**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**Forthe quarterly period ended June 30, 2007**

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

**Forthe transition period from                    to                   **

**Commissionfile number 1-8533**

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**DRS Technologies, Inc.**

(Exact name of registrantas specified in its charter)

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

 

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

(Address of principalexecutive offices)

**(973) 898-1500**

(Registrant’s telephonenumber, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities and Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):
| Large  Accelerated filer x | Accelerated Filer  o | Non-accelerated filer o |
|----------------------------|----------------------|-------------------------|

 

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

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| Class                              | ** ** | **Outstanding at August 6, 2007** |
|------------------------------------|------------|----------------------------------------|
| Common Stock—$0.01  par value |       | 41,116,298                             |

 

 

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**DRSTECHNOLOGIES, INC. AND SUBSIDIARIES**

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

**Forthe Quarter Ended June 30, 2007**
|            | ** ** | ** **                                                                                  | ** ** | **Page** |
|------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|       | ** ** | **PART I—FINANCIAL  INFORMATION**                                                 |       |     |
| Item 1.    |       | Financial  Statements (unaudited)                                                           |       |     |   |
|       |       | Consolidated  Balance Sheets—June 30, 2007 and March 31, 2007                |       | 1        |   |
|       |       | Consolidated  Statements of Earnings—Three Months Ended June 30, 2007 and  2006   |       | 2        |   |
|       |       | Consolidated  Statements of Cash Flows—Three Months Ended June 30, 2007 and 2006  |       | 3        |   |
|       |       | Notes  to the Consolidated Financial Statements                                             |       | 4        |   |
| Item  2.   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 29       |   |
| Item  3.   |       | Quantitative  and Qualitative Disclosure about Market Risk                                  |       | 40       |   |
| Item  4.   |       | Controls  and Procedures                                                                    |       | 40       |   |
|       | ** ** | **PART II—OTHER  INFORMATION**                                                    |       |     |   |
| Item 1.    |       | Legal  Proceedings                                                                          |       | 41       |   |
| Item 1A.   |       | Risk Factors                                                                                |       | 43       |   |
| Item 6.    |       | Exhibits                                                                                    |       | 44       |   |
| Signatures |       | 45                                                                                          |       |

 

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

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

| ** **                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2007**          | ** ** | **2007**           | ** ** |
| **Assets**                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current assets                                                                                                                                                                     |       |              |       |               |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                 | 34,113     |               | $          | 95,833 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $1,809 and $1,703 as of June 30,  2007 and March 31, 2007, respectively                                  |       | 515,782           |       | 535,242            |       |
| Inventories, net                                                                                                                                                                   |       | 355,737           |       | 367,612            |       |
| Prepaid expenses,  deferred income taxes and other current assets                                                                                                                  |       | 123,767           |       | 126,975            |       |
| Total current assets                                                                                                                                                               |       | 1,029,399         |       | 1,125,662          |       |
| Property, plant and  equipment, less accumulated depreciation of $191,000 and $178,241 at  June 30, 2007 and March 31, 2007, respectively                                |       | 233,919           |       | 231,206            |       |
| Acquired intangible  assets, net                                                                                                                                                   |       | 189,709           |       | 196,984            |       |
| Goodwill                                                                                                                                                                           |       | 2,621,945         |       | 2,616,642          |       |
| Deferred income taxes  and other noncurrent assets                                                                                                                                 |       | 44,199            |       | 44,216             |       |
| **Total  assets**                                                                                                                                                                  |       | $                 | 4,119,171  |               | $          | 4,214,710 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                     | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current liabilities                                                                                                                                                                |       |              |       |               |       |
| Current installments of  long-term debt                                                                                                                                            |       | $                 | 5,353      |               | $          | 5,161 |   |
| Accounts payable                                                                                                                                                                   |       | 238,029           |       | 297,427            |       |
| Accrued expenses and  other current liabilities                                                                                                                                    |       | 468,836           |       | 467,944            |       |
| Total current  liabilities                                                                                                                                                         |       | 712,218           |       | 770,532            |       |
| Long-term debt, excluding  current installments                                                                                                                                    |       | 1,732,102         |       | 1,783,046          |       |
| Other liabilities                                                                                                                                                                  |       | 161,113           |       | 158,682            |       |
| **Total  liabilities**                                                                                                                                                             |       | 2,605,433         |       | 2,712,260          |       |
| Commitments and  contingencies                                                                                                                                                     |       |              |       |               |       |
| Stockholders’ equity                                                                                                                                                          |       |              |       |               |       |
| Preferred stock, $10 par  value per share. Authorized 2,000,000 shares; none issued at  June 30, 2007 and March 31, 2007                                            |       | —            |       | —             |       |
| Common Stock, $.01 par  value per share. Authorized 100,000,000 shares; 41,081,214 and 40,673,944  shares issued at June 30, 2007 and March 31, 2007,  respectively |       | 411               |       | 407                |       |
| Additional paid-in  capital                                                                                                                                                        |       | 1,107,487         |       | 1,099,991          |       |
| Retained earnings                                                                                                                                                                  |       | 400,211           |       | 399,793            |       |
| Accumulated other  comprehensive earnings                                                                                                                                          |       | 5,629             |       | 2,259              |       |
| **Total  stockholders’ equity**                                                                                                                                               |       | 1,513,738         |       | 1,502,450          |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                |       | $                 | 4,119,171  |               | $          | 4,214,710 |   |

 

See Accompanying Notes to Consolidated Financial Statements.

1

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

| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Revenue:                                                    |       |                                            |       |   |   |
| Products                                                    |       | $                                               | 532,774    |   | $ | 475,891 |   |
| Services                                                    |       | 202,856                                         |       | 154,374 |   |
| Total revenues                                              |       | 735,630                                         |       | 630,265 |   |
| Costs and  expenses                                         |       | 704,296                                         |       | 565,280 |   |
| Operating income                                            |       | 31,334                                          |       | 64,985 |   |
| Interest income                                             |       | 559                                             |       | 176 |   |
| Interest and  related expenses                              |       | 28,710                                          |       | 29,902 |   |
| Other expense,  net                                         |       | 70                                              |       | 18 |   |
| Earnings before non-controlling interests and income  taxes |       | 3,113                                           |       | 35,241 |   |
| Non-controlling interests                                   |       | 493                                             |       | 473 |   |
| Earnings before income taxes                                |       | 2,620                                           |       | 34,768 |   |
| Income taxes                                                |       | 970                                             |       | 13,510 |   |
| Net earnings                                                |       | $                                               | 1,650      |   | $ | 21,258 |   |
| **Net  earnings per share of common stock:**                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Basic earnings per share:                                   |       | $                                               | 0.04       |   | $ | 0.54 |   |
| Diluted earnings per share:                                 |       | $                                               | 0.04       |   | $ | 0.52 |   |
| **Dividends  per common share**                             |       | $                                               | 0.03       |   | $ | 0.03 |   |

 

See Accompanying Notes to Consolidated Financial Statements.

2

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

| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                       | ** ** | **June 30,**                | ** ** |
| ** **                                                                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash Flows from Operating Activities**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net Earnings                                                                                     |       | $                                | 1,650      |   | $ | 21,258 |   |
| Adjustments to reconcile net earnings to cash flows provided  by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                                   |       | 18,513                           |       | 19,125 |   |
| Share-based compensation                                                                         |       | 2,228                            |       | 2,774 |   |
| Deferred income taxes                                                                            |       | (926                             | )          | 460 |   |
| Inventory write-off                                                                              |       | 36,844                           |       | — |   |
| Inventory reserve and  provision for doubtful accounts                                           |       | 202                              |       | 1,000 |   |
| Amortization and  write-off of deferred financing fees                                           |       | 1,623                            |       | 1,473 |   |
| Other, net                                                                                       |       | (85                              | )          | (234 | ) |
| Changes in assets and liabilities, net of effects from  business combinations:                   |       |                             |       |   |   |
| Decrease (increase) in  accounts receivable                                                      |       | 20,409                           |       | (20,861 | ) |
| Increase in inventories                                                                          |       | (23,470                          | )          | (11,275 | ) |
| Decrease (increase) in  prepaid expenses and other current assets                                |       | 4,151                            |       | (6,285 | ) |
| Decrease in accounts  payable                                                                    |       | (59,246                          | )          | (30,928 | ) |
| Decrease in accrued  expenses and other current liabilities                                      |       | (14,795                          | )          | (11,579 | ) |
| Increase in customer  advances                                                                   |       | 14,862                           |       | 9,550 |   |
| (Decrease) increase in  pension and postretirement benefit liabilities                           |       | (1,252                           | )          | 53 |   |
| Other, net                                                                                       |       | (181                             | )          | (473 | ) |
| **Net  cash provided by (used in) operating activities**                                         |       | 527                              |       | (25,942 | ) |
| **Cash Flows from Investing Activities**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital expenditures                                                                             |       | (13,893                          | )          | (13,080 | ) |
| Payments pursuant to  business combinations, net of cash acquired                                |       | —                           |       | (7,688 | ) |
| Other, net                                                                                       |       | 4                                |       | 84 |   |
| **Net  cash used in investing activities**                                                       |       | (13,889                          | )          | (20,684 | ) |
| **Cash Flows from Financing Activities**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Borrowings on revolving  line of credit                                                          |       | 90,000                           |       | — |   |
| Repayment of revolving  line of credit                                                           |       | (90,000                          | )          | — |   |
| Net borrowings of  short-term debt                                                               |       | —                           |       | 918 |   |
| Borrowings of long-term  debt                                                                    |       | —                           |       | 89,467 |   |
| Repayments of long-term  debt                                                                    |       | (51,317                          | )          | (783 | ) |
| Excess tax benefit  realized from share-based payment arrangements                               |       | 1,413                            |       | 84 |   |
| Proceeds from stock  option exercises                                                            |       | 2,664                            |       | 873 |   |
| Dividends paid                                                                                   |       | (1,213                           | )          | (1,191 | ) |
| Other                                                                                            |       | 3                                |       | — |   |
| **Net  cash (used in) provided by financing activities**                                         |       | (48,450                          | )          | 89,368 |   |
| **Effect  of exchange rates on cash and cash equivalents**                                       |       | 92                               |       | (253 | ) |
| **Net (decrease) increase in cash  and cash equivalents**                                        |       | (61,720                          | )          | 42,489 |   |
| **Cash  and cash equivalents, beginning of period**                                              |       | 95,833                           |       | 1,293 |   |
| **Cash and cash equivalents, end of period**                                                     |       | $                                | 34,113     |   | $ | 43,782 |   |

 

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 ofBusiness

DRS Technologies, Inc., its wholly-ownedsubsidiaries and its controlling interests (hereinafter, DRS or the Company) isa supplier of defense electronic products, systems and military supportservices. The Company provides high-technology products and services to allbranches of the U.S. military, major aerospace and defense prime contractors,government intelligence agencies, international military forces and industrialmarkets. 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, aircombat training systems, mission recorders, deployable flight incidentrecorders, environmental and telecommunication systems, aircraft loaders,military trailers and shelters. The Company also provides support services tothe military, including security and asset protection system services,telecommunication and information technology services, training and logisticssupport services for all branches of the U.S. armed forces, and certain foreignmilitaries, homeland security forces and selected government and intelligenceagencies.

On October 2, 2006,the Company implemented a new organizational operating structure that realignedits operations into four operating segments. The four operating segments arethe Command, Control, Communications, Computers and Intelligence (C4I) Segment,the Reconnaissance, Surveillance and Target Acquisition (RSTA) Segment, theSustainment Systems Segment and the Technical Services Segment. All otheroperations, primarily the Company’s Corporate Headquarters, are grouped inOther. See Note 12 for a description of each segment. All prior-year amountspresented by segment have been reclassified to reflect the new operatingstructure.

**2.**                 Basisof Presentation

The accompanying unaudited consolidated financialstatements include all wholly-owned and majority-owned subsidiaries andcontrolling interests of DRS. The financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and with the instructions to Form 10-Q and Article 10of Regulation S-X. In the opinion of the Company, the interim consolidatedfinancial information provided herein reflects all adjustments (consisting ofnormal and recurring adjustments) necessary for a fair presentation of theCompany’s consolidated financial position as of June 30, 2007 and theresults of its operations and cash flows for the three-month periods ended June 30,2007 and 2006. The results of operations and cash flows for the interim periodsended June 30, 2007 are not necessarily indicative of the results to beexpected for the full year. These interim consolidated financial statementsshould be read in conjunction with the consolidated financial statements of theCompany for the fiscal year ended March 31, 2007, included in the Company’sfiling on Form 10-K for the year ended March 31, 2007.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and costs and expenses during the reporting period. The mostsignificant of these estimates and assumptions relate to contract revenue, coststo complete performance on a contract, profit and loss recognition, fair valuesof assets acquired and liabilities assumed in business combinations, marketvalues for inventories reported at lower of cost or 

4

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

market, pension and postretirementbenefit obligations, share-based employee compensation costs,recoverability, useful lives and valuation of recorded amounts of long-livedassets, identifiable intangible assets and goodwill, income taxes, includingthe valuation of deferred tax assets, litigation reserves and environmentalobligations. Changes in estimates are reflected in the periods during whichthey become known. Actual amounts will differ from these estimates and coulddiffer materially. For a more complete discussion of these estimates andassumptions, see the Annual Report of DRS Technologies, Inc. on Form 10-Kfor the fiscal year ended March 31, 2007.

The fiscal year-end consolidated balance sheet datawas derived from the Company’s audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America. Certain fiscal 2007 amounts have beenreclassified to conform to the fiscal 2008 presentation.

**3.**                 IncomeTaxes

The provision for income taxes for the three-monthsended June 30, 2007, reflected an effective income tax rate ofapproximately 37%, as compared with 38.9% in the same period last year. TheCompany’s effective tax rate declined primarily due to the scheduled increasein the Domestic Manufacturing Deduction, reinstatement of the Research &Development Credit and the Company’s April 1, 2007 election to reportinterest expense associated with the income tax contingencies as interestexpense rather than a component of the income tax provision, partially off-setby a reduction in the Extraterritorial Income Exclusion.

In July 2006,the Financial Accounting Standard’s Board (FASB) issued FASB Interpretation No. 48(FIN 48). FIN 48 prescribes a comprehensive model for how a company shouldrecognize, measure, present and disclose in its financial statements uncertaintax positions that the company has taken or expects to take on a tax return.FIN 48 states that a tax benefit from an uncertain tax position may berecognized only if it is “more likely than not” that the position issustainable, based on its technical merits. The tax benefit of a qualifyingposition is the largest amount of tax benefit that is greater than 50% likelyof being realized upon settlement with a taxing authority having full knowledgeof all relevant information. A tax benefit from an uncertain tax position waspreviously recognized if it was “probable” of being sustained. Under FIN 48,the liability for unrecognized tax benefits is classified as noncurrent unlessthe liability is expected to be settled in cash within 12 months of thereporting date. FIN 48 is effective as of the beginning of the first fiscalyear beginning after December 15, 2006. The Company adopted the provisionsof FIN 48 on April 1, 2007. The impact of adopting FIN 48 on the Company’sconsolidated financial statements is summarized below.

| ** **           | ** ** | **Balance at**     | ** ** | ** **           | ** ** | **Balance at** | ** ** |
|----------------------|------------|-------------------------|------------|----------------------|------------|---------------------|------------|
| ** **           | ** ** | **March 31,**      | ** ** | **FIN 48**      | ** ** | **March 31,**  | ** ** |
| ** **           | ** ** | **2007**                | ** ** | **Reclassification** | ** ** | **2007**            | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| Accrued interest     |       | $                       | 25,608     |                 |       | $                   | 5,801      |   |   | $ | 31,409 |   |
| Income taxes payable |       | $                       | 51,470     |                 |       | $                   | (8,243     | ) |   | $ | 43,227 |   |
| Deferred tax assets  |       | $                       | 26,451     |                 |       | $                   | 4,932      |   |   | $ | 31,383 |   |
| Other liabilities    |       | $                       | 158,682    |                 |       | $                   | 7,374      |   |   | $ | 166,056 |   |
| Retained earnings    |       | $                       | 399,793    |                 |       | $                   | —     |   |   | $ | 399,793 |   |

 

The Company operates in multiple taxing jurisdictions,both within the United States and outside of the United States, and facesaudits from various tax authorities regarding transfer pricing, equity related 

5

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

payroll deductions, thedeductibility of certain expenses, intercompany transactions as well as othermatters. At April 1, 2007, the total amount of liability for unrecognizedtax benefits related to federal, state and foreign taxes was approximately $38.0 million(of which approximately $5.3 million would impact the Company’s effectivetax rate if recognized) plus accrued interest of $5.8 million. As of June 30,2007, the corresponding balance for unrecognized tax benefits is approximately$37.3 million for the items described above plus approximately $6.3 million ofaccrued interest.

TheCompany is currently under examination in several tax jurisdictions and remainssubject to examination until the statute of limitations expires for therespective tax jurisdiction. Within specific countries, the Company may besubject to audit by various tax authorities, or subsidiaries operating withinthe country may be subject to different statute of limitations expirationdates. As of April 1, 2007, a summary of the tax years that remain subjectto examination in the Company’s major tax jurisdictions are:

| United States—Federal |   | March 31, 2002 and  forward |
|----------------------------|--------|----------------------------------|
| United States—States  |   | March 31, 2002 and  forward |
| Germany                    |   | March 31, 2002 and  forward |
| United Kingdom             |   | March 31, 2002 and  forward |
| Canada                     |   | March 31, 2002 and  forward |
| Canada—Provinces      |   | March 31, 2002 and forward  |

 

Based upon the expiration of statutes of limitationsand/or the anticipated conclusion of tax examinations in several jurisdictions,the Company believes it reasonably possible that the total amount of previouslyunrecognized tax benefits for the items discussed above may decrease by up to $22.5 millionwithin 12 months of June 30, 2007.

The Company’s policy is toclassify penalties related to unrecognized tax benefits as income tax expense. TheCompany’s policy is to classify interest related to unrecognized tax benefitsas interest expense. In fiscal 2007 and prior, these amounts were classified asincome tax expense.

**4.**                 Share-BasedCompensation

In thethree months ended June 30, 2007 and 2006, the Company recorded totalshare-based costs related to stock options and non-vested stock of$2.7 million and $2.6 million, respectively. Such amounts wererecognized in the consolidated financial statements as follows:

| ** **                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** |                                         |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|
| ** **                                                                        | ** ** | **   2007   **    | ** ** | **   2006   ** | ** ** |   |
| ** **                                                                        | ** ** | **(in thousands)**                         | ** ** |                                         |
| Total cost of share-based  payment plans                                          |       | $                                               | 2,689      |                                         |   | $ | 2,644 |   |   |
| Amounts  capitalized in inventory                                                 |       | (1,374                                          | )          |                                         | (830 | ) |   |
| Amounts charged  against earnings for amounts previously capitalized in inventory |       | 913                                             |       |                                         | 960 |   |   |
| Amounts charged against  earnings before income tax benefit                       |       | 2,228                                           |       |                                         | 2,774 |   |   |
|                                                                                   |            |                                                 |            |                                              |  |  |  |  |  |  |

 

6

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

***Stock Options***   Thefollowing table summarizes information regarding the Company’s stock optionactivity and amounts as of and for the three-months ended June 30, 2007.

| ** **                                           | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | ** **                  | ** ** | ** **                             | ** ** | ** **                                                       | ** ** | **(in thousands)**         | ** ** |
| Outstanding at  March 31, 2007                  |       | 2,394,314                   |       |                                   | $          | 32.04                                                            |       |                            |       |   |   |   |   |   |   |   |
| Granted                                              |       | 224,469                     |       |                                   | $          | 54.30                                                            |       |                            |       |   |   |   |   |   |   |   |
| Exercised                                            |       | (148,317                    | )          |                                   | $          | 20.53                                                            |       |                            |       |   |   |   |   |   |   |   |
| Cancelled/Forfeited                                  |       | (12,897                     | )          |                                   | $          | 32.87                                                            |       |                            |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2007                   |       | 2,457,569                   |       |                                   | $          | 34.76                                                            |       |                            |       | 6.39 |   |   |   | $ | 55,314 |   |   |
| Vested and expected to vest at June 30, 2007(1) |       | 2,433,990                   |       |                                   | $          | 34.65                                                            |       |                            |       | 6.36 |   |   |   | $ | 55,051 |   |   |
| Exercisable at  June 30, 2007                   |       | 1,686,385                   |       |                                   | $          | 30.95                                                            |       |                            |       | 5.51 |   |   |   | $ | 44,397 |   |   |

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(1)          Represents outstandingoptions reduced by expected forfeitures.

The aggregate intrinsic values, disclosed in the tableabove, represent the difference between DRS’s closing stock price on the lasttrading day of the first quarter (June 29, 2007) 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 andthe related exercise price, during the three months ended June 30, 2007and 2006, was $4.7 million and $0.6 million, respectively. Totalcompensation costs related to stock options was $1.3 million and $1.8 million,for the three month periods ended June 30, 2007 and 2006, respectively. AtJune 30, 2007, unrecognized compensation costs related to stock optionswas $11.2 million ($7.0 million after income taxes), which is expected to berecognized over a weighted average remaining period of 2.6 years.

The estimated weighted average grant date fair valueof each stock option awarded was $21.00 and $21.47 for the three months ended June 30,2007 and 2006, respectively.

**Stock Option Fair ValueEstimation Assumptions**   For purposes of estimating the fair value provisions ofStatement of Financial Accounting Standard (SFAS) 123R, the Company estimatesthe fair value of its stock options at the date of grant using theBlack-Scholes option-pricing valuation model. The Company’s valuation model isimpacted by DRS’s stock price as well as weighted average assumptions for anumber of subjective variables described below.

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

·       *Expected Volatility  *Expectedvolatility is based on historical daily volatility of DRS common stock over theexpected holding period.

7

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

·       *Expected Dividend Yield  *Expecteddividend yield is based on DRS’s expected dividend payments relative to thecurrent market price of DRS common stock.

·       *Risk-Free Interest Rate  *Therisk-free interest rate for stock options is based on the U.S. Treasury yieldcurve in effect at the time of grant for maturities similar to the expectedholding period of the stock options.

·       *Forfeiture Rate  *The forfeiture rateis based on the historical forfeiture experience and prospective analysis ofdifferent pools of employees. We monitor share option exercise and employeetermination patterns of each pool to estimate forfeiture rates within thevaluation model.

Changesin assumptions can materially impact the estimated fair value of stock options.The weighted average assumptions used in the Company’s valuation model arepresented in the table below.

| ** **                                     | ** ** | **Three Months  Ended  June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                    | ** ** |
| Expected holding period  (in years)            |       |                                        | 5.4        |   |   |
| Expected volatility                            |       |                                        | 33.23      | % |   |
| Expected dividend yield                        |       |                                        | 0.22       | % |   |
| Risk-free interest rate                        |       |                                        | 4.98       | % |   |
| Weighted-average fair value of options granted |       |                                        | $          | 21.00 |   |   |
|                                                |            |                                             |            |  |  |  |

 

**Non-Vested Stock andNon-Vested Stock Units**   Non-vested stock awards are granted to certain employees,as permitted under the 2006 Plan in the name of the employee, who has all therights of a stockholder, subject to certain restrictions. Non-vested stockunits are granted in the name of the employee; however, the participant has norights as a stockholder. These non-vested stock units are redeemed for DRS commonstock once a three year cliff vesting period has been satisfied. The cost ofthe grants, as determined by the market prices of the common stock at the grantdates, net of expected forfeitures, is recognized over the vesting periods.

Compensation cost fornon-vested stock for the three months ended June 30, 2007 and 2006 was$1.4 million and $0.8 million, respectively. As of June 30,2007, total unrecognized compensation costs related to non-vested stock awardswas $25.0 million ($15.7 million after income taxes) and that amount isexpected to be recognized over a weighted average remaining period of 2.5years.

The following tabledetails the activity in non-vested stock awards for the three months ended June 30, 2007.

| ** **                                     | ** ** | **Three Months Ended  June 30, 2007** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares**                                | ** ** | **Weighted  Average Grant  Date Fair Value  per Share** | ** ** |
| Nonvested—Balance at  March 31, 2007 |       |                                                      | 362,396    |   |   |   | $ | 49.86 |   |   |
| Granted                                        |       |                                                      | 281,632    |   |   |   | $ | 54.28 |   |   |
| Vested                                         |       |                                                      | (2,000     | ) |   |   | $ | 27.79 |   |   |
| Forfeited / cancelled                          |       |                                                      | (13,023    | ) |   |   | $ | 50.16 |   |   |
| Nonvested—Balance at  June 30, 2007  |       |                                                      | 629,005    |   |   |   | $ | 51.91 |   |   |

 

8

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

**5.**                 Inventories

Inventoriesare summarized as follows:

| ** **                                             | ** ** | **June 30,**       | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **2007**                | ** ** | **2007**           | ** ** |
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Work-in-process                                        |       | $                       | 466,286    |               | $          | 466,221 |   |
| General and  administrative costs                      |       | 69,076                  |       | 64,229             |       |
| Raw material and  finished goods                       |       | 51,475                  |       | 53,158             |       |
|                                                   |       | 586,837                 |       | 583,608            |       |
| Less: Progress  payments and certain customer advances |       | 221,830                 |       | 206,746            |       |
| Inventory reserve                                      |       | 9,270                   |       | 9,250              |       |
| Total                                                  |       | $                       | 355,737    |               | $          | 367,612 |   |

 

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

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

| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                         | ** ** |
| Balance in  inventory at beginning of period |       | $                                               | 64,229     |   | $ | 63,836 |   |
| Add: Incurred costs                          |       | 79,214                                          |       | 68,756 |   |
| Less: Amounts included in costs and expenses |       | (74,367                                         | )          | (67,145 | ) |
| Balance in inventory at  end of period       |       | $                                               | 69,076     |   | $ | 65,447 |   |

 

Total expenditures for IRAD amounted to approximately$11.5 million and $11.0 million for the three-month periods ended June 30,2007 and 2006, respectively.

During the three-month period ended June 30, 2007, theCompany recorded a $36.8 million charge to operations for an anticipated losson the Thermal Weapon Sight II (TWS II) program. The charge reflects the cost ofprocuring new material following recent design modifications, as well as thewrite-off of certain obsolete inventory. As a result of the design changes, theCompany also transferred $30.0 million of saleable inventory from the TWS IIprogram (transferred inventory) to inventory which is valued at the lower ofcost or market as of June 30, 2007. The Company believes that thetransferred inventory will be sold primarily through international distributionchannels. The sale of certain products outside of the United States is highlyregulated and any inability to obtain the requisite licenses, or comply withapplicable government export regulations may affect the Company’s ability toexport the transferred inventory. If the Company is precluded from selling thetransferred inventory to certain international customers and, or is unable togenerate sufficient domestic revenues, the value of the transferred inventorymay be required to be written down or written off in a future period. Such awrite-down or write-off could be material to the results of operations in anyone period.

9

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

**6.**                 Goodwilland Intangible Assets

Thetable below reconciles the change in the carrying amount of goodwill byoperating segment for the period from March 31, 2007 to June 30,2007.

| ** **                              | ** ** | **C4I**                 | ** ** | **RSTA** | ** ** | **Sustainment  Systems** | ** ** | **Technical  Services** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------|------------|--------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Balance as of  March 31, 2007      |       | $                       | 654,446    |     | $          | 176,376                  |       | $                       | 1,040,605  |      | $          | 745,215 |   | $ | 2,616,642 |   |
| Codem acquisition earn-out              |       | 2,638                   |       | —   |       | —                   |       | —                  |       | 2,638     |       |
| WalkAbout acquisition earn-out          |       | 35                      |       | —   |       | —                   |       | —                  |       | 35        |       |
| Foreign currency translation adjustment |       | 2,041                   |       | —   |       | 589                      |       | —                  |       | 2,630     |       |
| Balance as of  June 30, 2007       |       | $                       | 659,160    |     | $          | 176,376                  |       | $                       | 1,041,194  |      | $          | 745,215 |   | $ | 2,621,945 |   |

 

Thefollowing disclosure presents certain information regarding the Company’sacquired intangible assets as of June 30, 2007 and March 31, 2007.All acquired intangible assets are being amortized over their estimated usefullives, as indicated below, with no estimated residual values.

| Acquired Intangible Assets                | ** ** | ** ** | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Balance** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **(in thousands)**                     | ** ** |
| **As of June 30, 2007**                        | ** ** |       | ** ** | ** **                                  |       |                        | ** ** | ** **                    |       |                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Technology-based intangibles                        |       |       | 18 years   | ** **                                  |       |                        | $          | 47,859                        | ** ** |                 |       | $ | (17,745 | ) |   |   | $ | 30,114 | ** ** |   |
| Customer  and program/contract- related intangibles |       |       | 11 years   | ** **                                  |       |                        | 214,506    | ** **                    |       |                 | (54,911    | ) |   |   | 159,595 | ** ** |   |
| Total                                               |       |       |       | ** **                                  |       |                        | $          | 262,365                       | ** ** |                 |       | $ | (72,656 | ) |   |   | $ | 189,709 | ** ** |   |
| **As of March 31, 2007**                       | ** ** |       | ** ** | ** **                                  |       |                        | ** ** | ** **                    |       |                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Technology-based intangibles                        |       |       | 18 years   | ** **                                  |       |                        | $          | 47,859                        | ** ** |                 |       | $ | (17,016 | ) |   |   | $ | 30,843 | ** ** |   |
| Customer  and program/contract- related intangibles |       |       | 11 years   | ** **                                  |       |                        | 214,439    | ** **                    |       |                 | (48,298    | ) |   |   | 166,141 | ** ** |   |
| Total                                               |       |       |       | ** **                                  |       |                        | $          | 262,298                       | ** ** |                 |       | $ | (65,314 | ) |   |   | $ | 196,984 | ** ** |   |

 

The aggregate acquired intangible asset amortizationexpense for the three-month periods ended June 30, 2007 and 2006 was $7.3 millionand $7.7 million, respectively. The estimated acquired intangible assetannual amortization expense is expected to be approximately $29.2 millionfor fiscal year 2008, $29.2 million for fiscal year 2009, $28.3 millionfor fiscal year 2010, $27.5 million for fiscal year 2011 and $14.0 millionfor fiscal year 2012.

The Company’s goodwill andintangible assets are more fully described in Note 3 to the Company’sconsolidated financial statements for the year ended March 31, 2007.

10

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

**7.**                 ProductWarranties

Product warrantycosts generally are accrued when the covered products are delivered to thecustomer. Product warranty expense is recognized based on the terms of theproduct warranty and the related estimated costs, considering historical claimsexpense. Accrued warranty costs are reduced as these costs are incurred and asthe warranty period expires, and otherwise may be modified as specific productperformance issues are identified and resolved. The table below presents thechanges in the Company’s accrual for product warranties for the three monthsended June 30, 2007 and 2006, which are included in accrued expenses andother current liabilities.

| ** **                                                | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                         | ** ** |
| Balance at beginning of  period                           |       | $                                               | 31,180     |   | $ | 29,869 |   |
| Acquisitions during the  period                           |       | —                                          |       | 932 |   |
| Accruals for product  warranties issued during the period |       | 6,732                                           |       | 4,727 |   |
| Settlements made during  the period                       |       | (4,586                                          | )          | (3,494 | ) |
| Other                                                     |       | 187                                             |       | 121 |   |
| Balance at end of the period                              |       | $                                               | 33,513     |   | $ | 32,155 |   |

 

**8.**                 Debt

| ** **                                                         | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | **(in thousands)**     | ** ** |
| Credit Facility:                                                   |       |                        |       |                         |       |   |   |   |   |
| Revolving line of credit                                           |       |                        | $          | —                       |       |   |   | $ | — |   |   |
| Term loan                                                          |       |                        | 221,563    |                         |       |   | 272,250 |   |   |
| Canadian Term Loan                                                 |       |                        | 8,652      |                         |       |   | 8,479 |   |   |
| 65¤8%  Senior Notes due 2016                                  |       |                        | 350,000    |                         |       |   | 350,000 |   |   |
| 75¤8%  Senior Subordinated Notes due 2018                     |       |                        | 250,000    |                         |       |   | 250,000 |   |   |
| 67¤8%  Senior Subordinated Notes due 2013                     |       |                        | 550,000    |                         |       |   | 550,000 |   |   |
| 2% Convertible Senior  Notes due 2026                              |       |                        | 345,000    |                         |       |   | 345,000 |   |   |
| Unamortized Bond Premium  on 67¤8%  Senior Subordinated Notes |       |                        | 7,170      |                         |       |   | 7,453 |   |   |
| Other obligations                                                  |       |                        | 5,070      |                         |       |   | 5,025 |   |   |
|                                                               |       |                        | 1,737,455  |                         |       |   | 1,788,207 |   |   |
| Less:                                                              |       |                        |       |                         |       |   |   |   |   |
| Current installments of  long-term debt                            |       |                        | 5,353      |                         |       |   | 5,161 |   |   |
| Total long-term debt                                               |       |                        | $          | 1,732,102                    |       |   |   | $ | 1,783,046 |   |   |

 

The weighted averageinterest rate on the Company’s term loan borrowings under its Credit Facilitywas 6.9% as of June 30, 2007 (6.9% as of March 31, 2007). At June 30,2007 and March 31, 2007, there were no outstanding revolving line ofcredit borrowings against the Credit Facility.

From time to time, theCompany enters into standby letters-of-credit and bank guarantee agreementswith financial institutions and customers, primarily relating to the guaranteeof its future performance on 

11

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

certaincontracts to provide products and services and to secure advance payments ithas received from its customers. As of June 30, 2007, $49.0 million wascontingently payable under letters of credit and bank guarantees. Of thisamount, approximately $0.9 million and $0.3 million in letters of credit andbank guarantees, respectively, as of June 30, 2007, were issued under aprevious credit agreement and by a bank agreement for the Company’s U.K.subsidiary, respectively, and are not considered when determining theavailability under the Company’s revolving line of credit. At June 30,2007, the Company had $352.2 million of availability under its revolving lineof credit.

In April 2007, theCompany prepaid, at its discretion, $50.0 million of the outstanding term loanwith proceeds from the Company’s revolving line of credit and recognized a $0.1million charge to interest and related expenses in the first quarter of fiscal2008.

On March 29, 2006,DRS Technologies Canada Company (DRS Canada) established a five-year seniorsecured term loan for approximately $9.9 million (C$11.5 million), maturing on April 1,2011. The weighted average interest rate on the term loan was 6.0% as of June 30,2007 (6.0% as of March 31, 2007).

Accrued interest expenseat June 30, 2007 and March 31, 2007 was $28.3 million and $25.6million, respectively.

Certain of the Company’sdebt arrangements contain customary representations, warranties and defaultprovisions as well as restrictions, that among other things, limit the amountof debt that the Company may have outstanding. As of June 30, 2007, the Companywas in compliance with all covenants.

In January 2006, inconnection with the offering of the Company’s 2% Convertible Notes due 2026(Convertible Notes), the Company entered into a registration rights agreementrelating to the Company's Common Stock issuable upon conversion of theConvertible Notes.  Pursuant to the registrationrights agreement, if the Company does not file a prospectus supplement or shelfregistration statement relating to the resale of the Common Stock withincertain specified time periods or maintain the effectiveness of a registrationstatement related to the resale of the Common Stock, subject to certainexceptions, the Company could be subject to additional interest.  The Company believes the likelihood ofoccurrence of such event is remote and, as such, the Company has not recorded aliability at June 30, 2007.  In theevent that it becomes probable that the Company would have to pay additionalinterest under the registration rights agreement, the Company estimates themaximum potential amount as of June 30, 2007 to be approximately$3.5 million per year.

The Company’s indebtednessis more fully described in Note 8 to the Company’s Consolidated FinancialStatements for the year ended March 31, 2007.

**9.**                 Earningsper Share

Basic earnings per share(EPS) is computed by dividing net earnings by the weighted average number ofshares of common stock outstanding during each period. The computation ofdiluted earnings per share includes the effect of shares from the assumedexercise of dilutive stock options, convertible debt (if dilutive), non-vestedstock and non-vested stock units using the treasury stock method. The followingtable presents the components of basic and diluted earnings per share:

12

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

 

| ** **                                  | ** ** | **Three Months Ended  June 30,**           | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(in thousands,  except per-share data)** | ** ** |
| **Basic EPS computation**                   | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net earnings                                |       | $                                                         | 1,650      |   | $ | 21,258 |   |
| Weighted average common  shares outstanding |       | 40,381                                                    |       | 39,663 |   |
| Basic earnings per share                    |       | $                                                         | 0.04       |   | $ | 0.54 |   |
| **Diluted  EPS computation**                | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net earnings                                |       | $                                                         | 1,650      |   | $ | 21,258 |   |
| Diluted common shares  outstanding          |       |                                                      |       |   |   |
| Weighted average common  shares outstanding |       | 40,381                                                    |       | 39,663 |   |
| Stock options and  non-vested awards        |       | 872                                                       |       | 1,034 |   |
| Diluted common shares  outstanding          |       | 41,253                                                    |       | 40,697 |   |
| Diluted earnings per  share                 |       | $                                                         | 0.04       |   | $ | 0.52 |   |

 

 

At June 30, 2007 and 2006, there were 246,969 and22,500 options to acquire DRS common stock outstanding, respectively, withweighted average exercise prices of $54.23 and $53.56 per option, respectively,that are excluded from the above calculation because their inclusion would havehad an antidilutive effect on EPS in their respective fiscal years.

For the three months endedJune 30, 2007 and 2006, DRS’s 2% Convertible Senior Notes due 2026 had noimpact on diluted EPS because the average stock price during such periods wasbelow $59.70 per share, and the Convertible Notes, if converted, would requireonly cash at settlement.

**10.**          ComprehensiveEarnings

Thecomponents of comprehensive earnings for the three-month periods ended June 30,2007 and 2006 consisted of the following:

| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                         | ** ** |
| Net earnings                                   |       | $                                               | 1,650      |   | $ | 21,258 |   |
| Other  comprehensive earnings:                 |       |                                            |       |   |   |
| Foreign currency translation adjustments       |       | 3,535                                           |       | 2,442 |   |
| Minimum pension liability, net of income taxes |       | (165                                            | )          | (598 | ) |
| Comprehensive earnings                         |       | $                                               | 5,020      |   | $ | 23,102 |   |

 

**11.**          Pensionsand Other Employee Benefits

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87,88, 106 and 132(R)” (SFAS 158). The Company adopted the recognition provisionsof SFAS 158 in its Consolidated Financial Statements at March 31, 2007. SeeNote 12 to the Company’s audited Consolidated Financial 

13

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

Statements for the yearended March 31, 2007, included in the Company’s Annual Report on Form 10-K for a discussion of therecognition provisions of SFAS 158. In addition, SFAS 158 requires companiesto measure pension and postretirement benefit plan assets and benefitobligations as of the date of the employer’s fiscal year end balance sheet. TheCompany will be required to change the measurement date from December 31 toMarch 31 for its pension and postretirement plans in the fiscal year beginningApril 1, 2008. The Company is currently evaluating the impact of thechange in the measurement date on the Company’s results of operations.

On June 29, 2007, the Company approved andadopted an amendment to one of its defined benefit pension plans to cease theaccrual of future benefits effective September 30, 2007. All retirementbenefits earned by employees enrolled in the plan as of September 30, 2007will be fully preserved. Such employees’ ongoing service with the Company willcontinue to be credited for vesting purposes. The amendment of the definedbenefit pension plan will be accounted for as a plan curtailment. As a resultof this curtailment, the Company expects to record a gain of $11.7 millionduring the second quarter of fiscal 2008.

The following tablesummarizes the components of net periodic benefit cost for the Company’spension and postretirement benefit plans for the three-month periods ended June 30,2007 and 2006. These plans are more fully described in Note 12 to the Company’sConsolidated Financial Statements for the year ended March 31, 2007.

| ** **                                            | ** ** | ** **                                          | ** ** | ** **             | ** ** | **Unfunded**              | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                            | ** ** | **Funded**                                          | ** ** | **Postretirement**     | ** ** | **Supplemental**          | ** ** |
| ** **                                            | ** ** | **Pension Plans**                              | ** ** | **Benefit Plans** | ** ** | **Retirement Plans** | ** ** |
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                                            | ** ** | **2007**                                            | ** ** | **2006**               | ** ** | **2007**                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                             | ** ** |
| Service cost                                          |       | $                                                   | 1,728      |                   | $          | 1,834                     |       | $ | 120 |   | $ | 146 |   | $ | 146 |   | $ | 143 |   |
| Interest cost                                         |       | 3,653                                               |       | 3,243                  |       | 332                       |       | 320 |   | 361 |   | 318 |   |
| Expected return  on plan assets                       |       | (4,065                                              | )          | (3,490                 | )          | (62                       | )          | (56 | ) | — |   | — |   |
| Amortization of  unrecognized loss (gain)             |       | 102                                                 |       | 117                    |       | (35                       | )          | (8 | ) | 41 |   | 47 |   |
| Amortization of  transition obligation                |       | —                                              |       | —                 |       | 28                        |       | 28 |   | — |   | — |   |
| Amortization of  unrecognized prior-service cost |       | 3                                                   |       | 39                     |       | (6                        | )          | (6 | ) | 194 |   | 194 |   |
| Net periodic benefit  cost                            |       | $                                                   | 1,421      |                   | $          | 1,743                     |       | $ | 377 |   | $ | 424 |   | $ | 742 |   | $ | 702 |   |

 

The Company expects tocontribute $15.9 million and $1.6 million to its pension and postretirementplans, respectively, during the fiscal year ended March 31, 2008, of which$3.9 million and $0.4 million, respectively, were contributed during the three-monthperiod ended June 30, 2007.

**12.**          OperatingSegments

As discussed in Note 1, onOctober 2, 2006, the Company implemented a new organizational operatingstructure which realigned its three operating groups into four operatingsegments. The four operating segments are the Command, Control, Communications,Computers and Intelligence (C4I) Segment, the Reconnaissance, Surveillance andTarget Acquisition (RSTA) Segment, the Sustainment Systems Segment and theTechnical Services Segment. All other operations, primarily our CorporateHeadquarters, are grouped in Other. Prior-year balances and results ofoperations for the C4I Group, SR Group and S3 Group have been reclassified toreflect this management reporting change.

14

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

The C4I Segment iscomprised of the following business areas: Command, Control &Communications, which includes naval display systems, ship communicationssystems, radar systems, technical support, electronic manufacturing and systemintegration services, secure voice and data communications, air combat trainingand electronic warfare and ship network systems; Power Systems, which includesnaval and industrial power generation, conversion, propulsion, distribution andcontrol systems; Intelligence Technologies, which includes signals intelligence,communications intelligence, data collection, processing and disseminationequipment, high-speed digital data and imaging systems, unmanned vehicles andmission and flight recorders; and Tactical Systems, which includes battlemanagement tactical computer systems, peripherals, electronic test, diagnosticsand vehicle electronics.

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

The Sustainment SystemsSegment designs, engineers and manufactures integrated military electronics andother military support equipment, primarily for the U.S. Department of Defense(DoD), as well as related heat transfer and air handling equipment, and powergeneration and distribution equipment for domestic commercial and industrialusers. The segment provides these systems for military, humanitarian, disasterrecovery and emergency responder applications.

The Technical ServicesSegment provides engineering services, logistics and training services,advanced technology services, security and asset protection systems andservices, telecommunication systems, integration and information technologyservices, power generation and vehicle armor kits. The segment provides theseservices for military, intelligence, humanitarian, disaster recovery andemergency responder applications.

Other includes theactivities of DRS Corporate Headquarters and certain non-operating subsidiariesof the Company.

Transactions betweensegments generally are negotiated and accounted for under terms and conditionsthat are similar to other government and commercial contracts; however, theseintercompany transactions are eliminated in consolidation. The Companyevaluates segment-level performance based on revenues and operating income, aspresented in the Consolidated Statements of Earnings. Operating income, asshown, includes amounts allocated from DRS Corporate operations using anallocation methodology prescribed by U.S. government regulations for governmentcontractors.

15

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

 

| ** **                                 | ** ** | **C4I**                 | ** ** | **RSTA**   | ** ** | **Sustainment  Systems** | ** ** | **Technical  Services** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| **Three Months Ended  June 30, 2007** | ** ** | ** **              | ** ** | ** ** | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                             |       | $                       | 303,221    |       | $          | 154,791                  |       | $                       | 115,436    |       | $          | 176,856    |       | $ | — |   | $ | 750,304 |   |
| Intersegment  revenues                     |       | (4,829                  | )          | (1,207     | )          | (7,458                   | )          | (1,180                  | )          | —     |       | (14,674    | )          |
| External revenues                          |       | $                       | 298,392    |       | $          | 153,584                  |       | $                       | 107,978    |       | $          | 175,676    |       | $ | — |   | $ | 735,630 |   |
| Operating income  (loss)                   |       | $                       | 31,905     |       | $          | (21,126                  | )          | $                       | 10,223     |       | $          | 10,492     |       | $ | (160 | ) | $ | 31,334 |   |
| Total assets                               |       | $                       | 1,237,376  |       | $          | 414,148                  |       | $                       | 1,304,884  |       | $          | 990,527    |       | $ | 172,236 |   | $ | 4,119,171 |   |
| Depreciation and  amortization             |       | $                       | 5,932      |       | $          | 3,368                    |       | $                       | 4,407      |       | $          | 3,459      |       | $ | 1,347 |   | $ | 18,513 |   |
| Capital expenditures                       |       | $                       | 7,887      |       | $          | 1,589                    |       | $                       | 1,371      |       | $          | 696        |       | $ | 2,350 |   | $ | 13,893 |   |
| **Three Months Ended  June 30, 2006** | ** ** | ** **              | ** ** | ** ** | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                             |       | $                       | 271,719    |       | $          | 117,834                  |       | $                       | 104,233    |       | $          | 157,622    |       | $ | — |   | $ | 651,408 |   |
| Intersegment  revenues                     |       | (1,403                  | )          | (1,200     | )          | (17,685                  | )          | (855                    | )          | —     |       | (21,143    | )          |
| External revenues                          |       | $                       | 270,316    |       | $          | 116,634                  |       | $                       | 86,548     |       | $          | 156,767    |       | $ | — |   | $ | 630,265 |   |
| Operating income  (loss)                   |       | $                       | 27,705     |       | $          | 12,981                   |       | $                       | 11,403     |       | $          | 13,320     |       | $ | (424 | ) | $ | 64,985 |   |
| Total assets                               |       | $                       | 1,184,475  |       | $          | 429,440                  |       | $                       | 1,266,100  |       | $          | 975,408    |       | $ | 222,419 |   | $ | 4,077,842 |   |
| Depreciation and  amortization             |       | $                       | 6,346      |       | $          | 3,693                    |       | $                       | 4,156      |       | $          | 3,630      |       | $ | 1,300 |   | $ | 19,125 |   |
| Capital expenditures                       |       | $                       | 5,938      |       | $          | 2,687                    |       | $                       | 1,194      |       | $          | 1,152      |       | $ | 2,109 |   | $ | 13,080 |   |

 

**13.**   Supplemental CashFlow Information

| ** **                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                         | ** ** |
| Cash paid for:                                                                       |       |                                            |       |   |   |
| Interest paid                                                                        |       | $                                               | 24,298     |   | $ | 26,373 |   |
| Income taxes paid                                                                    |       | $                                               | 14,432     |   | $ | 3,859 |   |
| Supplemental disclosure  of significant non-cash investing and financing activities: |       |                                            |       |   |   |
| Acquisition earn-out—Codem                                                      |       | $                                               | 2,638      |   | $ | 838 |   |
| Acquisition earn-out—WalkAbout                                                  |       | $                                               | 35         |   | $ | — |   |
| Acquisition costs for business combinations                                          |       | $                                               | —     |   | $ | 500 |   |
| Contribution of fixed assets to joint venture                                        |       | $                                               | 429        |   | $ | — |   |
| Fixed assets  vouchered but not paid                                                 |       | $                                               | 198        |   | $ | — |   |

 

**14.**   CashDividends on DRS Common Stock

On May 10, 2007, theBoard of Directors declared a $0.03 per common share cash dividend, payable onJune 29, 2007 to stockholders of record as of June 15, 2007. Cashdividends paid for the three-month period ended June 30, 2007 were  $1.2 million. On August 9, 2007,  the Board of Directors declared a $0.03 percommon share cash dividend, payable on September 28, 2007 to stockholdersof record as of September 14, 2007.

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

**15.**   Contingencies

Various legal actions,claims, assessments and other contingencies including certain matters describedbelow, are pending against the Company and certain of the Company’ssubsidiaries. These matters are subject to many uncertainties, and it ispossible that some of these matters ultimately could be decided, resolved orsettled adversely. The Company had recorded accruals totaling $3.0 million atboth June 30, 2007 and March 31, 2007 for losses related to thosematters that the Company considers to be probable and that can be reasonablyestimated (certain legal and environmental matters are discussed in detailbelow). Based on the Company’s ongoing analysis of various factual, legal andequitable considerations, the Company also has recorded as of June 30,2007 an accrual of $12.6 million ($11.8 million of which was originally chargedagainst goodwill) to reflect the probable income tax impact of informationuncovered in the Company’s ongoing internal investigation of historical ESSIstock option practices. Although, at June 30, 2007, the precise amount ofliability that may result from those matters for which the Company has recordedaccruals is not ascertainable, the Company believes that any amounts exceedingthe Company’s recorded accruals should not materially affect the Company’sfinancial condition or liquidity. It is possible, however, that the ultimateresolution of those matters could result in a material adverse effect on theCompany’s results of operations and/or cash flows from operating activities fora particular reporting period.

Some environmental laws,such as the Comprehensive Environmental Response, Compensation and LiabilityAct of 1980 (also known as CERCLA or the Superfund law) and similar statestatutes, can impose liability for the entire cost of the clean up ofcontaminated sites upon any of the current or former site owners or operators(or upon parties who send waste to these sites), regardless of the lawfulnessof the original activities that led to the contamination. In July 2000,prior to its acquisition by Integrated Defense Technologies Inc. (IDT), andprior to the Company’s acquisition of IDT, Tech-Sym Corporation received a Section 104(e) Requestfor Information from the National Park Service (NPS), pursuant to CERCLA,regarding a site known as the Orphan Mine site in the Grand Canyon NationalPark, Arizona, which is the subject of an NPS investigation regarding thepresence of residual radioactive materials and contamination. A corporation ofwhich Tech-Sym is an alleged successor operated this uranium mine from 1956 to1967. In 1962, the land was sold to the U.S. government and the allegedpredecessor of Tech Sym was given a 25-year mining lease. In 1967, themining rights were transferred to a third party by a trustee in bankruptcy, andthe Company believes that the mine was operated by such third party untilapproximately 1969. The Company understands that there are other companies inthe chain of title to the mining rights subsequent to Tech-Sym’s alleged predecessor,and, accordingly, that there are other potentially responsible parties (PRPs)for the environmental conditions at the site, including the U.S. government asowner, operator and arranger at the site. During its period of ownership, IDTretained a technical consultant in connection with this matter, who conducted alimited, preliminary review of site conditions and communicated with the NPSregarding actions that may be required at the site by all of the PRPs. On February 6,2005, the NPS sent the Company an Engineering Evaluation/Cost Analysis WorkPlan (the NPS EE/CA) under CERCLA (the CERCLA Letter) with regards to OperableUnit 1 of the Orphan Mine site. In the Company’s view, the NPS EE/CA includedadditional clean up not covered by CERCLA. The CERCLA Letter also requested (a) paymentof $0.5 million for costs incurred by the NPS related to the Orphan Mine, and (b) a‘‘good faith offer’’ to conduct the response activity outlined by the NPS andto reimburse the NPS for future costs. The NPS advised that a similar letterhad been sent to another PRP. The Company initiated discussions with the otherPRP and with NPS, and engaged a technical consultant to evaluate the existingdocumentation and the site in depth. As a result, on September 29, 2005the 

17

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

technicalconsultant submitted to the NPS, on behalf of the Company and the other PRP, analternative Engineering Evaluation/Cost Analysis Work Plan (the alternativeEE/CA) with regard to Operable Units 1 and 2 of the Orphan Mine site.

In December 2005 and August 2006,the PRPs and NPS met to discuss the technical merits of the alternative EE/CAand ways to resolve certain differences between the alternative EE/CA and theNPS EE/CA provided with the CERCLA Letter. Since late 2005, the parties alsohave discussed certain legal issues relating to the process for implementing analternative EE/CA and entering into a settlement agreement that wouldmemorialize the parties’ intent. The potential liability associated withimplementation of an EE/CA can change substantially due to such factors asadditional information on the nature or extent of contamination, methods ofremediation that might be recommended or required, changes in the apportionmentof costs among the responsible parties and other actions by governmentalagencies or private parties.

In connection with theCompany’s acquisition of ESSI in January 2006, the Company has been madeaware 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 aformal order directing a private investigation and was notified that the SEChad issued subpoenas to various individuals associated with ESSI to producecertain documents. The SEC staff also requested that ESSI produce certaindocuments in connection with the investigation. The subpoenas related totrading in ESSI stock around ESSI’s earnings releases in 2003 and to theadequacy of certain disclosures made by ESSI regarding related-partytransactions in 2002 and 2003 involving insurance policies placed by ESSIthrough an insurance brokerage firm in which an ESSI director was a principalat the time of the transactions. In February 2007, the SEC filed a civilinjunctive action in the United States District Court for the Eastern Districtof Missouri, Eastern Division, against a former director, officer andconsultant of ESSI, alleging that he had violated the federal securities lawsby “tipping” his financial advisor and close friend by sharing material,nonpublic information regarding ESSI’s financial condition shortly beforecertain 2003 earnings announcements.

On or about September 23,2005, the SEC staff advised ESSI’s counsel that it had issued a subpoenadirected to ESSI and expanded its investigation to include ESSI’s disclosure ofa November 2004 stop work order relating to ESSI’s Deployable PowerGeneration and Distribution Systems (DPGDS) program for the U.S. Air Force andrelating to trading in ESSI stock by certain individuals associated with ESSI.In connection with the foregoing SEC investigation, ESSI and certain of itsdirectors and officers have provided information and/or testimony to the SEC.

In January 2006, ESSIwas informed that the Office of the U.S. Attorney for the Eastern District ofMissouri was initiating an investigation into ESSI’s disclosure of the DPGDSstop-work order and into trading in ESSI stock by ESSI insiders, which precededsuch disclosure. The U.S. Attorney’s office advised ESSI that although itconsidered ESSI to be a subject of its investigation, ESSI was not a target. Inconnection with this investigation, the U.S. Attorney’s office issued ESSI asubpoena requesting specified information, which ESSI has furnished.

In May 2006, theCompany 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 bythe Company. As a part of its investigation, 

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

the SECissued subpoenas to certain former officers and employees of ESSI to providetestimony and produce certain documents.

In February 2007, theSEC filed civil injunctive actions in the United States District Court for theEastern District of Missouri, Eastern Division, alleging that ESSI’s formerChief Financial Officer and former controller, in which each was alleged tohave participated in a backdating scheme. Also in February 2007, the SECreported ESSI’s former controller had settled its action against him byconsenting to disgorgement, financial penalties, an officer and director barand 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 forthe Eastern District of Missouri, Eastern Division, alleging that ESSI’s formerChairman of the Board and Chief Executive Officer and his son (who was also amember of ESSI’s Board of Directors and Compensation Committee) each participatedin a backdating scheme.

In March 2007, ESSI’sformer controller pleaded guilty to a one-count information brought by theoffice of the United States Attorney for the Eastern District of Missouri,charging him with making false statements to the government. In connection withhis plea, this former ESSI executive admitted that a number of documents filedby ESSI with the SEC contained the materially false statement that the optionprice of shares subject to the ESSI stock option plan was the closing price ofthe stock on the date the options were awarded.

In March 2007, ESSI’sformer Chief Financial Officer was indicted by the grand jury of the UnitedStates District Court for the Eastern District of Missouri relating to thebackdating of the timing of stock options at ESSI prior to the time ESSI wasacquired by DRS.  In July 2007, ESSI’sformer Chairman of the Board and Chief Executive Officer and his son (who wasalso a member of ESSI’s Board of Directors and Compensation Committee) wereeach indicted on similar charges. The July 2007 superseding indictmentcharges these former ESSI officers and directors with twelve counts of fraudbased on allegations that they backdated stock options on at least eightoccasions between 1996 and 2002.

Although ESSI continues tobe a subject of the U.S. Attorney’s office’s investigation, the U.S. Attorney’soffice has advised the Company that ESSI is not a target. Because the eventsbeing investigated occurred prior to the time of the Company’s acquisition ofESSI, the U.S. Attorney’s office has further advised the Company that itconsiders DRS to be a witness, not a subject or target of its investigation.

The Company is committedto full cooperation with regard to the foregoing investigations. The Company isunable to determine at this time either the timing of the SEC or U.S. Attorney’soffice investigations or the impact, if any, the investigations could have onthe Company.

ESSI’s federal tax returnsfor the tax periods ended October 31, 2004, October 31, 2005 and January 31,2006 remain the subject of an Internal Revenue Service audit. In connectionwith this audit, ESSI expects that it will be required to amend previouslyfiled Federal and state tax returns to reflect the disallowance of certaincompensation deductions taken during the periods under review. The Company hasrecorded an accrual against goodwill to reflect the anticipated disallowance.

On August 7, 2007, ashareholder derivative complaint was filed in the United States District Courtfor the Eastern District of Missouri against ESSI’s former Chairman of theBoard and Chief Executive Officer, his son (who was also a member of ESSI’sBoard of Directors and Compensation Committee), ESSI’s former Chief FinancialOfficer and ESSI’s former Controller relating to the alleged backdating ofstock options prior to ESSI’s acquisition by DRS. The complaint also containsclaims against each of the current members of DRS’s Board of Directors relatingto the alleged backdating of ESSI stock options and 

19

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

the ESSIacquisition. The Company believes the claims made against the current DRSdirectors are without merit.

In July 2006, DRSTechnologies, Inc. and one of its subsidiaries, DRS Training & ControlSystems, Inc. each were issued a subpoena by the United States District Courtfor the Northern District of Florida. The subpoenas were issued in connectionwith an investigation conducted by the Antitrust Division of the U.S.Department of Justice involving allegations of possible anticompetitiveactivity in certain international markets. On June 21, 2007, the Company received written notification from theAntitrust Division of the Department of Justice that they had closed thisinvestigation.

**16.**   Related PartyTransactions

The Company currentlyleases a building in Oakland, New Jersey owned by LDR Realty Co., a partnershipthat was wholly owned, in equal amounts, by David E. Gross, DRS’s co-founderand former President and Chief Technical Officer, and the late Leonard Newman,DRS’s co-founder and former Chairman of the Board, Chief Executive Officer andSecretary and the father of Mark S. Newman, DRS’s current Chairman of theBoard, President and Chief Executive Officer. Following Leonard Newman’s deathin November 1998, Mrs. Ruth Newman, the wife of Leonard Newman andthe mother of Mark S. Newman, succeeded to Leonard Newman’s interest in LDRRealty Co. The lease agreement, with a monthly rental of $21.2 thousand,expired on April 30, 2007. The new lease commenced May 1, 2007 withthe new monthly rental commencing on June 1, 2007 of $21.8 thousand forthe first year with annual increases of approximately 3% every June 1. Thelease expires August 31, 2010.

Skadden, Arps, Slate,Meagher & Flom LLP, a law firm to which a member of the Company’sBoard is of counsel, provided legal services to the Company during the threemonths ended June 30, 2007 and 2006. Fees paid to Skadden, Arps, Slate,Meagher & Flom LLP for the three months ended June 30, 2007 and2006 were $0.9 million and $2.4 million, respectively.

In the fourth quarter of2007, the stepson of Mark S. Newman, the Company’s Chairman of the Board, Presidentand Chief Executive Officer, commenced employment with Nemco Brokerage, Inc.,a firm that has a longstanding relationship of providing insurance brokerageservices to the Company and which receives commissions from third-partyinsurers based on policies it places on the Company’s behalf.

**17.**   Guarantor andNon-Guarantor Financial Statements

As presented in Note 8, “Debt”, the Company has $350.0million 65¤8% Senior Notes, $550.0million 67¤8% Senior SubordinatedNotes, $250.0 million 75¤8% Senior Subordinated Notesand $345.0 million 2% Convertible Senior Notes outstanding (collectively,the Notes). The Notes are fully and unconditionally guaranteed, jointly andseverally, by the Company’s wholly-owned domestic subsidiaries (the GuarantorSubsidiaries). The foreign subsidiaries and certain domestic subsidiaries ofDRS (the Non-Guarantor Subsidiaries) do not guarantee the Notes.

Thefollowing condensed consolidating financial information in the CondensedConsolidating Balance Sheets as of June 30, 2007 and March 31, 2007,the Condensed Consolidating Statements of Earnings for the three-month periodsended June 30, 2007 and 2006, and the Condensed Consolidating Statementsof Cash Flows for the three-month periods ended June 30, 2007 and 2006presents:

a)               DRSTechnologies, Inc. (the Parent),

b)              theGuarantor Subsidiaries,

20

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

c)               theNon-Guarantor Subsidiaries, and

d)              DRSTechnologies, Inc. on a consolidated basis

The information includeselimination entries necessary to consolidate the Parent with the Guarantor andNon-Guarantor Subsidiaries.

The Guarantor andNon-Guarantor subsidiaries are presented on a combined basis. The principalelimination entries eliminate investments in subsidiaries and intercompanybalances and transactions. Separate financial information for each of theGuarantor and Non-Guarantor Subsidiaries is not presented because managementbelieves such financial statements would not be meaningful to investors.

21

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

**CondensedConsolidating Balance SheetAs of June 30, 2007(in thousands)**

| ** **                                                        | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                        |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| **Current  assets**                                               |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                         |       | $                   | 31,996     |                        |       | $                                 | —     |             |       |             | $          | 15,117 |   |   |   | $ | (13,000 | ) |   |   | $ | 34,113 |   |   |
| Accounts receivable, net                                          |       | 4                   |       |                        | 474,319    |                              |       |             | 41,459     |             |       |   | — |   |   |   | 515,782 |   |   |
| Inventories, net                                                  |       | —              |       |                        | 316,471    |                              |       |             | 39,272     |             |       |   | (6 | ) |   |   | 355,737 |   |   |
| Prepaid expenses, deferred income taxes and other  current assets |       | 7,530               |       |                        | 295,033    |                              |       |             | 20,230     |             |       |   | (199,026 | ) |   |   | 123,767 |   |   |
| Intercompany receivables                                          |       | 2,077,221           |       |                        | —     |                              |       |             | —     |             |       |   | (2,077,221 | ) |   |   | — |   |   |
| **Total current assets**                                          |       | 2,116,751           |       |                        | 1,085,823  |                              |       |             | 116,078    |             |       |   | (2,289,253 | ) |   |   | 1,029,399 |   |   |
| Property, plant and equipment, net                                |       | 16,883              |       |                        | 206,324    |                              |       |             | 10,712     |             |       |   | — |   |   |   | 233,919 |   |   |
| Acquired intangibles, net                                         |       | —              |       |                        | 188,994    |                              |       |             | 715        |             |       |   | — |   |   |   | 189,709 |   |   |
| Goodwill                                                          |       | 24,115              |       |                        | 2,551,931  |                              |       |             | 45,899     |             |       |   | — |   |   |   | 2,621,945 |   |   |
| Deferred income taxes and other noncurrent assets                 |       | 197,153             |       |                        | 2,752      |                              |       |             | 7,113      |             |       |   | (162,819 | ) |   |   | 44,199 |   |   |
| Investment in subsidiaries                                        |       | 1,143,419           |       |                        | 36,872     |                              |       |             | 34         |             |       |   | (1,180,325 | ) |   |   | — |   |   |
| **Total assets**                                                  |       | $                   | 3,498,321  |                        |       | $                                 | 4,072,696  |             |       |             | $          | 180,551 |   |   |   | $ | (3,632,397 | ) |   |   | $ | 4,119,171 |   |   |
| **Liabilities and Stockholders'  Equity**                         |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| **Current  liabilities**                                          |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current installments of long-term debt                            |       | $                   | 2,750      |                        |       | $                                 | 193        |             |       |             | $          | 2,410 |   |   |   | $ | — |   |   |   | $ | 5,353 |   |   |
| Accounts payable                                                  |       | 3,768               |       |                        | 216,436    |                              |       |             | 17,825     |             |       |   | — |   |   |   | 238,029 |   |   |
| Accrued expenses and other current liabilities                    |       | 231,257             |       |                        | 395,193    |                              |       |             | 39,437     |             |       |   | (197,051 | ) |   |   | 468,836 |   |   |
| Intercompany payables                                             |       | —              |       |                        | 817,069    |                              |       |             | 3,380      |             |       |   | (820,449 | ) |   |   | — |   |   |
| Total current liabilities                                         |       | 237,775             |       |                        | 1,428,891  |                              |       |             | 63,052     |             |       |   | (1,017,500 | ) |   |   | 712,218 |   |   |
| Long-term debt, excluding current installments                    |       | 1,720,982           |       |                        | 3,187      |                              |       |             | 7,933      |             |       |   | — |   |   |   | 1,732,102 |   |   |
| Other liabilities                                                 |       | 25,826              |       |                        | 279,389    |                              |       |             | 20,708     |             |       |   | (164,810 | ) |   |   | 161,113 |   |   |
| **Total liabilities**                                             |       | 1,984,583           |       |                        | 1,711,467  |                              |       |             | 91,693     |             |       |   | (1,182,310 | ) |   |   | 2,605,433 |   |   |
| **Total stockholders' equity**                                    |       | 1,513,738           |       |                        | 2,361,229  |                              |       |             | 88,858     |             |       |   | (2,450,087 | ) |   |   | 1,513,738 |   |   |
| **Total  liabilities and stockholders' equity**                   |       | $                   | 3,498,321  |                        |       | $                                 | 4,072,696  |             |       |             | $          | 180,551 |   |   |   | $ | (3,632,397 | ) |   |   | $ | 4,119,171 |   |   |

 

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

**CondensedConsolidating Balance SheetAs of March 31, 2007(in thousands)**

| ** **                                                        | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                        |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |
| **Current assets**                                                |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |
| Cash and cash equivalents                                         |       | $                   | 92,795     |                        | $          | —                            |       |             | $          | 14,598           |       |   | $ | (11,560 | ) |   | $ | 95,833 |   |   |
| Accounts receivable, net                                          |       | 4                   |       | 504,188                     |       |                              | 31,050     |             |       | —           |       |   | 535,242 |   |   |
| Inventories, net                                                  |       | —              |       | 321,877                     |       |                              | 45,735     |             |       | —           |       |   | 367,612 |   |   |
| Prepaid expenses, deferred income taxes and other  current assets |       | 8,547               |       | 298,737                     |       |                              | 21,120     |             |       | (201,429         | )          |   | 126,975 |   |   |
| Intercompany receivables                                          |       | 2,051,028           |       | —                      |       |                              | 24,115     |             |       | (2,075,143       | )          |   | — |   |   |
| **Total current assets**                                          |       | 2,152,374           |       | 1,124,802                   |       |                              | 136,618    |             |       | (2,288,132       | )          |   | 1,125,662 |   |   |
| Property, plant and equipment, net                                |       | 15,389              |       | 206,332                     |       |                              | 9,485      |             |       | —           |       |   | 231,206 |   |   |
| Acquired  intangibles, net                                        |       | —              |       | 196,488                     |       |                              | 496        |             |       | —           |       |   | 196,984 |   |   |
| Goodwill                                                          |       | 24,115              |       | 2,549,258                   |       |                              | 43,269     |             |       | —           |       |   | 2,616,642 |   |   |
| Deferred income  taxes and other noncurrent assets                |       | 196,737             |       | 2,292                       |       |                              | 7,227      |             |       | (162,040         | )          |   | 44,216 |   |   |
| Investment in  subsidiaries                                       |       | 1,143,419           |       | 36,905                      |       |                              | —     |             |       | (1,180,324       | )          |   | — |   |   |
| **Total assets**                                                  |       | $3,532,034          |       | $                           | 4,116,077  |                              |       | $                | 197,095    |             |       | $ | (3,630,496 | ) |   | $ | 4,214,710 |   |   |
| **Liabilities and Stockholders’ Equity**                     |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |
| **Current liabilities**                                           |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |
| Current installments of long-term  debt                           |       | $                   | 2,750      |                        | $          | 188                               |       |             | $          | 2,223            |       |   | $ | — |   |   | $ | 5,161 |   |   |
| Accounts payable                                                  |       | 11,022              |       | 253,796                     |       |                              | 32,609     |             |       | —           |       |   | 297,427 |   |   |
| Accrued expenses and other current liabilities                    |       | 226,667             |       | 401,351                     |       |                              | 39,370     |             |       | (199,444         | )          |   | 467,944 |   |   |
| Intercompany payables                                             |       | —              |       | 817,303                     |       |                              | 13,347     |             |       | (830,650         | )          |   | — |   |   |
| Total current liabilities                                         |       | 240,439             |       | 1,472,638                   |       |                              | 87,549     |             |       | (1,030,094       | )          |   | 770,532 |   |   |
| Long-term debt, excluding current installments                    |       | 1,771,953           |       | 3,242                       |       |                              | 7,851      |             |       | —           |       |   | 1,783,046 |   |   |
| Other liabilities                                                 |       | 17,192              |       | 285,793                     |       |                              | 19,723     |             |       | (164,026         | )          |   | 158,682 |   |   |
| **Total liabilities**                                             |       | 2,029,584           |       | 1,761,673                   |       |                              | 115,123    |             |       | (1,194,120       | )          |   | 2,712,260 |   |   |
| **Total stockholders’ equity**                               |       | 1,502,450           |       | 2,354,404                   |       |                              | 81,972     |             |       | (2,436,376       | )          |   | 1,502,450 |   |   |
| **Total  liabilities and stockholders’ equity**              |       | $                   | 3,532,034  |                        | $          | 4,116,077                         |       |             | $          | 197,095          |       |   | $ | (3,630,496 | ) |   | $ | 4,214,710 |   |   |

 

23

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

**CondensedConsolidating Statements of EarningsThree Months Ended June 30, 2007(in thousands)**

| ** **                                                          | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                                        |       |                | $          | —                      |       |                              |       | $                | 674,503    |             |       |   | $ | 64,238 |   |   |   | $ | (3,111 | ) |   |   | $ | 735,630 |   |   |
| Cost and expenses                                                   |       |                | 142        |                        |       |                              | 648,767    |             |       |             | 58,494     |   |   |   | (3,107 | ) |   |   | 704,296 |   |   |
| Operating income                                                    |       |                | (142       | )                           |       |                              | 25,736     |             |       |             | 5,744      |   |   |   | (4 | ) |   |   | 31,334 |   |   |
| Interest income                                                     |       |                | 501        |                        |       |                              | (8         | )                |       |             | 66         |   |   |   | — |   |   |   | 559 |   |   |
| Interest and  related expense                                       |       |                | 28,483     |                        |       |                              | 85         |             |       |             | 142        |   |   |   | — |   |   |   | 28,710 |   |   |
| Other income  (expense), net                                        |       |                | 577        |                        |       |                              | 61         |             |       |             | (708       | ) |   |   | — |   |   |   | (70 | ) |   |
| Management fees                                                     |       |                | 781        |                        |       |                              | (744       | )                |       |             | (37        | ) |   |   | — |   |   |   | — |   |   |
| Royalties                                                           |       |                | 412        |                        |       |                              | —     |             |       |             | (412       | ) |   |   | — |   |   |   | — |   |   |
| Intercompany  interest                                              |       |                | 23,376     |                        |       |                              | (23,363    | )                |       |             | (13        | ) |   |   | — |   |   |   | — |   |   |
| Earnings (losses) before non-controlling interest  and income taxes |       |                | (2,978     | )                           |       |                              | 1,597      |             |       |             | 4,498      |   |   |   | (4 | ) |   |   | 3,113 |   |   |
| Non-controlling  interest                                           |       |                | —     |                        |       |                              | (14        | )                |       |             | 507        |   |   |   | — |   |   |   | 493 |   |   |
| Earnings (losses) before income taxes                               |       |                | (2,978     | )                           |       |                              | 1,611      |             |       |             | 3,991      |   |   |   | (4 | ) |   |   | 2,620 |   |   |
| Income taxes                                                        |       |                | (1,102     | )                           |       |                              | 597        |             |       |             | 1,479      |   |   |   | (4 | ) |   |   | 970 |   |   |
| Earnings (losses)  from subsidiary entities                         |       |                | 3,526      |                        |       |                              | —     |             |       |             | —     |   |   |   | (3,526 | ) |   |   | — |   |   |
| **Net  earnings**                                                   |       |                | $          | 1,650                       |       |                              |       | $                | 1,014      |             |       |   | $ | 2,512 |   |   |   | $ | (3,526 | ) |   |   | $ | 1,650 |   |   |

 

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

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

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

 

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

**Condensed ConsolidatingStatements of Cash Flows Three Months Ended June 30, 2007 (in thousands)**

| ** **                                                         | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Net  cash (used in) provided by operating activities**           |       | $                   | (7,363     | )                           |       | $                                 | 15,041     |             |       |             | $          | (7,151 | ) |   |   | $ | — |   |   |   | $ | 527 |   |   |
| **Cash flows from investing  activities**                          | ** ** | ** **          | ** ** |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                               |       | (2,841              | )          |                        | (9,483     | )                                 |       |             | (1,569     | )                |       |   | — |   |   |   | (13,893 | ) |   |
| Other, net                                                         |       | —              |       |                        | 4          |                              |       |             | —     |             |       |   | — |   |   |   | 4 |   |   |
| **Net cash used in investing activities**                          |       | (2,841              | )          |                        | (9,479     | )                                 |       |             | (1,569     | )                |       |   | — |   |   |   | (13,889 | ) |   |
| **Cash flows from financing  activities**                          | ** ** | ** **          | ** ** |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Borrowings on revolving line of  credit                       | ** ** | 90,000              | ** ** |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 90,000 |   |   |
| Repayments on revolving line of credit                             | ** ** | (90,000             | )          |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (90,000 | ) |   |
| Repayments of long-term debt                                       |       | (50,688             | )          |                        | (49        | )                                 |       |             | (580       | )                |       |   | — |   |   |   | (51,317 | ) |   |
| Excess tax benefit realized from share-based payment  arrangements |       | 1,413               |       |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 1,413 |   |   |
| Proceeds from stock option exercises                               |       | 2,664               |       |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 2,664 |   |   |
| Dividends paid                                                     |       | (1,213              | )          |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (1,213 | ) |   |
| Other                                                              |       | —              |       |                        | —     |                              |       |             | 3          |             |       |   | — |   |   |   | 3 |   |   |
| Net (repayments to) borrowings from parent company                 |       | (2,771              | )          |                        | (5,513     | )                                 |       |             | 9,724      |             |       |   | (1,440 | ) |   |   | — |   |   |
| **Net cash provided by (used in) financing activities**            |       | (50,595             | )          |                        | (5,562     | )                                 |       |             | 9,147      |             |       |   | (1,440 | ) |   |   | (48,450 | ) |   |
| **Effect  of exchange rates on cash and cash equivalents**         |       | —              |       |                        | —     |                              |       |             | 92         |             |       |   | — |   |   |   | 92 |   |   |
| **Net  (decrease) increase in cash and cash equivalents**          |       | (60,799             | )          |                        | —     |                              |       |             | 519        |             |       |   | (1,440 | ) |   |   | (61,720 | ) |   |
| **Cash  and cash equivalents, beginning of period**                |       | 92,795              |       |                        | —     |                              |       |             | 14,598     |             |       |   | (11,560 | ) |   |   | 95,833 |   |   |
| **Cash and cash equivalents, end  of period**                      |       | $                   | 31,996     |                        |       | $                                 | —     |             |       |             | $          | 15,117 |   |   |   | $ | (13,000 | ) |   |   | $ | 34,113 |   |   |

 

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

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

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

 

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

**18.**          RecentlyIssued Accounting Pronouncements

In September of 2006, the FASB issued SFAS No. 157,“Fair Value Measurement.”  SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. However, for some entities, the application ofthis Statement will change current practice. This statement is effectivebeginning April 1, 2008 for DRS and is not expected to have a materialimpact on the Company’s consolidated financial statements.

In December 2006, the FASB issued FASB StaffPosition on Emerging Issues Task Force (EITF) No. 00-19-2, *“*Accounting for Registration PaymentArrangements” (FSP EITF 00-19-2). FSP EITF 00-19-2provides that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement should berecognized separately and measured in accordance with SFAS No. 5,“Accounting for Contingencies,” which provides that loss contingencies shouldbe recognized as liabilities if they are probable and reasonably estimable.Subsequent to the adoption of FSP EITF 00-19-2, any changes in thecarrying amount of the contingent liability will result in a gain or loss thatwill be recognized in the consolidated statement of earnings in the period thechanges occur. The guidance in FSP EITF 00-19-2 is effective forthe Company beginning in fiscal 2008 and interim periods within that year. Theadoption of EITF 00-19-2 did not have a material impact on theCompany’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities—Includingan amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159permits entities to choose to measure eligible items at fair value at specifiedelection dates and report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate. SFAS No. 159 is effective for DRS beginning April 1, 2008.Management does not expect the adoption of this statement will have a materialimpact on the Company’s consolidated financial position and results ofoperations.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

We begin the Management’s Discussion and Analysis ofFinancial 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 company overview, followed by summaries ofdefense industry, strategy and other business considerations to provide contextfor understanding our business. This is followed by a discussion of thecritical accounting estimates that we believe are important to understandingthe assumptions and judgments incorporated in our reported financial results,which we discuss under “Results of Operations.” We then provide an analysis ofcash flows and discuss our financial commitments under “Liquidity and CapitalResources” and “Contractual Obligations,” respectively. This MD&A should beread in conjunction with the consolidated financial statements and relatednotes contained herein and in our March 31, 2007 Annual Report on Form 10-K.

**Forward-LookingStatements**

The following discussion and analysis containsforward-looking statements, within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, that are based on management’s beliefs and assumptions,current expectations, estimates and projections. Such statements, includingstatements relating to the Company’s expectations for future financialperformance, are not considered historical facts and are consideredforward-looking statements under the federal securities laws. These statementsmay contain words such as “believes,” “anticipates,” “plans,” “expects,” “intends,”“estimates” or similar expressions. These statements are not guarantees of ourfuture performance and are subject to risks, uncertainties and other importantfactors that could cause our actual performance or achievements to differ materiallyfrom those expressed or implied by these forward-looking statements andinclude, without limitation: the effect of our acquisition strategy on futureoperating results, including our ability to effectively integrate acquiredcompanies into our existing operations; the uncertainty of acceptance of newproducts and successful bidding for new contracts; the effect of technologicalchanges or obsolescence relating to our products and services; and the effectsof government regulation or shifts in government policy, as they may relate toour products and services, and other risks or uncertainties detailed in Item1A, “Risk Factors,” included in our March 31, 2007 Annual Report onForm 10-K. Given these uncertainties, you should not rely onforward-looking statements. The Company undertakes no obligations to update anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

**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 anddefense prime contractors, government intelligence agencies, certaininternational military forces and industrial markets.

On October 2, 2006, we implemented a neworganizational operating structure that realigned our three operating segmentsinto four operating segments. The four operating segments are the Command,Control, Communications, Computers and Intelligence (C4I) Segment, theReconnaissance, Surveillance & Target Acquisition (RSTA) Segment, theSustainment Systems Segment and the Technical Services Segment. All otheroperations, primarily our Corporate Headquarters, are grouped in Other. Allprior-year amounts presented by segment have been reclassified to reflect thenew operating segment structure.

The C4I Segment is comprised of the following businessareas: Command, Control & Communications (C3), which includes naval displaysystems, ship communications systems, radar systems, technical support,electronic manufacturing and system integration services, secure voice and datacommunications, air combat training, and electronic warfare and ship networksystems; Power Systems, which includes naval and industrial power generation,conversion, propulsion, distribution and control systems; IntelligenceTechnologies, which includes signals intelligence, communications intelligence,data collection, processing and dissemination equipment, high-speed digitaldata and imaging systems, unmanned vehicles, and mission and flight recorders;and Tactical Systems, which includes battle management tactical computersystems, peripherals, electronic test and diagnostics and vehicle electronics.

29

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

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

The Technical Services Segment provides engineeringservices, logistics and training services, advanced technology services, assetprotection systems and services, telecommunication systems integration andinformation technology services, power generation and vehicle armor kits formilitary, intelligence, humanitarian, disaster recovery and emergency responderapplications.

**Defense IndustryConsiderations and Business Strategy**

The substantial majority of our revenue is generatedpursuant to written contractual arrangements to design, develop, manufactureand/or modify complex products and to provide related engineering, technicaland other services according to the specifications of the buyers (customers).Our primary “end-use” customer is the DoD. Our other customers includecertain U.S. government intelligence agencies, foreign governments, commercialcustomers and other U.S. federal, state and local government agencies.

The Global War on Terrorism (GWOT), Operation EnduringFreedom in Afghanistan and Operation Iraqi Freedom have altered the globaldefense and security environment and have had, and for the foreseeable futureare likely to continue to have, a significant impact on the markets for defenseand advanced technology systems and products. The DoD continues to focus onboth supporting ongoing operations in Afghanistan and Iraq and transforming theU.S. military to confront future threats. In addition, the Office of HomelandSecurity and other U.S. government agencies continue to focus on enhancing thesecurity of the United States. While the future direction of current operationsremains unsettled, we believe that the 2006 Quadrennial Defense Review, acomprehensive report issued by the DoD every four years on defense strategy,force structure, force modernization plans, infrastructure, budget plans, andother elements of U.S. defense programs and policies (the QDR), will continueto drive strategic thinking and budget priorities in the near term. The QDRrecommended certain changes to force structure, particularly with respect tospecial operations forces, relating to the GWOT and the insurgency in Iraq.However, at the same time, the QDR also largely maintained the DoD’stransformation initiatives. The President’s fiscal year 2008 budget and FutureYears Defense Plan (FYDP), which projects defense costs for the next fiveyears, are consistent with the 2006 QDR’s recommendations.

Over the past several years, DoD budgets haveexperienced increased focus on command, control, communications, computers,intelligence, surveillance and reconnaissance (C4ISR), precision-guidedweapons, unmanned aerial vehicles (UAVs), network-centric communications,Special Operations Forces (SOF) and missile defense. In addition, webelieve the DoD philosophy has focused on a transformation strategy thatbalances modernization and recapitalization (or upgrading existing platforms),while enhancing readiness and joint operations. As a result, we believe defensebudget program allocations continue to favor advanced information technologiesrelated to C4ISR. Furthermore, the DoD’s emphasis on system interoperability,force multipliers and the provision to battlefield commanders of real-time datais increasing the electronic content of nearly all major military procurementand research programs.

Ourstrategy is designed to capitalize on the breadth of our technology andextensive expertise in order to meet the evolving needs of our customers. Weintend to expand our share of existing programs and participate in new programsby leveraging the strong relationships that we have developed with the DoD,several other U.S. government agencies and all of the major U.S. defense primecontractors. We plan to continue to align our research and development,manufacturing and new business efforts to complement our customers’requirements and to provide state-of-the-art products and services. We plan tomaintain a diversified and broad business mix with limited reliance on anysingle program, significant follow-on business and an attractive customerprofile. We also intend to expand our technical services and 

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support offerings to the DoD, thus diversifying ourbusiness beyond the historical investment accounts and into Operations andMaintenance (O&M) funded activities.

A significant component of our strategy has been toenhance our existing product base through selective acquisitions that add newproducts, services and technologies in areas that complement our presentbusiness base. We intend to continue acquiring select publicly and privatelyheld companies, as well as defense businesses of larger companies that (i) exhibitsignificant market position(s) in their business areas, (ii) offerproducts that complement and/or expand our product offerings and (iii) displaygrowing revenues and positive operating income and cash flow prospects.

**Other BusinessConsiderations**

As agovernment contractor, we are subject to U.S. government oversight. Thegovernment may ask about and investigate our business practices and audit ourcompliance with applicable rules and regulations. Depending on the resultsof those audits and investigations, the government could make claims againstus. Under government procurement regulations and practices, an indictment of agovernment contractor could result in that contractor being fined and/orsuspended from being able to bid on, or be awarded, new government contractsfor a period of time. A conviction could result in debarment for a specificperiod of time. Similar government oversight exists in most other countrieswhere we conduct business.

Weare party to various legal actions and claims arising in the ordinary course ofour business. We believe we have adequate legal defenses for each of theactions and claims, and we believe that their ultimate disposition will nothave a material adverse effect on our consolidated financial position, resultsof operations or liquidity. It is possible, however, that the ultimateresolution of those matters could result in a material adverse effect on ourresults of operations and/or cash flows from operating activities for aparticular reporting period. (see Part II. Other Information, Item 1.Legal Proceedings).

Weassume greater financial risk on fixed-price contracts than on cost-typecontracts. Failure to anticipate technical problems, estimate costs accuratelyor control costs during performance of a fixed-price contract will reduce ourprofit or cause a loss. In particular, because of their inherent uncertaintiesand consequent cost overruns, development and development with follow-onproduction-type contracts historically have been less profitable than pureproduction contracts. Although we believe that adequate provision for our costsof performance is reflected in our consolidated financial statements, we cangive no assurance that losses on fixed-price and cost-type contracts will notoccur in the future. We also cannot assure you that current cost-type contractswill not be changed to fixed-price contracts.

Oursales to international customers involve additional risks, such as exposure tocurrency fluctuations and changes in foreign economic and politicalenvironments. International transactions frequently involve increased financialand legal risks arising from stringent contractual terms and conditions, andwidely differing legal systems, licensing requirements, customs and practicesin foreign countries. We expect that international sales, as a percentage ofour overall sales, may increase in future years as a result of, among otherfactors, our growth strategy and continuing changes in the defense industry.

Our future operating results depend on our ability tosuccessfully compete in a highly competitive industry that is characterized byrapid technological change and to find and effectively integrate acquiredcompanies into our existing operations. Continuation of our recent revenuegrowth rate depends primarily on our ability to identify and acquire suitableacquisition targets. We continue to participate successfully in the defenseindustry consolidation through strategic business acquisitions and bystreamlining our existing operations; however, we cannot guarantee that we willhave sufficient funds available to us to continue investing in businessacquisitions.

**CriticalAccounting Policies**

Our consolidated financial statements and accompanyingnotes are prepared in accordance with accounting principles generally acceptedin the United States of America. Preparing consolidated financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses, and disclosures of contingentassets and liabilities. These estimates and 

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assumptions are affectedby the application of our accounting policies. Our significant accountingpolicies are described in Note 1 to the Consolidated Financial Statementsincluded in our March 31, 2007 Annual Report on Form 10-K. Exceptas described below, there were no significant changes in the Company’s criticalaccounting policies during the three months ended June 30, 2007. Criticalaccounting policies are those that require application of management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effects of matters that are inherently uncertain andmay change in subsequent periods. Critical accounting policies for us includerevenue recognition on contracts and contract estimates, valuation of goodwilland acquired intangible assets, pension plan and postretirement benefit planobligations, accounting for income taxes, share-based payments and othermanagement estimates.

We adopted the provisions of Financial AccountingStandards Board (FASB) Interpretation No. 48 (FIN 48) effective April 1, 2007.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes,” and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. We had no cumulativeeffect adjustment related to the adoption. However, certain amounts have beenreclassified in the consolidated balance sheet in order to comply with therequirements of the statement.

**Results of Operations**

Our operating cycle islong-term and involves various types of production contracts and varyingproduction delivery schedules. Accordingly, operating results of a particularyear, or year-to-year comparisons of recorded revenues and earnings, may not beindicative of future operating results. Members of our senior management teamregularly review key performance metrics and the status of operatinginitiatives within our business. These key performance indicators are primarilyrevenues, operating income and bookings. We review this information on amonthly basis through operating segment reviews, which include, among otheroperating issues, discussions related to significant programs, proposedinvestments in new business opportunities or property, plant and equipment, andintegration and cost reduction efforts. The following table presents a summarycomparison of the key performance metrics, other significant financial metricsand significant liquidity metrics monitored by our senior management.

| ** **                               | ** ** | **Three Months Ended  June 30,**       | ** ** | **Percent** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|-------------|------------|
| ** **                               | ** ** | **2007**                                              | ** ** | **2006**    | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **(in thousands, except percentages)** | ** ** |
| **Key performance metrics**              | ** ** | ** **                                            | ** ** | ** **  | ** ** |   | ** ** | ** ** |   |
| Revenues                                 |       | $                                                     | 735,630    |        | $          | 630,265 |   |   | 16.7 | % |   |
| Operating income                         |       | $                                                     | 31,334     |        | $          | 64,985 |   |   | (51.8 | )% |   |
| Bookings                                 |       | $                                                     | 939,528    |        | $          | 782,126 |   |   | 20.1 | % |   |
| **Other  significant financial metrics** | ** ** | ** **                                            | ** ** | ** **  | ** ** |   | ** ** | ** ** |   |
| Interest and related  expenses           |       | $                                                     | 28,710     |        | $          | 29,902 |   |   | (4.0 | )% |   |
| Income taxes                             |       | $                                                     | 970        |        | $          | 13,510 |   |   | (92.8 | )% |   |
| **Significant  liquidity metrics(A)**    | ** ** | ** **                                            | ** ** | ** **  | ** ** |   | ** ** | ** ** |   |
| Free cash flow                           |       | $                                                     | (13,366    | )           | $          | (39,022 | ) |   | 65.7 | % |   |
| EBITDA                                   |       | $                                                     | 49,284     |        | $          | 83,619 |   |   | (41.1 | )% |   |

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(A)       See“Liquidity and Capital Resources” and “Use of Non-GAAP Financial Measures” foradditional discussion and information.

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***Three-Month PeriodEnded June 30, 2007, Compared with the Three-Month Period EndedJune 30, 2006***

**Revenues and operatingincome  **Consolidated revenues and operatingincome for the three-month period ended June 30, 2007 increased $105.4 millionand decreased $33.7 million, respectively, to $735.6 million and $31.3 million,respectively, as compared with the corresponding period in the prior year. Theprimary drivers of higher revenues over the prior year were increased demandfor equipment and services under the Rapid Response (R2) program and greater shipmentsof ground-based target acquisition and missile control subsystems, certainrugged computer systems, vision enhancement equipment for ground-based vehicles,and replacement environmental control systems for missile launch and alertfacilities. Partially offsetting the overall increase in revenues was lowerdemand for add-on commercial vehicle armor kits, continued delays in shipmentson the Thermal Weapons Sights II (TWS II) program, which we expect to resume inthe second quarter of fiscal 2008, and lower shipments of rugged computersystems sold into international markets.

The decline in operatingincome in the first quarter of fiscal 2008, as compared with the correspondingprior year period, was largely due to a charge of $36.8 million on the TWS II program.The operating charge primarily reflects the cost of procuring new materialfollowing recent design modifications, coupled with the write-off of existinginventory that can no longer be utilized on the program. We also realized loweroperating margins at our Sustainment Systems and Technical Services Segments.See Operating Segments discussion below for additional information.

**Bookings  **We generally definebookings as the value of contract awards received from the U.S. government, forwhich the U.S. government has appropriated funds, plus the value of contractawards and orders received from customers other than the U.S. government. Bookingsfor the three-month period ended June 30, 2007 increased $157.4 million,versus the same period in the prior year, to $939.5 million. The primary driversof the increase were strong bookings for ground-based target acquisition andmissile control subsystems from our RSTA segment and vision enhancementequipment for ground-based vehicles from our C4I and RSTA Segments.

**Interest and related expenses  **Interestand related expenses decreased $1.2 million for the three-month period ended June 30,2007, as compared with the same period in the prior year to $28.7 million. Lowerinterest and related expenses were primarily the result of a decrease in ouraverage borrowings outstanding for the three-month period ended June 30, 2007,as compared with the corresponding period in the prior year. We had noborrowings outstanding under our revolving credit facility at June 30,2007 and had approximately $129.0 million outstanding at June 30, 2006. Withthe adoption of FIN 48 on April 1, 2007, we began recording the interestassociated with our income tax contingencies as a component of interestexpense. For the three months ended June 30, 2007 we recorded$0.5 million of interest expense associated with tax contigencies.

**Income taxes  **Theprovision for income taxes for the three months ended June 30, 2007 reflectedan effective income tax rate of approximately 37%, as compared with 38.9% inthe same period last year. Our effective tax rate declined primarily due to thescheduled increase in the Domestic Manufacturing Deduction, reinstatement ofthe Research & Development Credit and, effective April 1, 2007, ourelection to report interest expense associated with the income taxcontingencies as interest expense rather than a component of the income taxprovision, partially offset by a reduction in the Extraterritorial IncomeExclusion. We anticipate that our effective income tax rate for the year endedMarch 31, 2008 will approximate 37%.

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***Operating Segments***

Thefollowing tables set forth by operating segment revenues, operating income and operatingmargin, and the percentage increase or decrease of those items, as comparedwith the prior fiscal year:

| ** **                       | ** ** | **Three Months Ended   June 30,**          | ** ** | **Three Months   Ended Percent   Changes** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                                       | ** ** | **2006**                                                       | ** ** | **2007 vs. 2006** | ** ** |
| ** **                       | ** ** | **(in thousands, except for percentages)** | ** ** |
| **C4I Segment**                  | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |   | ** ** | ** ** |   |
| Revenues                         |       | $                                                              | 298,392    |                                                           | $          | 270,316 |   |   | 10.4 | % |   |
| Operating income                 |       | $                                                              | 31,905     |                                                           | $          | 27,705 |   |   | 15.2 | % |   |
| Operating margin                 |       | 10.7                                                           | %          | 10.2                                                           | %          |   | 4.3 | % |   |
| **RSTA  Segment**                | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |   | ** ** | ** ** |   |
| Revenues                         |       | $                                                              | 153,584    |                                                           | $          | 116,634 |   |   | 31.7 | % |   |
| Operating (loss) income          |       | $                                                              | (21,126    | )                                                              | $          | 12,981 |   |   | (262.7 | )% |   |
| Operating margin                 |       | (13.8                                                          | )%         | 11.1                                                           | %          |   | (224.3 | )% |   |
| **Sustainment  Systems Segment** | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |   | ** ** | ** ** |   |
| Revenues                         |       | $                                                              | 107,978    |                                                           | $          | 86,548 |   |   | 24.8 | % |   |
| Operating income                 |       | $                                                              | 10,223     |                                                           | $          | 11,403 |   |   | (10.3 | )% |   |
| Operating margin                 |       | 9.5                                                            | %          | 13.2                                                           | %          |   | (28.0 | )% |   |
| **Technical  Services Segment**  | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |   | ** ** | ** ** |   |
| Revenues                         |       | $                                                              | 175,676    |                                                           | $          | 156,767 |   |   | 12.1 | % |   |
| Operating income                 |       | $                                                              | 10,492     |                                                           | $          | 13,320 |   |   | (21.2 | )% |   |
| Operating margin                 |       | 6.0                                                            | %          | 8.5                                                            | %          |   | (29.4 | )% |   |
| **Other**                        | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** |   | ** ** | ** ** |   |
| Operating loss                   |       | $                                                              | (160       | )                                                              | $          | (424 | ) |   | 62.3 | % |   |

 

***Three-Month PeriodEnded June 30, 2007, Compared with the Three-Month Period EndedJune 30, 2006***

**C4I Segment**   Revenuesincreased $28.1 million, or 10.4%, to $298.4 million for the three-month periodended June 30, 2007, as compared with the corresponding prior-year period.Operating income increased $4.2 million, or 15.2%, to $31.9 million. Theincrease in revenue was principally attributable to increased shipments ofcertain rugged computer systems and switchgear panels, increased engineeringfor a permanent magnet motor program and increased shipments of certainembedded diagnostics systems. Partially offsetting the overall higher revenuewere lower shipments of rugged computer systems sold in the internationalmarket, less engineering and development for certain power conversion equipment,and lower shipments of chassis modernization kits and surface search radars.

The increase in operatingincome for the three-months ended June 30, 2007, as compared with thecorresponding period in the prior year, was largely due to higher overallrevenues and improved margins at C4I’s Intelligence Technologies and TacticalSystems strategic business units, offset in part by increased lower-margin developmentwork for certain display consoles and remote displays.

**RSTA Segment****  **Revenues increased $37.0 million, or31.7%, to $153.6 million for the three-month period ended June 30, 2007,as compared with the corresponding prior-year period. Operating incomedecreased $34.1 million, or 262.7%, to a loss of $21.1 million. The increase inrevenues was primarily attributable to higher shipments of ground-based targetacquisition and missile control subsystems, vision enhancement equipment forground-based vehicles, and thermal imaging systems and subsystems for along-range surveillance system. Partially offsetting the overall increase inrevenues were lower revenue for the TWS II program due to delayed shipments,which are expected to resume in the second quarter of fiscal 2008, and lowervolume from airborne electro-optical sighting systems.

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The decrease in operatingincome and operating margin for the three-month period ended June 30,2007, as compared with the corresponding period in the prior year, was largelydue to a charge of $36.8 million on the TWS II program. Partiallyoffsetting the lower operating income were higher overall revenues.

The TWS II charge reflectsthe cost of procuring new material following recent design modifications, aswell as the write-off of certain obsolete inventory. As a result of the designchanges, we also transferred $30.0 million of saleable inventory from the TWSII program (transferred inventory) to inventory which is valued at the lower ofcost or market as of June 30, 2007.  Webelieve that the transferred inventory will be sold primarily throughinternational distribution channels. The sale of certain products outside ofthe United States is highly regulated, and any inability to obtain therequisite licenses or comply with applicable government export regulations mayaffect our ability to export the transferred inventory. If we are precludedfrom the sale of the transferred inventory to certain international customersand, or are unable to generate sufficient domestic revenues, the value of thetransferred inventory may be required to be written down or written off in afuture period. Such a write-down or write-off could be material to the resultsof operations in any one period.

**Sustainment SystemsSegment****  **Revenuesincreased $21.4 million, or 24.8%, to $108.0 million for the three-month periodended June 30, 2007, as compared with the corresponding prior-year period.Operating income decreased $1.2 million, or 10.3%, to $10.2 million. Theprimary drivers of the increase in revenues during the period were demand forreplacement environmental control systems for missile launch and alertfacilities, increased shipments of medium tactical quiet generators sets andmanportable target and acquisition radars, and strong demand for a heavyequipment transport refurbishment program for the U.S. Army.

The decreased operatingincome  and operating margin was largelydue to cost growth on certain defense electronics and environmental programs,partially offset by higher overall revenues.

**Technical Services Segment****  **Revenues increased $18.9 million, or12.1%, to $175.7 million for the three-month period ended June 30, 2007,as compared with the corresponding prior-year period. Operating incomedecreased $2.8 million, or 21.2%, to $10.5 million. The primary revenue driversin the segment were demand for equipment and services provided under the RapidResponse (R2) program and higher demand for the defense communicationtransmission system program, offset in part by lower volume from add-oncommercial vehicle armor kits.

The decrease in operatingincome and operating margin was largely due to higher revenue on a lower margindefense communication transmission system program and to cost growth on certainengineering and logistics programs partially, offset by higher overallrevenues.

**Other****  **The operating loss in Other consists of certainnon-allocable general and administrative expenses at DRS corporate.

**Liquidity and Capital Resources**

| ** **                                           | ** ** | **Three Months Ended June 30,**                                                      | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                                                                                  | ** ** |
| Net cash provided by (used  in) operating activities |       |                                                                                                     | $          | 527 |   |   |   | $ | (25,942 | ) |   |
| Net cash used in  investing activities               |       |                                                                                                     | $          | (13,889 | ) |   |   | $ | (20,684 | ) |   |
| Net cash used in provided by financing activities    |       |                                                                                                     | $          | (48,450 | ) |   |   | $ | 89,368 |   |   |

 

**Operating activities****  **During the three months ended June 30,2007, we generated $0.5 million of operating cash flow, $26.5 millionmore than the $25.9 million of operating cash flow used in the same period inthe prior year. Net earnings decreased $19.6 million to $1.7 million. Non-cashadjustments to reconcile net earnings to cash flows from operating activitiesincreased $33.8 million over the corresponding period in the prior fiscalperiod, driven primarily by a $36.8 million non-cash write-off ofinventory related to the TWS II program.

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Changes in assets andliabilities, net of effects from business combinations, used $59.5 millionin cash for the three months ended June 30, 2007. Accounts payable used $59.2 millionof cash during the period. Accounts receivable provided $20.4 million ofcash, as net collections exceeded billings. Inventories used $23.5 million ofcash, excluding a $36.8 million non-cash write-off related to the TWS IIprogram.  TWS II was the primaryreason for the increase in inventory, as we continued to procure new materialfollowing recent design modifications.  The increase in TWS II inventory andcertain other programs was offset, in part, by increased shipments of combatdisplay workstations and certain rugged computer systems. Accrued expenses andother current liabilities used $14.8 million of cash, mainly due to thepayment of income taxes and the liquidation of certain contract-relatedreserves. Customer advances increased and net prepaid expenses and othercurrent assets decreased $14.9 million and $4.2 million,respectively. The decrease in net prepaid expenses and other current assetsresulted primarily from the liquidation of certain vendor advances.

In the second quarter offiscal 2008, we expect to record a non-cash curtailment gain of approximately$11.7 million, as a result of an amendment to one of our defined benefitplans. The amendment discontinued the accrual of future benefits for currentemployees and is effective September 30, 2007.

**Investing activities****  **We paid $13.9 million for capitalimprovements during the three months ended June 30, 2007, as compared with$13.1 million in the corresponding prior-year period. We expect our capitalexpenditures to be in the range of $70.0 million to $90.0 million in fiscal2008, as we continue to upgrade our facilities.

**Financing activities****  **For the three months ended June 30,2007, financing activities used $48.5 million in cash. We prepaid$50 million of our term loan and made $1.3 million in scheduledrepayments under various long-term debt arrangements during the firstthree months of fiscal 2008. We also received $2.7 million from theexercise of stock options and $1.4 million from related excess taxbenefits and paid $1.2 million in cash dividends.

Simultaneously with theclosing 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 anaggregate amount of $675.0 million with a syndicate of lenders (the CreditFacility), replacing our previously existing credit facility. The CreditFacility consists of a $400.0 million senior secured revolving line of creditand a $275.0 million senior secured term loan. We are permitted, on nomore than two occasions, to increase the aggregate amount of the CreditFacility by up to $250.0 million, subject to certain restrictions. Any increasein the aggregate amount of the Credit Facility may be borrowed in the form ofeither additional term loans or available amounts under the revolving line ofcredit. The Credit Facility is guaranteed by substantially all of DRS’sdomestic subsidiaries. In addition, it is collateralized by liens onsubstantially all of the assets of our subsidiary guarantors’ and certain ofDRS’s other subsidiaries’ assets and by a pledge of a portion of certain of ournon-guarantor subsidiaries’ capital stock.

From time to time, weenter into standby letters-of-credit and bank guarantee agreements withfinancial institutions and customers, primarily relating to the guarantee of ourfuture performance on certain contracts to provide products and services and tosecure advance payments we have received from our customers. As of June 30,2007, $49.0 million was contingently payable under letters of credit and bankguarantees. Of this amount, approximately $0.9 million and $0.3 million inletters of credit and bank guarantees, respectively, were issued under aprevious credit agreement and by a bank agreement for our U.K. subsidiary,respectively, and are not considered when determining the availability underour revolving line of credit. At June 30, 2007, we had $352.2 million ofavailability under our revolving line of credit.

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

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covenantsunder the DRS Canada loan, as we are under the Credit Facility, and DRS Canadais subject to other non-financial covenants that are similar to those describedfor the Credit Facility.

On October 30, 2003,we issued $350.0 million aggregate principal amount of 67¤8%senior subordinated notes, due November 1, 2013 (the October 2003Notes). The net proceeds of the October 2003 Notes, together with aportion of our available cash and initial borrowings under the then existingcredit facility, were used to fund the acquisition of Integrated DefenseTechnologies, Inc. (IDT), repay certain of DRS’s and IDT’s outstandingindebtedness, and pay related fees and expenses. The October 2003 Noteswere issued under an indenture with The Bank of New York. Subject to a numberof exceptions, the indenture restricts our ability and the ability of oursubsidiaries to incur more debt, pay dividends and make distributions, makecertain investments, repurchase stock, create liens, enter into transactionswith affiliates, enter into sale lease-back transactions, merge or consolidate,and transfer or sell assets. The October 2003 Notes are unconditionallyguaranteed, jointly and severally, by DRS’s current and future wholly-owneddomestic subsidiaries. The foreign subsidiaries and certain domestic subsidiariesof 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% seniorsubordinated notes, due November 2013 (the December 2004 Notes). The December 2004Notes were offered as additional debt securities under our indenture with theBank of New York with identical terms and the same guarantors as the October 2003Notes.

On January 31, 2006,in connection with the acquisition of ESSI, we issued $900.0 million ofnew debt securities, including $350.0 million aggregate principal amountof 65¤8%senior notes due 2016, $250.0 million aggregate principal amount of 75¤8%senior subordinated notes due 2018 (collectively called the January 2006Notes) and $300.0 million aggregate principal amount of 2.0% convertiblesenior notes due 2026 (Convertible Notes). On February 8, 2006, we sold anadditional $45.0 million of Convertible Notes pursuant to an overallotmentoption exercised by the initial purchasers of the Convertible Notes. The netproceeds of the January 2006 Notes and the Convertible Notes, togetherwith a portion of our available cash and initial borrowings under the CreditFacility, were used to fund the ESSI acquisition, repay certain of ESSI’soutstanding indebtedness, and pay related fees and expenses.

In January 2006, inconnection with the offering of our 2% Convertible Notes due 2026 (ConvertibleNotes), we entered into a registration rights agreement relating to our CommonStock issuable upon conversion of the Convertible Notes. Pursuant to the registrationrights agreement, if we do not file a prospectus supplement or shelfregistration statement relating to the resale of the Common Stock withincertain specified time periods or maintain the effectiveness of a registrationstatement related to the resale of the Common Stock, subject to certainexceptions, we could be subject to additional interest. We believe thelikelihood of occurrence of such event is remote and, as such, we have notrecorded a liability at June 30, 2007. In the event that it becomesprobable that we would have to pay additional interest under the registration rightsagreement, we estimate the maximum potential amount as of June 30, 2007 tobe approximately $3.5 million per year.

The January 2006Notes are unsecured. The 75¤8% seniorsubordinated notes rank behind the Credit Facility, the 65¤8% seniornotes, the Convertible Notes and trade payables, and is pari passu with the 67¤8% seniorsubordinated notes. The January 2006 Notes were issued under indentureswith The Bank of New York. Subject to a number of exceptions, theindentures restrict our ability and the ability of our subsidiaries to incurmore debt, pay dividends and make distributions, make certain investments,repurchase stock, create liens, enter into transactions with affiliates, enterinto sale lease-back transactions, merge or consolidate, and transfer or sellassets. The January 2006 Notes are unconditionally guaranteed, jointly andseverally, by certain of our existing and future domestic subsidiaries.

Certain of our debtarrangements contain customary representations, warranties and defaultprovisions, as well as restrictions that, among other things, limit the amountof debt that the we may have outstanding. As of June 30, 2007, we were incompliance with all such financial covenants.

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Accrued interest expenseat June 30, 2007 and March 31, 2007 was approximately$28.3 million and $25.6 million, respectively.

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

**Equity**   OnMay 10, 2007, the Board of Directors declared a $0.03 per common sharecash dividend, payable on June 29, 2007 to stockholders of record as of June 15,2007. Cash dividends paid for the three-month period ended June 30,2007 were $1.2 million. On August 9, 2007, the Board of Directors declareda $0.03 per common share cash dividend, payable on September 28, 2007 tostockholders of record as of September 14, 2007.

**Free cash flow**   Freecash flow represents net cash provided by operating activities less capitalexpenditures. Free cash flow for the three-month period ended June 30,2007 was a deficit of $13.4 million, or $25.6 million more than thedeficit of $39.0 million in the corresponding period in the prior year. See“Use of Non-GAAP Financial Measures” below for additional discussion andinformation.

**EBITDA**   Netearnings before net interest and related expenses (primarily the amortizationand write-off of debt premium and issuance costs), income taxes, depreciationand amortization (EBITDA) for the three-month period ended June 30, 2007was $49.3 million, or $34.3 million less than the $83.6 millionin the corresponding period in the prior year. See “Use of Non-GAAP FinancialMeasures” below for additional discussion and information.

**Off-Balance SheetFinancing Arrangements****  **We have $345 million of 2% senior convertible noteswith a conversion price of $59.70 per share. Upon conversion, we would satisfyour obligation to convert the notes by delivering to the holders cash for theprincipal amount of the notes and stock for the value of the note in excess of$59.70 per share, as defined in the convertible debt agreement. We believe thenumber of shares to be issued upon conversion does not pose a reasonablelikelihood of potential significant dilution over the next twelve months. Forfurther information on our Convertible Notes, see Note 8 to ourConsolidated Financial Statements.

In addition, there are 2.5million stock options outstanding to purchase DRS common stock at a weightedaverage exercise price of $34.76 per share and 0.6 million of non-vested stockawards outstanding at June 30, 2007 that represent additional potentialdilution.

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

**Contractual Obligations**   Ourcontractual obligations and commitments principally include obligationsassociated with our outstanding indebtedness, future minimum operating leaseobligations, acquisition earn-outs and purchase obligations. Except asdiscussed below, the disclosures relating to our contractual obligations in ourAnnual Report on Form 10-K for the year ended March 31, 2007have not materially changed since we filed that report. Based upon theexpiration of statutes of limitations and/or the conclusion of tax examinationsin several jurisdictions, we believe it is reasonably possible that the totalamount of previously unrecognized tax benefits may decrease by up to$22.5 million within twelve months of June 30, 2007. We are unable toreasonably determine any amounts for years subsequent to June 30, 

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2008. SeeNote 3, Income Taxes in the notes to the unaudited condensed consolidatedfinancial statements contained in this report.

**Backlog**   Fundedbacklog represents products or services that our customers have committed bycontract to purchase from us. Due to the general nature of defense procurementand contracting, the operating cycle for our military business typically hasbeen long term. Military backlog currently consists of various production andengineering development contracts with varying delivery schedules and projecttimetables. Our backlog also includes 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 reportedrevenues and related backlog positions, may not be indicative of future resultsBacklog at June 30, 2007 was $3.26 billion, as compared with $3.04 billionat March 31, 2007. We booked $939.5 million in new orders for thethree-month period ended June 30, 2007.

**Internal Research andDevelopment**   In addition to customer-fundedresearch and development, we also engage in internal research and development.These expenditures reflect our continued investment in new technology anddiversification of our products. Expenditures for internal research anddevelopment for the three-month periods ended June 30, 2007 and 2006 were$11.5 million and $11.0 million, respectively.

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

| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **June 30,**                | ** ** |
| ** **                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)**          | ** ** |
| Net earnings                                                                  |       | $                                | 1,650      |   | $ | 21,258 |   |
| Income taxes                                                                  |       | 970                              |       | 13,510 |   |
| Interest income                                                               |       | (559                             | )          | (176 | ) |
| Interest and related expenses                                                 |       | 28,710                           |       | 29,902 |   |
| Depreciation and amortization                                                 |       | 18,513                           |       | 19,125 |   |
| EBITDA(A)                                                                     |       | 49,284                           |       | 83,619 |   |
| Income taxes                                                                  |       | (970                             | )          | (13,510 | ) |
| Interest income                                                               |       | 559                              |       | 176 |   |
| Interest and related expenses                                                 |       | (28,710                          | )          | (29,902 | ) |
| Deferred income taxes                                                         |       | (926                             | )          | 460 |   |
| Changes in assets and liabilities, net of effects  from business combinations |       | (59,522                          | )          | (71,798 | ) |
| Other, net                                                                    |       | 40,812                           |       | 5,013 |   |
| Net cash provided by (used in) operating activities                           |       | 527                              |       | (25,942 | ) |
| Capital expenditures                                                          |       | (13,893                          | )          | (13,080 | ) |
| Free cash flow(B)                                                             |       | $                                | (13,366    | ) | $ | (39,022 | ) |

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(A)       Wedefine EBITDA as net earnings before net interest and related expenses(principally amortization and write-off of debt premium and issuance costs),income taxes, depreciation and amortization. The table above presents thecomponents of EBITDA and a reconciliation of EBITDA to net cash provided byoperating activities. EBITDA is presented as additional information because webelieve it to be a useful indicator of our debt capacity and our ability toservice our debt. EBITDA is not a substitute for operating income, net earningsor cash flows from operating activities, as determined in accordance with GAAP.EBITDA is not a complete net cash flow measure because EBITDA is a 

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measure ofliquidity that does not reflect cash flows from discontinued operations, anddoes not include reductions for cash payments for an entity’s obligation toservice debt, fund working capital, business acquisitions and capitalexpenditures, and pay income taxes. Rather, EBITDA is one potential indicatorof an entity’s ability to fund these cash requirements. EBITDA also is not acomplete measure of an entity’s profitability because it does not include costsand expenses for depreciation and amortization, interest and related expensesand income taxes, and it also does not include the results of operations ofdiscontinued operations. EBITDA, as we defined it, may differ from similarlynamed measures used by other entities and, consequently, could be misleadingunless all entities calculate and define EBITDA in the same manner.

(B)        Freecash flow is defined as net cash provided by (used in) operating activitiesless capital expenditures. We disclose free cash flow because we believe thatit is useful in evaluating our financial performance and measuring cash flowsgenerated that are available for investing and financing activities. We believethat the most directly comparable GAAP financial measure to free cash flow isnet cash (used in) provided by operating activities. Free cash flow representscash generated after paying for interest on borrowings, income taxes, capitalexpenditures and changes in working capital, but before repaying outstandingdebt, investing cash to acquire businesses and making other strategicinvestments, and it does not reflect cash flows of discontinued operations.Thus, key assumptions underlying free cash flow are that we will be able torefinance our existing debt when it matures with new debt and that we will beable to finance any new acquisitions we make by raising new debt or equitycapital. We also use free cash flow as a performance measure and a component ofour management incentive compensation program. Free cash flow, as we define it,may differ from similarly named measures used by other entities and,consequently, could be misleading unless all entities calculate and define freecash flow in the same manner.

**OTHER MATTERS**

***New AccountingPronouncements***

New accountingpronouncements have been issued by the Financial Accounting Standards Boardwhich are not effective until after June 30, 2007. For further discussionof new accounting standards, see Note 18 to our Consolidated FinancialStatements in Item 1.

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

**Market Risk**

See Part II, Item 7A,“Qualitative and Quantitative Disclosures About Market Risk,” of the Company’sAnnual Report on Form 10-K for the fiscal year ended March 31,2007 for a discussion of the Company’s exposure to market risks.

**Item4.**                        Controlsand Procedures

**(a) DisclosureControls and Procedures.****  **The Company’s management, with the participation of theCompany’s Chief Executive Officer and Chief Financial Officer, has evaluatedthe effectiveness of the Company’s disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the Exchange Act)) as of theend of the period covered by this report. Based on such evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of such period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Exchange Act.

**(b) InternalControl Over Financial Reporting.****  **There have not been any changes inthe Company’s internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the three months ended June 30, 2007 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

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**PART II.**   OTHERINFORMATION

**Item1.**                        LegalProceedings

Various legal actions,claims, assessments and other contingencies including certain matters describedbelow, are pending against us and certain of our subsidiaries. These mattersare subject to many uncertainties, and it is possible that some of thesematters ultimately could be decided, resolved or settled adversely. We haverecorded accruals totaling $3.0 million at both June 30, 2007 and March 31,2007 for losses related to those matters that we consider to be probable andthat can be reasonably estimated (certain legal and environmental matters arediscussed in detail below). Based on our ongoing analysis of various factual,legal and equitable considerations, we also have recorded as of June 30,2007 an accrual of $12.6 million ($11.8 million of which was originally chargedagainst goodwill) to reflect the probable income tax impact of informationuncovered in our ongoing internal investigation of historical ESSI stock optionpractices. Although, at June 30, 2007, the precise amount of liabilitythat may result from those matters for which we have recorded accruals is notascertainable, we believe that any amounts exceeding our recorded accrualsshould not materially affect our financial condition or liquidity. It ispossible, however, that the ultimate resolution of those matters could resultin a material adverse effect on our results of operations and/or cash flowsfrom operating activities for a particular reporting period.

Some environmental laws,such as the Comprehensive Environmental Response, Compensation and LiabilityAct of 1980 (also known as CERCLA or the Superfund law) and similar statestatutes, can impose liability for the entire cost of the clean up ofcontaminated sites upon any of the current or former site owners or operators(or upon parties who send waste to these sites), regardless of the lawfulnessof the original activities that led to the contamination. In July 2000,prior to its acquisition by Integrated Defense Technologies Inc. (IDT), andprior to our acquisition of IDT, Tech-Sym Corporation received a Section 104(e) Requestfor Information from the National Park Service (NPS), pursuant to CERCLA,regarding a site known as the Orphan Mine site in the Grand Canyon NationalPark, Arizona, which is the subject of an NPS investigation regarding thepresence of residual radioactive materials and contamination. A corporation ofwhich Tech-Sym is an alleged successor operated this uranium mine from 1956 to1967. In 1962, the land was sold to the U.S. government and the allegedpredecessor of Tech Sym was given a 25-year mining lease. In 1967, themining rights were transferred to a third party by a trustee in bankruptcy, andwe believe that the mine was operated by such third party until approximately1969. We understand that there are other companies in the chain of title to themining rights subsequent to Tech-Sym’s alleged predecessor, and, accordingly,that there are other potentially responsible parties (PRPs) for theenvironmental conditions at the site, including the U.S. government as owner,operator and arranger at the site. During its period of ownership, IDT retaineda technical consultant in connection with this matter, who conducted a limited,preliminary review of site conditions and communicated with the NPS regardingactions that may be required at the site by all of the PRPs. On February 6,2005, the NPS sent us an Engineering Evaluation/Cost Analysis Work Plan (theNPS EE/CA) under CERCLA (the CERCLA Letter) with regards to Operable Unit 1 ofthe Orphan Mine site. In our view, the NPS EE/CA included additional clean upnot covered by CERCLA. The CERCLA Letter also requested (a) payment of$0.5 million for costs incurred by the NPS related to the Orphan Mine, and (b) a‘‘good faith offer’’ to conduct the response activity outlined by the NPS andto reimburse the NPS for future costs. The NPS advised that a similar letterhad been sent to another PRP. We initiated discussions with the other PRP andwith NPS, and engaged a technical consultant to evaluate the existingdocumentation and the site in depth. As a result, on September 29, 2005the technical consultant submitted to the NPS, on behalf of us and the otherPRP, an alternative Engineering Evaluation/Cost Analysis Work Plan (thealternative EE/CA) with regard to Operable Units 1 and 2 of the Orphan Minesite.

In December 2005 and August 2006,the PRPs and NPS met to discuss the technical merits of the alternative EE/CAand ways to resolve certain differences between the alternative EE/CA and theNPS EE/CA provided with the CERCLA Letter. Since late 2005, the parties alsohave discussed certain 

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legalissues relating to the process for implementing an alternative EE/CA andentering into a settlement agreement that would memorialize the parties’intent. The potential liability associated with implementation of an EE/CA canchange substantially due to such factors as additional information on thenature or extent of contamination, methods of remediation that might be recommendedor required, changes in the apportionment of costs among the responsibleparties and other actions by governmental agencies or private parties.

In connection with ouracquisition of ESSI in January 2006, we have been made aware of certainlegal actions, claims, assessments and other contingencies, including thosedescribed below.

In December 2004,ESSI was notified by the Enforcement Division of the SEC of the issuance of aformal order directing a private investigation and was notified that the SEC hadissued subpoenas to various individuals associated with ESSI to produce certaindocuments. The SEC staff also requested that ESSI produce certain documents inconnection with the investigation. The subpoenas related to trading in ESSIstock around ESSI’s earnings releases in 2003 and to the adequacy of certaindisclosures made by ESSI regarding related-party transactions in 2002 and 2003involving insurance policies placed by ESSI through an insurance brokeragefirm 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 UnitedStates District Court for the Eastern District of Missouri, Eastern Division,against a former director, officer and consultant of ESSI, alleging that he hadviolated the federal securities laws by “tipping” his financial advisor andclose friend by sharing material, nonpublic information regarding ESSI’sfinancial condition shortly before certain 2003 earnings announcements.

On or about September 23,2005, the SEC staff advised ESSI’s counsel that it had issued a subpoenadirected to ESSI and expanded its investigation to include ESSI’s disclosure ofa November 2004 stop work order relating to ESSI’s Deployable PowerGeneration and Distribution Systems (DPGDS) program for the U.S. Air Force andrelating to trading in ESSI stock by certain individuals associated with ESSI.In connection with the foregoing SEC investigation, ESSI and certain of itsdirectors and officers have provided information and/or testimony to the SEC.

In January 2006, ESSIwas informed that the Office of the U.S. Attorney for the Eastern District ofMissouri was initiating an investigation into ESSI’s disclosure of the DPGDSstop-work order and into trading in ESSI stock by ESSI insiders, which precededsuch disclosure. The U.S. Attorney’s office advised ESSI that although itconsidered ESSI to be a subject of its investigation, ESSI was not a target. Inconnection with this investigation, the U.S. Attorney’s office issued ESSI asubpoena requesting specified information, which ESSI has furnished.

In May 2006, we wereadvised that the Enforcement Division of the SEC and the U.S. Attorney’s officeeach had expanded its investigation to include possible “backdating” of thetiming of option grants at ESSI prior to the time ESSI was acquired by us. As apart of its investigation, the SEC issued subpoenas to certain former officersand employees of ESSI to provide testimony and produce certain documents.

In February 2007, theSEC filed civil injunctive actions in the United States District Court for theEastern District of Missouri, Eastern Division, alleging that ESSI’s formerChief Financial Officer and former controller, in which each was alleged tohave participated in a backdating scheme. Also in February 2007, the SECreported ESSI’s former controller had settled its action against him byconsenting to disgorgement, financial penalties, an officer and director barand 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 forthe Eastern District of Missouri, Eastern Division, alleging that ESSI’s formerChairman of the Board and Chief Executive Officer and his son (who was also amember of ESSI’s Board of Directors and Compensation Committee) eachparticipated in a backdating scheme.

In March 2007,ESSI’s former controller pleaded guilty to a one-count information brought bythe office of the United States Attorney for the Eastern District of Missouri,charging him with making false 

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statements to the government. In connection with hisplea, this former ESSI executive admitted that a number of documents filed byESSI with the SEC contained the materially false statement that the optionprice of shares subject to the ESSI stock option plan was the closing price ofthe stock on the date the options were awarded.

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

Although ESSI continues to be a subject of the U.S.Attorney’s office’s investigation, the U.S. Attorney’s office has advisedus that ESSI is not a target. Because the events being investigated occurredprior to the time of our acquisition of ESSI, the U.S. Attorney’s office has furtheradvised us that it considers DRS to be a witness, not a subject or target ofits investigation.

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

ESSI’s federal tax returnsfor the tax periods ended October 31, 2004, October 31, 2005 and January 31,2006 remain the subject of an Internal Revenue Service audit. In connectionwith this audit, ESSI expects that it will be required to amend previouslyfiled Federal and state tax returns to reflect the disallowance of certaincompensation deductions taken during the periods under review. We have recordedan accrual against goodwill to reflect the anticipated disallowance.

On August 7, 2007, a shareholder derivative complaintwas filed in the United States District Court for the Eastern District ofMissouri against ESSI’s former Chairman of the Board and Chief ExecutiveOfficer, his son (who was also a member of ESSI’s Board of Directors andCompensation Committee), ESSI’s former Chief Financial Officer and ESSI’sformer Controller relating to the alleged backdating of stock options prior toESSI’s acquisition by DRS.  The complaintalso contains claims against each of the current members of DRS’s Board ofDirectors relating to the alleged backdating of ESSI stock options and the ESSIacquisition.  We believe the claims madeagainst the current DRS directors are without merit.

In July 2006,DRS Technologies, Inc. and one of our subsidiaries,DRS Training & Control Systems, Inc. each were issued asubpoena by the United States District Court for the Northern District ofFlorida. The subpoenas were issued in connection with an investigationconducted by the Antitrust Division of the U.S. Department of Justice involvingallegations of possible anticompetitive activity in certain internationalmarkets. On June 21, 2007, we received written notification from the AntitrustDivision of the Department of Justice that they had closed this investigation.

**Item1.A.**             Risk Factors

In addition to theinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended March 31, 2007, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing ourCompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

**Items 2, 3, 4 and 5 arenot applicable and have been omitted.**

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**Item 6.**                        Exhibits

(a)          Exhibits
| Exhibit No. | ** ** | ** **                                                                                                | ** ** | **Description** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-----------------|
| 31.1*            |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 31.2*            |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 32.1*            |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
| 32.2*            |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002  |
|                  |            |                                                                                                           |            |                 |  |  |

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*                    Filed herewith

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                            | DRS TECHNOLOGIES,  INC.                             |
|----------------------------|-----------------------------------------------------|
| Date: August 9,  2007 | /s/ RICHARD A. SCHNEIDER                            |
|                       | Richard A. Schneider                                |
| * *                   | *Executive Vice President, Chief Financial Officer* |

 

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