e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 30, 2008


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

For the Transition period from to

Commission File Number 000-08193

ARGON ST, INC.

(Exact name of registrant as specified in its charter)


Delaware		38-1873250

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

12701 Fair Lakes Circle, Suite 800, Fairfax, Virginia 22033
(Address of principal executive offices)

Registrant’s telephone number (703) 322-0881

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 30, 2008, there were 21,526,474 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

ARGON ST, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT

FOR THE THREE AND SIX MONTHS ENDED MARCH 30, 2008

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at March 30, 2008 and September 30, 2007			3

Condensed Consolidated Statements of Earnings for the three and six months ended March 30, 2008 and April 1, 2007			4

Condensed Consolidated Statements of Cash Flows for the six months ended March 30, 2008 and April 1, 2007			5

Condensed Consolidated Statements of Stockholder’s Equity for the six months ended March 30, 2008			6

Notes to Condensed Consolidated Financial Statements			7-14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15-26

Item 3. Quantitative and Qualitative Disclosures about Market Risks			26

Item 4. Controls and Procedures			26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			26

Item 1A. Risk Factors			26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26

Item 3. Defaults Upon Senior Securities			27

Item 4. Submission of Matters to a Vote of Security Holders			27

Item 5. Other Information			28

Item 6. Exhibits			29-30

Signatures			31

Exhibits			32-34

ARGON ST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	March 30, 2008			September 30, 2007
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	13,984		$	22,965
Accounts receivable, net		102,455			95,639
Inventory, net		3,773			2,927
Deferred income tax asset		4,571			3,218
Prepaids and other		1,172			3,154

TOTAL CURRENT ASSETS		125,955			127,903
Property, equipment and software, net		24,917			22,822
Goodwill		172,289			170,192
Intangibles, net		4,907			5,760
Restricted cash		—			1,800
Other assets		892			1,168

TOTAL ASSETS	$	328,960		$	329,645


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	25,804		$	23,796
Accrued salaries and related expenses		10,836			12,899
Deferred revenue		8,146			12,651
Other liabilities		2,343			681

TOTAL CURRENT LIABILITIES		47,129			50,027
Deferred income tax liability, long term		2,225			1,794
Deferred rent and other liabilities		895			2,988
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Common stock:$.01 Par Value, 100,000,000 shares authorized, 22,647,619 and 22,561,639 shares issued at March 30, 2008 and September 30, 2007		226			226
Additional paid in capital		219,102			217,038
Treasury stock at cost, 1,126,245 and 674,145 shares at March 30, 2008 and September 30, 2007, respectively		(18,425	)		(10,527	)
Retained earnings		77,808			68,099

TOTAL STOCKHOLDERS’ EQUITY		278,711			274,836

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	328,960		$	329,645

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

ARGON ST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(In thousands, except share and per share amounts)


	For the Three Months Ended				For the Six Months Ended
	March 30, 2008		April 1, 2007		March 30, 2008		April 1, 2007
CONTRACT REVENUES	$	88,449	$	64,310	$	162,715	$	124,715

COST OF REVENUES		73,012		51,901		133,349		97,655

GENERAL AND ADMINISTRATIVE EXPENSES		4,663		4,160		10,120		8,887

RESEARCH AND DEVELOPMENT EXPENSES		1,811		1,748		3,511		3,964


INCOME FROM OPERATIONS		8,963		6,501		15,735		14,209

INTEREST INCOME, NET		35		267		154		597


INCOME BEFORE INCOME TAXES		8,998		6,768		15,889		14,806
PROVISION FOR INCOME TAXES		3,492		2,605		6,101		5,460

NET INCOME	$	5,506	$	4,163	$	9,788	$	9,346


EARNINGS PER SHARE (Basic)	$	0.25	$	0.19	$	0.45	$	0.42

EARNINGS PER SHARE (Diluted)	$	0.25	$	0.18	$	0.44	$	0.41


WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		21,698,836		22,331,900		21,781,588		22,279,745

Diluted		22,013,836		22,779,417		22,146,004		22,755,348

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

ARGON ST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)


	Six Months Ended
	March 30, 2008			April 1, 2007
Cash flows from operating activities
Net income	$	9,788		$	9,346
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,926			3,772
Amortization of deferred costs		84			—
Deferred income tax benefit		(897	)		(61	)
Stock-based compensation		1,621			865
Gain (loss) on sale of equipment and other		(16	)		32
Change in:
Accounts receivable		(6,480	)		(5,805	)
Inventory		(846	)		(38	)
Prepaids and other		1,284			6,082
Accounts payable and accrued expenses		1,499			(1,664	)
Accrued salaries and related expenses		(2,063	)		265
Deferred rent and other current liabilities		2,007			(379	)
Deferred revenue		(5,025	)		(8,987	)


Net cash provided by operating activities		4,882			3,428

Cash flows from investing activities
Acquisitions of property, equipment and software		(5,203	)		(3,091	)
Cash paid for acquisitions		(3,300	)		(400	)
Reduction in restricted cash		1,800			—
Proceeds from note receivable and other		339			(304	)


Net cash used in investing activities		(6,364	)		(3,795	)

Cash flows from financing activities
Stock repurchases		(7,898	)		—
Payments on capital leases		(90	)		49
Tax benefit of stock option exercises		36			438
Proceeds from exercise of stock options		169			722
Proceeds from employee stock purchase plan exercises		284			395


Net cash provided by (used in) financing activities		(7,499	)		1,604

Net increase (decrease) in cash and cash equivalents		(8,981	)		1,237
Cash and cash equivalents, beginning of period		22,965			33,498

Cash and cash equivalents, end of period	$	13,984		$	34,735

Supplemental disclosure
Income taxes paid	$	4,723		$	5,389

Interest expense paid	$	12		$	3

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

ARGON ST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(In thousands, except share data)


	Common Stock		Common										Total
	Number of		Stock		Additional Paid		Treasury			Retained			Stockholders’
	Shares		Par Value		in Capital		Stock			Earnings			Equity
Balance, September 30, 2007		22,561,639	$	226	$	217,038	$	(10,527	)	$	68,099		$	274,836
Net income		—		—		—		—			9,788			9,788
Cumulative effect of adoption of FIN 48		—		—		—		—			(79	)		(79	)
Shares issued upon exercise of stock options		69,841		—		169		—			—			169
Employee stock purchase plan		16,139		—		285		—			—			285
Stock-based compensation		—		—		1,575		—			—			1,575
Tax benefit on stock option exercises		—		—		35		—			—			35
Stock repurchases		—		—		—		(7,898	)		—			(7,898	)


Balance, March 30, 2008		22,647,619	$	226	$	219,102	$	(18,425	)	$	77,808		$	278,711

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

ARGON ST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share and per share amounts)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair presentation have been included. Operating results for the period ended March 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2008. Inter-company accounts and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and footnotes thereto included in Argon ST, Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007. Reclassifications are made to the prior year financial statements when appropriate, to conform to the current year presentation.

Argon ST, Inc. (“Argon ST” or the “Company”) maintains a September 30 fiscal year-end for annual financial reporting purposes. Argon ST presents its interim periods ending on the Sunday closest to the end of the month for each quarter consistent with labor and billing cycles. As a result, each quarter of each year may contain more or less days than other quarters of the year. Management does not believe that this practice has a material effect on quarterly results or on the comparison of such results.

Argon ST records contract revenues and costs of operations for interim reporting purposes based on annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual indirect rates. During the Company’s interim reporting periods, variances may accumulate between the actual indirect rates and the annual targeted rates. Timing-related indirect spending variances are not applied to contract costs, research and development, and general and administrative expenses, but are included in unbilled receivables during these interim reporting periods. These rates are reviewed regularly, and the Company records adjustments for any material, permanent variances in the period they become determinable.

Argon ST’s accounting policy for recording indirect rate variances is based on management’s belief that variances accumulated during interim reporting periods will be absorbed by management actions to control costs during the remainder of the year. The Company considers the rate variance to be unfavorable when the actual indirect rates are greater than the Company’s annual targeted rates. During interim reporting periods, unfavorable rate variances are recorded as reductions to operating expenses and increases to unbilled receivables. Favorable rate variances are recorded as increases to operating expenses and decreases to unbilled receivables. At March 30, 2008, the unfavorable rate variance totaled $4,773 of which $2,056 was planned for the period. If the Company anticipates that actual contract activities will be different than planned levels, there are alternatives the Company can utilize to absorb the variance: the Company can adjust planned indirect spending during the year, modify its billing rates to its customers, or record adjustments to expense based on estimates of future contract activities. Management expects the variance to be eliminated over the course of the fiscal year and therefore, no portion of the variance is considered permanent.

If the Company’s rate variance is unfavorable, the modification of the Company’s indirect rates will likely increase revenue and operating expenses. Profit percentages on fixed-price contracts will generally decline as a result of an increase to indirect costs unless compensating savings can be achieved in the direct costs to complete the projects. Profit percentages on cost reimbursement contracts will generally decline as a percentage of total costs as a result of an increase in indirect costs even if the cost increase is funded by the customer. If the Company’s rate variance is favorable, the modification of the Company’s indirect rates will decrease revenue and operating expenses. In this event, profit percentages on fixed-price contracts will generally increase. Profit percentages on cost-reimbursable contracts will generally be unaffected as a result of any reduction to indirect costs, due to the fact that programs will typically expend all of the funds available. Any impact on operating income, however, will depend on a number of other factors, including mix of contract types, contract terms and anticipated performance on specific contracts.

2. ACQUISITION OF CSIC HOLDINGS LLC

Effective August 12, 2007, the Company acquired 100% of the equity of CSIC Holdings, LLC (“Coherent”), a single member limited liability corporation that was owned 100% by Coherent Systems International Corp. in a transaction accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standard No. 141, Business Combinations (“SFAS No. 141”). Under applicable tax rules, this transaction is accounted for as an asset purchase. Coherent was based in Doylestown, Pennsylvania and is primarily engaged in the deployment of advanced command and control solutions, precision targeting systems, mobile communication gateways, high-performance electronic warfare systems, and aircraft sensor solutions. The Company believes synergies with Coherent will provide customers significant additional opportunities to leverage complementary technologies, programs and products to improve tactical operations. The results of Coherent’s operations are included in the consolidated financial statements beginning August 12, 2007.

During the second quarter of fiscal 2008, an agreement was reached between the Company and the prior owners of Coherent in which $300 of the original $1,800 of restricted cash was released to the prior owner. The remaining $1,500 of restricted cash, which was intended to be held back to settle any liabilities existing prior to the purchase date related to employee matters and matters with the DCAA for periods prior to the purchase, was released back to Argon ST as a result of differences between the net assets disclosed in the purchase agreement and the net assets actually acquired. As a result of the release of the $1,500, the parties amended the transaction purchase agreement to provide indemnification to Argon ST for all liabilities in excess of $350 related to employee- and DCAA-related matters. Subsequent to the agreement described above, the aggregate consideration for the net assets acquired was $21,833 which consisted of $18,328 of cash paid at closing, $3,000 of cash paid as part of an earn-out as a result of Coherent’s achievement of certain minimum revenue targets for the period ended December 30, 2007, $300 of cash retained in a restricted cash account at the time of purchase and released to the prior owners in February 2008, and approximately $205 of acquisition costs. The aggregate purchase price has been allocated to the tangible and identifiable intangible assets acquired based on their preliminary estimated fair values. These values are subject to change as more information becomes available as the Company has not had an appropriate amount of time to assess the value of an asset held for sale by a certain joint venture and to identify certain accrued expenses.

Argon has agreed to pay up to an additional $14,500 of cash, contingent upon Coherent’s ability to achieve certain minimum revenue and bookings targets for periods ending December 31, 2008. In the event that Coherent achieves minimum revenue, bookings or other specific targets for the 12 months ending December 31, 2008, the contingent consideration will be included as additional purchase consideration, when and if earned.

3. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. The following summary is presented for the fiscal quarters ended March 30, 2008 and April 1, 2007:


	For the three months ended				For the six months ended
	March 30, 2008		April 1, 2007		March 30, 2008		April 1, 2007
Net income	$	5,506	$	4,163	$	9,788	$	9,346
Weighted average shares outstanding — basic		21,698,836		22,331,900		21,781,588		22,279,745

Basic earnings per share	$	0.25	$	0.19	$	0.45	$	0.42
Effect of dilutive securities:
Net shares issuable upon exercise of stock options and awards		315,000		447,517		364,416		475,603
Weighted average shares outstanding — diluted		22,013,836		22,779,417		22,146,004		22,755,348
Diluted earnings per share	$	0.25	$	0.18	$	0.44	$	0.41

Stock options that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS, because to do so would have been antidilutive, were 1,089,600 and 1,029,100 for the three and six months ended March 30, 2008, respectively and were 836,165 for both the three and six months ended April 1, 2007.

4. STOCK-BASED COMPENSATION

Adoption of SFAS No. 123R

Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which requires that compensation costs related to share-based payment transactions be recognized in financial statements. The Company applied the modified prospective method which requires that compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption will be measured at estimated fair value and included in operating expenses over the vesting period during which an employee provides service in exchange for the award.

Stock-based compensation, which includes compensation recognized on stock option grants and restricted stock awards, has been included in the following line items in the accompanying condensed consolidated statements of earnings.


	For the three months ended						For the six months ended
	March 30, 2008			April 1, 2007			March 30, 2008			April 1, 2007
Cost of revenues	$	640		$	333		$	1,168		$	515
General and administrative expense		258			143			453			350

Total pre-tax stock-based compensation included in income from operations		898			476			1,621			865
Income tax expense (benefit) recognized for stock- based compensation		(183	)		(81	)		(311	)		(160	)

Total stock-based compensation expense, net of tax	$	715		$	395		$	1,310		$	705

As of March 30, 2008, there was $8,628 of total unrecognized compensation cost related to nonvested share-based compensation arrangements. This cost is to be fully amortized in six years, with half of the next total amortization to be recognized in the next 19 months.

Stock Options

The following table summarizes stock option activity for the six months ended March 30, 2008. At March 28, 2008, the closing price of our common stock was $16.59.


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
	Number			Average		Contractual		Intrinsic
	of Shares			Exercise Price		Term		Value
Shares under option, September 30, 2007		1,869,243		$	17.33
Options granted		7,000		$	20.69
Options exercised		(48,841	)	$	3.47			$	641
Options cancelled and expired		(51,995	)	$	23.56


Shares under option, March 30, 2008		1,775,407		$	17.54		6.3	$	7,886

Options vested at March 30, 2008		1,153,008		$	15.27		5.6	$	6,360

As of March 30, 2008, options that are vested and expected to vest prior to expiration		1,422,525		$	16.11		5.9	$	7,366

The Company awarded 7,000 incentive stock options to employees during the six months ended March 30, 2008. The incentive stock options vest ratably over 5 years and the weighted average fair value of the options is $7.03 per share based on the assumptions below using a binomial model.


	For the six
	months ended
	March 30, 2008
Volatility		33.8% – 35.9	%
Risk free rate		4.6% – 4.8	%
Exercise factor		1.2

Stock Awards

Stock awards have the same restrictions and conditions of the restricted shares, except that the vesting period is typically one year. Stock awards are those shares issued to the Company’s independent directors. The following table summarizes stock award activity for the six months ended March 30, 2008:


				Weighted-
	Number			Average Grant
	of Shares			Date Fair Value
Unvested shares, September 30, 2007		21,000		$	21.39
Awards granted		32,000		$	18.00
Awards vested		(21,000	)	$	21.39

Unvested shares, March 30, 2008		32,000		$	18.00

The Company awarded a total of 32,000 shares to its eight non-employee board members on December 5, 2007. The stock will vest one year after the award date. The fair value of these awards is $18.00 and amortization of such fair value is included in General and Administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.

Restricted Shares

The Company awarded a total of 118,000 restricted shares to its senior management and director level employees during the six months ended March 30, 2008. All shares are on a graded vesting schedule over 4 or 5 years. The weighted average fair value of these awards is $18.06 per share and the amortization of such fair value is included in Costs of Revenues and General and Administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.

Stock Appreciation Rights

The Company awarded a total of 147,000 stock appreciation rights (“SARs”) to its executive and director level employees in December 2007. All awards are on a graded vesting schedule over 5 years and the awards will be settled in cash based on the intrinsic value of such awards on the date of vest. In accordance with SFAS No. 123R, the Company has recorded the fair value of such awards as a long-term liability and will adjust such liability to its fair value at the end of each reporting period. The corresponding increase or decrease of the intrinsic value during each reporting period will be included in Costs of Revenues and General and Administrative expenses in the accompanying Condensed Consolidated Statements of Earnings. As of March 30, 2008, the liability and corresponding stock-based compensation expense attributable to these SARs was approximated $46.

5. ACCOUNTS RECEIVABLE

Accounts receivable consists of the following as of:


	March 30, 2008			September 30, 2007
Billed and billable	$	42,473		$	37,235
Unbilled costs and fees		48,324			47,088
Unfavorable indirect rate variance		4,773			—
Retainages		7,096			11,527
Reserve		(211	)		(211	)

Accounts receivable, net	$	102,455		$	95,639

The unbilled costs, fees, and retainages result from recognition of contract revenue in advance of contractual or progress billing terms and includes $4,773 of unfavorable indirect rate variance at March 30, 2008 (Refer to Note 1 for further discussion of the basis of presentation of indirect rate variances). Retainages include costs and fees on cost-reimbursable and time and material contracts withheld until audits are completed by DCAA and costs and fees withheld on progress payments on fixed price contracts. Reserves are determined based on management’s best estimate of potentially uncollectible accounts receivable. Argon ST writes off accounts receivable when such amounts are determined to be uncollectible.

6. INVENTORIES

Inventories are stated at the lower of cost or market, determined on the first-in, first-out basis. Inventories consist of the following at the dates shown below:


	March 30, 2008			September 30, 2007
Raw Materials	$	2,075		$	1,451
Component parts, work in process		1,253			1,223
Finished component parts		726			394

		4,054			3,068
Reserve		(281	)		(141	)

Inventory, net	$	3,773		$	2,927

7. PROPERTY, EQUIPMENT AND SOFTWARE

Property, equipment and software consists of the following as of:


	March 30,			September
	2008			30, 2007
Computer, machinery and test equipment	$	26,220		$	23,838
Leasehold improvements		10,459			9,651
Computer software		4,410			3,687
Furniture and fixtures		1,719			1,643
Equipment under capital lease		337			344
Construction in process		6,966			6,000

		50,111			45,163
Less accumulated depreciation and amortization		(25,194	)		(22,342	)

	$	24,917		$	22,822

As of March 30, 2008, the Company has capitalized $6,966 of construction in progress primarily consisting of $6,656 of costs incurred directly associated with the construction of two types of assets to be used internally for test equipment, demonstration equipment and other purposes. The Company expects to place these assets into service during fiscal years 2008 and 2009. Of the $6,000 construction in progress as of September 30, 2007, $2,715 has been placed into service during the six months ended March 30, 2008.

8. GOODWILL

The table below reconciles the change in the carrying amount of goodwill for the six months ended March 30, 2008.


Balance at September 30, 2007	$	170,192
Acquisition earn-out		3,000
Net asset adjustment, net of adjustments to indemnification clause		(1,150	)
Adjustments to and identification of the fair value of liabilities and reserves on accounts receivable		247

Balance at March 30, 2008	$	172,289

During the fiscal quarter ended December 30, 2007, Coherent achieved minimum revenue and bookings earn-out targets for the period ended December 31, 2007, resulting in $3,000 of cash paid in the second quarter of fiscal 2008. During the second quarter of fiscal 2008, an agreement was reached between the Company and the prior owners in which $300 of the original $1,800 of restricted cash was released to the prior owner. The remaining $1,500 of restricted cash, which was intended to be held back to settle any liabilities existing prior to the purchase date related to employee matters and matters with the DCAA for periods prior to the purchase, was released back to Argon ST as a result of differences between the net assets disclosed in the purchase agreement and the net assets actually acquired. As a result of the release of the $1,500, the parties amended the transaction purchase agreement to provide indemnification to Argon ST for all liabilities in excess of $350 related to employee- and DCAA related matters.

Additionally, during the six months ended March 30, 2008, the Company adjusted the Coherent purchase price allocation to revise the fair value of its obligation to perform work under certain contracts included in deferred revenue, to include additional liabilities identified which existed prior to the purchase of Coherent on August 12, 2007, and to reduce the estimated reserve on accounts receivable balances.

9. REVOLVING LINE OF CREDIT

The Company maintains a $40,000 line of credit with Bank of America, N.A. (the “Lender”). The credit facility will terminate no later than February 28, 2010 at which time the facility will be subject to renewal. The credit facility also contains a sublimit of $15,000 to cover letters of credit. In addition, borrowings on the line of credit bear interest at LIBOR plus 150 basis points. An unused commitment fee of 0.25% per annum, payable in arrears, is also required.

All borrowings under the line of credit are collateralized by all tangible assets of the Company. The line of credit agreement includes customary restrictions regarding additional indebtedness, business operations, permitted acquisitions, liens, guarantees, transfers and sales of assets, and maintaining the Company’s primary accounts with the Lender. Borrowing availability under the line of credit is equal to the product of 1.5 and the Company’s earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the trailing 12 months, calculated as of the end of each fiscal quarter. For the fiscal quarter ending March 30, 2008, EBITDA, on a trailing 12 month basis, was $38,211, and as such, the borrowing availability was $40,000. The agreement requires the Company to comply with a specific EBITDA to Funded Debt ratio, and contains customary events of default, including the failure to make timely payments and the failure to satisfy covenants, which would permit the Lender to accelerate repayment of borrowings under the agreement if not cured within the applicable grace period. As of March 30, 2008, the Company was in compliance with these covenants and the financial ratio.

At March 30, 2008, there were no borrowings outstanding against the line of credit. Letters of credit outstanding at March 30, 2008 amounted to $2,236, and $37,764 was available on the line of credit. In January 2008, the Company borrowed $7,000 from the line of credit to fund its current operations which was repaid by March 30, 2008.

10. TREASURY STOCK

As of September 30, 2007, the Company had repurchased 674,145 shares of treasury stock at an accumulated cost of $10,527, of which, 547,900 shares were purchased under a plan announced by the Board of Directors on August 31, 2007 authorizing the purchase of up to an additional 2,000,000 shares through August 31, 2008. The balance of 126,245 shares was repurchased at various times from May 2000 to September 30, 2001 pursuant to a stock repurchase program announced in May 2000.

During the six months ended March 30, 2008, the Company purchased an additional 452,100 shares under the plan at an average price of $17.47. As of March 30, 2008, 1,000,000 shares have been purchased under the plan announced on August 31, 2007 at an aggregate price of $17,891.

11. INCOME TAXES

Effective October 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 creates a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation, the Company recognized a $79 net increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the balance sheet.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all U.S. state income tax matters for years through 2003, except for California and Michigan state returns which have a four year statute of limitations. The Company’s consolidated federal income tax return was examined through September 30, 2004 and all matters have been settled. However, the final federal return for Argon Engineering Associates, Inc. for the year ended September 30, 2004 will remain subject to examination through June 2008.

If the examination periods were to expire or, in the event of an examination, the Company’s positions are sustained in favor of the Company, the Company would recognize approximately $339 of tax benefits reducing its effective rate. The Company does not believe there is a reasonable possibility of material changes to the estimated amount of reserves for uncertain tax positions within the next 12 months.

The Company’s accounting policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $62 accrued for interest and penalties as of March 30, 2008.

12. COMMITMENTS AND CONTINGENCIES

We are subject to litigation from time to time, in the ordinary course of business including, but not limited to, allegations of wrongful termination or discrimination. The Company believes the outcome of such matters will not have a material adverse effect on our results of operations, financial position or cash flows.

13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 will become effective for our fiscal year beginning October 1, 2008. Early adoption is permitted. The Company does not believe the adoption of this pronouncement will have any material effect on our consolidated financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 (“SFAS No. 159”), which allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted. The Company does not believe the adoption of this pronouncement will have any material effect on our consolidated financial position, results of operations, or cash flows.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset, with the payments expensed when the research and development activities are performed. EITF 07-3 applies to new contractual arrangements entered into in fiscal years beginning after December 15, 2007, and early adoption is not permitted. The Company does not believe that the adoption of EITF 07-3 will have any material effect on our consolidated financial position, results of operations, or cash flows.

In December 2007, the FASB issued Statement of Financials Accounting Standards No. 141R, Business Combinations (“SFAS No. 141R”), which replaces SFAS No. 141 Business Combinations. SFAS No. 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interest, contingent consideration, and certain acquired contingencies. SFAS No. 141R also requires acquisition-related transaction expenses and restructuring cost be expensed as incurred rather than capitalized a component of the business combination. SFAS No. 141R will be applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R would have an impact on accounting for any business combinations occurring after our fiscal year ending September 30, 2008.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information which management believes is relevant to an assessment and an understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and accompanying notes as well as our annual report on Form 10-K for the fiscal year ended September 30, 2007.

Forward-looking Statements

Statements in this filing which are not historical facts are forward-looking statements under the provision of the Private Securities Litigation Reform Act of 1955. Such forward-looking statements include, without limitation, statements with respect to total estimated remaining contract values and the Company’s expectations regarding the U.S. government’s procurement activities. Forward-looking statements are not guarantees of future performance and are based upon numerous assumptions about future conditions that could prove not to be accurate. Forward looking statements are subject to numerous risks and uncertainties, and our actual results could differ materially as a result of such risks and other factors. In addition to those risks specifically mentioned in this report and in the other reports filed by the Company with the Securities and Exchange Commission (including our Form 10-K for the fiscal year ended September 30, 2007), such risks and uncertainties include, but are not limited to: the availability of U.S. and international government funding for our products and services; changes in the U.S. federal government procurement laws, regulations, policies and budgets (including changes to respond to budgetary constraints and cost-cutting initiatives); the number and type of contracts and task orders awarded to us; the exercise by the U.S. government of options to extend our contracts; our ability to retain contracts during any rebidding process; the timing of Congressional funding on our contracts; any government delay or termination of our contracts and programs; difficulties in developing and producing operationally advanced technology systems; the timing and customer acceptance of contract deliverables; our ability to attract and retain qualified personnel, including technical personnel and personnel with required security clearances; charges from any future impairment reviews; the future impact of any acquisitions or divestitures we may make; the competitive environment for defense and intelligence information technology products and services; general economic, business and political conditions domestically and internationally; and other factors affecting our business that are beyond our control. All of the 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 these forward-looking statements to reflect new information, future events or otherwise, except as provided by law.

Overview

General

We are a leading systems engineering and development company providing full-service C5ISR (command, control, communications, computers, combat systems, intelligence, surveillance and reconnaissance) systems to a wide range of defense and intelligence customers. These systems and services are provided to a wide range of defense and intelligence customers, including commercial enterprises. Our systems provide communications intelligence, electromagnetic intelligence, electronic warfare and information operations capabilities that enable our defense and intelligence customers to detect, evaluate and respond to potential threats. These systems are deployed on a range of military and strategic platforms including surface ships, submarines, unmanned underwater vehicles (UUV), aircraft, unmanned aerial vehicles (UAV), land mobile vehicles, fixed site installations and re-locatable land sites.

Revenues

Our revenues are primarily generated from the design, development, installation and support of complex sensor systems under contracts primarily with the U.S. Government and major domestic prime contractors, as well as with foreign governments, agencies and defense contractors.

Our government contracts can be divided into three major types: cost reimbursable contracts, fixed-price, and time and materials. Cost reimbursable contracts are primarily used for system design and development activities involving considerable risks to the contractor, including risks related to cost estimates on complex systems, performance risks associated with real time signal processing, embedded software, high performance hardware, and requirements that are not fully understood by the customer or us, the development of technology that has never been used, and interfaces with other systems that are in development or are obsolete without adequate documentation. Fees under these contracts are usually fixed at the time of negotiation; however, in some cases the fee is an incentive or award fee based on cost, schedule, and performance or a combination of those factors. Although the U.S. government customer assumes the cost risk on these contracts, the contractor is not allowed to exceed the cost ceiling on the contract without the approval of the customer.

Fixed-price contracts are typically used for the production of systems. Development activities similar to activities performed under previous contacts are also usually covered by fixed-price contracts, due to the lower risk involved. In these contracts, cost risks are borne entirely by the contractor. Some fixed-price contracts include an award fee or an incentive fee as well as the negotiated profit. Most foreign customers, and some U.S. customers, use fixed-price contracts for design and development work even when the work is considered high risk.

Time and material contracts are based on hours worked, multiplied by approved labor rates, plus other costs incurred and allocated.

The following table represents our revenue concentration by contract type for the three and six months ended March 30, 2008 and April 1, 2007:


	Three Months Ended						Six Months Ended
Contract Type	March 30, 2008			April 1, 2007			March 30, 2008			April 1, 2007
Fixed-price contracts		64	%		60	%		58	%		63	%
Cost reimbursable contracts		32	%		35	%		38	%		31	%
Time and material contracts		4	%		5	%		4	%		6	%

Generally, we experience revenue growth when systems move from the development stage to the production stage due to increases in sales volumes from production of multiple systems, and when we add new customers or are successful in selling new systems to existing customers. Much of our current production work has been derived from programs for which we have performed the initial development work. These programs are next generation systems replacing existing, obsolete systems that were developed by other companies. We were able to displace these companies primarily on the basis of technological capability. We believe that the current state of world affairs and the U.S. government’s emphasis on protecting U.S. citizens will cause funding of these programs to continue.

The increase in our contract mix of cost-reimbursable contracts in the six months ended March 30, 2008 as compared to the six months ended April 1, 2007 resulted primarily from the addition of contracts from an entity acquired in 2007, which had a significant amount of cost-reimbursable type programs, and the effects of the contributed revenue from our cost-reimbursable development type contracts, including the SSEE Increment F program. During the three months ended March 30, 2008, compared to the same period in the prior year, the growth in cost-reimbursable type contracts from recently acquired entities and our cost-reimbursable development type contract efforts, was offset by growth in our fixed price production contracts including the SSEE Increment E programs.

Backlog

We define backlog as the funded and unfunded amount provided in contracts that we are tasked to complete less previously recognized revenue and exclude all unexercised options on contracts. Some contracts where work has been authorized carry a funding ceiling that does not allow us to continue work on the contract once the customer obligations have reached the funding ceiling. In such cases, we are required to stop work until additional funding is added to the contract. Our experience in this case is rare and therefore we generally carry the entire amount that the customer intends to execute as backlog when we are confident that the customer has access to the required funding for the contract.

In general, most of our backlog results in revenue in subsequent fiscal years, as we maintain minimal inventory and therefore the lead time on ordering and receiving material and increasing staff to execute programs has a lag time of several months from the receipt of order.

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.

From time to time, we will exclude from backlog portions of contract values of very long or complex contracts where we judge revenue could be jeopardized by a change in U.S. government policy. Because of possible future changes in delivery schedules and cancellations of orders, backlog at any particular date is not necessarily representative of actual revenue to be expected for any succeeding period, and actual revenue for the year may not meet or exceed the backlog represented. We may experience significant contract cancellations or reductions that were previously booked and included in backlog.

Our backlog at the dates shown was as follows (in thousands):


	March 30,		September 30,
	2008		2007
Funded	$	223,777	$	246,571
Unfunded		46,353		58,279

*Total*	$	270,130	$	304,850

Cost of Revenues

Cost of revenues consist of direct costs incurred on contracts such as labor, materials, travel, subcontracts and other direct costs and indirect costs associated with overhead expenses such as facilities, fringe benefits and other costs that are not directly related to the execution of a specific contract. We plan indirect costs on an annual basis and on cost reimbursable contracts receive government approval to bill those costs as a percentage of our direct labor, other direct costs and direct materials as we execute our contracts. The U.S. government approves the planned indirect rates as provisional billing rates near the beginning of each fiscal year.

General and Administrative Expenses

Our general and administrative expenses include administrative salaries, costs related to proposal activities, internally funded research and development, and other administrative costs.

Research and Development

We conduct internally funded research and development into complex signal processing, system and software architectures, and other technologies that are important to continued advancement of our systems and are of interest to our current and prospective customers. The variance from year to year in internal research and development is caused by the status of our product cycles and the level of complementary U.S. government funded research and development. For the three and six months ended March 30, 2008 internally funded research and development expenditures were $1.8 million and $3.5 million, respectively, representing 2% of revenues in each period. For the three and six months ended April 1, 2007 internally funded research and development expenditures were $1.7 million and $4.0 million, respectively, representing 3% of revenues in each period.

Internally funded research and development is a small portion of our overall research and development, as government funded research and development constitutes the majority of our activities in this area.

Interest Income and Expense

Interest income is derived solely from interest earned on cash reserves maintained in short term investment accounts and are therefore subject to short-term interest rates that have minimal risk.

Interest expense relates to interest charged on borrowings against our line and credit and capital leases.

Deferred Revenue

Many of our fixed-price contracts contain provisions under which our customers are required to make payments when we achieve certain milestones. In many instances, these milestone payments occur before we have incurred the associated costs to which the payments will be applied. For example, under certain of our production contracts, our order of materials constitutes a milestone for which we receive a significant payment, but we do not pay the materials vendors until the materials are received and placed into production. We recognize deferred revenue when we receive milestone payments for which we have not yet incurred the applicable costs. As costs are incurred and revenue recognition criteria are met, we recognize revenue.

As the time lag between our receipt of a milestone payment and our incurrence of associated costs under the contract can be several months, milestone payments under fixed-price contracts can significantly affect our cash position at any given time. The receipt of milestone payments will temporarily increase our cash on hand and our deferred revenue. As costs are incurred under the contract and contract revenue is recognized, cash and deferred revenue associated with the payment will decrease.

We expect that fluctuations in deferred revenue will occur based on the particular timing of milestone payments under our fixed-price contracts and our subsequent incurrence of costs under the contracts. Due to these fluctuations, our cash position at the end of any fiscal quarter or year may not be indicative of our cash position at the end of subsequent fiscal quarters or years.

Critical Accounting Practices and Estimates

General

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements. These financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the estimates, assumptions, and judgments involved in the accounting practices described below have the greatest potential impact on our financial statements and, therefore, consider these to be critical accounting practices.

Revenue and Cost Recognition

General

The majority of our contracts, which are with the U.S. government, are accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Production-Type Contracts. These contracts are transacted using written contractual arrangements, most of which require us to design, develop, manufacture and/or modify complex products and systems, and perform related services according to specifications provided by the customer. We account for fixed-price contracts by using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations as incurred. A portion of the contract revenue, based on estimated profits and the degree of completion of the contract as measured by a comparison of the actual and estimated costs, is recognized as revenue each period. In the case of contracts with materials requirements, revenue is recognized as those materials are applied to the production process in satisfaction of the contracts’ end objectives. We account for cost reimbursable contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying the negotiated fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred, and estimated completion costs regularly and adjusts revenues and profits on contracts in the period in which changes become determinable.

Anticipated losses on contracts are also recorded in the period in which they become determinable. Unexpected increases in the cost to develop or manufacture a product, whether due to inaccurate estimates in the bidding process, unanticipated increases in material costs, inefficiencies, or other factors are borne by us on fixed-price contracts, and could have a material adverse effect on results of operations and financial condition. Unexpected cost increases in cost reimbursable contracts may be borne by us for purposes of maintaining customer relationships. If the customer agrees to fund cost increases on cost type contracts, the additional work does not have any profit and therefore dilutes margin.

Indirect rate variance

We record contract revenues and costs of operations for interim reporting purposes based on annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual indirect rates. During our interim reporting periods, variances may accumulate between the actual indirect rates and the annual targeted rates. Timing-related indirect spending variances are not applied to contract costs, research and development, and general and administrative expenses, but are included in unbilled receivables during these interim reporting periods. These rates are reviewed regularly, and we record adjustments for any material, permanent variances in the period they become determinable.

Our accounting policy for recording indirect rate variances is based on management’s belief that variances accumulated during interim reporting periods will be absorbed by management actions to control costs during the remainder of the year. We consider the rate variance to be unfavorable when the actual indirect rates are greater than our annual targeted rates. During interim reporting periods, unfavorable rate variances are recorded as reductions to operating expenses and increases to unbilled receivables. Favorable rate variances are recorded as increases to operating expenses and decreases to unbilled receivables.

If we anticipate that actual contract activities will be different than planned levels, there are alternatives we can utilize to absorb the variance: we can adjust planned indirect spending during the year, modify our billing rates to our customers, or record adjustments to expense based on estimates of future contract activities.

If our rate variance is unfavorable, the modification of our indirect rates will likely increase revenue and operating expenses. Profit percentages on fixed-price contracts will generally decline as a result of an increase to indirect costs unless compensating savings can be achieved in the direct costs to complete the projects. Profit percentages on cost reimbursement contracts will generally decline as a percentage of total costs as a result of an increase in indirect costs even if the cost increase is funded by the customer. If our rate variance is favorable, the modification of our indirect rates will decrease revenue and operating expenses. In this event, profit percentages on fixed-price contracts will generally increase. Profit percentages on cost-reimbursable contracts will generally be unaffected as a result of any reduction to indirect costs, due to the fact that programs will typically expend all of the funds available. Any impact on operating income, however, will depend on a number of other factors, including mix of contract types, contract terms and anticipated performance on specific contracts.

At March 30, 2008, the unfavorable rate variance totaled $4.8 million of which $2.1 million was planned. Management deems this variance to be temporary and expects this variance to be eliminated by fiscal year-end.

Award Fee Recognition

Our practice for recognizing interim fee on our cost-plus-award-fee contracts is based on management’s assessment as to the likelihood that the award fee or an incremental portion of the award fee will be earned on a contract-by-contract basis. Management’s assessments are based on numerous factors including contract terms, nature of the work performed, our relationship and history with the customer, our history with similar types of projects, and our current and anticipated performance on the specific contract. No award fee is recognized until management determines that it is probable that an award fee or portion thereof will be earned. Actual fees awarded are typically within management’s estimates. However, changes could arise within an award fee period causing management to either lower or raise the award fee estimate in the period in which it occurs.

Goodwill

Costs in excess of the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded as goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test for impairment at least annually using a two-step approach. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. We performed the test during the fourth quarter of fiscal year 2007 and found no impairment to the carrying value of goodwill.

Long-Lived Assets (Excluding Goodwill)

We follow the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”) in accounting for long-lived assets such as property and equipment and intangible assets subject to amortization. SFAS No.144 requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized if the sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived asset being evaluated. Impairment losses are treated as permanent reductions in the carrying amount of the assets.

Accounts Receivable

We are required to estimate the collectibility of our accounts receivables. Judgment is required in assessing the realization of such receivables, and the related reserve requirements are based on the best facts available to us. Since most of our revenue is generated under U.S. government contracts, our current accounts receivable reserve is not significant to our overall receivables balance.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123R”) which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123R requires all companies to measure compensation costs for all share-based payments at fair value, and eliminates the option of using the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB No. 25”) which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees and directors if certain conditions were met.

Effective October 1, 2005, the Company adopted SFAS No. 123R using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption will be measured at estimated fair value and included in cost of revenues and general and administrative expenses over the vesting period during which an employee provides service in exchange for the award.

Historical Operating Results

Three months ended March 30, 2008 compared to three months ended April 1, 2007

The following table sets forth certain items, including consolidated revenues, cost of revenues, general and administrative expenses, income tax expense and net income, and the changes in these items for the three months ended March 30, 2008 and April 1, 2007 (in thousands):


	Three months quarter ended				Increase
	March 30, 2008		April 1, 2007		(Decrease)
Contract revenues	$	88,449	$	64,310	$	24,139
Cost of revenues	$	73,012	$	51,901	$	21,111
General and administrative expenses	$	4,663	$	4,160	$	503
Research and development expenses	$	1,811	$	1,748	$	63
Interest income, net	$	35	$	267	$	(232	)
Provision for income taxes	$	3,492	$	2,605	$	887
Net income	$	5,506	$	4,163	$	1,343

Revenues:

Revenues increased approximately $24.1 million or 38% for the three months ended March 30, 2008, as compared to three months ended April 1, 2007. The revenue increase is primarily attributable to revenue growth from continued work on production contracts including our SSEE Increment E programs and other maritime defense programs as well as revenue from both classified contracts and Coherent, which was acquired in the fourth quarter of fiscal 2007.

Cost of Revenues:

Cost of revenues increased approximately $21.1 million or 41% for the three months ended March 30, 2008 as compared to the three months ended April 1, 2007. The increase was primarily due to increased contract activity and increased revenue as well as the inclusion of the operations of Coherent. Direct materials costs increased $18.4 million and direct labor increased $1.9 million consistent with our increase in production activity on primarily fixed price contracts. Cost of revenues as a percentage of total revenue increased to 83% for the three months ended March 30, 2008 as compared to 81% in the same quarter of fiscal year 2007. We have been able to control growth of general and administrative costs as a percentage of revenue resulting in an increase in the percentage of cost of revenue. Also contributing to the increase are high material content for the period, an increase in stock-based compensation included in cost of revenues, an increase in the amortization of customer-related intangible assets from the purchase of Coherent, and an increase in retention compensation accrued as a result of acquisitions.

General and Administrative Expenses:

General and administrative expenses increased approximately $0.5 million or 12% for the three months ended March 30, 2008, as compared to the three months ended April 1, 2007. The increase was due primarily to an increase from the inclusion of operations of Coherent for the three months ended March 30, 2008. As a percentage of revenue, general and administrative costs have decreased to 5% of revenue for the three months ended March 30, 2008 as compared to 6% of revenue for the three months ended April 1, 2007. We continue to focus on controlling general and administrative expenses, including realigning certain resources on a geographic basis to eliminate duplicating functions.

Research and Development Expenses:

Research and development expenses increased $0.1 million or 4% for the three months ended March 30, 2008, as compared to the three months ended April 1, 2007 due to the timing of specific planned research and development projects. Research and development expenditures represented 2.0% and 2.7% of our consolidated revenues for the three months ended March 30, 2008 and April 1, 2007, respectively. We expect that research and development expenditures will continue to represent approximately 2% to 3% of our consolidated revenue in future periods.

Interest Income, net:

Interest income, net of interest expense, decreased approximately $0.2 million for the three months ended March 30, 2008, as compared to the three months ended April 1, 2007. This decrease was a result of lower average cash balances and interest expense incurred on $7.0 million of borrowings on the line of credit in January 2008 which was repaid prior to March 30, 2008. Cash and cash equivalents on hand were approximately $14.0 million and $34.7 million at March 30, 2008 and April 1, 2007, respectively.

Provision for Income Taxes:

The provision for income taxes increased approximately $0.9 million or 34% for the three months ended March 30, 2008, as compared to the three months ended April 1, 2007. Our effective income tax rate increased to 38.8% for the three months ended March 30, 2008, compared to an effective rate of 38.5% for the three months ended April 1, 2007.

Net Income:

As a result of the above, net income increased approximately $1.3 million, or 32%, for the three months ended March 30, 2008 compared to the three months ended April 1, 2007.

Six months ended March 30, 2008 compared to six months ended April 1, 2007

The following table sets forth certain items, including consolidated revenues, cost of revenues, general and administrative expenses, income tax expense and net income, and the changes in these items for the six months ended March 30, 2008 and April 1, 2007 (in thousands):


	Six months ended				Increase
	March 30, 2008		April 1, 2007		(Decrease)
Contract revenues	$	162,715	$	124,715	$	38,000
Cost of revenues	$	133,349	$	97,655	$	35,694
General and administrative expenses	$	10,120	$	8,887	$	1,233
Research and development expenses	$	3,511	$	3,964	$	(453	)
Interest income, net	$	154	$	597	$	(443	)
Provision for income taxes	$	6,101	$	5,460	$	641
Net income	$	9,788	$	9,346	$	442

Revenues:

Revenues increased approximately $38.0 million or 30% for the six months ended March 30, 2008, as compared to six months ended April 1, 2007. The revenue increase is primarily attributable to revenue growth from continued work on production contracts in our SSEE Increment E program, the inclusion of operations of Coherent and increased work performed for our OT-TES program.

Cost of Revenues:

Cost of revenues increased approximately $35.7 million or 37% for the six months ended March 30, 2008 as compared to the six months ended April 1, 2007. The increase was primarily due to increased contract activity and increased revenue as well as the inclusion of the operations of Coherent. Direct materials costs increased $22.0 million and direct labor increased $4.4 million consistent with the increase in production activity on primarily fixed price contracts. Cost of revenues as a percentage of total revenue increased to 82% for the six months ended March 30, 2008 as compared to 78% in the same period of fiscal year 2007. This increase is due to the increase in cost-reimbursable type contracts for the period and that we have been able to control growth of general and administrative costs as a percentage of revenue, resulting in an increase in the percentage of cost of revenue. Also contributing to the increase are high material content for the period, an increase in stock-based compensation included in cost of revenues, an increase in the amortization of customer-related intangible assets from the purchase of Coherent, and an increase in retention compensation accrued as a result of acquisitions.

General and Administrative Expenses:

General and administrative expenses increased approximately $1.2 million or 14% for the six months ended March 30, 2008, as compared to the six months ended April 1, 2007. The increase was due primarily to the inclusion of operations of Coherent for the six months ended March 30, 2008. As a percentage of revenue, general and administrative costs were 6% of revenue for the six months ended March 30, 2008 and 7% of revenue for the six months ended April 1, 2007. We continue to focus on controlling general and administrative expenses, including realigning certain resources on a geographic basis to eliminate duplicating functions.

Research and Development Expenses:

Research and development expenses decreased $0.5 million or 11% for the six months ended March 30, 2008, as compared to the six months ended April 1, 2007 due to the timing of specific planned research and development projects. Research and development expenditures represented 2.2% and 3.2% of our consolidated revenues for the six months ended March 30, 2008 and April 1, 2007, respectively. We expect that research and development expenditures will continue to represent approximately 2% to 3% of our consolidated revenue in future periods.

Interest Income, net:

Interest income, net of interest expense, decreased approximately $0.4 million for the six months ended March 30, 2008, as compared to the six months ended April 1, 2007. This decrease was a result of lower average cash balances and interest expense incurred on $7.0 million of borrowings on the line of credit in January 2008 which was repaid prior to March 30, 2008. Cash and cash equivalents on hand was approximately $14.0 million and $34.7 million at March 30, 2008 and April 1, 2007, respectively.

Provision for Income Taxes:

The provision for income taxes increased approximately $0.6 million or 12% for the six months ended March 30, 2008, as compared to the six months ended April 1, 2007. Our effective income tax rate increased to 38.4% for the six months ended March 30, 2008, compared to an effective rate of 36.9% for the six months ended April 1, 2007. The increase in the effective tax rate was primarily due to decreased tax exempt interest in the first six months of fiscal year 2008 as compared to the first six months of fiscal year 2007.

Net Income:

As a result of the above, net income increased approximately $0.4 million, or 5%, for the six months ended March 30, 2008 compared to the six months ended April 1, 2007.

Analysis of Liquidity and Capital Resources

Our liquidity requirements relate primarily to the funding of working capital requirements supporting operations, capital expenditures and strategic initiatives including potential future acquisitions and research and development activities.

Cash

At March 30, 2008, we had cash of $14.0 million compared to cash of $23.0 million at September 30, 2007. The $9.0 million decrease in cash was primarily the result of $7.9 million of cash used for stock purchases under our stock repurchase plan, $5.2 million of capital expenditures, $1.5 million cash paid for acquisition net of cash that was previously restricted for future payments, all of which were partially offset by $4.9 million of cash from operations.

Line of Credit

The Company maintains a $40.0 million line of credit with Bank of America, N.A. (the “Lender”). The credit facility will terminate no later than February 28, 2010 at which time the facility will be subject to renewal. The credit facility also contains a sublimit of $15.0 million to cover letters of credit. In addition, borrowings on the line of credit bear interest at LIBOR plus 150 basis points. An unused commitment fee of 0.25% per annum, payable in arrears, is also required.

All borrowings under the line of credit are collateralized by all tangible assets of the Company. The line of credit agreement includes customary restrictions regarding additional indebtedness, business operations, permitted acquisitions, liens, guarantees, transfers and sales of assets, and maintaining the Company’s primary accounts with the Lender. Borrowing availability under the line of credit is equal to the product of 1.5 and the Company’s earnings before interest expense, taxes depreciation and amortization (EBITDA) for the trailing 12 months, calculated as of the end of each fiscal quarter. For the fiscal quarter ending March 30, 2008, EBITDA, on a trailing 12 month basis, was $38.2 million. The agreement requires the Company to comply with a specific EBITDA to Funded Debt ratio, and contains customary events of default, including the failure to make timely payments and the failure to satisfy covenants, which would permit the Lender to accelerate repayment of borrowings under the agreement if not cured within the applicable grace period. As of March 30, 2008, the Company was in compliance with these covenants and the financial ratio.

At March 30, 2008, there were no borrowings outstanding against the line of credit. Letters of credit outstanding at March 30, 2008 amounted to $2.2 million, and $37.8 million was available on the line of credit. In January 2008, the Company borrowed $7.0 million from our line of credit to fund its current operations which was repaid by March 30, 2008.

Cash Flows

Net cash provided by operating activities was $4.9 million for the six months ended March 30, 2008, compared to net cash provided by operating activities of $3.4 million in the six months ended April 1, 2007. Cash provided by operating activities during the six months ended March 30, 2008 was comprised of $14.5 million of net income as adjusted for non-cash reconciling items including depreciation and amortization, changes in deferred income taxes and stock-based compensation. Net income, as adjusted for non-cash reconciling items, was reduced by $9.6 million as a result of changes in operating assets and liabilities. This change was driven by a $6.5 million increase in accounts receivable and a $5.0 million decrease in deferred revenue, partially offset by a $1.9 million of changes in other operating assets and liabilities.

The increase in accounts receivable is due primarily to the timing of our contractual ability to bill our customers and subsequently receive payments on such billings. Many of our fixed-price contracts contain provisions under which our customers are required to make payments when we achieve certain milestones. In many instances, these milestone payments occur after we have incurred the associated costs to which the payments will be applied. For example, under some of our contracts providing certain deliverables constitutes a milestone for which we receive a significant payment near the end of the contract, but we incur costs to complete the deliverables ratably over the life of the contract. We recognize revenue as costs are incurred and revenue recognition criteria are met, with a corresponding increase in unbilled receivables.

The time lag between our receipt of a milestone payment and our incurrence of associated costs under the contract can be several months. Therefore, milestone payments under fixed-price contracts can significantly affect our cash position at any given time. The receipt of milestone payments will temporarily increase our cash on hand and decrease our unbilled receivables. As milestone payments under the contract are billed and received, cash will increase and unbilled receivables associated with the payment will decrease. Over the years, these milestone payments have had a significant effect on our comparative cash balances. We expect that fluctuations in unbilled receivables and deferred revenue will occur based on the particular timing of milestone payments under our fixed-price contracts and our incurrence of costs under the contracts. Due to these fluctuations, our cash position at the end of any fiscal quarter or year may not be indicative of our cash position at the end of subsequent fiscal quarters or years.

Net cash used in investing activities was $6.4 million for the six months ended March 30, 2008, compared to net cash used in investing activities of $3.8 million for the six months ended April 1, 2007. The increase in cash used in investing activities was primarily due to $5.2 million of capital expenditures and $1.5 million of cash paid in earn-outs, net of $1.8 million of cash previously restricted for certain acquisition related cash outlays in connection with the acquisition of Coherent.

Net cash used in financing activities was $7.5 million for the six months ended March 30, 2008 compared to cash provided by financing activities of $1.6 million for the six months ended April 1, 2007. Cash used in financing activities was primarily comprised of $7.9 million of cash used to purchase 452,100 shares of our common stock under our stock repurchase program.

Contractual Obligations and Commitments

As of March 30, 2008, our contractual cash obligations were as follows (in thousands):


			Due in		Due in		Due in		Due in		Due in
	Total		2007		2008		2009		2010		2011		Thereafter
Capital leases	$	164	$	69	$	63	$	27	$	5		—		—
Operating leases		18,708		8,053		3,714		2,249		1,850		1,525		1,317

Total	$	18,872	$	8,122	$	3,777	$	2,276	$	1,855	$	1,525	$	1,317

As of March 30, 2008, our other commercial commitments were as follows:


(in thousands)	Total		Less Than 1 Year		1-3 Years
Letters of credit	$	2,236	$	2,236		—

We have no long-term debt obligations, capital lease obligations, other operating lease obligations, contractual purchase obligations, or other long-term liabilities other than those shown above. We also have no off-balance sheet arrangements of any kind.

Market Risks

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

Cash and Cash Equivalents:

All unrestricted, highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. We maintain cash and cash equivalents with various financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. We believe that any credit risk related to these cash and cash equivalents is minimal.

Interest Rates:

Our line of credit financing provides available borrowing to us at a variable interest rate tied to the LIBOR rate. There were no outstanding borrowings under this line of credit at March 30, 2008. Accordingly, we do not believe that any movement in interest rates would have a material impact on future earnings or cash flows. In the event that we borrow on our line of credit in future periods, we will be subject to the risks associated with fluctuating interest rates.

Foreign Currency:

We have contracts to provide services to certain foreign countries approved by the U.S. government. Our foreign sales contracts require payment in U.S. dollars, and therefore are not affected by foreign currency fluctuations. We occasionally issue orders or subcontracts to foreign companies in local currency. The current obligations to foreign companies are of an immaterial amount and we believe the associated currency risk is also immaterial.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

ITEM 4. CONTROLS AND PROCEDURES

	(a)		Our management has evaluated, with the participation of the our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

	(b)		During the last quarter, there were no significant changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected these controls, or are reasonably likely to materially affect these controls subsequent to the evaluation of these controls.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to litigation from time to time, in the ordinary course of business including, but not limited to, allegations of wrongful termination or discrimination.

ITEM 1A. RISK FACTORS

There were no other material changes from the risk factors disclosed in our Form 10-K for the fiscal year ended September 30, 2007, filed on November 30, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases that we made during the second quarter of fiscal year 2008 of our equity securities that are registered by us pursuant to Section 12 of the Exchange Act. We purchased our common stock pursuant to the stock repurchase plan announced on August 30, 2007 authorizing the purchase of up to 2.0 million shares of our common stock. The repurchase plan is scheduled to terminate on August 31, 2008.


							Approximate
					Total Number of		Number of Shares
	Total Number		Average		Shares Purchased as		that May Yet Be
	of Shares		Price Paid		Part of Publicly		Purchased Under
Period	Purchased		per Share		Announced Plan		the Plan
December 31, 2007 to January 31, 2008		—	$	—		—		1,302,100
February 1, 2008 to February 29, 2008		166,164		17.49		166,164		1,135,936
March 1, 2008 to March 30, 2008		135,936		16.33		135,936		1,000,000

Second quarter fiscal 2008 totals		302,100	$	16.97		302,100

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On February 26, 2008, the Company held its Annual Meeting of Stockholders. The following items were voted upon and approved by the requisite number of shares present in person or by proxy at the meeting:

The inspector of election tabulated the following votes for the election of directors. There were 314,189 broker non-votes.


	Number of Votes		Number of Votes
Nominee for Office	In Favor		Withheld
Terry L. Collins		20,919,159		433,623
Thomas E. Murdock		20,706,958		645,824
Victor F. Sellier		21,210,422		142,360
S. Kent Rockwell		21,202,603		150,179
David C. Karlgaard		20,937,630		415,132
Lloyd A. Semple		20,041,792		1,310,990
Robert McCashin		20,254,707		1,098,075
John Irvin		21,167,415		185,367
Peter A. Marino		20,544,994		807,788
Maureen Baginski		21,232,155		120,627

The inspector of election tabulated the following votes for the proposal to approve the Argon ST 2008 Equity Incentive Plan. There were 4,790,133 broker non-votes.


Number of Votes	Number of Votes
“In Favor”	“Against”	Abstain
10,655,496	6,190,934	28,956

ITEM 6. EXHIBITS


Exhibit
Number		Description of Exhibit
	2.1	Agreement and Plan of Merger dated as of June 7, 2004, by and between Sensytech, Inc. and Argon Engineering Associates, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Registration Statement on Form S-4 filed on July 16, 2004, Registration Statement No. 333-117430)

	2.2	Agreement and Plan of Merger, Dated as of June 9, 2006, by and among Argon ST, Inc., Argon ST Merger Sub, Inc., San Diego Research Center, Incorporated, Lindsay McClure, Thomas Seay and Harry B. Lee, Trustee of the HBL and BVL Trust (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 14, 2006)

	2.3	Equity Purchase Agreement by and among Argon ST, Inc., CSIC Holdings LLC, Coherent Systems International, Corp., the Stockholders of Coherent Systems International, Corp. and Richard S. Ianieri, as Seller Representative (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed August 16, 2007)

	3.1	Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (Registration Statement No. 333-98757) filed on August 26, 2002)

	3.1.1	Amendment, dated September 28, 2004, to the Company’s Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 the Company’s Current Report on Form 8-K filed October 5, 2004 covering Items 2.01, 5.01, 5.02, 8.01 and 9.01 of Form 8-K).

	3.1.2	Amendment, dated March 15, 2005 to the Company’s Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 5, 2005, filed May 11, 2005)

	3.2	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 13(a)(i) of the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2001)

	3.2.1	Amendment, dated as of February 28, 2007, to the Company’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed March 6, 2007)

	4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 (Registration Statement No. 333-128211) filed on September 9, 2005)

	10.1	Second Amended and Restated Line of Credit Agreement with Bank of America (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1 (Registration Statement No. 333-98757) filed on August 27, 2002)

	10.1.1	Fifth Amendment to Second Amended and Restated Financing and Security Agreement, dated as of March 31, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 6, 2006)

	10.1.2	Sixth Amendment to the Second Amended and Restated Financing and Security Agreement, dated as of February 28, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 4, 2008)

	10.2+	Argon ST, Inc. 2002 Stock Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A for its 2006 annual meeting of stockholders, filed January 27, 2006)

	10.2.1	Form of Stock Option Agreement under Argon ST 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005, filed December 14, 2005)

	10.3+	Argon Engineering Associates, Inc. Stock Plan (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004, filed December 14, 2004)

	31.1*	Certification of the Company’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act

	31.2*	Certification of the Company’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)


*		Filed herewith

**		Furnished herewith

+		Indicates management contract or compensatory plan or arrangement


		ARGON ST, INC. (Registrant)

		By: /s/ Terry L. Collins Terry L. Collins, Ph.D.
		Chairman, Chief Executive Officer and President

		By: /s/ Aaron N. Daniels Aaron N. Daniels
		Vice President, Chief Financial Officer, and Treasurer

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

1.		I have reviewed this quarterly report on Form 10-Q of Argon ST, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


/s/ Terry L. Collins Terry L. Collins
Chief Executive Officer


/s/ Aaron N. Daniels Aaron N. Daniels
Chief Financial Officer