UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED –For the quarterly period endedDecember 31, 2003September 30, 2004

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIODFromFor the transition period from                   to                   

Commission File number1-1000

SPARTON CORPORATION

Ohio

38-1054690

2400 East Ganson Street, Jackson, Michigan 49202

(517) 787- 8600

Indicate by checkmark 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 (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.                                                                                                                     [X] Yes þ[  ] Noo

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Common Stock, $1.25 Par Value —8,345,303Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofJanuary 31, 2004. the latest practical date.

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SPARTON CORPORATION AND SUBSIDIARIES

SPARTON CORPORATION & SUBSIDIARIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

—The following is a summary of the Company’s accounting policies not discussed elsewhere within this report.

Basis of presentation —The accompanying unaudited Condensed Consolidated Financial Statements of Sparton Corporation and all active subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. All significant intercompany transactions and accounts have been eliminated. The Condensed Consolidated Balance Sheet at December 31, 2003,September 30, 2004, and the related Condensed Consolidated Statements of Operations and Cash Flows for the three-month and six-month periods ended December 31,September 30, 2004 and 2003, and 2002, and cash flows for the six-month periods ended December 31, 2003 and 2002, are unaudited, but include all adjustments (consisting of normal recurring accruals) which the Company considers necessary for a fair presentation of such financial statements. Certain reclassificationsreclassification of prior period amounts have been made to conform to the current presentation. Operating results for the three-month and six-month periodsperiod ended December 31, 2003,September 30, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2004.2005.

The balance sheet at June 30, 2003,2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.2004.

Operations —The Company provides design and electronic manufacturing services, which include a complete range of engineering, pre-manufacturing and post-manufacturing services. Capabilities range from product design and development through after marketaftermarket support. FacilitiesAll facilities are registered to ISO 9001.9001, with many having additional certifications. The Company’s operations are in one line of business, electronic contract manufacturing services (EMS). Products and services include complete “Box Build” products for Original Equipment Manufacturers, microprocessor-based systems, transducers, printed circuit boards and assemblies, sensors and electromechanical devices. Markets served are in the telecommunications, medical/scientific instrumentation, electronics, aerospace, and other industries, with a focus on regulated markets. The Company also develops and manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S. Navy and other free-world countries. Many of the physical and technical attributes in the production of sonobuoys are the same as those required in the production of the Company’s other electrical and electromechanical products and assemblies.

Use of estimates —Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the disclosure of assets and liabilities and the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue recognition—The Company’s net sales are comprised primarily of product sales, with supplementary revenues earned from engineering and design services. Standard contract terms are FOB shipping point. Revenue from product sales is generally recognized upon shipment of the goods; service revenue is recognized as the service is performed or under the percentage of completion method, depending on the nature of the arrangement. Long-term contracts relate principally to government defense contracts. These contracts are accounted for based on completed units accepted and their estimated average contract cost per unit. Development contracts are accounted for based on percentage of completion. Costs and fees billed under cost-reimbursement-type contracts are recorded as sales. A provision for the entire amount of a loss on a contract is charged to operations as soon as the loss is determinable. Shipping and handling costs are included in costs of goods sold.

Market risk exposure —The Company manufactures its products in the United States and Canada. Sales of the Company’s products are in the U.S. and Canada, as well as other foreign markets. The Company is potentially subject to foreign currency exchange rate risk relating to intercompany activity and balances, receipts from customers, and payments to suppliers in foreign currencies. Also, adjustments related to the translation of the Company’s Canadian financial statements into U.S. dollars are included in current earnings. As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currency and, historically, foreign currency gains and losses related to intercompany activity and balances have not been significant. The Company does not consider the market risk exposure relating to currency exchange to be material.

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The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, the interest rate risk is not considered to be material.

New accounting standards —In December 2003,2002, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial Accounting StandardsSFAS No. 132 Revised148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 132(R)), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”148), which amends SFAS Nos. 87, 88, and 106.No. 123, “Accounting for Stock-Based Compensation.” The revised Statement retainsamendment permits two additional transition methods for a voluntary change to the disclosure requirements contained infair value based method of accounting for stock-based compensation. In addition, SFAS No. 132, which it replaces, and requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. The Company will follow148 amends the disclosure requirements of SFAS No. 132(R), which is123 to require more prominent and frequent disclosures about the effects of stock-based compensation. SFAS No. 148 was effective for the Company beginning inCompany’s fiscal year end June 30, 2003. SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the third quarterfair value of fiscal 2004, which ends March 31, 2004.

Stock options —The Company followsstock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”Employees,” and related Interpretations (APB 25), and provide pro forma net income and earnings per share disclosures for employee stock compensation as if the fair-value-based method defined in SFAS No. 123 had been applied.

If the Company were to start expensing stock options immediately, the applicable accounting rules would be those prescribed by SFAS 123, which require the use of fair value to report stock option expense. However, the FASB has proposed new rules that would replace SFAS 123, and those new rules, if adopted as proposed, would require companies to expense stock options and, for the Company, would be effective beginning in the first quarter of fiscal 2006. The Company will fully comply once final rules are published and effective. It is expected that these new rules will be different than SFAS 123. Differences between the two rules could include the tax accounting for stock options, the pattern and timing of recording each stock option’s expense, accounting for option plan modifications and share cancellations. Given that these new rules are not final, the Company believes that expensing stock options using SFAS 123 and then changing to the FASB’s new rules when finalized would confuse users of our financial statements. Therefore, given the changes under consideration by the FASB, the Company believes it is appropriate to await the official pronouncement of the FASB before changing its formal accounting method on this subject. The Company does not expect the final pronouncement to have a significant impact on results of operations or financial position.

Periodic benefit cost —The Company follows the disclosure requirements of SFAS No. 132 (R). For the three months ended September 30, 2004, $132,000 of expense had been recorded. Total net periodic benefit cost for fiscal 2005 is expected to be $528,000. The components of net periodic pension expense for each of the periods presented were as follows:

Stock options —The Company follows APB 25 and related Interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized as the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant. The Company follows the disclosure requirements of SFAS No.123 “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting148.

The Company has an incentive stock option plan under which 760,000 common shares were reserved for Stock-Based Compensation-Transitionoption grants to key employees and Disclosure.”directors at the fair market value of the stock at the date of the grant. As of September 30, 2004, there were 558,136 shares under option outstanding with prices ranging from $3.40 to $9.35, a weighted contracted life of 2.60 years, and a weighted average exercise price of $6.10. The following table summarizes information about stock options outstanding and exercisable at September 30, 2004:

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At December 31, 2003, theSeptember 30, 2004 exercisable options and per share weighted average exercise price of options outstanding was $6.04. The weighted averagewere 307,136 and $5.72, respectively. At September 30, 2004, remaining contractual life of those options was approximately 3 years. At December 31, 2003, there were 280,996 options exercisable at the weighted average per share price of $5.52. Remaining shares available for grant under the plan were 186,441 at December 31, 2003.186,472.

The following sets forth a reconciliation of net income (loss) and earnings (loss) per share information for the three months ended September 30, 2004 and six months ended December 31, 2003, and 2002, as if the Company had recognized compensation expense based on the fair value at the grant date for awards under the plan. For purposes of computing pro forma net income (loss), the fair value of each option grant is estimated on the date of grant using the Black-Scholes optionsoption pricing model.

4. COMPREHENSIVE INCOME (LOSS)

—Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net of tax, on investment securities owned and investment securities held by an investee accounted for by the equity method, which are excluded from net income. TheyUnrealized gains and losses, net of tax, are however, reflected as a direct charge or credit to shareowners’ equity. Total comprehensive income (loss) is as follows for the three-month and six-month periods ended December 31:September 30, 2004 and 2003, respectively:

6. COMMITMENTS AND CONTINGENCIES

—One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been involved with ongoing environmental remediation since the early 1980’s. At December 31, 2003,September 30, 2004, Sparton has accrued $7,372,000$7,072,000 as its estimate of the minimum future undiscounted financial liability, of which $693,000$599,000 is classified as a current liability and included in accrued liabilities. Amounts charged to operations, principally legal and consulting fees, for the sixthree months ended December 31,September 30, 2004 and 2003 were $84,000 and 2002 were $137,000 and $270,000,$74,000, respectively. These costs were generally incurred in pursuit of various claims for reimbursement/recovery. The Company’s minimum cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment, operating, and continued monitoring costs for onsite and offsite pump and treat containment systems.

During the first quarter ofIn fiscal 2003, Sparton reached an agreement with the United States Department of Energy (DOE) and others to recover certain remediation costs. Under the settlement terms, Sparton received $4,850,000 fromcash and the DOE and others in fiscal 2003, plus an additional $1,000,000, which was received during the first quarter of fiscal 2004. In addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred from the date of settlement. The financial impact of the settlement was recorded in the first quarter of fiscal 2003 with $5,500,000 recorded as income.

Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable over a continuum of events and activities that help to frame and define a liability. Factors which cause uncertainties for the Company include, but are not limited to, the effectiveness of the current work plans in achieving targeted results and proposals of regulatory agencies for desired methods and outcomes. It is possible that cash flows and results of operations could be significantly affected by the impact of changes associated with the ultimate resolution of this contingency.

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SPARTON CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant events affecting the Company’s earnings and financial condition during the periods included in the accompanying financial statements. Additional information regarding the Company can be accessed via Sparton’s website at www.sparton.com. Information provided at the website includes, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, and the Code of Business Conduct and Ethics, as well as the various committee charters of the Board of Directors. These items are also available, free of charge, by contacting the Company’s Shareowners Relations department. The Company’s operations are in one line of business, electronic contract manufacturing services (EMS). Sparton’s capabilities range from product design and development through aftermarket support, specializing in total business solutions for government, medical,medical/scientific instrumentation, aerospace and industrialindustrial/other markets. This includesThese include the design, development and/or manufacture of electronic parts and assemblies for both government and commercial customers worldwide. Governmental sales are mainly sonobuoys.

The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the disclosures of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This report on Form 10-Q contains forward-looking statements within the scope of the Securities Act Exchange of 1933 and the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,” “plans,” and similar expressions, and the negatives of such expressions, are intended to identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (SEC). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below. Accordingly, Sparton’s future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. The Company notes that a variety of factors could cause the actual results and experience to differ materially from anticipated results or other expectations expressed in the Company’s forward-looking statements.

Sparton, as a high-mix, and mid-volumelow to medium-volume supplier, provides rapid product turnaround for customers. High-mix pertains to customers needing multiple product types with generally lower volume manufacturing runs. As a contract manufacturer with customers in a variety of markets, the Company has substantially less visibility of end user demand and, therefore, forecasting sales can be problematic. Customers may cancel their orders, change production quantities and/or reschedule production for a number of reasons. Depressed economic conditions may result in customers delaying delivery of product, or the placement of purchase orders for lower volumes than previously anticipated. Unplanned cancellations, reductions, or delays by customers may negatively within certain ranges, impact the Company’s results of operations. As many of the Company’s costs and operating expenses are relatively fixed within given ranges of production, a reduction in customer demand can disproportionately affect the Company’s gross margins and operating income. The majority of the Company’s sales have historically come from a limited number of customers. Significant reductions in sales to, or a loss of, one of these customers could materially impact business if the Company were not able to replace those sales with new business.

Other risks and uncertainties that may affect operations, performance, growth forecasts and business results include, but are not limited to, timing and fluctuations in U.S. and/or world economies, competition in the overall EMS business, availability of production labor and management services under terms acceptable to the Company, Congressional budget outlays for sonobuoy development and production, Congressional legislation, foreign currency exchange rate risk, uncertainties associated with the costs and benefits of new facilities and the closing of others, uncertainties associated with the outcome of litigation, changes in the interpretation of environmental laws and the uncertainties of environmental remediation. A further risk factor is the availability and cost of materials. The Company has encountered availability and extended lead time issues on some electronic components in the past when market demand has been strong, which have resulted in higher prices and late deliveries. Additionally, the timing of sonobuoy sales to the U.S. Navy is dependent upon access to the test range and successful passage of product tests performed by the U.S. Navy. Reduced governmental budgets have made access to the test range less predictable and less frequent than in the past. Finally, the Sarbanes-Oxley Act of 2002 has required changes in, and formalization of, some of the Company’s Corporatecorporate governance and compliance practices. The SEC and New York Stock Exchange have also have passed new rules and regulations requiring additional compliance activities. Compliance with these rules has increased legal and accountingadministrative costs, and it is expected that certain of these costs will continue indefinitely. Management cautions readers not to place undue reliance on forward-looking statements, which are subject to influence by the enumerated risk factors as well as unanticipated future events.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.

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RESULTS OF OPERATIONS

Three-Month Periods

Sales for the three-month period ended December 31, 2003,September 30, 2004, totaled $33,240,000, a decrease$45,188,000, an increase of $10,039,000 (23%$8,763,000 (24.1%) from the same quarter last year. Government sales declined $5,662,000 (47%)increased slightly, and included $4.7 million of a delayed sonobuoy sale originally anticipated to $6,385,000. This decline is principallyship in fiscal 2004. Government sales were lower than anticipated due to technical difficulties with one sonobuoy contract. Additional information regarding issues affecting government sales is includedproduction interruptions at the Company’s Florida facilities, as several tropical storms disrupted operations in the Company’s discussionfirst quarter of operations for the six-month period ended December 31, 2003, which follows.

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contract that had experienced technical problems. In addition, as manythe prior year’s margin included a redesign effort on an existing product line, which resulted in a charge to operations of $496,000. The majority of the Company’s costs and operating expenses are fixed, a reduction in customer demand, as evidenced above, depresses gross profit and operating income. Sellinglowered selling and administrative expenses, have increased slightly from the prior year period. Most of this increase was due to higher bid and proposal and research and development activities, primarily related to government programs. While these expenses have shown a larger increase as a percentage of sales, was due to the significant increase in sales for the first quarter of fiscal 2005, compared to the same period last year, without a related increase in these expenses. In addition, bid and proposal and unreimbursed research and development expenses for fiscal 2005 declined $340,000 from the prior year, many expenses in this area are generally fixed, within ranges, and do not fluctuate directly based on sales volume.same period last year.

Interest and Investment Incomeinvestment income decreased $62,000$15,000 to $123,000$215,000 in 2003.2004. This reduction was due to reduceddecreased funds available for investment, as well as $56,000investment. Other income-net in 2004 was $358,000, versus expense of realized losses which occurred upon the sale of securities$69,000 in December 2003. Proceeds from the sale of securities were used to purchase a new facility in Albuquerque, New Mexico (see “Liquidity and Capital Resources”). Other Expense-Net in 2003 was $250,000 versus $61,000 in 2002. Other Expense-Net in 2003 includes a charge of $418,000 for insurance charges related to Sparton’s previously owned automotive segment. These charges are for the settlement of a previously disputed claim. Translation adjustments, along with gains and losses from foreign currency transactions, are included in current earningsother income and, in the aggregate, amounted to incomea gain of $184,000$361,000 and a loss of $10,000 during the three months ended December 31, 2003.September 30, 2004 and 2003, respectively. Other expense-net in 2003 includes $60,000 of charges for the Company’s previously owned automotive segment.

Due to factors described above, the Company reported a loss of $1,516,000 ($(0.18) per share) for the three months ended December 31, 2003, versus net income of $2,178,000$2,414,000 ($0.260.29 per share, basic and diluted) for the corresponding period last year.

Six-Month Periods

Sales for the six-month period ended December 31, 2003, totaled $69,665,000, a decline of $10,382,000 (13%), as compared to the same period in the prior year. All markets, with the exception of aerospace, are down from the same period last prior year. Government sales were $16,685,000 for the sixthree months ended December 31, 2003, as compared to $22,876,000 for the prior year period, a decline of 27%. Medical/scientific instrumentation sales were $9,046,000 for the six months ended December 31, 2003, as compared to $9,789,000 for the prior year period, a decline of 8%. Industrial sales were $17,920,000 for the six months ended December 31, 2003, as compared to $26,021,000 for the prior year period, a decline of 31%. While other markets have declined, aerospace sales have increased by $4,653,000 (22%) to $26,014,000 from the prior year period. Government sales declined from last year in part due to limited test range availability, and the resulting decline in sonobuoy sales to the U.S. Navy. The limited access to test facilities in the first quarter of the year, along with technical and production issues, resulted in reduced sales through December 31, 2003. Technical difficulties have resulted in reduced sales and margins in the production of a current sonobuoy contract. Two additional sonobuoy contracts also encountered difficulties, with the resulting delays further depressing sales. Increased costs on these two sonobuoys contracts adversely impacted operating margins by $597,000. Industrial sales have declined sharply due to reduced sales for homeland security. Prior year’s sales benefited from strong demand for homeland security products, principally driven by the installation of detection equipment in U.S. and Canadian airports. These sales totaled approximately $.8 million in fiscalSeptember 30, 2004, compared to approximately $15 million last year. This decrease in the industrial market was partially offset by increased sales to existing customers.

The majority of our sales come from a small number of customers. Sales to our 6 largest customers, including government sales, accounted for approximately 75% of net sales in both periods. Four of the customers, including government, were the same both years. One of these customers, with 25% and 16% of the sales as of December 31, 2003 and 2002, respectively, is comprised of six separate facilities.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2003.2004. The preparation of these financial statements requires management to make estimates assumptions, and judgementsassumptions that affect the amounts reported of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are regularly evaluated including those related to allowance for doubtful accounts, inventories and contingencies. Estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results maycould differ from these estimates. The following criticalCompany believes that of its significant accounting policies, affect the more significant judgementsfollowing involve a higher degree of judgment and estimates used in the preparation of the Company’s consolidated financial statements.complexity.

Environmental Contingencies

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been the subject of ongoing investigations and remediation efforts conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). Sparton has accrued its estimate of the minimum future non-discounted financial liability. The estimate was developed using existing technology and excludes legal and related consulting costs. The minimum cost estimate includes equipment, operating and monitoring costs for both onsite and offsite remediation. Sparton recognizes legal and consulting services in the periods incurred and reviews its EPA accrual activity quarterly. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. It is possible that cash flows and results of operations could be materially affected by the impact of changes in these estimates.

Government Contract Cost Estimates

Government production contracts are accounted for based on completed units accepted with respect to revenue recognition and their estimated average cost per unit regarding costs. Losses for the entire amount of a contract are recognized in the period when such losses are determinable. Significant judgment is exercised in determining estimated total contract costs including, but not limited to, cost experience to date, estimated length of time to contract completion, costs for materials, production labor and support services to be expended, and known issues on remaining units to be completed. Estimated costs developed in the early stages of contracts can change significantly as the contracts progress, and events and activities take place. Significant changes in estimates can also occur when new designs are initially placed into production. The Company formally reviews its costs incurred-to-date and estimated costs to complete on all significant contracts on a quarterly basis. Revisedbasis and revised estimated total contract costs are reflected in the financial statements. Depending upon the circumstances, it is possible that the Company’s financial position, results of operations, and cash flows could be materially affected by changes in estimated costs to complete on one or more significant contracts.

Commercial Inventory Valuation Allowances

The establishment of inventoryInventory valuation allowances for commercial customer inventories requiresrequire a significant degree of judgment and isare influenced by the Company’s experience to date with both customers and other markets, prevailing market conditions for raw materials, contractual terms and customers’ ability to satisfy these obligations, environmental or technological materials obsolescence, changes in demand for customer products, and other factors resulting in acquiring materials in excess of customer product demand. Contracts with some commercial customers may be based upon estimated quantities of product manufactured for shipment over estimated time periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demand for products frequently changes, sometimes creating excess and obsolete inventories.

The Company regularly reviews raw material inventories by customer for both excess and obsolete quantities, with adjustments made accordingly. Wherever possible, the Company attempts to recover its full cost of excess and obsolete inventories from customers or, in some cases, through other markets. When it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income and a valuation allowance is established for the difference between the carrying cost and the estimated realizable amount. Conversely, should the disposition of

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Allowance for Possible Losses on Receivables

The accounts receivable balance is recorded net of allowances for amounts not expected to be collected from customers. The Company maintains an allowance for possible estimated losses on receivables. The allowance is estimated based on historical experience of write-offs, the level of past due amounts, information known about specific customers with respect to their ability to make payments, and future expectations of conditions that might impact the collectibility of accounts. Accounts receivable are generally due under normal trade terms for the industry. Credit is granted, and credit evaluations are periodically performed, based on a customers’ financial condition and other factors. Although the Company does not generally require collateral, cash in advance or letters of credit may be required from customers in certain circumstances, including some foreign customers. When management determines that it is probable that an account will not be collected, it is charged against the allowance for possible losses. The Company reviews the adequacy of its allowance monthly. The allowance for doubtful accounts was $825,000$125,000 and $739,000$46,000 at December 31September 30, 2004 and June 30, 2003,2004, respectively. If the financial conditions of customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Given the Company’s significant balance of government receivables and letters of credit from foreign customers, collection risk is considered minimal. Historically, uncollectible accounts have been insignificant and the minimal allowance is deemed adequate.

Pension Obligations

The Company calculates the cost of providing pension benefits under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87. The key assumptions required within the provisions of SFAS No. 87 are used in making these calculations. The most significant of these assumptions are the discount rate used to value the future obligations and the expected return on pension plan assets. The discount rate is consistent with market interest rates on high-quality, fixed income investments. The expected return on assets is based on long-term returns and assets held by the plan, which is influenced by historical averages. If actual interest rates and returns on plan assets materially differ from the assumptions, future adjustments to the financial statements would be required. While changes in these assumptions can have a significant effect on the pension benefit obligations reported in the Condensed Consolidated Balance Sheets and the unrecognized gain or loss accounts, the effect of changes in these assumptions is not expected to have a significantthe same relative effect on net periodic pension costsexpense in the near term. While these assumptions may change in the future based on changes in long-term interest rates and market conditions, there are no known expected changes in these assumptions as of December 31, 2003.September 30, 2004. As indicated above, to the extent the assumptions differ from actual results, there would be a future impact on the financial statements. The extent to which this will result in future expense is not determinable at this time as it will depend upon a number of variables, including trends in interest rates and the actual return on plan assets. For example, an increase in the return on the plan assets due to improved market conditions would reduce the unrecognized loss account and thus reduce future expense. While net periodic pension expense has increased during the past two years, no cash payments are expected to be required for the next several years due to the plan’s funded status.

OTHER

LITIGATION

One of Sparton’s facilities, located in Albuquerque, New Mexico, has been the subject of ongoing investigations conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). The investigation began in the early 1980’s and involved a review of onsite and offsite environmental impacts.

At December 31, 2003,September 30, 2004, Sparton has accrued $7,372,000$7,072,000 as its estimate of the future undiscounted minimum financial liability related to this site. The Company’s cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment and operating costs for onsite and offsite operations and is based on existing methodology. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable over a continuum of events and activities that help to frame and define a liability. It is possible that cash flows and results of operations could be affected by the impact of the ultimate resolution of this contingency.

Sparton is currently involved with two legal actions, which are disclosed in Part II —- “Other Information, Item 1. Legal Proceedings” of this report. At this time, the Company is unable to predict the amountoutcome of recovery, if any, that may result from the pursuiteither of these claims.

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Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK EXPOSURE

The Company manufactures its products in the United States and Canada. Sales are to the U.S. and Canada, as well as other foreign markets. The Company is potentially subject to foreign currency exchange rate risk relating to intercompany activity and balances and to receipts from customers and payments to suppliers in foreign currencies. Also, adjustments related to the translation of the Company’s Canadian financial statements into U.S. dollars are included in current earnings. As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currency and, historically, foreign currency gains and losses related to intercompany activity and balances have not been significant. The Company does not consider the market risk exposure relating to currency exchange to be material.

The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, the interest rate risk is not considered to be material.

Item 4. CONTROLS AND PROCEDURES

The Company maintains internal controls over financial reporting intended to provide reasonable assurance that all material transactions are executed in accordance with properCompany authorization, and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. The Company also maintains a system of disclosure controls and procedures to ensure that information required to be disclosed in Company reports, filed or submitted under the Securities Exchange Act of 1934, is properly reported in the Company’s periodic and other reports.

As of December 31, 2003,September 30, 2004, an evaluation was updated by the Company’s management, including the CEO and CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures continue to be effective as of December 31, 2003.September 30, 2004. There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGSLegal Proceedings

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been involved with ongoing environmental remediation since the early 1980’s. At December 31, 2003,September 30, 2004, Sparton has accrued $7,372,000$7,072,000 as its estimate of the minimum future undiscounted financial liability, of which $693,000$599,000 is classified as a current liability and included in accrued liabilities. The Company’s minimum cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment, operating, and continued monitoring costs for onsite and offsite pump and treat containment systems.

Factors which cause uncertainties forwith respect to the CompanyCompany’s estimate include, but are not limited to, the effectiveness of the current work plans in achieving targeted results and proposals of regulatory agencies for desired methods and outcomes. It is possible that cash flows and results of operations could be significantly affected by the impact of changes associated with the ultimate resolution of this contingency. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable over a continuum of events and activities that help to frame and define a liability. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of this contingency.

During the first quarter ofIn fiscal 2003, Sparton reached an agreement with the United States Department of Energy (DOE) and others to recover certain remediation costs. Under the settlement terms, Sparton received $4,850,000 fromcash and the DOE and others in fiscal 2003, plus an additional $1,000,000, which was received during the first quarter of fiscal 2004. In addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred from the date of settlement. The financial impact of the settlement was recorded in the first quarter of fiscal 2003 with $5,500,000 recorded as operating income.

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In 1995, Sparton Corporation and Sparton Technology, Inc. filed a Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance Company demanding reimbursement of expenses incurred in connection with its remediation efforts at the Coors Road facility based on various primary and excess comprehensive general liability policies in effect between 1959 and 1975. In 1999, the Complaint was amended to add various other excess insurers, including certain London market insurers and Fireman’s Fund Insurance Company. The case remains in pretrial activity.

In September 2002, Sparton Technology, Inc. (STI) filed an action in the U.S. District Court for the Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October 21, 2002, the defendants filed a counterclaim seeking money damages, alleging that STI breached its duties in the manufacture of products for the defendants. The defendant Util-Link has asked for damages in the amount of $25,000,000 for lost profits. The defendant NRTC has asked for damages in the amount $20,000,000 for the loss of its investment in and loans to Util-Link. Sparton has had an opportunity to fully review the respective claims and believes that the damages sought by NRTC are included in Util-Link’s claim for damages and, as such, are duplicative. Sparton also believes the counterclaim to be without merit and intends to vigorously defend against it. This case isThese claims are now in the discoverypretrial stage.

At this time, the Company is unable to predict the amountoutcome of recovery, if any, that may result from the pursuiteither of these two claims.

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

At the October 15, 2004, Special Meeting of Shareholders of Sparton Corporation, a continuation of the September 24, 2004, meeting, a total of 7,958,235 of the Company’s shares were present or represented by proxy at the meeting. This represented more than 95% of the Company’s shares outstanding. Total shares outstanding and eligible to vote were 8,351,538, of which 393,303 did not vote.

•		The proposal to eliminate cumulative voting in the election of directors was approved, with 5,607,704 shares voting for, 2,335,140 shares voting against, and 15,391 shares abstaining.
•		The proposal to require timely written notice of shareholder nominations for the election of directors was approved, with 5,783,636 shares voting for, 2,162,807 shares voting against, and 11,792 shares abstaining.

Item 6. EXHIBITS AND REPORTS ON FORM 8-KExhibits

(a)

Exhibits

	3 & 43.1		Amended Articles of Incorporation of the Registrant are filed herewith and attached.
3.2		Amended Code of Regulation of the Registrant are filed herewith and attached.
3.3		The amended By-Laws of the Registrant were filed on Form 10-Q for the three-monthnine-month period ended September 30, 2002,March 31, 2004, and are incorporated hereinherewith by reference.
			Amended By-laws of the Registrant were filed on Form 10-Q for the three-month period ended December 31, 2000, and are incorporated herein by reference.
			Amended Code of Regulation of the Registrant were filed with Form 10-Q for the three-month period ended September 30, 1982, and are incorporated herein by reference.
	31.1		Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K filed in the second quarter of fiscal 2004:

SIGNATURES

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

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