**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended June 30, 2006**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition periodfrom                       to                       **

**Commissionfile number 1-8533**

----

****

**DRS Technologies, Inc.**

(Exact name of registrantas specified in its charter) 

| **Delaware**                                                    | **13-2632319**                     |
|-----------------------------------------------------------------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (IRS Employer  Identification No.) |

 

**5 Sylvan Way, Parsippany,New Jersey 07054**

**(Address of principal executiveoffices)**

**(973) 898-1500**

(Registrant’s telephonenumber, including area code)

----

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities and Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer x               AcceleratedFiler o               Non-acceleratedfiler o

Indicated by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

| Class                              | ** ** | **Outstanding at August 3, 2006** |
|------------------------------------|------------|----------------------------------------|
| Common Stock—$0.01  par value |       | 40,166,053                             |

 

 

----

**DRS TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**Indexto Quarterly Report on Form 10-Q**

**For the Quarter Ended June 30,2006**
|            | ** ** | ** **                                                                                  | ** ** | **Page** |
|------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|       |       | **PART I—FINANCIAL  INFORMATION**                                                 |       |     |   |
| Item 1.    |       | Financial Statements (unaudited)                                                            |       |     |   |
|       |       | Consolidated Balance  Sheets—June 30, 2006 and March 31, 2006                |       | 1        |   |
|       |       | Consolidated Statements of  Earnings—Three Months Ended June 30, 2006 and 2005    |       | 2        |   |
|       |       | Consolidated Statements of  Cash Flows—Three Months Ended June 30, 2006 and 2005  |       | 3        |   |
|       |       | Notes to the Consolidated Financial  Statements                                             |       | 4        |   |
| Item 2.    |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       | 28       |   |
| Item 3.    |       | Quantitative and Qualitative  Disclosure about Market Risk                                  |       | 39       |   |
| Item 4.    |       | Controls and Procedures                                                                     |       | 39       |   |
|       |       | **PART II—OTHER  INFORMATION**                                                    |       |     |   |
| Item 1.    |       | Legal Proceedings                                                                           |       | 40       |   |
| Item 1A.   |       | Risk Factors                                                                                |       | 42       |   |
| Item 6.    |       | Exhibits                                                                                    |       | 42       |   |
| Signatures |       | 43                                                                                          |       |

 

----

**PART I—FINANCIALINFORMATION**

**Item 1.**                        Financial Statements

**DRS TECHNOLOGIES, INC. ANDSUBSIDIARIESConsolidated Balance Sheets(in thousands, except share data)(Unaudited)**

| ** **                                                                                                                                                                   | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| **Assets**                                                                                                                                                                   | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current assets                                                                                                                                                               |       |              |       |               |       |
| Cash and cash  equivalents                                                                                                                                                   |       | $                 | 43,782     |               | $          | 1,293 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $1,506 and $1,668 as of June 30,  2006 and March 31, 2006, respectively                            |       | 454,293           |       | 432,678            |       |
| Inventories, net                                                                                                                                                             |       | 334,752           |       | 331,206            |       |
| Prepaid expenses,  deferred income taxes and other current assets                                                                                                            |       | 137,874           |       | 135,613            |       |
| Total current assets                                                                                                                                                         |       | 970,701           |       | 900,790            |       |
| Property, plant and  equipment, less accumulated depreciation of $149,942 and $138,324 at  June 30, 2006 and March 31, 2006, respectively                          |       | 222,356           |       | 220,506            |       |
| Acquired intangible  assets, net                                                                                                                                             |       | 223,420           |       | 231,139            |       |
| Goodwill                                                                                                                                                                     |       | 2,603,713         |       | 2,608,068          |       |
| Deferred income taxes  and other noncurrent assets                                                                                                                           |       | 57,652            |       | 58,616             |       |
| **Total  assets**                                                                                                                                                            |       | $                 | 4,077,842  |               | $          | 4,019,119 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                               | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current liabilities                                                                                                                                                          |       |              |       |               |       |
| Current installments of  long-term debt                                                                                                                                      |       | $                 | 5,253      |               | $          | 4,622 |   |
| Accounts payable                                                                                                                                                             |       | 194,982           |       | 224,673            |       |
| Accrued expenses and  other current liabilities                                                                                                                              |       | 444,873           |       | 471,068            |       |
| Total current  liabilities                                                                                                                                                   |       | 645,108           |       | 700,363            |       |
| Long-term debt,  excluding current installments                                                                                                                              |       | 1,917,109         |       | 1,828,771          |       |
| Other liabilities                                                                                                                                                            |       | 138,497           |       | 138,405            |       |
| **Total  liabilities**                                                                                                                                                       |       | 2,700,714         |       | 2,667,539          |       |
| Commitments and contingencies                                                                                                                                                |       |              |       |               |       |
| Stockholders’ equity                                                                                                                                                    |       |              |       |               |       |
| Preferred stock, $10 par  value per share. Authorized 2,000,000 shares; none issued at  June 30, 2006 and March 31, 2006                                      |       | —            |       | —             |       |
| Common stock, $.01 par  value per share. Authorized 100,000,000 shares; 40,166,097 and 39,912,541  shares issued at June 30, 2006 and March 31, 2006, respectively |       | 402               |       | 399                |       |
| Additional paid-in  capital                                                                                                                                                  |       | 1,073,233         |       | 1,076,786          |       |
| Retained earnings                                                                                                                                                            |       | 297,764           |       | 277,706            |       |
| Accumulated other  comprehensive earnings                                                                                                                                    |       | 5,729             |       | 3,885              |       |
| Unamortized stock  compensation                                                                                                                                              |       | —            |       | (7,196             | )          |
| **Total  stockholders’ equity**                                                                                                                                         |       | 1,377,128         |       | 1,351,580          |       |
| **Total liabilities and stockholders’ equity**                                                                                                                          |       | $                 | 4,077,842  |               | $          | 4,019,119 |   |

 

See accompanying Notes to Consolidated Financial Statements.

1

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Statements of Earnings(in thousands, except per-share data)(Unaudited)**

| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**                | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenue:                                                   |       |                             |       |   |   |
| Product sales                                              |       | $475,891                         |       | $ | 305,983 |   |
| Services                                                   |       | 154,374                          |       | 32,476 |   |
| Totals revenues                                            |       | 630,265                          |       | 338,459 |   |
| Costs and  expenses                                        |       | 565,280                          |       | 303,401 |   |
| Operating income                                           |       | 64,985                           |       | 35,058 |   |
| Interest income                                            |       | 176                              |       | 1,877 |   |
| Interest and  related expenses                             |       | 29,902                           |       | 12,211 |   |
| Other income (expense),  net                               |       | (18                              | )          | 25 |   |
| Earnings before non-controlling interest and income  taxes |       | 35,241                           |       | 24,749 |   |
| Non-controlling  interest                                  |       | 473                              |       | 580 |   |
| Earnings before income taxes                               |       | 34,768                           |       | 24,169 |   |
| Income taxes                                               |       | 13,510                           |       | 10,151 |   |
| Net earnings                                               |       | $                                | 21,258     |   | $ | 14,018 |   |
| **Net  earnings per share of common stock:**               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Basic earnings per share                                   |       | $                                | 0.54       |   | $ | 0.51 |   |
| Diluted earnings per share                                 |       | $                                | 0.52       |   | $ | 0.49 |   |
| **Dividends  per common share**                            |       | $                                | 0.03       |   | $ | 0.03 |   |

 

See accompanying Notes to Consolidated Financial Statements.

2

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(in thousands)(Unaudited)**

| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**                | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Cash Flows from Operating Activities**                                       | ** ** | ** **                       |       | ** ** | ** ** |
| Net earnings                                                                   |       | $                                | 21,258     |   | $ | 14,018 |   |
| Adjustments to reconcile net earnings to cash flows  from operating activities |       |                             |       |   |   |
| Depreciation and  amortization                                                 |       | 19,125                           |       | 10,417 |   |
| Share-based compensation                                                       |       | 2,774                            |       | 165 |   |
| Deferred income taxes                                                          |       | 460                              |       | (522 | ) |
| Inventory reserve and  provision for doubtful accounts                         |       | 1,000                            |       | 946 |   |
| Amortization and  write-off of deferred financing fees                         |       | 1,473                            |       | 952 |   |
| Other, net                                                                     |       | (234                             | )          | 77 |   |
| Changes in assets and liabilities, net of effects  from business combinations: |       |                             |       |   |   |
| Increase in accounts  receivable                                               |       | (20,861                          | )          | (2,453 | ) |
| Increase in inventories                                                        |       | (11,275                          | )          | (7,911 | ) |
| Increase in prepaid  expenses and other current assets                         |       | (6,285                           | )          | (4,102 | ) |
| (Decrease) increase in  accounts payable                                       |       | (30,928                          | )          | 10,450 |   |
| Decrease in accrued  expenses and other current liabilities                    |       | (11,579                          | )          | (30,320 | ) |
| Increase (decrease) in  customer advances                                      |       | 9,550                            |       | (7,207 | ) |
| Increase in pension and  postretirement benefit liabilities                    |       | 53                               |       | 1,433 |   |
| Other, net                                                                     |       | (473                             | )          | (489 | ) |
| **Net  cash used in operating activities**                                     | ** ** | (25,942                          | )          | (14,546 | ) |
| **Cash Flows from Investing Activities**                                       | ** ** | ** **                       |       | ** ** | ** ** |
| Capital expenditures                                                           |       | (13,080                          | )          | (6,336 | ) |
| Payments pursuant to  business combinations, net of cash acquired              |       | (7,688                           | )          | (52,350 | ) |
| Other, net                                                                     |       | 84                               |       | (206 | ) |
| **Net  cash used in investing activities**                                     | ** ** | (20,684                          | )          | (58,892 | ) |
| **Cash Flows from Financing Activities**                                       | ** ** | ** **                       |       | ** ** | ** ** |
| Net borrowings of  short-term debt                                             |       | 918                              |       | — |   |
| Return of advanced  interest on senior subordinated notes                      |       | —                           |       | (1,986 | ) |
| Debt issuance costs                                                            |       | —                           |       | (120 | ) |
| Borrowings of long-term  debt                                                  |       | 89,467                           |       | — |   |
| Repayments of long-term  debt                                                  |       | (783                             | )          | (10,674 | ) |
| Excess tax benefit  realized from share-based payment arrangements             |       | 84                               |       | — |   |
| Proceeds from stock  option exercises                                          |       | 873                              |       | 4,175 |   |
| Dividends paid                                                                 |       | (1,191                           | )          | (829 | ) |
| **Net  cash provided by (used in) financing activities**                       | ** ** | 89,368                           |       | (9,434 | ) |
| **Effect  of exchange rates on cash and cash equivalents**                     |       | (253                             | )          | (328 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                      |       | 42,489                           |       | (83,200 | ) |
| **Cash  and cash equivalents, beginning of period**                            |       | 1,293                            |       | 306,852 |   |
| **Cash and cash equivalents, end of period**                                   | ** ** | $                                | 43,782     |   | $ | 223,652 |   |

 

See accompanying Notes to Consolidated Financial Statements

3

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited)**

**1.**                 Description ofBusiness 

DRS Technologies, Inc.and subsidiaries (hereinafter, DRS or the Company) is a supplier of defenseelectronic products, systems and military support services. The Companyprovides high-technology products and services to all branches of the U.S.military, major aerospace and defense prime contractors, governmentintelligence agencies, international military forces and industrial markets.The Company focuses on several key areas of importance for the U.S. Departmentof Defense (DoD), such as intelligence, surveillance, reconnaissance, powermanagement, advanced communications and network systems. DRS is a provider ofthermal imaging devices, combat display workstations, electronic sensorsystems, power systems, battlefield digitization systems, air combat trainingsystems, mission recorders, deployable flight incident recorders, environmentaland telecommunication systems, aircraft loaders, military trailers andshelters, and integrated logistics support services. The Company also providessupport services to the military, including security and asset protectionsystem services, telecommunication and information technology services,training and logistics support services for all branches of the U.S. armedforces, and certain foreign militaries, homeland security forces and selectedgovernment and intelligence agencies.

The Company operates inthree principal operating segments on the basis of products and servicesoffered. Each operating segment is comprised of separate and distinct businesses.Our segments are: the Command, Control, Communications, Computers andIntelligence (C4I) Group, the Surveillance & Reconnaissance (SR) Groupand the Sustainment Systems & Services (S3) Group. All otheroperations, primarily our Corporate Headquarters, are grouped in Other.

**2.**                 Basis ofPresentation

The accompanying unauditedConsolidated Financial Statements of DRS Technologies, Inc., itswholly-owned subsidiaries and a partnership of which DRS owns an 80%controlling interest (hereinafter, DRS or the Company) have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. In the opinion of the Company, the interim consolidated financialinformation provided herein reflects all adjustments (consisting of normal andrecurring adjustments) necessary for a fair presentation of the Company’sconsolidated financial position as of June 30, 2006, the results of itsoperations for the three-month periods ended June 30, 2006 and 2005,and its cash flows for the three-month periods ended June 30, 2006 and2005. The results of operations for the three-month period ended June 30,2006 are not necessarily indicative of the results to be expected for the fullyear. Certain fiscal 2006 amounts have been reclassified to conform to thefiscal 2007 presentation. These interim Consolidated Financial Statementsshould be read in conjunction with the Consolidated Financial Statements of theCompany for the fiscal year ended March 31, 2006, included in the Company’sfiling on Form 10-K for the year ended March 31, 2006.

The fiscal year-endconsolidated balance sheet data was derived from the Company’s auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. 

**3.**                 Acquisitions

On January 31, 2006,DRS completed its acquisition of Engineered Support Systems, Inc. (ESSI)for $1.93 billion in cash and DRS common stock. In the transaction, awholly-owned subsidiary of DRS was merged with ESSI, with the ESSI operatingunits forming DRS’s third operating segment—the S3 Group. ESSI, formerly headquarteredin St. Louis, Missouri, is a supplier of integrated military electronics, 

4

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

supportequipment and technical services focused on advanced sustainment and logisticssupport solutions for all branches of the U.S. armed services, major primedefense contractors, certain international militaries, homeland security forcesand selected government and intelligence agencies. ESSI also producesspecialized equipment and systems for commercial and industrial applications.The results of ESSI have been included in our financial statements since thedate of acquisition.

Inaccordance with EITF 95-3 “Recognition of Liabilities in Connection with aPurchase Business Combination”, the Company recorded a $5.7 million liabilityin the preliminary purchase price allocation in connection with a plan toinvoluntarily terminate approximately 190 employees of ESSI, as well as exit certainleased facilities. The Company is currently in the process of evaluatingadditional restructuring actions and management anticipates finalizing its plansin the second quarter of fiscal 2007 with the payments being substantiallycomplete by the fourth quarter of fiscal 2007.

| ** **                                   | ** ** | **Balance at**     | ** ** | **Three Months Ended** | ** ** | **Balance at** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **March 31,**      | ** ** | **June 30, 2006**      | ** ** | **June 30,**   | ** ** |
| ** **                                   | ** ** | **2006**                | ** ** | **Additions**                    | ** ** | **Payments**        | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Employee  severance and termination benefits |       |                    | $          | 5,129                            |       |                |       | $ | — |   |   |   | $ | (3,151 | ) |   |   | $ | 1,978 |   |   |
| Facility and  other exit costs               |       |                    | —     |                             |       |                | 554        |   |   |   | — |   |   |   | 554 |   |   |
| Total                                        |       |                    | $          | 5,129                            |       |                |       | $ | 554 |   |   |   | $ | (3,151 | ) |   |   | $ | 2,532 |   |   |

 

The Company is in theprocess of obtaining a third-party valuation of certain assets and liabilities,including acquired intangible assets and finalizing its own internal assessmentof the purchase price allocation; thus, the preliminary allocation of purchaseprice will change, and such change could be material. Our preliminary purchaseprice allocation as of June 30, 2006 has not changed materially from theallocation included in Note 2 to the Company’s consolidated financialstatements for the fiscal year ended March 31, 2006. The Companyanticipates completing the purchase price allocation in the third quarter offiscal 2007.

**4.**                 Share-BasedCompensation

**Adoption of SFAS 123R  ****In December 2004, the FinancialAccounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R replaces SFAS No. 123, “Accounting forStock-Based Compensation”, (SFAS No. 123) and supercedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (APBNo. 25). SFAS 123R addresses the accounting for transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS 123R requires companies to recognizecompensation cost in an amount equal to the fair value of share-based awardsexpected to vest.**

On April 1, 2006, weadopted SFAS 123R using the modified prospective method. Under this method, weare required to record compensation cost for the unvested portion of previouslygranted awards that were outstanding as of April 1, 2006. Results forprior periods have not been restated. We previously accounted for share-basedcompensation under the recognition and measurement principle of APB No. 25and related interpretations. Prior to SFAS 123R adoption, no share-basedcompensation cost was reflected in net income for stock options, as stockoptions granted had an exercise price equal to the market value of theunderlying common stock on the date of the grant. Also, prior to the SFAS 123Radoption, compensation cost for restricted stock and restricted stock units(collectively “non-vested stock”) was 

5

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

recordedbased on the closing market value on the last trading day prior to the date ofgrant. Compensation cost for non-vested stock was charged to unamortized stockcompensation in Stockholders’ equity and amortized to expense over therequisite vesting periods. With the adoption of SFAS 123R on April 1,2006, unamortized stock compensation relating to previous grants of non-vestedstock of $7.2 million was credited to additional paid-in capital. Additionally,prior to the adoption of SFAS 123R, the Company presented all tax benefits ofdeductions resulting from the exercise of stock options as operating cash flowsin the Consolidated Statement of Cash Flows. SFAS 123R requires excess taxbenefits (i.e., the tax benefit recognized upon exercise of stock options inexcess of the benefit recognized as compensation cost for those options) to beclassified as financing cash flows in the Consolidated Statement of Cash Flows.Pursuant to SFAS 123R, tax benefits resulting from the exercise of stockoptions, which have been presented as operating cash flows prior to theadoption of SFAS 123R are not reclassified to financing activities, but rathercontinue to be presented as operating cash flows.

The adoption of SFAS 123Rresulted in a non-cash credit to other income (expense), net for the cumulativeeffect of a change in accounting principle of $0.2 million related to therecognition of estimated forfeitures on non-vested stock. The cumulative effectcredit is immaterial for purposes of separate presentation on the Consolidated Statementof Earnings.

As a result of the applicationof SFAS 123R in the three months ended June 30, 2006, we recorded share-basedcosts related to stock options and non-vested stock of $2.6 million. Suchamount was recognized in the consolidated financial statements as follows:

Amountsrecognized in the financial statements for equity-based compensation are as follows:

| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)**          | ** ** |
| Total cost of share-based  payment plans                                      |       |                             | $          | 2,644 |   |   |   | $ | 245 |   |   |
| Amounts  capitalized in inventory                                             |       |                             | $          | 830 |   |   |   | $ | 245 |   |   |
| Amounts  recognized in income for amounts previously capitalized in inventory |       |                             | $          | 960 |   |   |   | $ | 165 |   |   |
| Amounts charged  against income before income tax benefit                     |       |                             | $          | 2,774 |   |   |   | $ | 165 |   |   |
| Amount of related income  tax benefit recognized in income                    |       |                             | $          | 1,109 |   |   |   | $ | 69 |   |   |

 

As aresult of applying SFAS 123R, the Company’s earnings before income taxes andnet earnings for the three months ended June 30, 2006 were $1.8 millionand $1.1 million lower, respectively, than if it had continued to accountfor share-based compensation under APB No. 25. Basic and diluted earningsper share for the three months ended June 30, 2006 would have been $0.57per share and $0.55 per share, respectively, if the Company had not adoptedSFAS 123R, compared to reported amounts of $0.54 per basic share and $0.52 perdiluted share.

**Prior Period Pro Forma Information**   Priorto April 1, 2006, the Company applied the intrinsic-value-basedmethod of accounting prescribed by APB 25, and its related interpretations.Compensation expense for stock options granted to an employee or director wasrecognized in earnings based on the excess, if any, of the quoted market priceof DRS common stock at the date of grant, or other measurement date, over theamount an employee or director must pay to acquire the common stock. When theexercise price of the option granted to an employee or director equaled orexceeded the quoted market price of DRS common stock at the date of grant, theCompany did not recognize compensation 

6

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

expense. Compensationcost for nonvested stock was recorded based on the market value of DRS commonstock on the date of grant.

The tablebelow compares the “as reported” net earnings and earnings per share to the “proforma” net earnings and earnings per share for the three months ended June 30,2005, that the Company would have reported if it had elected to recognizecompensation expense in accordance with the fair value-based method ofaccounting of SFAS No. 123. For purposes of determining the pro formaeffects of SFAS No. 123, the estimated fair value of options granted wascalculated using the Black-Scholes option pricing valuation model. Optionforfeitures were accounted for as they occurred and no amount of stock optionexpense were capitalized into inventory or other assets, but instead wereconsidered period expenses.

| ** **                                                                                                           | ** ** | **Three Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                                        | ** ** |
| Net earnings, as reported                                                                                            |       |                                            | $          | 14,018 |   |   |
| Add: Stock-based  compensation expense included in reported net earnings, net of taxes                               |       |                                            | 148        |   |   |
| Less: Total stock-based  compensation expense determined under fair-value-based method for all awards,  net of taxes |       |                                            | (1,427     | ) |   |
| Pro forma net earnings                                                                                               |       |                                            | $          | 12,739 |   |   |
| Earnings per share:                                                                                                  |       |                                            |       |   |   |
| Basic—as reported                                                                                               |       |                                            | $          | 0.51 |   |   |
| Basic—pro forma                                                                                                 |       |                                            | $          | 0.46 |   |   |
| Diluted—as reported                                                                                             |       |                                            | $          | 0.49 |   |   |
| Diluted—pro forma                                                                                               |       |                                            | $          | 0.45 |   |   |

 

**Share-basedCompensation Plans  **On August 7, 1996, thestockholders approved the 1996 Omnibus Plan (1996 Plan). Under the terms of theOmnibus Plan, which expired on June 16, 2006, options could be granted tokey employees, directors and consultants of the Company. The 1996 Planinitially was limited to 500,000 shares of DRS common stock and was ultimatelyincreased, with stockholder approval, to 5,875,000 shares of DRS common stock.Awards under the 1996 Plan were the discretion of the Executive CompensationCommittee and could be made in the form of incentive stock options,non-qualified stock options, stock appreciation rights, restricted stock andrestricted stock units, phantom stock, stock bonuses and other awards. TheCompany has historically utilized newly issued shares of DRS common stock tosatisfy its equity-based compensation awards.

***On August 3, 2006, the stockholders approved the 2006Omnibus Plan which has similar terms to that of the 1996 Omnibus Plan. The 2006Omnibus Plan provides for the issuance of up to a maximum of 4.0 millionshares of DRS common stock.***

***Stock Options  ***Unlessthe Executive Compensation Committee expressly provides otherwise, optionsgranted under the Omnibus Plan have a contractual term of ten years andgenerally are not exercisable prior to one year after the date of grant, with25% of the options granted exercisable on each of the first four anniversariesof the date of grant. On July 6, 2005, the Company granted 209,500 stockoptions that fully vested on March 31, 2006. In accordance with the July 6,2005 stock option grant, recipients are required to hold any shares acquiredupon exercise of the options prior to March 31, 2008 (net of any sharessold or withheld to pay the exercise price and any applicable statutory minimumfederal, state and 

7

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

local tax requirements)for a period of one year following the date of exercise. The Company’s decisionto modify its traditional vesting terms for the July 6, 2005 stock optiongrant was made pursuant to management’s ongoing evaluation of the Company’soverall incentive compensation strategy, including the type of futureshare-based compensation awards. As a part of the evaluation, managementconsidered the amount of compensation expense that would otherwise have beenrecognized in the Company’s results of operations in future periods underSFAS 123R. The July 6, 2005 stock option grant had a$4.8 million impact on the Company’s pro forma pre-tax compensationexpense.

During fiscal 1999, the Board of Directors issuedoptions to purchase 250,000 shares of DRS common stock with vesting termssimilar to awards issued under the 1996 Plan at exercise prices in excess ofthe market price on the date of grant. The options expire in fiscal 2009.

The stock options exercised during fiscal 2000included 50,000 shares, which are being held by the Company in “book entry”form. Book entry shares are not considered issued or outstanding and areexcluded from the tables below. However, these shares are included in theCompany’s diluted earnings per share calculations for the three months ended June 30,2006 and 2005.

Thetable summarizes information regarding the Company’s stock option activity andamounts as of and for the three months ended June 30, 2006.

| ** **                                           | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value (In  Thousands)** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  March 31, 2006                  |       | 2,913,358                   |       |                                   | $          | 29.08                                                            |       |                                                 |       |   |   |   |   |   |   |   |
| Granted                                              |       | 199,672                     |       |                                   | $          | 49.91                                                            |       |                                                 |       |   |   |   |   |   |   |   |
| Exercised                                            |       | (27,426                     | )          |                                   | $          | 31.81                                                            |       |                                                 |       |   |   |   |   |   |   |   |
| Forfeited/cancelled                                  |       | (20,996                     | )          |                                   | $          | 33.22                                                            |       |                                                 |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2006                   |       | 3,064,608                   |       |                                   | $          | 30.39                                                            |       |                                                 |       | 6.5 |   |   |   | $ | 56,923 |   |   |
| Vested and expected to vest at June 30, 2006(1) |       | 2,999,229                   |       |                                   | $          | 30.25                                                            |       |                                                 |       | 6.4 |   |   |   | $ | 56,107 |   |   |
| Exercisable at  June 30, 2006                   |       | 1,935,114                   |       |                                   | $          | 26.91                                                            |       |                                                 |       | 5.5 |   |   |   | $ | 42,560 |   |   |

----

       (1) Represents outstanding options reduced by expected forfeitures.

The aggregate intrinsic value, disclosed in the tableabove, represents the difference between DRS’s closing stock price on the lasttrading day of the first quarter (June 30, 2006) and the exercise price,multiplied by the number of in-the-money stock options outstanding.

The total intrinsic value of stock options exercised,based on the difference between DRS’s stock price at the time of exercise andthe related exercise price, was $0.6 million during the first quarter offiscal 2007 and $8.2 million during the first quarter of fiscal 2006. Totalcompensation expense related to stock options was $1.8 million for the threemonths ended June 30, 2006. At June 30, 2006, unrecognized compensationcosts related to stock options was $13.7 million ($8.3 million afterincome taxes), which is expected to be recognized over a weighted averageremaining period of 2.7 years.

8

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

The estimated weighted average grant date fair valueof each stock option awarded was $49.91 for the three months ended June 30,2006 and there were no options granted for the three months ended June 30,2005. 

***StockOption Fair Value Estimation Assumptions*  **Forpurposes of estimating the fair value provisions of SFAS 123R, the Companyestimates the fair value of its stock options at the date of grant using theBlack-Scholes option-pricing valuation model. The Company’s valuation model isimpacted by DRS’s stock price as well as weighted average assumptions for anumber of subjective variables described below.

·       *Expected Holding Period  *The expectedholding period of stock options granted represents the period of time thatstock options granted are expected to be outstanding until they are exercised,cancelled or forfeited. The Company uses historical data to estimate stockoption exercise data and employee terminations within the valuation model.

·       *Expected Volatility  *Expected volatility is based on historical daily volatilityof DRS common stock over the expected holding period. 

·       *Expected Dividend Yield  *Expected dividend yield is basedon DRS’s expected payments.

·       *Risk-Free Interest Rate  *The risk-free interest ratesfor stock options are based on the U.S. Treasury yield curve in effect atthe time of grant for maturities similar to the expected holding period of thestock options.

·  *Forfeiture Rate*  The forfeiture rate is based on thehistorical forfeiture experience and prospective analysis of different pools ofemployees. We monitor share option exercise and employee termination patternsof each pool to estimate forfeiture rates within the valuation model.

Changes in assumptions canmaterially impact the estimated fair value of stock options. The weightedaverage assumptions used in the valuation model are presented in the tablebelow.

| ** **                                      | ** ** | **Three Months  Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                        | ** ** |
| Expected holding  period (in years)             | ** ** |                                            | 5.6        |   |   |
| Expected  volatility                            | ** ** |                                            | 38.7       | % |   |
| Expected dividend  yield                        | ** ** |                                            | 0.24       | % |   |
| Risk-free  interest rate                        | ** ** |                                            | 4.98       | % |   |
| Weighted-average  fair value of options granted | ** ** |                                            | $          | 21.47 |   |   |
|                                                 |            |                                                 |            |  |  |  |

 

**Restricted Stock and Restricted Stock Units*  ***Restricted stock awards are grantedto certain employees, as permitted under the 1996 Plan in the name of theemployee, who has all the rights of a stockholder, subject to certainrestrictions. The restricted stock cliff vests three years from the date ofgrant. Restricted stock units are granted in the name of the employee; however,the participant has no rights as a stockholder. These restricted stock unitsare redeemed for DRS common stock once a three-year cliff vesting period hasbeen satisfied. The cost of the grants, as determined by the market prices ofthe common stock at the grant dates, is recognized over the vesting periods.

Compensation cost for non-vestedstock for the three months ended June 30, 2006 and 2005 was $0.8 millionand $0.2 million, respectively. As of June 30, 2006, totalunrecognized compensation costs related to non-vested stock awards was $18.1 millionand that amount is expected to be recognized over a weighted average remainingperiod of 2.1 years.

9

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

Thefollowing table details the activity in non-vested stock awards for the threemonths ended June 30, 2006.

| ** **                                | ** ** | **Number of  Shares/Units** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------|------------|
| Nonvested balance  at March 31, 2006 |       |                             | 281,590    |                                                    |       |   | $ | 40.81 |   |   |
| Granted                                   |       |                             | 241,872    |                                                    |       |   | $ | 49.91 |   |   |
| Vested                                    |       |                             | —     |                                                    |       |   | $ | — |   |   |
| Forfeited                                 |       |                             | (6,850     | )                                                       |       |   | $ | 42.63 |   |   |
| Nonvested balance at  June 30, 2006  |       |                             | 516,612    |                                                    |       |   | $ | 45.04 |   |   |

 

**5.**                 Inventories

Inventoriesare summarized as follows:

| ** **                                             | ** **        | **June 30,**       | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------|-------------------|-------------------------|------------|--------------------|------------|
| ** **                                             | ** **        | **2006**                | ** ** | **2006**           | ** ** |
| ** **                                             | ** **        | **(in thousands)** | ** ** |
| Work-in-process                                        |              | $                       | 412,956    |               | $          | 368,991 |   |
| General and administrative costs                       |              | 65,447                  |       | 63,836             |       |
| Raw material and  finished goods                       |              | 40,531                  |       | 66,706             |       |
|                                                   |              | 518,934                 |       | 499,533            |       |
| Less: Progress  payments and certain customer advances |              | 173,850                 |       | 158,967            |       |
|                                                   | Inventory reserve |                    | 10,332     |               | 9,360      |   |
| Total                                                  |              | $                       | 334,752    |               | $          | 331,206 |   |
|                                                        |                   |                         |            |                    |            |  |  |  |

 

Inventoried contract costs for the Company’sbusinesses that are primarily government contractors include certain generaland administrative (G&A) costs, including internal research and developmentcosts (IRAD) and bid and proposal costs (B&P). G&A, IRAD and B&Pcosts are allowable, indirect contract costs under U.S. government regulations.The Company allocates these costs to government contracts and accounts for themas product costs at the majority of the Company’s operating units, not asperiod expenses.

Thetable below presents a summary of G&A, IRAD and B&P costs included ininventoried contract costs and changes to them, including amounts used in thedetermination of costs and expenses. The cost data in the table below does notinclude the G&A, IRAD and B&P costs for the Company’s lines ofbusinesses that are not primarily contracted with the U.S. government, suchcosts are expensed as incurred.

| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                         | ** ** |
| Balance in  inventory at beginning of period |       | $                                               | 63,836     |   | $ | 47,365 |   |
| Add: Incurred costs                          |       | 68,756                                          |       | 53,178 |   |
| Less: Amounts included in costs and expenses |       | (67,145                                         | )          | (53,034 | ) |
| Balance in inventory at end  of period       |       | $                                               | 65,447     |   | $ | 47,509 |   |

 

10

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

Total expenditures forIRAD amounted to approximately $11.0 million and $9.2 million for thethree-month periods ended June 30, 2006 and 2005, respectively.

**6.**                 Goodwilland Intangible Assets

Thefollowing disclosure presents certain information regarding the Company’sacquired intangible assets as of June 30, 2006 and March 31, 2006.All acquired intangible assets are being amortized over their estimated usefullives, as indicated below, with no estimated residual values.

| **Acquired Intangible Assets** | ** ** | ** ** | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Balance** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | **(in thousands)**     | ** ** | ** **                    | ** ** |
| **As of June 30, 2006**             | ** ** |       | ** ** | ** **                                  |       | ** **                  | ** ** |                          | ** ** | ** **           |       |   | ** ** | ** ** |   |
| Technology-based intangibles             |       |       | 18  years  | ** **                                  |       | $                           | 47,861     |                          |       | $                    | (14,831    | ) |   |   | $ | 33,030 | ** ** |   |
| Customer-related intangibles             |       |       | 11  years  | ** **                                  |       | 217,214                     |       |                          | (26,824    | )                    |       |   | 190,390 | ** ** |   |
| Total                                    |       |       |       | ** **                                  |       | $                           | 265,075    |                          |       | $                    | (41,655    | ) |   |   | $ | 223,420 | ** ** |   |
| **As of  March 31, 2006**           | ** ** |       | ** ** | ** **                                  |       | ** **                  | ** ** |                          | ** ** | ** **           |       |   | ** ** | ** ** |   |
| Technology-based intangibles             |       |       | 18  years  | ** **                                  |       | $                           | 47,861     |                          |       | $                    | (14,100    | ) |   |   | $ | 33,761 | ** ** |   |
| Customer-related intangibles             |       |       | 11  years  | ** **                                  |       | 217,190                     |       |                          | (19,812    | )                    |       |   | 197,378 | ** ** |   |
| Total                                    |       |       |       | ** **                                  |       | $                           | 265,051    |                          |       | $                    | (33,912    | ) |   |   | $ | 231,139 | ** ** |   |

 

The aggregate acquired intangible asset amortizationexpense for the three-month periods ended June 30, 2006 and 2005 was $7.7million and $2.1 million, respectively. The estimated acquired intangibleamortization expense, based on gross carrying amounts at June 30, 2006, isestimated to be $30.7 million for fiscal 2007 and 2008, $29.9 million forfiscal 2009, $29.0 million for fiscal 2010 and $28.3 million for fiscal 2011.

Thetable below reconciles the change in the carrying amount of goodwill byoperating segment for the period from March 31, 2006 to June 30,2006.

| ** **                                          | ** ** | **C4I  Group**          | ** ** | **SR  Group** | ** ** | **S3  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|---------------|------------|---------------|------------|-----------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Balance as of  March 31, 2006                  |       | $                       | 472,230    |          | $          | 354,809       |       | $         | 1,781,029  |   | $ | 2,608,068 |   |
| ESSI purchase  price allocation adjustments         |       | —                  |       | —        |       | (6,811        | )          | (6,811    | )          |
| Codem acquisition  earn-out                         |       | 838                     |       | —        |       | —        |       | 838       |       |
| Transfer of  operating unit(A)                      |       | (4,929                  | )          | —        |       | 4,929         |       | —    |       |
| Foreign currency  translation and other adjustments |       | 1,551                   |       | —        |       | 67            |       | 1,618     |       |
| Balance as of  June 30, 2006                   |       | $                       | 469,690    |          | $          | 354,809       |       | $         | 1,779,214  |   | $ | 2,603,713 |   |

 

----

    (A) On April 1, 2006, DRS Technical Services, Inc.(TSI), an operating unit of the C4I Group, was consolidated into an operatingunit of the S3 Group to achieve certain operating synergies. For the threemonths ended June 30, 2005, the operating unit recorded $5.2 million and $0.3 millionin revenues and operating income, respectively, and $10.6 million ofassets, which was considered 

11

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

immaterial forpurposes of restating prior year goodwill balances and segment information forboth the C4I Group and the S3 Group.

**7.**                 ProductWarranties

Productwarranty costs are accrued when the covered products are delivered to thecustomer. Product warranty expense is recognized based on the terms of theproduct warranty and the related estimated costs, considering historical claimsexpense. Accrued warranty costs are reduced as these costs are incurred and asthe warranty period expires, and may be otherwise modified as specific productperformance issues are identified and resolved. The table below presents thechanges in the Company’s accrual for product warranties for the three monthsended June 30, 2006 and 2005, which are included in accrued expenses andother current liabilities.

| ** **                                                | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                         | ** ** |
| Balance at beginning  of period                           |       | $                                               | 29,869     |   | $ | 21,839 |   |
| Acquisitions during the period                            |       | —                                          |       | 360 |   |
| Accruals for product warranties issued during the  period |       | 4,727                                           |       | 1,665 |   |
| Settlements made during the period                        |       | (3,494                                          | )          | (2,942 | ) |
| Other                                                     |       | 121                                             |       | (27 | ) |
| Balance at end of period                                  |       | $                                               | 31,223     |   | $ | 20,895 |   |

 

**8.**                 Debt

| ** **                                     | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Credit Facility:                               |       |                    |       |                     |       |
| Revolving line of credit                       |       | $                       | 129,000    |                     | $          | 40,000 |   |
| Term loan                                      |       | 274,312                 |       | 275,000                  |       |
| Canadian Term  Loan                            |       | 10,314                  |       | 9,853                    |       |
| 65¤8%  Senior Notes due 2016              |       | 350,000                 |       | 350,000                  |       |
| 2.00% Convertible  Senior Notes due 2026       |       | 345,000                 |       | 345,000                  |       |
| 75¤8%  Senior Subordinated Notes due 2018 |       | 250,000                 |       | 250,000                  |       |
| 67¤8%  Senior Subordinated Notes due 2013 |       | 550,000                 |       | 550,000                  |       |
| Unamortized Bond  Premium on 67¤8%        |       |                    |       |                     |       |
| Senior Subordinated Notes                      |       | 8,302                   |       | 8,585                    |       |
| Other obligations                              |       | 5,434                   |       | 4,955                    |       |
|                                           |       | 1,922,362               |       | 1,833,393                |       |
| Less:                                          |       |                    |       |                     |       |
| Current  installments of long-term debt        |       | 5,253                   |       | 4,622                    |       |
| Total long-term  debt                          |       | $                       | 1,917,109  |                     | $          | 1,828,771 |   |

 

12

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

The weighted averageinterest rate on the Company’s term loan borrowings was 6.7% as of June 30,2006 (6.3% as of March 31, 2006). The weighted average interest rate underthe revolving line of credit borrowings was 7.5% at June 30, 2006 (6.2% asof March 31, 2006).

From time to time, theCompany enters into standby letters-of-credit and bank guarantee agreementswith financial institutions and customers, primarily relating to the guaranteeof its future performance on certain contracts to provide products and servicesand to secure advance payments it has received from its customers. As of June 30,2006, $47.5 million was contingently payable under letters of credit and bankguarantees. Of this amount, approximately $0.9 million and $0.4 million inletters of credit and bank guarantees, respectively, as of June 30, 2006,were issued under a previous credit agreement and by a bank agreement for theCompany’s U.K. subsidiary, respectively, and are not considered whendetermining the availability under the Company’s revolving line of credit. AtJune 30, 2006, the Company had $224.8 million of availability underits revolving line of credit.

On March 29, 2006,DRS Technologies Canada Company (DRS Canada) established a five-year seniorsecured term loan for approximately $9.9 million (C$11.5 million), maturing on April 1,2011. The weighted average interest rate on the term loan was 6.0% as of June 30,2006 (5.5% as of March 31, 2006). The carrying value of the Canadian termloan increased $0.5 million during the three months ended June 30,2006, as a result of the strengthening of the Canadian dollar compared to theU.S. dollar during that period.

Accrued interest expenseat June 30, 2006 and March 31, 2006 was $29.6 million and $27.3million, respectively.

The Company’s indebtednessis more fully described in Note 8 to the Company’s Consolidated FinancialStatements for the year ended March 31, 2006.

**9.**                 Earnings perShare

Basicearnings per share (EPS) is computed by dividing net earnings by the weightedaverage number of shares of common stock outstanding during each period. Thecomputation of diluted earnings per share includes the effect of shares fromthe assumed exercise of dilutive stock options, restricted stock and restrictedstock units. The following table presents the components of basic and dilutedearnings per share:

| ** **                                 | ** ** | **Three Months Ended  June 30,**                      | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                 | ** ** | **(in thousands, except  per-share data)**            | ** ** |
| **Basic  EPS computation**                 | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net earnings                               |       |                                                                 | $          | 21,258 | ** ** |   |   | $ | 14,018 | ** ** |   |
| Weighted average common shares outstanding |       |                                                                 | 39,663     | ** ** |   |   | 27,479 | ** ** |   |
| Basic earnings per share                   |       |                                                                 | $          | 0.54 | ** ** |   |   | $ | 0.51 | ** ** |   |
| **Diluted EPS computation**                | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net earnings                               |       |                                                                 | $          | 21,258 | ** ** |   |   | $ | 14,018 | ** ** |   |
| Diluted common shares outstanding          |       |                                                                 |       | ** ** |   |   |   | ** ** |   |
| Weighted average common shares outstanding |       |                                                                 | 39,663     | ** ** |   |   | 27,479 | ** ** |   |
| Stock options and restricted stock         |       |                                                                 | 1,034      | ** ** |   |   | 922 | ** ** |   |
| Diluted common  shares outstanding         |       |                                                                 | 40,697     | ** ** |   |   | 28,401 | ** ** |   |
| Diluted earnings per  share                |       |                                                                 | $          | 0.52 | ** ** |   |   | $ | 0.49 | ** ** |   |

 

13

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

At June 30, 2006 therewere 22,500 options that were excluded from the diluted EPS calculation becausetheir inclusion would have had an antidilutive effect on EPS. At June 30,2005, all outstanding options are included in the diluted EPS calculation. Forthe three months ended June 30, 2006, DRS’s 2% Convertible Senior Noteshad no impact on EPS because the average stock price during the period wasbelow $59.70 per share, and the convertible notes, if converted, would requireonly cash at settlement.

**10.**          ComprehensiveEarnings

Thecomponents of comprehensive earnings for the three-month periods ended June 30,2006 and 2005 consisted of the following:

| ** **                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                         | ** ** |
| Net earnings                                                                                 |       | $                                               | 21,258     |   | $ | 14,018 |   |
| Other  comprehensive earnings:                                                               |       |                                            |       |   |   |
| Foreign currency translation adjustments                                                     |       | 2,442                                           |       | (1,312 | ) |
| Minimum pension liability                                                                    |       | (598                                            | )          | — |   |
| Amortization of unrealized gain on terminated hedging  instruments, net of income taxes |       | —                                          |       | (46 | ) |
| Comprehensive earnings                                                                       |       | $                                               | 23,102     |   | $ | 12,660 |   |

 

**11.**          Pensionsand Other Employee Benefits

Thefollowing table summarizes the components of net periodic benefit cost for theCompany’s pension and postretirement benefit plans for the three-month periodsended June 30, 2006 and 2005. These plans are more fully described in Note12 to the Company’s Consolidated Financial Statements for the year ended March 31,2006.

| ** **                                       | ** ** | ** **                                          | ** ** | ** **             | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Unfunded**                                 | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **Funded**                                          | ** ** | **Postretirement**     | ** ** | **Supplemental**                             | ** ** |
| ** **                                       | ** ** | **Pension Plans**                              | ** ** | **Benefit Plans** | ** ** | **Retirement Plans**                    | ** ** |
| ** **                                       | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                                       | ** ** | **2006**                                            | ** ** | **2005**               | ** ** | **   2006   ** | ** ** | **2005**   | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                             | ** ** |
| Service cost                                     |       | $                                                   | 1,834      |                   | $          | 988                                          |       |       | $          | 146                                          |       |   | $ | 150 |   |   | $ | 143 |   |   |   | $ | 136 |   |   |
| Interest cost                                    |       | 3,243                                               |       | 1,511                  |       |                                         | 320        |       |       | 241                                          |       |   | 318 |   |   |   | 279 |   |   |
| Expected return  on plan assets                  |       | (3,490                                              | )          | (1,769                 | )          |                                         | (56        | )          |       | (42                                          | )          |   | — |   |   |   | — |   |   |
| Amortization of  unrecognized loss (gain)        |       | 117                                                 |       | 43                     |       |                                         | (8         | )          |       | (2                                           | )          |   | 47 |   |   |   | 42 |   |   |
| Amortization of  transition obligation           |       | —                                              |       | —                 |       |                                         | 28         |       |       | 27                                           |       |   | — |   |   |   | — |   |   |
| Amortization of  unrecognized prior-service cost |       | 39                                                  |       | 1                      |       |                                         | (6         | )          |       | —                                       |       |   | 194 |   |   |   | 194 |   |   |
| Net periodic benefit  cost                       |       | $                                                   | 1,743      |                   | $          | 774                                          |       |       | $          | 424                                          |       |   | $ | 374 |   |   | $ | 702 |   |   |   | $ | 651 |   |   |

 

 

14

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

The Company expects tocontribute $7.9 million and $2.3 million to its pension and postretirementplans, respectively, during the fiscal year ended March 31, 2007, of which$2.1 million and $0.8 million, respectively were contributed during the three-monthperiod ended June 30, 2006.

**12.   OperatingSegments**

The C4I Group is comprised of the following businessareas: Command, Control and Communications (C3), which includes naval displaysystems, ship communications systems, radar systems, technical support,electronic manufacturing and system integration services, and secure voice anddata communications; Power Systems, which includes naval and industrial powergeneration, conversion, propulsion, distribution and control systems;Intelligence Technologies, which includes signals intelligence, communicationsintelligence, data collection, processing and dissemination equipment; andTactical Systems, which includes battle management tactical computer systemsand peripherals.

The SR Group is comprised of the following businessareas: Reconnaissance, Surveillance & Target Acquisition (RSTA), whichdevelops and produces electro-optical sighting, targeting and weapon sensorsystems, aircraft weapons alignment systems and image intensification (I2 ) night vision, combat identificationand laser aimers/illuminator products, and provides electronic manufacturingservices; Training & Control Systems, which develops and produces aircombat training, electronic warfare and network systems, high-speed digital dataand imaging systems, unmanned vehicles and mission and flight recorders; andTest & Energy Management, which develops and produces electronic test,diagnostics and vehicle electronics.

The S3 Group is comprised of the following businessareas: Sustainment Systems, which designs, engineers and manufacturesintegrated military electronics and other military support equipment, primarilyfor the U.S. Department of Defense, as well as related heat transfer and airhandling equipment and power generation and distribution equipment for domesticcommercial and industrial users; and Support Services, which providesengineering services, logistics and training services, advanced technologyservices, asset protection systems and services, telecommunication systemsintegration and information technology services, and vehicle armor kits formilitary, humanitarian, disaster recovery and emergency responder applications.

Other includes the activities of DRS CorporateHeadquarters and certain non-operating subsidiaries of the Company.

15

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

Transactionsbetween segments generally are negotiated and accounted for under terms andconditions that are similar to other government and commercial contracts;however, these intercompany transactions are eliminated in consolidation. TheCompany evaluates segment-level performance based on revenues and operatingincome, as presented in the Consolidated Statements of Earnings. Operatingincome, as shown, includes amounts allocated from DRS Corporate operationsusing an allocation methodology prescribed by U.S. government regulations forgovernment contractors.

| ** **                            | ** ** | **C4I Group**      | ** ** | **SR Group** | ** ** | **S3 Group** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** |
| **Three Months Ended June 30,  2006** |       |                    |       |              |       |              |       |      |       |      |       |
| Total revenues                        |       | $                       | 195,719    |              | $          | 193,432           |       | $         | 243,686    |      | $          | — |   | $ | 632,837 |   |
| Intersegment revenues                 |       | (1,727                  | )          | (474              | )          | (371              | )          | —    |       | (2,572    | )          |
| External revenues                     |       | $                       | 193,992    |              | $          | 192,958           |       | $         | 243,315    |      | $          | — |   | $ | 630,265 |   |
| Operating income (loss)               |       | $                       | 19,937     |              | $          | 20,749            |       | $         | 24,686     |      | $          | (387 | ) | $ | 64,985 |   |
| Total assets                          |       | $                       | 825,609    |              | $          | 788,306           |       | $         | 2,326,026  |      | $          | 137,901 |   | $ | 4,077,842 |   |
| Depreciation and amortization         |       | $                       | 3,741      |              | $          | 6,298             |       | $         | 7,786      |      | $          | 1,300 |   | $ | 19,125 |   |
| Capital expenditures                  |       | $                       | 5,216      |              | $          | 3,409             |       | $         | 2,346      |      | $          | 2,109 |   | $ | 13,080 |   |
| **Three  Months Ended June 30, 2005** |       |                    |       |              |       |              |       |      |       |      |       |
| Total revenues                        |       | $                       | 191,030    |              | $          | 148,523           |       | $         | —     |      | $          | — |   | $ | 339,553 |   |
| Intersegment revenues                 |       | (539                    | )          | (555              | )          | —            |       | —    |       | (1,094    | )          |
| External revenues                     |       | $                       | 190,491    |              | $          | 147,968           |       | $         | —     |      | $          | — |   | $ | 338,459 |   |
| Operating income (loss)               |       | $                       | 19,488     |              | $          | 15,788            |       | $         | —     |      | $          | (218 | ) | $ | 35,058 |   |
| Total assets                          |       | $                       | 860,689    |              | $          | 736,019           |       | $         | —     |      | $          | 273,306 |   | $ | 1,870,014 |   |
| Depreciation and amortization         |       | $                       | 3,436      |              | $          | 6,074             |       | $         | —     |      | $          | 907 |   | $ | 10,417 |   |
| Capital  expenditures                 |       | $                       | 2,303      |              | $          | 3,418             |       | $         | —     |      | $          | 615 |   | $ | 6,336 |   |

 

**13.**   SupplementalCash Flow Information

| ** **                                                                           | ** ** | **Three Months Ended  June 30,**                                              | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                                                                      | ** ** |
| Cash paid for:                                                                       |       |                                                                                         |       |   |   |   |   |   |   |
| Income taxes                                                                         |       |                                                                                         | $          | 3,859 |   |   |   | $ | 10,732 |   |   |
| Interest                                                                             |       |                                                                                         | $          | 26,373 |   |   |   | $ | 18,704 | * |   |
| Supplemental  disclosure of significant non-cash investing and financing activities: |       |                                                                                         |       |   |   |   |   |   |   |
| Acquisition costs for business combinations, net                                     |       |                                                                                         | $          | 500 |   |   |   | $ | 335 |   |   |
| Acquisition earn-out—Codem                                                      |       |                                                                                         | $          | 838 |   |   |   | $ | — |   |   |

----

*                    Excludes theadvanced interest of $2.0 million that was repaid in conjunction with thesemi-annual interest payments on the senior subordinated notes. See Note 8 tothe Company’s Consolidated Financial Statements for the year ended March 31,2006.

16

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**14.   Cash Dividendson DRS Common Stock**

On May 12, 2006, theBoard of Directors declared a $0.03 per common share cash dividend, which waspaid on June 30, 2006 to stockholders of record as of June 15, 2006.Cash dividends of $0.03 per common share were paid in each quarter of fiscal2006. On August 3, 2006, the Board of Directors declared a $0.03 percommon share cash dividend, payable on September 29, 2006 to stockholdersof record as of September 15, 2006.

**15.   Contingenciesand Related Party Transactions**

**Contingencies**   The Company is party to various legal actions andclaims arising in the ordinary course of its business. In the Company’sopinion, the Company has adequate legal defenses for each of the actions andclaims.

Various legal actions,claims, assessments and other contingencies arising in the normal course of theCompany’s business, including certain matters described below, are pendingagainst the Company and certain of its subsidiaries. These matters are subjectto many uncertainties, and it is possible that some of these matters could beultimately decided, resolved or settled adversely. The Company has recordedaccruals totaling $4.4 million and $4.3 million at June 30, 2006 and March 31,2006, respectively, for losses related to those matters that it considers to beprobable and that can be reasonably estimated (certain legal and environmentalmatters are discussed in detail below). Although the ultimate amount ofliability at June 30, 2006 that may result from those matters for whichthe Company has recorded accruals is not ascertainable, the Company believesthat any amounts exceeding the Company’s recorded accruals should notmaterially affect the Company’s financial condition or liquidity. It ispossible, however, that the ultimate resolution of those matters could resultin a material adverse effect on the Company’s results of operations for aparticular reporting period.

Some environmental laws, such as the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980 (also known asCERCLA or the Superfund law) and similar state statutes, can impose liabilityfor the entire cost of the clean up of contaminated sites upon any of thecurrent or former site owners or operators (or upon parties who send waste tothese sites), regardless of the lawfulness of the original activities that ledto the contamination. In July 2000, prior to its acquisition by IDT, and priorto DRS’s acquisition of IDT, Tech-Sym Corporation received a Section 104(e)Request for Information from the National Park Service (NPS), pursuant toCERCLA, regarding a site known as the Orphan Mine site in the Grand CanyonNational Park, Arizona, which is the subject of an NPS investigation regardingthe presence of residual radioactive materials and contamination. A corporationof which Tech-Sym is an alleged successor operated this uranium mine from 1956to 1967. In 1962, the land was sold to the U.S. government and the allegedpredecessor of Tech-Sym was given a 25-year mining lease. In 1967, the miningrights were transferred to a third party by a trustee in bankruptcy, and theCompany believes that the mine was operated by such third party untilapproximately 1969. The Company understands that there are other companies inthe chain of title to the mining rights subsequent to Tech-Sym’s allegedpredecessor, and, accordingly, that there are other potentially responsibleparties (PRPs) for the environmental conditions at the site, including the U.S.government as owner, operator and arranger at the site. During its period ofownership, IDT retained a technical consultant in connection with this matter,who conducted a limited, preliminary review of site conditions and communicatedwith the NPS regarding actions that may be required at the site by all of thePRPs. On February 6, 2005, the NPS sent the 

17

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

Company an EngineeringEvaluation/Cost Analysis Work Plan (the “NPS EE/CA”) under CERCLA (the ‘‘CERCLALetter’’) with regards to Operable Unit 1 of the Orphan Mine site. In theCompany’s view, the NPS EE/CA included additional clean up not covered byCERCLA. The CERCLA Letter also requested (a) payment of $0.5 million forcosts incurred by the NPS related to the Orphan Mine, and (b) a ‘‘goodfaith offer’’ to conduct the response activity outlined by the NPS and toreimburse the NPS for future costs. The NPS advised that a similar letter hasbeen sent to another PRP. The Company initiated discussions with the other PRPand with NPS, and engaged a technical consultant to evaluate the existingdocumentation and the site in depth. As a result, on September 29, 2005,the technical consultant submitted to the NPS, on behalf of the Company and theother PRP, an alternative Engineering Evaluation/Cost Analysis Work Plan (the“alternative EE/CA”) with regards to Operating Units 1 and 2 of the Orphan MineSite.

On December 6, 2005, the PRPs and NPS met to discussthe alternative EE/CA. The meeting focused on the technical merits of thealternative EE/CA and certain differences between the alternative EE/CA and theNPS EE/CA provided with the CERCLA Letter. The differences included analternative sampling technique and the inclusion of Operable Unit 2 (the lowermine area) in the alternative EE/CA. Since that meeting in late 2005, theparties have also discussed certain legal issues relating to the process forimplementing an alternative EE/CA and entering into a settlement agreement thatwould memorialize the parties’ intent. The potential liability associated withimplementation of the EE/CA can change substantially due to such factors asadditional information on the nature or extent of contamination, methods ofremediation that might be recommended or required, changes in the apportionmentof costs among the responsible parties and other actions by governmentalagencies or private parties.

In connection with the ESSI acquisition, the Companyhas been made aware of certain legal actions, claims, assessments and othercontingencies, certain of which are described below.

In December 2004, ESSI was notified by the EnforcementDivision of the SEC of the issuance of a formal order directing a privateinvestigation captioned *In the Matter ofEngineered Support Systems, Inc.*and was notified that the SEC hadissued subpoenas to various individuals associated with ESSI to produce certaindocuments. The SEC staff also requested that ESSI produce certain documents inconnection with the investigation. The subpoenas related to trading in ESSIstock around ESSI’s earnings releases in 2003 and to the adequacy of certaindisclosures made by ESSI regarding related-party transactions in 2002 and 2003involving insurance policies placed by ESSI through an insurance brokerage firmin which an ESSI director was a principal at the time of the transactions.

On or about September 23, 2005, the SEC staff advisedESSI’s counsel that it had issued a subpoena directed to ESSI and expanded itsinvestigation to include ESSI’s disclosure of a November 2004 stop work orderrelating to ESSI’s Deployable Power Generation and Distribution Systems(“DPGDS”) program for the U.S. Air Force, and relating to trading in ESSI stockby certain individuals associated with ESSI.

In connection with the foregoing SEC investigation,ESSI and certain of its directors and officers have provided information and/ortestimony to the SEC. On November 14, 2005, ESSI was informed by theEnforcement Division that one of ESSI’s former directors and officers, andsubsequently a consultant to ESSI, had been issued a so-called Wells noticeinforming him that the staff of the SEC was considering recommending that theSEC bring a civil injunctive action against him in connection with the SEC’sinvestigation into trading in ESSI common stock in 2003.  A Wells notice provides prospectivedefendants with an opportunity to respond to the SEC staff members before thestaff makes a formal recommendation 

18

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

on whether the SEC shouldpursue disciplinary action against them. ESSI, itself, has not received a Wellsnotice and continues to cooperate with the investigation.

In January 2006, ESSI was informed that the Office ofthe U.S. Attorney for the Eastern District of Missouri was initiating aninvestigation into ESSI’s disclosure of the DPGDS stop-work order and intotrading in ESSI stock by ESSI insiders which preceded such disclosure. The U.S.Attorney’s office advised ESSI that although it considered it to be a subjectof its investigation, ESSI was not a target. In connection with thisinvestigation, the U.S. Attorney’s office issued ESSI a subpoena requestingspecified information, which ESSI continues to furnish.

In May 2006, the Company was advised that theEnforcement Division of the SEC and the U.S. Attorney’s office had eachexpanded its investigation to include possible “backdating” of the timing ofoption grants at ESSI prior to the time ESSI was acquired by DRS. As a part ofits investigation, the SEC has issued subpoenas to certain officers andemployees of ESSI to provide testimony and produce certain documents. AlthoughESSI continues to be a subject of the U.S. Attorney’s office’s investigation,the U.S. Attorney’s office has advised the Company that ESSI is not a target.Because the events being investigated occurred prior to the time of theCompany’s acquisition of ESSI, the U.S. Attorney’s office has further advisedthe Company that it considers DRS to be a witness, not a subject or target ofits investigation.

The Company is committed to full cooperation withregard to the foregoing investigations. The Company is unable to determine atthis time either the timing of the SEC or U.S. Attorney’s office investigationsor the impact, if any, which the investigations could have on the Company. Afinding that ESSI had “backdated” option grants could result in the taxauthorities disallowing all or part of related compensation deductions taken onESSI’s previous income tax returns.

**RelatedParty Transactions**   The Company currently leases a building in Oakland, NewJersey, owned by LDR Realty Co., a partnership that was wholly owned in equalamounts by David E. Gross, DRS’s cofounder and the former President and ChiefTechnical Officer, and the late Leonard Newman, DRS’s cofounder, the formerChairman of the Board, Chief Executive Officer, and Secretary and the father ofMark S. Newman, the Company’s current Chairman of the Board, President andChief Executive Officer. The lease agreement with a monthly rental of $21.2thousand expires on April 30, 2007. Following Leonard Newman’s death in November 1998,Mrs. Ruth Newman, the wife of Leonard Newman and the mother of Mark S.Newman, succeeded to Leonard Newman’s interest in LDR Realty Co.

Skadden, Arps, Slate,Meagher & Flom LLP, a law firm to which a member of our Board is ofcounsel, provided legal services to the Company during the three months ended June 30,2006 and 2005. Fees paid to Skadden, Arps, Slate, Meagher & Flom LLPfor the three months ended June 30, 2006 and 2005 were $2.4 million andless than $0.1 million, respectively.

**16.   Guarantor andNon-Guarantor Financial Statements**

As presented in Note 8, “Debt”, the Company has$350.0 million 65¤8%Senior Notes, $550.0 million 67¤8%Senior Subordinated Notes, $250.0 million 75¤8% SeniorSubordinated Notes and $345.0 million 2% Convertible Senior Notes outstanding(collectively, the Notes). The Notes are fully and unconditionally guaranteed,jointly and severally, by the Company’s wholly-owned domesticsubsidiaries (the Guarantor Subsidiaries). The foreign subsidiaries and certaindomestic subsidiaries of DRS (the Non-Guarantor Subsidiaries) do not guaranteethe Notes.

19

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

The followingcondensed consolidating financial information presents the CondensedConsolidating Balance Sheets as of June 30, 2006 and March 31, 2006,the related Condensed Consolidating Statements of Earnings and CondensedConsolidating Statements of Cash Flows for the three months ended June 30,2006 and 2005 for:

a)               DRS Technologies, Inc.(the Parent),

b)              the GuarantorSubsidiaries,

c)               the Non-GuarantorSubsidiaries, and

d)              DRS Technologies, Inc.on a consolidated basis

The information includes elimination entries necessaryto consolidate the Parent with the Guarantor and Non-Guarantor Subsidiaries.

The Guarantor and Non-Guarantorsubsidiaries are presented on a combined basis. The principal eliminationentries eliminate investments in subsidiaries and intercompany balances andtransactions. Separate financial information for each of the Guarantor and Non-GuarantorSubsidiaries are not presented because management believes such financialstatements would not be meaningful to investors.

20

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Balance Sheet**As of June 30,2006(in thousands)

| ** **                                                        | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                        | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| **Current assets**                                                | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Cash and cash equivalents                                         |       | $                   | 44,304     |                        | $          | (6,406                            | )          |             | $          | 5,884            |       |   | $ | — |   |   | $ | 43,782 | ** ** |   |
| Accounts receivable, net                                          |       | 4                   |       | 425,173                     |       |                              | 29,116     |             |       | —           |       |   | 454,293 | ** ** |   |
| Inventories, net                                                  |       | (2,033              | )          | 294,047                     |       |                              | 42,738     |             |       | —           |       |   | 334,752 | ** ** |   |
| Prepaid expenses, deferred income taxes and other  current assets |       | 3,348               |       | 137,755                     |       |                              | 5,567      |             |       | (8,796           | )          |   | 137,874 | ** ** |   |
| Intercompany receivables                                          |       | 2,055,783           |       | —                      |       |                              | 24,115     |             |       | (2,079,898       | )          |   | — | ** ** |   |
| **Total current assets**                                          |       | 2,101,406           |       | 850,569                     |       |                              | 107,420    |             |       | (2,088,694       | )          |   | 970,701 | ** ** |   |
| Property, plant and equipment, net                                |       | 14,746              |       | 199,479                     |       |                              | 8,131      |             |       | —           |       |   | 222,356 | ** ** |   |
| Acquired  intangibles, net                                        |       | —              |       | 222,647                     |       |                              | 773        |             |       | —           |       |   | 223,420 | ** ** |   |
| Goodwill                                                          |       | 24,115              |       | 2,542,282                   |       |                              | 37,316     |             |       | —           |       |   | 2,603,713 | ** ** |   |
| Deferred income  taxes and other noncurrent assets                |       | 53,768              |       | 6,856                       |       |                              | 10,505     |             |       | (13,477          | )          |   | 57,652 | ** ** |   |
| Investment in  subsidiaries                                       |       | 1,147,206           |       | 46,642                      |       |                              | —     |             |       | (1,193,848       | )          |   | — | ** ** |   |
| **Total assets**                                                  |       | $                   | 3,341,241  |                        | $          | 3,868,475                         |       |             | $          | 164,145          |       |   | $ | (3,296,019 | ) |   | $ | 4,077,842 | ** ** |   |
| **Liabilities and Stockholders' Equity**                          | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| **Current  liabilities**                                          | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Current installments of long-term debt                            |       | $                   | 2,750      |                        | $          | 231                               |       |             | $          | 2,272            |       |   | $ | — |   |   | $ | 5,253 | ** ** |   |
| Accounts payable                                                  |       | 5,776               |       | 176,312                     |       |                              | 12,894     |             |       | —           |       |   | 194,982 | ** ** |   |
| Accrued expenses and other current liabilities                    |       | 48,991              |       | 383,424                     |       |                              | 21,245     |             |       | (8,787           | )          |   | 444,873 | ** ** |   |
| Intercompany payables                                             |       | —              |       | 1,667,328                   |       |                              | 22,210     |             |       | (1,689,538       | )          |   | — | ** ** |   |
| Total current liabilities                                         |       | 57,517              |       | 2,227,295                   |       |                              | 58,621     |             |       | (1,698,325       | )          |   | 645,108 | ** ** |   |
| Long-term debt, excluding current installments                    |       | 1,903,864           |       | 3,381                       |       |                              | 9,864      |             |       | —           |       |   | 1,917,109 | ** ** |   |
| Other liabilities                                                 |       | 2,732               |       | 126,036                     |       |                              | 23,208     |             |       | (13,479          | )          |   | 138,497 | ** ** |   |
| **Total liabilities**                                             |       | 1,964,113           |       | 2,356,712                   |       |                              | 91,693     |             |       | (1,711,804       | )          |   | 2,700,714 | ** ** |   |
| **Total stockholders' equity**                                    |       | 1,377,128           |       | 1,511,763                   |       |                              | 72,452     |             |       | (1,584,215       | )          |   | 1,377,128 | ** ** |   |
| **Total  liabilities and stockholders' equity**                   |       | $                   | 3,341,241  |                        | $          | 3,868,475                         |       |             | $          | 164,145          |       |   | $ | (3,296,019 | ) |   | $ | 4,077,842 | ** ** |   |

 

21

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Balance SheetAs of March 31, 2006(in thousands)**

| ** **                                                       | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                       | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| **Current assets**                                               | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Cash and cash equivalents                                        |       | $                   | 15,905     |                        | $          | (19,520                           | )          |             | $          | 4,908            | ** ** |   | $ | — |   |   | $ | 1,293 | ** ** |   |
| Accounts receivable, net                                         |       | 5                   |       | 401,958                     |       |                              | 30,715     | ** **       |       | —           |       |   | 432,678 | ** ** |   |
| Inventories, net                                                 |       | —              |       | 282,109                     |       |                              | 49,109     | ** **       |       | (12              | )          |   | 331,206 | ** ** |   |
| Prepaid expenses deferred income taxes and other  current assets |       | 10,525              |       | 123,684                     |       |                              | 9,962      | ** **       |       | (8,558           | )          |   | 135,613 | ** ** |   |
| Intercompany receivables                                         |       | 1,976,809           |       | —                      |       |                              | 24,115     | ** **       |       | (2,000,924       | )          |   | — | ** ** |   |
| **Total current assets**                                         |       | 2,003,244           |       | 788,231                     |       |                              | 118,809    | ** **       |       | (2,009,494       | )          |   | 900,790 | ** ** |   |
| Property, plant and equipment, net                               |       | 13,937              |       | 198,656                     |       |                              | 7,913      | ** **       |       | —           |       |   | 220,506 | ** ** |   |
| Acquired intangibles,  net                                       |       | —              |       | 231,139                     |       |                              | —     | ** **       |       | —           |       |   | 231,139 | ** ** |   |
| Goodwill                                                         |       | 24,115              |       | 2,547,436                   |       |                              | 36,517     | ** **       |       | —           |       |   | 2,608,068 | ** ** |   |
| Deferred income  taxes and other noncurrent assets               |       | 54,234              |       | 7,443                       |       |                              | 10,420     | ** **       |       | (13,481          | )          |   | 58,616 | ** ** |   |
| Investment in  subsidiaries                                      |       | 1,140,066           |       | 46,635                      |       |                              | —     | ** **       |       | (1,186,701       | )          |   | — | ** ** |   |
| **Total assets**                                                 |       | $                   | 3,235,596  |                        | $          | 3,819,540                         |       |             | $          | 173,659          | ** ** |   | $ | (3,209,676 | ) |   | $ | 4,019,119 | ** ** |   |
| **Liabilities  and Stockholders' Equity**                        | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| **Current liabilities**                                          | ** ** | ** **          | ** ** | ** **                  | ** ** |                              | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Current installments of long-term debt                           |       | $                   | 2,750      |                        | $          | 194                               |       |             | $          | 1,678            | ** ** |   | $ | — |   |   | $ | 4,622 | ** ** |   |
| Accounts payable                                                 |       | 9,701               |       | 186,530                     |       |                              | 28,442     | ** **       |       | —           |       |   | 224,673 | ** ** |   |
| Accrued expenses and other current liabilities                   |       | 53,401              |       | 404,080                     |       |                              | 22,151     | ** **       |       | (8,564           | )          |   | 471,068 | ** ** |   |
| Intercompany payables                                            |       | —              |       | 1,670,055                   |       |                              | 22,098     | ** **       |       | (1,692,153       | )          |   | — | ** ** |   |
| Total current liabilities                                        |       | 65,852              |       | 2,260,859                   |       |                              | 74,369     | ** **       |       | (1,700,717       | )          |   | 700,363 | ** ** |   |
| Long-term debt, excluding current installments                   |       | 1,815,835           |       | 3,432                       |       |                              | 9,504      | ** **       |       | —           |       |   | 1,828,771 | ** ** |   |
| Other liabilities                                                |       | 2,329               |       | 127,026                     |       |                              | 22,532     | ** **       |       | (13,482          | )          |   | 138,405 | ** ** |   |
| **Total liabilities**                                            |       | 1,884,016           |       | 2,391,317                   |       |                              | 106,405    | ** **       |       | (1,714,199       | )          |   | 2,667,539 | ** ** |   |
| **Total stockholders' equity**                                   |       | 1,351,580           |       | 1,428,223                   |       |                              | 67,254     | ** **       |       | (1,495,477       | )          |   | 1,351,580 | ** ** |   |
| **Total  liabilities and stockholders' equity**                  |       | $                   | 3,235,596  |                        | $          | 3,819,540                         |       |             | $          | 173,659          | ** ** |   | $ | (3,209,676 | ) |   | $ | 4,019,119 | ** ** |   |

 

22

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Statements of EarningsThree Months Ended June 30, 2006(in thousands)**

| ** **                                                 | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                               |       |                | $          | —                      |       |                              |       | $                | 574,506    |             |       |   | $ | 60,789 |   |   |   | $ | (5,030 | ) |   |   | $ | 630,265 |   |   |
| Cost and expenses                                          |       |                | 386        |                        |       |                              | 513,369    |             |       |             | 56,567     |   |   |   | (5,042 | ) |   |   | 565,280 |   |   |
| Operating income                                           |       |                | (386       | )                           |       |                              | 61,137     |             |       |             | 4,222      |   |   |   | 12 |   |   |   | 64,985 |   |   |
| Interest income                                            |       |                | 125        |                        |       |                              | 17         |             |       |             | 34         |   |   |   | — |   |   |   | 176 |   |   |
| Interest and  related expense                              |       |                | 29,678     |                        |       |                              | 65         |             |       |             | 159        |   |   |   | — |   |   |   | 29,902 |   |   |
| Other income  (expense), net                               |       |                | 33         |                        |       |                              | 62         |             |       |             | (110       | ) |   |   | (3 | ) |   |   | (18 | ) |   |
| Management fees                                            |       |                | 720        |                        |       |                              | (684       | )                |       |             | (36        | ) |   |   | — |   |   |   | — |   |   |
| Royalties                                                  |       |                | 517        |                        |       |                              | —     |             |       |             | (517       | ) |   |   | — |   |   |   | — |   |   |
| Intercompany  interest                                     |       |                | 24,949     |                        |       |                              | (24,867    | )                |       |             | (82        | ) |   |   | — |   |   |   | — |   |   |
| Earnings before non-controlling interest and income  taxes |       |                | (3,720     | )                           |       |                              | 35,600     |             |       |             | 3,352      |   |   |   | 9 |   |   |   | 35,241 |   |   |
| Non-controlling  interest                                  |       |                | —     |                        |       |                              | —     |             |       |             | 473        |   |   |   | — |   |   |   | 473 |   |   |
| Earnings before income taxes                               |       |                | (3,720     | )                           |       |                              | 35,600     |             |       |             | 2,879      |   |   |   | 9 |   |   |   | 34,768 |   |   |
| Income taxes                                               |       |                | (1,452     | )                           |       |                              | 13,834     |             |       |             | 1,119      |   |   |   | 9 |   |   |   | 13,510 |   |   |
| Earnings (losses)  from subsidiary entities                |       |                | 23,526     |                        |       |                              | —     |             |       |             | —     |   |   |   | (23,526 | ) |   |   | — |   |   |
| **Net  earnings**                                          |       |                | $          | 21,258                      |       |                              |       | $                | 21,766     |             |       |   | $ | 1,760 |   |   |   | $ | (23,526 | ) |   |   | $ | 21,258 |   |   |

 

23

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Statements of EarningsThree Months Ended June 30, 2005(in thousands)**

| ** **                                                 | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                               |       |                | $          | —                      |       |                              |       | $                | 287,462    |             |       |   | $ | 55,604 |   |   |   | $ | (4,607 | ) |   |   | $ | 338,459 |   |   |
| Cost and expenses                                          |       |                | 218        |                        |       |                              | 255,227    |             |       |             | 52,563     |   |   |   | (4,607 | ) |   |   | 303,401 |   |   |
| Operating income                                           |       |                | (218       | )                           |       |                              | 32,235     |             |       |             | 3,041      |   |   |   | — |   |   |   | 35,058 |   |   |
| Interest income                                            |       |                | 1,774      |                        |       |                              | 38         |             |       |             | 65         |   |   |   | — |   |   |   | 1,877 |   |   |
| Interest and  related expense                              |       |                | 12,169     |                        |       |                              | 38         |             |       |             | 4          |   |   |   | — |   |   |   | 12,211 |   |   |
| Other income  (expense), net                               |       |                | 36         |                        |       |                              | 7          |             |       |             | (18        | ) |   |   | — |   |   |   | 25 |   |   |
| Management fees                                            |       |                | 520        |                        |       |                              | (480       | )                |       |             | (40        | ) |   |   | — |   |   |   | — |   |   |
| Royalties                                                  |       |                | 523        |                        |       |                              | —     |             |       |             | (523       | ) |   |   | — |   |   |   | — |   |   |
| Intercompany  interest                                     |       |                | 6,254      |                        |       |                              | (6,349     | )                |       |             | 95         |   |   |   | — |   |   |   | — |   |   |
| Earnings before non-controlling interest and income  taxes |       |                | (3,280     | )                           |       |                              | 25,413     |             |       |             | 2,616      |   |   |   | — |   |   |   | 24,749 |   |   |
| Non-controlling  interest                                  |       |                | —     |                        |       |                              | —     |             |       |             | 580        |   |   |   | — |   |   |   | 580 |   |   |
| Earnings before income taxes                               |       |                | (3,280     | )                           |       |                              | 25,413     |             |       |             | 2,036      |   |   |   | — |   |   |   | 24,169 |   |   |
| Income taxes                                               |       |                | (1,378     | )                           |       |                              | 10,674     |             |       |             | 855        |   |   |   | — |   |   |   | 10,151 |   |   |
| Earnings (losses)  from subsidiary entities                |       |                | 15,920     |                        |       |                              | —     |             |       |             | —     |   |   |   | (15,920 | ) |   |   | — |   |   |
| **Net  earnings**                                          |       |                | $          | 14,018                      |       |                              |       | $                | 14,739     |             |       |   | $ | 1,181 |   |   |   | $ | (15,920 | ) |   |   | $ | 14,018 |   |   |

 

24

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Statements of Cash FlowsThree Months Ended June 30, 2006(in thousands)**
|                                                                    | ** ** | **Parent  Company** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|--------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Net  cash provided by (used in) operating activities**           | ** ** | $                   | 5,988        | ** **                  |       | $                                 | (34,671    | )                |       |             | $          | 2,741 | ** ** |   |   | $ | — | ** ** |   |   | $ | (25,942 | ) |   |
| **Cash Flows from Investing  Activities**                          | ** ** | ** **          | ** **   |                        |       |                              |       |             |       | ** **       |       |   |   | ** ** |   |   |   |   |   |
| Capital expenditures                                               |       | (2,109              | )            |                        | (10,341    | )                                 |       |             | (630       | )                |       |   | — |   |   |   | (13,080 | ) |   |
| Payments pursuant to business combinations, net of  cash  acquired |       | (7,688              | )            |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (7,688 | ) |   |
| Other investing activities                                         |       | 60                  |         |                        | 24         |                              |       |             | —     |             |       |   | — |   |   |   | 84 |   |   |
| **Net cash used in investing activities**                     |       | (9,737              | )            |                        | (10,317    | )                                 |       |             | (630       | )                |       |   | — |   |   |   | (20,684 | ) |   |
| **Cash  Flows from Financing Activities**                          | ** ** | ** **          | ** **   |                        |       |                              |       |             |       | ** **       |       |   |   | ** ** |   |   |   |   |   |
| Net borrowing of short-term debt                                   |       |                |         |                        | 918        |                              |       |             | —     |             |       |   | — |   |   |   | 918 |   |   |
| Borrowings of long-term debt                                       |       | 89,000              |    |                        | —     |                              |       |             | 467        |             |       |   |   |   |   |   | 89,467 |   |   |
| Repayments of long-term debt                                       |       | (688                | )            |                        | (58        | )                                 |       |             | (37        | )                |       |   |   |   |   |   | (783 | ) |   |
| Excess tax benefit realized from share-based payment  arrangements |       | 84                  |         |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 84 |   |   |
| Proceeds from exercise of stock options                       |       | 873                 |         |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 873 |   |   |
| Dividends paid                                                     |       | (1,191              | )            |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (1,191 | ) |   |
| Parent Company                                                     |       | (55,930             | )            |                        | 57,242     |                              |       |             | (1,312     | )                |       |   | — |   |   |   | — |   |   |
| **Net cash provided by (used in) financing activities**            | ** ** | 32,148              | ** **   |                        | 58,102     |                              |       |             | (882       | )                |       |   | — | ** ** |   |   | 89,368 |   |   |
| **Effects  of exchange rates on cash and cash equivalents**        | ** ** | —              | ** **   |                        | —     |                              |       |             | (253       | )                |       |   | — | ** ** |   |   | (253 | ) |   |
| **Net increase  in cash and cash equivalents**                     | ** ** | 28,399              | ** **   |                        | 13,114     |                              |       |             | 976        | ** **       |       |   | — | ** ** |   |   | 42,489 |   |   |
| **Cash  and cash equivalents, beginning of period**                |       | 15,905              |         |                        | (19,520    | )                                 |       |             | 4,908      |             |       |   | — |   |   |   | 1,293 |   |   |
| **Cash and cash equivalents, end  of period**                 |       | $                   | 44,304       |                        |       | $                                 | (6,406     | )                |       |             | $          | 5,884 |   |   |   | $ | — |   |   |   | $ | 43,782 |   |   |

 

25

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**CondensedConsolidating Statements of Cash FlowsThree Months Ended June 30, 2005(in thousands)**

| ** **                                                        | ** **               | **Parent  Company** | ** **               | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **               | **Eliminations** | ** ** | **Consolidated** | ** **               |
|-------------------------------------------------------------------|--------------------------|---------------------|--------------------------|-----------------------------|------------|-----------------------------------|--------------------------|------------------|------------|------------------|--------------------------|
| **Net  cash provided by operating activities**                    |                     | $                   | (8,898                   | )                           |       | $                                 | (16,922                  | )                |       |             | $                        | 11,274 |   |   |   | $ | — | ** ** |   |   | $ | (14,546 | ) |   |
| **Cash  Flows from Investing Activities**                         | ** **               | ** **          | ** **               |                        | ** ** | ** **                        |                     |             | ** ** | ** **       |                     |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Capital expenditures                                              |                     | (615                | )                        |                        | (5,148     | )                                 |                     |             | (573       | )                |                     |   | — | ** ** |   |   | (6,336 | ) |   |
| Payments pursuant to business combinations, net of  cash acquired |                     | (52,350             | )                        |                        | —     |                              |                     |             | —     |             |                     |   | — | ** ** |   |   | (52,350 | ) |   |
| Dispositions of property, plant & equipment              |      | —              |      |                        | —     |                              |      |             | —     |             |      |   | — | ** ** |      |   | — |   |    |
| Other investing activities                                        |                     | (191                | )                        |                        | 241        |                              |                     |             | (256       | )                |                     |   | — | ** ** |   |   | (206 | ) |   |
| **Net cash used in investing activities**                         |                     | (53,156             | )                        |                        | (4,907     | )                                 |                     |             | (829       | )                |                     |   | — | ** ** |   |   | (58,892 | ) |   |
| **Cash  Flows from Financing Activities**                         | ** **               | ** **          | ** **               |                        | ** ** | ** **                        |                     |             | ** ** | ** **       |                     |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Return of advanced interest on senior subordinated  notes         |                     | (1,986              | )                        |                        |       |                              |                     |             |       |             |                     |   |   | ** ** |   |   | (1,986 | ) |   |
| Debt issuance costs                                               |                     | (120                | )                        |                        | —     |                              |                     |             | —     |             |                     |   | — | ** ** |   |   | (120 | ) |   |
| Repayments of long-term debt                                      |                     | (10,591             | )                        |                        | (83        | )                                 |                     |             | —     |             |                     |   | — | ** ** |   |   | (10,674 | ) |   |
| Proceeds from exercise of stock options                           |                     | 4,175               |                     |                        | —     |                              |                     |             | —     |             |                     |   | — | ** ** |   |   | 4,175 |   |   |
| Dividends paid                                                    |                     | (829                | )                        |                        | —     |                              |                     |             | —     |             |                     |   | — | ** ** |   |   | (829 | ) |   |
| Net repayments to (borrowings from) Parent Company                |                     | (19,385             | )                        |                        | 26,782     |                              |                     |             | (7,397     | )                |                     |   | — | ** ** |   |   | — |   |   |
| **Net cash used in financing activities**                         |                     | (28,736             | )                        |                        | 26,699     |                              |                     |             | (7,397     | )                |                     |   | — | ** ** |   |   | (9,434 | ) |   |
| **Effects  of exchange rates on cash and cash equivalents**       |                     | —              |                     |                        | —     |                              |                     |             | (328       | )                |                     |   | — | ** ** |   |   | (328 | ) |   |
| **Net (decrease) increase in cash and cash  equivalents**         |                     | (90,790             | )                        |                        | 4,870      |                              |                     |             | 2,720      |             |                     |   | — | ** ** |   |   | (83,200 | ) |   |
| **Cash  and cash equivalents, beginning of period**               |                     | 300,788             |                     |                        | (8,272     | )                                 |                     |             | 14,336     |             |                     |   | — | ** ** |   |   | 306,852 |   |   |
| **Cash and cash equivalents, end  of period**                     |                     | $                   | 209,998                  |                        |       | $                                 | (3,402                   | )                |       |             | $                        | 17,056 |   |   |   | $ | — | ** ** |   |   | $ | 223,652 |   |   |

 

26

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Unaudited)**

**17.**   RecentlyIssued Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140” (SFAS No. 155). SFAS No. 155 permitsa fair value remeasurement for any hybrid financial instrument that contains anembedded derivative that would otherwise require bifurcation. This accountingstandard will be effective for the Company beginning April 1, 2007. SFAS No. 155is not expected to have an impact on the Company’s financial position, resultsof operations or cash flows.

In July of 2006, the FASB issued FASB Interpretation (FIN)No. 48, “Accounting for Uncertainty in Income Taxes an interpretation ofFASB Statement No. 109.” FIN 48 prescribes a comprehensive model forhow a company should recognize, measure, present, and disclose in its financialstatements uncertain tax positions that the company has taken or expects totake on a tax return. FIN 48 states that a tax benefit from an uncertainposition may be recognized only if it is “more likely than not” that theposition is sustainable, based on its technical merits. The tax benefit of aqualifying position is the largest amount of tax benefit that is greater than 50 percentlikely of being realized upon ultimate settlement with a taxing authorityhaving full knowledge of all relevant information. The Company currently recognizesa tax position if it is probable of being sustained. FIN 48 is effective beginningApril 1, 2007 for DRS. The Company is currently evaluating the impact thatadopting FIN 48 will have on its operations and financial condition.

27

----

**Item2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

We begin the Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) of DRS Technologies, Inc. and subsidiaries, and a partnershipof which DRS owns an 80% controlling interest (hereinafter, we, us, our, theCompany or DRS) with a discussion of acquisition activity and a companyoverview, followed by summaries of defense industry considerations and otherbusiness considerations to provide context for understanding our business. Thisis followed by a discussion of the critical accounting estimates that webelieve are important to understanding the assumptions and judgmentsincorporated in our reported financial results, which we discuss under “Resultsof Operations.” We then provide an analysis of cash flows and discuss ourfinancial commitments under “Liquidity and Capital Resources” and “ContractualObligations,” respectively. This MD&A should be read in conjunction withthe consolidated financial statements and related notes contained herein and inour March 31, 2006 Annual Report on Form 10-K.

**Forward-Looking Statements**

The following discussionand analysis contains forward-looking statements, within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, that are based on management’sbeliefs and assumptions, current expectations, estimates and projections. Suchstatements, including statements relating to the Company’s expectations forfuture financial performance, are not considered historical facts and areconsidered forward-looking statements under the federal securities laws. Thesestatements may contain words such as “believes,” “anticipates,” “plans,” “expects,”“intends,” “estimates” or similar expressions. These statements are notguarantees of our future performance and are subject to risks, uncertaintiesand other important factors that could cause our actual performance orachievements to differ materially from those expressed or implied by theseforward-looking statements and include, without limitation: the effect of ouracquisition strategy on future operating results, including our ability toeffectively integrate acquired companies into our existing operations; theuncertainty of acceptance of new products and successful bidding for newcontracts; the effect of technological changes or obsolescence relating to ourproducts and services; and the effects of government regulation or shifts ingovernment priorities (including changes in priorities in response to the waron terrorism and to homeland security), as they may relate to our products andservices; and other risks or uncertainties detailed in the Company’s Securitiesand Exchange Commission filings. Given these uncertainties, you should not relyon forward-looking statements. The Company undertakes no obligations to updateany forward-looking statements, whether as a result of new information, futureevents or otherwise.

**Business Combinations**

On January 31, 2006we completed our acquisition of Engineered Support Systems, Inc. (ESSI)for $1.93 billion in cash and DRS common stock. In the transaction, awholly-owned subsidiary of DRS was merged with ESSI, forming our thirdoperating segment—the Sustainment Systems & Services (S3) Group. ESSI,formerly headquartered in St. Louis, Missouri, is a supplier of integratedmilitary electronics, support equipment and technical services focused onadvanced sustainment and logistics support solutions for all branches of theU.S. armed services, major prime defense contractors, certain internationalmilitaries, homeland security forces and selected government and intelligenceagencies. ESSI also produces specialized equipment and systems for commercialand industrial applications. The addition of ESSI is expected to contribute asignificant base of systems, products and services focused on military forcesustainment, technical and logistics support, integrated military electronicsand field support equipment.

On June 27, 2005, weacquired WalkAbout Computer Systems, Inc. (WalkAbout) in a stock purchasetransaction for approximately $13.8 million in cash, with additionalconsideration payable of up to $5.0 million upon achievement of certainrevenue targets for a period of two and a half years. WalkAbout, located inWest Palm Beach, Florida, is a manufacturer of several lines of rugged, mobiletablet PCs, 

28

----

servingindustrial, municipal, military and government markets. We believe that the acquisitionof WalkAbout has enhanced our position in the tactical computer systemsbusiness by broadening our product offerings. WalkAbout is being managed aspart of our Command, Control, Communications, Computers and Intelligence (C4I)Group.

On April 15, 2005, weacquired Codem Systems, Inc. (Codem) in a stock purchase transaction forapproximately $31.6 million in cash, with additional consideration payable ofup to $5.0 million upon achievement of certain annual bookings targets for aperiod of three years. Codem, located in Merrimack, New Hampshire, is aprovider of signals intelligence (SIGINT) systems, network interface modulesand high-performance antenna control systems. Management believes that theaddition of Codem has enhanced our existing intelligence product base. Codem isbeing managed as part of our C4I Group.

**Company Overview**

DRS is a supplier ofdefense electronic products, systems and military support services. We providehigh technology products, services and support to all branches of the U.S.military, major aerospace and defense prime contractors, governmentintelligence agencies, international military forces and industrial markets. Weoperate in three principal operating segments, on the basis of products andservices offered. Each operating segment is comprised of separate and distinctbusinesses. Our operating segments are: the Command, Control, Communications,Computers and Intelligence (C4I) Group, the Surveillance and Reconnaissance(SR) Group, and the Sustainment Systems & Services Group (S3). Allother operations, primarily our Corporate Headquarters are grouped in Other.

The C4I Group is comprisedof the following business areas: Command, Control and Communications (C3),which includes naval display systems, ship communications systems, radarsystems, technical support, electronic manufacturing and system integrationservices and secure voice and data communications; Power Systems, whichincludes naval and industrial power generation, conversion, propulsion,distribution and control systems; Intelligence Technologies, which includessignals intelligence, communications intelligence, data collection, processingand dissemination equipment; and Tactical Systems, which includes battlemanagement tactical computer systems and peripherals product lines.

The SR Group is comprisedof the following business areas: Reconnaissance, Surveillance & TargetAcquisition (RSTA), which develops and produces electro-optical sighting,targeting and weapon sensor systems, aircraft weapons alignment systems andimage intensification (I2) night vision, combat identification and laseraimers/illuminator products, and provides electronic manufacturing services;Training & Control Systems, which develops and produces air combattraining, electronic warfare and network systems, high-speed digital data andimaging systems, unmanned vehicles and mission and flight recorders; and Test &Energy Management, which develops and produces electronic test, diagnostics andvehicle electronics.

The S3 Group is comprisedof the following business areas: Sustainment Systems, which designs, engineersand manufactures integrated military electronics and other military supportequipment, primarily for the U.S. Department of Defense (DoD) as well asrelated heat transfer and air handling equipment and power generation anddistribution equipment for domestic commercial and industrial users; andSupport Services, which provides engineering services, logistics and trainingservices, advanced technology services, asset protection systems and services,telecommunication systems integration and information technology services, andvehicle armor kits for military, humanitarian, disaster recovery and emergencyresponder applications.

On April 1, 2006, DRSTechnical Services, Inc. (TSI), an operating unit of the C4I Group, wasconsolidated into an operating unit of the S3 Group to achieve certainoperating synergies. For the three months ended June 30, 2005 theoperating unit recorded $5.2 million and $0.3 million in revenues andoperating income, respectively, and $10.6 million of assets, which wasconsidered immaterial for purposes 

29

----

ofrestating prior year goodwill balances and segment information for both the C4I Groupand the S3 Group.

**Defense Industry Considerations and Business Strategy**

The substantial majorityof our revenue is generated pursuant to written contractual arrangements todesign, develop, manufacture and/or modify complex products and to providerelated engineering, technical and other services according to thespecifications of the buyers (customers). Our primary “end-use” customeris the DoD. Our other customers include certain U.S. government intelligenceagencies, foreign governments, commercial customers and other U.S. federal,state and local government agencies.

We believe markets fordefense and related advanced technology systems and services for fiscal 2007and beyond will continue to be affected by the global war on terrorism, throughthe continued need for military missions and efforts in Iraq and Afghanistan.The war on terrorism has focused greater attention on homeland security andbetter communication and interplay among local, state and federal governmentagencies and U.S. military services. We believe the United States overalldefense posture continues to move toward a more joint-capabilities-basedstructure, which creates the ability for a more flexible response with greaterforce mobility, stronger space capabilities, enhanced missile defense, andimproved information systems capability and security.

We believe DoD budgetshave experienced increased focus on command, control, communications,computers, intelligence, surveillance and reconnaissance (C4ISR), precisionguided weapons, unmanned aerial vehicles (UAVs), network-centriccommunications, Special Operations Forces (SOF) and missile defense. Inaddition, we believe the DoD philosophy has focused on a transformationstrategy that balances modernization and recapitalization (or upgradingexisting platforms), while enhancing readiness and joint operations. As aresult, we believe defense budget program allocations continue to favoradvanced information technologies related to command, control, communications,and computers, (C4) and Intelligence, Surveillance and Reconnaissance (ISR).Furthermore, the DoD’s emphasis on system interoperability, force multipliersand providing battlefield commanders with real-time data is increasing theelectronic content of nearly all major military procurement and researchprograms.

Our strategy is designedto capitalize on the breadth of our technology and extensive expertise in orderto meet the evolving needs of our customers. We intend to expand our share ofexisting programs and participate in new programs by leveraging the strongrelationships that we have developed with the DoD, several other U.S.government agencies and all of the major U.S. defense prime contractors. Weplan to continue to align our research and development, manufacturing and newbusiness efforts to complement our customers’ requirements and to providestate-of-the-art products and services. We plan to maintain a diversified andbroad business mix with limited reliance on any single program. We also intendto expand our technical services and support offerings to the DoD, thusdiversifying our business beyond the historical investment accounts and intoOperations and Maintenance funded activities.

A significant component ofour strategy has been to enhance our existing product base through selectiveacquisitions that add new products and technologies in areas that complementour present business base. We intend to continue acquiring select publicly andprivately held companies, as well as defense businesses of larger companiesthat (i) exhibit significant market position(s) in their businessareas, (ii) offer products that complement and/or expand our product offerings,and (iii) display growing revenues and positive operating income and cashflow prospects.

**Other Business Considerations**

As a governmentcontractor, we are subject to U.S. government oversight. The government may askabout and investigate our business practices and audit our compliance withapplicable rules and regulations. Depending on the results of those auditsand investigations, the government could make 

30

----

claimsagainst us. Under government procurement regulations and practices, anindictment of a government contractor could result in that contractor beingfined and/or suspended from being able to bid on, or be awarded, new governmentcontracts for a period of time. A conviction could result in debarment for aspecific period of time. Similar government oversight exists in most othercountries where we conduct business.

We are party to variouslegal actions and claims arising in the ordinary course of our business. Webelieve we have adequate legal defenses for each of the actions and claims, andwe believe that their ultimate disposition will not have a material adverseeffect on our consolidated financial position, results of operations orliquidity (see Part II. Other Information, Item 1. Legal Proceedings).

Our sales to internationalcustomers involve additional risks, such as exposure to currency fluctuationsand changes in foreign economic and political environments. Internationaltransactions frequently involve increased financial and legal risks arisingfrom stringent contractual terms and conditions, and widely differing legalsystems, customs and practices in foreign countries. We expect thatinternational sales, as a percentage of our overall sales, may increase infuture years as a result of, among other factors, our growth strategy and continuingchanges in the defense industry.

Our future operatingresults depend on our ability to successfully compete in a highly competitiveindustry that is characterized by rapid technological change and to find andeffectively integrate acquired companies into our existing operations.Continuation of our recent revenue growth rate depends primarily on our abilityto identify and acquire suitable acquisition targets. We continue toparticipate successfully in the defense industry consolidation through strategicbusiness acquisitions and by streamlining our existing operations; however, wecannot guarantee that we will have sufficient funds available to us to continueinvesting in business acquisitions.

**Critical Accounting Policies**

Our consolidated financialstatements and accompanying notes are prepared in accordance with accountingprinciples generally accepted in the United States of America. Preparingconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and disclosures of contingent assets and liabilities. These estimates andassumptions are affected by the application of our accounting policies. Oursignificant accounting policies are described in Note 1 to the ConsolidatedFinancial Statements included in our March 31, 2006 Annual Report on Form 10-K.Except for the change in our accounting for share-based payments describedbelow, there were no significant changes in the Company’s critical accountingpolicies during the three months ended June 30, 2006. Critical accountingpolicies are those that require application of management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effects of matters that are inherently uncertain and maychange in subsequent periods. Critical accounting policies for us includerevenue recognition on contracts and contract estimates, valuation of goodwilland acquired intangible assets, pension plan and postretirement benefit planobligations, accounting for income taxes, share-based payments and othermanagement estimates.

*Share-*BasedCompensation—As of April 1,2006 we adopted the provisions of Statement of Financial Accounting StandardsNo. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), as interpreted by SEC Staff AccountingBulletin No. 107 which requires that the cost resulting from all share-based paymenttransactions be recognized in the financial statements at their fair values. Weadopted SFAS 123R using the modified prospective application method under whichthe provisions of SFAS 123R apply to new awardsand to awards modified, repurchased, or cancelled after the adoption date.Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date basedon the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, includingestimating our stock price 

31

----

*volatility and employee stock option exercise behaviors*. Our expected volatility is based upon thehistorical volatility of our stock. The expected life of share-based awards is based on observed historical exercisepatterns for different groups of employees and directors. As share-basedcompensation expense recognized in theconsolidated statement of earnings is based on awards ultimately expected tovest, the amount of expense has been reduced for estimated forfeitures. SFAS123R requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. Forfeitures were estimated based on historical experience.

**Results of Operations**

Ouroperating cycle is long-term and involves various types of production andservice contracts and varying production delivery schedules. Accordingly,operating results of a particular period, or year-to-year comparisons ofrecorded revenues and earnings, may not be indicative of future operatingresults. Members of our senior management team regularly review key performancemetrics and the status of operating initiatives within our business. These keyperformance indicators are primarily revenues, operating income and bookings.We review this information on a monthly basis through extensive operatingsegment reviews which include, among other operating issues, detaileddiscussions related to significant programs, proposed investments in newbusiness opportunities or property, plant, and equipment and integration andcost reduction efforts. The following table presents a summary comparison ofthe key performance metrics, other significant financial metrics andsignificant liquidity metrics monitored by senior management of the Company.

| ** **                              | ** ** | **Three Months Ended  June 30,**                                  | ** ** | **Percent**                                                                      | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(in thousands, except percentages)**                            | ** ** |
| **Key  performance metrics**            | ** ** |                                                                             | ** ** | ** **                                                                       |       |   | ** ** |   |   |   |   |   |   |
| Revenues                                |       |                                                                             | $          | 630,265                                                                          |       |   |   | $ | 338,459 |   |   |   | 86.2 | % |   |
| Operating income                        |       |                                                                             | $          | 64,985                                                                           |       |   |   | $ | 35,058 |   |   |   | 85.4 | % |   |
| Bookings                                |       |                                                                             | $          | 782,126                                                                          |       |   |   | $ | 520,504 |   |   |   | 50.3 | % |   |
| **Other significant financial metrics** |       |                                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Interest and  related expenses          |       |                                                                             | $          | 29,902                                                                           |       |   |   | $ | 12,211 |   |   |   | 144.9 | % |   |
| Income taxes                            |       |                                                                             | $          | 13,510                                                                           |       |   |   | $ | 10,151 |   |   |   | 33.1 | % |   |
| **Significant liquidity metrics(A)**    |       |                                                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Free cash flow  (deficit)               |       |                                                                             | $          | (39,022                                                                          | )          |   |   | $ | (20,882 | ) |   |   | (86.9 | %) |   |
| EBITDA                                  |       |                                                                             | $          | 83,619                                                                           |       |   |   | $ | 44,920 |   |   |   | 86.2 | % |   |

----

    (A) See Liquidity and Capital Resources and Use ofNon-GAAP Financial Measures for additional discussion and information.

***Three-Month Period Ended June 30, 2006, Comparedwith the Three-Month Period Ended June 30, 2005***

**Revenues and operatingincome**   Consolidated revenues andoperating income for the three-month period ended June 30, 2006 increased$291.8 million and $29.9 million, respectively, to $630.3 million and $65.0million, respectively, as compared with the corresponding period in the prioryear. The increase in revenues was largely driven by our January 31, 2006,acquisition of ESSI, as well as our June 27, 2005 acquisition of WalkAboutwhich contributed combined incremental (current quarter over correspondingprior-year quarter) revenues of $243.0 million*.*Also contributing to higher revenues were increased volume fromembedded diagnostics, engineering and development for a certain naval infraredsearch and track program, and increased shipments of uncooled thermal weaponssights. Partially offsetting theoverall increase in revenues were decreased shipments of combat displayworkstations, airborne electro-optical sighting systems and surveillancetuners.

32

----

The growth in operating income in the first quarter offiscal 2007, as compared with the corresponding prior year period, was due primarilyto the overall increase in revenues, as well as favorable margins from anuclear control panel program and rugged computers for the U.K. Ministry ofDefence. Partially offsetting the overall increase in operating income were lowermargins realized from our intelligence businesses and on certain ruggedcomputer systems being sold in the final year of a multi-year contract atprices lower than previously. Our acquisitions of ESSI and WalkAboutcontributed $24.5 million of combined incremental operating income for thethree-month period ended June 30, 2006. See Operating Segments discussionbelow for additional information.

As described in Note 4 to our unaudited ConsolidatedFinancial Statements, we adopted SFAS 123R effective April 1, 2006 usingthe modified prospective method. As a result of the application of SFAS 123R inthe three months ended June 30, 2006, we recorded share-based costsrelated to stock options and non-vested stock of $2.6 million, $1.8 million ofwhich was charged to operating income. At June 30, 2006, there was $13.7million of unrecognized compensation costs related to stock options, which is expectedto be recognized over a weighted average remaining period of 2.7 years. As ofJune 30, 2006, total unrecognized compensation costs related to non-vestedstock awards was $18.1 million and that amount is expected to be recognizedover a weighted average remaining period of 2.1 years.

As a result of applying SFAS 123R, our earnings beforeincome taxes and net earnings for the three months ended June 30, 2006were $1.8 million and $1.1 million lower, respectively, than if we hadcontinued to account for share-based compensation under Accounting PrinciplesBulletin (APB) No. 25. Basic and diluted earnings per share for the threemonths ended June 30, 2006 would have been $0.57 per share and $0.55 pershare, respectively, if we had not adopted SFAS 123R, compared to reportedamounts of $0.54 per basic and $0.52 per diluted share.

**Bookings**   We define bookings as the value of contract awardsand orders received from the U.S. government, for which the U.S.government has appropriated funds, plus the value of contract awards and ordersreceived from customers other than the U.S. government. Bookings for thethree-month period ended June 30, 2006 increased $261.6 million, versusthe same period in the prior year, to $782.1 million. The primary drivers ofthe increase were our acquisitions of ESSI and WalkAbout which contributed$279.0 million of combined incremental bookings to the three months ended June 30,2006.

**Interest and relatedexpenses**   Interest and relatedexpenses increased $17.7 million for the three-month period ended June 30,2006 as compared with the same period in the prior year, to $29.9 million.The increase in interest and related expenses is primarily the result of an increasein our borrowings outstanding for the three-months ended June 30, 2006, ascompared with the corresponding period in the prior-year. Our averageborrowings increased due to our January 31, 2006 issuance of $350 millionof 65¤8% senior notes, $250 million issuance of 75¤8% senior subordinated notes, $300 million 2% seniorconvertible notes and the February 8, 2006 exercise of an overallomentoption for an additional $45 million 2% senior convertible notes. In additionthere was approximately $129.0 million outstanding against our revolving lineof credit at June 30, 2006 (see Liquidity and Capital Resources below). Wehad no borrowings outstanding under our revolving credit facility at June 30,2005.

**Income taxes****  **The provision for income taxes forthe three-months ended June 30, 2006, reflected an effective income taxrate of approximately 38.9%, as compared with 42.0% in the same period lastyear. Our effective tax rate declined primarily due to the ESSI acquisition aswell as a favorable tax adjustment of approximately $0.4 million recordedduring the three months ended June 30, 2006. We anticipate that oureffective income tax rate for the year ended March 31, 2007, willapproximate 40.0%.

33

----

**Operating Segments**

Thefollowing table sets forth, by operating segment, revenues, operating incomeand operating margin for the three-month periods ended June 30, 2006 and2005, and the percentage increase or decrease of the current fiscal perioditems, as compared with the corresponding prior year period:

| ** **       | ** ** | **Three Months Ended  June 30,**                | ** ** | **Three Months  Ended Percent  Changes** | ** ** |
|------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                                       | ** ** | **2005**                                           | ** ** | **2006 vs. 2005** | ** ** |
| ** **       | ** ** | **(in thousands, except for percentages)** | ** ** |
| **C4I  Group**   |       |                                                           |       |                                               |       |   |   |   |   |
| Revenues         |       | $                                                              | 193,992    |                                               | $          | 190,491 |   |   | 1.8 | % |   |
| Operating income |       | $                                                              | 19,937     |                                               | $          | 19,488 |   |   | 2.3 | % |   |
| Operating margin |       | 10.3                                                           | %          | 10.2                                               | %          |   | 0.5 | % |   |
| **SR Group**     | ** ** | ** **                                                     | ** ** | ** **                                         | ** ** |   |   |   |   |
| Revenues         |       | $                                                              | 192,958    |                                               | $          | 147,968 |   |   | 30.4 | % |   |
| Operating income |       | $                                                              | 20,749     |                                               | $          | 15,788 |   |   | 31.4 | % |   |
| Operating margin |       | 10.8                                                           | %          | 10.7                                               | %          |   | 0.9 | % |   |
| **S3 Group**     |       |                                                           |       |                                               |       |   |   |   |   |
| Revenues         |       | $                                                              | 243,315    |                                               | $          | — |   |   | N/A |   |   |
| Operating income |       | $                                                              | 24,686     |                                               | $          | — |   |   | N/A |   |   |
| Operating margin |       | 10.1                                                           | %          | —                                             |       |   | N/A |   |   |
| **Other**        |       |                                                           |       |                                               |       |   |   |   |   |
| Operating loss   |       | $                                                              | (387       | )                                                  | $          | (218 | ) |   | (77.5 | )% |   |

 

***Three-MonthPeriod Ended June 30, 2006, Compared with the Three-Month Period EndedJune 30, 2005***

**C4I Group**   Revenues increased$3.5 million, or 1.8%, to $194.0 million for the three-months endedJune 30, 2006, as compared with the corresponding prior-year period.Operating income increased $0.4 million, or 2.3%, to $19.9 million. Theincrease in revenue was principally attributable to higher engineering anddevelopment revenue from a naval infrared search and track program, increased volumefor border security surveillance systems, power conversion equipment for theU.S. Navy and increased volume from a cable reset and refurbishment program. Ouracquisition of WalkAbout contributed incremental (current quarter overcorresponding prior-year quarter) revenues of $5.3 million to the three-monthsended June 30, 2006. Largely offsetting our increases in revenues were decreased shipments of combat displayworkstations and surveillance tuners.

The increase in operatingincome for the three-months ended June 30, 2006, as compared to thecorresponding period in the prior year, was driven primarily by the overallincrease in revenues, as well as favorable margins on a certain nuclear controlcabinet program and $0.2 million in incremental operating income from WalkAbout.Partially offsetting our overall higher operating income were lower margins inour intelligence businesses and on certain rugged computer systems being sold inthe final phase of a multi-year contract at prices lower than previously.

**SR Group****  **Revenues increased $45.0 million, or30.4%, to $193.0 million for the three-months ended June 30, 2006, ascompared with the corresponding prior-year period. Operating income increased$5.0 million, or 31.4%, to $20.7 million. The increase in revenues wasprimarily attributable to****increased demandfor embedded diagnostics,******increasedshipments of uncooled thermal weapons sights and higher sales volume from aircombat training systems and ground-based target acquisition and missile controlsubsystems. Partially offsetting the overall increase in revenues were lower volumefrom airborne electro-optical sighting systems products and services, unmannedthreat emitter systems and infrared assemblies for an anti-tank missile system.

34

----

The increase in operatingincome for the three-months ended June 30, 2006, as compared with thecorresponding period in the prior year was largely due to higher overallrevenues.

**S3 Group****  **The S3 Group, which consists of theoperating units acquired from our acquisition of ESSI on January 31, 2006,recorded revenues of $243.3 million and operating income of $24.7 million. Theprimary revenue and operating income drivers in the group were demand for equipmentand services provided under the Rapid Response (R2) program, add-on commercialvehicle armor kits, heavy equipment transport refurbishment for the U.S. Armyand mobile power generation and distribution equipment for the U.S. Air Force.

**Other****  **The operating loss in Other consistsof certain non-allocable general and administrative expenses at DRS corporate.

**Liquidity and Capital Resources**

| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                             | ** ** |
| Net cash used in  operating activities               |       |                                                | $          | (25,942 | ) |   |   | $ | (14,546 | ) |   |
| Net cash used in  investing activities               |       |                                                | $          | (20,684 | ) |   |   | $ | (58,892 | ) |   |
| Net cash provided by (used  in) financing activities |       |                                                | $          | 89,368 |   |   |   | $ | (9,434 | ) |   |

** **

**Operating activities****  **During the three months ended June 30,2006, we used $25.9 million of operating cash flow, $11.4 million more than the$14.5 million of operating cash flow used in the same period in the prior year.Net earnings increased $7.2 million to $21.3 million. Non-cash adjustments toreconcile net earnings to cash flows from operating activities increased $12.6 millionover the corresponding prior fiscal period, driven primarily by increaseddepreciation of fixed assets and amortization of the intangible assets relatedto our acquisition of ESSI, and increased share-based compensation due to theadoption of SFAS 123R.

Changes in assets andliabilities, net of effects from business combinations, used $71.8 million incash for the three months ended June 30, 2006. Accounts payable used $30.9million of cash during the period as payments required to build inventoriesexceeded related purchases. Accounts receivable used $20.9 million of cashas net billings exceeded collections. Inventories used $11.3 million of cash asinventories increased in certain of our electro-optical infrared sighting andtargeting businesses, offset, in part, by decreased inventories within certaintactical computing businesses. Accrued expenses and other current liabilitiesused $11.6 million of cash. Net increases in both customer advances and net prepaidexpenses and other current assets generated $9.6 million and used $6.3 millionin cash, respectively.

**Investing activities****  **We paid $13.1 million for capitalimprovements during the three-months ended June 30, 2006, as compared with$6.3 million in the corresponding prior-year period. We expect our capitalexpenditures to be in the range of $50.0 million to $60.0 million in fiscal2007, as we continue to upgrade our facilities and integrate recentacquisitions into our existing businesses. Payments pursuant to businesscombinations, net of cash acquired, totaled $7.7 million driven by $7.1 millionof additional consideration paid to satisfy an earn-out obligation related toour acquisition of DKD, Inc. (now operating as a component of DRS Sensors &Targeting Systems, Inc.), and $0.6 million in ESSI acquisition-relatedpayments.

**Financing activities**   Forthe three months ended June 30, 2006, financing activities generated $89.4 millionin cash. Net borrowings on our revolving line of credit were $89.0 million. Wealso received $0.9 million from the exercise of stock options and paid $1.2million in cash dividends.

Simultaneously with theclosing of our acquisition of ESSI, on January 31, 2006 we entered into anamended and restated credit facility for up to an aggregate amount of $675.0million with a syndicate of lenders (the Credit Facility), replacing ourpreviously existing credit facility. The Credit Facility consists of 

35

----

a $400.0million senior secured revolving line of credit and a $275.0 million seniorsecured term loan. We are permitted, on no more than two occasions, to increasethe aggregate amount of the Credit Facility by up to $250.0 million, subject tocertain restrictions. Any increase in the aggregate amount of the CreditFacility may be borrowed in the form of either additional term loans oravailable amounts under the revolving line of credit. The Credit Facility isguaranteed by substantially all of DRS’s domestic subsidiaries. In addition, itis collateralized by liens on substantially all of the assets of our subsidiaryguarantors’ and certain of DRS’s other subsidiaries’ assets and by a pledge ofa portion of certain of our non-guarantor subsidiaries’ capital stock.

From time to time, weenter into standby letters-of-credit and bank guarantee agreements withfinancial institutions and customers, primarily relating to the guarantee ofits future performance on certain contracts to provide products and servicesand to secure advance payments we have received from our customers. As of June 30,2006, $47.5 million was contingently payable under letters of credit and bankguarantees. Of this amount, approximately $0.9 million and $0.4 million inletters of credit and bank guarantees, respectively, as of June 30, 2006,were issued under a previous credit agreement and by a bank agreement for ourU.K. subsidiary, respectively, and are not considered when determining theavailability under our revolving line of credit. At June 30, 2006approximately $38.3 million and $0.4 million in letters of credit andbank guarantees, respectively, are due within one year. At June 30, 2006,we had $224.8 million of availability under our revolving line of credit.

On March 29, 2006,DRS Technologies Canada Company (DRS Canada) established a five-year seniorsecured term loan for approximately $9.9 million (C$11.5 million), maturing on April 1,2011. The proceeds of the loan were utilized to permit repatriation of certainamounts from Canada to the U.S. which were subject to more favorable taxtreatment under the Jobs Act. The debt is collateralized by the assets of DRSCanada and guaranteed by DRS Technologies, Inc. We are subject to the samefinancial covenants under the DRS Canada loan, as we are under the CreditFacility, and DRS Canada is subject to other non-financial covenants that aresimilar to those described for the Credit Facility.

On October 30, 2003, weissued $350.0 million aggregate principal amount of 67¤8%senior subordinated notes, due November 1, 2013 (the October 2003Notes). The net proceeds of the October 2003 Notes, together with aportion of our available cash and initial borrowings under the then existingcredit facility, were used to fund the acquisition of Integrated DefenseTechnologies, Inc. (IDT), repay certain of DRS’s and IDT’s outstandingindebtedness, and pay related fees and expenses. The October 2003 Noteswere issued under an indenture with The Bank of New York. Subject to a numberof exceptions, the indenture restricts our ability and the ability of oursubsidiaries to incur more debt, pay dividends and make distributions, makecertain investments, repurchase stock, create liens, enter into transactionswith affiliates, enter into sale lease-back transactions, merge or consolidate,and transfer or sell assets. The October 2003 Notes are unconditionallyguaranteed, jointly and severally, by DRS’s current and future wholly-owneddomestic subsidiaries. The foreign subsidiaries and certain domesticsubsidiaries of DRS do not guarantee the October 2003 Notes.

On December 23, 2004,we issued an additional $200.0 million aggregate principal amount of 67¤8%senior subordinated notes, due November 2013 (December 2004Notes). The December 2004 Notes were offered as additional debt securitiesunder the Company’s indenture with the Bank of New York with identicalterms and the same guarantors as the October 2003 Notes.

On January 31, 2006,in connection with the acquisition of ESSI, we issued $900.0 million of newdebt securities, including $350.0 million aggregate principal amount of 65¤8%senior notes due 2016, $250.0 million aggregate principal amount of 75¤8%senior subordinated notes due 2018 (collectively called the January 2006Notes) and $300.0 million aggregate principal amount of 2.0% convertible seniornotes due 2026 (Convertible Notes). On February 8, 2006, we sold anadditional $45.0 million of Convertible Notes pursuant to an overallotmentoption exercised by the initial purchasers of the Convertible Notes. The netproceeds of the January 2006 Notes and the Convertible Notes, togetherwith a portion of the 

36

----

Company’savailable cash and initial borrowings under the Credit Facility, were used tofund the ESSI acquisition, repay certain of ESSI’s outstanding indebtedness,and pay related fees and expenses. The January 2006 Notes are unsecured.The 75¤8%senior subordinated notes rank behind the Credit Facility, the 65¤8% senior notesand the Convertible Notes, other than trade payables and is pari passu with the67¤8%senior subordinated notes.

The January 2006Notes were issued under indentures with The Bank of New York. Subject to anumber of exceptions, the indentures restrict our ability and the ability of oursubsidiaries to incur more debt, pay dividends and make distributions, makecertain investments, repurchase stock, create liens, enter into transactionswith affiliates, enter into sale lease-back transactions, merge or consolidate,and transfer or sell assets. The January 2006 Notes are unconditionallyguaranteed, jointly and severally, by certain of our existing and futuredomestic subsidiaries.

Accrued interest expenseat June 30, 2006 and March 31, 2006 was approximately $29.6 millionand $27.3 million, respectively.

Based upon our anticipatedlevel of future operations, we believe that our existing cash and cashequivalents balances and our cash generated from operating activities, togetherwith available borrowings under our amended and restated senior secured creditfacility, will be adequate to meet our anticipated requirements for workingcapital, capital expenditures, commitments, research and developmentexpenditures, contingent purchase prices, program and other discretionaryinvestments, and interest and principal payments for the foreseeable future.There can be no assurance, however, that our business will continue to generatecash flow at current levels. If we are unable to generate sufficient cash flowfrom operations to service our debt, we may be required to sell assets, reducecapital expenditures, refinance all or a portion of our existing debt or obtainadditional financing. Our ability to make scheduled principal payments or topay interest on or to refinance our indebtedness depends on our futureperformance and financial results, which, to a certain extent, are subject togeneral conditions in or affecting the defense industry and to generaleconomic, political, financial, competitive, legislative and regulatory factorsbeyond our control. There can be no assurance that sufficient funds will beavailable to enable us to service our indebtedness, make necessary capitalexpenditures or to make discretionary investments.

**Equity****  **On May 12, 2006, the Board ofDirectors declared a $0.03 per common share cash dividend, which was paid on June 30,2006 to stockholders of record as of June 15, 2006. On August 3,2006, the Board of Directors declared a $0.03 per common share cash dividend,payable on September 29, 2006 to stockholders of record as of September 15,2006.

**Free Cash Flow****  **Free cash flow represents net cashprovided by operating activities less capital expenditures. Free cash flow forthe three-month period ended June 30, 2006 was a deficit of $39.0 million,or $18.1 million less than the deficit of $20.9 million of free cashflow in the corresponding period in the prior year. See “Use of Non-GAAPFinancial Measures” below for additional discussion and information.

**EBITDA****  **Earnings before net interest andrelated expenses (primarily the amortization and write-off of debt premium andissuance costs), income taxes, depreciation and amortization (EBITDA) for thethree-month period ended June 30, 2006 was $83.6 million, or$38.7 million greater than the $44.9 million of EBITDA in thecorresponding period in the prior year. See “Use of Non-GAAP Financial Measures”below for additional discussion and information.

**Off-****Balance Sheet Financing Arrangements**   Wehave not entered into any off-balance sheet financing arrangements.

**ContractualObligations****  **Ourcontractual obligations and commitments principally include obligationsassociated with our outstanding indebtedness, future minimum operating leaseobligations, acquisition earn-outs and purchase obligations. The disclosuresrelating to our contractual obligations in our Annual Report on Form 10-Kfor the year ended March 31, 2006 have not materially changed since wefiled that report.

37

----

**Backlog  **Fundedbacklog represents products or services that our customers have committed bycontract to purchase from us. Due to the general nature of defense procurementand contracting, the operating cycle for our military business typically hasbeen long term. Military backlog currently consists of various production andengineering development contracts with varying delivery schedules and projecttimetables. Our backlog also includes a significant amount of commercialoff-the-shelf (COTS)-based systems for the military, which have shorterdelivery times. Accordingly, revenues for a particular period, or year-to-yearcomparisons of reported revenues and related backlog positions may not beindicative of future results. Backlog at June 30, 2006 was $2.56 billion,as compared with $2.40 billion at March 31, 2006. We booked $782.1 millionin new orders for the three-month period ended June 30, 2006.

**Internal Research andDevelopment  **In addition to customer-sponsoredresearch and development, we also engage in internal research and development.These expenditures reflect our continued investment in new technology anddiversification of our products. Expenditures for internal research anddevelopment for the three-month periods ended June 30, 2006 and 2005 were$11.0 million and $9.2 million, respectively.

**Use of Non-GAAP FinancialMeasures  **Certain disclosures in this documentinclude “non-GAAP (Generally Accepted Accounting Principles) financialmeasures.” A non-GAAP financial measure is defined as a numerical measure of acompany’s financial performance that excludes or includes amounts so as to bedifferent than the most directly comparable measure calculated and presented inaccordance with GAAP in the Consolidated Balance Sheets, Statements ofEarnings, or Statements of Cash Flows of the Company. The components of EBITDAand a reconciliation of EBITDA and “free cash flow” with the most directlycomparable GAAP measure follows:

| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)**                         | ** ** |
| Net earnings                                                                  |       | $                                               | 21,258     |   | $ | 14,018 |   |
| Income taxes                                                                  |       | 13,510                                          |       | 10,151 |   |
| Interest income                                                               |       | (176                                            | )          | (1,877 | ) |
| Interest and  related expenses                                                |       | 29,902                                          |       | 12,211 |   |
| Depreciation and  amortization                                                |       | 19,125                                          |       | 10,417 |   |
| EBITDA(A)                                                                     |       | 83,619                                          |       | 44,920 |   |
| Income taxes                                                                  |       | (13,510                                         | )          | (10,151 | ) |
| Interest income                                                               |       | 176                                             |       | 1,877 |   |
| Interest and  related expenses                                                |       | (29,902                                         | )          | (12,211 | ) |
| Deferred income  taxes                                                        |       | 460                                             |       | (522 | ) |
| Changes in assets  and liabilities, net of effects from business combinations |       | (71,798                                         | )          | (40,599 | ) |
| Other, net                                                                    |       | 5,013                                           |       | 2,140 |   |
| Net cash used in operating activities                                         |       | (25,942                                         | )          | (14,546 | ) |
| Capital  expenditures                                                         |       | (13,080                                         | )          | (6,336 | ) |
| Free cash flow  deficit(B)                                                    |       | $                                               | (39,022    | ) | $ | (20,882 | ) |

----

(A)       Wedefine EBITDA as net earnings before net interest and related expenses(principally amortization and write-off of debt premium and issuance costs),income taxes, depreciation and amortization. The table above presents thecomponents of EBITDA and a reconciliation of EBITDA to net cash (used in)provided by operating activities. EBITDA is presented as additional informationbecause we believe it to be a useful indicator of our debt capacity and ourability to service our debt. EBITDA is not a substitute for operating income,net earnings or cash flows from operating activities, as determined inaccordance with GAAP. EBITDA is not a complete net cash flow measure because 

38

----

EBITDA is a measure of liquidity that does not reflect cash flows fromdiscontinued operations, and does not include reductions for cash payments foran entity’s obligation to service its debt, fund its working capital, businessacquisitions, and capital expenditures and pay its income taxes. Rather, EBITDAis one potential indicator of an entity’s ability to fund these cashrequirements. EBITDA also is not a complete measure of an entity’s profitabilitybecause it does not include costs and expenses for depreciation andamortization, interest and related expenses and income taxes, and it also doesnot include the results of operations of discontinued operations. EBITDA, as wedefine it, may differ from similarly named measures used by other entities and,consequently, could be misleading unless all entities calculate and defineEBITDA in the same manner.

(B)        Freecash flow is defined as net cash (used in) provided by operating activitiesless capital expenditures. We disclose free cash flow (deficit) because webelieve that it is useful in evaluating our financial performance and measuringcash flows generated that are available for investing and financing activities.We believe that the most directly comparable GAAP financial measure to freecash flow is net cash (used in) provided by operating activities. Free cashflow represents cash generated after paying for interest on borrowings, incometaxes, capital expenditures and changes in working capital, but before repayingoutstanding debt, investing cash to acquire businesses and making otherstrategic investments, and it does not reflect cash flows of discontinuedoperations. Thus, key assumptions underlying free cash flow are that we will beable to refinance our existing debt when it matures with new debt and that wewill be able to finance any new acquisitions we make by raising new debt orequity capital. We also use free cash flow as a performance measure as acomponent of our management incentive compensation program. Free cash flow, aswe define it, may differ from similarly named measures used by other entitiesand, consequently, could be misleading unless all entities calculate and definefree cash flow in the same manner.

**Item3.**                        Quantitativeand Qualitative Disclosures About Market Risk

**Market Risk**

See Part II, Item 7A,“Qualitative and Quantitative Disclosures About Market Risk,” of the Company’sAnnual Report on Form 10-K for the fiscal year ended March 31, 2006for a discussion of the Company’s exposure to market risks.

**Item4.**                        Controlsand Procedures

(a)           **Disclosure Controls and Procedures.** The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report. Based on suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of such period, the Company’s disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act.

(b)          **Internal Control Over Financial Reporting.** The addition ofthe business units added through the acquisition of ESSI on January 31,2006, resulted in a material change in internal control over financialreporting. The acquired ESSI business units utilize separate information andaccounting systems and processes. With the exception of the change in internalcontrol over financial reporting as we integrate the acquired ESSI businessunits, there have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the three months ended June 30,2006 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

39

----

**PART II.   OTHERINFORMATION**

**Item 1.**                        LegalProceedings

We are party to various legal actions and claimsarising in the ordinary course of our business. In our opinion, we haveadequate legal defenses for each of the actions and claims.

Various legal actions, claims, assessments and othercontingencies arising in the normal course of our business, including certainmatters described below, are pending against us and certain of oursubsidiaries. These matters are subject to many uncertainties, and it ispossible that some of these matters could be ultimately decided, resolved orsettled adversely. We have recorded accruals totaling $4.4 million and $4.3 millionat June 30, 2006 and March 31, 2006, respectively, for losses relatedto those matters that it considers to be probable and that can be reasonablyestimated (certain legal and environmental matters are discussed in detailbelow). Although the ultimate amount of liability at June 30, 2006 thatmay result from those matters for which we have recorded accruals is notascertainable, we believe that any amounts exceeding our recorded accrualsshould not materially affect our financial condition or liquidity. It ispossible, however, that the ultimate resolution of those matters could resultin a material adverse effect on our results of operations for a particularreporting period.

Some environmental laws, such as the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980 (also known asCERCLA or the Superfund law) and similar state statutes, can impose liabilityfor the entire cost of the clean up of contaminated sites upon any of thecurrent or former site owners or operators (or upon parties who send waste tothese sites), regardless of the lawfulness of the original activities that ledto the contamination. In July 2000, prior to its acquisition by IDT, andprior to DRS’s acquisition of IDT, Tech-Sym Corporation received aSection 104(e) Request for Information from the National Park Service(NPS), pursuant to CERCLA, regarding a site known as the Orphan Mine site inthe Grand Canyon National Park, Arizona, which is the subject of an NPSinvestigation regarding the presence of residual radioactive materials andcontamination. A corporation of which Tech-Sym is an alleged successor operatedthis uranium mine from 1956 to 1967. In 1962, the land was sold to the U.S.government and the alleged predecessor of Tech-Sym was given a 25-yearmining lease. In 1967, the mining rights were transferred to a third party by atrustee in bankruptcy, and we believe that the mine was operated by such thirdparty until approximately 1969. We understand that there are other companies in the chain of title to themining rights subsequent to Tech-Sym’s alleged predecessor, and, accordingly,that there are other potentially responsible parties (PRPs) for theenvironmental conditions at the site, including the U.S. government as owner,operator and arranger at the site. During its period of ownership, IDT retaineda technical consultant in connection with this matter, who conducted a limited,preliminary review of site conditions and communicated with the NPS regardingactions that may be required at the site by all of the PRPs. OnFebruary 6, 2005, the NPS sent us an Engineering Evaluation/Cost AnalysisWork Plan (the “NPS EE/CA”) under CERCLA (the ‘‘CERCLA Letter’’) with regardsto Operable Unit 1 of the Orphan Mine site. In our view, the NPS EE/CA includedadditional clean up not covered by CERCLA. The CERCLA Letter also requested(a) payment of $0.5 million for costs incurred by the NPS related to theOrphan Mine, and (b) a ‘‘good faith offer’’ to conduct the responseactivity outlined by the NPS and to reimburse the NPS for future costs. The NPSadvised that a similar letter has been sent to another PRP. We initiated discussionswith the other PRP and with NPS, and engaged a technical consultant to evaluatethe existing documentation and the site in depth. As a result, onSeptember 29, 2005, the technical consultant submitted to the NPS, onbehalf of us and the other PRP, an alternative Engineering Evaluation/CostAnalysis Work Plan (the “alternative EE/CA”) with regards to Operating Units 1and 2 of the Orphan Mine Site.

On December 6, 2005, the PRPs and NPS met todiscuss the alternative EE/CA. The meeting focused on the technical merits ofthe alternative EE/CA and certain differences between the alternative EE/CA andthe NPS EE/CA provided with the CERCLA Letter. The differences included analternative sampling 

40

----

technique and theinclusion of Operable Unit 2 (the lower mine area) in the alternative EE/CA.Since that meeting in late 2005, the parties have also discussed certain legalissues relating to the process for implementing an alternative EE/CA andentering into a settlement agreement that would memorialize the parties’intent. The potential liability associated with implementation of the EE/CA canchange substantially due to such factors as additional information on thenature or extent of contamination, methods of remediation that might berecommended or required, changes in the apportionment of costs among theresponsible parties and other actions by governmental agencies or privateparties.

In connection with the ESSI acquisition, we have beenmade aware of certain legal actions, claims, assessments and other contingencies,certain of which are described below.

In December 2004, ESSI was notified by theEnforcement Division of the SEC of the issuance of a formal order directing aprivate investigation captioned *In theMatter of Engineered Support Systems, Inc.*and was notifiedthat the SEC had issued subpoenas to various individuals associated with ESSIto produce certain documents. The SEC staff also requested that ESSI producecertain documents in connection with the investigation. The subpoenas relatedto trading in ESSI stock around ESSI’s earnings releases in 2003 and to theadequacy of certain disclosures made by ESSI regarding related-partytransactions in 2002 and 2003 involving insurance policies placed by ESSIthrough an insurance brokerage firm in which an ESSI director was a principalat the time of the transactions.

On or about September 23, 2005, the SEC staffadvised ESSI’s counsel that it had issued a subpoena directed to ESSI andexpanded its investigation to include ESSI’s disclosure of a November 2004stop work order relating to ESSI’s Deployable Power Generation and DistributionSystems (“DPGDS”) program for the U.S. Air Force, and relating to trading inESSI stock by certain individuals associated with ESSI.

In connection with the foregoing SEC investigation,ESSI and certain of its directors and officers have provided information and/ortestimony to the SEC. On November 14, 2005, ESSI was informed by theEnforcement Division that one of ESSI’s former directors and officers, andsubsequently a consultant to ESSI, had been issued a so-called Wells noticeinforming him that the staff of the SEC was considering recommending that theSEC bring a civil injunctive action against him in connection with the SEC’sinvestigation into trading in ESSI common stock in 2003. A Wells noticeprovides prospective defendants with an opportunity to respond to the SEC staffmembers before the staff makes a formal recommendation on whether the SECshould pursue disciplinary action against them. ESSI, itself, has not receiveda Wells notice and continues to cooperate with the investigation.

In January 2006, ESSI was informed that theOffice of the U.S. Attorney for the Eastern District of Missouri was initiatingan investigation into ESSI’s disclosure of the DPGDS stop-work order and intotrading in ESSI stock by ESSI insiders which preceded such disclosure. The U.S.Attorney’s office advised ESSI that although it considered it to be a subjectof its investigation, ESSI was not a target. In connection with this investigation,the U.S. Attorney’s office issued ESSI a subpoena requesting specifiedinformation, which ESSI continues to furnish.

In May 2006, we were advised that the EnforcementDivision of the SEC and the U.S. Attorney’s office had each expanded itsinvestigation to include possible “backdating” of the timing of option grantsat ESSI prior to the time ESSI was acquired by DRS.  As part of its investigation, the SEC hasissued subpoenas to certain officers and employees of ESSI to provide testimonyand produce certain documents. Although ESSI continues to be a subject of theU.S. Attorney’s office’s investigation, the U.S. Attorney’s office has advisedus that ESSI is not a target. Because the events being investigated occurredprior to the time of our acquisition of ESSI, the U.S. Attorney’s office hasfurther advised us that it considers DRS to be a witness, not a subject ortarget of its investigation.

We are committed to fullcooperation with regard to the foregoing investigations. We are unable todetermine at this time either the timing of the SEC or U.S. Attorney’s officeinvestigations or the impact, if 

41

----

any,which the investigations could have on us. A finding that ESSI had “backdated”option grants could result in tax authorities disallowing all or part ofrelated compensation deductions taken on ESSI’s previous income tax returns.

**Item 1.A.**             RiskFactors

In addition to the informationset forth in this report, you should carefully consider the factors discussedin Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31,2006, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not the only risks facingour Company. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

**Items 2, 3, 4 and 5are not applicable and have been omitted**

**Item 6.**                        Exhibits

(a)   Exhibits

| Exhibit No. | ** ** | **Description**                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------|
| 10.1*            |       | DRS Technologies, Inc.  2006 Omnibus Plan                                                                     |
| 31.1*            |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2*            |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1*            |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2*            |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

----

*                    Filed herewith

42

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                       | DRS TECHNOLOGIES,  INC.   |
|----------------------------|---------------------------|
| Date: August 9,  2006 | /s/ Richard A. Schneider  |   |
|                       | Richard A. Schneider      |
| * *                   | *Chief Financial Officer* |

 

43

----