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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended September 28, 2003

OR

For the transition period from            to           

Commission file number 0-21682

SPARTA, Inc.

25531 Commercentre Drive, Suite 120, Lake Forest, CA 92630-8873

(949) 768-8161

Not Applicable

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

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

As of September 28, 2003, the registrant had 5,095,890 shares of common stock, $.01 par value per share, issued and outstanding.

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SPARTA, Inc.

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 28, 2003

INDEX

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PART I

Item 1  Financial Statements

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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)

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

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

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

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

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

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

Note A - Basis of Presentation

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

     The Company’s fiscal year is the 52 or 53 week period ending on the Sunday closest to December 31. The Company’s last fiscal year ended on December 29, 2002, its third quarter ended September 28, 2003, and its corresponding third quarter last year ended on September 29, 2002. To aid the reader of the financial statements, the year-end has been presented as December 31, 2002 and the three and nine-month period ends have been presented as September 30, 2003 and September 30, 2002.

     In the opinion of management, the unaudited financial information for the three and nine-month periods ended September 30, 2003 and September 30, 2002 reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation thereof.

Note B - Income Taxes

     Income taxes for interim periods are computed using the estimated annual effective rate method.

Note C – Computation of Earnings Per Share

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Note D – Accounting for Stock-Based Compensation

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

Note E – Stockholders’ Equity

     For the nine months ended September 30, 2003, proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $5.4 million. In addition, the Company repurchased a total of 358,096 common shares totaling approximately $8.1 million, of which $0.2 million was repurchased in exchange for promissory notes.

     Treasury stock is shown at cost, and consisted of 1,282,045 shares and 923,949 shares of common stock at September 30, 2003 and December 31, 2002, respectively. Repurchase of outstanding stock by the Company in exercise of its right of repurchase upon termination of employment (as defined) are made at estimated fair value. The stock price is calculated quarterly by the Company using a formula approved by the Board of Directors (which the Company believes estimates fair value). The stock price formula is evaluated annually by reference to discounted cash flow analysis and other financial valuation techniques.

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Note F – Commitments and Contingencies

     In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements 5, 57, and 107, and rescission of FASB Interpretation No. 34.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements.

     As permitted under Delaware law, the Company has entered into agreements whereby it indemnifies its officers and directors over his or her lifetime for certain events or occurrences while the officer or director is, or was serving, in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and should enable it to recover a portion of any future amounts paid. As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. All of these indemnification agreements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.

     In addition, the Company has entered into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party (generally our business partners or customers) in connection with any claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.

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

Note G – Other Recent Accounting Pronouncements

     The Company adopted the following Statements of Financial Accounting Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting for acquired business using the purchase method of accounting; SFAS 142, which addressees accounting for acquired goodwill and other intangible assets; SFAS 143, which addresses accounting for obligations associated with the retirement

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of tangible long-lived assets and the associated retirement costs; and SFAS 144, which addresses the impairment or disposal of long-lived assets. Adoption of these standards did not have a material effect on the Company’s financial position or results of operations.

     During December 2002, the FASB issued SFAS 148, which provides alternative transition methods for companies adopting a voluntary change to the fair value method of accounting for stock-based compensation. SFAS 148 also requires enhanced disclosure regarding the method of accounting and the effect of the method used on reported results of operations. SFAS 148 is effective for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 in December 2002, and has elected to continue to account for its stock-based compensation under the intrinsic value method.

     In January 2003, the Company adopted SFAS 146, which addresses accounting for costs associated with exit or disposal activities. In addition, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after June 15, 2003. Adoption of these statements did not have a material effect on the Company’s financial position or results of operations

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

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

Results of Operations

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

(1)

The Company defines gross profit as sales less all costs that are allowable for and allocable to contracts under government procurement regulations. As such, gross profit excludes certain unallowable expenses. Management considers gross profit, and gross profit as a percentage of costs, to be key measures of the Company’s contract performance. It should also be considered in conjunction with income from operations, net income, and other measures of financial performance. The following presents a reconciliation of gross profit to income from operations (amounts in thousands) :

     The Company’s contract revenues for the three-month period ended September 30, 2003 increased 15%, from $42.9 million for the third quarter of 2002 to $49.4 million for the third quarter of 2003. Year-to-date sales for 2003 are $147.5 million, an increase of 23% above performance through September of 2002. The most significant contributor to the Company’s revenue growth has been in BMD programs, where revenues increased 25%, from $18.9 million for the three-month period ended September 30, 2002 to $23.7 million for the corresponding period in 2003. Year-to-date, BMD revenues have increased 39%, from $51.0 million in 2002 to $71.1 million in 2003. In addition to continuing its work on BMD systems engineering and technical analysis, the Company has generated growth in its BMD business base through penetration of other BMD program elements. Revenue on other DoD programs increased 15%, from $21.0 million during the third quarter of 2002 to $24.2 million for the third quarter of 2003, primarily due to increased revenue on programs for a variety of intelligence agencies as a result of the government’s increased focus on intelligence in response to the terrorist attacks of September 11. Non-DoD sales decreased 47% during the third quarter, from $2.6 million as of September 2002 to $1.4 million as of September 2003, due to the completion in July 2002 of a contract to provide a variety of engineering and other range support services to the NASA Dryden Flight Research Center.

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     The Company defines gross profit as sales less all costs that are allowable for and allocable to contracts under government procurement regulations. As such, gross profit excludes certain unallowable expenses, as well as interest income and interest expense. Management considers gross profit, and the gross profit rate (gross profit as a percentage of contract costs), to be key measures of the Company’s contract performance. It should also be considered in conjunction with income from operations, net income, and other measures of financial performance.

     The gross profit rate (gross profit as a percentage of contract costs) increased from 9.8% in the third quarter of 2002 to 10.2% in third quarter of 2003. The increase in the gross profit rate for the quarter, relative to the corresponding quarter of 2002, is primarily attributable to the write-off of $125,000 (due to uncollectibility) in September 2002 of costs incurred on a commercial contract. In addition, the gross profit rate during the quarter was affected by two other factors: the mix of contract types, and the proportion of the Company’s total revenues derived from BMD programs. During the third quarter of 2003, time and material and fixed price contracts comprised 40% of total sales, compared with 30% of total sales in the corresponding quarter of 2002. The Company generally earns higher profits on time and material and fixed price contracts than it does on cost reimbursable contracts, due to the greater risk associated with such contract types. Offsetting the effect of the change in contract type mix was the increase in BMD revenues, from 45% of total revenues in the third quarter of 2002 to 48% in the corresponding quarter of 2003. The gross profit rate on many of the Company’s BMD programs tends to be lower than on other programs because subcontractor costs (on which the Company typically receives lower fees) comprise a significant portion of the work effort on many BMD programs.

     Year-to-date, the gross profit rate continued to trend slightly lower than last year, declining from 10.4% through September 2002 to 10.1% through September 2003. Year-to-date, the impact on the gross profit rate of the change in contract type mix approximated that for the quarter. However, the impact on the gross profit rate of the increase in the proportion of BMD revenues was greater over the year-to-date period than for the quarter, as revenue on BMD programs increased from 43% of year-to-date sales in 2002 to 48% in 2003. The write-off referred to above had an insignificant effect on the year-to-date profit rate.

     The Company earned net interest income during the third quarter of 2003 and 2002. During the third quarter of 2003, the Company had cash receipts totaling $52.2 million, an increase of $8.9 million over the corresponding period in 2002. Both the Company’s investments in cash equivalents and the Company’s long-term debt are floating rate. Accordingly, the reduction in average interest rates from 2002 to 2003 had a minimal effect on net interest.

     The Company’s effective income tax rate was 41% and 40% during the third quarter of 2003 and 2002, respectively. The increase in the effective tax rate in 2003 is attributable to an increase in certain non-deductible compensation expenses.

Backlog

     Although the Company’s backlog has historically been indicative of its future revenues, there can be no assurance that this will continue. The Company’s backlog is typically subject to variations from year to year as contracts are completed, major existing contracts are renewed, or major new contracts are awarded. Additionally, all U.S. Government contracts included in backlog, whether or not funded, may be terminated at the convenience of the U.S. Government. Moreover, U.S. Government contracts are conditioned upon the continuing availability of congressional appropriations. New presidential administrations, changes in the composition of Congress, and disagreement or significant delay between Congress and the Administration in reaching a defense budget accord can all significantly affect the timing of funding on the Company’s contract backlog. Delays in contract funding resulting from these

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factors may have a significant adverse effect on the Company’s financial position and results of operations.

     The following table compares the Company’s 12-month contract backlog as of the dates indicated:

     The 12-month contract backlog, representing expected sales over the next twelve months on existing contracts, increased from $174.6 million at the end of 2002 to $199.1 million as of September 30, 2003, an increase of 14%. BMD contract backlog increased $13.5 million, or 17%, during the first nine months of 2003, as the Company has continued to generate growth in its BMD business base, both through increased level-of-effort in certain of the Company’s existing BMD program areas, and through penetration of other BMD program elements. Other DoD contract backlog increased $11.9 million, or 13%, while Non-DoD contract backlog decreased $0.9 million, a decrease of 13%, during the first nine months of 2003.

     In the third quarter of 2003, the Company had ten significant competitive contract/task order wins, one sole-source win, and six competitive contract/task order losses. In our Missile Defense business area, Advanced Systems Technology Operation (ASTO) won the Advanced Systems Technology Development contract from the Missile Defense Agency. This is a one-year Indefinite Delivery Indefinite Quantity (IDIQ) contract with a one-year base plus four one-year options. The total program value is estimated at $28.6 million. The Space and Missile Defense Operation (SMDO), as a subcontractor to BAe Systems, won an IDIQ contract on the US STRATCOM Architecture and Mission Support Program. This effort with a new customer has an expected value of $8-10 million over five years. SMDO also won a GSA Blanket Purchase Agreement from the Air Force Space and Missile Systems Center as part of their Technical Acquisition Support Services Program. The estimated value of this contract is $2.5 million over 2½ years.

     In our Intelligence business area, the Advanced Communications Technology Operation (ACTO) won a $1.2 million, one-year follow-on contract from the Federal Bureau of Investigation on the Pilaster 2 program. ACTO also won two other contracts from classified customers totaling $4.2 million for one year. As part of the National Security Agency Cross Domain Solutions Program, the Information System and Security Operation (ISSO) won a sole-source $5 million contract for four years (one-year base plus three one-year options). ACTO lost a $5 million, five-year contract from the Tailored Access Office as a subcontractor to Booz Allen Hamilton, and ISSO lost a $2.6 million, five-year task order contract on the ATLAS Program as a subcontractor to QSS.

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     In our Homeland Security business area, in a collaborative effort between ASTO and the Defense Systems and Technology Operation (DSTO), the Company won a $2.8 million, three-year subcontract from SRS Technologies on the Man Portable Air Defense Countermeasures Program. This is our first contract with the new Department of Homeland Security.

     In Military Systems, the Company had two significant contract wins and four losses. The Military Systems Operation (MSO) won the competitive follow-on contract to its Laboratory and Operations contract from the Missile and Space Intelligence Center. The new effort, Integrated Systems Production and JRAAC Operations, is valued at $36.8 million over five years. As a subcontractor to the Advanced Logistics Solutions Joint Venture, the Technical and Acquisition Support Operation (TASO) won a $2 million, 1½ year contract from the Army Missile and Aviation Command for Logistics Channel Management. Significant losses include a $19 million, four-year subcontract from Orbital Sciences Corporation for the Air Force Space Based Surveillance System (SMDO); an $11 million, five-year subcontract from Decisive Analytics Corporation for the Army Space Command C4ISR Operational Management Engineering and Technical Services Program (SMDO); a $1.8 million, 11/2 year subcontract from the Advanced Logistics Solutions Joint Venture for support to the Army Missile and Aviation Command Aviation Systems Program Management Office (TASO); and a $2.8 million, three-year subcontract from GeoCenters for support to the Army CECOM Night Vision Electro Optics and Sensors Laboratory (MSO).

     In the Hardware Systems business area, the Composite Products Operation (CPO) was part of the team of Boeing and MBDA that was selected for the Air Force Small Diameter Bomb Program. CPO will provide composite wing kits for these new smart weapons. In the first two years, CPO will receive $2.4 million to complete the development of the wing kits, after which they will participate in the nine-year production program. The total value of the production program to the Company is yet to be specified.

Liquidity and Capital Resources

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

Overview

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

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

     The Company’s bank line of credit provides for borrowings of up to $6.0 million, and matures July 1, 2005. Borrowings under the line of credit agreement are secured by accounts receivable and certain equipment and improvements, and bear interest at the prime rate. The line of credit agreement prohibits the payment of dividends by the Company without the bank’s prior consent and requires the Company to maintain certain financial ratios. The Company was in compliance with all such requirements at September 30, 2003. The Company believes that, as in the past, it will be able to renew its banking agreement under similar terms. There were no amounts outstanding under the bank line of credit at September 30, 2003

     Generally, the Company limits its stockholders to current employees and directors of the Company. Accordingly, the Company’s Amended and Restated Certificate of Incorporation places restrictions on the transferability of the Company’s common stock and grant the Company the right to repurchase the shares held by any stockholder whose association with the Company terminates. Generally, the Company’s policy is to repurchase the stockholdings of all individuals terminating their association with the Company, so as to retain all stockholdings among active employees and directors. However, during 1993 and 1994, the 40% reduction in the Company’s staff level resulted in the termination of employees who held, in the aggregate, approximately 30% of the Company’s total common stock then outstanding. Consequently, in April 1994, the Company temporarily suspended the policy of repurchasing all of the stock held by terminating employees so as not to deplete stockholders’ equity. As of September 30, 2003, the percentage of the Company’s outstanding common stock held by former employees totaled approximately 3.5%.

     The policy of repurchasing all stockholdings of terminated employees was reinstated in 1997. In support of this policy the Board of Directors authorized the Company’s Chief Executive Officer to issue, at his discretion, promissory notes to repurchase stock held by certain terminating employees. Such promissory notes are subordinated to borrowings under the bank line of credit. In addition to repurchasing the stockholdings of terminated employees, the Company has established and maintains a program that periodically permits the Company’s stockholders to offer shares for sale to the Company. The Company’s repurchase program, which is conducted on a quarterly basis, is a voluntary program on the part of the Company, and the Company’s stockholders therefore have no right to compel the Company to repurchase any of the stockholders’ shares. There can be no assurance that the Company will continue its voluntary repurchase program. Moreover, the number of shares that the Company may repurchase is subject to legal restrictions imposed by applicable corporate law affecting the ability of corporations generally to repurchase shares of their capital stock. In addition, the number of shares which the Company may repurchase is subject to a self-imposed quarterly repurchase limitation which is designed to ensure that the Company’s repurchase of its shares does not materially impair the Company’s liquidity or financial condition. The Board of Directors may approve waivers to the self-imposed quarterly repurchase limitation.

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Cash Flow Information

     During the first three quarters of 2003 the Company’s cash balances increased $11.0 million compared with the prior year end.

     Operating activities generated $16.7 million in cash during the first three quarters of 2003. The Company generated $7.6 million in net income through September of 2003. Non-cash expenses totaled $5.6 million, of which $4.2 million related to the Company’s practice of issuing shares of common stock in connection with certain compensation and benefit plans. The Company expects to continue to follow this practice for the foreseeable future. The income tax benefit relating to stock compensation plans provided $1.7 million in cash flow during the first three quarters of 2003 and the company generated an additional $1.8 million in cash from working capital

     Although sales through September 2003 increased 23% in comparison with the corresponding period in 2002, accounts receivable increased only 3% from $31.9 million at December 31, 2002 to $33.0 million at September 30, 2003. This favorable aspect of working capital performance (relative to sales growth) is primarily a result of the reduction in average DSO from 65 days as of December 2002 to 55 days as of September 2003. The Company continues to emphasize rapid billing and collection of its receivables, however, there can be no assurance that the Company will be able to further reduce, or maintain, its average DSO.

     Through the nine months ended September 2003 the Company’s capital expenditures totaled approximately $1.4 million. The Company currently does not expect a significant change in its level of capital expenditures.

     In connection with the aforementioned stock repurchase policies, the Company repurchased a total of 358,096 common shares totaling approximately $8.1 million. Of this total, $0.2 million was repurchased in exchange for promissory notes. Year-to-date principal payments on promissory notes as of the end of the third quarter of 2003 totaled $1.8 million. Proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $5.4 million.

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

Recent Accounting Pronouncements

     The Company adopted the following Statements of Financial Accounting Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting for acquired business using the purchase method of accounting; SFAS 142, which addressees accounting for acquired goodwill and other intangible assets; SFAS 143, which addresses accounting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs; and SFAS 144, which addresses the impairment or disposal of long-lived assets. Adoption of these standards did not have a material effect on the Company’s financial position or results of operations.

     During December 2002, the Financial Accounting Standards Board (FASB) issued SFAS 148, which provides alternative transition methods for companies adopting a voluntary change to the fair value method of accounting for stock-based compensation. SFAS 148 also requires enhanced disclosure regarding the method of accounting and the effect of the method used on reported results of operations. SFAS 148 is effective for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 in December

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2002, and has elected to continue to account for its stock-based compensation under the intrinsic value method.

     In November 2002, the FASB issued FASB Interpretation (FIN) 45, which requires disclosures about obligations under certain guarantees issued by the Company, and which requires recognition of a liability for the fair value of the obligation undertaken in issuing the guarantee. The liability recognition provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002, and the disclosure provisions are effective for interim or annual fiscal periods ending after December 15, 2002. Adoption of FIN 45 did not have a material effect on the Company’s financial position or results of operations.

     In January 2003, the Company adopted SFAS 146, which addresses accounting for costs associated with exit or disposal activities. In addition, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after June 15, 2003. Adoption of these statements did not have a material effect on the Company’s financial position or results of operations

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

Effects of Federal Funding for Defense Programs

     The Company continues to derive over 90% of its revenues from contracts with U.S. Government agencies. The Company’s government contracts may be terminated, in whole or in part, at the convenience of the customer (as well as in the event of default). In the event of a termination for convenience, the customer is generally obligated to pay the costs incurred by the Company under the contract plus a fee based upon work completed. Through the first three quarters of 2003 there has been one contract terminated for the convenience of the U.S. Government. The total contract value of this contract was $0.1 million. This termination did not have a material effect on the Company’s financial condition or results of operations. The Company does not anticipate any additional termination of programs or contracts in 2003. However, no assurances can be given that such events will not occur.

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

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Forward-Looking Statements

     All statements in this report that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent the Company’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, many of which are outside the Company’s control. These factors could cause our actual results, performance, achievements or industry results to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements. These factors are described in more detail in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, and such other filings that the Company makes with the SEC from time to time. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

Item 3 Quantitative and Qualitative Disclosures about Market Risk

Refer to item 7A in the Company’s Annual Report on Form 10-K for the year ended December 29, 2002.

Item 4 Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

     Management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 28, 2003. Based on the results of this evaluation, management believes that such controls and procedures are operating effectively.

(b)

Changes in Internal Controls

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

Part II OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 2 Changes in Securities and Use of Proceeds

     Not Applicable

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Item 3 Defaults Upon Senior Securities

     Not Applicable

Item 4 Submission of Matters to a Vote of Security Holders

     Not Applicable

Item 5 Other Information

     Not Applicable

Item 6 Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)		Reports on Form 8-K
		On July 22, 2003, SPARTA, Inc issued a memorandum to its stockholders and its employees dated July 21, 2003 regarding “Second Quarter 2003 Report and Stock Price Evaluation” reporting (1) the establishment of the price of its common stock at $24.57 per share, and (2) revenues and net income for the fiscal quarter ended June 30, 2003. Pursuant to the Commission’s regulations, the foregoing information was reported on Form 8-K filed July 23, 2003.

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Signature

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

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Exhibit Index

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