classes of which (other than directors' qualifying shares) at the time are owned directly or indirectly by the Borrower and/or by one or more Wholly Owned Subsidiaries of the Borrower. "Wire Transfer Procedures" means the rules, policies and procedures adopted and implemented by the Lender and its Affiliates at any time and from time to time with respect to electronic funds transfers, including, without limitation, the Security Procedures, all as the same may be amended, restated, supplemented, terminated or otherwise modified at any time and from time to time by the Lender in its sole and absolute discretion. Section 1.2 Accounting Terms and Other Definitional Provisions. Unless otherwise defined herein, as used in this Agreement and in any certificate, report or other document made or delivered pursuant hereto, accounting terms not otherwise defined herein, and accounting terms only partly defined herein, to the extent not defined, shall have the respective meanings given to them under GAAP, as consistently applied to the applicable Person. All terms used herein which are defined by the Uniform Commercial Code shall have the same meanings as assigned to them by the Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, subsection, schedule and exhibit references are references to articles, sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Financing Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. 17 ARTICLE II THE CREDIT FACILITIES Section 2.1 The Revolving Credit Facility. 2.1.1 Revolving Credit Facility. Subject to and upon the provisions of this Agreement, the Lender establishes a revolving credit facility in favor of the Borrower. The aggregate of all advances under the Revolving Credit Facility is sometimes referred to in this Agreement as the "Revolving Loan". The principal amount of Ten Million Dollars ($10,000,000) is the "Revolving Credit Committed Amount". If at any time the unpaid principal balance of the Revolving Loan exceeds the Revolving Credit Committed Amount in effect from time to time, the Borrower shall pay such excess to the Lender ON DEMAND. During the Revolving Credit Commitment Period, the Borrower may request advances under the Revolving Credit Facility in accordance with the provisions of this Agreement; provided that after giving effect to the Borrower's request the aggregate outstanding principal balance of the Revolving Loan and all Letter of Credit Obligations would not exceed the lesser of (a) the Revolving Credit Committed Amount or (b) the then most current Borrowing Base. Unless sooner paid, the unpaid Revolving Loan, together with interest accrued and unpaid thereon, and all other Obligations shall be due and payable in full on the Revolving Credit Expiration Date. 2.1.2 Procedure for Making Advances Under the Revolving Loan; Lender Protection Loans. The Borrower may borrow under the Revolving Credit Facility on any Business Day. Advances under the Revolving Loan shall be deposited to a demand deposit account of the Borrower with the Lender (or an Affiliate of the Lender) or shall be otherwise applied as directed by the Borrower, which direction the Lender may require to be in writing. Not later than 12:00 noon. (Eastern Time) on the date of the requested borrowing, the Borrower shall give the Lender oral or written notice (a "Loan Notice") of the amount and (if requested by the Lender) the purpose of the requested borrowing. Any oral Loan Notice shall be confirmed in writing by the Borrower within three (3) Business Days after the making of the requested advance under the Revolving Loan. Each Loan Notice shall be irrevocable. In addition, the Borrower hereby irrevocably authorizes the Lender at any time and from time to time, without further request from or notice to the Borrower, to make advances under the Revolving Loan, and to establish, without duplication, reserves against the Borrowing Base, which the Lender, in its sole and absolute discretion, deems necessary or appropriate to protect the interests of the Lender, including, without limitation, advances and reserves under the Revolving Loan made to cover debit balances in the Revolving Loan Account, principal of, and/or interest on, any Loan, the Obligations (including, without limitation, any 18 Letter of Credit Obligations), and/or Enforcement Costs, prior to, on, or after the termination of other advances under this Agreement, regardless of whether the outstanding principal amount of the Revolving Loan that the Lender may advance or reserve hereunder exceeds the Revolving Credit Committed Amount or the Borrowing Base. 2.1.3 Borrowing Base. As used in this Agreement, the term "Borrowing Base" means at any time, an amount equal to the aggregate of (a) ninety percent (90%) of the amount of Eligible Receivables derived from Government Contracts, (b) eighty percent (80%) of the amount of Eligible Receivables derived from contracts other than Government Contracts approved by the Lender, (c) ninety percent (90%) of the Borrower's foreign Eligible Receivables that are supported by a letter of credit from a financial institution acceptable to the Lender and (d) one hundred percent (100%) of cash held in restricted accounts as advance payments and secured by letters of credit. The Borrowing Base shall be computed based on the Borrowing Base Report most recently delivered to and accepted by, the Lender in its sole and absolute discretion. In the event the Borrower fails to furnish a Borrowing Base Report required by Section 2.1.4 (Borrowing Base Report), or in the event the Lender believes that a Borrowing Base Report is no longer accurate, the Lender may, in its sole and absolute discretion exercised from time to time and without limiting its other rights and remedies under this Agreement, suspend the making of or limit advances under the Revolving Loan. The Borrowing Base shall be subject to reduction by amounts credited to the Collateral Account since the date of the most recent Borrowing Base Report and by the amount of any Receivable which was included in the Borrowing Base but which the Lender determines fails to meet the respective criteria applicable from time to time for Eligible Receivables. If at any time the total of the aggregate principal amount of the Revolving Loan and Outstanding Letter of Credit Obligations exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") shall exist. Each time a Borrowing Base Deficiency exists, the Borrower, at the sole and absolute discretion of the Lender exercised from time to time, shall pay the Borrowing Base Deficiency ON DEMAND to the Lender. Without implying any limitation on the Lender's discretion with respect to the Borrowing Base, the criteria for Eligible Receivables contained in the definition of Eligible Receivables are in part based upon the business operations of the Borrower existing on or about the Closing Date and upon information and records furnished to the Lender by the Borrower. If at any time or from time to time hereafter, the business operations of the Borrower change or such information and records furnished to the Lender is materially incorrect or misleading, the Lender in its discretion, may at any time and from time to time during the duration of this Agreement change such criteria or add new criteria. The Lender may communicate such changed or additional criteria to the Borrower from time to time either orally or in writing. 2.1.4 Borrowing Base Report. The Borrower will furnish to the Lender a report of the Borrowing Base (each a "Borrowing Base Report"; collectively, the "Borrowing Base Reports") in the form 19 attached hereto as EXHIBIT C and made a part hereof or such other form as may be required from time to time by the Lender, appropriately completed and duly signed as follows: (a) if any sum is outstanding under the Revolving Loan or any Letter of Credit is outstanding, not later than the twentieth (20th) day after the end of each month and at such other times as may be reasonably requested by the Lender and (b) if there is no sum outstanding under the Revolving Loan and no Letter of Credit is outstanding, not later than the forty fifth (45th) day after the end of each calendar quarter and at such other times as may be reasonably requested by the Lender. The Borrowing Base Report shall contain the amount and payments on the Receivables, and the calculations of the Borrowing Base, all in such detail, and accompanied by such supporting and other information, as the Lender may from time to time request. Upon the Lender's request upon the creation of any Receivables or at such other intervals as the Lender may require, the Borrower will provide the Lender with: (a) confirmatory assignment schedules; (b) copies of Account Debtor invoices; (c) such further schedules, documents and/or information regarding any of the Receivables as the Lender may reasonably require. The items to be provided under this subsection shall be in form satisfactory to the Lender, and certified as true and correct by a Responsible Officer (or by any other officers or employees of the Borrower whom a Responsible Officer from time to time authorizes in writing to do so), and delivered to the Lender from time to time solely for the Lender's convenience in maintaining records of the Collateral. The failure of the Borrower to deliver any such items to the Lender shall not affect, terminate, modify, or otherwise limit the Liens of the Lender on the Collateral. 2.1.5 Revolving Credit Note. The obligation of the Borrower to pay the Revolving Loan, with interest, shall be evidenced by a promissory note (as from time to time extended, amended, restated, supplemented or otherwise modified, the "Revolving Credit Note") substantially in the form of EXHIBIT "A" attached hereto and made a part hereof, with appropriate insertions. The Revolving Credit Note shall be dated as of the Closing Date, shall be payable to the order of the Lender at the times provided in the Revolving Credit Note, and shall be in the principal amount of the Revolving Credit Committed Amount. The Borrower acknowledges and agrees that, if the outstanding principal balance of the Revolving Loan outstanding from time to time exceeds the face amount of the Revolving Credit Note, the excess shall bear interest at the Post-Default Rate for the Revolving Loan and shall be payable, with accrued interest, ON DEMAND. The Revolving Credit Note shall not operate as a novation of any of the Obligations or nullify, discharge, or release any such Obligations or the continuing contractual relationship of the parties hereto in accordance with the provisions of this Agreement. 2.1.6 Mandatory Prepayments of Revolving Loan. The Borrower shall make the mandatory prepayments (each a "Revolving Loan Mandatory Prepayment" and collectively, the "Revolving Loan Mandatory Prepayments") of the Revolving Loan at any time and from time to time in such amounts requested by the Lender pursuant to Section 2.1.3 (Borrowing Base) in order to cover any Borrowing Base Deficiency. 20 2.1.7 Optional Prepayments of Revolving Loan. The Borrower shall have the option, at any time and from time to time, to prepay (each a "Revolving Loan Optional Prepayment" and collectively the "Revolving Loan Optional Prepayments") the Revolving Loan, in whole or in part without premium or penalty. 2.1.8 The Collateral Account. The Borrower will deposit, or cause to be deposited, all Items of Payment to a bank account designated by the Lender and from which the Lender alone has power of access and withdrawal (the "Collateral Account"). Each deposit shall be made not later than the next Business Day after the date of receipt of the Items of Payment. The Items of Payment shall be deposited in precisely the form received, except for the endorsements of the Borrower where necessary to permit the collection of any such Items of Payment, the Borrower hereby agreeing to make such endorsement. In the event the Borrower fails to do so, the Lender is hereby authorized by the Borrower to make the endorsement in the name of the Borrower. Prior to such a deposit, the Borrower will not commingle any Items of Payment with any of the Borrower's other funds or property, but will hold them separate and apart in trust and for the account of the Lender. In addition, if so directed by the Lender, the Borrower shall direct the mailing of all Items of Payment from its Account Debtors to a post-office box designated by the Lender, or to such other additional or replacement post-office boxes pursuant to the request of the Lender from time to time (collectively, the "Lockbox"). The Lender shall have unrestricted and exclusive access to the Lockbox. The Borrower hereby authorizes the Lender to inspect all Items of Payment, endorse all Items of Payment in the name of the Borrower, and deposit such Items of Payment in the Collateral Account. The Lender reserves the right, exercised in its sole and absolute discretion from time to time, to provide to the Collateral Account credit prior to final collection of an Item of Payment and to disallow credit for any Item of Payment which is unsatisfactory to the Lender. In the event Items of Payment are returned to the Lender for any reason whatsoever, the Lender may, in the exercise of its discretion from time to time, forward such Items of Payment a second time. Any returned Items of Payment shall be charged back to the Collateral Account, the Revolving Loan Account, or other account, as appropriate. The Lender will apply the whole or any part of the collected funds credited to the Collateral Account against the Revolving Loan (or with respect to Items of Payment that are not proceeds of Accounts or after a Default or Event of Default, against any of the Obligations) or credit such collected funds to a depository account of the Borrower with the Lender (or an Affiliate of the Lender), the order and method of such application to be in the reasonable discretion of the Lender. 2.1.9 Revolving Loan Account. The Lender will establish and maintain a loan account on its books (the "Revolving Loan Account") to which the Lender will (a) debit (i) the principal amount of each advance of the Revolving Loan made by the Lender hereunder as of the date made, (ii) the 21 amount of any interest accrued on the Revolving Loan as and when due, and (iii) any other amounts due and payable by the Borrower to the Lender from time to time under the provisions of this Agreement in connection with the Revolving Loan, including, without limitation, Enforcement Costs, Fees, late charges, and service, collection and audit fees, as and when due and payable, and (b) credit all payments made by the Borrower to the Lender on account of the Revolving Loan as of the date made including, without limitation, funds credited to the Revolving Loan Account from the Collateral Account. The Lender may debit the Revolving Loan Account for the amount of any Item of Payment that is returned to the Lender unpaid. All credit entries to the Revolving Loan Account are conditional and shall be readjusted as of the date made if final and indefeasible payment is not received by the Lender in cash or solvent credits. Any and all periodic or other statements or reconciliations, and the information contained in those statements or reconciliations, of the Revolving Loan Account shall be final, binding and conclusive upon the Borrower in all respects, absent manifest error, unless the Lender receives specific written objection thereto from the Borrower within thirty (30) Business Days after such statement or reconciliation shall have been received by the Borrower. 2.1.10 Revolving Credit Unused Line Fee. The Borrower shall pay to the Lender a quarterly revolving credit facility fee (collectively, the "Revolving Credit Unused Line Fees" and individually, a "Revolving Credit Unused Line Fee") in an amount equal to one quarter of one percent (1/4%) per annum of the average daily unused and undisbursed portion of the Revolving Credit Committed Amount in effect from time to time accruing during each calendar quarter. The accrued and unpaid portion of the Revolving Credit Unused Line Fee shall be paid by the Borrower to the Lender on the first day of each calendar quarter, commencing on the first such date following the date hereof, and on the Revolving Credit Termination Date. Section 2.2 The Letter of Credit Facility. 2.2.1 Letters of Credit. Subject to and upon the provisions of this Agreement, and as a part of the Revolving Credit Commitment, the Borrower, upon the prior approval of the Lender, may obtain standby or commercial letters of credit (as the same may from time to time be amended, supplemented or otherwise modified, each a "Letter of Credit" and collectively the "Letters of Credit") from the Lender from time to time from the Closing Date until the Business Day preceding the Revolving Credit Termination Date. The Borrower will not be entitled to obtain a Letter of Credit hereunder unless after giving effect to the request, the outstanding principal balance of the Revolving Loan and of the Letter of Credit Obligations would not exceed the lesser of (i) the Revolving Credit Committed Amount, or (ii) the most current Borrowing Base. 2.2.2 Letter of Credit Fees. Prior to or simultaneously with the opening of each Letter of Credit, the Borrower shall pay to the Lender, a letter of credit fee (each a "Letter of Credit Fee" and collectively the "Letter of Credit Fees") in an amount equal to two percent (2%) per annum of the face amount of the Letter of Credit. The Letter of Credit Fees shall be paid upon the opening of each Letter of Credit and upon each anniversary thereof, if any. In addition, the Borrower shall pay to the Lender any and all additional issuance, negotiation, processing, transfer or other 22 fees to the extent and as and when required by the provisions of any Letter of Credit Agreement. All Letter of Credit Fees and all such other additional fees are included in and are a part of the "Fees" payable by the Borrower under the provisions of this Agreement and are a part of the Obligations. Subsequent to an Event of Default, the Letter of Credit Fee shall be increased to three percent (3%) per annum of the amount of each Letter of Credit. 2.2.3 Terms of Letters of Credit; Post-Expiration Date Letters of Credit.. Each Letter of Credit shall (a) be opened pursuant to a Letter of Credit Agreement and (b) expire on a date not later than the Business Day preceding the Revolving Credit Expiration Date; provided, however, if any Letter of Credit does have an expiration date later than the Business Day preceding the Revolving Credit Termination Date (each a "Post-Expiration Date Letter of Credit" and collectively, the "Post-Expiration Date Letters of Credit"), effective as of the Business Day preceding the Revolving Credit Termination Date and without prior notice to or the consent of the Borrower, the Lender shall make advances under the Revolving Loan for the account of the Borrower in the aggregate face amount of all such Letters of Credit. The Lender shall deposit the proceeds of such advances into one or more non-interest bearing accounts with and in the name of the Lender and over which the Lender alone shall have exclusive power of access and withdrawal (collectively, the "Letter of Credit Cash Collateral Account"). The Letter of Credit Cash Collateral Account is to be held by the Lender as additional collateral and security for any Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit. The Borrower hereby assigns, pledges, grants and sets over to the Lender a first priority security interest in, and Lien on, all of the funds on deposit in the Letter of Credit Cash Collateral Account, together with any and all Proceeds and products thereof as additional collateral and security for the Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit. The Borrower acknowledges and agrees that the Lender shall be entitled to fund any draw or draft on any Post-Expiration Date Letter of Credit from the monies on deposit in the Letter of Credit Cash Collateral Account without notice to or consent of the Borrower or the Lender. The Borrower further acknowledges and agrees that the Lender's election to fund any draw or draft on any Post-Expiration Date Letter of Credit from the Letter of Credit Cash Collateral shall in no way limit, impair, lessen, reduce, release or otherwise adversely affect the Borrower's obligation to pay any Letter of Credit Obligations under or relating to the Post-Expiration Date Letters of Credit. At such time as all Post-Expiration Date Letters of Credit have expired and all Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit have been paid in full, the Lender agrees to apply the amount of any remaining funds on deposit in the Letter of Credit Cash Collateral Account to the then unpaid balance of the Obligations under the Revolving Credit Facility in such order and manner as the Lender shall determine in its sole and absolute discretion in accordance with the provisions of this Agreement. The aggregate face amount of all Letters of Credit at any one time outstanding and issued by the Lender pursuant to the provisions of this Agreement, including, without limitation, any and all Post-Expiration Date Letters of Credit, plus the amount of any unpaid Letter of Credit Fees accrued or scheduled to accrue thereon, and less the aggregate amount of all drafts issued under or purporting to have been issued under such Letters of Credit that have been paid by the Lender and for which the Lender has been reimbursed by the Borrower in full in accordance with Section 2.2.5 (Payments of Letters of Credit) and the Letter 23 of Credit Agreements, and for which the Lender has no further obligation or commitment to restore all or any portion of the amounts drawn and reimbursed, is herein called the "Outstanding Letter of Credit Obligations". 2.2.4 Procedures for Letters of Credit. The Borrower shall give the Lender written notice at least five (5) Business Days prior to the date on which the Borrower desires the Lender to issue a Letter of Credit.The Borrower shall give the Lender written notice at least three (3) Business Days prior to the date on which a Letter of Credit is requested to be opened of their request for a Letter of Credit. Such notice shall be accompanied by a duly executed and delivered Letter of Credit Agreement. Upon receipt of the Letter of Credit Agreement and the Letter of Credit Fee, the Lender shall process such Letter of Credit Agreement in accordance with its customary procedures and open such Letter of Credit on the Business Day specified in such notice. 2.2.5 Payments of Letters of Credit. The Borrower hereby promises to pay to the Lender, ON DEMAND and in United States Dollars, the following which are herein collectively referred to as the "Current Letter of Credit Obligations": (a) the amount which the Lender has paid or will be required to pay under each draft or draw on a Letter of Credit, whether such demand be in advance of the Lender's payment or for reimbursement for such payment; (b) any and all reasonable charges and expenses which the Lender may pay or incur relative to the Letter of Credit and/or such draws or drafts; and (c) interest on the amounts described in (a) and (b) not paid by the Borrower as and when due and payable under the provisions of (a) and (b) above from the day the same are due and payable until paid in full at a rate per annum equal to the then current highest rate of interest on the Revolving Loan. In addition, the Borrower hereby promises to pay any and all other Letter of Credit Obligations as and when due and payable in accordance with the provisions of this Agreement and the Letter of Credit Agreements. The obligation of the Borrower to pay Current Letter of Credit Obligations and all other Letter of Credit Obligations shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or any other account party may have or have had against the beneficiary of such Letter of Credit, the Lender, or any other Person, including, without limitation, any defense based on the failure of any draft or draw to conform to the terms of such Letter of Credit, any draft or other document proving to be forged, fraudulent or invalid, or the legality, validity, regularity or enforceability of such Letter of Credit, any draft or other documents presented with any draft, any Letter of Credit Agreement, this Agreement, or any of the other Financing Documents, all whether or not the Lender had actual or constructive 24 knowledge of the same, and irrespective of any Collateral, security or guarantee therefore or right of offset with respect thereto and irrespective of any other circumstances whatsoever which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for any Letter of Credit Obligations, in bankruptcy or otherwise; provided, however, that the Borrower shall not be obligated to reimburse the Lender for any wrongful payment under such Letter of Credit made as a result of the Lender's willful misconduct. The obligation of the Borrower to pay the Letter of Credit Obligations shall not be conditioned or contingent upon the pursuit by the Lender or any other Person at any time of any right or remedy against any Person which may be or become liable in respect of all or any part of such obligation or against any Collateral, security or guarantee therefore or right of offset with respect thereto. The Letter of Credit Obligations shall continue to be effective, or be reinstated, as the case may be, if at any time payment of all or any portion of the Letter of Credit Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Person, or upon or as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, any Person, or any substantial part of such Person's property, all as though such payments had not been made. 2.2.6 Change in Law; Increased Cost. If any change in any law or regulation or in the interpretation thereof by any court or other Governmental Authority charged with the administration thereof shall either (a) impose, modify or deem applicable any reserve, special deposit or similar requirement against Letters of Credit issued by the Lender, or (b) impose on the Lender any other condition regarding this Agreement or any Letter of Credit, and the result of any event referred to in clauses (a) or (b) above shall be to increase the cost to the Lender of issuing, maintaining or extending the Letter of Credit or the cost to Lender of funding any obligation under or in connection with the Letter of Credit, then, upon demand by the Lender, the Borrower shall immediately pay to the Lender from time to time as specified by the Lender, additional amounts which shall be sufficient to compensate the Lender for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at a rate per annum equal to the then highest current rate of interest on the Revolving Loan. A certificate as to such increased cost incurred by the Lender, submitted by the Lender to the Borrower, shall be conclusive, absent manifest error. 2.2.7 General Letter of Credit Provisions. The Borrower hereby instructs the Lender to pay any draft complying with the terms of any Letter of Credit irrespective of any instructions of the Borrower to the contrary. The Borrower assumes all risks of the acts and omissions of the beneficiary and other users of any Letter of Credit. The Lender and its respective branches, Affiliates and/or correspondents shall not be responsible for and the Borrower hereby indemnifies and holds the Lender and its branches, Affiliates and/or correspondents harmless from and against all liability, loss and expense (including reasonable attorney's fees and costs) incurred by the Lender and/or its respective branches, Affiliates and/or correspondents relative to and/or as a consequence of (a) any failure by the Borrower to perform the agreements hereunder and under any Letter of Credit 25 Agreement, (b) any Letter of Credit Agreement, this Agreement, any Letter of Credit and any draft, draw and/or acceptance under or purported to be under any Letter of Credit, (c) any action taken or omitted by the Lender and/or any of its respective branches, Affiliates and/or correspondents at the request of the Borrower, (d) any failure or inability to perform in accordance with the terms of any Letter of Credit by reason of any control or restriction rightfully or wrongfully exercised by any de facto or de jure Governmental Authority, group or individual asserting or exercising governmental or paramount powers, and/or (e) any consequences arising from causes beyond the control of the Lender and/or any of its respective branches, Affiliates and/or correspondents. Except for willful misconduct, the Lender and its respective branches, Affiliates and/or correspondents, shall not be liable or responsible in any respect for any (a) error, omission, interruption or delay in transmission, dispatch or delivery of any one or more messages or advices in connection with any Letter of Credit, whether transmitted by cable, telegraph, mail or otherwise and despite any cipher or code which may be employed, and/or (b) action, inaction or omission which may be taken or suffered by it or them in good faith or through inadvertence in identifying or failing to identify any beneficiary or otherwise in connection with any Letter of Credit. Any Letter of Credit may be amended, modified or revoked only upon the receipt by the Lender from the Borrower and the beneficiary (including any transferee and/or assignee of the original beneficiary), of a written consent and request therefore. If any Laws, order of court and/or ruling or regulation of any Governmental Authority of the United States (or any state thereof) and/or any country other than the United States permits a beneficiary under a Letter of Credit to require the Lender and/or any of its respective branches, Affiliates and/or correspondents to pay drafts under or purporting to be under a Letter of Credit after the expiration date of the Letter of Credit, the Borrower shall reimburse the Lender, as appropriate, for any such payment pursuant to provisions of Section 2.2.5 (Change in Law; Increased Cost). Except as may otherwise be specifically provided in a Letter of Credit or Letter of Credit Agreement, the laws of the State and the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500 shall govern the Letters of Credit. The Laws, rules, provisions and regulations of the Uniform Customs and Practice for Documentary Credits are hereby incorporated by reference. In the event of a conflict between the Uniform Customs and Practice for Documentary Credits and the laws of the State, the Uniform Customs and Practice for Documentary Credits shall prevail. Section 2.3 General Financing Provisions. 2.3.1 Borrower's Representatives. The Borrower hereby irrevocably authorizes the Lender to make Loans, and issue or cause to be issued Letters of Credit for the account of the Borrower, pursuant to the provisions of this Agreement upon the written, oral or telephone request of any one or more of the Persons who is from time to time a Responsible Officer of the Borrower under the provisions of the most recent certificate of corporate resolutions and/or incumbency of the Borrower on file 26 with the Lender or who is an officer or employee of the Borrower whom a Responsible Officer from time to time authorizes in writing to do so. The Lender does not and shall not assume any responsibility or liability for any errors, mistakes, and/or discrepancies in the oral, telephonic, written or other transmissions of any instructions, orders, requests and confirmations between the Lender and the Borrower in connection with the Credit Facilities, any Loan , any Letter of Credit or any other transaction in connection with the provisions of this Agreement. 2.3.2 Use of Proceeds of the Loan. The proceeds of each advance under the Loan shall be used by the Borrower for Permitted Uses, and for no other purposes except as may otherwise be agreed by the Lender in writing. The Borrower shall use the proceeds of the Loan promptly. 2.3.3 Administrative Fees. The Borrower shall pay to the Lender a quarterly administrative fee (each an "Administrative Fee" and collectively, the "Administrative Fees") for administrative services performed in conjunction with the Revolving Credit Facility. The quarterly Administrative Fee shall be $3,750 and shall be payable each quarter, in advance, on the first (1st) day of each March, June, September and December until the Revolving Credit Termination Date. 2.3.4 Computation of Interest and Fees. All applicable Fees and interest shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Any change in the interest rate on any of the Obligations resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate is announced. 2.3.5 Payments. All payments of the Obligations, including, without limitation, principal, interest, Prepayments, and Fees, shall be paid by the Borrower without setoff, recoupment or counterclaim to the Lender in immediately available funds not later than 12:00 p.m. (Eastern Time) on the due date of such payment. All payments received by the Lender after such time shall be deemed to have been received by the Lender for purposes of computing interest and Fees and otherwise as of the next Business Day. Payments shall not be considered received by the Lender until such payments are paid to the Lender in immediately available funds to the Lender's principal office in McLean, Virginia or at such other location as the Lender may at any time and from time to time notify the Borrower. Alternatively, at its sole discretion, the Lender may charge any deposit account of the Borrower at the Lender or any Affiliate of the Lender with all or any part of any amount due to the Lender under this Agreement or any of the other Financing Documents to the extent that the Borrower shall have not otherwise tendered payment to the Lender. All payments shall be applied first to any unpaid Fees, second to any and all accrued and unpaid late charges and Enforcement Costs, third to any and all accrued and unpaid interest on the Obligations, and then to the then unpaid principal balance of the Obligations, all in such order and manner as shall be determined by the Lender in its sole and absolute discretion. 27 2.3.6 Liens; Setoff. The Borrower hereby grants to the Lender as additional collateral and security for all of the Obligations, a continuing Lien on any and all monies, Investment Property, and other property of the Borrower and the proceeds thereof, now or hereafter held or received by or in transit to, the Lender, and/or any Affiliate of the Lender, from or for the account of, the Borrower, and also upon any and all deposit accounts (general or special) and credits of the Borrower, if any, with the Lender or any Affiliate of the Lender, at any time existing, excluding any deposit accounts held by the Borrower in its capacity as trustee for Persons who are not Affiliates of the Borrower. Without implying any limitation on any other rights the Lender may have under the Financing Documents or applicable Laws, during the continuance of an Event of Default, the Lender is hereby authorized by the Borrower at any time and from time to time, without notice to the Borrower, to set off, appropriate and apply any or all items hereinabove referred to against all Obligations then outstanding (whether or not then due), all in such order and manner as shall be determined by the Lender in its sole and absolute discretion. 2.3.7 Requirements of Law. In the event that the Lender shall have determined in good faith that (a) the adoption of any Capital Adequacy Regulation, or (b) any change in any Capital Adequacy Regulation or in the interpretation or application thereof or (c) compliance by the Lender or any corporation controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority, does or shall have the effect of reducing the rate of return on the capital of the Lender or any corporation controlling the Lender, as a consequence of the obligations of the Lender hereunder to a level below that which the Lender or any corporation controlling the Lender would have achieved but for such adoption, change or compliance (taking into consideration the policies of the Lender and the corporation controlling the Lender, with respect to capital adequacy) by an amount deemed by the Lender, in its discretion, to be material, then from time to time, after submission by the Lender to the Borrower of a written request therefore and a statement of the basis for such determination, the Borrower shall pay to the Lender such additional amount or amounts in order to compensate the Lender or its controlling corporation for any such reduction. 2.3.8 ACH Transactions and Swap Contracts. The Borrower may request and the Lender or its affiliates may, in their sole and absolute discretion, provide ACH Transactions and Swap Contracts. In the event the Borrower requests Lender or its affiliates to procure ACH Transactions or Swap Contracts, then the Borrower agrees to indemnify and hold the Lender or its affiliates harmless from any and all obligations now or hereafter owing to the Lender or its affiliates. The Borrower agrees to pay the Lender or its affiliates all amounts owing to the Lender or its affiliates pursuant to ACH Transactions and Swap Contracts. In the event the Borrower shall not have paid to the Lender or its affiliates such amounts, the Lender may cover such amounts by an advance under the Revolving Loan, which advance shall be deemed to have been requested by the Borrower. The Borrower acknowledges and agrees that the obtaining of ACH Transactions and Swap Contracts from the Lender or its Affiliates (a) is in the sole and absolute discretion of the Lender or its Affiliates and (b) is subject to all rules and regulations of the Lender or its Affiliates. 28 Section 2.4 Interest 2.4.1 Applicable Interest Rates. (a) Each Loan shall bear interest until maturity (whether by acceleration, declaration, extension or otherwise) at either the Base Rate or the Eurodollar Rate, as selected and specified by the Borrower in an Interest Rate Election Notice furnished to the Lender in accordance with the provisions of Section 2.4.1(e), or as otherwise determined in accordance with the provisions of this 2.3.8, as may be adjusted from time to time in accordance with the provisions of Section. (b) Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of Default, at the option of the Lender, all Loans and all other Obligations shall bear interest at the Post-Default Rate. (c) The Applicable Margin for (i) Eurodollar Loans shall be 225 basis points per annum, and (ii) Base Rate Loans shall be 0 basis points per annum unless and until a change is required by the operation of Section 2.4.1(d). (d) Changes in the Applicable Margin shall be made not more frequently than quarterly based on the Borrower's Pricing Ratio, determined by the Lender in the exercise of its sole and absolute discretion from the reports required by Section 6.1.1 (Financial Statements), except that the first such determination shall be made based on the Borrower's quarterly financial statements for the period ending December 31, 2002 previously delivered to the Lender and shall be effective as of the first day of the first month after the Lender receives such statements. The Applicable Margin (expressed as basis points) shall vary depending upon the Borrower's Pricing Ratio, as follows:

2.4.2 Selection of Interest Rates. (a) The Borrower may select the initial Applicable Interest Rate or Applicable Interest Rates to be charged on the Loan. (b) From time to time after the date of this Agreement as provided in this Section, by a proper and timely Interest Rate Election Notice furnished to the Lender in accordance with the provisions of Section 2.4.2(e), the Borrower may select an initial 29 Applicable Interest Rate or Applicable Interest Rates for any Loans or may convert the Applicable Interest Rate, for any existing Loan to any other Applicable Interest Rate. (c) The Borrower's selection of an Applicable Interest Rate, the Borrower's election to convert an Applicable Interest Rate to another Applicable Interest Rate, and any other adjustments in an interest rate are subject to the following limitations: (i) no change from the Eurodollar Rate to the Base Rate shall become effective on a day other than a Business Day and no change from the Base Rate to the Eurodollar Rate shall become effective on a day other than a day which is a Eurodollar Business Day; (ii) any Applicable Interest Rate change for any Loan to be effective on a date on which any principal payment on account of such Loan is scheduled to be paid shall be made only after such payment shall have been made; (iii) no more than three (3) different Eurodollar Rates may be outstanding at any time and from time to time with respect to the Revolving Loan; (iv) as of the effective date of a selection, there shall not exist a Default or an Event of Default; and (v) the minimum principal amount of a Eurodollar Loan shall be One Hundred Thousand Dollars ($100,000). (d) If a request for an advance under the Loan is not accompanied by an Interest Rate Election Notice or does not otherwise include a selection of an Applicable Interest Rate, or if, after having made a selection of an Applicable Interest Rate, the Borrower fails or is not otherwise entitled under the provisions of this Agreement to continue such Applicable Interest Rate, the Borrower shall be deemed to have selected the Base Rate as the Applicable Interest Rate until such time as the Borrower has selected a different Applicable Interest Rate in accordance with, and subject to, the provisions of this Section. (e) The Lender will not be obligated to make Loans or to convert the Applicable Interest Rate on Loans to another Applicable Interest Rate, unless the Lender shall have received an irrevocable written or telephonic notice (an "Interest Rate Election Notice") from the Borrower specifying the following information: (i) the amount to be borrowed or converted; (ii) a selection of the Base Rate or the Eurodollar Rate; and (iii) the requested date on which such election is to be effective. Any telephonic notice must be confirmed in writing within three (3) Business Days. Each Interest Rate Election Notice must be received by the Lender not later than 10:00 a.m. (Eastern Time) on the Business Day of any requested borrowing or conversion in the 30 case of a selection of the Base Rate and not later than 10:00 a.m. (Eastern Time) on the third Business Day before the effective date of any requested borrowing or conversion in the case of a selection of the Eurodollar Rate. 2.4.3 Inability to Determine Eurodollar Base Rate. In the event that (a) the Lender shall have determined that, by reason of circumstances affecting the London interbank eurodollar market, adequate and reasonable means do not exist for ascertaining the Eurodollar Base Rate with respect to a Loan the Borrower has requested to be made as or to be converted to a Eurodollar Loan or (b) the Lender shall determine that the Eurodollar Base Rate with respect to a Loan the Borrower has requested to be made as or to be converted to a Eurodollar Loan does not adequately and fairly reflect the cost to the Lender of funding or converting such Loan, the Lender shall give telephonic or written notice of such determination to the Borrower at least one (1) day prior to the proposed date for funding or converting such Loan. If such notice is given, any request for a Eurodollar Loan shall be made as or converted to a Base Rate Loan. Until such notice has been withdrawn by the Lender, the Borrower will not request that any Loan be made as or converted to a Eurodollar Loan. 2.4.4 Payment of Interest. (a) Unpaid and accrued interest on the Loans shall be paid monthly, in arrears, on the first day of each calendar month, commencing on the first such date after the date of this Agreement, and on the first day of each calendar month thereafter, and at maturity (whether by acceleration, declaration, extension or otherwise). (b) Notwithstanding the foregoing, any and all unpaid and accrued interest on any Base Rate Loan converted to a Eurodollar Loan or prepaid shall be paid immediately upon such conversion and/or prepayment, as appropriate. ARTICLE III THE COLLATERAL Section 3.1 Debt and Obligations Secured. All property and Liens assigned, pledged or otherwise granted under or in connection with this Agreement (including, without limitation, those under Section 3.2 (Grant of Liens)) or any of the Financing Documents shall secure (a) the payment of all of the Obligations, including, without limitation, any and all Outstanding Letter of Credit Obligations, and (b) the performance, compliance with and observance by the Borrower of the provisions of this Agreement and all of the other Financing Documents or otherwise under the Obligations. Section 3.2 Grant of Liens. The Borrower hereby assigns, pledges and grants to the Lender, and agrees that the Lender shall have a perfected and continuing security interest in, and Lien on, all of the Borrower's Accounts, Government Contracts, Chattel Paper, Inventory, Documents, Instruments, Equipment, Investment Property, and General Intangibles and all of the Borrower's deposit accounts with any financial institution with which the Borrower maintains deposits, whether now owned or existing or hereafter acquired or arising, all insurance policies relating to the foregoing, 31 all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to the foregoing and all Equipment and General Intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all Proceeds and products of the foregoing. The Borrower further agrees that the Lender, shall have in respect thereof all of the rights and remedies of a secured party under the Uniform Commercial Code as well as those provided in this Agreement, under each of the other Financing Documents and under applicable Laws. The Borrower acknowledges and agrees that, with respect to any term used herein that is defined in either (a) Article 9 of the Uniform Commercial Code as in force in the jurisdiction in which this financing statement was signed by the Borrower at the time that it was signed, or (b) Article 9 as in force at any relevant time in the jurisdiction in which this financing statement is filed, the meaning to be ascribed thereto with respect to any particular item of property shall be that under the more encompassing of the two definitions. A form of assignment is attached hereto as EXHIBIT D and made a part hereof. The Borrower covenants and agrees that the Borrower shall provide the Lender with all necessary information and, if requested, will execute and deliver such documents as are required to comply with the Federal Assignment of Claims Act of 1940 (31 U.S.C. Section 3727 and 41 U.S.C. Section 15), excluding classified Government Contracts, with a contract value equal to or greater than Five Hundred Thousand Dollars ($500,000) and such other Government Contracts as the Lender may determine in its sole discretion. Section 3.3 Collateral Disclosure List. On or prior to the Closing Date, the Borrower shall deliver to the Lender a list (the "Collateral Disclosure List") which shall contain such information with respect to the Borrower's business and real and personal property as the Lender may require and shall be certified by a Responsible Officer of the Borrower, all in the form provided to the Borrower by the Lender. Promptly after demand by the Lender, the Borrower shall furnish to the Lender an update of the information contained in the Collateral Disclosure List at any time and from time to time as may be requested by the Lender. Section 3.4 Personal Property. The Borrower acknowledges and agrees that it is the intention of the parties to this Agreement that the Lender shall have a first priority, perfected Lien, in form and substance satisfactory to the Lender and its counsel, on all of the Borrower's assets of any kind and nature whatsoever, whether now owned or hereafter acquired, subject only to the Permitted Liens, if any. In furtherance of the foregoing: 3.4.1 Investment Property, Chattel Paper, Promissory Notes, etc. (a) On the Closing Date and without implying any limitation on the scope of Section 3.2 (Grant of Liens), the Borrower shall deliver to the originals of all of the Borrower's letters of credit, Investment Property, Chattel Paper, Documents and Instruments and, if the Lender so requires, shall execute and deliver separate pledge, assignment and security agreements in form and content acceptable to the Lender, which pledge, assignment and security 32 agreements shall assign, pledge and grant a Lien to the Lender on all of the Borrower's letters of credit, Investment Property, Chattel Paper, Documents, and Instruments. (b) In the event that the Borrower shall acquire after the Closing Date any letters of credit, Investment Property, Chattel Paper, Documents, or Instruments, the Borrower shall promptly so notify the Lender and deliver the originals of all of the foregoing to the Lender promptly and in any event within ten (10) days of each acquisition. (c) All letters of credit, Investment Property, Chattel Paper, Documents and Instruments shall be delivered to the Lender endorsed and/or assigned as required by the pledge, assignment and security agreement and/or as the Lender may require and, if applicable, shall be accompanied by blank irrevocable and unconditional stock or bond powers and/or notices as the Lender may require. 3.4.2 Patents, Copyrights and Other Property Requiring Additional Steps to Perfect. On the Closing Date and without implying any limitation on the scope of Section 3.2 (Grant of Liens), the Borrower shall execute and deliver all Financing Documents and take all actions reasonably requested by the Lender in order to perfect a first priority assignment of Patents, Copyrights, Trademarks or any other type or kind of intellectual property acquired by the Borrower after the Closing Date. Section 3.5 Record Searches. As of the Closing Date and thereafter at the time any Financing Document is executed and delivered by the Borrower pursuant to this Section, the Lender shall have received, in form and substance satisfactory to the Lender, such Lien or record searches with respect to the Borrower and/or any other Person, as appropriate, and the property covered by such Financing Document showing that the Lien of such Financing Document will be a perfected first priority Lien on the property covered by such Financing Document subject only to Permitted Liens or to such other matters as the Lender may approve. Section 3.6 Costs. The Borrower agrees to pay, as part of the Enforcement Costs and to the fullest extent permitted by applicable Laws, on demand all costs, fees and expenses incurred by the Lender in connection with the taking, perfection, preservation, protection and/or release of a Lien on the Collateral, including, without limitation: (a) customary fees and expenses incurred in preparing Financing Documents from time to time (including, without limitation, reasonable attorneys' fees incurred in connection with preparing the Financing Documents, including, any amendments and supplements thereto); (b) all filing and/or recording taxes or fees; (c) all costs of Lien and record searches; 33 (d) reasonable attorneys' fees in connection with all legal opinions required; and (e) all related costs, fees and expenses. Section 3.7 Release. Upon the indefeasible repayment in full in cash of the Obligations and performance of all Obligations of the Borrower and all obligations and liabilities of each other Person, other than the Lender, under this Agreement and all other Financing Documents, the termination and/or expiration of the Commitment and Outstanding Letter of Credit Obligations, upon the Borrower's request and at the Borrower's sole cost and expense, the Lender shall release and/or terminate any Financing Document but only if and provided that there is no commitment or obligation (whether or not conditional) of the Lender to re-advance amounts which would be secured thereby and/or no commitment or obligation of the Lender to issue any Letter of Credit or return or restore any payment of any Current Letter of Credit Obligations. Section 3.8 Inconsistent Provisions. In the event that the provisions of any Financing Document directly conflict with any provision of this Agreement, the provisions of this Agreement govern. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties. The Borrower represents and warrants to the Lender, as follows: 4.1.1 Subsidiaries. The Borrower has only those Subsidiaries listed on the Collateral Disclosure List attached hereto and made a part hereof and no others. Each of the Subsidiaries is a Wholly Owned Subsidiary except as shown on the Collateral Disclosure List, which correctly indicates the nature and amount of the Borrower's ownership interests therein. 4.1.2 Existence. The Borrower (a) is a Registered Organization under the laws of the jurisdiction stated in the Preamble of this Agreement, (b) is in good standing under the laws of the jurisdiction in which it is organized, (c) has the power to own its property and to carry on its business as now being conducted, and (d) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. The Borrower is organized under the laws of only one (1) jurisdiction. 4.1.3 Power and Authority. The Borrower has full power and authority to execute and deliver this Agreement and, the other Financing Documents to which it is a party, to make the borrowings 34 and request Letters of Credit under this Agreement, and to incur and perform the Obligations whether under this Agreement, the other Financing Documents or otherwise, all of which have been duly authorized by all proper and necessary action. No consent or approval of shareholders or any creditors of the Borrower, and no consent, approval, filing or registration with or notice to any Governmental Authority on the part of the Borrower, is required as a condition to the execution, delivery, validity or enforceability of this Agreement or any of the other Financing Documents, the performance by the Borrower of the Obligations. 4.1.4 Binding Agreements. This Agreement and the other Financing Documents executed and delivered by the Borrower have been properly executed and delivered and constitute the valid and legally binding obligations of the Borrower and are fully enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general applications affecting the rights and remedies of creditors and secured parties, and general principles of equity regardless of whether applied in a proceeding in equity or at law. 4.1.5 No Conflicts. Neither the execution, delivery and performance of the terms of this Agreement or of any of the other Financing Documents executed and delivered by the Borrower nor the consummation of the transactions contemplated by this Agreement will conflict with, violate or be prevented by (a) the Borrower's organizational or governing documents, (b) any existing mortgage, indenture, contract or agreement binding on the Borrower or affecting its property, or (c) any Laws. 4.1.6 No Defaults, Violations. (a) No Default or Event of Default has occurred and is continuing. (b) Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any obligation under any existing mortgage, indenture, contract or agreement binding on it or affecting its property in any respect which could be materially adverse to the business, operations, property or financial condition of the Borrower, or which could materially adversely affect the ability of the Borrower to perform its obligations under this Agreement or the other Financing Documents, to which the Borrower is a party. 4.1.7 Compliance with Laws. Neither the Borrower nor any of its Subsidiaries is in violation of any applicable Laws (including, without limitation, any Laws relating to employment practices, to environmental, occupational and health standards and controls) or order, writ, injunction, decree or demand of any court, arbitrator, or any Governmental Authority affecting the Borrower or any of its properties, the violation of which, considered in the aggregate, could materially adversely affect the business, operations or properties of the Borrower and/or its Subsidiaries. 35 4.1.8 Margin Stock. None of the proceeds of the Loan will be used, directly or indirectly, by the Borrower or any Subsidiary for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System or for any other purpose which might make the transactions contemplated in this Agreement a "purpose credit" within the meaning of Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes. 4.1.9 Investment Company Act; Margin Stock. Neither the Borrower nor any of its Subsidiaries is an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of said Act. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System. 4.1.10 Litigation. Except as otherwise disclosed on Schedule 4.1.10 attached hereto and made a part hereof, there are no proceedings, actions or investigations pending or, so far as the Borrower knows, threatened before or by any court, arbitrator or any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of the Borrower or any Subsidiary, would have a material adverse effect on the business, properties, condition (financial or otherwise) or operations, present or prospective, of the Borrower. 4.1.11 Financial Condition. The financial statements of the Borrower dated September 30, 2001, are complete and correct and fairly present the financial position of the Borrower and the results of its operations and transactions in its surplus accounts as of the date and for the period referred to and have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved. There are no liabilities, direct or indirect, fixed or contingent, of the Borrower as of the date of such financial statements that are not reflected therein or in the notes thereto. There has been no adverse change in the financial condition or operations of the Borrower since the date of such financial statements and to the Borrower's knowledge no such adverse change is pending or threatened. The Borrower has not guaranteed the obligations of, or made any investment in or advances to, any Person, except as disclosed in such financial statements. 4.1.12 Full Disclosure. The financial statements referred to in Section 4.1.11 (Financial Condition), the Financing Documents (including, without limitation, this Agreement), and the 36 statements, reports or certificates furnished by the Borrower in connection with the Financing Documents (a) do not contain any untrue statement of a material fact and (b) when taken in their entirety, do not omit any material fact necessary to make the statements contained therein not misleading. There is no fact known to the Borrower which the Borrower has not disclosed to the Lender in writing prior to the date of this Agreement with respect to the transactions contemplated by the Financing Documents that materially and adversely affects or in the future could, in the reasonable opinion of the Borrower materially adversely affect the condition, financial or otherwise, results of operations, business, or assets of the Borrower. 4.1.13 Funded Debt. Except for the Obligations and except as set forth in Schedule 4.1.13 attached hereto and made a part hereof, the Borrower has no Funded Debt. The Lender has received photocopies of all promissory notes evidencing any Funded Debt set forth in Schedule 4.1.13, together with any and all subordination agreements, other agreements, documents, or instruments securing, evidencing, guarantying or otherwise executed and delivered in connection therewith. 4.1.14 Taxes. Each of the Borrower and its Subsidiaries has filed all returns, reports and forms for Taxes that, to the knowledge of the Borrower, are required to be filed, and has paid all Taxes as shown on such returns or on any assessment received by it, to the extent that such Taxes have become due, unless and to the extent only that such Taxes, assessments and governmental charges are currently contested in good faith and by appropriate proceedings by the Borrower, such Taxes are not the subject of any Liens other than Permitted Liens, and adequate reserves therefore have been established as required under GAAP. All tax liabilities of the Borrower were as of the date of audited financial statements referred to in Section 4.1.11 (Financial Condition), and are now, adequately provided for on the books of the Borrower and its Subsidiaries, as appropriate. No tax liability has been asserted by the Internal Revenue Service or any state or local authority against the Borrower for Taxes in excess of those already paid. 4.1.15 ERISA. With respect to any Plan that is maintained or contributed to by the Borrower and/or by any Commonly Controlled Entity or as to which the Borrower retains material liability: (a) no "accumulated funding deficiency" as defined in Code Section 412 or ERISA Section 302 has occurred, whether or not that accumulated funding deficiency has been waived; (b) no Reportable Event has occurred other than events for which reporting has been waived; (c) no termination of any plan subject to Title IV of ERISA has occurred; (d) neither the Borrower nor any Commonly Controlled Entity has incurred a "complete withdrawal" within the meaning of ERISA Section 4203 from any Multi-employer Plan; (e) neither the Borrower nor any Commonly Controlled Entity has incurred a "partial withdrawal" within the meaning of ERISA Section 4205 with respect to any Multi-employer Plan; (f) no Multi-employer Plan to which the Borrower or any Commonly Controlled Entity has an obligation to contribute is in "reorganization" within the meaning of ERISA Section 4241 nor has notice been received by the Borrower or any Commonly Controlled Entity that such a Multi-employer Plan will be placed in "reorganization". 37 4.1.16 Title to Properties. The Borrower has good and marketable title to all of its properties, including, without limitation, the Collateral and the properties and assets reflected in the balance sheets described in Section 4.1.11 (Financial Condition). The Borrower has legal, enforceable and uncontested rights to use freely such property and assets. 4.1.17 Patents, Trademarks, Etc. The Borrower owns, possesses, or has the right to use all necessary Patents, licenses, Trademarks, Copyrights, permits and franchises to own its properties and to conduct its business as now conducted, without known conflict with the rights of any other Person. Any and all obligations to pay royalties or other charges with respect to such properties and assets are properly reflected on the financial statements described in Section 4.1.11 (Financial Condition). 4.1.18 Presence of Hazardous Materials or Hazardous Materials Contamination. Except as previously disclosed to the Lender, to the best of the Borrower's knowledge, (a) no Hazardous Materials are located on any real property owned, controlled or operated by of the Borrower or for which the Borrower is, or is claimed to be, responsible, except for reasonable quantities of necessary supplies for use by the Borrower in the ordinary course of its current line of business and stored, used and disposed in accordance with applicable Laws; and (b) no property owned, controlled or operated by the Borrower or for which the Borrower has, or is claimed to have, responsibility has ever been used as a manufacturing, storage, or dump site for Hazardous Materials nor is affected by Hazardous Materials Contamination at any other property. 4.1.19 Perfection and Priority of Collateral. The Lender has, or upon execution and recording of this Agreement and the Security Documents will have, and will continue to have as security for the Obligations, a valid and perfected Lien on and security interest in all Collateral, free of all other Liens, claims and rights of third parties whatsoever except Permitted Liens, including, without limitation, those described on Schedule 4.1.19 attached hereto and made a part hereof.. 4.1.20 No Suspension or Debarment. Neither the Borrower nor any Affiliate nor any of their respective directors, officers or employees has received any notice of, or information concerning, any proposed, contemplated or initiated suspension or debarment, be it temporary or permanent, due to an administrative or a statutory basis, of the Borrower or any Affiliate by any Governmental Authority. The Borrower and each Affiliate further warrants and represents that neither the Borrower nor any Affiliate has defaulted under any Government Contract which default would be a basis of terminating such Government Contract. 38 4.1.21 Collateral Disclosure List. The information contained in the Collateral Disclosure List is complete and correct. The Collateral Disclosure List completely and accurately identifies (a) the type of entity, the state of organization and the chief executive office of the Borrower, (b) each other place of business of the Borrower, (c) the location of all books and records pertaining to the Collateral, and (d) each location, other than the foregoing, where any of the Collateral is located. 4.1.22 Business Names and Addresses. In the five (5) years preceding the date hereof, the Borrower has not changed its name, identity or corporate structure, has not conducted business under any name other than its current name, and has not conducted its business in any jurisdiction other than those disclosed on the Collateral Disclosure List. 4.1.23 Equipment. All Equipment is personalty and is not and will not be affixed to real estate in such manner as to become a fixture or part of such real estate. No equipment is held by the Borrower on a sale on approval basis. 4.1.24 Accounts. With respect to all Accounts and to the best of the Borrower's knowledge (a) they are genuine, and in all respects what they purport to be, and are not evidenced by a judgment, an Instrument, or Chattel Paper (unless such judgment has been assigned and such Instrument or Chattel Paper has been endorsed and delivered to the Lender); (b) they represent bona fide transactions completed in accordance with the terms and provisions contained in the invoices, purchase orders and other contracts relating thereto, and the underlying transaction therefore is in accordance with all applicable Laws; (c) the amounts shown on the Borrower's books and records, with respect thereto are actually and absolutely owing to the Borrower and are not contingent or subject to reduction for any reason other than regular discounts, credits or adjustments allowed by the Borrower in the ordinary course of its business; (d) no payments have been or shall be made thereon except payments turned over to the Lender by the Borrower; (e) all Account Debtors thereon have the capacity to contract; and (f) the services furnished giving rise thereto are not subject to any Liens except the security interest granted to the Lender by this Agreement and Permitted Liens. 4.1.25 Compliance with Eligibility Standards. Each Account included in the calculation of the Borrowing Base does and will at all times meet and comply with all of the standards for Eligible Receivables. With respect to those Accounts which the Lender has deemed Eligible Receivables (a) there are no facts, events or occurrences which in any way impair the validity, collectibility or enforceability thereof or tend to reduce the amount payable thereunder; and (b) there are no proceedings or actions known to the Borrower that are threatened or pending against any Account Debtor which might result in any material adverse change in the Borrowing Base. 39 Section 4.2 Survival; Updates of Representations and Warranties. All representations and warranties contained in or made under or in connection with this Agreement and the other Financing Documents shall survive the Closing Date, the making of any advance under the Loan and extension of credit made hereunder, and the incurring of any other Obligations and shall be deemed to have been made at the time of each request for, and again at the time of the making of, each advance under the Loan or the issuance of each Letter of Credit, except that the representations and warranties which relate to the financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements). ARTICLE V CONDITIONS PRECEDENT Section 5.1 Conditions to the Initial Advance and Initial Letter of Credit. The making of the initial advance under the Loan and the issuance of the initial Letter of Credit is subject to the fulfillment on or before the Closing Date of the following conditions precedent in a manner satisfactory in form and substance to the Lender and its counsel: 5.1.1 Organizational Documents - Borrower. The Lender shall have received: (a) a certificate of good standing for the Borrower certified by the Secretary of State, or other appropriate Governmental Authority, of the state of incorporation for the Borrower; (b) a certificate of qualification to do business for the Borrower certified by the Secretary of State or other Governmental Authority of each state in which the Borrower conducts business; (c) a certificate dated as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower covering: (i) true and complete copies of the Borrower's corporate charter, bylaws, and all amendments thereto; (ii) true and complete copies of the resolutions of its Board of Directors authorizing (i) the execution, delivery and performance of the Financing Documents to which the Borrower is a party, (ii) the borrowings by the Borrower hereunder, (iii) the granting of the Liens contemplated by this Agreement and the Financing Documents to which the Borrower is a party; (iii) the incumbency, authority and signatures of the officers of the Borrower authorized to sign this 40 Agreement and the other Financing Documents to which the Borrower is a party; and (iv) the identity of the Borrower's current directors. 5.1.2 Opinion of Borrower's Counsel. The Lender shall have received the favorable opinion of counsel for the Borrower addressed to the Lender. 5.1.3 Consents, Licenses, Approvals, Etc. The Lender shall have received copies of all consents, licenses and approvals, required in connection with the execution, delivery, performance, validity and enforceability of the Financing Documents, and such consents, licenses and approvals shall be in full force and effect. 5.1.4 Notes. The Lender shall have received the Revolving Credit Note, conforming to the requirements hereof and executed by a Responsible Officer of the Borrower and attested by a duly authorized representative of the Borrower. 5.1.5 Financing Documents and Collateral. The Borrower shall have executed and delivered the Financing Documents to be executed by it, and shall have delivered original Chattel Paper, Instruments, Investment Property, and related Collateral and all opinions, title insurance, and other documents contemplated by ARTICLE III (The Collateral). 5.1.6 Other Financing Documents. In addition to the Financing Documents to be delivered by the Borrower, the Lender shall have received the Financing Documents duly executed and delivered by Persons other than the Borrower. 5.1.7 Other Documents, Etc. The Lender shall have received such other certificates, opinions, documents and instruments confirmatory of or otherwise relating to the transactions contemplated hereby as may have been reasonably requested by the Lender. 5.1.8 Payment of Fees. The Lender shall have received payment of any Fees due on or before the Closing Date. 41 5.1.9 Collateral Disclosure List. The Borrower shall have delivered the Collateral Disclosure List required under the provisions of 0 (Collateral Disclosure List) duly executed by a Responsible Officer of the Borrower. 5.1.10 Recordings and Filings. The Borrower shall have: (a) executed and delivered all Financing Documents (including, without limitation, UCC-1 and UCC-3 statements) required to be filed, registered or recorded in order to create, in favor of the Lender, a perfected Lien in the Collateral (subject only to the Permitted Liens) in form and in sufficient number for filing, registration, and recording in each office in each jurisdiction in which such filings, registrations and recordations are required, and (b) delivered such evidence as the Lender deems satisfactory that all necessary filing fees and all recording and other similar fees, and all Taxes and other expenses related to such filings, registrations and recordings will be or have been paid in full. 5.1.11 Insurance Certificate. The Lender shall have received an insurance certificate in accordance with the provisions of Section 6.1.8 (Insurance) and Section 6.1.18 (Insurance With Respect to Equipment). 5.1.12 Field Examination. The Lender, at its option, shall have completed a field examination of the Borrower's business, operations and income, the results of which field examination and audit shall be in all respects acceptable to the Lender in its sole and absolute discretion and shall include reference discussions with key customers and vendors. Section 5.2 Conditions to all Extensions of Credit. The making of all advances under the Loan and the issuance of all Letters of Credit is subject to the fulfillment of the following conditions precedent in a manner satisfactory in form and substance to the Lender and its counsel: 5.2.1 Compliance. The Borrower shall have complied and shall then be in compliance with all terms, covenants, conditions and provisions of this Agreement and the other Financing Documents that are binding upon it. 5.2.2 Borrowing Base. The Borrower shall have furnished all Borrowing Base Reports required by Section 2.1.4 (Borrowing Base Report), there shall exist no Borrowing Base Deficiency, and as evidence thereof, the Borrower shall have furnished to the Lender such reports, schedules, certificates, records and other papers as may be requested by the Lender and the Borrower shall be in compliance with the provisions of this Agreement both immediately before and immediately after the making of the advance requested. 42 5.2.3 Default. There shall exist no Event of Default or Default hereunder. 5.2.4 Representations and Warranties. The representations and warranties of the Borrower contained among the provisions of this Agreement shall be true and with the same effect as though such representations and warranties had been made at the time of the making of, and of the request for, each advance under the Loan or the issuance of each Letter of Credit, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements). 5.2.5 Adverse Change. No adverse change shall have occurred in the condition (financial or otherwise), operations or business of the Borrower that would, in the good faith judgment of the Lender, materially impair the ability of the Borrower to pay or perform any of the Obligations. 5.2.6 Legal Matters. All legal documents incident to each advance under the Loan and each of the Letters of Credit shall be reasonably satisfactory to counsel for the Lender. ARTICLE VI COVENANTS OF THE BORROWER Section 6.1 Affirmative Covenants. So long as any of the Obligations or the Commitment shall be outstanding hereunder, the Borrower agrees with the Lender as follows: 6.1.1 Financial Statements. The Borrower shall furnish to the Lender: (a) Annual Statements and Certificates. The Borrower shall furnish to the Lender as soon as available, but in no event more than one hundred and twenty (120) days after the close of each fiscal year of the Borrower, (i) a copy of the annual financial statement in reasonable detail satisfactory to the Lender relating to the Borrower, prepared in accordance with GAAP and examined and certified by independent certified public accountants satisfactory to the Lender, which financial statement shall include a balance sheet of the Borrower as of the end of such fiscal year and statements of income, cash flows and changes in shareholders equity of the Borrower for such fiscal year, (ii) a Compliance Certificate, in substantially the form attached to this Agreement as EXHIBIT C, as may be amended by the Lender from time to time, containing a detailed computation of each financial covenant which is applicable for the period reported, a certification that no material change has occurred to the information contained in the Collateral Disclosure List (except as set forth in a schedule attached to the certification), and a cash flow projection report, each prepared by a Responsible Officer of 43 the Borrower in a format acceptable to the Lender, and (iii) a management letter in the form prepared by the Borrower's independent certified public accountants. (b) Quarterly Statements and Certificates. The Borrower shall furnish to the Lender as soon as available, but in no event more than forty five (45) days after the close of the Borrower's fiscal quarters, balance sheets of the Borrower as of the close of such period, income, cash flows and changes in shareholders equity statements for such period and a detailed computation of each financial covenant in this Agreement which is applicable for the period reported, all as prepared and certified by a Responsible Officer of the Borrower and accompanied by a certificate of that officer stating whether any event has occurred which constitutes a Default or an Event of Default hereunder, and, if so, stating the facts with respect thereto. (c) Quarterly Contract Backlog Reports. The Borrower shall furnish to the Lender within forty-five (45) days after the end of each fiscal quarter, a contract backlog report in form and substance acceptable to the Lender. A form of Backlog Report is attached hereto as EXHIBIT E and made a part hereof. (d) Monthly reports. If any sum is outstanding under the Revolving Loan or any Letter of Credit is outstanding, not later than the twentieth (20th) day after the end of each month and if there is no sum outstanding under the Revolving Loan and no Letter of Credit is outstanding, not later than the forty fifth (45th) day after the end of each calendar quarter, the Borrower shall furnish to the Lender the Borrowing Base Report and a report containing the following information: (i) a detailed aging schedule of all Receivables by Account Debtor, in such detail, and accompanied by such supporting information, as the Lender may from time to time reasonably request; and (ii) such other information as the Lender may reasonably request. (e) Annual Budget and Projections. The Borrower shall furnish to the Lender as soon as available, but in no event later than the one hundred and twentieth (120th) day subsequent to the end of each fiscal year (i) a pro forma financial statements on a quarterly basis for the following fiscal year; and (ii) cash flow projections on a quarter-to-quarter basis. (f) Additional Reports and Information. The Borrower shall furnish to the Lender promptly, such additional information, reports or statements as the Lender may from time to time reasonably request. 6.1.2 Reports to SEC and to Stockholders. The Borrower will furnish to the Lender, promptly upon the filing or making thereof, at least one (1) copy of all financial statements, reports, notices and proxy 44 statements sent by the Borrower to its stockholders, and of all regular and other reports filed by the Borrower with any securities exchange or with the Securities and Exchange Commission. 6.1.3 Recordkeeping, Rights of Inspection, Audit, Etc. (a) The Borrower shall, and shall cause each of its Subsidiaries to, maintain (a) a standard system of accounting in accordance with GAAP, and (b) proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its properties, business and activities. (b) The Borrower shall, and shall cause each of its Subsidiaries to, permit Lender or its agents to enter upon the premises of the Borrower or any Subsidiaries at during normal business hours and other reasonable times and as often as the Lender may reasonably request for the purpose of conducting field examinations of the Collateral, as well as any and all records pertaining thereto, and at any time during the continuance of an Event of Default Lender may take possession of and remove any or all such records. Borrower agrees to reimburse Lender for the cost of periodic field examinations of the Collateral at such intervals as Lender may reasonably require. The field examinations may be performed by employees of Lender or by independent appraisers. If, as a result of such examination the Lender determines that the Borrowing Base Deficiency exists, then Lender shall have the right to demand payment of the Obligations, and the Lender shall have no obligation to make any further extensions of credit to the Borrower. At all times, Lender shall also have the right to adjust the eligibility standards applicable to any Collateral based on field examination results. (c) The Borrower hereby irrevocably authorizes and directs all accountants and auditors employed by the Borrower and/or any of its Subsidiaries at any time prior to the repayment in full of the Obligations to exhibit and deliver to the Lender copies of any and all of the financial statements, trial balances, management letters, or other accounting records of any nature of the Borrower and/or any of its Subsidiaries in the accountant's or auditor's possession, and to disclose to the Lender any information they may have concerning the financial status and business operations of the Borrower and/or any of its Subsidiaries . Further, the Borrower hereby authorizes all Governmental Authorities to furnish to the Lender copies of reports or examinations relating to the Borrower and/or any of its Subsidiaries, whether made by the Borrower or otherwise. (d) Any and all costs and expenses incurred by, or on behalf of, the Lender in connection with the conduct of any of the foregoing shall be part of the Enforcement Costs and shall be payable to the Lender upon demand. The Borrower acknowledges and agrees that such expenses may include, but shall not be limited to, any and all out-of-pocket costs and expenses of the Lender's employees and agents in, and when, traveling to any of the Borrower's facilities. 6.1.4 Existence. The Borrower shall (a) maintain, and cause each of its Subsidiaries to maintain, its existence in good standing in the jurisdiction in which it is organized and in each other jurisdiction where it is required to register or qualify to do business if the failure to do so in such other jurisdiction might have a material adverse effect on the ability of the Borrower to 45 perform the Obligations, on the conduct of the Borrower's operations, on the Borrower's financial condition, or on the value of, or the ability of the Lender to realize upon, the Collateral and (b) remain a Registered Organization under the laws of the jurisdiction stated in the Preamble of this Agreement. 6.1.5 Compliance with Laws. The Borrower shall comply, and cause each of its Subsidiaries to comply, with all applicable Laws and observe the valid requirements of Governmental Authorities, the noncompliance with or the nonobservance of which might have a material adverse effect on the ability of the Borrower to perform the Obligations, the conduct of the Borrower's operations, the Borrower's financial condition, or the value of, or the ability of the Lender to realize upon, the Collateral. 6.1.6 Preservation of Properties. The Borrower will, and will cause each of its Subsidiaries to, at all times (a) maintain, preserve, protect and keep its properties, whether owned or leased, in good operating condition, working order and repair (ordinary wear and tear excepted), and from time to time will make all proper repairs, maintenance, replacements, additions and improvements thereto needed to maintain such properties in good operating condition, working order and repair, and (b) do or cause to be done all things necessary to preserve and to keep in full force and effect its material franchises, leases of real and personal property, trade names, Patents, Trademarks, Copyrights and permits which are necessary for the orderly continuance of its business. 6.1.7 Line of Business. The Borrower will continue to engage substantially only in the business of electronic systems manufacturer and integrator with associated related services. 6.1.8 Insurance. The Borrower will, and will cause each of its Subsidiaries to, at all times maintain with A-or better rated insurance companies such insurance as is required by applicable Laws and such other insurance, all in such amounts not less than the Lender shall reasonably determine from time to time, of such types and against such risks, hazards, liabilities, casualties and contingencies as are usually insured against in the same geographic areas by business entities engaged in the same or similar business. Without limiting the generality of the foregoing, the Borrower will, and will cause each of its Subsidiaries to, keep adequately insured all of its property against loss or damage resulting from fire or other risks insured against by extended coverage and maintain public liability insurance against claims for personal injury, death or property damage occurring upon, in or about any properties occupied or controlled by it, or arising in any manner out of the businesses carried on by it. The Borrower shall deliver to the Lender on the Closing Date (and thereafter on each date there is a material change in the insurance coverage) a certificate of a Responsible Officer of the Borrower containing a detailed list of the insurance then in effect and stating the names of the insurance companies, the types, the amounts and rates of the insurance, dates of the expiration thereof and the properties and 46 risks covered thereby. Within thirty (30) days after notice in writing from the Lender, the Borrower will obtain such additional insurance as the Lender may reasonably request. 6.1.9 Taxes. Except to the extent that the validity or amount thereof is being contested in good faith and by appropriate proceedings, the Borrower will, and will cause each of its Subsidiaries to, pay and discharge all Taxes prior to the date when any interest or penalty would accrue for the nonpayment thereof. The Borrower shall furnish to the Lender at such times as the Lender may require proof satisfactory to the Lender of the making of payments or deposits required by applicable Laws including, without limitation, payments or deposits with respect to amounts withheld by the Borrower from wages and salaries of employees and amounts contributed by the Borrower on account of federal and other income or wage taxes and amounts due under the Federal Insurance Contributions Act, as amended. 6.1.10 ERISA. The Borrower will, and will cause each of its Commonly Controlled Entities to, comply with the funding requirements of ERISA with respect to Plans for its respective employees. The Borrower will not permit with respect to any Plan (a) any prohibited transaction or transactions under ERISA or the Internal Revenue Code, which results, or may result, in any material liability of the Borrower, or (b) any Reportable Event if, upon termination of the plan or plans with respect to which one or more such Reportable Events shall have occurred, there is or would be any material liability of the Borrower to the PBGC. Upon the Lender's request, the Borrower will deliver to the Lender a copy of the most recent actuarial report, financial statements and annual report completed with respect to any Plan. 6.1.11 Notification of Events of Default and Adverse Developments. The Borrower shall promptly notify the Lender upon obtaining knowledge of the occurrence of: (a) any Event of Default; (b) any Default; (c) any litigation instituted or threatened against the Borrower or its Subsidiaries and of the entry of any judgment or Lien (other than any Permitted Liens) against any of the assets or properties of the Borrower or any Subsidiary where the claims against the Borrower or any Subsidiary exceed Two Hundred Fifty Thousand Dollars ($250,000) and are not covered by insurance; (d) any guaranty or other actual or potential contingent liability where the claims against the Borrower or any Subsidiary exceed Two Hundred Fifty Thousand Dollars ($250,000) and are not covered by insurance; (e) any event, development or circumstance whereby the financial statements furnished hereunder fail in any material respect to present 47 fairly, in accordance with GAAP, the financial condition and operational results of the Borrower; (f) any judicial, administrative or arbitral proceeding pending against the Borrower or any of its Subsidiaries and any judicial or administrative proceeding known by the Borrower or any of its Subsidiaries to be threatened against it which, if adversely decided, could materially adversely affect its financial condition or operations (present or prospective); (g) the receipt by the Borrower or any of its Subsidiaries of any notice, claim or demand from any Governmental Authority which alleges that the Borrower or any of its Subsidiaries is in violation of any of the terms of, or has failed to comply with any applicable Laws regulating its operation and business, including, but not limited to, the Occupational Safety and Health Act and the Environmental Protection Act; and (h) any other development in the business or affairs of the Borrower or any of its Subsidiaries that may be materially adverse; in each case describing in detail satisfactory to the Lender the nature thereof and the action the Borrower proposes to take with respect thereto. 6.1.12 Government Contracts. The Borrower shall immediately notify the Lender of the execution of any Government Contract with a contract value equal to or greater than One Million Dollars ($1,000,000) and shall in accordance with Section 3.2 execute any instruments and take any steps in order that all moneys due and to become due under such Government Contracts shall be assigned to the Lender and notice thereof given to the Government under the Federal Assignment of Claims Act of 1940 (31 U.S.C. Section 3727 and 41 U.S.C. Section 15) or any other similar applicable law. On the Lender's request the Borrower shall assign such other Government Contracts as the Lender requires in the exercise of its reasonable discretion. 6.1.13 Hazardous Materials; Contamination. The Borrower agrees to: (a) give notice to the Lender immediately upon the Borrower's acquiring knowledge of the presence of any Hazardous Materials and of any Hazardous Materials Contamination on any property owned or controlled by the Borrower or for which the Borrower is, or is claimed to be, responsible (provided that such notice shall not be required for Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course (including, without limitation, quantity) of the Borrower's line of business expressly described in this Agreement) or of any Hazardous Materials Contamination, with a full description thereof; 48 (b) promptly comply with any Laws requiring the removal, treatment or disposal of Hazardous Materials or Hazardous Materials Contamination and provide the Lender with satisfactory evidence of such compliance; (c) provide the Lender, within thirty (30) days after a demand by the Lender, with a bond, letter of credit or similar financial assurance evidencing to the Lender's satisfaction that the necessary funds are available to pay the cost of removing, treating, and disposing of such Hazardous Materials or Hazardous Materials Contamination and discharging any Lien which may be established as a result thereof on any property owned or controlled by the Borrower or for which the Borrower is, or is claimed to be, responsible; and (d) as part of the Obligations, defend, indemnify and hold harmless the Lender and its agents, employees, trustees, successors and assigns from any and all claims which may now or in the future (whether before or after the termination of this Agreement) be asserted as a result of the presence of any Hazardous Materials or any Hazardous Materials Contamination on any property owned or controlled by the Borrower or for which the Borrower is, or is claimed to be, responsible. The Borrower acknowledges and agrees that this indemnification shall survive the termination of this Agreement and the Commitment and the payment and performance of all of the other Obligations. 6.1.14 Disclosure of Significant Transactions. The Borrower shall deliver to the Lender a written notice describing in detail each transaction by it involving the purchase, sale, lease, or other acquisition or loss or casualty to or disposition of an interest in Fixed or Capital Assets which exceeds Fifty Thousand Dollars ($50,000.00), said notices to be delivered to the Lender within thirty (30) days of the occurrence of each such transaction. 6.1.15 Financial Covenants. (a) Tangible Net Worth. The Borrower will at all times maintain a Tangible Net Worth of not less than $8,500,000. (b) Funded Debt to EBITDA Ratio. The Borrower will maintain, tested as of the last day of each of the Borrower's fiscal quarters for the preceding four (4) fiscal quarters, a Funded Debt to EBITDA Ratio of not more than 3.25 to 1.0 through September 29, 2002 and not more than 3.0 to 1.0 at all times thereafter. 6.1.16 Collection of Receivables. Until such time that the Lender shall notify the Borrower of the revocation of such privilege, the Borrower shall at its own expense have the privilege for the account of, and in trust for, the Lender of collecting its Receivables and receiving in respect thereto all Items of Payment and shall otherwise completely service all of the Receivables including (a) the billing, posting and maintaining of complete records applicable thereto, (b) the taking of such action 49 with respect to the Receivables as the Lender may request or in the absence of such request, as the Borrower may deem advisable; and (c) the granting, in the ordinary course of business, to any Account Debtor, any rebate, refund or adjustment to which the Account Debtor may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to a Receivable and may take such other actions relating to the settling of any Account Debtor's claim as may be commercially reasonable. The Lender may, at its option, at any time or from time to time after and during the continuance of an Event of Default hereunder, revoke the collection privilege given in this Agreement to the Borrower by either giving notice of its assignment of, and lien on the Collateral to the Account Debtors or giving notice of such revocation to the Borrower. The Lender shall not have any duty to, and the Borrower hereby releases the Lender from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to preserve any rights against any other party with an interest in the Collateral. The Lender shall be entitled at any time and from time to time to confirm and verify Receivables. 6.1.17 Assignments of Receivables. The Borrower will promptly, upon request, execute and deliver to the Lender written assignments, in form and content acceptable to the Lender, of specific Receivables or groups of Receivables; provided, however, the Lien and/or security interest granted to the Lender under this Agreement shall not be limited in any way to or by the inclusion or exclusion of Receivables within such assignments. Receivables so assigned shall secure payment of the Obligations and are not sold to the Lender whether or not any assignment thereof, which is separate from this Agreement, is in form absolute. The Borrower agrees that neither any assignment to the Lender nor any other provision contained in this Agreement or any of the other Financing Documents shall impose on the Lender any obligation or liability of the Borrower with respect to that which is assigned and the Borrower hereby agrees to indemnify the Lender and hold the Lender harmless from any and all claims, actions, suits, losses, damages, costs, expenses, fees, obligations and liabilities which may be incurred by or imposed upon the Lender by virtue of the assignment of and Lien on the Borrower's rights, title and interest in, to, and under the Collateral. 6.1.18 Insurance With Respect to Equipment. The Borrower will (a) maintain hazard insurance with fire and extended coverage and naming the Lender as an additional insured with loss payable to the Lender as its respective interest may appear on the Equipment in an amount at least equal to the lesser amount of the outstanding principal amount of the Obligations or the fair market value of the Equipment (but in any event sufficient to avoid any co-insurance obligations) and with a specific endorsement to each such insurance policy pursuant to which the insurer agrees to give the Lender at least thirty (30) days written notice before any alteration or termination of such insurance policy and that no act or default of the Borrower shall affect the right of the Lender to recover under such policy in the event of loss or damage; (b) file with the Lender, upon its request, a detailed list of the insurance then in effect and stating the names of the insurance companies, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby; and (c) within thirty (30) days after notice in writing from the Lender, obtain such additional insurance as the Lender may reasonably request. 50 6.1.19 Maintenance of the Collateral. The Borrower will maintain the Collateral in good working order, saving and excepting ordinary wear and tear, and will not permit anything to be done to the Collateral which may materially impair the value thereof. The Lender, or an agent designated by the Lender, shall be permitted to enter the premises of the Borrower and examine, audit and inspect the Collateral at any reasonable time and from time to time without notice. The Lender agrees to act in a commercially reasonable manner when inspecting the premises of the Borrower and when examining, auditing and/or inspecting the Collateral. The Lender shall not have any duty to, and the Borrower hereby releases the Lender from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to, preserve any rights against any other party with an interest in the Collateral. 6.1.20 Equipment. The Borrower shall (a) maintain all Equipment as personalty, (b) not affix any Equipment to any real estate in such manner as to become a fixture or part of such real estate, and (c) shall hold no Equipment on a sale on approval basis. The Borrower hereby declares its intent that, notwithstanding the means of attachment, no goods of the Borrower hereafter attached to any realty shall be deemed a fixture, which declaration shall be irrevocable, without the Lender's consent, until all of the Obligations have been paid in full and all of the Commitments and Letters of Credit have been terminated. 6.1.21 Defense of Title and Further Assurances. At its expense the Borrower will defend the title to the Collateral (and any part thereof), and will immediately execute, acknowledge and deliver any renewal, affidavit, deed, assignment, security agreement, certificate or other document which the Lender may require in order to perfect, preserve, maintain, continue, protect and/or extend the Lien granted to the Lender under this Agreement or under any of the other Financing Documents and the first priority of that Lien subject only to the Permitted Liens. The Borrower hereby authorizes the filing of any financing statement or continuation statement required under the Uniform Commercial Code. The Borrower will from time to time do whatever the Lender may require by way of obtaining, executing, delivering, and/or filing landlords', mortgagees' or bailees' waivers, notices of assignment and other notices and amendments and renewals thereof and the Borrower will take any and all steps and observe such formalities as the Lender may require, in order to create and maintain a valid Lien upon, pledge of, or paramount security interest in, the Collateral, subject to the Permitted Liens. The Borrower shall pay to the Lender on demand all taxes, costs and expenses incurred by the Lender in connection with the preparation, execution, recording and filing of any such document or instrument. To the extent that the proceeds of any of the Accounts or Receivables of the Borrower are expected to become subject to the control of, or in the possession of, a party other than the Borrower or the Lender, the Borrower shall cause all such parties to execute and deliver on the Closing Date security documents or other documents as requested by the Lender and as may be necessary to evidence and/or perfect the security interest of the Lender in those proceeds. The Borrower hereby irrevocably appoints the Lender as the Borrower's attorney-in-fact, with power of substitution, in the name of the Lender or in the name of the Borrower or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrower and without notice to the Borrower, to execute and deliver any and 51 all of the instruments and other documents and take any action which the Lender may require pursuant the foregoing provisions of this Section. 6.1.22 Business Names; Locations. The Borrower will notify the Lender not less than thirty (30) days prior to (a) any change in the name under which the Borrower conducts its business, (b) any change of the location of the chief executive office of the Borrower, (c) the opening of any new place of business or the closing of any existing place of business, and (d) any change in the location of the places where the Collateral, or any part thereof, or the books and records, or any part thereof, are kept. 6.1.23 Use of Premises and Equipment. The Borrower agrees that until the Obligations are fully paid and the Commitment and the Letters of Credit have been terminated or have expired, the Lender (a) after and during the continuance of an Event of Default, may use any of the Borrower's owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (b) shall have, and is hereby granted, a right of ingress and egress to the places where the Collateral is located, and may proceed over and through any of the Borrower's owned or leased property. 6.1.24 Protection of Collateral. The Borrower agrees that the Lender may at any time following an Event of Default take such steps as the Lender deems reasonably necessary to protect the Lender's interest in, and to preserve the Collateral, including, the hiring of such security guards or the placing of other security protection measures as the Lender deems appropriate, may employ and maintain at any of the Borrower's premises a custodian who shall have full authority to do all acts necessary to protect the Lender's interests in the Collateral and may lease warehouse facilities to which the Lender may move all or any part of the Collateral to the extent commercially reasonable. The Borrower agrees to cooperate fully with the Lender's efforts to preserve the Collateral and will take such actions to preserve the Collateral as the Lender may reasonably direct. All of the Lender's expenses of preserving the Collateral, including any reasonable expenses relating to the compensation and bonding of a custodian, shall be part of the Enforcement Costs. Section 6.2 Negative Covenants. So long as any of the Obligations or the Commitment shall be outstanding hereunder, the Borrower agrees with the Lender as follows: 6.2.1 Capital Structure, Merger, Acquisition or Sale of Assets. The Borrower will not alter or amend its capital structure, authorize any additional class of equity, enter into any merger or consolidation or amalgamation, windup or dissolve itself (or suffer any liquidation or dissolution) or acquire all or substantially all the assets of any Person, or sell, lease or otherwise dispose of any of its assets without the prior 52 written consent of the Lender. Any consent of the Lender to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition. 6.2.2 Subsidiaries. The Borrower will not create or acquire any Subsidiaries other than the Subsidiaries identified on the Collateral Disclosure List without the prior written consent of the Lender. 6.2.3 Purchase or Redemption of Securities, Dividend Restrictions. The Borrower will not purchase, redeem or otherwise acquire any shares of its capital stock or warrants now or hereafter outstanding, declare or pay any dividends thereon (other than stock dividends), apply any of its property or assets to the purchase, redemption or other retirement of, set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, make any distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower, or any warrants, permit any Subsidiary to purchase or acquire any shares of any class of capital stock of, or warrants issued by, the Borrower, make any distribution to stockholders or set aside any funds for any such purpose, and not prepay, purchase or redeem any Funded Debt other than the Obligations. Notwithstanding the foregoing, provided that the purchase, redemption or acquisition of shares of capital stock does not result in a default under the covenants contained in Section 6.1.15 (Financial Covenants), the Borrower may purchase, redeem or acquire shares of capital stock for the period February 1, 2001 and forward in a cumulative amount equal to not more than $2,000,000 pursuant to the ______________ Plan dated ______________. 6.2.4 Indebtedness. The Borrower will not create, incur, assume or suffer to exist any Funded Debt, except: (a) the Obligations; (b) current accounts payable arising in the ordinary course; (c) Indebtedness secured by Permitted Liens; (d) Subordinated Indebtedness; (e) Indebtedness of the Borrower existing on the date hereof and reflected on the financial statements furnished pursuant to Section 4.1.11 (Financial Condition); and (f) Capitalized Leases less than Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate at any time. 53 6.2.5 Investments, Loans and Other Transactions. Except as otherwise provided in this Agreement, the Borrower will not (a) make, assume, acquire or continue to hold any investment in any real property (unless used in connection with its business and treated as a Fixed or Capital Asset of the Borrower) or any Person, whether by stock purchase, capital contribution, acquisition of indebtedness of such Person or otherwise (including, without limitation, investments in any joint venture or partnership), (b) guaranty or otherwise become contingently liable for the indebtedness or obligations of any Person, (c) make any loans or advances, or otherwise extend credit to any Person except in the ordinary course of business or (d) pay any bonuses, fees compensation, commissions, salaries, drawing account or other payments, whether direct or indirect, to any stockholders of the Borrower, or any Affiliate of the Borrower, other than reasonable compensation for actual services rendered by stockholders in their capacity as officers or employees of the Borrower, except: (a) any advance to an officer of the Borrower for travel or other business expenses in the ordinary course of business; (b) the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (c) any investment in Cash Equivalents, which are pledged to the Lender as collateral and security for the Obligations; and (d) trade credit extended to customers in the ordinary course of business. 6.2.6 Operating Lease Obligations. The Borrower will not incur or permit to exist any Lease Obligations except Capital Leases expressly permitted by this Agreement, if the aggregate amount of all such Lease Obligations would at any time exceed One Million Dollars ($1,000,000) during any fiscal year of the Borrower. 6.2.7 Subordinated Indebtedness. The Borrower will not make: (a) any payment of principal of, or interest on, any of the Subordinated Indebtedness, including, without limitation, the Subordinated Debt, if a Default or an Event of Default then exists hereunder or would result from such payment; (b) any payment of the principal or interest due on the Subordinated Indebtedness as a result of acceleration thereunder or a mandatory prepayment thereunder; (c) any amendment or modification of or supplement to the documents evidencing or securing the Subordinated Indebtedness; or 54 (d) payment of principal or interest on the Subordinated Indebtedness other than when due (without giving effect to any acceleration of maturity or mandatory prepayment). 6.2.8 Liens; Confessed Judgment. The Borrower agrees that it (a) will not create, incur, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired, except for Liens securing the Obligations and Permitted Liens, (b) will not agree to, assume or suffer to exist any provision in any instrument or other document for confession of judgment, cognovit or other similar right or remedy, (c) will not allow or suffer to exist any Permitted Liens to be superior to Liens securing the Obligations, (d) will not enter into any contracts for the consignment of goods to the Borrower, (e) will not execute or suffer the filing of any financing statements or the posting of any signs giving notice of consignments to the Borrower, (f) will not, as a material part of its business, engage in the sale of goods belonging to others, and (g) will not allow or suffer to exist the failure of any Lien described in the Security Documents to attach to, and/or remain at all times perfected on, any of the property described in the Security Documents. 6.2.9 Transactions with Affiliates. The Borrower and its Subsidiaries will not enter into or participate in any transaction with any Affiliate or, except in the ordinary course of business, with the officers, directors, employees and other representatives of the Borrower and/or any Subsidiary. 6.2.10 Other Businesses. The Borrower and its Subsidiaries will not engage directly or indirectly in any business other than its current line of business described elsewhere in this Agreement. 6.2.11 ERISA Compliance. Neither the Borrower nor any Commonly Controlled Entity shall: (a) engage in or permit any "prohibited transaction" (as defined in ERISA); (b) cause any "accumulated funding deficiency" as defined in ERISA and/or the Internal Revenue Code; (c) terminate any pension plan in a manner which could result in the imposition of a lien on the property of the Borrower pursuant to ERISA; (d) terminate or consent to the termination of any Multi-employer Plan; or (e) incur a complete or partial withdrawal with respect to any Multi-employer Plan. 6.2.12 Prohibition on Hazardous Materials. The Borrower shall not place, manufacture or store or permit to be placed, manufactured or stored any Hazardous Materials on any property owned, operated or controlled by the Borrower or for which the Borrower is responsible other than Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course. 55 6.2.13 Method of Accounting; Fiscal Year. (a) The Borrower shall not change the method of accounting employed in the preparation of any financial statements furnished to the Lender under the provisions of Section 6.1.1 (Financial Statements), unless required to conform to GAAP and on the condition that the Borrower's accountants shall furnish such information as the Lender may request to reconcile the changes with the Borrower's prior financial statements. (b) The Borrower will not change its fiscal year from a year ending on September 30. 6.2.14 Compensation. The Borrower shall not pay any bonuses, fees, compensation, commissions, salaries, drawing accounts, or other payments (cash and non-cash), whether direct or indirect, to any stockholders of the Borrower, or any Affiliate of the Borrower, other than reasonable compensation for actual services rendered by stockholders in their capacity as officers or employees of the Borrower. 6.2.15 Transfer of Collateral. The Borrower will not transfer, or permit the transfer, to another location of any of the Collateral or the books and records related to any of the Collateral. 6.2.16 Sale and Leaseback. The Borrower will not directly or indirectly enter into any arrangement to sell or transfer all or any substantial part of its fixed assets and thereupon or within one (1) year thereafter rent or lease the assets so sold or transferred. 6.2.17 Disposition of Collateral. The Borrower will not sell, discount, allow credits or allowances, transfer, assign, extend the time for payment on, convey, lease, assign, transfer or otherwise dispose of the Collateral, except, prior to an Event of Default, dispositions expressly permitted elsewhere in this Agreement, and the sale of unnecessary or obsolete Equipment, but only if the proceeds of the sale of such Equipment are (a) used to purchase similar Equipment to replace the unnecessary or obsolete Equipment or (b) immediately turned over to the Lender for application to the Obligations. 6.2.18 Profitability. The Borrower will not incur a net loss in any fiscal quarter. 6.2.19 Stock of Subsidiaries. The Borrower will not sell or otherwise dispose of any shares of capital stock of any Subsidiary (except in connection with a merger or consolidation of a Wholly Owned Subsidiary into the Borrower or another Wholly Owned Subsidiary or with the dissolution of any Subsidiary) or permit any Subsidiary to issue any additional shares of its capital stock except pro rata to its stockholders. 56 ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES Section 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" under the provisions of this Agreement: 7.1.1 Failure to Pay. The failure of the Borrower to pay any of the Obligations as and when due and payable in accordance with the provisions of this Agreement, the Notes and/or any of the other Financing Documents. 7.1.2 Breach of Representations and Warranties. Any representation or warranty made in this Agreement or in any report, statement, schedule, certificate, opinion (including any opinion of counsel for the Borrower), financial statement or other document furnished in connection with this Agreement, any of the other Financing Documents, or the Obligations, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. 7.1.3 Failure to Comply with Covenants. The failure of the Borrower to perform, observe or comply with any covenant, condition or agreement contained in this Agreement. 7.1.4 Default Under Other Financing Documents or Obligations. A default shall occur under any of the other Financing Documents or under any other Obligations, and such default is not cured within any applicable grace period provided therein. 7.1.5 Receiver; Bankruptcy. The Borrower or any Subsidiary shall (a) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (b) admit in writing its inability to pay its debts as they mature, (c) make a general assignment for the benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e) file a voluntary petition in bankruptcy or a petition or an answer seeking or consenting to reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or take corporate action for the purposes of effecting any of the foregoing, (f) by any act indicate its consent to, approval of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of sixty (60) days, or (g) by any act indicate its consent to, approval of or acquiescence in any order, judgment or decree by any court of competent jurisdiction or any Governmental Authority enjoining or otherwise prohibiting the operation of a material portion of 57 the Borrower's or any Subsidiary's business or the use or disposition of a material portion of the Borrower's or any Subsidiary's assets. 7.1.6 Involuntary Bankruptcy, etc. (a) An order for relief shall be entered in any involuntary case brought against the Borrower or any Subsidiary under the Bankruptcy Code, or (b) any such case shall be commenced against the Borrower or any Subsidiary and shall not be dismissed within sixty (60) days after the filing of the petition, or (c) an order, judgment or decree under any other Law is entered by any court of competent jurisdiction or by any other Governmental Authority on the application of a Governmental Authority or of a Person other than the Borrower or any Subsidiary (i) adjudicating the Borrower or any Subsidiary bankrupt or insolvent, or (ii) appointing a receiver, trustee or liquidator of the Borrower or of any Subsidiary, or of a material portion of the Borrower's or any Subsidiary's assets, or (iii) enjoining, prohibiting or otherwise limiting the operation of a material portion of the Borrower's or any Subsidiary's business or the use or disposition of a material portion of the Borrower's or any Subsidiary's assets, and such order, judgment or decree continues unstayed and in effect for a period of thirty (30) days from the date entered. 7.1.7 Judgment. Unless adequately insured in the opinion of the Lender, the entry of a final judgment for the payment of money involving more than $25,000 against the Borrower, and the failure by the Borrower to discharge the same, or cause it to be discharged, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered, or to secure a stay of execution pending appeal of such judgment. 7.1.8 Execution; Attachment. Any execution or attachment shall be levied against the Collateral, or any part thereof, and such execution or attachment shall not be set aside, discharged or stayed within thirty (30) days after the same shall have been levied. 7.1.9 Default Under Other Borrowings. Default shall be made with respect to any Funded Debt (other than the Loan) if the effect of such default is to accelerate the maturity of such Funded Debt or to permit the holder or obligee thereof or other party thereto to cause any such Funded Debt to become due prior to its stated maturity. 7.1.10 Challenge to Agreements. The Borrower shall challenge the validity and binding effect of any provision of any of the Financing Documents or shall state its intention to make such a challenge of any of the Financing Documents or any of the Financing Documents shall for any reason (except to the extent permitted by its express terms) cease to be effective or to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. 58 7.1.11 Material Adverse Change. The Lender in its reasonable discretion determines in good faith that a material adverse change has occurred in the financial condition of the Borrower. 7.1.12 Impairment of Position. The Lender in its reasonable discretion determines in good faith that an event has occurred which impairs the prospect of payment of the Obligations and/or the value of the Collateral. 7.1.13 Collateral Inadequacy. The determination in good faith by the Lender that the security for the Obligations is inadequate. 7.1.14 Change in Ownership. Any change in ownership of the Borrower 7.1.15 Contract Default, Debarment or Suspension. Default shall be made under any Government Contract, or any Government Contract is terminated for default by any Governmental Authority for any reason whatsoever, or if the Borrower is debarred or suspended, whether temporarily or permanently, by any Governmental Authority. 7.1.16 Liquidation, Termination, Dissolution, Change in Management, etc. The Borrower shall liquidate, dissolve or terminate its existence or shall suspend or terminate a substantial portion of its business operations or any change occurs in the management or control of the Borrower without the prior written consent of the Lender. 7.1.17 Advances to Subsidiaries. The Borrower shall make any advance, loan, or extension of credit to or any payment on behalf of or guaranty any obligation of any Subsidiary without the Lender's prior written consent. 7.1.18 Swap Default. An event occurs which gives the Lender the right or option to terminate any Swap Contract which is secured by the Collateral. Section 7.2 Remedies. Upon the occurrence of any Default or Event of Default, the Lender may at any time thereafter exercise any one or more of the following rights, powers or remedies: 59 7.2.1 Acceleration. The Lender may declare the Obligations to be immediately due and payable, notwithstanding anything contained in this Agreement or in any of the other Financing Documents to the contrary, without presentment, demand, protest, notice of protest or of dishonor, or other notice of any kind, all of which the Borrower hereby waives. 7.2.2 Further Advances. The Lender may from time to time without notice to the Borrower suspend, terminate or limit any further loans or other extensions of credit under this Agreement and under any of the other Financing Documents. Further, upon the occurrence of an Event of Default or Default specified in Section 7.1.5 (Receiver; Bankruptcy) or Section 7.1.6 (Involuntary Bankruptcy, etc.), the Revolving Credit Commitment and any agreement in any of the Financing Documents to provide additional credit and/or to issue Letters of Credit shall immediately and automatically terminate and the unpaid principal amount of the Notes (with accrued interest thereon) and all other Obligations then outstanding, shall immediately become due and payable without further action of any kind and without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. 7.2.3 Uniform Commercial Code. The Lender shall have all of the rights and remedies of a secured party under the applicable Uniform Commercial Code and other applicable Laws. Upon demand by the Lender, the Borrower shall assemble the Collateral and make it available to the Lender, at a place designated by the Lender. The Lender or its agents may without notice from time to time enter upon the Borrower's premises to take possession of the Collateral, to remove it, to render it unusable, to process it or otherwise prepare it for sale, or to sell or otherwise dispose of it. Any written notice of the sale, disposition or other intended action by the Lender with respect to the Collateral which is sent by regular mail, postage prepaid, to the Borrower at the address set forth in Section 8.1 (Notices), or such other address of the Borrower which may from time to time be shown on the Lender's records, at least ten (10) days prior to such sale, disposition or other action, shall constitute commercially reasonable notice to the Borrower. The Lender may alternatively or additionally give such notice in any other commercially reasonable manner. Nothing in this Agreement shall require the Lender to give any notice not required by applicable Laws. If any consent, approval, or authorization of any state, municipal or other Governmental Authority or of any other Person or of any Person having any interest therein, should be necessary to effectuate any sale or other disposition of the Collateral, the Borrower agrees to execute all such applications and other instruments, and to take all other action, as may be required in connection with securing any such consent, approval or authorization. The Borrower recognizes that the Lender may be unable to effect a public sale of all or a part of the Collateral consisting of Investment Property by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and other applicable Federal and state Laws. The Lender may, therefore, in its discretion, take such steps as it may deem 60 appropriate to comply with such Laws and may, for example, at any sale of the Collateral consisting of securities restrict the prospective bidders or purchasers as to their number, nature of business and investment intention, including, without limitation, a requirement that the Persons making such purchases represent and agree to the satisfaction of the Lender that they are purchasing such securities for their account, for investment, and not with a view to the distribution or resale of any thereof. The Borrower covenants and agrees to do or cause to be done promptly all such acts and things as the Lender may request from time to time and as may be necessary to offer and/or sell the securities or any part thereof in a manner which is valid and binding and in conformance with all applicable Laws. Upon any such sale or disposition, the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral consisting of securities so sold. 7.2.4 Specific Rights With Regard to Collateral. In addition to all other rights and remedies provided hereunder or as shall exist at law or in equity from time to time, the Lender may (but shall be under no obligation to), without notice to the Borrower, and the Borrower hereby irrevocably appoints the Lender as its attorney-in-fact, with power of substitution, in the name of the Lender and/or in the name of the Borrower or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrower and without notice to the Borrower: (a) request any Account Debtor obligated on any of the Accounts to make payments thereon directly to the Lender, with the Lender taking control of the Proceeds thereof; (b) compromise, extend or renew any of the Collateral or deal with the same as it may deem advisable; (c) make exchanges, substitutions or surrenders of all or any part of the Collateral; (d) copy, transcribe, or remove from any place of business of the Borrower or any Subsidiary all books, records, ledger sheets, correspondence, invoices and documents, relating to or evidencing any of the Collateral or without cost or expense to the Lender, make such use of the Borrower's or any Subsidiary's place(s) of business as may be reasonably necessary to administer, control and collect the Collateral; (e) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the Collateral; (f) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (g) settle, renew, extend, compromise, compound, exchange or adjust claims in respect of any of the Collateral or any legal proceedings brought in respect thereof; 61 (h) endorse or sign the name of the Borrower upon any Items of Payment, certificates of title, Instruments, Investment Property, stock powers, documents, documents of title, financing statements, assignments, notices or other writing relating to or part of the Collateral and on any proof of claim in bankruptcy against an Account Debtor; (i) notify the Post Office authorities to change the address for the delivery of mail to the Borrower to such address or Post Office Box as the Lender may designate and receive and open all mail addressed to the Borrower; and (j) take any other action necessary or beneficial to realize upon or dispose of the Collateral or to carry out the terms of this Agreement. 7.2.5 Application of Proceeds. Any proceeds of sale or other disposition of the Collateral will be applied by the Lender to the payment first of any and all Enforcement Costs, and any balance of such proceeds will be applied to the Obligations in such order and manner as the Lender shall determine. If the sale or other disposition of the Collateral fails to fully satisfy the Obligations, the Borrower shall remain liable to the Lender for any deficiency. 7.2.6 Performance by Lender. Upon the occurrence and continuation of an Event of Default, the Lender without notice to or demand upon the Borrower and without waiving or releasing any of the Obligations or any Default or Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Borrower, and may enter upon the premises of the Borrower for that purpose and take all such action thereon as the Lender may consider necessary or appropriate for such purpose and the Borrower hereby irrevocably appoints the Lender as its attorney-in-fact to do so, with power of substitution, in the name of the Lender or in the name of the Borrower or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrower and without notice to the Borrower. All sums so paid or advanced by the Lender together with interest thereon from the date of payment, advance or incurring until paid in full at the Post-Default Rate and all costs and expenses, shall be deemed part of the Enforcement Costs, shall be paid by the Borrower to the Lender on demand, and shall constitute and become a part of the Obligations. 7.2.7 Other Remedies. The Lender may from time to time proceed to protect or enforce its rights by an action or actions at law or in equity or by any other appropriate proceeding, whether for the specific performance of any of the covenants contained in this Agreement or in any of the other Financing Documents, or for an injunction against the violation of any of the terms of this Agreement or any of the other Financing Documents, or in aid of the exercise or execution of any right, remedy or power granted in this Agreement, the Financing Documents, and/or applicable Laws. The Lender is authorized to offset and apply to all or any part of the 62 Obligations all moneys, credits and other property of any nature whatsoever of the Borrower now or at any time hereafter in the possession of, in transit to or from, under the control or custody of, or on deposit with, the Lender or any Affiliate of the Lender. ARTICLE VIII MISCELLANEOUS Section 8.1 Notices. All notices, requests and demands to or upon the parties to this Agreement shall be in writing and shall be deemed to have been given or made when delivered by hand on a Business Day, or two (2) days after the date when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or when sent by overnight courier, on the Business Day next following the day on which the notice is delivered to such overnight courier, addressed as follows: Borrower: SensyTech Inc. 8419 Terminal Road Newington, Virginia 22122 Attention: Joe Houston Lender: Bank of America, N. A. 8300 Greensboro Drive Suite 550 McLean, Virginia 22102-3604 Attention: Commercial Lending By written notice, each party to this Agreement may change the address to which notice is given to that party, provided that such changed notice shall include a street address to which notices may be delivered by overnight courier in the ordinary course on any Business Day. Section 8.2 Amendments; Waivers. This Agreement and the other Financing Documents may not be amended, modified, or changed in any respect except by an agreement in writing signed by the Lender and the Borrower. No waiver of any provision of this Agreement or of any of the other Financing Documents, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing signed by the Lender. No course of dealing between the Borrower and the Lender and no act or failure to act from time to time on the part of the Lender shall constitute a waiver, amendment or modification of any provision of this Agreement or any of the other Financing Documents or any right or remedy under this Agreement, under any of the other Financing Documents or under applicable Laws. Without implying any limitation on the foregoing: (a) Any waiver or consent shall be effective only in the specific instance, for the terms and purpose for which given, subject to such conditions as the Lender may specify in any such instrument. 63 (b) No waiver of any Default or Event of Default shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereto. (c) No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstance. (d) No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the other Financing Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver, amendment or modification of any such term, condition, covenant or agreement or of any such breach or preclude the Lender from exercising any such right, power or remedy at any time or times. (e) By accepting payment after the due date of any amount payable under this Agreement or under any of the other Financing Documents, the Lender shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Financing Documents, or to declare a default for failure to effect such prompt payment of any such other amount. Section 8.3 Cumulative Remedies. The rights, powers and remedies provided in this Agreement and in the other Financing Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Lender shall determine, subject to the provisions of this Agreement, and are in addition to, and not exclusive of, rights, powers and remedies provided by existing or future applicable Laws. In order to entitle the Lender to exercise any remedy reserved to it in this Agreement, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Without limiting the generality of the foregoing and subject to the terms of this Agreement, the Lender may: (d) proceed against the Borrower with or without proceeding against any other Person who may be liable (by endorsement, guaranty, indemnity or otherwise) for all or any part of the Obligations; (a) proceed against the Borrower with or without proceeding under any of the other Financing Documents or against any Collateral or other collateral and security for all or any part of the Obligations; (b) without reducing or impairing the obligation of the Borrower and without notice, release or compromise with any guarantor or other Person liable for all or any part of the Obligations under the Financing Documents or otherwise; (i) without reducing or impairing the obligations of the Borrower and without notice thereof:fail to perfect the Lien in any or all Collateral or to release any or all the Collateral or to accept substitute Collateral; 64 (ii) approve the making of advances under the Revolving Loan under this Agreement; (iii) waive any provision of this Agreement or the other Financing Documents; (iv) exercise or fail to exercise rights of set-off or other rights; or (c) accept partial payments or extend from time to time the maturity of all or any part of the Obligations. Section 8.4 Severability. In case one or more provisions, or part thereof, contained in this Agreement or in the other Financing Documents shall be invalid, illegal or unenforceable in any respect under any Law, then without need for any further agreement, notice or action: (a) the validity, legality and enforceability of the remaining provisions shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby; (b) the obligation to be fulfilled shall be reduced to the limit of such validity; (c) if such provision or part thereof pertains to repayment of the Obligations, then, at the sole and absolute discretion of the Lender, all of the Obligations of the Borrower to the Lender shall become immediately due and payable; and (d) if the affected provision or part thereof does not pertain to repayment of the Obligations, but operates or would prospectively operate to invalidate this Agreement in whole or in part, then such provision or part thereof only shall be void, and the remainder of this Agreement shall remain operative and in full force and effect. Section 8.5 Assignments by Lender. The Lender may, without notice to or consent of the Borrower, assign to any Person (each an "Assignee" and collectively, the "Assignees") all or a portion of the Lender's Commitments. The Lender and its Assignee shall notify the Borrower in writing of the date on which the assignment is to be effective (the "Adjustment Date"). On or before the Adjustment Date, the Lender, the Borrower and the Assignee shall execute and deliver a written assignment agreement in a form acceptable to the Lender, which shall constitute an amendment to this Agreement to the extent necessary to reflect such assignment. Upon the request of the Lender following an assignment made in accordance with this Section 8.5, the Borrower shall issue new Notes to the Lender and its Assignee reflecting such assignment, in exchange for the existing Notes held by the Lender. 65 In addition, notwithstanding the foregoing, the Lender may at any time pledge all or any portion of the Lender's rights under this Agreement, any of the Commitments or any of the Obligations to a Federal Reserve Bank. Section 8.6 Participations by Lender. The Lender may at any time sell to one or more financial institutions participating interests in any of the Lender's Obligations or Commitments; provided, however, that (a) no such participation shall relieve the Lender from its obligations under this Agreement or under any of the other Financing Documents to which it is a party, (b) the Lender shall remain solely responsible for the performance of its obligations under this Agreement and under all of the other Financing Documents to which it is a party, and (c) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement and the other Financing Documents. Section 8.7 Disclosure of Information by Lender. In connection with any sale, transfer, assignment or participation by the Lender in accordance with Section 8.5 (Assignments by Lender) or Section 8.6 (Participations by Lender), the Lender shall have the right to disclose to any actual or potential purchaser, assignee, transferee or participant all financial records, information, reports, financial statements and documents obtained in connection with this Agreement and/or any of the other Financing Documents or otherwise. Section 8.8 Successors and Assigns. This Agreement and all other Financing Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender. Section 8.9 Continuing Agreements. All covenants, agreements, representations and warranties made by the Borrower in this Agreement, in any of the other Financing Documents, and in any certificate delivered pursuant hereto or thereto shall survive the making by the Lender of the Loans, the issuance of Letters of Credit and the execution and delivery of the Notes, shall be binding upon the Borrower regardless of how long before or after the date hereof any of the Obligations were or are incurred, and shall continue in full force and effect so long as any of the Obligations are outstanding and unpaid. From time to time upon the Lender's request, and as a condition of the release of any one or more of the Security Documents, the Borrower and other Persons obligated with respect to the Obligations shall provide the Lender with such acknowledgments and agreements as the Lender may require to the effect that there exists no defenses, rights of setoff or recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against the Lender and/or any of its agents and others, or to the extent there are, the same are waived and released. 66 Section 8.10 Enforcement Costs. The Borrower agrees to pay to the Lender on demand all Enforcement Costs, together with interest thereon from the date incurred or advanced until paid in full at a per annum rate of interest equal at all times to the Post-Default Rate. Enforcement Costs shall be immediately due and payable at the time advanced or incurred, whichever is earlier. Without implying any limitation on the foregoing, the Borrower agrees, as part of the Enforcement Costs, to pay upon demand any and all stamp and other Taxes and fees payable or determined to be payable in connection with the execution and delivery of this Agreement and the other Financing Documents and to save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay any Taxes or fees referred to in this Section. The provisions of this Section shall survive the execution and delivery of this Agreement, the repayment of the other Obligations and shall survive the termination of this Agreement. Section 8.11 Applicable Law; Jurisdiction. 8.11.1 Applicable Law. The Borrower acknowledges and agrees that the Financing Documents, including, this Agreement, shall be governed by the Laws of the State, as if each of the Financing Documents and this Agreement had each been executed, delivered, administered and performed solely within the State even though for the convenience and at the request of the Borrower, one or more of the Financing Documents may be executed elsewhere. The Lender acknowledges, however, that remedies under certain of the Financing Documents that relate to property outside the State may be subject to the laws of the state in which the property is located. 8.11.2 Submission to Jurisdiction. The Borrower irrevocably submits to the jurisdiction of any state or federal court sitting in the State over any suit, action or proceeding arising out of or relating to this Agreement or any of the other Financing Documents. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Borrower and may be enforced in any court in which the Borrower is subject to jurisdiction, by a suit upon such judgment, provided that service of process is effected upon the Borrower in one of the manners specified in this Section or as otherwise permitted by applicable Laws. 8.11.3 Appointment of Agent for Service of Process. The Borrower hereby irrevocably designates and appoints Robert C. Bower at 8419 Terminal Road Newington, Virginia 22122, as the Borrower's authorized agent to receive on the Borrower's behalf service of any and all process that may be served in any suit, action or proceeding of the nature referred to in this Section in any state or federal court sitting in the State. If such agent shall cease so to act, the Borrower shall irrevocably designate and appoint without delay another such agent in the State satisfactory to the Lender and shall 67 promptly deliver to the Lender evidence in writing of such other agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable. 8.11.4 Service of Process. The Borrower hereby consents to process being served in any suit, action or proceeding of the nature referred to in this Section by (a) the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the Borrower at the Borrower's address designated in or pursuant to Section 8.1 (Notices), and (b) serving a copy thereof upon the agent, if any, designated and appointed by the Borrower as the Borrower's agent for service of process by or pursuant to this Section. The Borrower irrevocably agrees that such service (y) shall be deemed in every respect effective service of process upon the Borrower in any such suit, action or proceeding, and (z) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon the Borrower. Nothing in this Section shall affect the right of the Lender to serve process in any manner otherwise permitted by law or limit the right of the Lender otherwise to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions. Section 8.12 Duplicate Originals and Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. Section 8.13 Headings. The headings in this Agreement are included herein for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8.14 No Agency. Nothing herein contained shall be construed to constitute the Borrower as the agent of the Lender for any purpose whatsoever or to permit the Borrower to pledge any of the credit of the Lender. The Lender shall not be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof. The Lender shall not, by anything herein or in any of the Financing Documents or otherwise, assume any of the Borrower's obligations under any contract or agreement assigned to the Lender, and the Lender shall not be responsible in any way for the performance by the Borrower of any of the terms and conditions thereof. Section 8.15 Date of Payment. Should the principal of or interest on the Notes become due and payable on other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and in the case of principal, interest shall be payable thereon at the rate per annum specified in the Notes during such extension. 68 Section 8.16 Entire Agreement. This Agreement is intended by the Lender and the Borrower to be a complete, exclusive and final expression of the agreements contained herein. Neither the Lender nor the Borrower shall hereafter have any rights under any prior agreements pertaining to the matters addressed by this Agreement but shall look solely to this Agreement for definition and determination of all of their respective rights, liabilities and responsibilities under this Agreement. Section 8.17 Waiver of Trial by Jury. THE BORROWER AND THE LENDER HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by the Borrower and the Lender, and the Borrower and the Lender hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Borrower and the Lender further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this waiver with counsel. Section 8.18 Liability of the Lender. The Borrower hereby agrees that the Lender shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Lender in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations. By inspecting the Collateral or any other properties of the Borrower or by accepting or approving anything required to be observed, performed or fulfilled by the Borrower or to be given to the Lender pursuant to this Agreement or any of the other Financing Documents, the Lender shall not be deemed to have warranted or represented the condition, sufficiency, legality, effectiveness or legal effect of the same, and such acceptance or approval shall not constitute any warranty or representation with respect thereto by the Lender. 69 IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. WITNESS OR ATTEST: SENSYTECH INC. _________________________ By:____________________________(Seal) Name: Title: WITNESS: BANK OF AMERICA, N. A. _________________________ By:____________________________(Seal) Elaine Eaton Senior Vice President 70 LIST OF EXHIBITS A. Second Amended and Restated Revolving Credit Note B. Form of Compliance Certificate and Compliance Worksheet C. Form of Borrowing Base D. Form of Direct Assignment E. Form of Backlog Report 71 EXHIBIT B FINANCING AGREEMENT COMPLIANCE CERTIFICATE THIS CERTIFICATE is made as of __________________, 200_, by SENSYTECH INC, a corporation organized under the laws of the State of Delaware (the "Borrower"), to BANK OF AMERICA, N. A., a national banking association (the "Lender"), pursuant to Section __ of the Second Amended and Restated Financing and Security Agreement dated as of February 28, 2002, (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Financing Agreement") by and between the Borrower and the Lender. I, ____________________, hereby certify that I am the ______________ of the Borrower and am a Responsible Officer (as that term is defined in the Financing Agreement) authorized to certify to the Lender on behalf the Borrower as follows: (a) This Certificate is given to induce the Lender to make advances to the Borrower under the Financing Agreement. (b) This Certificate accompanies the _____________ financial statements for the period ended ___________________, 200__ (the "Current Financials") which the Borrower is furnishing to the Lender pursuant to Section 6.1.1(__) of the Financing Agreement. The Current Financials have been prepared in accordance with GAAP (as that term is defined in the Financing Agreement). (c) As required by Section 6.1.1(__) of the Financing Agreement, I have set forth on Schedule 1 a detailed computation of each financial covenant in Financing Agreement and a cash flow projection report. (d) No change has occurred to the information contained in the Collateral Disclosure List except as set forth on Schedule 2 to this Certificate. By way of example and not limitation, the Collateral Disclosure List, together with Schedule 2, contains a listing of all of the Borrower's Patents, Trademarks, Copyrights (as those terms are defined in the Financing Agreement), all locations (owned, leased, warehouses or otherwise) where any Collateral (as that term is defined in the Financing Agreement) is located, all Subsidiaries (as that term is defined in the Financing Agreement). (e) As of the date hereof, there exists no Default or Event of Default, as defined in the ARTICLE VII (Default and Rights and Remedies) of the Financing Agreement, nor any event which, upon notice or the lapse of time, or both, would constitute such an Event of Default. (f) On the date hereof, the representations and warranties contained in Article 4 of the Financing Agreement are true with the same effect as though such representations and warranties had been made on the date hereof. WITNESS my signature this _____ day of ____________, 200_. SENSYTECH INC. By:______________________________ Name: Title: 2 SCHEDULE 1 WORKSHEET - 1 Minimum Tangible Net Worth Sensytech, Inc. Page 49 of Financing and Security Agreement - Maintain at all times Tangible Net Worth of not less Eight Million Five Hundred Thousand Dollars ($8,500,000). Page 21 of Financing and Security Agreement - "Tangible Net Worth" means the value of Borrower's total assets (including leaseholds and leasehold improvements and reserves against assets but excluding goodwill, patents, trademarks, trade names, organization expense, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, and other like intangibles, and monies due from affiliates, officers, directors, employees, shareholders, members or managers of Borrower) less total liabilities, including but not limited to accrued and deferred income taxes, but excluding the non-current portion of Subordinated Liabilities. "Subordinated Liabilities" means liabilities subordinated to Borrower's obligations to Lender in a manner acceptable to Lender in its sole discretion. Period Ending : ______________ - ------------------------------------------------------------------------------ (a) Total Assets - ------------------------------------------------------------------------------ (b) Less Intangibles - ------------------------------------------------------------------------------ (c) Equal Total Tangible Assets - ------------------------------------------------------------------------------ (d) Less: Total Liabilities - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Actual Tangible Net Worth - ------------------------------------------------------------------------------ -------------------------------------------------- Required Net Worth $8,500,000 -------------------------------------------------- Pass/Fail: --------------------------------------------------

3 WORKSHEET - 2 Funded Debt to EBIDTA Sensytech, Inc. Page 49 of Financing and Security Agreement - The Borrower will maintain, tested as of the last day of each of the Borrower's fiscal quarters for the preceding four (4) fiscal quarters, a Funded Indebtedness to EBITDA Ratio of not less than 3.25 to 1.0 through September 29, 2002 and not less than 3.0 to 1.0 at all times thereafter. Page 9 of Financing and Security Agreement - "Funded Debt," means all outstanding liabilities for borrowed money and other interest-bearing liabilities, including current and long-term debt issued letters of credit and capitalized leases less the non-current portion of Subordinated Liabilities. Page 5 of Financing and Security Agreement - "EBITDA" means as to the Borrower for any period of determination thereof, the sum of (a) the net profit (or loss) determined in accordance with GAAP, plus (b) interest and taxes for such period, plus (c) depreciation and amortization of assets for such period. Amounts in Thousands
Funded Debt - ----------------------------------------------------------------------------------- (i) Debt for Borrowed money - ----------------------------------------------------------------------------------- (ii) DEBT EVIDENCED BY FUNDS OR NOTES AND OTHER SIMILAR INSTRUMENTS - ----------------------------------------------------------------------------------- (iii) LETTERS OF CREDIT - ----------------------------------------------------------------------------------- (iv) Debt consisting of Capital Lease Obligations - ----------------------------------------------------------------------------------- Funded Debt numerator = -------------------------------------------------------------------------------- ---------------------------------------------------- (a) (b) (c ) [(b)-(a)]+(c) Current PY Period FYE period / / / / / / Totals ---------------------------------------------------- Denominator - ----------------------------------------------------------------------------------- (a) Net Income after tax - ----------------------------------------------------------------------------------- (c) + Depreciation Expense - ----------------------------------------------------------------------------------- (c) + Amortization Expense - ----------------------------------------------------------------------------------- (d) + Interest Expense - ----------------------------------------------------------------------------------- (e) + Income Taxes Paid - ----------------------------------------------------------------------------------- EBITDA denominator = - ----------------------------------------------------------------------------------- Funded Debt to EBITDA ------------ Requirement (see above): ------------ Pass/Fail: ------------
4 Schedule 2 LIST OF SCHEDULES Schedule 4.1.10 Litigation Schedule 4.1.13 Other Indebtedness Schedule 4.1.19 Permitted Liens Schedule 4.1.10 LITIGATION Schedule 4.1.13 OTHER INDEBTEDNESS Schedule 4.1.19 LIENS ON COLLATERAL Asset Covered Lienholder Balance TABLE OF CONTENTS ARTICLE I DEFINITIONS 1 Section 1.1 Certain Defined Terms. 1 Section 1.2 Accounting Terms and Other Definitional Provisions. 17 ARTICLE II THE CREDIT FACILITIES 18 Section 2.1 The Revolving Credit Facility. 18 2.1.1 Revolving Credit Facility. 18 2.1.2 Procedure for Making Advances Under the Revolving Loan; Lender Protection Loans. 18 2.1.3 Borrowing Base. 19 2.1.4 Borrowing Base Report. 19 2.1.5 Revolving Credit Note. 20 2.1.6 Mandatory Prepayments of Revolving Loan. 20 2.1.7 Optional Prepayments of Revolving Loan. 21 2.1.8 The Collateral Account. 21 2.1.9 Revolving Loan Account. 21 2.1.10 Revolving Credit Unused Line Fee. 22 Section 2.2 The Letter of Credit Facility. 22 2.2.1 Letters of Credit. 22 2.2.2 Letter of Credit Fees. 22 2.2.3 Terms of Letters of Credit; Post-Expiration Date Letters of Credit.. 23 2.2.4 Procedures for Letters of Credit. 24 2.2.5 Payments of Letters of Credit. 24 2.2.6 Change in Law; Increased Cost. 25 2.2.7 General Letter of Credit Provisions. 25 Section 2.3 General Financing Provisions. 26 2.3.1 Borrower's Representatives. 26 2.3.2 Use of Proceeds of the Loan. 27 2.3.3 Administrative Fees. 27 2.3.4 Computation of Interest and Fees. 27 2.3.5 Payments. 27 2.3.6 Liens; Setoff. 28 2.3.7 Requirements of Law. 28 2.3.8 ACH Transactions and Swap Contracts. 28 Section 2.4 Interest 29 2.4.1 Applicable Interest Rates. 29 2.4.2 Selection of Interest Rates. 29 2.4.3 Inability to Determine Eurodollar Base Rate. 31 2.4.4 Payment of Interest. 31 ARTICLE III THE COLLATERAL 31 Section 3.1 Debt and Obligations Secured. 31 Section 3.2 Grant of Liens. 31 Section 3.3 Collateral Disclosure List. 32 Section 3.4 Personal Property. 32 3.4.1 Investment Property, Chattel Paper, Promissory Notes, etc. 32 3.4.2 Patents, Copyrights and Other Property Requiring Additional Steps to Perfect. 33 Section 3.5 Record Searches. 33 Section 3.6 Costs. 33 Section 3.7 Release. 34

Section 3.8 Inconsistent Provisions. 34 ARTICLE IV REPRESENTATIONS AND WARRANTIES 34 Section 4.1 Representations and Warranties. 34 4.1.1 Subsidiaries. 34 4.1.2 Existence. 34 4.1.3 Power and Authority. 34 4.1.4 Binding Agreements. 35 4.1.5 No Conflicts. 35 4.1.6 No Defaults, Violations. 35 4.1.7 Compliance with Laws. 35 4.1.8 Margin Stock. 36 4.1.9 Investment Company Act; Margin Stock. 36 4.1.10 Litigation. 36 4.1.11 Financial Condition. 36 4.1.12 Full Disclosure. 36 4.1.13 Funded Debt. 37 4.1.14 Taxes. 37 4.1.15 ERISA. 37 4.1.16 Title to Properties. 38 4.1.17 Patents, Trademarks, Etc. 38 4.1.18 Presence of Hazardous Materials or Hazardous Materials Contamination. 38 4.1.19 Perfection and Priority of Collateral. 38 4.1.20 No Suspension or Debarment. 38 4.1.21 Collateral Disclosure List. 39 4.1.22 Business Names and Addresses. 39 4.1.23 Equipment. 39 4.1.24 Accounts. 39 4.1.25 Compliance with Eligibility Standards. 39 Section 4.2 Survival; Updates of Representations and Warranties. 40 ARTICLE V CONDITIONS PRECEDENT 40 Section 5.1 Conditions to the Initial Advance and Initial Letter of Credit. 40 5.1.1 Organizational Documents - Borrower. 40 5.1.2 Opinion of Borrower's Counsel. 41 5.1.3 Consents, Licenses, Approvals, Etc. 41 5.1.4 Notes. 41 5.1.5 Financing Documents and Collateral. 41 5.1.6 Other Financing Documents. 41 5.1.7 Other Documents, Etc. 41 5.1.8 Payment of Fees. 41 5.1.9 Collateral Disclosure List. 42 5.1.10 Recordings and Filings. 42 5.1.11 Insurance Certificate. 42 5.1.12 Field Examination. 42 Section 5.2 Conditions to all Extensions of Credit. 42 5.2.1 Compliance. 42 5.2.2 Borrowing Base. 42 5.2.3 Default. 43 5.2.4 Representations and Warranties. 43 5.2.5 Adverse Change. 43 5.2.6 Legal Matters. 43 ARTICLE VI COVENANTS OF THE BORROWER 43

Section 6.1 Affirmative Covenants. 43 6.1.1 Financial Statements. 43 6.1.2 Reports to SEC and to Stockholders. 44 6.1.3 Recordkeeping, Rights of Inspection, Audit, Etc. 45 6.1.4 Existence. 45 6.1.5 Compliance with Laws. 46 6.1.6 Preservation of Properties. 46 6.1.7 Line of Business. 46 6.1.8 Insurance. 46 6.1.9 Taxes. 47 6.1.10 ERISA. 47 6.1.11 Notification of Events of Default and Adverse Developments. 47 6.1.12 Government Contracts. 48 6.1.13 Hazardous Materials; Contamination. 48 6.1.14 Disclosure of Significant Transactions. 49 6.1.15 Financial Covenants. 49 6.1.16 Collection of Receivables. 49 6.1.17 Assignments of Receivables. 50 6.1.18 Insurance With Respect to Equipment. 50 6.1.19 Maintenance of the Collateral. 50 6.1.20 Equipment. 51 6.1.21 Defense of Title and Further Assurances. 51 6.1.22 Business Names; Locations. 52 6.1.23 Use of Premises and Equipment. 52 6.1.24 Protection of Collateral. 52 Section 6.2 Negative Covenants. 52 6.2.1 Capital Structure, Merger, Acquisition or Sale of Assets. 52 6.2.2 Subsidiaries. 53 6.2.3 Purchase or Redemption of Securities, Dividend Restrictions. 53 6.2.4 Indebtedness. 53 6.2.5 Investments, Loans and Other Transactions. 53 6.2.6 Operating Lease Obligations. 54 6.2.7 Subordinated Indebtedness. 54 6.2.8 Liens; Confessed Judgment. 55 6.2.9 Transactions with Affiliates. 55 6.2.10 Other Businesses. 55 6.2.11 ERISA Compliance. 55 6.2.12 Prohibition on Hazardous Materials. 55 6.2.13 Method of Accounting; Fiscal Year. 55 6.2.14 Compensation. 56 6.2.15 Transfer of Collateral. 56 6.2.16 Sale and Leaseback. 56 6.2.17 Disposition of Collateral. 56 6.2.18 Profitability. 56 6.2.19 Stock of Subsidiaries. 56 ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES 57 Section 7.1 Events of Default. 57 7.1.1 Failure to Pay. 57 7.1.2 Breach of Representations and Warranties. 57 7.1.3 Failure to Comply with Covenants. 57 7.1.4 Default Under Other Financing Documents or Obligations. 57 7.1.5 Receiver; Bankruptcy. 57 7.1.6 Involuntary Bankruptcy, etc. 58 7.1.7 Judgment. 58

7.1.8 Execution; Attachment. 58 7.1.9 Default Under Other Borrowings. 58 7.1.10 Challenge to Agreements. 58 7.1.11 Material Adverse Change. 59 7.1.12 Impairment of Position. 59 7.1.13 Collateral Inadequacy. 59 7.1.14 Change in Ownership. 59 7.1.15 Contract Default, Debarment or Suspension. 59 7.1.16 Liquidation, Termination, Dissolution, Change in Management, etc. 59 7.1.17 Advances to Subsidiaries. 59 7.1.18 Swap Default. 59 Section 7.2 Remedies. 59 7.2.1 Acceleration. 60 7.2.2 Further Advances. 60 7.2.3 Uniform Commercial Code. 60 7.2.4 Specific Rights With Regard to Collateral. 61 7.2.5 Application of Proceeds. 62 7.2.6 Performance by Lender. 62 7.2.7 Other Remedies. 62 ARTICLE VIII MISCELLANEOUS 63 Section 8.1 Notices. 63 Section 8.2 Amendments; Waivers. 63 Section 8.3 Cumulative Remedies. 64 Section 8.4 Severability. 65 Section 8.5 Assignments by Lender. 65 Section 8.6 Participations by Lender. 66 Section 8.7 Disclosure of Information by Lender. 66 Section 8.8 Successors and Assigns. 66 Section 8.9 Continuing Agreements. 66 Section 8.10 Enforcement Costs. 67 Section 8.11 Applicable Law; Jurisdiction. 67 8.11.1 Applicable Law. 67 8.11.2 Submission to Jurisdiction. 67 8.11.3 Appointment of Agent for Service of Process. 67 8.11.4 Service of Process. 68 Section 8.12 Duplicate Originals and Counterparts. 68 Section 8.13 Headings. 68 Section 8.14 No Agency. 68 Section 8.15 Date of Payment. 68 Section 8.16 Entire Agreement. 69 Section 8.17 Waiver of Trial by Jury. 69 Section 8.18 Liability of the Lender. 69

FINANCING AND SECURITY AGREEMENT DATED FEBRUARY 28, 2002 BY AND BETWEEN SENSYTECH INC. AND BANK OF AMERICA, N. A. EX-10.2 6 w62605exv10w2.txt 2002 STOCK INCENTIVE PLAN Exhibit 10.2 SENSYTECH, INC. 2002 STOCK INCENTIVE PLAN 1. Purposes. The purposes of this Sensytech, Inc. 2002 Stock Incentive Plan are to provide incentives and rewards to those employees who are largely responsible for the success and growth of Sensytech, Inc. ("the Company") and its Subsidiary corporation/s; and to assist them in attracting and retaining executives and other key employees with experience and ability; and to attract and retain experienced and qualified Directors who are not employees of the Company or any Subsidiary. 2. Definitions. (a) "Award" means one or more of the following: shares of Common Stock, Restricted Shares, Stock Options, Performance Units, and Stock Performance Shares. (b) "Board of Directors" means the Board of Directors of the Company. (c) "Common Stock" means the Common Stock, $0.01 par value, of the Company. (d) "Company" means Sensytech, Inc., a Delaware corporation. (e) "Director" means a member of the Board of Directors of the Company or a member of the Board of Directors of any Subsidiary. (f) "Director Stock Option" means a Stock Option granted pursuant to Section 11. (g) "Incentive Stock Option" means a Stock Option which meets all of the requirements of an "incentive stock option" as defined in Section 422(b) of the Internal Revenue Code. (h) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. (i) "Outside Director" means a Director who is not an employee of the Company or a Subsidiary. (j) "Outside Director Recipient" means an Outside Director who has been granted a Director Stock Option. (k) "Performance Period" means that period of time specified by the Committee during which a Recipient must satisfy any designated performance goals in order to receive an Award. (l) "Performance Share" means the right to receive, upon satisfying designated performance goals for a Performance Period, shares of Common Stock. (m) "Performance Unit" means the right to receive, upon satisfying designated performance goals within a Performance Period, Performance Shares, cash, or a combination of cash and Performance Shares, based upon the market value of shares of Common Stock covered by such Performance Shares at the close of the Performance Period. (n) "Plan" means this Sensytech, Inc. 2002 Stock Incentive Plan, as the same may be amended from time to time. (o) "Recipient" means someone who has been granted an Award under the Plan and is either (i) an employee of the Company or a Subsidiary, (ii) a Director, (iii) a person who has agreed in writing to become an employee of the Company or a Subsidiary within thirty (30) days, or (iv) a consultant or advisor who has rendered bona fide services to the Company or a Subsidiary not in connection with the offer or sale of securities in a capital-raising transaction. (p) "Restricted Share" means a share of Common Stock issued to a Recipient hereunder subject to such terms and conditions, including, without limitation, forfeiture or resale to the Company, and to such restrictions against sale, transfer or other disposition, as the Committee may determine at the time of issuance. (q) "Stock Option" means the right to purchase shares of the Company's Common Stock upon exercise of an option granted under the Plan, including a Director Stock Option. (r) "Subsidiary" means a subsidiary of the Company controlled directly or indirectly by the Company within the meaning of Rule 405 promulgated under the Securities Exchange Act of 1933, as amended, and such subsidiaries divisions, departments, and subsidiaries and the respective divisions, departments and subsidiaries of such subsidiaries. (s) "Target Award" means an Award, other than a Stock Option, the payment under which is intended to qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code and the regulations thereunder. (t) "Target Award Performance Period" means the performance period over which a Target Award is earned. 3. Administration of the Plan. (a) The Plan shall be administered by a Compensation Committee (the "Committee") consisting of not less than two (2) Outside Directors of the Company each of whom qualifies as an "Outside Director" under Treasury Regulation Section 2 1.162-27(e)(3) and as a "Non-Employee Director" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The members of the Committee shall be appointed by, and serve at the pleasure of, the Board of Directors. A majority of the Committee members shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present or acts approved in writing by a majority of the Committee, shall be valid acts of the Committee. All references herein to the Committee shall be deemed to mean any successor to the Committee, however designated, or the Board of Directors, if the Board of Directors has not appointed a Committee. (b) Subject to the powers herein specifically reserved to the Board of Directors, the Committee shall have full power and authority to determine which Recipients shall receive Awards, to construe, interpret and administer the Plan and, subject to the other provisions of the Plan, to make determinations which shall be final, conclusive and binding upon all persons including, without limitation, the Company, the stockholders of the Company, the Board of Directors, the Recipients and any persons having any interest in any Awards which may be granted under the Plan. The Committee shall impose such additional conditions upon the grant and exercise of Awards under the Plan as may from time to time be deemed necessary or advisable, in the opinion of counsel to the Company, to comply with applicable laws and regulations. The Committee from time to time may adopt such rules and regulations for the carrying out of the Plan and written policies for implementation of the Plan. Such policies may include, but need not be limited to, the type, size and terms of Awards to be made to Recipients and the conditions for payment of such Awards. Notwithstanding the foregoing, the Board of Directors shall have authority to determine which Directors shall receive Awards and the terms and conditions of such Awards. In addition, the Committee may delegate to the Chief Executive Officer of the Company the authority to grant Awards to Recipients who are not subject to Section 16(a) of the Securities Exchange Act of 1934, as amended. (c) The payment under any Target Award shall be contingent upon the attainment of one or more pre-established performance goals established by the Committee in writing within ninety (90) days of the commencement of the Target Award Performance Period (or in the case of a newly hired Recipient, before 25% of such Recipient's service for such Target Award Performance Period has elapsed). Such performance goals will be based upon one or more of the following performance-based criteria: earnings per share of the Common Stock, the Company's return on net assets, equity, or revenues, or the Company's cash flow, book value, Common Stock performance or price-earnings ratio. The Committee, in its discretion, may cancel or decrease an earned Target Award, but, except as otherwise permitted by Treasury Regulation Section 1.162-27(e)(2)(iii)(C), may not, under any circumstances, increase such award. 3 4. Eligibility. Awards may be granted to any Recipient; provided, that Incentive Stock Options may only be granted to employees of the Company or a Subsidiary in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of such Subsidiary (or such other level of stock ownership as may from time to time be set forth in Section 424(c) of the Internal Revenue Code). No member of the Committee (other than an ex officio member) shall be eligible for grants of Awards under the Plan by the Committee, although such member may be eligible for grants of Director Stock Options or for Awards granted by the Board of Directors. 5. Stock Subject to the Plan. (a) The total number of shares of Common Stock issuable under this Plan may not exceed an aggregate of 650,000 shares plus the number of shares available under the 1995 Amended and Restated Stock Incentive Plan subject to adjustment pursuant to Section 15 pertaining to a change in capital structure, and subject to increase as provided in Section 5. Shares of Common Stock to be delivered or purchased under the Plan may be either authorized but unissued Common Stock or treasury shares. All of such shares may be issued or issuable under this Plan in connection with the exercise of Incentive Stock Options, provided that not more than 650,000 shares plus the number of shares available under the 1995 Amended and Restated Stock Incentive Plan may used to grant Incentive Stock Options subject to adjustment pursuant to Section 15 pertaining to a change in capital structure, and subject to increase as provided in Section 5. (b) Shares of Common Stock reserved for issuance pursuant to previously granted Awards or Director Stock Options which are not actually issued pursuant to such Award or Director Stock Option pursuant to this Plan (due to forfeiture, cancellation, lapse, surrender, payment of withholding taxes or otherwise) shall be available for future Awards or Director Stock Options. (c) Shares of Common Stock reserved for issuance pursuant to previously granted stock options under any other plan of the Company for the benefit of employees or Directors which has been approved by the stockholders of the Company, and which are not actually issued pursuant to such stock option (due to forfeiture, cancellation, lapse, surrender, payment of withholding taxes or otherwise) shall be available for future Awards or Director Stock Options. 6. Awards. (a) Awards under the Plan may include shares of Common Stock, Restricted Shares, Stock Options, Performance Shares, Performance Units, and Target Awards. (b) The Committee may establish performance goals to be achieved within such Performance Periods as may be selected by it using such measures of the 4 performance of the Company it may select as a condition to the receipt of the Award. 7. Vesting Requirements and Other Contingencies. The Committee may determine that all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, shall be vested at such times and upon such terms as may be selected by it, except that (i) an award of Restricted Shares shall not vest prior to the expiration of three (3) years from the date of grant, and (ii) all other Awards may not vest in less than one year from the date of grant (unless such Award was granted to a Recipient in lieu of cash compensation due to such Recipient). However, the Committee may accelerate the vesting of any Award upon a "Change of Control of the Company" as such term may be defined in the Award agreement. In addition, the Committee may require a Recipient to refund to the Company the value of an Award realized by a Recipient, if the Recipient accepts employment with a competitor of the Company or a subsidiary of the Company within six (6) months of such realization. In the case of a Stock Option, a Recipient shall be deemed to realize its value upon the exercise of the Stock Option and its value shall be an amount equal to the excess of the market value of the shares of Common Stock received as of the date of the exercise over the exercise price paid for such shares. In the case of all other Awards, a Recipient shall be deemed to realize their value upon the payment of the Award and its value shall be the amount of any cash received plus an amount equal to the market value of the shares of Common Stock received in connection with the Award. The market value of shares shall be the closing price for the Common Stock on the NASDAQ Exchange (or on the principal securities exchange or other market on which the Common Stock is then being traded) on the date of realization, or if such closing price is not reported on such date, the last reported closing price. 8. Deferred Payment. The Committee, or in the case of Awards to Outside Directors, the Board of Directors, may determine that the receipt of all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, (i) shall be deferred, or (ii) at the election of such Recipient, may be deferred. Deferrals shall be for such periods and upon such terms as the Committee, or in the case of Awards to Outside Directors, the Board of Directors, may determine. 9. Continuation of Employment. With respect to Awards granted to employees, the Committee shall require that (a) Awards may only be granted to Recipients, and (b) a Recipient must be an employee of the Company or a Subsidiary (or must have retired with the approval of the Company or a Subsidiary) at the time an Award becomes vested. Notwithstanding the foregoing, the Committee shall have the sole power to determine the date of and the circumstances which shall constitute a cessation of employment (including whether the spin-off of a Subsidiary constitutes a cessation of employment of employees who continue in the employ of Subsidiary subject to such spin-off) and to determine whether such cessation is the result of retirement, death or any other reason. The Committee may provide for the termination of any such outstanding Award if a Recipient 5 ceases to be an employee of the Company or a Subsidiary or a Director and may establish such other provisions with respect to the termination or disposition of an Award on the death or retirement of a Recipient as it, in its sole and absolute discretion, deems advisable. 10. Employment Status. No Award shall be construed as imposing upon the Company or a Subsidiary the obligation to continue the employment of a Recipient. No employee or other person shall have any claim or right to be granted an Award under the Plan. 11. Director Stock Options. The Board of Directors may grant to each Outside Director serving on the Company's Board of Directors a stock option to purchase up to 15,000 shares of Common Stock as an Outside Director (a "Director Stock Option"). Director Stock Options shall contain such terms as the Board of Directors shall determine; provided, however, that such Stock Options shall vest on the first anniversary of the date of grant, shall have a term of ten (10) years and must be exercised prior to the first anniversary of the Outside Director's termination of service as a Director. 12. Stock Option Price. The purchase price per share of Common Stock under each Stock Option shall not be less than the closing price for the Common Stock on the NASDAQ Exchange (or on the principal securities exchange or other market on which the Common Stock is then being traded) on the date the Stock Option or Incentive Stock Option is granted or if such closing price is not reported on the date of grant, the last reported closing price. Payment for exercise of any Stock Option granted hereunder shall be made in cash. 13. Registration of Stock. Each Award and each Director Stock Option shall be subject to the requirement that if at any time the Committee (or, in the case of a Director Stock Option, counsel for the Company) shall determine that qualification or registration under any state or federal law of the shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, or other securities thereby covered or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with the granting of such Award or Stock Option or the purchase of shares thereunder, the Award or Stock Option may not be paid or exercised in whole or in part unless and until such qualification, registration, consent or approval shall have been effected or obtained free of any conditions the Committee, in its sole discretion, deems unacceptable. 14. Assignability. No Award or Director Stock Option shall be transferable or assignable by the Recipient other than by will or the laws of descent and distribution and during the lifetime of the Recipient 6 shall be exercisable or payable only by him or her. Notwithstanding the foregoing, the Committee may permit a Recipient of a Stock Option (other than an Incentive Stock Option) or an Outside Director Recipient, to transfer such Stock Option to any one or more of the following: such Recipient's or Outside Director Recipient's family member, a trust established primarily for the benefit of a family member, or to an entity which is a corporation, partnership, or limited liability company (or any other similar entity) the owners of which are primarily the aforementioned persons or trusts. Any such Stock Option so transferred shall be subject to the provisions of Section 9 or 11 as the case may be, concerning the exercisability during such transferor's employment or service as a Director. 15. Dilution or Other Adjustments. In the event of any changes in the capital structure of the Company, including but not limited to a change resulting from a stock dividend or split-up, or combination or reclassification of shares, the Board of Directors shall make such equitable adjustments with respect to Awards and Director Stock Options or any other provisions of this Plan as it deems necessary and appropriate, including, if necessary, any adjustment in the maximum number of shares of Common Stock subject to the Plan or the number of shares of Common Stock subject to an outstanding Award or Director Stock Option. In the absence of any of the foregoing transactions, in no event shall Stock Options be re-priced to a lower price without approval of the stockholders of the Company and in no event shall Stock Options be cancelled and reissued at a lower price if the reissuance occurs within six (6) months of cancellation. 16. Change of Control. a. Acceleration. Except as otherwise provided in this Plan or in an agreement reflecting an Award, upon the occurrence of a Change of Control: i. All outstanding Stock Options shall become fully exercisable. ii. All Stock Awards shall become fully vested. iii. Performance Units may be paid out in such manner and amounts as determined by the Committee. b. Definition of Change in Control. For purposes of this Plan, the term "Change in Control" means a change in the beneficial ownership of the Company's voting stock or a change in the composition of the Board of Directors which occurs as follows: i. any "Person" (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than the Company, any entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and any trustee or other fiduciary holding securities under an employee benefit plan of the Company or its subsidiaries or such 7 proportionately owned corporation, becomes through acquisitions of securities of the Company after the date of this Plan, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities having the right to vote for the election of Directors; ii. the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transactions) in which no Person acquires more than 15% of the Company's then outstanding securities having the right to vote for the election of Directors; iii. the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect); or iv. during any 24-month period, individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new Director (other than a Director designated by a Person who has entered into any agreement with the Company to effect a transaction described in paragraph i, ii or iii of this subsection 16b) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof. 17. Withholding Taxes. The Company shall have the right to deduct from all Awards paid hereunder in cash the minimum federal, state, and local taxes required by law to be withheld with respect to such Awards. Subject to such conditions as the Committee may establish, Awards payable in shares of Common Stock may provide that the Recipients thereof may elect, in accordance with any applicable regulations, to tender shares of Common Stock to the Company. 8 18. Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and not charged to any Award nor to any Recipient or Outside Director Recipient. 19. Funding the Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Award under the Plan. 20. Award Contracts and Stock Option Agreements. The Committee shall have the power to specify the form of Award contracts to be granted from time to time pursuant to and in accordance with the provisions of the Plan and such contracts shall be final, conclusive and binding upon the Company, the stockholders of the Company and the Recipients. The Board of Directors shall have the power to specify the form of Director Stock Option agreements to be granted from time to time pursuant to and in accordance with the provisions of the Plan and such agreements shall be final, conclusive and binding upon the Company, the stockholders of the Company and the Outside Director Recipients. No Recipient or Outside Director Recipient shall have any rights as a holder of Common Stock with respect to Awards or Director Stock Options hereunder unless and until certificates for shares of Common Stock or Restricted Shares are issued to the Recipient or to the Outside Director Recipient. 21. Guidelines. The Board of Directors of the Company shall have the power to provide guidelines for administration of the Plan by the Committee and to make any changes in such guidelines from time to time as the Board deems necessary. 22. Amendment and Discontinuance. The Board of Directors of the Company shall have the right at any time during the continuance of the Plan to amend, modify, supplement, suspend or terminate the Plan, provided that in the absence of the approval of the holders of a majority of the shares of Common Stock of the Company present in person or by proxy at a duly constituted meeting of the stockholders of the Company, no such amendment, modification or supplement shall (i) increase the aggregate number of shares which may be issued under the Plan, unless such increase is by reason of any change in capital structure referred to in Section 15 hereof, (ii) change the termination date of the Plan provided in Section 23, or (iii) delete or amend the market value restrictions contained in Sections 12 and 13 hereof, and provided further, that no amendment, modification or termination of the Plan shall in any manner affect any Award or Director Stock Option of any kind theretofore granted under the Plan without the consent of the Recipient of the Award or the Outside Director Recipient, as the case may be, unless such amendment, modification or 9 termination is by reason of any change in capital structure referred to in Section 15 hereof or unless the same is by reason of the matters referred to in Section 16 hereof. 23. Termination. The Committee may grant Awards and Director Stock Options at any time prior to February 12, 2012, on which date this Plan will terminate except as to Awards and Stock Options then outstanding hereunder, which Awards and Director Stock Options shall remain in effect until they have expired according to their terms or until February 12, 2022, whichever first occurs. No Stock Option shall be exercisable later than ten (10) years following the date it is granted and no other Award shall have a term of more than ten (10) years. 24. Approval. The 2002 Stock Incentive Plan was adopted by the Board of Directors on March 26, 2002. The Plan shall take effect upon due approval of the stockholders of the Company. 10 EX-23.2 7 w62605exv23w2.htm CONSENT OF INDEPENDENT ACCOUNTANTS exv23w2


Delaware	3812	38-1873250
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)






	Proposed Maximum
Title of Each Class of	Aggregate Offering	Amount of
Securities to be Registered	Price(1)(2)	Registration Fee


Common stock, $0.01 par value per share	$21,297,600	$1,959.38


	Price	Total

Public offering price	$	$
Underwriters’ discounts and commissions⁽¹⁾	$	$
Proceeds, before expenses, to us	$	$
Proceeds to selling stockholder	$	$


Common stock offered by us in this offering⁽¹⁾		shares

Common stock offered by the selling stockholder in this offering		20,000 shares

Common stock to be outstanding immediately after this offering⁽²⁾		shares

Use of proceeds		We expect to use the net proceeds to us of this offering, which are estimated to be $ million, to repay $2.9 million of our revolving credit line with Bank of America, for working capital, strategic acquisitions of businesses and for general corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholder. See “Use of Proceeds” on page 17.

Over-allotment option		We have granted the underwriters an option to purchase up to an additional shares of common stock solely to cover over-allotments. If the over-allotment option is exercised in full, the number of shares offered by us will be , and the common stock outstanding immediately after this offering will be .

Nasdaq SmallCap Market symbol⁽³⁾		STST



																		Nine Months
			Years Ended September 30,															Ended June 30,

			1997			1998⁽³⁾			1999			2000			2001			2001			2002


			(in thousands, except per share data)
Consolidated Statement of Earnings Data:
Contract revenue			$	23,953		$	21,927		$	26,424		$	22,706		$	16,391		$	12,593		$	20,509

Costs and expenses
	Cost of revenues			20,762			18,522			19,237			16,195			11,744			9,233			15,363
	General and administrative expenses			2,654			3,424			4,251			3,974			2,901			2,195			2,529
	Restructuring costs⁽¹⁾			—			1,096			—			—			—			—			—

		Total costs and expenses		23,416			23,042			23,488			20,169			14,645			11,428			17,892

Income (loss) from operations				537			(1,115	)		2,936			2,537			1,746			1,165			2,617
Other income (expenses)
	Interest (expense) income, net			(345	)		(197	)		(40	)		116			141			90			24
	Other income, net			—			—			—			39			116			113			66

Income (loss) before income taxes				192			(1,312	)		2,896			2,692			2,003			1,368			2,707
Income tax (provision) benefit				(72	)		490			(1,207	)		(1,026	)		(779	)		(561	)		(1,110	)

Net income (loss)			$	120		$	(822	)	$	1,689		$	1,666		$	1,224		$	807		$	1,597

Earnings (loss) per share
	Basic		$	0.06		$	(0.27	)	$	0.42		$	0.42		$	0.31		$	0.20		$	0.40

	Diluted		$	0.06		$	(0.27	)	$	0.40		$	0.40		$	0.30		$	0.20		$	0.38


Warren J. Archer Plummer, Harty & Owsiany, LLP 707 Grant Street Pittsburgh, Pennsylvania 15219 (412) 566-1600 Fax: (412) 261-6040		Howard B. Adler Gibson, Dunn & Crutcher LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5306 (202) 955-8500 Fax: (202) 467-0539


	Page

Prospectus Summary		1
Risk Factors		5
Special Note Regarding Forward-Looking Statements		16
Use of Proceeds		17
Price Range of Common Stock		17
Dividend Policy		18
Capitalization		19
Selected Financial Data		20
Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Business		30
Management		44
Principal and Selling Stockholders		48
Related Party Transactions		49
Shares Eligible for Future Sale		49
Description of Capital Stock, Certificate of Incorporation and Bylaws		51
Tax Considerations		52
Underwriting		56
Legal Matters		57
Experts		57
Where You Can Find More Information		57
Index to Consolidated Financial Statements		F-1



		As of September 30,										As of June 30,

		1997		1998		1999		2000		2001		2001		2002

Other Data:
	Backlog⁽²⁾	$	16,900	$	22,600	$	17,106	$	7,033	$	5,884	$	3,256	$	24,482


	*We are dependent on contracts with the U.S. federal government for substantially all of our revenues.*


	*U.S. federal government spending priorities may change in a manner adverse to our business.*


	*The U.S. federal government may terminate or modify its existing contracts with us or with contractors for which we are a subcontractor, which could adversely affect our revenues.*


	*Our business is subject to various laws and regulations that are more restrictive because we are a contractor and subcontractor to the U.S. federal government.*


	*Our products and systems may be rendered obsolete by our inability to adapt to technological change.*


	*Acquisitions or investments that we have made or may decide to make in the future could turn out to be unsuccessful.*


	*If we are unable to manage our growth, our business could be adversely affected.*


	BB&T CAPITAL MARKETS


	*Our foreign sales involve additional risks compared to those presented by domestic sales.*


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


	*Failure to maintain strong relationships with other contractors could result in a decline in our revenues.*


	*We may not receive the full amount authorized under contracts that we have entered into and may not accurately estimate our backlog.*


	*We may not accurately estimate the expenses, time and resources necessary to satisfy our contractual obligations.*


	*Our contracts are subject to audits and cost adjustments by the U.S. federal government.*


	*Security breaches in classified government programs could adversely affect our business.*


	*Our senior management is important to the success of our business.*


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


	*Our business is dependent upon obtaining and maintaining required security clearances.*


	*Covenants in our credit facility may restrict our financial and operating flexibility.*


	*Our employees may engage in misconduct or other improper activities.*


	*We may not be able to receive or retain the necessary licenses or authorizations required for us to export our products.*


	*We may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned.*


	*We may be affected by intellectual property infringement claims.*


	*Loss of third party software licensing could materially and adversely affect our business, prospects, financial condition and operating results.*


	We rely on a limited number of suppliers and manufacturers for specific components, and we may not be able to obtain substitute suppliers and manufacturers on terms that are as favorable if our supplies are interrupted.


	*Environmental laws and regulations may subject us to significant liabilities.*


	Because we do not have long-term commitments from many of our customers, we must estimate customer demand and errors in our estimates would have negative effects on our inventory levels and revenues.


	*The classified nature of our business means that the underwriters and their counsel are not able to do all of their normal due diligence on our company.*