UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008o

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


Commission file number 1-8533



DRS Technologies, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

13-2632319(IRS Employer Identification No.)


5 Sylvan Way, Parsippany, New Jersey 07054(Address of principal executive offices)

(973) 898-1500(Registrant's telephone number, including area code)

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller reporting company)

Smaller reporting company o


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

As of October 22, 2008, there were 1,000 shares of common stock, with a par value of $0.01, outstanding of the registrant. As of that date, all such shares
were owned by Meccanica Holdings USA, Inc., a Delaware corporation and wholly-owned subsidiary of FinmeccanicaSocietá per azioni, a societá per azioni
organized under the laws of Italy.

The
registrant is no longer subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, but will continue to file annual, quarterly and current reports with
the Commission as a voluntary filer to fulfill its obligations under the indentures governing its 67/8% Senior Subordinated Notes due 2013, 65/8% Senior Notes due 2016
and 75/8% Senior Subordinated Notes due 2018.



---





DRS TECHNOLOGIES, INC. AND SUBSIDIARIES  Index to Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2008

PagePART IFINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Consolidated Balance SheetsSeptember 30, 2008 and March 31, 2008

1Consolidated Statements of EarningsThree and Six Months Ended September 30, 2008 and 2007

2Consolidated Statements of Cash FlowsSix Months Ended September 30, 2008 and 2007

3Notes to the Consolidated Financial Statements

4Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

35Item 3.

Quantitative and Qualitative Disclosure about Market Risk

53Item 4.

Controls and Procedures

53PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

54Item 1A.

Risk Factors

57Item 4.

Submission of Matters to a Vote of Security Holders

58Item 6.

Exhibits

58Signatures

59


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PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES  Consolidated Balance Sheets  (in thousands, except share and per-share data)  (Unaudited)

September 30, 2008

March 31, 2008AssetsCurrent assetsCash and cash equivalents

$
117,565

$
86,251Accounts receivable, net of allowance for doubtful accounts of $3,136 and $2,819 as of September 30, 2008 and March 31, 2008,
respectively


576,127


574,129Inventories, net


407,236


437,709Prepaid expenses, deferred income taxes and other current assets


117,268


127,466Total current assets


1,218,196


1,225,555Property, plant and equipment, less accumulated depreciation of $239,218 and $220,986 at September 30, 2008 and March 31, 2008,
respectively


272,214


255,677Acquired intangible assets, net


153,126


167,774Goodwill


2,619,130


2,624,589Deferred income taxes and other noncurrent assets


37,006


42,440Total assets

$
4,299,672

$
4,316,035Liabilities and Stockholders' EquityCurrent liabilitiesShort-term borrowings and current installments of long-term debt

$
350,524

$
5,384Accounts payable


279,979


357,859Accrued expenses and other current liabilities


500,959


507,550Total current liabilities


1,131,462


870,793Long-term debt, excluding current installments


1,279,627


1,627,468Other liabilities


113,514


134,168Total liabilities


2,524,603


2,632,429Commitments and contingenciesStockholders' equityPreferred stock, $10 par value per share. Authorized 2,000,000 shares; none issued at September 30, 2008 and March 31, 2008





Common Stock, $.01 par value per share. Authorized 100,000,000 shares; 41,629,231 and 41,373,509 shares issued at September 30, 2008 and March 31,
 2008, respectively


415


414Additional paid-in capital


1,150,568


1,129,924Retained earnings


612,276


537,130Accumulated other comprehensive earnings


11,810


16,138Total stockholders' equity


1,775,069


1,683,606Total liabilities and stockholders' equity

$
4,299,672

$
4,316,035


See
accompanying Notes to the Consolidated Financial Statements.

1

---





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

Three Months Ended
September 30,

Six Months Ended
September 30,2008

2007

2008

2007
(Restated)Revenues:Products

$
752,130

$
585,505

$
1,473,326

$
1,122,330Services


234,962


198,264


465,632


397,069Total revenues


987,092


783,769


1,938,958


1,519,399Costs and expenses:Products


684,639


512,536


1,335,494


994,662Services


208,109


179,104


421,424


364,430Merger-related expenses (Note 1)


5,074





16,621


Total costs and expenses


897,822


691,640


1,773,539


1,359,092Operating income


89,270


92,129


165,419


160,307Interest income


551


380


851


939Interest and related expenses


24,361


28,106


47,832


56,816Other expense, net


427


217


667


287Earnings before noncontrolling interests and income taxes


65,033


64,186


117,771


104,143Noncontrolling interests


293


586


707


1,079Earnings before income taxes


64,740


63,600


117,064


103,064Income taxes


21,770


20,566


38,689


34,826Net earnings

$
42,970

$
43,034

$
78,375

$
68,238Net earnings per share of common stock:Basic earnings per share:

$
1.05

$
1.06

$
1.91

$
1.69Diluted earnings per share:

$
0.99

$
1.04

$
1.82

$
1.65Dividends per common share

$
0.03

$
0.03

$
0.06

$
0.06


See
accompanying Notes to the Consolidated Financial Statements.

2

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES  Consolidated Statements of Cash Flows  (in thousands)        (Unaudited)

Six Months Ended
September 30,2008

2007
(Restated)Cash Flows from Operating ActivitiesNet earnings

$
78,375

$
68,238Adjustments to reconcile net earnings to cash flows from operating activities:Depreciation and amortization


39,925


37,360Share-based compensation


7,253


5,128Deferred income taxes


1,708


15,003Inventory reserve and provision for doubtful accounts


2,038


2,123Amortization and write-off of deferred financing fees


2,967


3,174Curtailment gain





(11,719
)Other, net


(2,515
)

869Changes in assets and liabilities:(Increase) decrease in accounts receivable


(3,084
)

23,387Decrease (increase) in inventories


27,750


(47,993
)(Increase) decrease in prepaid expenses and other current assets


(8,069
)

4,322Decrease in accounts payable


(73,570
)

(40,064
)Decrease in accrued expenses and other current liabilities


(8,401
)

(27,231
)Increase in customer advances


7,202


32,670Decrease in pension and postretirement benefit liabilities


(8,619
)

(7,257
)Other, net


5,635


2,731Net cash provided by operating activities


68,595


60,741Cash Flows from Investing ActivitiesCapital expenditures


(44,272
)

(32,497
)Disposition of property, plant and equipment


1


48Net cash used in investing activities


(44,271
)

(32,449
)Cash Flows from Financing ActivitiesBorrowings on revolving line of credit


265,000


215,000Repayments of revolving line of credit


(265,000
)

(215,000
)Borrowings of short-term debt


201


Borrowings of long-term debt


580


Repayments of long-term debt


(2,685
)

(77,715
)Excess tax benefit realized from share-based payment arrangements


3,923


2,772Proceeds from stock option exercises


8,899


4,815Dividends paid


(2,477
)

(2,449
)Other


110


245Net cash provided by (used in) financing activities


8,551


(72,332
)Effect of exchange rates on cash and cash equivalents


(1,561
)

478Net increase (decrease) in cash and cash equivalents


31,314


(43,562
)Cash and cash equivalents, beginning of period


86,251


95,833Cash and cash equivalents, end of period

$
117,565

$
52,271


See
accompanying Notes to the Consolidated Financial Statements.

3

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

1. Description of Business

DRS Technologies, Inc. (hereinafter, DRS or the Company), is a supplier of defense electronic products, systems and military support services. The Company provides
high-technology products and services to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military forces
and industrial markets. The Company focuses on several key areas of importance for the U.S. Department of Defense (DoD), such as intelligence, surveillance, reconnaissance, power management, advanced
communications and network systems. DRS is a provider of thermal imaging devices, combat display workstations, electronic sensor systems, power systems, battlefield digitization systems, air combat
training systems, mission recorders, deployable flight incident recorders, environmental and telecommunication systems, aircraft loaders, military trailers and shelters. The Company also provides
support services, including security and asset protection system services, telecommunication and information technology services, training and logistics support services for all branches of the U.S.
armed forces, certain foreign militaries, homeland security forces and selected government and intelligence agencies.



On October 22, 2008, pursuant to a definitive merger agreement dated May 12, 2008 (the Merger Agreement) among DRS
Technologies, Inc., FinmeccanicaSocietá per azioni, a societá per azioni organized under the laws of Italy (Finmeccanica) and Dragon Merger Sub, Inc.,
a Delaware corporation and a wholly-owned subsidiary of Finmeccanica (Sub), Sub merged with and into the Company (the Merger). The Company survived the Merger and, as a result, became a wholly-owned
subsidiary of Meccanica Holdings USA, Inc. (Holdings), a Delaware corporation and wholly-owned subsidiary of Finmeccanica.

In
connection with the closing of the Merger, pursuant to the Merger Agreement, the Company has notified the New York Stock Exchange that each share of the Company's common stock, $0.01
par
value per share, has been converted into the right to receive $81.00 in cash, without interest, and has requested that the New York Stock Exchange file with the Securities and Exchange Commission (the
SEC) an application on Form 25 to strike DRS's common stock from listing and registration thereon. In addition, the Company filed with the SEC on October 22, 2008 a Certification on
Form 15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), requesting that DRS's common stock be deregistered and that DRS's reporting obligations under
Sections 13 and 15(d) of the Exchange Act be suspended. The Company is filing this Form 10-Q voluntarily to satisfy its reporting obligations under its indentures referred to
on the cover page of this Form 10-Q.

In
the three- and six-month periods ended September 30, 2008, the Company incurred $5.1 million and $16.6 million, respectively, in investment banking,
legal and consulting expenses related to the Merger.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements include all wholly-owned and majority-owned subsidiaries and controlling interests of DRS. The financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of the Company, the interim consolidated financial information provided herein reflects all adjustments

4

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

2. Basis of Presentation (Continued)

(consisting
of normal and recurring adjustments) necessary for a fair presentation of the Company's consolidated financial position as of September 30, 2008, the results of its operations for
the three- and six-month periods ended September 30, 2008 and 2007, and its cash flows for the six-month periods ended September 30, 2008 and 2007. The results of
operations and cash flows for the interim period ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial
statements should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended
March 31, 2008, which are included in the Company's filing on Form 10-K for the year ended March 31, 2008.

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs
and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract revenue, costs to complete performance on a contract, profit and loss recognition,
fair values of assets acquired and liabilities assumed in business combinations, market values for inventories reported at lower of cost or market, pension and postretirement benefit obligations,
share-based employee compensation costs, recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill, income taxes,
including the valuation of deferred tax assets and liabilities, the valuation of unrecognized tax benefits, litigation reserves and environmental obligations. Changes in estimates are reflected in the
periods during which they become known. Actual amounts will differ from these estimates and could differ materially. For a more complete discussion of these estimates and assumptions, see the Annual
Report of DRS Technologies, Inc. on Form 10-K for the fiscal year ended March 31, 2008.

The
fiscal year-end consolidated balance sheet data was derived from the Company's audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Certain fiscal 2008 amounts have been reclassified to conform to the fiscal 2009 presentation.

3. Restatement of Previously Issued Consolidated Financial Statements

In February 2008, the Company received a comment letter from the staff of the SEC on its fiscal 2007 Form 10-K (filed on May 30, 2007) and its fiscal 2008
second quarter Form 10-Q (filed on November 9, 2007). In the initial comment letter, and in other subsequent written and telephonic communications with the staff of the SEC,
information was requested regarding the timing of a $36.8 million pretax charge that was recorded in the Company's fiscal 2008 first quarter ended June 30, 2007 for the impact of a
redesign on the Company's Thermal
Weapon Sight II (TWS II) program. Following discussions with the staff of the SEC and review of the judgments and estimates the Company made relating to the charge, the Company concluded that
the $36.8 million charge should have been recorded in the Company's fiscal 2007 fourth quarter ended March 31, 2007.

As
a result of the foregoing, the Company restated in its March 31, 2008 Form 10-K its previously filed consolidated financial statements for the year ended
March 31, 2007, inclusive of the Company's fourth quarter ended March 31, 2007 and the previously issued quarterly consolidated financial statements for the three-month period ended
June 30, 2007.

5

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

3. Restatement of Previously Issued Consolidated Financial Statements (Continued)

The
following table sets forth the effects of the restatement adjustment on the consolidated statement of earnings for the six-month period ended September 30, 2007.

Six Months Ended September 30, 2007As Previously
Reported

Adjustment

As Restated(in thousands except per share amounts)Consolidated Statement of Earnings:Costs and expensesProducts

$
1,031,506

$
(36,844
)
$
994,662Total costs and expenses

$
1,395,936

$
(36,844
)
$
1,359,092Operating income

$
123,463

$
36,844

$
160,307Earnings before noncontrolling interests and income taxes

$
67,299

$
36,844

$
104,143Earnings before income taxes

$
66,220

$
36,844

$
103,064Income taxes

$
21,536

$
13,290

$
34,826Net earnings

$
44,684

$
23,554

$
68,238Basic earnings per share

$
1.10

$
0.58

$
1.69Diluted earnings per share

$
1.08

$
0.57

$
1.65


The
restatement adjustment did not affect the reported amounts of net cash provided by operating activities, net cash used in investing activities, and net cash used in financing
activities for the six-month period ended September 30, 2007.

As
a result of the adjustment discussed above, modifications were required to previously filed footnotes: Notes 6, 10, 11, 13 and 18.

4. Income Taxes

The provision for income taxes for the three- and six-month periods ended September 30, 2008 reflected an effective income tax rate of approximately 33.6% and 33.0%,
respectively, as compared with 32.3% and 33.8%, respectively, in the same periods last year. Our effective tax rate for the three- and six-month periods ended September 30, 2008
decreased primarily due to a favorable settlement with the Internal Revenue Service (IRS), concerning its examination of our federal income tax returns for the years ended March 31, 2002, 2003
and 2004, which was partially offset by an increase in the effective tax rate due to the expiration of the research and development credit effective December 31, 2007.

As
a result of the audit and expiration of federal and state statute of limitations, the Company paid approximately $5.5 million, which included interest of approximately
$1.3 million, and recorded a discrete tax benefit of approximately $4.4 million, an adjustment to goodwill of approximately $3.1 million, an adjustment to additional paid in
capital of $0.1 million with the remainder impacting deferred tax assets, deferred tax liabilities and income taxes payable.

6

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

4. Income Taxes (Continued)

A
reconciliation of the change in our unrecognized tax benefits for the six months ended September 30, 2008 follows:

Balance as of April 1, 2008

$
29,154Increase related to current-year positions


657Decrease due to changes in prior-year positions


8,643Decrease due to settlements with taxing authorities


4,395Decrease due to expiration of statute of limitations


2,207Balance as of September 30, 2008

$
14,566


The
Company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities regarding transfer
pricing, the deductibility of certain costs and intercompany transactions, as well as other matters. At September 30, 2008, the total amount of the liability for unrecognized tax benefits
related to federal, state and foreign income tax matters was approximately $14.6 million. Upon settlement of the Company's unrecognized tax benefits, approximately $6.9 million would
impact goodwill and additional paid-in-capital, if recognized, and $7.7 million would impact our effective tax rate, if recognized. Additionally, the impact of accrued
interest on unrecognized tax benefits would be approximately $0.7 million, if recognized.

Based
upon the expiration of statutes of limitations and/or the conclusion of tax examinations in several jurisdictions, the Company believes it is reasonably possible that the total
amount of previously unrecognized tax benefits for the items discussed above may decrease by up to $0.2 million within 12 months of September 30, 2008.

On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the Act) was signed into law. The Act contains certain provisions that retroactively extend through
December 31, 2009 the research and development tax credit that expired on December 31, 2007. The retroactive impact of this credit on the Company's income tax provision is estimated to
be approximately $1.6 million, which will be recorded in the third quarter of fiscal 2009.

5. Share-Based Compensation

The Company recorded total share-based costs related to stock options and non-vested stock of $3.2 million and $6.9 million for the three- and
six-month periods ended September 30, 2008, respectively, and $3.9 million and $6.6 million for the three- and six-month periods ended

7

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

5. Share-Based Compensation (Continued)

September 30,
2007, respectively. Such amounts were recognized in the consolidated financial statements as follows:

Three Months
Ended
September 30,

Six Months
Ended
September 30,2008

2007

2008

2007(in thousands)Total cost of share-based payment plans

$
3,212

$
3,866

$
6,902

$
6,555Amounts capitalized in inventory


(2,109
)

(2,340
)

(4,643
)

(3,715
)Amounts charged against earnings for amounts previously capitalized in inventory


2,534


1,375


4,994


2,288Amounts charged against earnings before income tax benefit

$
3,637

$
2,901

$
7,253

$
5,128


Stock OptionsThe following table summarizes information regarding the Company's stock option activity and amounts as of and for the six months ended
September 30, 2008.

Number of
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (years)

Aggregate
Intrinsic Value(in thousands)Outstanding at March 31, 2008


2,152,418

$
36.54Granted





Exercised


253,697

$
35.08Cancelled/forfeited


(2,000
)
$
37.29Outstanding at September 30, 2008


1,896,721

$
36.74


5.54

$
75,887Vested and expected to vest at September 30, 2008(1)


1,888,566

$
36.68


5.52

$
75,681Exercisable at September 30, 2008


1,520,383

$
33.96


5.01

$
65,055


---

The
aggregate intrinsic values, disclosed in the table above, represent the difference between DRS's closing stock price on the last trading day of the second quarter
(September 30, 2008) and the exercise price, multiplied by the number of in-the-money stock options for each category.

The
total intrinsic values of stock options exercised, based on the difference between DRS's stock price at the time of exercise and the related exercise price, during the
six-month periods ended September 30, 2008 and 2007 was $10.4 million and $8.9 million, respectively. Total compensation cost related to stock options was
$1.1 million and $2.3 million for the three- and six-month periods ended September 30, 2008, respectively, and $1.6 million and $2.9 million for the
three- and six-month periods ended September 30, 2007, respectively. At September 30, 2008, unrecognized compensation costs related to stock options were $5.0 million
($3.0 million after income taxes), which are expected to be recognized over a weighted average remaining period of 1.2 years.

8

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

5. Share-Based Compensation (Continued)

The
estimated weighted average grant date fair value of each stock option awarded was $20.91 and $20.99 for the three- and six-month periods ended September 30, 2007,
respectively. There were no stock option grants in the three- and six-month periods ended September 30, 2008.

On
October 22, 2008, all options were converted into the right to receive $81.00 per share less the exercise price of each stock option.

Non-Vested Stock and Non-Vested Stock UnitsNon-vested stock was granted to certain employees, as permitted under the 2006
Omnibus Plan in the names of the employees, who had all the rights of stockholders, subject to certain restrictions.
Non-vested stock units were granted in the names of the employees; however, the participants had no rights as stockholders. These non-vested stock units were redeemable for DRS
common stock once a three-year cliff vesting period had been satisfied. The cost of the grants, as determined by the market prices of the common stock at the grant dates, net of expected
forfeitures, was recognized over the vesting periods.

Compensation
cost for non-vested stock awards for the three- and six-month periods ended September 30, 2008 was $2.1 million and
$4.6 million, respectively, and $2.3 million and $3.7 million for the three- and six-month periods ended September 30, 2007, respectively. As of
September 30, 2008, total unrecognized compensation costs related to non-vested stock awards were $11.7 million ($7.1 million after income taxes), and that amount is
expected to be recognized over a weighted average remaining period of 1.6 years.

The
following table details the activity in non-vested stock awards for the six months ended September 30, 2008.

Six Months Ended
September 30, 2008Number of
Shares

Weighted
Average Grant
Date Fair Value
per ShareNonvestedBalance at March 31, 2008


602,875

$
51.94Granted


1,911

$
78.48Vested


(129,225
)
$
50.19Forfeited/cancelled


(5,241
)
$
52.28NonvestedBalance at September 30, 2008


470,320

$
52.52


On
October 22, 2008, all non-vested stock vested as a result of the Merger. In addition all nonvested stock units were converted into the right to receive $81.00 per
unit.

9

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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

6. Inventories

Inventories are summarized as follows:

September 30,
2008

March 31,
2008(in thousands)Work-in-process

$
542,057

$
550,323General and administrative costs


54,144


64,521Raw material and finished goods


58,925


61,961655,126


676,805Less: Progress payments and certain customer advances


238,325


231,093Inventory reserve


9,565


8,003Total

$
407,236

$
437,709


Inventoried
contract costs for the Company's businesses that are primarily government contractors include certain general and administrative (G&A) costs, including
internal research and development (IRAD) costs and bid and proposal (B&P) costs. G&A, IRAD and B&P costs are allowable, indirect contract costs under U.S. government regulations. The Company allocates
these costs to government contracts and accounts for them as product costs, not as period expenses, at the majority of the Company's operating units.

Total
expenditures for IRAD amounted to approximately $17.9 million and $14.1 million for the three-month periods ended September 30, 2008 and 2007, respectively,
and $34.5 million and $25.5 million, respectively, for the six-month periods then ended.

The
Company bifurcates its total G&A costs into "allowable" and "unallowable" cost pools, as the terms are defined in the U.S. Federal Acquisition Regulations (FAR) procurement
regulations. The Company accounts for allowable G&A costs allocated to its government contractor operating units that design, develop and produce complex defense electronic components and systems for
specifically identified contracts as contract costs because such costs are generally reimbursable indirect contract costs pursuant to the terms of the contracts. The Company expenses such allowable
G&A costs as a component of costs and expenses when the revenues related to those contracts are recognized.

The
Company's government contractor operating units allocate allowable G&A costs to contracts using an indirect overhead rate, which generally is based upon allowable G&A costs as a
percentage of a total cost (direct labor, manufacturing overhead, raw material and other direct costs) input base.

The
Company believes that accounting for allowable G&A costs as contract costs is consistent with industry practice and supported by authoritative accounting literature, as outlined in
the American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (SOP 81-1), the AICPA Audit and Accounting Guide, Audits of Federal Government Contractors, and Chapter 4 of Accounting and Research
Bulletin (ARB) 43, Restatement and Revision of Accounting Research Bulletins.

The
Company expenses "unallowable" G&A costs allocable to its government contractor operating units as they are incurred (i.e., period expense) because unallowable costs, as
defined in the FAR, are not reimbursable under government contracts. All G&A costs allocated to the Company's non-government contractor operating units are expensed as incurred.

10

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

6. Inventories (Continued)

The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and changes to them, including amounts used in the determination of costs and
expenses. The
cost data in the table below does not include the G&A, IRAD and B&P costs for the Company's non-government contractor operating units, which are expensed as incurred:

Six Months Ended
September 30,Three Months Ended
September 30,2007
(Restated)2008

2007

2008(in thousands)Balance in inventory at beginning of period

$
57,280

$
69,076

$
64,521

$
60,485Add: Incurred costs


98,010


91,449


211,689


189,322Less: Amounts included in costs and expenses


(101,146
)

(89,708
)

(222,066
)

(178,990
)Balance in inventory at end of period

$
54,144

$
70,817

$
54,144

$
70,817


General
and administrative expenses related to the Company's non-government contractor operating units amounted to $45.3 million and $29.0 million for the
three-month periods ended September 30, 2008 and 2007, respectively, and $101.9 million and $71.7 million, respectively, for the six-month periods then ended.

During
the fourth quarter of fiscal 2007, the Company recorded a $40.3 million charge to operations for an anticipated loss on the Thermal Weapon Sight II (TWS II) program.
The most significant component of the charge was a result of the estimated cost of new material following design modifications, as well as the write-off of certain inventory. As a result
of the design changes, the Company also transferred $30.0 million of saleable product and components from the TWS II program to inventory during the fourth quarter of fiscal 2007. In addition
to the inventory transferred in the fourth quarter of fiscal 2007, the Company transferred $7.1 million of additional saleable components from the TWS II program to inventory in the
second quarter of fiscal 2009. The TWS II transferred inventory is valued at the lower of cost or market.

The
Company believes that the transferred inventory will be sold primarily through international distribution channels. The sale of certain products outside of the United States is
highly regulated, and any inability to obtain the requisite licenses or comply with applicable government export regulations may affect the Company's ability to export the transferred inventory. If
the Company is precluded from selling the transferred inventory to certain international customers and/or is unable to generate sufficient domestic revenues, the value of the transferred inventory may
be required to be written down or written off in a future period. Such a write-down or write-off could be material to the results of operations in any one period. As of
September 30, 2008 and March 31, 2008, approximately $19.6 million and $21.3 million respectively, of transferred inventory remained with the Company.

11

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

7. Goodwill and Intangible Assets

The table below reconciles the change in the carrying amount of goodwill by operating segment for the period from March 31, 2008 to September 30, 2008.

C4I

RSTA

Sustainment
Systems

Technical
Services

Total(in thousands)Balance as of March 31, 2008

$
661,531

$
180,114

$
1,051,075

$
731,869

$
2,624,589Settlement of 2002-2004 IRS audits


(2,549
)

(99
)

(234
)

(234
)

(3,116
)Foreign currency translation adjustment


(2,116
)




(227
)




(2,343
)Balance as of September 30, 2008

$
656,866

$
180,015

$
1,050,614

$
731,635

$
2,619,130


The
following disclosure presents certain information regarding the Company's acquired intangible assets as of September 30, 2008 and March 31, 2008. All acquired
intangible assets are being amortized over their estimated useful lives, 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 September 30, 2008Technology-based intangibles

18 years

$
47,863

$
(21,393
)
$
26,470Customer and program/contract-related intangibles

11 years


214,509


(87,853
)

126,656Total



$
262,372

$
(109,246
)
$
153,126As of March 31, 2008Technology-based intangibles

18 years

$
47,879

$
(19,945
)
$
27,934Customer and program/contract-related intangibles

11 years


214,536


(74,696
)

139,840Total



$
262,415

$
(94,641
)
$
167,774


The
aggregate acquired intangible asset amortization expense for the three-month periods ended September 30, 2008 and 2007 was $7.3 million, and for the
six-month periods ended September 30, 2008 and 2007 was $14.7 million and $14.6 million, respectively. The estimated acquired intangible asset annual amortization
expense is expected to be approximately $29.2 million for fiscal year 2009, $28.3 million for fiscal year 2010, $27.5 million for fiscal year 2011, $14.0 million for fiscal
year 2012 and $13.6 million for fiscal year 2013.

8. Product Warranties

Product warranty costs generally are accrued when the covered products are delivered to the customer. Product warranty costs are recognized based on the terms of the product warranty and
the related estimated costs, considering historical claims experience. Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified
as specific product performance issues are identified and resolved. The table below presents the changes in the

12

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

8. Product Warranties (Continued)

Company's
accrual for product warranties for the six months ended September 30, 2008 and 2007, which are included in accrued expenses and other current liabilities.

Six Months Ended
September 30,2008

2007(in thousands)Balance at beginning of period

$
43,613

$
31,180Accruals for product warranties issued during the period


13,513


12,584Settlements made during the period


(14,782
)

(8,987
)Other


(233
)

320Balance at end of period

$
42,111

$
35,097


9. Debt

September 30,
2008

March 31,
2008(in thousands)Credit Facility:Revolving line of credit

$


$
Term loan


118,124


119,499Canadian Term Loan


5,969


7,27365/8% Senior Notes due 2016


350,000


350,00075/8% Senior Subordinated Notes due 2018


250,000


250,00067/8% Senior Subordinated Notes due 2013


550,000


550,0002.0% Convertible Senior Notes due 2026


345,000


345,000Unamortized Bond Premium on 67/8% Senior Subordinated Notes


5,757


6,323Other obligations


5,301


4,7571,630,151


1,632,852Less:Short-term borrowings and current installments of long-term debt


350,524


5,384Total long-term debt

$
1,279,627

$
1,627,468


The
weighted average interest rate on the Company's term loan borrowings was 4.9% as of September 30, 2008 (4.4% as of March 31, 2008). At September 30, 2008 and
March 31, 2008, there were no outstanding revolving line of credit borrowings against the Credit Facility.

The
Company has entered into standby letters-of-credit and bank guarantee agreements with financial institutions and customers, primarily relating to the
guarantee of its future performance on certain contracts to provide products and services and to secure advance payments it has received from its customers. As of September 30, 2008,
$27.2 million was contingently payable under letters of credit

13

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

9. Debt (Continued)

and
bank guarantees. Of this amount, approximately $0.1 million and $0.5 million in letters of credit and bank guarantees, respectively, were issued under a previous credit agreement and
by a bank agreement for the Company's U.K. subsidiary, respectively, and are not considered when determining the availability under the Company's revolving line of credit. At September 30,
2008, the Company had $373.4 million of availability under its revolving line of credit.

On
March 29, 2006, DRS Technologies Canada Company (DRS Canada) established a five-year senior secured term loan (Canadian 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 4.75% as of September 30, 2008 (5.25% as of
March 31, 2008). The carrying value of the Canadian Term Loan decreased $0.2 million during the six months ended September 30, 2008 due to the weakening of the Canadian dollar.

As
of September 30, 2008, the Convertible Senior Notes (Convertible Notes) were convertible because the average trading price for the Convertible Notes was less than 103% of the
average of the closing sale price of the Company's common stock during the consecutive five trading-day period ended September 30, 2008. Consequently, the Company classified the
Convertible Notes as current as of September 30, 2008. In the event the notes were converted prior to the Merger, the Company would have satisfied the bond principal payment using available
cash on hand and borrowings under the Company's revolving line of credit and would have settled the conversion value in excess of par by using shares of the Company's common stock. See Subsequent
Events Note 20 for further details on the Convertible Notes.

Accrued
interest expense at September 30, 2008 and March 31, 2008 was $25.3 million and $29.8 million, respectively.

Certain
of the Company's debt arrangements contain customary representations, warranties and default provisions, as well as restrictions that, among other things, limit the amount of
debt that the Company may have outstanding. As of September 30, 2008, the Company was in compliance with all covenants.

10. Earnings per Share

Basic earnings per share (EPS) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during each period. The computation of diluted
earnings per share includes the effect of shares from the assumed exercise of dilutive stock options,

14

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

10. Earnings per Share (Continued)

convertible
debt (if dilutive), non-vested stock and non-vested stock units using the treasury stock method. The following table presents the components of basic and diluted
earnings per share:

Three Months Ended
September 30,

Six Months Ended
September 30,2008

2007

2008

2007
(Restated)(in thousands, except per-share data)Basic EPS computationNet earnings

$
42,970

$
43,034

$
78,375

$
68,238Weighted average common shares outstanding


41,061


40,525


40,951


40,453Basic earnings per share

$
1.05

$
1.06

$
1.91

$
1.69Diluted EPS computationNet earnings

$
42,970

$
43,034

$
78,375

$
68,238Diluted common shares outstandingWeighted average common shares outstanding


41,061


40,525


40,951


40,453Stock options and non-vested awards


970


835


981


854Convertible debt


1,372





1,144


Diluted common shares outstanding


43,403


41,360


43,076


41,307Diluted earnings per share

$
0.99

$
1.04

$
1.82

$
1.65


At
September 30, 2007, there were 246,969 options to acquire DRS common stock outstanding with an average exercise price greater than $52.77 per option that are
excluded from the above calculation because their inclusion would have had an antidilutive effect on EPS. There were no antidilutive options at September 30, 2008.

For
the three- and six-month periods ended September 30, 2008, DRS's 2% Convertible Senior Notes due 2026 increased average diluted shares outstanding by 1,371,586 and
1,143,567, respectively, because the average stock price was greater than $59.70 per share for the period. For the three- and six-month period ended September 30, 2007,
the 2% Convertible Senior Notes had no impact on diluted EPS because the average stock price during such period was below $59.70.

11. Comprehensive Earnings

The components of comprehensive earnings for the three- and six-month periods ended September 30, 2008 and 2007 consisted of the following:

Three Months Ended
September 30,

Six Months Ended
September 30,2008

2007

2008

2007
(Restated)(in thousands)Net earnings

$
42,970

$
43,034

$
78,375

$
68,238Other comprehensive earnings:Foreign currency translation adjustments


(5,220
)

3,278


(4,723
)

6,813Minimum pension liability, net of income taxes


470


1,418


395


1,253Comprehensive earnings

$
38,220

$
47,730

$
74,047

$
76,304


15

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

12. Pensions and Other Employee Benefits

The following table summarizes the components of net periodic benefit cost for the Company's pension and postretirement benefit plans for the three- and six-month periods
ended
September 30, 2008 and 2007. These plans are more fully described in Note 13 to the Company's Consolidated Financial Statements for the year ended March 31, 2008.

Funded
Pension Plans

Postretirement
Benefit Plans

Unfunded
Supplemental
Retirement PlansThree Months Ended September 30,2008

2007

2008

2007

2008

2007(in thousands)Service cost

$
897

$
1,728

$
92

$
120

$
288

$
146Interest cost


3,737


3,653


334


332


363


361Expected return on plan assets


(4,554
)

(4,065
)

(71
)

(62
)




Amortization of unrecognized (gain) loss


(40
)

102


(54
)

(35
)

(26
)

41Amortization of transition obligation








32


28





Amortization of unrecognized prior-service cost


23


3


(6
)

(6
)

194


194Curtailment gain





(11,719
)










Net periodic benefit cost

$
63

$
(10,298
)
$
327

$
377

$
819

$
742




Funded
Pension Plans

Postretirement
Benefit Plans

Unfunded
Supplemental
Retirement PlansSix Months Ended September 30,2008

2007

2008

2007

2008

2007(in thousands)Service cost

$
1,794

$
3,456

$
184

$
240

$
576

$
292Interest cost


7,474


7,306


668


664


726


721Expected return on plan assets


(9,108
)

(8,130
)

(142
)

(124
)




Amortization of unrecognized (gain) loss


(80
)

204


(108
)

(70
)

(52
)

82Amortization of transition obligation








64


56





Amortization of unrecognized prior-service cost


46


6


(12
)

(12
)

388


388Curtailment gain





(11,719
)










Net periodic benefit cost

$
126

$
(8,877
)
$
654

$
754

$
1,638

$
1,483


The Company expects to contribute $17.0 million and $1.7 million to its pension and postretirement plans, respectively, during the
fiscal year ended March 31, 2009, of which $10.2 million and $0.8 million, respectively, were contributed during the six-month period ended September 30, 2008.

As
of result of the Merger on October 22, 2008, one of the Company's Supplemental Retirement Plans was terminated, with its participants receiving their change in control
benefits. The Company expects the termination of the plan will result in a $17.4 million settlement loss and $0.1 million curtailment loss in the Company's fiscal 2009 third quarter.

On
April 1, 2008, the Company adopted the measurement date provisions of Statement of Financial Accounting Standard (SFAS) SFAS No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R)" (SFAS 158). SFAS 158 will require the Company to measure
plan assets and benefit obligations as of March 31 of each year. The Company previously performed this measurement at December 31 of each year. As a result of implementing the
measurement date provisions of SFAS

16

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

12. Pensions and Other Employee Benefits (Continued)

No. 158,
the Company recorded an additional quarter of pension and postretirement benefit cost as of April 1, 2008, which resulted in a $1.2 million increase to its pension and
postretirement liability.

13. Operating Segments

The Company's four principal operating segments, on the basis of products and services offered are: the Command, Control, Communications, Computers and Intelligence (C4I) Segment, the
Reconnaissance, Surveillance & Target Acquisition (RSTA) Segment, the Sustainment Systems Segment and the Technical Services Segment. All other operations, primarily our Corporate Headquarters,
are grouped in Other.

The
C4I Segment is comprised of the following business areas: Command, Control & Communications (C3), which includes naval display systems, ship communications systems, radar
systems, technical support, electronic manufacturing and system integration services, secure voice and data communications, air combat training, electronic warfare, ship network systems and unmanned
vehicles, and integration of traditional security infrastructures into a comprehensive border security suite for the Department of Homeland Security; Power Systems, which includes naval and industrial
power generation, conversion, propulsion, distribution and control systems; Intelligence Technologies, which includes signals intelligence, communications intelligence, data collection, processing and
dissemination equipment, high-speed digital data and imaging systems, and mission and flight recorders; Tactical Systems, which includes battle management tactical computer systems,
peripherals, electronic test and diagnostics, and vehicle electronics.

The
RSTA Segment develops and produces electro-optical sighting, targeting and weapon sensor systems, and image intensification (I2) night vision, combat identification and
laser aimers/illuminator products, and provides electronic manufacturing services.

The
Sustainment Systems Segment designs, engineers and manufactures integrated military electronics and other military support equipment, primarily for the DoD, as well as related heat
transfer and air handling equipment, and power generation and distribution equipment for domestic commercial and industrial users. The segment provides these systems for military, humanitarian,
disaster recovery and emergency responder applications.

The
Technical Services Segment provides engineering services, logistics and training services, advanced technology services, security and asset protection systems and services,
telecommunication systems, integration and information technology services, power generation and vehicle armor kits. The segment provides these services for military, intelligence, humanitarian,
disaster recovery and emergency responder applications.

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

On
October 1, 2007, the ESSIBuy operating unit, an operating unit of the Technical Services Segment, was consolidated into an operating unit of the Sustainment Systems Segment to
achieve certain operating synergies. The balance sheet and operating results of ESSIBuy were reclassified for the period from April 1, 2007 through September 30, 2007.

Transactions
between segments generally are negotiated and accounted for under terms and conditions that are similar to other government and commercial contracts; however, these
intercompany transactions are eliminated in consolidation. The Company evaluates segment-level performance based on revenues and operating income, as presented in the Consolidated Statements of
Earnings. Operating

17

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

13. Operating Segments (Continued)

income,
as shown, includes amounts allocated from DRS Corporate operations using an allocation methodology prescribed by U.S. government regulations for government contractors.

C4I

RSTA

Sustainment
Systems

Technical
Services

Other

Total(in thousands)Three Months Ended September 30, 2008Total revenues

$
369,821

$
303,064

$
141,443

$
195,494

$


$
1,009,822Intersegment revenues


(17,855
)

(1,582
)

(2,028
)

(1,265
)




(22,730
)External revenues

$
351,966

$
301,482

$
139,415

$
194,229

$


$
987,092Operating income (loss)

$
34,377

$
23,789

$
18,302

$
16,114

$
(3,312
)
$
89,270Total assets

$
1,378,526

$
450,440

$
1,305,456

$
962,902

$
202,348

$
4,299,672Depreciation and amortization

$
6,624

$
3,824

$
4,665

$
3,705

$
1,377

$
20,195Capital expenditures

$
5,253

$
7,589

$
2,253

$
4,858

$
4,628

$
24,581Three Months Ended September 30, 2007Total revenues

$
313,545

$
190,898

$
114,399

$
173,553

$


$
792,395Intersegment revenues


(4,120
)

(2,128
)

(2,038
)

(340
)




(8,626
)External revenues

$
309,425

$
188,770

$
112,361

$
173,213

$


$
783,769Operating income (loss)

$
34,083

$
18,416

$
25,225

$
14,653

$
(248
)
$
92,129Total assets

$
1,257,623

$
445,173

$
1,312,008

$
965,935

$
171,656

$
4,152,395Depreciation and amortization

$
6,102

$
3,430

$
4,359

$
3,561

$
1,395

$
18,847Capital expenditures

$
6,112

$
3,416

$
1,995

$
6,079

$
1,002

$
18,604Six Months Ended September 30, 2008Total revenues

$
751,500

$
567,692

$
289,988

$
377,715

$


$
1,986,895Intersegment revenues


(34,950
)

(8,094
)

(2,904
)

(1,989
)




(47,937
)External revenues

$
716,550

$
559,598

$
287,084

$
375,726

$


$
1,938,958Operating income (loss)

$
71,138

$
49,518

$
34,021

$
25,629

$
(14,887
)
$
165,419Total assets

$
1,378,526

$
450,440

$
1,305,456

$
962,902

$
202,348

$
4,299,672Depreciation and amortization

$
12,985

$
7,294

$
9,442

$
7,581

$
2,623

$
39,925Capital expenditures

$
15,069

$
11,083

$
4,696

$
8,263

$
5,161

$
44,272Six Months Ended September 30, 2007 (Restated)Total revenues

$
616,766

$
345,689

$
230,429

$
346,357

$


$
1,539,241Intersegment revenues


(8,949
)

(3,335
)

(6,039
)

(1,519
)




(19,842
)External revenues

$
607,817

$
342,354

$
224,390

$
344,838

$


$
1,519,399Operating income (loss)

$
65,988

$
34,134

$
35,798

$
24,795

$
(408
)
$
160,307Total assets

$
1,257,623

$
445,173

$
1,312,008

$
965,935

$
171,656

$
4,152,395Depreciation and amortization

$
12,034

$
6,798

$
8,766

$
7,020

$
2,742

$
37,360Capital expenditures

$
13,999

$
5,005

$
3,366

$
6,775

$
3,352

$
32,497


The operating loss for "Other" for the three- and six-month periods ended September 30, 2008 was primarily due to $5.1 and
$16.6 million, respectively, in investment banking, legal and consulting-related expenses associated with the Merger.

On
October 24, 2008, the Company implemented a new organizational structure that realigned its four segments (C4I, RSTA, Sustainment Systems and Technical Services) into five
operating groups: Reconnaissance Surveillance and Target Acquisition Group, Tactical Systems Group, Power and Environmental Systems Group, Command, Control and Computers Group; and Technical Services,
Intelligence and Advanced Systems Group.

18

---





DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

14. Supplemental Cash Flow Information

Six Months Ended September 30,2008

2007Cash paid for:Interest

$
50,013

$
54,306Income taxes

$
39,402

$
35,030Supplemental disclosure of significant non-cash investing activities:Acquisition earn-outCodem Systems, Inc.

$


$
2,638Acquisition earn-outWalkAbout Computer Systems, Inc.

$


$
160Contribution of fixed assets to joint venture

$


$
429Fixed assets vouchered but not paid

$
1,267

$
1,869Non-monetary exchange of fixed assets

$
2,656

$



15. Cash Dividends on DRS Common Stock

On August 7, 2008, the Board of Directors declared a $0.03 per common share cash dividend, payable on September 30, 2008 to stockholders of record as of
September 15, 2008. Cash dividends paid for the three- and six-month periods ended September 30, 2008 were $1.2 million and $2.5 million, respectively.

16. Contingencies

Various legal actions, claims, assessments and other contingencies, including certain matters described below, are pending against the Company and certain of the Company's subsidiaries.
These matters are subject to many uncertainties, and it is possible that some of these matters ultimately could be decided, resolved or settled adversely. The Company had recorded accruals for losses
related to those matters that the Company considers to be probable and that can be reasonably estimated (certain legal and environmental matters are discussed in detail below). Although, at
September 30, 2008, the precise amount of liability that may result from those matters for which the Company has recorded accruals is not ascertainable, the Company believes that any amounts
exceeding the Company's recorded accruals should not materially affect the Company's financial condition or liquidity. It is possible, however, that the ultimate resolution of those matters could
result in a material adverse effect on the Company's results of operations and/or cash flows from operating activities for a particular reporting period.

Some
environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as CERCLA or the Superfund law) and similar state statutes,
can impose liability upon former owners or operators for the entire cost of investigating and remediating contaminated sites regardless of the lawfulness of the original activities that led to the
contamination. In July 2000, prior to its acquisition by Integrated Defense Technologies, Tech-Sym Corporation, an indirect subsidiary of the Company, received a Section 104(e)
Request for Information from the National Park Service (NPS), pursuant to CERCLA, regarding a site known as the Orphan Mine site in the Grand Canyon National Park, Arizona. The Orphan Mine, which was
operated by an

19

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

16. Contingencies (Continued)

alleged
predecessor to Tech Sym between 1956 and 1967, is the subject of an NPS investigation regarding the presence of residual radioactive materials and contamination. Following
Tech-Sym's response to the Request for Information, the NPS directed Tech Sym and another alleged former owner/operator to perform an Engineering Evaluation and Cost Analysis (EE/CA) of
the site. Tech Sym made a good faith offer to conduct the EE/CA, but the NPS rejected this offer and has announced that it will perform the EE/CA itself. Following completion of the EE/CA, the NPS may
direct one or more of the potentially responsible parties to perform any remediation that may be required by CERCLA. The Company believes that it has legitimate defenses
to Tech-Sym's potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator
and arranger at the site. The potential liability associated with this matter can change substantially, due to such factors as additional information on the nature or extent of contamination, methods
of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties and other actions by governmental agencies or private parties.

In
connection with the Company's acquisition of ESSI in January 2006, the Company has been made aware of certain legal actions, claims, assessments and other contingencies, including
those described below.

In
December 2004, ESSI was notified by the Enforcement Division of the SEC of the issuance of a formal order directing a private investigation and was notified that the SEC had issued
subpoenas to various individuals associated with ESSI to produce certain documents. The SEC staff also requested that ESSI produce certain documents in connection with the investigation. The subpoenas
related to trading in ESSI stock around ESSI's earnings releases in 2003 and to the adequacy of certain disclosures made by ESSI regarding related-party transactions in 2002 and 2003 involving
insurance policies placed by ESSI through an insurance brokerage firm in which an ESSI director was a principal at the time of the transactions. In February 2007, the SEC filed a civil injunctive
action in the United States District Court for the Eastern District of Missouri, Eastern Division, against a former director, officer and consultant of ESSI, alleging that he had violated the federal
securities laws by "tipping" his financial advisor and close friend by sharing material, nonpublic information regarding ESSI's financial condition shortly before certain 2003 earnings announcements.
That action is scheduled for trial on December 15, 2008.

On
or about September 23, 2005, the SEC staff advised ESSI's counsel that it had issued a subpoena directed to ESSI and expanded its investigation to include ESSI's disclosure of
a November 2004 stop-work order relating to ESSI's Deployable Power Generation and Distribution Systems (DPGDS) program for the U.S. Air Force and relating to trading in ESSI 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/or testimony to the SEC. ESSI has
received no additional subpoenas or requests for information from the SEC on these subject matters since May 2006.

In
January 2006, ESSI was informed that the Office of the U.S. Attorney for the Eastern District of Missouri was initiating an investigation into ESSI's disclosure of the DPGDS
stop-work order and into trading in ESSI stock by ESSI insiders, which preceded such disclosure. The U.S. Attorney's office advised ESSI that although it considered ESSI to be a subject of
its investigation, ESSI was not a

20

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

16. Contingencies (Continued)

target.
In connection with this investigation, the U.S. Attorney's office issued ESSI a subpoena requesting specified information, which ESSI has furnished. ESSI has received no additional subpoenas
or requests for information from the U.S. Attorney's office on these subject matters since May 2006.

In
May 2006, the Company was advised that the Enforcement Division of the SEC and the U.S. Attorney's office each had expanded its investigation to include possible "backdating" of the
timing of option grants at ESSI prior to the time ESSI was acquired by the Company. As a part of its investigation, the SEC issued subpoenas to certain former officers and employees of ESSI to provide
testimony and produce certain documents.

In
February 2007, the SEC filed civil injunctive actions in the United States District Court for the Eastern District of Missouri, Eastern Division, alleging that ESSI's former Chief
Financial Officer and former Controller had each participated in a backdating scheme. Also in February 2007, the SEC reported that ESSI's former Controller had settled its action against him by
consenting to disgorgement, financial penalties, an officer and director bar and a permanent suspension from practicing before the SEC as an accountant. In July 2007, the SEC filed civil injunctive
actions in the United States District Court for the Eastern District of Missouri, Eastern Division, alleging that ESSI's former Chairman of the Board and Chief Executive Officer and his son (who was
also a member of ESSI's Board of Directors and Compensation Committee) each participated in a backdating scheme. The pending SEC actions were consolidated and stayed at the request of the U.S.
Attorney's office pending resolution of related criminal proceedings. ESSI's former Chief Financial Officer represented in an October 2008 court filing that he had agreed to pay a civil penalty to the
SEC of $400,000.

In
March 2007, ESSI's former Controller pleaded guilty to a one-count information brought by the office of the United States Attorney for the Eastern District of Missouri,
charging him with making false statements to the government. In connection with his plea, this former ESSI executive admitted that a number of documents filed by ESSI with the SEC contained the
materially false statement that the option price of shares subject to the ESSI stock option plan was the closing price of the stock on the date the options were awarded. This former ESSI executive is
expected to be sentenced in November 2008.

In
March 2007, ESSI's former Chief Financial Officer was indicted by the grand jury of the United States District Court for the Eastern District of Missouri relating to the backdating of
the timing of stock options at ESSI prior to the time ESSI was acquired by DRS. In July 2007, ESSI's former Chairman of the Board and Chief Executive Officer and his son (who was also a member of
ESSI's Board of Directors and Compensation Committee) were each indicted on similar charges. The July 2007 superseding indictment charges these former ESSI officers and directors with twelve counts of
fraud based on allegations that they backdated stock options on at least eight occasions between 1996 and 2002.

In
July 2008, ESSI's former Chairman of the Board and Chief Executive Officer and former Chief Financial Officer each pleaded guilty to falsifying (or causing the falsification of) the
records of a publicly traded company. In connection with their respective pleas, ESSI's former Chairman of the Board and Chief Executive Officer admitted that he knowingly and intentionally signed
falsely dated stock option award letters and ESSI's former Chief Financial Officer admitted that he caused such falsely dated award letters to be issued to stock option recipients.

21

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

16. Contingencies (Continued)

On
October 3, 2008, ESSI's former Chairman of the Board and Chief Executive Officer was sentenced to probation for a term of three years, and ordered to serve forty hours of
community service and pay approximately $7.9 million in restitution. On October 17, 2008, ESSI's former Chief Financial Officer was sentenced to fifteen months in prison and two years of
supervised release thereafter. He also was ordered to pay approximately $1.8 million in restitution and a penalty of approximately $4 million.

The
remaining charges against these former executives and the indictment issued against ESSI's former Chairman of the Board and Chief Executive Officer's son (who was also a member of
ESSI's Board of Directors and Compensation Committee) were dismissed.

Although
ESSI 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 the Company's acquisition of ESSI, the U.S. Attorney's office has further advised the Company that it considers DRS to be a witness, not a subject or
target of its investigation.

The
Company is committed to full cooperation with regard to the foregoing investigations and proceedings. The Company is unable to determine at this time the impact, if any, these
matters could have on the Company.

In
September 2006, the Internal Revenue Service commenced an audit of ESSI's Federal tax returns for the tax periods ended October 31, 2004, October 31, 2005 and
January 31, 2006. Thereafter, the Internal Revenue Service agreed, subject to Congressional approval, to close these audits based on ESSI's agreement to accept certain proposed adjustments
(primarily involving the reversal of certain compensation deductions taken during these tax years) and a corresponding assessment of approximately $11.3 million (exclusive of interest) which
was previously accrued. In September 2007, the Company received written confirmation from the Congressional Joint Committee on Taxation that it took no exception to the proposed adjustments.

In
August 2007, a shareholder derivative complaint was filed in the United States District Court for the Eastern District of Missouri against ESSI's former Chairman of the Board and
Chief Executive Officer, his son (who was also a member of ESSI's Board of Directors and Compensation Committee), ESSI's former Chief Financial Officer and ESSI's former Controller relating to the
alleged backdating of stock options prior to ESSI's acquisition by DRS. The complaint also contains claims against the Company as a nominal defendant and against each of the current members of the
Company's Board of Directors relating to the alleged backdating of ESSI stock options and the ESSI acquisition. The Company
believes the claims made against the Company and its current Directors are without merit. The U.S. Attorney's office has moved to intervene and stay the case pending resolution of the related criminal
charges against the individual ESSI defendants. DRS and the DRS Directors have moved to dismiss the case on substantive and jurisdictional grounds. Those motions are pending.

In
January 2008, the Company received an inquiry from the Australian Competition and Consumer Commission (ACCC) related to one of our subsidiaries, DRS Training & Control
Systems, Inc. The ACCC has requested documents and information regarding allegations of possible anticompetitive activity in violation of the Australian Trade Practices Act. In April 2008, the
Company provided the documents and information requested by the ACCC. We have commenced an internal investigation

22

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

16. Contingencies (Continued)

involving
this matter, but are currently unable to determine the timing or the impact, if any, that the matter may have on us.

In
May 2008, the Company was notified that the NYSE Regulation Inc.'s Market Trading Analysis Department (the NYSE) and the SEC had each commenced independent inquiries regarding
trading in DRS securities prior to the public announcement that Finmeccanica S.p.A. and the Company had entered into a definitive merger agreement pursuant to which Finmeccanica had agreed to acquire
the Company for $81 per share subject to the terms thereof. In each case, the Company has been asked to provide certain documents and information. In May 2008, the Company was advised by the SEC that
its informal inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred or as an adverse reflection upon any person or security. Similarly, the
NYSE advised the Company that it was engaged in a fact gathering process and that no inference of impropriety should be inferred. The SEC subsequently filed an action in the Southern District of New
York captioned SEC v. One or More Unknown Purchasers 08 Civ. 6609 (PAC) and, in October 2008, requested additional information from the Company.

In
May 2008, a plaintiff filed a putative class action lawsuit against the Company and the members of its board of directors in New Jersey state court, challenging the transactions
contemplated by the merger agreement and alleging breaches of fiduciary duty. As amended, the complaint asserts a claim for breach of fiduciary duties against the director defendants and a claim for
aiding and abetting breach of fiduciary duties against the Company and its general counsel. The plaintiff alleges, among other things, that the proposed transaction arises out of a flawed process and
that the Company's preliminary proxy statement, filed with the SEC on June 13, 2008, contained misleading disclosures and/or omits certain material information. On July 25, 2008, the
defendants moved to dismiss the amended complaint for failure to state a claim. On September 15, 2008, the plaintiff filed a motion to enjoin the stockholder vote. On September 22, 2008,
the Court denied both motions. The Company believes that the claims asserted by the plaintiff in the amended complaint are wholly without merit.

17. Related-Party Transactions

The Company currently leases a building in Oakland, New Jersey owned by LDR Realty Co., a partnership that was wholly owned, in equal amounts, by David E. Gross, DRS's
co-founder and former President and Chief Technical Officer, and the late Leonard Newman, DRS's co-founder and former Chairman of the Board, Chief Executive Officer and
Secretary and the father of Mark S. Newman, DRS's current Chairman of the Board and Chief Executive Officer. 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. The lease agreement, with a monthly rental of $21.2 thousand, expired
on April 30, 2007. The new lease commenced May 1, 2007 with the new monthly rental commencing on June 1, 2007 of $21.8 thousand for the first year with annual increases of
approximately 3% every June 1. The lease expires August 31, 2010.

Skadden,
Arps, Slate, Meagher & Flom LLP (Skadden), a law firm to which a member of the Company's Board is of counsel, provided legal services to the Company during the six
months ended September 30, 2008 and 2007. Fees paid to Skadden for the six months ended September 30, 2008 and 2007 were $0.9 million and $1.3 million, respectively. The
Company has also recorded $8.4 million in

23

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

17. Related-Party Transactions (Continued)

legal
fees for Skadden's services associated with the Merger for the six months ended September 30, 2008.

In
the fourth quarter of fiscal 2007, the stepson of Mark S. Newman, the Company's Chairman of the Board, President and Chief Executive Officer, commenced employment with Nemco
Brokerage, Inc., a firm that has a longstanding relationship of providing insurance brokerage services to the Company and which receives commissions from third-party insurers based on policies
it places on the Company's behalf.

18. Guarantor and Non-Guarantor Financial Statements

As presented in Note 9, Debt, the Company has $350.0 million 65/8% Senior Notes, $550.0 million 67/8% Senior Subordinated Notes,
$250.0 million 75/8% Senior Subordinated Notes and $345.0 million 2% Convertible Senior Notes outstanding (collectively, the Notes) at September 30, 2008 and
March 31, 2008. The Notes are fully and unconditionally guaranteed, jointly and severally, by the Company's wholly-owned domestic subsidiaries (the Guarantor Subsidiaries). The foreign
subsidiaries and certain domestic subsidiaries of DRS (the Non-Guarantor Subsidiaries) do not guarantee the Notes.

The
following condensed consolidating financial information in the Condensed Consolidating Balance Sheets as of September 30, 2008 and March 31, 2008, the Condensed
Consolidating Statements of Earnings for the three- and six-month periods ended September 30, 2008 and 2007, and the Condensed Consolidating Statements of Cash Flows for the
six-month periods ended September 30, 2008 and 2007 presents:



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

The
Guarantor and Non-Guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Separate financial information for each of the Guarantor and Non-Guarantor Subsidiaries is not presented because management believes such financial statements
would not be meaningful to investors.

24

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Balance Sheet  As of September 30, 2008  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assetsCash and cash equivalents

$
108,431

$


$
22,822

$
(13,688
)
$
117,565Accounts receivable, net


3


531,132


44,992





576,127Inventories, net





345,524


61,712





407,236Prepaid expenses, deferred income taxes and other current assets


194,472


245,109


47,659


(369,972
)

117,268Intercompany receivables


2,147,310








(2,147,310
)

Total current assets


2,450,216


1,121,765


177,185


(2,530,970
)

1,218,196Property, plant and equipment, net


20,677


235,244


16,293





272,214Acquired intangibles, net





152,838


288





153,126Goodwill


24,116


2,550,790


44,224





2,619,130Deferred income taxes and other noncurrent assets


22,876


45,245


16,405


(47,520
)

37,006Investment in subsidiaries


1,143,419


36,898


7


(1,180,324
)

Total assets

$
3,661,304

$
4,142,780

$
254,402

$
(3,758,814
)
$
4,299,672Liabilities and Stockholders' EquityCurrent liabilitiesCurrent installments of long-term debt

$
347,750

$
432

$
2,342

$


$
350,524Accounts payable


3,459


244,875


31,645





279,979Accrued expenses and other current liabilities


235,915


564,067


71,067


(370,090
)

500,959Intercompany payables





661,572


15,191


(676,763
)

Total current liabilities


587,124


1,470,946


120,245


(1,046,853
)

1,131,462Long-term debt, excluding current installments


1,271,130


3,464


5,033





1,279,627Other liabilities


27,981


111,322


21,733


(47,522
)

113,514Total liabilities


1,886,235


1,585,732


147,011


(1,094,375
)

2,524,603Total stockholders' equity


1,775,069


2,557,048


107,391


(2,664,439
)

1,775,069Total liabilities and stockholders' equity

$
3,661,304

$
4,142,780

$
254,402

$
(3,758,814
)
$
4,299,672


25

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Balance Sheet  As of March 31, 2008  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assetsCash and cash equivalents

$
65,130

$


$
31,195

$
(10,074
)
$
86,251Accounts receivable, net


4


549,463


24,662





574,129Inventories, net





390,594


46,610


505


437,709Prepaid expenses, deferred income taxes and other current assets


191,400


242,233


45,639


(351,806
)

127,466Intercompany receivables


2,105,884





4,834


(2,110,718
)

Total current assets


2,362,418


1,182,290


152,940


(2,472,093
)

1,225,555Property, plant and equipment, net


16,096


224,589


14,992





255,677Acquired intangibles, net





167,301


473





167,774Goodwill


24,116


2,553,906


46,567





2,624,589Deferred income taxes and other noncurrent assets


16,591


41,985


16,805


(32,941
)

42,440Investment in subsidiaries


1,143,419


36,861


44


(1,180,324
)

Total assets

$
3,562,640

$
4,206,932

$
231,821

$
(3,685,358
)
$
4,316,035Liabilities and Stockholders' EquityCurrent liabilitiesCurrent installments of long-term debt

$
2,750

$
225

$
2,409

$


$
5,384Accounts payable


11,824


312,892


33,143





357,859Accrued expenses and other current liabilities


219,793


578,701


60,862


(351,806
)

507,550Intercompany payables





721,477





(721,477
)

Total current liabilities


234,367


1,613,295


96,414


(1,073,283
)

870,793Long-term debt, excluding current installments


1,618,071


3,017


6,380





1,627,468Other liabilities


26,596


116,592


23,921


(32,941
)

134,168Total liabilities


1,879,034


1,732,904


126,715


(1,106,224
)

2,632,429Total stockholders' equity


1,683,606


2,474,028


105,106


(2,579,134
)

1,683,606Total liabilities and stockholders' equity

$
3,562,640

$
4,206,932

$
231,821

$
(3,685,358
)
$
4,316,035


26

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Earnings  Three Months Ended September 30, 2008  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$


$
908,281

$
88,435

$
(9,624
)
$
987,092Cost and expenses


3,280


820,954


83,534


(9,946
)

897,822Operating income


(3,280
)

87,327


4,901


322


89,270Interest income


153


(100
)

498





551Interest and related expense


24,305


(33
)

89





24,361Other (income) expense, net


495


47


(115
)




427Management fees


892


(844
)

(48
)




Royalties


334





(334
)




Intercompany interest


21,284


(20,944
)

(340
)




Earnings (losses) before noncontrolling interest and income taxes


(5,417
)

65,425


4,703


322


65,033Noncontrolling interest








293





293Earnings (losses) before income taxes


(5,417
)

65,425


4,410


322


64,740Income taxes


(2,094
)

22,045


1,497


322


21,770Earnings (losses) from subsidiary entities


46,293








(46,293
)

Net earnings

$
42,970

$
43,380

$
2,913

$
(46,293
)
$
42,970


27

---





DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Earnings  Three Months Ended September 30, 2007  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$


$
712,557

$
75,675

$
(4,463
)
$
783,769Cost and expenses


230


627,006


68,867


(4,463
)

691,640Operating income


(230
)

85,551


6,808





92,129Interest income


260


51


69





380Interest and related expense


27,889


70


147





28,106Other (income) expense, net


(648
)

245


620





217Management fees


787


(746
)

(41
)




Royalties


648





(648
)




Intercompany interest


22,734


(22,663
)

(71
)




Earnings (losses) before noncontrolling interest and income
taxes


(3,042
)

61,878


5,350





64,186Noncontrolling interest





(195
)

781





586Earnings (losses) before income
taxes


(3,042
)

62,073


4,569





63,600Income taxes


(852
)

20,113


1,305





20,566Earnings (losses) from subsidiary
entities


45,224








(45,224
)

Net earnings

$
43,034

$
41,960

$
3,264

$
(45,224
)
$
43,034


28

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Earnings  Six Months Ended September 30, 2008  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$


$
1,796,393

$
161,532

$
(18,967
)
$
1,938,958Cost and expenses


14,831


1,627,343


149,827


(18,462
)

1,773,539Operating income


(14,831
)

169,050


11,705


(505
)

165,419Interest income


328


(65
)

588





851Interest and related expense


47,516


112


204





47,832Other (income) expense, net


425


422


(180
)




667Management fees


1,783


(1,687
)

(96
)




Royalties


900





(900
)




Intercompany interest


42,713


(42,180
)

(533
)




Earnings (losses) before noncontrolling interest and income taxes


(17,048
)

124,584


10,740


(505
)

117,771Noncontrolling interest








707





707Earnings (losses) before income taxes


(17,048
)

124,584


10,033


(505
)

117,064Income taxes


(5,295
)

41,174


3,315


(505
)

38,689Earnings (losses) from subsidiary
entities


90,128








(90,128
)

Net earnings

$
78,375

$
83,410

$
6,718

$
(90,128
)
$
78,375


29

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Earnings  Six Months Ended September 30, 2007  (in thousands)

Parent Company

Guarantor Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$


$
1,387,060

$
139,913

$
(7,574
)
$
1,519,399Cost and expenses


372


1,238,929


127,361


(7,570
)

1,359,092Operating income


(372
)

148,131


12,552


(4
)

160,307Interest income


761


43


135





939Interest and related expense


56,372


155


289





56,816Other (income) expense, net


(1,225
)

184


1,328





287Management fees


1,568


(1,490
)

(78
)




Royalties


1,060





(1,060
)




Intercompany interest


46,110


(46,026
)

(84
)




Earnings (losses) before noncontrolling interest and income taxes


(6,020
)

100,319


9,848


(4
)

104,143Noncontrolling interest





(195
)

1,274





1,079Earnings (losses) before income taxes


(6,020
)

100,514


8,574


(4
)

103,064Income taxes


(1,927
)

34,010


2,747


(4
)

34,826Earnings (losses) from subsidiary entities


72,331








(72,331
)

Net earnings

$
68,238

$
66,504

$
5,827

$
(72,331
)
$
68,238


30

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Cash Flows  Six Months Ended September 30, 2008  (in thousands)

Parent Company

Guarantor Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
70,223

$
21,237

$
(22,865
)
$


$
68,595Cash flows from investing activitiesCapital expenditures


(4,904
)

(36,018
)

(3,350
)




(44,272
)Dispositions of property, plant & equipment


1


(1
)

1





1Net cash used in investing activities


(4,903
)

(36,019
)

(3,349
)




(44,271
)Cash flows from financing activitiesBorrowings on revolving line of
credit


265,000











265,000Repayments of revolving line of
credit


(265,000
)










(265,000
)Borrowings of short-term debt





201








201Borrowings of long-term debt





580








580Repayments of long-term debt


(1,375
)

(127
)

(1,183
)




(2,685
)Excess tax benefit realized from share-based payment arrangements


3,923











3,923Proceeds from stock option exercises


8,899











8,899Dividends paid


(2,477
)










(2,477
)Other








110





110Net (repayments to) borrowings from parent company


(30,989
)

14,128


20,475


(3,614
)

Net cash (used in) provided by financing activities


(22,019
)

14,782


19,402


(3,614
)

8,551Effect of exchange rates on cash and cash equivalents








(1,561
)




(1,561
)Net increase (decrease) in cash and cash equivalents


43,301





(8,373
)

(3,614
)

31,314Cash and cash equivalents, beginning of period


65,130





31,195


(10,074
)

86,251Cash and cash equivalents, end of
period

$
108,431

$


$
22,822

$
(13,688
)
$
117,565


31

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

18. Guarantor and Non-Guarantor Financial Statements (Continued)

Condensed Consolidating Statements of Cash Flows  Six Months Ended September 30, 2007  (in thousands)

Parent
Company

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
61,608

$
3,503

$
(4,370
)
$


$
60,741Cash flows from investing activitiesCapital expenditures


(3,915
)

(25,207
)

(3,375
)




(32,497
)Disposition of property, plant and equipment





44


4





48Net cash used in investing activities


(3,915
)

(25,163
)

(3,371
)




(32,449
)Cash flows from financing activitiesBorrowings on revolving line of
credit


215,000











215,000Repayments of revolving line of
credit


(215,000
)










(215,000
)Repayments of long-term debt


(76,375
)

(102
)

(1,238
)




(77,715
)Excess tax benefit realized from share-based payment arrangements


2,772











2,772Proceeds from stock option exercises


4,815











4,815Dividends paid


(2,449
)










(2,449
)Other








245





245Net (repayments to) borrowings from parent company


(34,083
)

21,762


12,676


(355
)

Net cash (used in) provided by financing activities


(105,320
)

21,660


11,683


(355
)

(72,332
)Effects of exchange rates on cash and cash equivalents








478





478Net (decrease) increase in cash and cash equivalents


(47,627
)




4,420


(355
)

(43,562
)Cash and cash equivalents, beginning of period


92,795





14,598


(11,560
)

95,833Cash and cash equivalents, end of period

$
45,168

$


$
19,018

$
(11,915
)
$
52,271


19. Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" (SFAS 157),
which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157 was effective beginning April 1,
2008, except

32

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

19. Recently Issued Accounting Pronouncements (Continued)

for
nonfinancial assets and liabilities measured at fair value on a non-recurring basis for which it will be effective April 1, 2009 for the Company. The Company's cash equivalents
of $30.8 million and $35.6 million at September 30, 2008 and March 31, 2008, respectively, were measured
using quoted prices in active markets for identical items and are valued using published market prices. The impact of the adoption of SFAS 157 was not material to the Company's consolidated
financial statements, and the adoption of the items deferred until fiscal 2010 is not expected to be material.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R significantly changes the way companies account for
business combinations and generally will require more assets acquired and liabilities assumed to be measured at their acquisition-date fair value. Under SFAS 141R, legal fees and
other transaction-related costs are expensed as incurred and are no longer included in goodwill as a cost of acquiring the business. SFAS 141R also requires, among other things, acquirers to
estimate the acquisition date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. In addition, restructuring
costs the acquirer expected, but was not obligated to incur, will be recognized separately from the business acquisition. This statement is effective beginning April 1, 2009 for DRS.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," an Amendment of ARB 51 (SFAS 160). SFAS 160 amends
ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure on the face of the consolidated statement of income of the
amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition, this statement establishes a single method of accounting for changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement is
effective beginning April 1, 2009 for DRS, and the Company currently is evaluating the impact of this statement on its consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 161 enhances the disclosures for derivative instruments and related hedging activities to include, among other disclosures,
the location and fair value amounts of derivative instruments, hedged items and related gains and losses in the balance sheet and income statement, presented in a tabular format. SFAS 161 is
effective for the Company beginning April 1, 2009 and will be applied prospectively. SFAS 161 will not affect the Company's financial position, results of operations and cash flows, but
will require enhanced disclosure.

In
May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board (APB) Opinion No. 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSB APB 14-1). The FSP will require cash-settled convertible debt to be separated into debt and
equity components at issuance and a value to be assigned to each. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the
conversion feature. The difference between the bond cash proceeds and this estimated fair value will be recorded as a debt discount and amortized to interest

33

---



DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements (Continued)

(Unaudited)

19. Recently Issued Accounting Pronouncements (Continued)

expense
over the life of the bond. FSP APB 14-1 will become effective for the Company April 1, 2009 and will require retrospective application. The Company is currently
assessing the impact the adoption of the FSP will have on the Company's future results of operations.

In
June 2008, the FASB issued FASB FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities" (FSP EITF 03-6-1). The FSP addresses whether awards granted in share-based payment transactions are participating securities prior to vesting and, therefore,
need to be included in the earnings allocation in computing earnings per share using the two-class method under SFAS No. 128, Earnings per Share. The FSP requires unvested
share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents to be treated as a separate class of securities in calculating earnings per share. FSP
EITF 03-6-1 will be effective beginning April 1, 2009 and will be retrospectively applied to all prior periods presented. The FSP will not have an impact on the
Company as its share-based awards vested and were paid off as a result of Finmeccanica's merger with DRS.

20. Subsequent Event

On October 9, 2008, the Company gave notice to the holders of its 2% Convertible Senior Notes due 2026 (Convertible Notes) that a "Fundamental Change" (as defined in the indenture
governing the Convertible Notes) would occur upon the consummation of the Merger and that the holders may surrender their
Convertible Notes for conversion at any time up until the "Fundamental Change Purchase Date." In accordance with the indenture governing the Convertible Notes, the Company will notify holders of the
Fundamental Change Purchase Date no later than 30 days after the effective date of the Merger.

Convertible
Notes that were surrendered prior to the Merger for conversion would be converted into the right to receive cash, less any applicable withholding taxes, and, if applicable,
shares of DRS common stock in accordance with the indenture governing the Convertible Notes (the Settlement Amount). However, any Settlement Amount that is due from and after the effective time of the
Merger will be paid in cash, less any applicable withholding taxes, and will not include any shares of DRS common stock. The conversion rate of the Convertible Notes after the Merger and before the
Fundamental Change Purchase Date is 17.2875 per $1,000.00 note, which equates to a value of $1,400.29 per $1,000 principal amount of Convertible Notes. In accordance with the indenture governing the
Convertible Notes, on October 22, 2008, the Company executed a supplemental indenture reflecting such Settlement Amount. The Company is funding the conversion of the Convertible Notes with
proceeds from an intercompany loan from Finmeccanica.

The
Merger triggered the change of control provision in the Company's credit facility, which required the Company to repay its outstanding term loan and terminate its credit facility. In
addition, holders of the Company's 65/8% Senior Notes due 2016, 67/8% Senior Subordinated Notes due 2013 and 75/8% Senior Subordinated Notes due 2018 have
the right to require the Company to purchase those notes for 101% of the principal amount of the notes, plus accrued and unpaid interest up to but excluding the payment date. Within 30 days
following the change of control, the Company will mail a notice to each of the noteholders describing the Merger and stating the purchase price and purchase date, which shall be no earlier than
30 days and no later than 60 days from the day the notice is mailed. The Company expects to fund any purchases with proceeds from an intercompany loan with Finmeccanica.

34

---





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

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of DRS Technologies, Inc.
and its wholly-owned subsidiaries and controlling interests (hereinafter, we, us, our, the Company or DRS) with a note describing the Restatement of Previously Issued Consolidated Financial
Statements, followed by recent developments and a company overview. This is followed by a discussion of the critical accounting estimates that we believe are important to understanding the assumptions
and judgments incorporated in our reported financial results, which we discuss under "Results of Operations." We then provide an analysis of cash flows and discuss our financial commitments under
"Liquidity and Capital Resources." This MD&A should be read in conjunction with the consolidated financial statements and related notes contained herein and in our March 31, 2008 Annual Report
on Form 10-K.

Forward-Looking Statements

The following discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates and
projections. Such statements, including statements relating to the Company's expectations for future financial performance, are not considered historical facts and are considered forward-looking
statements under the federal securities laws. These statements may contain words such as "believes," "anticipates," "plans," "expects," "intends," "estimates" or similar
expressions. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other important factors that could cause our actual performance or achievements
to differ materially from those expressed or implied by these forward-looking statements and include, without limitation: the effect of our acquisition strategy on future operating results, including
our ability to effectively integrate acquired companies into our existing operations; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of
technological changes or obsolescence relating to our products and services; and the effects of government regulation or shifts in government policy, as they may relate to our products and services,
and other risks or uncertainties detailed in Item 1A, "Risk Factors," included in our March 31, 2008 Annual Report on Form 10-K. Given these uncertainties, you should
not rely on forward-looking statements. The Company undertakes no obligations to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Restatement of Previously Issued Consolidated Financial Statements

In February 2008, we received a comment letter from the staff of the U.S. Securities and Exchange Commission (SEC) on our fiscal 2007
Form 10-K (filed on May 30, 2007) and our fiscal 2008 second quarter Form 10-Q (filed on November 9, 2007). In the initial comment letter and in
other subsequent written and telephonic communications with the staff of the SEC, information was requested regarding the timing of a $36.8 million pretax charge that was recorded in our fiscal
2008 first quarter ended June 30, 2007 for the impact of a redesign on our Thermal Weapon Sight II (TWS II) program.

In
March 2007, we stopped production on the TWS II line due to intermittent failures. After several weeks of analysis, we identified the root causes of the failures, and in May 2007 we
released a redesign that we believed would address them. The charge reflects our revised estimate of the excess of the total estimated costs to fulfill the scope of work of the TWS II contract over
the total TWS II contract value. The total estimated costs to complete the contract reflect all direct costs (primarily labor and material), overhead and allowable general and administrative expenses.
The most significant component of the charge was a result of the write-off of certain TWS II on-hand component parts that would no longer be utilized in the new TWS II design.
The charge also reflects the estimated future cost of the redesign and cost growth that was unrelated to the redesign.

35

---



Following
discussions with the staff of the SEC and review of the judgments and estimates we made relating to the charge, we concluded that the $36.8 million charge should have
been recorded in our fiscal 2007 fourth quarter ended March 31, 2007.

As
a result of foregoing, we restated our previously filed consolidated financial statements and selected financial data for the year ended March 31, 2007, inclusive of our fourth
quarter ended March 31, 2007 and our previously issued quarterly consolidated financial statements for the three month period ended June 30, 2007 in our March 31, 2008
Form 10-K (filed May 30, 2008). All amounts impacted by the restatement that are presented in the MD&A have been restated to reflect the $36.8 million charge in the
appropriate period.

For
additional information and a detailed discussion of the restatement, see Note 3, Restatement of Previously Issued Consolidated Financial Statements, to the accompanying
consolidated financial statements.

Recent Developments

On October 22, 2008, pursuant to a definitive merger agreement dated May 12, 2008 (the Merger Agreement) among the
Company, FinmeccanicaSocietá per azioni, a societá per azioni organized under the laws of Italy (Finmeccanica) and Dragon Merger Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of Finmeccanica (Sub), Sub merged with and into the Company (the Merger). The Company survived the Merger and, as a result, became a wholly-owned subsidiary
of Meccanica Holdings USA, Inc. (Holdings), a wholly-owned subsidiary of Finmeccanica.

In
connection with the closing of the Merger pursuant to the Merger Agreement, we notified the New York Stock Exchange that each share of the Company's common stock, $0.01 par value per
share, had been converted into the right to receive $81.00 in cash without interest.

Company Overview

DRS is a supplier of defense electronic products, systems and military support services. We provide high-technology
products, services and support to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, certain international military forces and
industrial markets.

The
Company has four principal operating segments, on the basis of products and services offered: the Command, Control, Communications, Computers and Intelligence (C4I) Segment, the
Reconnaissance,
Surveillance & Target Acquisition (RSTA) Segment, the Sustainment Systems Segment and the Technical Services Segment. All other operations, primarily our Corporate Headquarters, are grouped in
Other.

On
October 1, 2007, the ESSIBuy operating unit, an operating unit of the Technical Services Segment, was consolidated into an operating unit of the Sustainment Systems Segment to
achieve certain operating synergies. The balance sheet and operating results of ESSIBuy were reclassified for the period from April 1, 2007 through September 30, 2007.

The
C4I Segment is comprised of the following business areas: Command, Control & Communications (C3), which includes naval display systems, ship communications systems, radar
systems, technical support, electronic manufacturing and system integration services, secure voice and data communications, air combat training, electronic warfare, ship network systems and unmanned
vehicles, and integration of traditional security infrastructures into a comprehensive border security suite for the Department of Homeland Security; Power Systems, which includes naval and industrial
power generation, conversion, propulsion, distribution and control systems; Intelligence Technologies, which includes signals intelligence, communications intelligence, data collection, processing and
dissemination equipment, high-speed digital data and imaging systems, and mission and flight recorders;

36

---



Tactical
Systems, which includes battle management tactical computer systems, peripherals, electronic test and diagnostics, and vehicle electronics.

The
RSTA Segment develops and produces electro-optical sighting, targeting and weapon sensor systems, image intensification (I2) night vision, combat identification and
laser aimer/illuminator products, and provides electronic manufacturing services.

The
Sustainment Systems Segment designs, engineers and manufactures integrated military electronics and other military support equipment, primarily for the U.S. Department of Defense
(DoD), as well as related heat transfer and air handling equipment, and power generation and distribution equipment for domestic commercial and industrial users.

The
Technical Services Segment provides engineering services, logistics and training services, advanced technology services, asset protection systems and services, telecommunication
systems integration and information technology services, power generation and vehicle armor kits for military, intelligence, humanitarian, disaster recovery and emergency responder applications.

On
October 24, 2008, we implemented a new organizational structure that realigned our four segments (C4I, RSTA, Sustainment Systems, and Technical Services) into five operating
groups: Reconnaissance Surveillance and Target Acquisition Group, Tactical Systems Group, Power and Environmental Systems Group, Command, Control and Computers Group; Technical Services, Intelligence
and Advanced Systems Group.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted
in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are
described in Note 1 to the Consolidated Financial Statements included in our March 31, 2008 Annual Report on Form 10-K. There were no significant changes in the
Company's critical accounting policies during the six-month period ended September 30, 2008. Critical accounting policies are those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. Critical
accounting policies for us include revenue recognition on contracts and contract estimates, valuation of goodwill and acquired intangible assets, pension plan and postretirement benefit plan
obligations, accounting for income taxes, share-based payments and other management estimates.

Results of Operations

Our operating cycle is long term and involves various types of production contracts and varying production delivery schedules.
Accordingly, operating results of a particular year, or year-to-year comparisons of recorded revenues and earnings, may not be indicative of future operating results. Members
of our senior management team regularly review key performance metrics and the status of operating initiatives within our business. These key performance indicators are primarily revenues, operating
income and bookings. We review this information on a monthly basis through operating segment reviews, which include, among other operating issues, discussions related to significant programs, proposed
investments in new business opportunities or property, plant and equipment, and integration and cost reduction efforts. The following table presents a summary comparison of the key

37

---



performance
metrics, other significant financial metrics and significant liquidity metrics monitored by our senior management.

Three Months Ended
September 30,



Six Months Ended
September 30,2008

2007

Percent
Change

2008

2007
(Restated)

Percent
ChangeKey performance metrics

(in thousands, except percentages)

(in thousands, except percentages)Revenues:Products

$
752,130

$
585,505


28.5
%
$
1,473,326

$
1,122,330


31.3
%Services

$
234,962

$
198,264


18.5
%
$
465,632

$
397,069


17.3
%Total revenues

$
987,092

$
783,769


25.9
%
$
1,938,958

$
1,519,399


27.6
%Costs and expenses:Cost and expensesProducts

$
684,639

$
512,536


33.6
%
$
1,335,494

$
994,662


34.3
%% of product revenues


91.0
%

87.5
%




90.6
%

88.6
%Cost and expensesServices

$
208,109

$
179,104


16.2
%
$
421,424

$
364,430


15.6
%% of service revenues


88.6
%

90.3
%




90.5
%

91.8
%Merger-related expenses

$
5,074

$



n/m

$
16,621

$



n/mTotal costs and expenses

$
897,822

$
691,640


29.8
%
$
1,773,539

$
1,359,092


30.5
%Operating income

$
89,270

$
92,129


(3.1
)%
$
165,419

$
160,307


3.2
%Operating income percentage


9.0
%

11.8
%




8.5
%

10.6
%Bookings

$
1,229,938

$
1,107,989


11.0
%
$
2,295,178

$
2,047,517


12.1
%Other significant financial metricsInterest and related expenses

$
24,361

$
28,106


(13.3
)%
$
47,832

$
56,816


(15.8
)%Income taxes

$
21,770

$
20,566


5.9
%
$
38,689

$
34,826


11.1
%Significant liquidity metrics(A)Free cash flow

$
51,889

$
41,610


24.7
%
$
24,323

$
28,244


(13.9
)%EBITDA

$
108,745

$
110,173


(1.3
)%
$
203,970

$
196,301


3.9
%


---

n/m
 not meaningful

Revenues for the three-months and six-months ended September 30, 2008, compared with the three-months and six-months ended September 30, 2007.

Consolidated revenue increased $203.3 million, or 25.9%, to $987.1 million for the three-month period ended
September 30, 2008, as compared with the corresponding period in the prior year. The increase in revenue was comprised of an increase of $166.6 million and $36.7 million for
product and service revenues, respectively.

Consolidated
revenue increased $419.6 million, or 27.6%, to $1.94 billion for the six-month period ended September 30, 2008, as compared with the
corresponding period in the prior year. The increase in revenue was comprised of an increase of $351.0 million and $68.6 million for product and service revenues, respectively.

RevenuesProducts

Revenue from our products (e.g., hardware, components and systems) increased $166.6 million, or 28.5%, to
$752.1 million for the three-month period ended September 30, 2008, as compared with the corresponding period in the prior year. The increase was primarily driven by greater shipments of

38

---



driver
vision enhancement equipment and components for ground-based vehicles, Thermal Weapon Sights II (TWS II), certain rugged computer systems and a precision targeting system.

Revenues
from driver vision enhancement equipment and components increased significantly as a result of elevated priority placed on the program by the customer to assist in increasing
combat vehicle drivers' vision capability, survivability and mobility, which resulted in increased funding and accelerated delivery schedules. TWS II shipments increased as shipments were delayed in
the prior-year period due to certain technical issues experienced on the programs. Rugged computer systems revenue increased due to increased funding and accelerated customer delivery
requirements to supply troops in theatre, and the precision targeting system increased as we received a new contract for an armored version of the program.

Partially
offsetting overall higher product revenues were lower revenues from a vehicle armor program, as the program was substantially completed during fiscal 2008, as well as decreased
shipments of combat display workstations due to lower demand in the current year, lower shipments of replacement video display modules, as the program was substantially completed in fiscal 2008, and
lower revenues from a reset program for heavy equipment trailers, as the program is winding down and switching to production which has not yet begun.

Revenue
from our products increased $351.0 million, or 31.3%, to $1.47 billion for the six-month period ended September 30, 2008, as compared with the
corresponding period in the prior year. The increase was primarily driven by greater shipments of driver vision enhancement equipment and components for ground-based vehicles, TWS II, certain rugged
computer systems and roof assemblies for the Mine Resistant Ambush Protected (MRAP) vehicle.

Revenues
from driver vision enhancement equipment and components increased significantly as a result of elevated priority placed on the program by the customer to assist in increasing
combat vehicle drivers' vision capability, survivability and mobility, which resulted in increased funding and accelerated delivery schedules. TWS II shipments increased as shipments were delayed in
the prior-year period due to certain technical issues experienced on the programs. Rugged computer systems revenue increased due to increased funding and accelerated customer delivery
requirements to supply troops in theatre, and MRAP roof assembly production increased as the program commenced in the second half of fiscal 2008.

Partially
offsetting overall higher product revenues were lower shipments of combat display workstations due to lower demand in the current year, fewer shipments of mobile power
generation and distribution equipment for the U.S. Air Force and lower revenues from a vehicle armor program as both programs were substantially completed during fiscal 2008.

RevenuesServices

Revenue from services increased $36.7 million, or 18.5%, to $235.0 million for the three-month period ended
September 30, 2008, as compared with the corresponding prior-year period. The primary drivers of the increase were increased demand for equipment and services under the Rapid
Response program and revenues from satellite-based communication services.

Revenues
from the Rapid Response program continue to increase as a result of continued operational demand in Iraq and Afghanistan and the increased revenue from satellite-based
communications is a result of the commencement of program operations in the second half of fiscal 2008 to support deployed personnel.

Revenue
from services increased $68.6 million, or 17.3%, to $465.6 million for the six-month period ended September 30, 2008, as compared with the
corresponding prior-year period. The primary drivers of the increase were revenues from satellite-based communication services and demand for equipment and services under the Rapid
Response program. The increased revenue from satellite-based

39

---



communications
is a result of the commencement of program operations in the second half of fiscal 2008 to support deployed personnel. Revenues from the Rapid Response program continue to increase as a
result of continued operational demand in Iraq and Afghanistan.

Partially
offsetting the increase in service revenues were decreased revenues for a defense communication transmission system program as the contract is substantially complete. We expect
to recognize additional revenue on this program as a result of a newly awarded contract.

Costs and expenses/Operating income

The majority of our business is comprised of thousands of individually unique contracts to design and/or produce defense electronics
(components and systems) and to provide other sustainment, logistics management and communications services to the military. In general, we do not manufacture large homogenous product lines.

Costs
and expenses include contract costs, consisting of direct costs (labor, material, etc), indirect overhead, allowable general and administrative expenses, as defined below,
including internal research and development and bid-and-proposal costs and non-allocable costs, such as unallowable general and administrative expenses, as defined
below, and amortization of intangible assets.

We
bifurcate our total general and administrative (G&A) costs into "allowable" and "unallowable" cost pools, as the terms are defined in the U.S. Federal Acquisition Regulations (FAR)
procurement regulations. We account for allowable G&A costs allocated to our government contractor operating units that design, develop and produce complex defense electronic components and systems
for specifically identified contracts as contract costs because such costs are generally reimbursable indirect contract costs pursuant to the terms of the contracts. We expense such allowable G&A
costs as a component of costs and expenses when the revenues related to those contracts are recognized. Our government contractor operating units allocate allowable G&A costs to their contracts using
an indirect allocation rate, which is based generally upon allowable G&A costs as a percentage of a total cost (direct labor, manufacturing overhead, raw materials and other direct costs) input base.

Consolidated
costs and expenses increased $206.2 million, or 29.8%, to $897.8 million for the three-month period ended September 30, 2008, as compared with the
corresponding period in the prior year. The increased costs are attributed to a $172.1 million increase in product-related expenses, $29.0 million increase in service-related expenses
and $5.1 million in merger-related expenses.

Consolidated
costs and expenses increased $414.4 million, or 30.5%, to $1.77 billion for the six-month period ended September 30, 2008, as compared with
the corresponding period in the prior year. The increased costs are attributed to a $340.8 million increase in product-related expenses, a $57.0 million increase in service-related
expenses and $16.6 million in merger-related expenses.

Costs and expensesProducts

Product costs and expenses increased $172.1 million, or 33.6%, to $684.6 million for the three-month period ended
September 30, 2008, as compared with the corresponding period in the prior year, while increasing 350 basis points as a percentage of product revenues over the same period. The increase in
costs and expenses was attributed to significant products revenue growth during the period, as noted above. The increase in cost and expenses as a percentage of product revenues was largely
attributable to a significant increase in TWS II deliveries, along with additional material cost growth on the program, and a field retrofit provision for an airborne infrared counter measure
program, as well $9.4 million of gains associated with the curtailment of certain pension plans recorded in the corresponding period in the prior year.

Product
costs and expenses increased $340.8 million, or 34.3%, to $1.34 billion for the six-month period ended September 30, 2008, as compared with the
corresponding period in the prior year, while

40

---



increasing
200 basis points as a percentage of product revenues over the same period. The increase in costs and expenses was attributed to significant products revenue growth during the period, as
noted above. The increase in cost and expenses as a percentage of product revenues was largely attributable to a significant increase in TWS II deliveries along with additional material cost
growth on the program, a field retrofit provision for an airborne infrared counter measure program, as well $9.4 million of gains associated with the curtailment of certain pension plans
recorded in the corresponding period in the prior year.

Costs and expensesServices

Costs and expensesservices increased $29.0 million, or 16.2% to $208.1 million during the three-month period
ended September 30, 2008, as compared with the corresponding prior-year period, while decreasing 170 basis points as a percentage of service revenues over the same period. The
increase in cost and expenses was attributed to service revenue growth during the period, as noted above. The decrease in costs and expenses as a percentage of service revenues was driven by the
increase in higher margin satellite-based communication services and engineering services revenue, partially offset by $2.3 million of gains associated with the curtailment of certain pension
plans recorded in the corresponding period in the prior year.

Costs
and expensesservices increased $57.0 million, or 15.6%, to $421.4 million during the six-month period ended September 30, 2008, as
compared with the corresponding prior-year period, while decreasing 130 basis points as a percentage of service revenues over the same period. The increase in cost and expenses was
attributed to service revenue growth during the period, as noted above. The decrease in costs and expenses as a percentage of service revenues was driven by the increase in higher margin
satellite-based communication service revenue, partially offset by $2.3 million of gains associated with the curtailment of certain pension plans recorded in the corresponding period in the
prior year.

Merger-related expensesIn the three- and six-month periods ended September 30, 2008, the Company incurred $5.1 and
$16.6 million, respectively, in investment banking, legal and consulting expenses related to the merger with Finmeccanica.

Operating incomeWe consider operating income to be an important measure for evaluating our operating performance and, as is typical in the industry, define
operating income as revenues less related costs and expenses of producing the revenues, including allowable general and administrative expenses, and non-allocable costs, as defined above.
Operating income is discussed in detail for each of the business segments in which we operate, and the segment operating income is one of the key metrics used by management to internally manage its
operations. Consolidated operating income for the three-month period ended September 30, 2008 decreased $2.9 million, or 3.1%, to $89.3 million, as compared with the corresponding
period in the prior year. In addition, operating income as a percentage of revenues decreased 280 basis points, which was attributed to the cost/revenue relationships, the curtailment gain
recorded in the corresponding period in the prior year and merger-related expenses detailed above. See "Operating Segments" discussion for additional information.

Consolidated
operating income for the six-month period ended September 30, 2008 increased $5.1 million, or 3.2%, to $165.4 million, as compared with the
corresponding period in the prior year. Operating income as a percentage of revenues decreased 210 basis points, which was attributed to the cost/revenue relationships, the curtailment gain recorded
in the corresponding period in the prior year and merger-related expenses detailed above. See "Operating Segments" discussion for additional information.

BookingsWe define bookings as the value of contract awards received from the U.S. government for which the U.S. government has appropriated funds, plus the value
of contract awards and orders

41

---



received
from customers other than the U.S. government. Bookings for the three-month period ended September 30, 2008 increased $121.9 million, as compared with the corresponding period
in the prior year, to $1.23 billion. The increase was driven by strong demand at all four segments.

Bookings
for the six-month period ended September 30, 2008 increased $247.7 million, as compared with the corresponding period in the prior year, to
$2.30 billion. The increase was driven by strong demand at all four segments.

Interest and related expensesInterest and related expenses decreased $3.7 million and $9.0 million for the three- and six-month periods
ended September 30, 2008, as compared with corresponding periods in the prior year, to $24.4 million and $47.8 million, respectively. Lower interest and related expenses were
primarily the result of a decrease in our average borrowings outstanding for the three- and six-month periods ended September 30, 2008, as compared with the
corresponding periods in the prior year and a $2.5 million interest credit related to the completion of federal income tax audits and expirations of statute of limitations. We had no borrowings
outstanding under our revolving credit facility at September 30, 2008 and 2007. During fiscal 2008, we prepaid, at our discretion, approximately $150.0 million of our outstanding term
loan, $100.0 million of which was prepaid during the last nine months of the that fiscal year.

Income taxesThe provision for income taxes for the three- and six-month periods ended September 30, 2008 reflected an effective income tax rate
of approximately 33.6% and 33.0%, respectively, as compared with 32.3% and 33.8%, respectively, in the same period last year. Our effective tax rate for the three- and six-month periods
ended September 30, 2008 decreased primarily due to a favorable settlement with the Internal Revenue Service, (IRS) concerning its examination of our federal income tax returns for the years
ended March 31, 2002, 2003 and 2004, which was partially offset by an increase in the effective tax rate due to the expiration of the research and development credit effective
December 31, 2007.

As
a result of the audit and expiration of federal and state statute of limitations, we paid approximately $5.5 million, which included interest of approximately
$1.3 million, and recorded a discrete tax benefit of approximately $4.4 million, an adjustment to goodwill of approximately $3.1 million, an adjustment to additional paid in
capital of $0.1 million, with the remainder impacting deferred tax assets, deferred tax liabilities and income taxes payable.

Operating Segments

The following table sets forth, by operating segment, revenues, operating income and operating margin and the percentage increase or
decrease of those items, as compared with the prior fiscal year:

Three Months Ended
September 30,

Three Months
Ended Percent
Changes

Six Months Ended
September 30,

Six Months
Ended Percent
Changes2008

2007

2008 vs. 2007

2008

2007
(Restated)

2008 vs. 2007(in thousands, except for percentages)C4I SegmentRevenues

$
351,966

$
309,425


13.7
%
$
716,550

$
607,817


17.9
%Operating income

$
34,377

$
34,083


0.9
%
$
71,138

$
65,988


7.8
%Operating margin


9.8
%

11.0
%

n/m


9.9
%

10.9
%

n/mRSTA SegmentRevenues

$
301,482

$
188,770


59.7
%
$
559,598

$
342,354


63.5
%Operating income

$
23,789

$
18,416


29.2
%
$
49,518

$
34,134


45.1
%Operating margin


7.9
%

9.8
%

n/m


8.8
%

10.0
%

n/mSustainment Systems SegmentRevenues

$
139,415

$
112,361


24.1
%
$
287,084

$
224,390


27.9
%Operating income

$
18,302

$
25,225


(27.4
)%
$
34,021

$
35,798


(5.0
)%Operating margin


13.1
%

22.4
%

n/m


11.9
%

16.0
%

n/m


42

---



Three Months Ended
September 30,

Three Months
Ended Percent
Changes

Six Months Ended
September 30,

Six Months
Ended Percent
Changes2008

2007

2008 vs. 2007

2008

2007
(Restated)

2008 vs. 2007(in thousands, except for percentages)Technical Services SegmentRevenues

$
194,229

$
173,213


12.1
%
$
375,726

$
344,838


9.0
%Operating income

$
16,114

$
14,653


10.0
%
$
25,629

$
24,795


3.4
%Operating margin


8.3
%

8.5
%

n/m


6.8
%

7.2
%

n/mOtherOperating loss

$
(3,312
)
$
(249
)

(1230.1
)%
$
(14,887
)
$
(409
)

(3539.9
)%


---

n/mnot
meaningful

Three-Month Period Ended September 30, 2008, Compared with the Three-Month Period Ended September 30, 2007

C4I Segment

RevenuesRevenues increased $42.5 million, or 13.7%, to $352.0 million for the three-month period ended September 30, 2008, as compared with
the corresponding period in the prior year. The increase in revenue was primarily attributable to increased shipments of certain rugged computer systems, driver vision enhancement equipment and
components for ground-based vehicles, and certain electrical system test sets.

Revenues
from rugged computer systems increased significantly over the prior year due to increased funding and accelerated customer delivery requirements to supply troops in theatre.
Driver vision enhancement equipment and components also increased as a result of elevated priority placed on the program by the customer to assist in increasing combat vehicle drivers' vision
capability, survivability and mobility, which resulted in incremental customer funding and accelerated delivery schedules. Revenues increased for certain electrical system test sets due to incremental
funding for test set service and maintenance for the Bradley Fighting Vehicle systems.

Partially
offsetting overall higher revenues were lower shipments of combat display workstations and replacement video display modules. Revenue from combat display workstations was lower
as a result of decreased demand during the current year. Replacement video display modules revenue decreased as a result of the contract being substantially completed during the prior year.

Operating incomeOperating income increased $0.3 million, or 0.9%, to $34.4 million, as compared with the corresponding period in the prior year. The
increase in operating income was attributed primarily to the increase in revenues. Partially offsetting the higher overall operating income was a 120 basis
point decrease in C4I's operating margins. The lower margins were driven by the substantial completion of a high margin replacement video display module program in the prior year and the increased
development costs of certain switchboard programs.

RSTA Segment

RevenuesRevenues increased $112.7 million, or 59.7%, to $301.5 million for the three-month period ended September 30, 2008, as compared with
the corresponding period in the prior year. The increase in revenue was primarily attributable to greater shipments of driver vision enhancement equipment and components for ground-based vehicles and
TWS II. Partially offsetting the overall increase in revenue were lower volume on a firepower enhancement program and night vision systems.

Revenues
from driver vision enhancement equipment increased significantly as a result of elevated priority placed on the program by the customer to assist in increasing combat vehicle
drivers' vision

43

---



capability,
survivability and mobility, which resulted in increased funding and accelerated delivery schedules. In addition, TWS II shipments increased due to the delay of shipments on the program in
the prior year, due to certain technical issues experienced on the program, until late in the second quarter of fiscal 2008. Partially offsetting the increases was lower volume from a certain
firepower enhancement program, as the program was substantially completed in the prior fiscal year, and overall lower demand for certain night vision systems.

Operating IncomeOperating income increased $5.4 million, or 29.2%, to $23.8 million, as compared with the corresponding period in the prior year.
Operating margin decreased 190 basis points for the three-month period ended September 30, 2008, as compared with the corresponding period in the prior year. The increase in operating income
was primarily attributed to the overall increase in revenues. Operating margins decreased primarily due to a significant increase in TWS II deliveries along with additional material cost growth on the
program during the quarter. Future TWS II deliveries are expected to be recorded at or near break-even resulting in a dilution of overall operating margin for the segment. In addition, we
recorded a provision for field retrofit for an airborne infrared counter measure program.

Sustainment Systems Segment

RevenueRevenues increased $27.1 million, or 24.1%, to $139.4 million for the three months ended September 30, 2008, as compared with the
corresponding period in the prior year. The primary drivers of the increase were increased revenues for precision targeting systems and increased shipments of roof assemblies for the Mine Resistant
Ambush Protected Vehicle (MRAP). The increases were partially offset by lower revenues from a reset program for heavy equipment trailers.

The
precision targeting system revenue increase was attributed to a prior-year customer-initiated design change that resulted in production delays to adhere to the proposed
changes. Production resumed during the fourth quarter of fiscal 2008 resulting in increased revenue, as compared with the corresponding prior-year period. Revenues from MRAP roof
assemblies increased significantly, as compared with the corresponding period in the prior year, as a result of the program commencing in the second half of fiscal 2008, as well as increased priority
placed on the program by the customer. The reset program for heavy equipment trailers declined, as the program is winding down and switching to production which has not yet begun.

Operating IncomeOperating income decreased $6.9 million, or 27.4%, to $18.3 million, as compared with the corresponding period in the prior year.
Operating income decreased due to a 930 basis point drop in operating margin. The decline in operating margin was due primarily to an $11.7 million gain associated with the curtailment of
certain pension plans recorded in the corresponding period in the prior year and cost growth on a certain mobile environmental system program. Partially offsetting the lower margins were higher
overall revenues.

Technical Services Segment

RevenueRevenues increased $21.0 million, or 12.1%, to $194.2 million for the three-month period ended
September 30, 2008, as compared with the corresponding period in the prior year. Programs with significant year-over-year revenue increases are the Rapid Response and a
satellite-based communication services programs. Revenues from the Rapid Response program continue to increase as a result of continued operational demand in Iraq and Afghanistan. Revenues from
satellite-based communication services increased as a result of the commencement of program operations in the second half of fiscal 2008 to support deployed personnel.

Largely
offsetting the revenue increases were lower revenues from a vehicle armor program, a power generation and distribution equipment program and a certain defense communication
transmission system programs, as the contracts were substantially completed in the prior year.

44

---



Operating IncomeOperating income increased $1.5 million, or 10.0%, to $16.1 million compared with the corresponding period in the prior year.
Operating margin experienced a decrease of 20 basis points from the 8.5% earned in the corresponding period in the prior year. The decreased profitability was attributed to the substantial completion
of the profitable power generation and distribution equipment contract during the prior year. In addition, selling, general and administrative expenses increased, as compared with the corresponding
period in the prior year. The decreases were partially offset by increased revenue on the profitable satellite-based communication services program.

Other

Operating loss increased $3.1 million from the corresponding period in the prior year is a result of $5.1 million in
investment banking, legal and consulting expenses related to the merger with Finmeccanica, partially offset by a $2.1 million gain on the disposal of an asset.

Six-Month Period Ended September 30, 2008, Compared with the Six-Month Period Ended September 30, 2007

C4I Segment

RevenuesRevenues increased $108.7 million, or 17.9%, to $716.6 million for the six-month period ended September 30, 2008, as
compared with the corresponding period in the prior year. The increase in revenue was primarily attributable to increased shipments of certain rugged computer systems and driver vision enhancement
equipment and components for ground-based vehicles.

Revenues
from rugged computer systems increased significantly over the prior year due to increased funding and accelerated customer delivery requirements to supply troops in theatre.
Driver vision enhancement components also increased as a result of elevated priority placed on the program by the customer to assist in increasing combat vehicle drivers' vision capability,
survivability and mobility, which resulted in incremental customer funding and accelerated delivery schedules.

Partially
offsetting overall higher revenues were lower shipments of combat display workstations and replacement video display modules. Revenue from combat display workstations was lower
as a result of decreased demand during the current year. Replacement video display modules revenue declined as a result of the contract being substantially completed during the prior year.

Operating incomeOperating income increased $5.2 million, or 7.8%, to $71.1 million, as compared with the corresponding period in the prior year. The
increase in operating income was attributed primarily to the increase in revenue. Operating margins decreased 100 basis points to 9.9% largely due to cost growth on signal intelligence software,
certain sidecar cable assemblies, the development of certain switchboard programs and the substantial completion of a high margin replacement video display module program in the prior year. Partially
offsetting the overall lower operating margin was increased volume and profitability on certain driver vision enhancement equipment and components programs as a result of increased volume-driven
efficiencies and strong margins for certain rugged computer systems due to a contract settlement.

RSTA Segment

RevenuesRevenues increased $217.2 million, or 63.5%, to $559.6 million for the six-month period ended September 30, 2008, as
compared with the corresponding period in the prior year. The increase in revenue was primarily attributable to greater shipments of driver vision enhancement equipment for ground-based vehicles and
TWS II. Partially offsetting the overall increase in revenue was lower volume on a firepower enhancement program and night vision systems.

Revenues
from driver vision enhancement equipment increased significantly as a result of elevated priority placed on the program by the customer to assist in increasing combat vehicle
drivers' vision

45

---



capability,
survivability and mobility, which resulted in increased funding and accelerated delivery schedules. In addition, TWS II shipments increased due to the delay of shipments on the program in
the prior year, due to certain technological issues experienced in the program until late in the second quarter of fiscal 2008. Partially offsetting the increases was lower volume from a certain
firepower enhancement program, as the program was substantially completed in the prior fiscal year, and overall lower demand for certain night vision systems.

Operating IncomeOperating income increased $15.4 million, or 45.1%, to $49.5 million as compared with the corresponding period in the prior year.
Operating margin decreased 120 basis points for the six-month period ended September 30, 2008, as compared with the corresponding period in the prior year. The increase in
operating income was primarily attributed to the overall increase in revenue. Operating margins decreased primarily due to the significant increase in TWS II deliveries along with additional material
cost growth on the program during the quarter. Future TWS II deliveries are expected to be recorded at or near break-even resulting in a dilution of overall operating margin for the
segment. In addition, we recorded a provision for a field retrofit for an airborne infrared counter measure program. Partially offsetting the overall lower operating margin were increased margins on
certain ground-based target acquisition and missile control subsystems as a result of volume-driven efficiencies.

Sustainment Systems Segment

RevenueRevenues increased $62.7 million, or 27.9%, to $287.1 million for the six-month period ended September 30, 2008, as
compared with the corresponding period in the prior year. The primary drivers of the increase were increased shipments of roof assemblies for the Mine Resistant Ambush Protected Vehicle (MRAP) and
precision targeting systems, partially offset by lower revenues from a reset program for heavy equipment trailers.

Revenues
from MRAP roof assemblies increased significantly, as compared with the corresponding period in the prior year, as a result of the program commencing in the second half of
fiscal 2008, as well as increased priority placed on the program by the customer. The precision targeting system revenue increase was attributed to a prior-year customer-initiated design
change that resulted in production delays to adhere to the proposed changes. Production resumed during the fourth quarter of fiscal 2008 resulting in increased revenue, as compared with the
corresponding prior-year period. The reset program for heavy equipment trailers declined, as the program is winding down and switching to production which has not yet begun.

Operating IncomeOperating income decreased $1.8 million, or 5.0%, to $34.0 million, as compared with the corresponding period in the prior year. The
decrease in operating income was primarily driven by a decrease in operating margin which declined 410 basis points, partially offset by higher overall revenues. The decline in operating margin was
largely attributable to an $11.7 million gain associated with the curtailment of certain pension plans recorded in the corresponding period in the prior year.

Technical Services Segment

RevenueRevenues increased $30.9 million, or 9.0%, to $375.7 million for the six-month period ended September 30, 2008, as
compared with the corresponding period in the prior year. Programs with significant year-over-year revenue increases were
satellite-based communication services and Rapid Response programs. Revenues from satellite-based communication services increased as a result of the commencement of program operations in the second
half of fiscal 2008 to support deployed personnel. Revenues from the Rapid Response program continued to increase as a result of continued operational demand in Iraq and Afghanistan.

46

---



Largely
offsetting the revenue increases were lower revenues from a vehicle armor program, a power generation and distribution equipment program and a certain defense communication
transmission system programs, as the contracts were substantially completed in the prior year.

Operating IncomeOperating income increased $0.8 million, or 3.4%, to $25.6 million compared with the corresponding period in the prior year.
Operating margin decreased 40 basis points from the 7.2% earned in the corresponding period in the prior year. The decreased profitability was attributed to the substantial completion of the
profitable power generation and distribution equipment contract during the prior year and increased selling, general and administrative expenses in the current period. The decreases were partially
offset by increased revenue on the profitable satellite-based communication services program.

Other

Operating loss increased $14.5 million from the corresponding period in the prior-year as a result of
$16.6 million in investment banking, legal and consulting expenses related to the merger with Finmeccanica partially offset by a $2.1 million gain on the disposal of an asset.

Liquidity and Capital Resources

Six Months Ended September 30,2008

2007(in thousands)Net cash provided by operating activities

$
68,595

$
60,741Net cash used in investing activities

$
(44,271
)
$
(32,449
)Net cash provided by (used in) financing activities

$
8,551

$
(72,332
)


Operating activitiesDuring the six months ended September 30, 2008, we generated $68.6 million of operating cash flow, as compared to the
$60.7 million of operating cash flow in the corresponding period in the prior year. Net earnings increased $10.1 million to $78.4 million. Non-cash adjustments to
reconcile net earnings to cash flows from operating activities decreased $0.6 million from the corresponding period in the prior year, driven primarily by a decrease in deferred income taxes of
$13.3 million, offset in part by a non-cash curtailment gain of $11.7 million realized in the corresponding period in the prior year.

Cash
used resulting from changes in assets and liabilities was $61.2 million for the six months ended September 30, 2008. Accounts payable decreased $73.6 million.
The pension and postretirement benefit liability decreased $8.6 million, as payments exceeded pension expense for the period. Accrued expenses and other current liabilities decreased
$8.4 million driven primarily by a decrease in the accrual for unrecognized tax benefits and the utilization of contract related reserves. Prepaid expenses and other current assets increased
$8.1 million as a result of vendor advance payments made during the period, and accounts receivable increased $3.1 million as a result of increased sales volume.

Cash
provided from changes in assets and liabilities resulted from a decrease in inventories of $27.8 million, an increase in customer advances of $7.2 million and
$5.6 million of cash provided in other, net. The inventory decrease was driven by increased deliveries and the resumption of progress billings on the TWS II program, which greatly
reduced inventory during the period. Customer advances increased during the period as a result of payments received on our underwater radar programs and satellite-based communication network. The
increased customer advances were offset in part by increased production and liquidation on our driver vision enhancement equipment for ground-based vehicles.

47

---



Investing activitiesFor the six months ended September 30, 2008, we used $44.3 million for capital asset
expenditures, as compared with $32.5 million in the prior year. We expect capital expenditures of approximately $100.0 million to $110.0 million in fiscal 2009.

Financing activitiesFor the six months ended September 30, 2008, financing activities provided net cash of $8.6 million, compared with
$72.3 million utilized in the prior year. We received $8.9 million from the exercise of stock options and paid $2.5 million in cash dividends. In the prior year, we repaid
$77.7 million in long-term debt.

Simultaneously
with the closing of our acquisition of Engineered Support Systems, Inc. (ESSI), on January 31, 2006 we entered into an amended and restated credit facility
for up to an aggregate amount of $675.0 million with a syndicate of lenders (the Credit Facility), replacing our previously existing credit facility. The Credit Facility consists of a
$400.0 million senior secured revolving line of credit and a $275.0 million senior secured term loan. We are permitted, on no more than two occasions, to increase the aggregate amount of
the Credit Facility by up to $250.0 million, subject to certain restrictions. Any increase in the aggregate amount of the Credit Facility may be borrowed in the form of either additional term
loans or available amounts under the revolving line of credit. The Credit Facility is guaranteed by substantially all of DRS's domestic subsidiaries. In addition, it is collateralized by liens on
substantially all of the assets of our subsidiary guarantors, certain of DRS's other subsidiaries' assets and by a pledge of a portion of certain of our non-guarantor subsidiaries' capital
stock.

We
have entered into standby letters-of-credit and bank guarantee agreements with financial institutions and customers, primarily relating to the guarantee of its
future performance on certain contracts to provide products and services and to secure advance payments we have received from our customers. As of September 30, 2008, $27.2 million was
contingently payable under letters of credit and bank guarantees. Of this amount, approximately $0.1 million and $0.5 million in letters of credit and bank guarantees, respectively, were
issued under a previous credit agreement and by a bank agreement for the Company's U.K. subsidiary, respectively, and are not considered when determining the availability under our revolving line of
credit. At September 30, 2008, we had $373.4 million of availability under our revolving line of credit.

On
March 29, 2006, DRS Technologies Canada Company (DRS Canada) established a five-year senior secured term loan (Canadian 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 4.75% as of September 30, 2008 (5.25% as of
March 31, 2008). The carrying value of the Canadian Term Loan decreased $0.2 million during the six months ended September 30, 2008 due to the weakening of the Canadian dollar.

On
October 30, 2003, we issued $350.0 million aggregate principal amount of 67/8% senior subordinated notes, due November 1, 2013 (the October 2003
Notes). The net proceeds of the October 2003 Notes, together with a portion of our available cash and initial borrowings under the then existing credit facility, were used to fund the acquisition of
Integrated Defense Technologies, Inc. (IDT), repay certain of DRS's and IDT's outstanding indebtedness, and pay related fees and expenses. The October 2003
Notes were issued under an indenture with The Bank of New York. Subject to a number of exceptions, the indenture restricts our ability and the ability of our subsidiaries to incur more debt, pay
dividends and make distributions, make certain investments, repurchase stock, create liens, enter into transactions with affiliates, enter into sale lease-back transactions, merge or
consolidate, and transfer or sell assets. The October 2003 Notes are unconditionally guaranteed, jointly and severally, by DRS's current and future wholly-owned domestic subsidiaries. The foreign
subsidiaries and certain domestic subsidiaries 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 (the December
2004 Notes). The December 2004 Notes

48

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were
offered as additional debt securities under our indenture with the Bank of New York with identical terms 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 new debt 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 2006 Notes)
and $300.0 million aggregate principal amount of 2.0% convertible senior notes due 2026 (Convertible Notes). On February 8, 2006, we sold an additional $45.0 million of
Convertible Notes pursuant to an overallotment option exercised by the initial purchasers of the Convertible Notes. The net proceeds of the January 2006 Notes and the Convertible Notes, together with
a portion of our available cash and initial borrowings under the Credit Facility, were used to fund 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 notes, the Convertible Notes and
trade payables, and arepari passuwith the 67/8% senior subordinated notes. The January 2006 Notes were issued under indentures with The
Bank of New York. Subject to a number of exceptions, the indentures restrict our ability and the ability of our subsidiaries to incur more debt, pay dividends and make distributions, make certain
investments, repurchase stock, create liens, enter into transactions with affiliates, enter into sale lease-back transactions, merge or consolidate, and transfer or sell assets. The
January 2006 Notes are unconditionally guaranteed, jointly and severally, by certain of our existing and future domestic subsidiaries.

As
of September 30, 2008, the Convertible Senior Notes (Convertible Notes) were convertible because the average trading price for the Convertible Notes was less than 103% of the
average of the closing sale price of our common stock during the consecutive five trading-day period ended September 30, 2008. Consequently, we classified the Convertible Notes as
current as of September 30, 2008. In the event the notes were converted prior to the Merger, we would have satisfied the bond principal payment using available cash on hand and borrowings under
our revolving line of credit and would have settled the conversion value in excess of par by using shares of our common stock.

On
October 9, 2008, we gave notice to the holders of the 2% Convertible Senior notes (Convertible Note) that a "Fundamental Change" (as defined in the indenture governing the
Convertible Notes) would occur upon the consummation of the merger and that the holders may surrender their Convertible Notes for conversion at any time up until the "Fundamental Change Purchase
Date." In accordance with the indenture, we will notify holders of the Fundamental Change Purchase Date no later than 30 days after the effective date of the Merger.

Convertible
Notes that are surrendered prior to the Merger for conversion would be converted into the right to receive cash, less any applicable withholding taxes, and, if applicable,
shares of common stock of DRS Technologies in accordance with the indenture (the Settlement Amount). However, any Settlement Amount that is due from and after the effective time of the Merger will be
paid in cash, less any applicable withholding taxes, and will not include any shares of common stock of DRS Technologies. The conversion rate of the bonds after the change of control was 17.2875 per
$1,000.00 note, which equates to a value of $1,400.29 per note. We are funding the conversion of the Convertible Notes with proceeds from an intercompany loan from Finmeccanica.

On
October 22, 2008, we merged with Finmeccanica (see note 1), which triggered the change of control provision in our Credit Facility. The change of control provision
required us to repay our outstanding term loan and terminate our Credit Facility. In addition, holders of the Company's 65/8% Senior notes, 67/8% Senior Subordinated
notes and 75/8% Senior Subordinated notes have the option to put each note to us for 101% of face value of the bonds. Within 30 days following the change of control, we will mail
a notice to each of the bondholders describing the transaction and stating the

49

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purchase
price and purchase date, which shall be no earlier than 30 days and no later than 60 days from the day the notice is mailed. We expect to fund any bond redemptions with proceeds
from an intercompany loan with Finmeccanica.

Certain
of the Company's debt arrangements contain customary representations, warranties and default provisions, as well as restrictions that, among other things, limit the amount of
debt that we may have outstanding. As of September 30, 2008, we were in compliance with all covenants.

Accrued
interest expense at September 30, 2008 and March 31, 2008 was $25.3 million and $29.8 million, respectively.

Based
upon our anticipated level of future operations, we believe that our existing cash and cash equivalents balances and our cash generated from operating activities, together with
available borrowings through an intercompany loan with Finmeccanica, will be adequate to meet our anticipated requirements for working capital, capital expenditures, commitments, research and
development expenditures, contingent purchase prices, program and other discretionary investments, and interest and
principal payments for the foreseeable future. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash
flow from operations to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to
make scheduled principal payments or to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general
conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control. There can be no assurance that
sufficient funds will be available to enable us to service our indebtedness, make necessary capital expenditures or to make discretionary investments.

DividendsOn August 7, 2008, the Board of Directors declared a $0.03 per common share cash dividend, payable on September 30, 2008 to stockholders of
record as of September 15, 2008. Cash dividends paid for the three- and six-month periods ended September 30, 2008 were $1.2 million and $2.5 million.

Free cash flowFree cash flow represents net cash provided by operating activities less capital expenditures. Free cash flow for the three-month period ended
September 30, 2008 was $51.9 million, or $10.3 million more than $41.6 million in the corresponding period in the prior year. Free cash flow for the six-month
period ended September 30, 2008 was $24.3 million, or $3.9 million less than $28.2 million in the corresponding period in the prior year. See "Use of Non-GAAP
Financial Measures" below for additional discussion and information.

EBITDANet earnings before net interest and related expenses (primarily the amortization and write-off of debt premium and issuance costs), income
taxes, depreciation and amortization (EBITDA)) for the three-month period ended September 30, 2008 was $108.7 million, or $1.4 million less than the $110.2 million in the
corresponding period in the prior year. EBITDA for the six-month period ended September 30, 2008 was $204.0 million, or $7.7 million more than the
$196.3 million in the corresponding period in the prior year. See "Use of Non-GAAP Financial Measures" below for additional discussion and information.

Off-Balance Sheet Financing ArrangementsWe have $345.0 million of 2% senior convertible notes with a conversion price of $59.70 per share at
September 30, 2008. Upon conversion, we would have satisfied our obligation to convert the notes by delivering to the holders cash for the principal amount of the notes and stock for the value
of the notes in excess of the principal amount of the notes, as defined in the convertible debt agreement. The number of shares potentially issuable upon conversion are reflected in our diluted
earnings per share for three-month period ended September 30, 2008.

50

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In
addition, there were 1.5 million stock options outstanding to purchase DRS common stock at a weighted average exercise price of $33.96 per share and 0.5 million of
non-vested stock awards outstanding at September 30, 2008 that represented additional potential dilution.

We
have not entered into any other off-balance sheet financing arrangements.

Contractual ObligationsOur contractual obligations and commitments principally include obligations associated with our outstanding indebtedness, future minimum
operating lease obligations, acquisition earn-outs and purchase obligations. Except as discussed below, the disclosures relating to our contractual obligations in our Annual Report on
Form 10-K for the year ended March 31, 2008 have not changed materially since we filed that report.

Based
upon the expiration of statutes of limitations and/or the conclusion of tax examinations in several jurisdictions, we believe it is reasonably possible that the total amount of
liability for unrecognized tax benefits may decrease by up to $0.2 million within twelve months of September 30, 2008. We are unable to reasonably determine any amounts for years
subsequent to September 30, 2009. See Note 4, Income Taxes, in the notes to the unaudited consolidated financial statements contained in this report.

BacklogFunded backlog represents products or services that our customers have committed by contract to purchase from us. Due to the general nature of defense
procurement and contracting, the operating cycle for our military business typically has been long term. Military backlog currently consists of various production and engineering development contracts
with varying delivery schedules and project timetables. Our backlog also includes certain commercial off-the-shelf (COTS)-based systems for the military, which have shorter
delivery times. Accordingly, revenues for a particular year, or year-to-year comparisons of reported revenues and related backlog positions, may not be indicative of future
results. Backlog at September 30, 2008 was $3.91 billion, as compared with $3.61 billion at March 31, 2008. We booked $1.23 billion and $2.30 billion in new
orders for the three- and six-month periods ended September 30, 2008.

Internal Research and DevelopmentIn addition to customer-funded research and development, we also engage in internal research and development. These expenditures
reflect our continued investment in new technology and diversification of our products. Expenditures for internal research and development for the three-month periods ended September 30, 2008
and 2007 were $17.9 million and $14.1 million, respectively, and $34.5 million and $25.5 million for the six-month periods ended September 30, 2008 and
2007, respectively.

Use of Non-GAAP Financial MeasuresCertain disclosures in this document include "non-GAAP (Generally Accepted Accounting Principles)
financial measures." A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different than the most
directly comparable measure calculated and presented in accordance with GAAP in our Consolidated Balance Sheets, Statements of Earnings or Statements of Cash Flows. The

51

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components
of EBITDA and a reconciliation of EBITDA and "free cash flow" with the most directly comparable GAAP measure follows:

Three Months Ended September 30,

Six Months Ended September 30,2008

2007

2008

2007 (Restated)(in thousands)Net Earnings

$
42,970

$
43,034

$
78,375

$
68,238Income taxes


21,770


20,566


38,689


34,826Interest income


(551
)

(380
)

(851
)

(939
)Interest and related expenses


24,361


28,106


47,832


56,816Depreciation and amortization


20,195


18,847


39,925


37,360EBITDA(A)


108,745


110,173


203,970


196,301Income taxes


(21,770
)

(20,566
)

(38,689
)

(34,826
)Interest income


551


380


851


939Interest and related expenses


(24,361
)

(28,106
)

(47,832
)

(56,816
)Deferred income taxes


3,289


4,711


1,708


15,003Changes in assets and liabilities


5,592


(1,985
)

(61,156
)

(59,435
)Other, net


4,424


(4,393
)

9,743


(425
)Net cash provided by operating activities


76,470


60,214


68,595


60,741Capital expenditures


(24,581
)

(18,604
)

(44,272
)

(32,497
)Free cash flow(B)

$
51,889

$
41,610

$
24,323

$
28,244


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52

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OTHER MATTERS



New accounting pronouncements have been issued, which are not effective until after September 30, 2008. For further discussion
of new accounting standards, see Note 19 to our Consolidated Financial Statements in Item 1.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Market Risk

See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2008 for a discussion of the Company's exposure to market risks.

Item 4.    Controls and Procedures

(a)   Disclosure Controls and ProceduresThe Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

(b)   Management's Report on Internal Control Over Financial ReportingAs of March 31, 2008, management had
assessed the effectiveness of the Company's internal control over financial reporting based on the framework established in "Internal ControlIntegrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management had identified a material weakness. A material weakness is a deficiency or a combination of deficiencies in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be
prevented or detected on a timely basis. Based on the aforementioned assessment, the following material weakness was identified in the Company's internal control over financial reporting for the
fiscal year ended March 31, 2008:



Subsequent
to March 31, 2008, but effective for the fourth quarter of fiscal 2008, management required every operating unit to perform a subsequent events assessment that
considers the financial statement impact of events occurring after the quarter-end date, but before the Company's anticipated filing date of its financial statements. In addition to
re-asserting the representations made in an original representation letter (typically due 20 days after period-end), business unit management is required to pay
particular attention to the accuracy of program estimates-at-completion, collectability of billed and unbilled accounts receivable, recoverability of pre-contract
costs, the carrying value or classification of assets and liabilities, and any operating irregularities. This process is now in place and is occurring quarterly.

There
have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the three months ended September 30, 2008 that materially have affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.

53

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

Various
legal actions, claims, assessments and other contingencies, including certain matters described below, are pending against us and certain of our subsidiaries. These matters are
subject to many uncertainties, and it is possible that some of these matters ultimately could be decided, resolved or settled adversely. We have recorded accruals for losses related to those matters
that we consider to be probable and that can be reasonably estimated (certain legal and environmental matters are discussed in detail below). Although, at September 30, 2008, the precise amount
of liability that may result from those matters for which we have recorded accruals is not ascertainable, the Company believes that any amounts exceeding the Company's recorded accruals should not
materially affect our financial condition or liquidity. It is possible, however, that the ultimate resolution of those matters could result in a material adverse effect on our results of operations
and/or cash flows from operating activities for a particular reporting period.

Some
environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as CERCLA or the Superfund law) and similar state statutes,
can impose liability upon former owners or operators for the entire cost of investigating and remediating
contaminated sites regardless of the lawfulness of the original activities that led to the contamination. In July 2000, prior to its acquisition by Integrated Defense Technologies,
Tech-Sym Corporation, an indirect subsidiary of the Company, received a Section 104(e) Request for Information from the National Park Service (NPS), pursuant to CERCLA, regarding a
site known as the Orphan Mine site in the Grand Canyon National Park, Arizona. The Orphan Mine, which was operated by an alleged predecessor to Tech Sym between 1956 and 1967, is the subject of an NPS
investigation regarding the presence of residual radioactive materials and contamination. Following Tech-Sym's response to the Request for Information, the NPS directed Tech Sym and
another alleged former owner/operator to perform an Engineering Evaluation and Cost Analysis (EE/CA) of the site. Tech Sym made a good faith offer to conduct the EE/CA, but the NPS rejected this offer
and has announced that it will perform the EE/CA itself. Following completion of the EE/CA, the NPS may direct one or more of the potentially responsible parties to perform any remediation that may be
required by CERCLA. We believe that it has legitimate defenses to Tech-Sym's potential liability and that there are other potentially responsible parties for the environmental conditions
at the site, including the U.S. government as owner, operator and arranger at the site. The potential liability associated with this matter can change substantially, due to such factors as additional
information on the nature or extent of contamination, methods of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties and other
actions by governmental agencies or private parties.

In
connection with the our acquisition of ESSI in January 2006, we have been made aware of certain legal actions, claims, assessments and other contingencies, including those described
below.

In
December 2004, ESSI was notified by the Enforcement Division of the SEC of the issuance of a formal order directing a private investigation and was notified that the SEC had issued
subpoenas to various individuals associated with ESSI to produce certain documents. The SEC staff also requested that ESSI produce certain documents in connection with the investigation. The subpoenas
related to trading in ESSI stock around ESSI's earnings releases in 2003 and to the adequacy of certain disclosures made by ESSI regarding related-party transactions in 2002 and 2003 involving
insurance policies placed by ESSI through an insurance brokerage firm in which an ESSI director was a principal at the time of the transactions. In February 2007, the SEC filed a civil injunctive
action in the United States District Court for the Eastern District of Missouri, Eastern Division, against a former director, officer and consultant of ESSI, alleging that he had violated the federal
securities laws by "tipping" his financial advisor and close friend by sharing material, nonpublic information regarding ESSI's financial condition shortly before certain 2003 earnings announcements.
That action is scheduled for trial on December 15, 2008.

54

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On
or about September 23, 2005, the SEC staff advised ESSI's counsel that it had issued a subpoena directed to ESSI and expanded its investigation to include ESSI's disclosure of
a November 2004 stop-work order relating to ESSI's Deployable Power Generation and Distribution Systems (DPGDS)
program for the U.S. Air Force and relating to trading in ESSI 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/or testimony to the SEC. ESSI has received no additional subpoenas or requests for information from the SEC on these subject matters since May 2006.

In
January 2006, ESSI was informed that the Office of the U.S. Attorney for the Eastern District of Missouri was initiating an investigation into ESSI's disclosure of the DPGDS
stop-work order and into trading in ESSI stock by ESSI insiders, which preceded such disclosure. The U.S. Attorney's office advised ESSI that although it considered ESSI to be a subject of
its investigation, ESSI was not a target. In connection with this investigation, the U.S. Attorney's office issued ESSI a subpoena requesting specified information, which ESSI has furnished. ESSI has
received no additional subpoenas or requests for information from the U.S. Attorney's office on these subject matters since May 2006.

In
May 2006, the Company was advised that the Enforcement Division of the SEC and the U.S. Attorney's office each had expanded its investigation to include possible "backdating" of the
timing of option grants at ESSI prior to the time ESSI was acquired by us. As a part of its investigation, the SEC issued subpoenas to certain former officers and employees of ESSI to provide
testimony and produce certain documents.

In
February 2007, the SEC filed civil injunctive actions in the United States District Court for the Eastern District of Missouri, Eastern Division, alleging that ESSI's former Chief
Financial Officer and former Controller had each participated in a backdating scheme. Also in February 2007, the SEC reported that ESSI's former Controller had settled its action against him by
consenting to disgorgement, financial penalties, an officer and director bar and a permanent suspension from practicing before the SEC as an accountant. In July 2007, the SEC filed civil injunctive
actions in the United States District Court for the Eastern District of Missouri, Eastern Division, alleging that ESSI's former Chairman of the Board and Chief Executive Officer and his son (who was
also a member of ESSI's Board of Directors and Compensation Committee) each participated in a backdating scheme. The pending SEC actions were consolidated and stayed at the request of the U.S.
Attorney's office pending resolution of related criminal proceedings. ESSI's former Chief Financial Officer represented in an October 2008 court filing that he had agreed to pay a civil penalty to the
SEC of $400,000.

In
March 2007, ESSI's former Controller pleaded guilty to a one-count information brought by the office of the United States Attorney for the Eastern District of Missouri,
charging him with making false statements to the government. In connection with his plea, this former ESSI executive admitted that a number of documents filed by ESSI with the SEC contained the
materially false statement that the option price of shares subject to the ESSI stock option plan was the closing price of the stock on the date the options were awarded. This former ESSI executive is
expected to be sentenced in November 2008.

In
March 2007, ESSI's former Chief Financial Officer was indicted by the grand jury of the United States District Court for the Eastern District of Missouri relating to the backdating of
the timing of stock options at ESSI prior to the time ESSI was acquired by DRS. In July 2007, ESSI's former
Chairman of the Board and Chief Executive Officer and his son (who was also a member of ESSI's Board of Directors and Compensation Committee) were each indicted on similar charges. The July 2007
superseding indictment charges these former ESSI officers and directors with twelve counts of fraud based on allegations that they backdated stock options on at least eight occasions between 1996 and
2002.

55

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In
July 2008, ESSI's former Chairman of the Board and Chief Executive Officer and former Chief Financial Officer each pleaded guilty to falsifying (or causing the falsification of) the
records of a publicly traded company. In connection with their respective pleas, ESSI's former Chairman of the Board and Chief Executive Officer admitted that he knowingly and intentionally signed
falsely dated stock option award letters and ESSI's former Chief Financial Officer admitted that he caused such falsely dated award letters to be issued to stock option recipients.

On
October 3, 2008, ESSI's former Chairman of the Board and Chief Executive Officer was sentenced to probation for a term of three years, and ordered to serve forty hours of
community service and pay approximately $7.9 million in restitution. On October 17, 2008, ESSI's former Chief Financial Officer was sentenced to fifteen months in prison and two years of
supervised release thereafter. He also was ordered to pay approximately $1.8 million in restitution and a penalty of approximately $4 million.

The
remaining charges against these former executives and the indictment issued against ESSI's former Chairman of the Board and Chief Executive Officer's son (who was also a member of
ESSI's Board of Directors and Compensation Committee) were dismissed.

Although
ESSI continues to be a subject of the U.S. Attorney's office's investigation, the U.S. Attorney's office has advised us that ESSI is not a target. Because the events being
investigated occurred prior to the time of our acquisition of ESSI, the U.S. Attorney's office has further advised us that it considers DRS to be a witness, not a subject or target of its
investigation.

We
are committed to full cooperation with regard to the foregoing investigations and proceedings. We are unable to determine at this time the impact, if any, these matters could have on
us.

In
September 2006, the Internal Revenue Service commenced an audit of ESSI's Federal tax returns for the tax periods ended October 31, 2004, October 31, 2005 and
January 31, 2006. Thereafter, the Internal Revenue Service agreed, subject to Congressional approval, to close these audits based on
ESSI's agreement to accept certain proposed adjustments (primarily involving the reversal of certain compensation deductions taken during these tax years) and a corresponding assessment of
approximately $11.3 million (exclusive of interest) which was previously accrued. In September 2007, we received written confirmation from the Congressional Joint Committee on Taxation that it
took no exception to the proposed adjustments.

In
August 2007, a shareholder derivative complaint was filed in the United States District Court for the Eastern District of Missouri against ESSI's former Chairman of the Board and
Chief Executive Officer, his son (who was also a member of ESSI's Board of Directors and Compensation Committee), ESSI's former Chief Financial Officer and ESSI's former Controller relating to the
alleged backdating of stock options prior to ESSI's acquisition by DRS. The complaint also contains claims against us as a nominal defendant and against each of the current members of our Board of
Directors relating to the alleged backdating of ESSI stock options and the ESSI acquisition. We believe the claims made against us and our current Directors are without merit. The U.S. Attorney's
office has moved to intervene and stay the case pending resolution of the related criminal charges against the individual ESSI defendants. DRS and the DRS Directors have moved to dismiss the case on
substantive and jurisdictional grounds. Those motions are pending.

In
January 2008, we received an inquiry from the Australian Competition and Consumer Commission (ACCC) related to one of our subsidiaries, DRS Training & Control
Systems, Inc. The ACCC has requested documents and information regarding allegations of possible anticompetitive activity in violation of the Australian Trade Practices Act. In April 2008, we
provided the documents and information requested by the ACCC. We have commenced an internal investigation involving this matter, but are currently unable to determine the timing or the impact, if any,
that the matter may have on us.

56

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In
May 2008, we were notified that the NYSE Regulation Inc.'s Market Trading Analysis Department (the NYSE) and the SEC had each commenced independent inquiries regarding trading
in DRS securities prior to the public announcement that Finmeccanica S.p.A. and we have entered into a definitive merger agreement pursuant to which Finmeccanica had agreed to acquire us for $81 per
share subject to the terms thereof. In each case, we have been asked to provide certain documents and information. In May 2008, we were advised by the SEC that its informal inquiry should not be
construed as an indication by the SEC or its staff that any violations of law have occurred or as an adverse reflection upon any person or security. Similarly, the NYSE advised us that it was engaged
in a fact gathering process and that no inference of impropriety should be inferred. The SEC subsequently filed an action in the Southern District of New York captioned SEC v. One or More Unknown
Purchasers 08 Civ. 6609 (PAC) and, in October 2008, requested additional information from us.

In
May 2008, a plaintiff filed a putative class action lawsuit against us and the members of our board of directors in New Jersey state court, challenging the transactions contemplated
by the merger agreement and alleging breaches of fiduciary duty. As amended, the complaint asserts a claim for breach of fiduciary duties against the director defendants and a claim for aiding and
abetting breach of fiduciary duties against us and our general counsel. The plaintiff alleges, among other things, that the proposed transaction arises out of a flawed process and that our preliminary
proxy statement, filed with the SEC on June 13, 2008, contained misleading disclosures and/or omits certain material information. On July 25, 2008, the defendants moved to dismiss the
amended complaint for failure to state a claim. On September 15, 2008, the plaintiff filed a motion to enjoin the stockholder vote. On September 22, 2008, the Court denied both motions.
We believe that the claims asserted by the plaintiff in the amended complaint are wholly without merit.

Item 1A.    Risk Factors

In addition to the information set forth in this report, you should carefully consider the factors discussed in Part I,
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended March 31, 2008, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also materially may adversely affect our business, financial condition and/or operating results.

Recent turmoil in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate
outcome of these events cannot be predicted, they may have a material adverse effect on our liquidity, financial condition and results of operations as a result of any additional significant
recessionary pressures and declines in economic growth associated with the economic crisis. In particular, no assurance can be given that the United States federal government will maintain its current
level of defense spending. In addition, the economic crisis also could adversely impact our suppliers' ability to provide us with materials and components, either of which may negatively impact our
business, financial condition and results of operations.

57

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Items 2 and 3 are not applicable and have been omitted.

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

On September 25, 2008, the Company held a special meeting of stockholders at the Hilton Parsippany, One Hilton Court,
Parsippany, New Jersey 07054. The following matters were submitted to a vote of stockholders:



For

Abstain

AgainstProposal (i):

28,979,010

31,947

16,871


For

Abstain

AgainstProposal (ii):

27,332,717

1,446,517

248,594


Item 6.    Exhibits



Exhibit No.

Description31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


---

58

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SIGNATURES

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

DRS TECHNOLOGIES, INC.Date: November 7, 2008

/s/ RICHARD A. SCHNEIDERRichard A. Schneider Chief Financial Officer


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