**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For thefiscal year ended March 31, 2007**

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

**For thetransition periodfrom                  to**

**Commission File Number 1-8533**

----

****

**DRS Technologies, Inc.**

(Exact name of registrant as specified in charter)

| **Delaware**                                                     |   | **13-2632319**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
| **5 Sylvan  Way, Parsippany, New Jersey**                        |   | **07054**                                |
| (Address of principal  executive offices)                        |   | (Zip Code)                               |

 

**(973) 898-1500**

(Telephone No.)

**Securities registered pursuant to Section 12(b) ofthe Act:**

|                               |   | **Name of  Each Exchange**        |
|-------------------------------|--------|-----------------------------------|
| **Title of  Each Class**      |   | **on which  Registered**          |
| Common Stock, $.01 par  value |   | New York Stock Exchange  Euronext |

 

**Securities registeredpursuant to Section 12(g) of the Act: None**

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes x  No o

Indicate bycheck mark if the registrant in not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large Accelerated filer x  Accelerated filer o  Non-accelerated filer o

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

The market value of shares of common stock held bynon-affiliates as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was $1,741.4 million. The number of sharesof common stock outstanding as of May 22, 2007 was 40,717,657.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the definitive proxystatement for the Annual Meeting of Stockholders to be held August 9, 2007have been incorporated herein by reference into Part III of this Form 10-K.

 

----

**Table of Contents**
|               | ** ** | ** **                                                                                                               | ** ** | **Page** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |
| Item 1.       |       | Business                                                                                                                 |       |     | 1          |   |   |
| Item  1A.     |       | Risk Factors                                                                                                             |       |     | 11         |   |   |
| Item 1B.      |       | Unresolved Staff Comments                                                                                                |       |     | 21         |   |   |
| Item 2.       |       | Properties                                                                                                               |       |     | 21         |   |   |
| Item  3.      |       | Legal  Proceedings                                                                                                       |       |     | 24         |   |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                      |       |     | 26         |   |   |
| PART II  |       |
| Item 5.       |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities  |       |     | 27         |   |   |
| Item 6.       |       | Selected Financial Data                                                                                                  |       |     | 29         |   |   |
| Item 7.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations     |       |     | 31         |   |   |
| Item 7A.      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                              |       |     | 59         |   |   |
| Item 8.       |       | Financial Statements and Supplementary Data                                                                              |       |     | 61         |   |   |
| Item 9.       |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                |       |     | 128        |   |   |
| Item 9A.      |       | Controls and Procedures                                                                                                  |       |     | 128        |   |   |
| Item  9B.     |       | Other  Information                                                                                                       |       |     | 130        |   |   |
| PART III |       |
| Item 10.      |       | Directors, Executive Officers and Corporate Governance                                                                   |       |     | 131        |   |   |
| Item 11.      |       | Executive Compensation                                                                                                   |       |     | 131        |   |   |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                          |       |     | 131        |   |   |
| Item 13.      |       | Certain Relationships and Related Transactions and  Director Independence                                                |       |     | 131        |   |   |
| Item 14.      |       | Principal Accountant Fees and Services                                                                                   |       |     | 131        |   |   |
| PART IV  |       |
| Item 15.      |       | Exhibits, Financial Statement Schedules                                                                                  |       |     | 132        |   |   |
| Signatures    |       |                                                                                                                     | 133        |     |       |

 

i

----

**Item 1.**                    Business

References in this Annual Reporton Form 10-K to “DRS Technologies,” “DRS,” “the Company,” “we,” “our”and “us” refer to DRS Technologies, Inc., its wholly-ownedsubsidiaries and its controlling interests.

**General**

DRS is a leading supplier ofdefense electronic products, systems and military support services. We providehigh-technology products andservices to all branches of the U.S. military, major aerospace and defenseprime contractors, government intelligence agencies, international militaryforces and industrial markets. We focus on several key areas ofimportance to the U.S. Department of Defense (DoD), such as command andcontrol, intelligence, surveillance, reconnaissance, power management,battlefield digitization, advanced communications and networks, militaryvehicle diagnostics, troop sustainment and technical support. Incorporated in1968, we have served the defense industry for over 38 years. We are a leadingprovider of thermal imaging devices, combat display workstations, electronicsensor systems, power systems, rugged computer systems, air combat trainingsystems, mission recorders, deployable flight incident recorders, environmentaland telecommunication systems, aircraft loaders, military trailers andshelters, and integrated logistics support services. Our products are deployedon a wide range of high-profile military platforms,such as DDG-51 Aegis destroyers, M1A2Abrams Main Battle Tanks, M2A3 Bradley Fighting Vehicles, OH-58D Kiowa Warrior helicopters, AH-64 Apache helicopters, F/A-18E/FSuper Hornet and F-16 Fighting Falcon jetfighters, F-15 Eagle tactical fighters, C-17 Globemaster II and C-130Hercules cargo aircraft, Ohio, Los Angeles and Virginia classsubmarines, and on several other platforms for military and non-military applications. We have contracts that supportfuture military platforms, such as the DDG-1000 Zumwalt destroyer, CVN-78 next-generation aircraft carrier and Future CombatSystem. We provide sustainment products that support military forces,such as environmental control systems, power generators, water and fueldistribution systems, chemical/biological decontamination systems and heavyequipment transport systems. We also provide support services to the military,including security and asset protection system services, telecommunication andinformation technology services, training and logistics support services forall branches of the U.S. armed forces and certain foreign militaries, homelandsecurity forces, and selected government and intelligence agencies.

**Available Information**

The address of our principalexecutive office is 5 Sylvan Way, Parsippany, New Jersey 07054, and ourtelephone number is (973) 898-1500. Our web address is *www.drs.com.* We are subject to the informationalrequirements of the U.S. Securities Exchange Act of 1934, as amended (ExchangeAct) and, in accordance therewith, file reports and other information with theSecurities and Exchange Commission (SEC). Such reports and other informationcan be inspected and copied at the Public Reference Room of the SEC,located at 100 F Street N.E., Washington D.C. 20549. Copies of such materialcan be obtained from the Public Reference Room of the SEC at prescribedrates. You may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. Such material also may beaccessed electronically by means of the SEC’s home page on the Internet atwww.sec.gov or at www.drs.com.

We provide free of charge on ourweb site, under the heading “Investor Info,” our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act, as soon as reasonably practicable after we filesuch material with, or furnish it to, the SEC.

The corporate governanceinformation on our web site includes our Code of Ethics and Code of BusinessConduct for all employees of DRS, including senior financial personnel and ourBoard of Directors. In addition, amendments to and waivers granted to ourdirectors and executive 

1

----

officers underour Code of Ethics, if any, will be posted in this area of our web site. Thesecorporate governance documents can be accessed by visiting our web site andclicking on the “Corporate Info” link followed by the “Ethics Program” link.You can request a copy of our Code of Ethics at no cost by contacting InvestorRelations at (973) 898-1500.

**Company Organization**

On October 2, 2006, weimplemented a new organizational operating structure that realigned our threepreviously existing operating segments—the Command, Control, Communications,Computers & Intelligence Group, the Surveillance &Reconnaissance Group and the Sustainment Systems & Services Group—intofour operating segments. The four operating segments are the Command, Control,Communications, Computers & 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 structure.

On January 31, 2006, weacquired all of the outstanding stock of Engineered Support Systems, Inc.(ESSI) forming substantially all of our Sustainment Systems and TechnicalServices segments. The total transaction value was approximately$1.93 billion.

On March 10, 2005, wecompleted the sale of two of our operating units, DRS Weather Systems, Inc.(DRS Weather) and DRS Broadcast Technology, Inc. (DRS Broadcast). These operatingunits were acquired in connection with our fiscal 2004 acquisition ofIntegrated Defense Technologies, Inc. (IDT). The results of operations ofDRS Weather and DRS Broadcast for the fiscal year ended March 31, 2005 areincluded in the Consolidated Statements of Earnings as “Earnings fromDiscontinued Operations,” which includes a gain on their sale. The cash flowsof the discontinued operations also are presented separately in theConsolidated Statements of Cash Flows for the fiscal year ended March 31,2005. A summary of the operating results of the discontinued operations for theyear ended March 31, 2005 is more fully described under Note 1.A. inour Consolidated Financial Statements for the fiscal year ended March 31,2007.

On November 4, 2003 we acquiredall of the outstanding stock of Integrated Defense Technologies, Inc.(IDT).  The business units acquired inconnection with the transaction are included within the C4I Segment. The totaltransaction value was approximately $380.3 million.

Financial information on ourreportable business segments is presented in Note 14 of our ConsolidatedFinancial Statements, which are included in this Form 10-K. See Item8. “Financial Statements and Supplementary Data.” Additional financial data andcommentary on the results of operations for the operating segments are includedin Management’s Discussion and Analysis of Financial Condition and Results ofOperations, which also is included in this Form 10-K. See Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

**C4I Segment**

The C4I Segment is comprised ofthe following business areas: Command, Control & Communications (C3),which includes naval display systems, ship communications systems, radarsystems, technical support, electronic manufacturing and system integrationservices, secure voice and data communications, air combat training andelectronic warfare and ship network systems; Power Systems, which includesnaval and industrial power generation, conversion, propulsion, distribution andcontrol systems; Intelligence Technologies, which includes signalsintelligence, communications intelligence, data collection, processing anddissemination equipment, high-speed digital data and imaging systems, unmannedvehicles and mission and flight recorders; and Tactical Systems, which includesbattle management tactical computer systems, peripherals, electronic test, and diagnosticsand vehicle electronics.

2

----

**RSTA Segment**

The RSTA Segment develops andproduces electro-optical sighting, targeting and weapon sensor systems, andimage intensification (I2 ) night vision, combat identification andlaser aimer/illuminator products, and provides electronic manufacturingservices.

**Sustainment Systems Segment**

The Sustainment Systems Segmentdesigns, engineers and manufactures integrated military electronics and othermilitary support equipment, primarily for the DoD, as well as related heattransfer and air handling equipment, and power generation and distributionequipment for domestic commercial and industrial users. The segment providesthese systems primarily for military, humanitarian, disaster recovery andemergency responder applications.

**Technical Services Segment**

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

**Other.****  **”Other” includes the activities of DRSCorporate Headquarters and certain of our non-operating subsidiaries.

**Industry Background**

The U.S. military has worked tomeet the changing threats that have evolved since the mid-1980s with afocus on lighter, faster and more intelligent weapons and an emphasis onintelligence, surveillance and reconnaissance. This change in focus followedthe end of the Cold War and the subsequent reduction in defense spending, whichled to consolidation in the defense industry. Today, we believe the industry isdominated by five domestic prime contractors and a few large European defensecompanies with an increasing presence in the U.S. markets. These large primecontractors have shifted their business strategies to focus on platforms andsystems integration and, consequently, subcontract the development of manysystems and subsystems.

Events of the last six years,including the Global War on Terrorism, Operation Enduring Freedom and OperationIraqi Freedom, have altered the defense and homeland security environment ofthe United States. We believe these events will likely continue to have asignificant impact on the markets for defense and advanced technology productsand services for the next several years. The DoD continues to focus on bothsupporting ongoing operations and transforming our military to confront futurethreats. We believe that the current military needs and political and globalenvironments will continue to create new opportunities for mid-tier defensecompanies like DRS to develop strategic relationships directly with thegovernment and with prime contractors. Through these relationships, we believewe can continue to provide essential systems and services, which are capable ofmeeting the military’s evolving requirements.

**Business Strategy**

Our goal is tocontinually improve our position as a leading supplier of defense electronicsproducts and systems. Our strategies to achieve our objectives include:

·                    ***Leveraging Incumbent Relationships.******  ***Weintend to leverage our relationships with government and industry decision-makersby continuing to perform well on our existing contracts. Our experience hasshown that strong performance on existing contracts enhances our ability toobtain additional business with our existing customer base. To accomplish this,we intend to continue to position ourselves as a “best value” provider 

3

----

for our customers. “Bestvalue” is a DoD contracting theme, which focuses supplier selection on avariety of criteria, including a supplier’s past performance, instead ofevaluating suppliers solely on lowest price.

·                    ***Developing and Expanding ExistingTechnologies.******  ***Througha combination of customer-funded research and development and our owninternal research and development efforts, we intend to continue to focus ontechnology development. Customer-funded development contracts enable usto work with our customers to develop new technologies and design andmanufacture new systems and components, while decreasing our financial risk.

·                    ***Leveraging Our Ability to Provide a Combination ofServices with Products to Better Serve Customers.******  ***Weintend to leverage our ability to supplement our product portfolio withlife-cycle engineering, product repair and logistics support services toprovide a complete, integrated solution to our customers to better serve them.

·                    ***Continuing to React Quickly to theChanging Defense Environment.***   In addition to being wellpositioned for conventional warfare roles, we intend to continue to adaptexisting technologies and products, such as thermal imaging, rugged computerand communication systems, to address evolving military requirements, includingrapid deployment and containment of non-conventional threats, such asterrorism, and asymmetric warfare.

·                    ***Capitalizing on the DoD’s Emphasison Transformation and Modernization.***   The DoD has emphasized its goal to transform theU.S. military into a nimble, light and network-centric force. We believe ourexpertise in electro-optics, power management, training and test, signalsintelligence, rugged computers, advanced communications, network systems,sustainment systems and support services fits well into the DoD’s current andfuture technological focus. We also intend to continue to supply upgrades forforce modernization of the current force through back-fit and forward-fitinitiatives.

·                    ***Pursuing Strategic Acquisitions.*** Weplan to continue our participation in the ongoing consolidation of theaerospace and defense industry. Through selective acquisitions, we aim tobroaden our existing product base, build on our existing customer relationshipsand enhance our ability to enter new markets.

·                    **Maintaining a DiversifiedBusiness Mix.**  We have an attractive customer profile anda diverse and broad business mix, with limited reliance on any single program.We also have a balance of cost-reimbursable type, time-and-material type andfixed-price type contracts with significant follow-on business opportunities.

·                    **Developing and RetainingHighly Talented Management and Technical Employees.**  Thesuccess of our businesses, including our ability to retain existing businessand to successfully compete for new business is primarily dependent on themanagement, marketing and business development, contracting, engineering andtechnical skills and knowledge of our employees. We intend to retain anddevelop our existing employees and recruit and hire new qualified and skilledemployees through training, competitive compensation, and organizational andstaff development, as well as effective recruiting.

**Customers**

We sell a significant portion ofour products to agencies of the U.S. government, primarily the DoD, tointernational government agencies and to prime contractors and theirsubcontractors. Approximately 90%, 87% and 84% of total consolidated revenuesfor fiscal 2007, 2006 and 2005, respectively, were derived directly or indirectlyfrom defense contracts for end use by the U.S. government and its agencies.Export sales accounted for approximately 8%, 10% and 14% of total consolidatedrevenues in the fiscal years ended March 31, 2007, 2006 and 2005,respectively.

4

----

**Backlog**

“Backlog”refers to the aggregate revenues on a specified date remaining to be earnedunder contracts held by us, including U.S. government contracts, to the extentthe funded amounts under such a contract have been appropriated by Congress andallotted to the contract by the procuring government agency. Our backlog doesnot include the value of unexercised options that may be exercised in thefuture on multi-year contracts, nor does it include the value of additionalpurchase orders that we may receive under indefinite quantity-type contracts orbasic ordering agreements. Backlog includes all firm orders forcommercial/industrial products. Fluctuations in backlog generally relate to thetiming and amount of defense contract awards. The following table sets forthour backlog by major customer-type at the dates indicated.

| ** **                      | ** ** | **March 31,**      | ** **    |
|---------------------------------|------------|-------------------------|---------------|
| ** **                      | ** ** | **2007**                | ** **    | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** **    |
| U.S. government                 |       | **$**                   | **2,789,388** |   | $ | 2,101,446 |   | $ | 1,096,275 |   |
| Foreign governments             |       | **213,397**             |          | 240,976 |   | 171,880 |   |
|                            |       | **3,002,785**           |          | 2,342,422 |   | 1,268,155 |   |
| Commercial/Industrial  products |       | **35,079**              |          | 53,640 |   | 46,623 |   |
|                            |       | **$**                   | **3,037,864** |   | $ | 2,396,062 |   | $ | 1,314,778 |   |

 

We expect to record as revenuesapproximately 72% of our funded backlog as of March 31, 2007 during fiscal2008. However, there can be no assurance that our entire funded backlog willbecome revenues in future periods.

**Research and Development**

We conduct research anddevelopment to maintain and advance our technology base. Our research anddevelopment efforts are funded by both internal sources and customer-fundeddevelopment contracts.

We recorded revenues for customer-fundedresearch and development of approximately $110.4 million,$106.1 million and $93.1 million for fiscal 2007, 2006 and 2005,respectively. Such customer-funded activities are primarily the result ofcontracts directly or indirectly with the U.S. government. We also invest ininternal research and development. Expenditures for internal research anddevelopment amounted to approximately $50.9 million, $47.6 millionand $38.9 million for fiscal 2007, 2006 and 2005, respectively.

**Contracts**

A significant portion of ourrevenue is derived from long-term programs and from programs for which we arethe incumbent supplier or have been the sole or dual supplier for many years. Alarge percentage of our revenue is derived from programs that are in theproduction phase.

We have a diverse business mixwith limited dependence on any single contract. The Rapid Response contractualinstrument represented approximately 11% of our revenue for the year ended March 31,2007. No single contractual instrument represented more than 10% of revenuesfor the years ended March 31, 2006 and 2005.

Thepercentages of revenues during fiscal 2007, 2006 and 2005 attributable to ourcontracts by contract type were as follows:

| ** **                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2007**           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Fixed-price                  |       |               | 76         | % |   |   | 83 | % |   |   | 81 | % |   |
| Cost-type/time and materials |       |               | 24         | % |   |   | 17 | % |   |   | 19 | % |   |

 

5

----

Our contracts are normally forproduction, services or development. Production contracts are typically thefixed-price type, development contracts are typically the cost-type, andservice contracts are typically time and material. We believe continued predominanceof fixed-price contracts is reflective of the significant portion ofproduction contracts in our U.S. government contract portfolio. Fixed-pricecontracts may provide for a fixed price or they may be fixed-price-incentive-feecontracts. Under the fixed-price contracts, we agree to perform for anagreed-upon price. Accordingly, we derive benefits from cost savings, but bearthe risk of cost overruns. Under the fixed-price-incentive-fee contracts,if actual costs incurred in the performance of the contracts are less thanestimated costs for the contracts, the savings are apportioned between thecustomer and us. If actual costs under such a contract exceed estimated costs,however, excess costs are apportioned between the customer and us, up to a ceiling.We bear all costs that exceed the ceiling, if any.

Cost-plus-type contracts typicallyprovide for reimbursement of allowable costs incurred plus a fee (profit). Undercost-plus-fixed-fee contracts, we are reimbursed for allowable costs andreceive a fixed fee, which is negotiated and specified in the contract. Suchfees have statutory limits. Unlike fixed-price contracts in which we arecommitted to deliver without regard to cost, cost-plus contracts normallyobligate us to use our best efforts to accomplish the scope of work within aspecified time and a stated contract dollar limitation. In addition, U.S.government procurement regulations mandate lower profits for cost-typecontracts because of our reduced risk. Under cost-plus-incentive-fee contracts,an additional incentive fee awarded may be based on cost or performance. Whenthe incentive is based on cost, the contract specifies that we are reimbursedfor allowable incurred costs plus a fee adjusted by a formula based on theratio of total allowable costs to target cost. Target cost, target fee, minimumand maximum fee and adjustment formulae are agreed upon when the contract isnegotiated. In the case of performance-based incentives, we arereimbursed for allowable incurred costs plus an incentive, contingent uponmeeting or surpassing stated performance targets. The contract provides forincreases in the fee to the extent that such targets are surpassed and fordecreases to the extent that such targets are not met. In some instances,cost-plus-incentive-fee contracts also may include a combination of both costand performance incentives. Under cost-plus-fixed-fee contracts, we arereimbursed for costs and receive a fixed fee, which is negotiated and specifiedin the contract. Such fees have statutory limits. Time-and-material-typecontracts provide for reimbursement of labor hours expended at a contractualfixed labor rate per hour, plus the actual costs of material and other directnon-labor costs. The fixed labor rates on time-and-material-type contractsinclude amounts for the cost of direct labor, indirect contract costs andprofit.

We negotiate for and generallyreceive progress payments from our customers of between 75-90% ofallowable costs incurred on the previously described contracts. Included in ourreported revenues are certain amounts, which we have not billed to customers.These amounts consist of costs and related profits, if any, in excess ofprogress payments for contracts on which revenues are recognized on apercentage-of-completion basis.

Under generally acceptedaccounting principles in the United States (GAAP), contract costs, includingapplicable general and administrative expenses on certain government contracts,are charged to work-in-progress inventory and are written off to costs andexpenses as revenues are recognized. The Federal Acquisition Regulations (FAR),incorporated by reference in U.S. government contracts, provide that internalresearch and development costs are allowable general and administrative expenses.To the extent that general and administrative expenses are included ininventory, research and development costs also are included. Unallowable costs,pursuant to the FAR, are excluded from costs accumulated on U.S. governmentcontracts.

Our defense contracts andsubcontracts are subject to audit, various profit and cost controls, andstandard provisions for termination at the convenience of the customer. TheDefense Contract Audit Agency (DCAA) performs these audits on behalf of theU.S. government. The 

6

----

DCAA has theright to perform audits on our incurred costs on all contracts on a yearlybasis. Approval of an incurred cost submission can take from one to three yearsfrom the date of the submission of the contract cost.

Under the Truth in NegotiationsAct of 1962 (Negotiations Act), the U.S. government has the right for threeyears after final payment on certain negotiated contracts, subcontracts andmodifications, to determine whether DRS furnished the U.S. government withcomplete, accurate and current cost or pricing data as defined by theNegotiations Act. If DRS fails to satisfy this requirement, the U.S. governmenthas the right to adjust a contract or subcontract price by the amount of anyoverstatement, as defined by the Negotiations Act.

U.S. government contracts are, bytheir terms, subject to termination by the U.S. government for eitherconvenience or default by the contractor. Fixed-price contracts providefor payment upon termination for items delivered to and accepted by the U.S.government and, if the termination is for convenience, for payment of faircompensation of work performed plus the costs of settling and paying claims byterminated subcontractors, other settlement expenses and a reasonable profit onthe costs incurred. Cost-plus contracts provide that, upon termination, thecontractor is entitled to reimbursement of its allowable costs and, if thetermination is for convenience, a total fee proportionate to the percentage ofthe work completed under the contract. If a contract termination is fordefault, however, the contractor is paid an amount agreed upon for completedand partially completed products and services accepted by the U.S. government.In these circumstances, the U.S. government is not liable for excess costsincurred by us in procuring undelivered items from another source.

In addition to the right of theU.S. government to terminate, U.S. government contracts are conditioned uponthe continuing availability of Congressional appropriations. Congress usuallyappropriates funds for a given program on a September 30 fiscal yearbasis, even though contract performance may take many years. Consequently, atthe outset of a major program, the contract usually is funded partially, andadditional monies normally are committed to the contract by the procuringagency only as appropriations are made by Congress for future fiscal years.

**Competition**

Our productsare sold in markets in which several of our competitors are substantiallylarger than we are, devote substantially greater resources to research anddevelopment, and, generally, have greater financial resources. We face avariety of competitors, including BAE Systems PLC, Raytheon Company and L-3Communications Holdings, Inc., among others. Certain competitors are alsoour customers and suppliers. The extent of competition for any single projectgenerally varies according to the complexity of the product and the dollarvalue of the anticipated award. We believe that we compete on the basis of:

·       Theperformance, adaptability and price of our products;

·       Reputationfor prompt and responsive contract performance;

·       Accumulatedtechnical knowledge and expertise;

·       Breadthof our product lines; and

·       Thecapabilities of our facilities, equipment and personnel to undertake theprograms for which we compete.

Our future success will depend inlarge part upon our ability to improve existing product lines and to developnew products and technologies in the same or related fields.

In the military sector, we competewith large and mid-tier defense contractors on the basis of productperformance, cost, overall value, delivery schedule and reputation. Since anumber of consolidations and mergers of defense suppliers has occurred, thenumber of participants in the 

7

----

defense industryhas decreased in recent years. We expect this consolidation trend to continue.As the industry consolidates, the large defense contractors are narrowing theirsupplier base, awarding increasing portions of projects to strategic mid- and lower-tiersuppliers, and, in the process, are becoming oriented more toward systemsintegration and assembly. We believe that we have benefited from this defenseindustry trend.

In addition to the militarysector, we compete with a large number of suppliers to commercial andindustrial customers on the basis of both performance and price.

**Patents and Licenses**

We have patents on certain of ourcommercial and data recording products, semiconductor devices, ruggedcomputer-related items, and electro-optical and infrared focal planearray products, in addition to other products. We and our subsidiaries havecertain registered trademarks, none of which are considered material to ourcurrent operations. We believe our patent position and intellectual propertyportfolio in the aggregate are valuable to our operations. We do not believethat the conduct of our business as a whole is materially dependent on anysingle patent, trademark or copyright.

When we work on U.S. governmentcontracts, the U.S. government may have contractual rights to data for our “core”technologies, source codes and other developments associated with suchgovernment contracts. Records of our data rights are maintained in order toclaim these rights as our proprietary technology, but it may not always bepossible to delineate our proprietary developments from those developed underU.S. government contracts. The protection of our data from use by other U.S.government contractors is subject to negotiation from time to time between usand the U.S. government. The extent of the government’s data rights in anyparticular product generally depends upon whether the product was developedunder a government contract and the degree of government funding for thedevelopment of such product.

**Manufacturing and Supplies**

Our manufacturing processes formost of our products include the assembly of purchased components and testingof products at various stages in the assembly process. Purchased componentsinclude integrated circuits, circuit boards, sheet metal fabricated intocabinets, resistors, capacitors, semiconductors, silicon wafers and otherconductive materials, and insulated wire and cables. In addition, many of ourproducts use machine castings and housings, motors, and recording andreproducing media.

Many of the purchased componentsare fabricated to our designs and specifications. The manufacturing process forcertain of our optic products includes the grinding, polishing and coating ofvarious optical materials and the machining of metal components.

Although materials and purchasedcomponents generally are available from a number of different suppliers,several suppliers are our sole source of certain components. If a suppliershould cease to deliver such components, other sources probably would be available;however, added cost and manufacturing delays might result. We have notexperienced significant production delays attributable to supply shortages, butoccasionally we experience quality and other related problems with respect tocertain components, such as semiconductors and connectors. In addition, withrespect to our optical products, certain materials, such as germanium, zincsulfide and cobalt, may not always be readily available.

**International Operations and Export Sales**

We currently sell several of ourproducts and services internationally, such as to Canada, the United Kingdom,Israel, Spain and Australia, as well as other countries. International sales ofour 

8

----

U.S. productsand services are subject to export licenses granted on a case-by-case basis bythe U.S. Department of State and Department of Commerce. In addition, the U.S.government prohibits or restricts the export of some of our products. Ourinternational contracts generally are payable in U.S. dollars. Export salesaccounted for approximately 8%, 10% and 14% of total revenues in the fiscalyears ended March 31, 2007, 2006 and 2005, respectively.

There are two principalcontracting methods used by DRS for export sales: Direct Foreign Sales (DFS)and the U.S. government’s Foreign Military Sales (FMS). In a DFS transaction,the contractor sells directly to the foreign country and assumes all the risksin the transaction. In an FMS transaction, the sale is funded by, contracted byand made to the U.S. government, which then sells the product to the foreigncountry.

We currently operate in Canadathrough our C4I Segment and Sustainment Systems Segment and in the UnitedKingdom through our C4I Segment.

Our international operationsinvolve additional risks for us, such as exposure to currency fluctuations,future investment obligations and changes in international economic andpolitical environments. In addition, international transactions frequentlyinvolve increased financial and legal risks arising from stringent contractualterms and conditions and widely different legal systems, customs and practicesin foreign countries.

**Seasonality**

No material portion of ourbusiness is considered to be seasonal. Various factors can affect thedistribution of our revenue between accounting periods, including the timing ofgovernment awards, the availability of government funding, product deliveriesand customer acceptance.

**Environmental Matters**

Our operations include the use,generation and disposal of hazardous materials. We are subject to various U.S.federal, state, local and foreign laws and regulations relating to theprotection of the environment, including those governing the discharge ofpollutants into the air and water, the management and disposal of hazardoussubstances and wastes, the clean up of contaminated sites and the maintenanceof a safe workplace. Except as described under Item 3, Legal Proceedings, webelieve that we have been and are in material compliance with environmentallaws and regulations and that we have no liabilities under environmentalrequirements that would be expected to have a material adverse effect on ourbusiness, results of operations, financial condition or liquidity. It ispossible, however, that the ultimate resolution of the matters discussed in Item 3,“Legal Proceedings,” could result in a material adverse effect on the Company’sresults of operations for a particular reporting period.

9

----

**EXECUTIVEOFFICERS AND CERTAIN OTHER OFFICERS OF THE REGISTRANT**

**Executive Officers**

The names of our executive officers, their positionsand offices with us, and their ages are set forth below:
| Name                             | ** ** | **Age** | ** ** | **Position**                                                  |
|--------------------------------------------|------------|---------|------------|---------------------------------------------------------------|
| Mark S. Newman                             |       | 57      |       | Chairman of the Board, President and Chief  Executive Officer |
| Vice Admiral Michael L. Bowman, USN (Ret.) |       | 63      |       | Executive Vice President, Washington Operations               |
| Nina Laserson Dunn                         |       | 60      |       | Executive Vice President, General Counsel and Secretary       |
| Robert F. Mehmel                           |       | 44      |       | Executive Vice President, Chief Operating Officer             |
| Richard A. Schneider                       |       | 54      |       | Executive Vice President, Chief Financial Officer             |

*** ***

***Mark S. Newman*** is Chairman of the Board,President and Chief Executive Officer. He joined us in 1973, four years afterour founding, and became President and CEO in 1994, after serving many years asour Chief Financial Officer. He was named a director in 1988, and in 1995, waselected Chairman of the Board. He is active in many important professionalorganizations. He is a member of the Board of Governors of the AerospaceIndustries Association and is a director on the boards of Business Executivesfor National Security and the New Jersey Technology Council. He also serves asa member of the Navy League of the United States, the National DefenseIndustrial Association, the Association of the U.S. Army and the Surface NavyAssociation, among other professional affiliations. He is a past chairman ofthe American Electronics Association. He is also a director of CongoleumCorporation and EFJ, Inc.

***Vice Admiral Michael L. Bowman,USN (Ret.)***has been our Executive Vice President, Washington Operations,since June 2005. He served as our Senior Vice President, WashingtonOperations, from the time he joined us in March 2001 until June 2005.Prior to that, he served for 35 years with the U.S. Navy, including anumber of assignments in the Washington, D.C. area involving Congressionalrelations in support of Navy and Marine Corps defense issues. Initially headingthe Senate Liaison Office of the Secretary of the Navy, he later was appointedChief of Legislative Affairs, responsible for the coordination of allDepartment of the Navy issues in the U.S. House of Representatives and theSenate.

***Nina Laserson Dunn***joined us as Executive VicePresident, General Counsel and Secretary in July 1997. Prior to joiningDRS, Ms. Dunn was a director in the corporate law department of HannochWeisman, a Professional Corporation, where she served as our outside legalcounsel. Ms. Dunn is admitted to practice law in New York and New Jerseyand is a member of the American, New York State and New Jersey State BarAssociations.

***Robert F. Mehmel******hasbeen our Executive Vice President, Chief Operating Officer, since May 2006. Hej***oinedus as Executive Vice President, Business Operations and Strategy, in January 2001.Before joining DRS, he was Director, Corporate Development, at Jabil Circuit, Inc.Prior to that, he was Vice President, Planning, at L-3 CommunicationsCorporation from its inception in April 1997 until June 2000.Earlier, Mr. Mehmel held various positions in divisional and corporatefinancial management with Lockheed Martin Corporation, Loral Corporation andLear Siegler, Inc. He is also a member of the board of directors of UnitedIndustrial Corporation.

***Richard A. Schneider***joined us in 1999 as our ExecutiveVice President, Chief Financial Officer. He also served as our Treasurer until November2002. He held similar positions at NAI Technologies, Inc. (NAI) andwas a member of its board of directors prior to its acquisition by us in February 1999.Mr. Schneider has over 30 years of experience in corporate financialmanagement.

10

----

**Employees**

As of March 31, 2007, we hadapproximately 9,700 employees, approximately 9,300 of whom are located in theUnited States. There is a continuing demand for qualified technical personnel,and we believe that our future growth and success will depend upon our abilityto attract, train and retain such personnel. Approximately 90 of our employeesat DRS Power & Control Technologies, Inc. are represented by a laborunion and are covered by a collective bargaining agreement through March 2009.Two DRS Power & Control Technologies employees are represented by aseparate labor union and are covered by a collective bargaining agreementthrough September 2009. Approximately 145 employees at DRS Test &Energy Management, Inc. are represented by a union and are covered by acollective bargaining agreement that expires in May 2009. Approximately275 of our employees at DRS Sustainment Systems, Inc. are covered under acollective bargaining agreement that expires in March 2009. We believethat our relations with our employees generally are good.

**Item 1A.**           RiskFactors

Our financial position, results ofoperations and cash flows are subject to various risks, many of which are notexclusively within our control that may cause actual performance to differmaterially from historical or projected future performance. Information in thisForm 10-K should be considered carefully by investors in light ofthe risk factors described below.

**Our revenuesdepend on our ability to maintain our level of government business. The loss of our contracts withdomestic and non-U.S. government agencies could adversely affect our revenues.**

We derive the substantial majorityof our revenues from contracts or subcontracts with domestic and non-U.S.government agencies. A significant reduction in the purchase of our products bythese agencies would have a material adverse effect our business. For thefiscal years ended March 31, 2007, 2006 and 2005, approximately 90%, 87%and 84%, respectively, of our revenues were derived directly or indirectly fromdefense-industry contracts with the U.S. government and its agencies. Inaddition, for the fiscal years ended March 31, 2007, 2006 and 2005,approximately 7%, 9% and 12% of our revenues were derived directly orindirectly from sales to foreign governments, respectively. Therefore, thedevelopment of our business in the future will depend upon the continuedwillingness of the U.S. government and its prime contractors to commitsubstantial resources to defense programs and, in particular, upon thecontinued purchase of our products, and other products which incorporate ourproducts, by the U.S. government. In particular, the current funding demands onthe U.S. government, combined with a potential reduction of forces in Iraq, maylead to lower levels of government defense spending.

The risk that governmentalpurchases of our products may decline stems from the nature of our businesswith the U.S. government, in which the U.S. government may:

·       terminatecontracts at its convenience;

·       terminate,reduce or modify contracts or subcontracts if its requirements or budgetaryconstraints change;

·       cancelmulti-year contracts and related orders if funds become unavailable; and

·       shiftits spending priorities.

In addition,as a defense business, we are subject to the following risks in connection withgovernment contracts:

·       thefrequent need to bid on programs prior to completing the necessary design,which may result in unforeseen technological difficulties and/or cost overruns;

11

----

·       thedifficulty in forecasting long-term costs and schedules and the potentialobsolescence of products related to long-term, fixed-price contracts;

·       therisk of fluctuations or a decline in government expenditures due to any changesin the DoD budget or appropriation of funds;

·       whenwe act as a subcontractor, the failure or inability of the prime contractor toperform its prime contract may result in an inability to obtain payment of feesand contract costs;

·       restrictionor potential prohibition on the export of products based on licensingrequirements; and

·       thefact that government contract wins can be contested by other contractors.

**Our revenues will be adversely affected if we fail toreceive renewal or follow-on contracts.**

Renewal and follow-on contractsare important because our contracts are for fixed terms. These terms vary fromshorter than one year to over five years, particularly for contracts withoptions. The typical term of our contracts with the U.S. government is betweenone and three years. The loss of revenues from our possible failure to obtainrenewal or follow-on contracts may be significant because our U.S. governmentcontracts account for a substantial portion of our revenues.

**Our operating results may fluctuate.**

Our results ofoperations fluctuate as a result of a number of factors, many of which arebeyond our control. These factors include:

·       thetermination of a key government contract;

·       thesize and timing of new contract awards to replace completed or expiredcontracts; and

·       changesin governmental policies, budgetary priorities and allocation and timing offunding.

**We may not besuccessful in implementing our growth strategy if we are unable to identify, acquire and financesuitable acquisition targets.**

Finding and consummatingacquisitions is an important component of our growth strategy. Our continuedability to grow by acquisition is dependent upon the availability ofacquisition candidates at reasonable prices and our ability to obtainadditional acquisition financing on acceptable terms. Larger companies withsignificantly greater resources compete against us for acquisitions. We arelikely to use significant amounts of cash, issue additional equity securities and/orincur additional debt in connection with future acquisitions, each of whichcould have a material adverse effect on our business and/or a dilutive effecton returns to existing stockholders. Based on our current level of indebtednessand other factors, which may or may not be within our control, there can be noassurance that we will be able to procure the necessary funds to effectuate ouracquisition strategy on commercially reasonable terms, or at all. In addition,as our revenue growth has been attributable historically in large part to oursuccessful acquisition strategy, failure to identify, consummate or integratesuitable acquisitions could lead to a reduced rate of revenue growth, operatingincome and net earnings in the future.

**Integrationof the operations of businesses we may acquire is complex, time consuming and expensive and may adversely affect the results ofour operations after the acquisition.**

The anticipated benefits of ouracquisitions will depend in part on whether we can integrate our operations inan efficient, timely and effective manner. Integrating our acquisitions is a 

12

----

complex, time consumingand expensive process. We may not successfully accomplish a given integration andmay not realize the benefits contemplated by combining the operations of bothcompanies. The diversion of our attention to integration efforts and anydifficulty encountered in combining operations could cause the interruption of,or a loss of momentum in, activities of our business.

**If we areunable to successfully integrate companies we acquire into our operations on a timelybasis, our profitability could be negatively affected.**

We generally expect ouracquisitions to result in certain business opportunities and growth prospects.We, however, may never realize these expected business opportunities and growthprospects. We may experience increased competition that limits our ability toexpand our business. Our assumptions underlying estimates of expected costsavings may be inaccurate, or general industry and business conditions maydeteriorate. Acquisitions involve numerous risks, including, but not limitedto:

·       difficultiesin assimilating and integrating the operations, technologies and productsacquired;

·       thediversion of our management’s attention from other business concerns;

·       ourcurrent operating and financial systems and controls, which may be inadequateto manage our growth;

·       ourpossible inability to maintain or renew contracts of businesses we acquire;

·       ourentering of markets in which we have limited or no prior experience; and

·       theloss of key employees.

If these factors limit our abilityto integrate the operations of our acquisitions successfully or on a timelybasis, our expectations of future results of operations may not be met. Inaddition, our growth and operating strategies for businesses we acquire may bedifferent from the strategies that such business currently is pursuing. If ourstrategies are not the proper strategies for a company we acquire, it couldhave a material adverse effect on our business, financial condition and resultsof operations. Further, there can be no assurance that we will be able tomaintain or enhance the profitability of any acquired business or consolidatethe operations of any acquired business to achieve cost savings.

In addition, there may beliabilities that we fail or are unable to discover in the course of performingdue diligence investigations on each company or business we have alreadyacquired or may acquire in the future. Such liabilities could include thosearising from employee benefits contribution obligations of a prior owner ornon-compliance with or liability pursuant to applicable federal, state or localenvironmental requirements by prior owners for which we, as a successor owner,may be responsible. In addition, there may be additional costs relating toacquisitions, including, but not limited to, possible purchase priceadjustments. We cannot assure you that rights to indemnification by sellers ofassets to us, even if obtained, will be enforceable, collectible or sufficientin amount, scope or duration to fully offset the possible liabilitiesassociated with the business or property acquired. Any such liabilities, individuallyor in the aggregate, could have a material adverse effect on our business.

**Failure toanticipate technical problems, estimate costs accurately or control costsduring performance of afixed-price contract may reduce our profit or cause a loss.**

We provide our services primarilythrough two types of contracts: fixed-price and cost-type contracts.Approximately 76%, 83% and 81% of our total revenues for the fiscal years endedMarch 31, 2007, 2006 and 2005, respectively, were derived from fixed-pricecontracts, which require us to perform services under a contract at astipulated price. We derived approximately 

13

----

24%, 17% and 19%of our revenues for the fiscal years ended March 31, 2007, 2006 and 2005,respectively, from cost-type, including time-and-material-type, contracts bywhich we are reimbursed for incurred costs and receive a fee that, depending onthe contract, is either dependent on cost savings and/or performance or is afixed fee, which is negotiated but limited by statutes.

We assume greater financial riskon fixed-price contracts than on cost-type contracts. Failure toanticipate technical problems, estimate costs accurately or control costsduring performance of a fixed-price contract will reduce our profit orcause a loss. In particular, because of their inherent uncertainties andconsequent cost overruns, development contracts have historically been lessprofitable than production contracts. Although we believe that adequateprovision for our costs of performance is reflected in our consolidatedfinancial statements, we can give no assurance that this provision is adequateor that losses on fixed-price and cost-type contracts will not occur inthe future. We also cannot assure you that current cost-type contracts will notbe changed to fixed-price contracts.

**We may experience production delays if suppliers failto deliver materials to us.**

Our manufacturing process forcertain products consists primarily of the assembly of purchased components andtesting of the product at various stages in the assembly process.

Although we can obtain materialsand purchase components for these products from a number of differentsuppliers, several suppliers are our sole source of certain components. If asupplier should cease to deliver such components, we believe that we wouldprobably find other sources; however, this could result in added cost andmanufacturing delays. We have not experienced significant production delaysattributable to supply shortages, but we occasionally experience procurementproblems with respect to certain components, such as semiconductors andconnectors. In addition, with respect to our electro-optical products, certainmaterials, such as germanium, zinc sulfide and cobalt, may not always bereadily available.

**Our backlogis subject to reduction and cancellation, which could negatively impact our revenues and results ofoperations.**

Backlog represents products orservices that our customers have committed by contract to purchase from us. Ourtotal funded backlog as of March 31, 2007 was approximately $3.0 billion.Backlog is subject to fluctuations and is not necessarily indicative of futuresales. Moreover, cancellations or reductions of product quantities in existingcontracts could substantially and materially reduce backlog and, consequently,future revenues. Our failure to replace canceled or reduced backlog couldnegatively impact our revenues and results of operations.

**Our international operations expose us to risks oflosses.**

Approximately7%, 9% and 12% of our revenues for the fiscal years ended March 31, 2007,2006 and 2005, respectively, were derived from sales to foreign governments. Weare exploring the possibility of expansion into additional internationalmarkets.  We cannot assure you that wewill maintain significant operations internationally or that any suchoperations will be successful. Any international operations we establish willbe subject to risks similar to those affecting our U.S. operations and ourcurrent operations in Canada and the United Kingdom, in addition to a number ofother risks, including:

·       politicaland economic instability in foreign markets;

·       inconsistentproduct regulation by foreign agencies or governments;

·       impositionof product tariffs and burdens;

14

----

·       costof complying with a wide variety of international and U.S. export laws andregulatory requirements, including the Foreign Corrupt Practices Act, theExport Administration Act and the Arms Export Control Act (and the regulationspromulgated thereunder);

·       lackof local business experience;

·       foreigncurrency fluctuations;

·       difficultyin enforcing intellectual property rights; and

·       languageand other cultural barriers.

As noted above, the sale ofcertain of our products outside the United States is highly regulated.  Our inability to obtain the requisitelicenses, meet registration standards or comply with applicable governmentexport regulations may affect our ability to export products or to generaterevenues from the sale of such products outside the United States, which couldhave a material adverse effect on our business, financial condition and resultsof operations. Compliance with government regulations also may subject us tosubstantial fees, costs and delays.  Theabsence of comparable restrictions on competitors in other countries mayadversely affect our competitive position.

**We operate inhighly competitive markets.**

The markets in which we competeare highly competitive and are subject to rapid technological change. Apotential inability to improve existing product lines and develop new productsand technologies could have a material adverse effect on our business. Inaddition, our competitors could introduce new products with greatercapabilities, which could have a material adverse effect on our business.

There are many competitors in themarkets in which we sell our products. Some of these competitors aresubstantially larger than we are, devote substantially greater resources toresearch and development, and generally have greater financial and other resources.Consequently, these competitors may be better positioned to take advantage ofeconomies of scale and develop new technologies. A number of these competitorsare also our suppliers and customers.

We compete with many large andmid-tier defense contractors on the basis of performance, cost, overall value,delivery and reputation. Additionally,some customers, including the DoD, are increasingly purchasing “off the shelf”components from commercial suppliers in lieu of using traditional defense contractorsto design and manufacture such items. Further, the industry has experienced substantialconsolidation, increasing the market share of certain companies and enablingthem to enhance their competitive position.

**We aredependent in part upon our relationships and alliances with industryparticipants in order togenerate revenue.**

We rely on the strength of ourrelationships with other industry participants to form strategic alliances.Some of our industry partners assist us in the development of some of ourproducts through teaming arrangements.  If any of our existing relationships with ourindustry partners were impaired or terminated, we could experience significantdelays in the development of new products ourselves, and we would incuradditional development costs. We would need to fund these costs internally oridentify new industry partners.

Some of our likely industrypartners are also potential competitors, which may impair the viability of newor continued strategic relationships. While we must compete effectively in themarketplace, our future alliances may depend on our industry partners’perception of us. Our ability to win new and/or follow-on contracts may bedependent upon our relationships within the defense industry.

15

----

**The U.S. government’s rightto use technology developed by us limits our intellectual property rights.**

We seek to protect the competitive benefits we derivefrom our patents, proprietary information and other intellectual property.However, we do not have the right to prohibit the U.S. government from usingcertain technologies developed by us or to prohibit third party companies,including our competitors, from using those technologies in providing productsand services to the U.S. government. The U.S. government has the right toroyalty-free use of technologies that we have developed under U.S. governmentcontracts. We are free to commercially exploit those government-fundedtechnologies and may assert our intellectual property rights to seek to blockother non-government users thereof, but we cannot assure you that we successfullycould do so.

**We are subject toenvironmental laws and regulations, and our ongoing operations may expose us to environmentalliabilities.**

Our operations, like those of other companies engagedin similar businesses, are subject to federal, state, foreign and localenvironmental and health and safety laws and regulations. As a result, we havebeen involved from time to time in administrative or legal proceedings relatingto environmental matters. We cannot assure you that the aggregate amount offuture clean-up costs and other environmental liabilities will not be material.We could be subject to potentially significant fines or penalties, includingcriminal sanctions, if we fail to comply with these requirements. We have madeand will continue to make capital and other expenditures in order to complywith these laws and regulations. However, the requirements of these laws andregulations are complex, change frequently and could become more stringent inthe future. We cannot predict what environmental legislation or regulationswill be enacted in the future, how existing or future laws or regulations willbe administered or interpreted or what environmental conditions may be found toexist. Also, in the future, contamination may be found to exist at our currentor former facilities or at off-site locations to which we or certain companiesthat we have acquired or previously owned may have sent waste, including theOrphan Mine site in the Grand Canyon National Park, Arizona, which is currentlysubject to a government investigation. We could be held liable for suchcontamination. The remediation of such contamination, or the enactment of morestringent laws or regulations or more strict interpretation of existing lawsand regulations, may require us to make additional expenditures, some of whichcould be material.

**ESSI currently is subjectto investigations by the Enforcement Division of the SEC and the Office of theU.S. Attorney for the Eastern District of Missouri, each of which could requiresignificant management attention and legal and financial resources and couldhave a material adverse effect on us.**

In December 2004, ESSI, prior to its acquisition byus, was notified by the Enforcement Division of the SEC of the issuance of aformal order directing a private investigation relating to trading in ESSI stock in 2003 and to the adequacy ofcertain disclosures made by ESSI regarding certain related party transactionsin 2002 and 2003.  In February2007, the SEC filed a civil injunctive action in the United States DistrictCourt for the Eastern District of Missouri against a former director, officerand consultant of ESSI, alleging that he had violated the federal securitieslaws by “tipping” his financial advisor and close friend by sharing material,nonpublic information regarding ESSI’s financial condition shortly beforecertain 2003 earnings announcements.

In September 2005,ESSI received notice that the SEC staff had expanded the scope of the foregoinginvestigation to include ESSI’s disclosure of a November 2004 stop-work orderrelating to ESSI’s Deployable Power Generation and Distribution Systems (DPGDS)program. In connection with this investigation, ESSI and certain of itsdirectors and officers have received subpoenas and 

16

----

provided information and testimonyto the SEC. ESSI has furnished the information required by the SEC.

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

In May 2006, we were advised that the EnforcementDivision of the SEC and the U.S. Attorney’s office each had expanded itsinvestigation to include possible “backdating” of the timing of option grantsat ESSI prior to the time we acquired it. As a part of its investigation, the SEC issued subpoenas to certainofficers and employees of ESSI to provide testimony and produce certaindocuments.

In February 2007, the SEC filed civil injunctiveactions in the United States District Court for the Eastern District ofMissouri, Eastern Division, against ESSI’s former chief financial officer andformer controller in which each was alleged to have participated in abackdating scheme. In March 2007, ESSI’s former chief financial officer wasindicted by the grand jury of the United States District Court for the EasternDistrict of Missouri on ten counts of fraud relating to the “backdating” of thetiming of stock options at ESSI prior to the time ESSI was acquired byDRS.  The indictment alleges that thisformer ESSI executive and others “backdated” stock options on at least eightoccasions between 1996 and 2002. In February 2007, the SEC reported ESSI’s former controllerhad settled its action against him by consenting to disgorgement, financialpenalties, an officer and director bar and a permanent suspension frompracticing before the SEC as an accountant. In March 2007, theformer controller pled guilty to a one-count brought by the office of theUnited States Attorney for the Eastern District of Missouri charging him withmaking false statements to the government. In connection with his plea, thisformer ESSI executive admitted that a number of documents filed by ESSI withthe SEC contained the materially false statement that the option price ofshares subject to the ESSI stock option plan was the closing price of the stockon the date the options were awarded. 

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

The Internal Revenue Service is in the process ofauditing ESSI’s federal tax returns for the tax periods ended October 31, 2004,October 31, 2005 and January 31, 2006. In connection with these audits, ESSI expects that it will be requiredto amend previously filed Federal and state tax returns to reflect thedisallowance of certain compensation deductions taken during the periods underreview. We have recorded an accrual to reflect the anticipated disallowance.

We are committed to full cooperation with regard tothe foregoing investigations.  We areunable to determine at this time either the timing of the investigations or theimpact, if any, the investigations could have on the Company. See Item 3.“Legal Proceedings.”

**We are subject to anongoing investigation by the Antitrust Division of the U.S. Department ofJustice, which could require significant management attention and legalresources and have a material adverse effect on the Company.**

In July 2006, DRS and one of our subsidiaries, DRSTraining & Control Systems, Inc. (TCS), each were issued a subpoena by theUnited States District Court for the Northern District of Florida. Thesubpoenas were issued in connection with an inquiry being conducted by theAntitrust Division of the U.S. Department of Justice (DOJ) and require TCS toproduce certain documents related to an investigation involving allegations ofanticompetitive activity in certain 

17

----

international markets. Inaddition, certain employees and officers of TCS were served with subpoenas totestify before the grand jury of the Florida District Court with regard to thismatter. We have cooperated with the DOJ in producing documents in response tothe subpoenas. We have commenced an internal investigation regarding thismatter, which we expect to continue through the conclusion of the DOJ’sinvestigatory process. We are unable to determine either the timing or theimpact, if any, this investigation may have on us. See Item 3. “LegalProceedings.”

**We are involved in a numberof legal proceedings, each of which could have a material adverse affect on ourbusiness. We cannot predict the outcome of litigation and other contingencieswith certainty.**

**In addition tothe investigations noted above, various legal lawsuits, claims and demands arepending against us and certain of our subsidiaries. Although we believe that wehave meritorious defenses to the claims made in the litigation matters in whichwe have been named a party and intend to contest each lawsuit vigorously, noassurances can be given that the results of these matters will be favorable tous. An adverse resolution or outcome of any of these lawsuits, claims ordemands could have a negative impact on our financial condition, results ofoperations and liquidity. **

**Our businessmay be adversely affected by the outcome of these legal proceedings and othercontingencies that cannot be predicted with certainty. As required by GAAP, weestimate material loss contingencies and establish liabilities based on ourassessment of contingencies where liability is deemed probable and reasonablyestimable in light of the facts and circumstances known to us at a particularpoint in time. Subsequent developments in legal proceedings may affect ourassessment and estimates of the loss contingency recorded as a liability or asa reserve against assets in our financial statements. It is possible that theultimate resolution of those matters could result in a material adverse effecton our results of operations and/or cash flows from operating activities in aparticular reporting period.  For adescription of our current legal proceedings, see Item 3. “Legal Proceedings.”**

**A failure to attract andretain technical and other key personnel could reduce our revenues and our operationaleffectiveness.**

There is a continuing demand for qualified technicaland other key personnel, and we believe that our future growth and success willdepend upon our ability to attract, train and retain such personnel.Competition for personnel in the military industry is intense, and there is alimited number of persons with knowledge of and experience in this industry.Although we currently experience relatively low rates of turnover for ourtechnical personnel, the rate of turnover may increase in the future. Aninability to attract or maintain a sufficient number of technical and other keypersonnel could have a material adverse effect on our contract performance oron our ability to capitalize on market opportunities.

**As a U.S. governmentcontractor, we are subject to a number of procurement rules, regulations, andprocedures, including routine audits.**

Government contractors must comply with specificprocurement regulations and other requirements and are subject to routineaudits and investigations by U.S. government agencies, such as the DCAA. Theseagencies review a contractor’s performance under its contracts, cost structureand compliance with applicable laws, regulations and standards. Any costs foundto be allocated improperly to a specific contract will not be reimbursed ormust be refunded if already reimbursed. If we fail to comply with procurementregulations or other requirements, or if an audit otherwise uncovers improperor illegal activities, we may be subject to civil and/or criminal penalties and/oradministrative sanctions, which may include termination or modification of contracts,forfeiture of profits, suspension of payments, fines and suspension orprohibition from doing business with the U.S. government. In addition, we couldsuffer serious reputational harm if allegations of impropriety **are**made against us.

18

----

**Our operations involverapidly evolving products and technological change.**

The rapid change of technology is a key feature of themarket for the majority of our defense applications. To succeed, we will needto design, develop, manufacture, assemble, test, market and support newproducts and enhancements on a timely and cost-effective basis. Historically,our technology has been developed through customer-sponsored research anddevelopment, as well as from internally funded research and development. Wecannot guarantee that we will continue to maintain comparable levels ofresearch and development. In the past, we have allocated substantial funds tocapital expenditures, and we intend to continue to do so in the future. Evenso, we cannot assure you that we successfully will identify new opportunitiesand continue to have the needed financial resources to develop new products ina timely or cost-effective manner. At the same time, products and technologiesdeveloped by others may render our products and systems obsolete ornon-competitive.

**Our level of indebtednesscould limit cash flow available for our operations and could adversely affect ourability to service our debt or obtain additional financing, if necessary. Wemay incur substantial additional indebtedness in the future.**

Our total debt outstandingas of March 31, 2007 was approximately $1.8 billion. Our level ofindebtedness could restrict our operations and make it more difficult for us tosatisfy our obligations. For example, our levels of indebtedness could, amongother things:

·       limitour ability to obtain additional financing for working capital, capitalexpenditures, acquisitions and general corporate purposes or make suchfinancing more costly;

·       requireus to dedicate all or a substantial portion of our cash flow to service ourdebt, which would reduce funds available for other business purposes, such ascapital expenditures, research and development, dividends or acquisitions;

·       limitour flexibility in planning for or reacting to changes in the markets in whichwe compete;

·       placeus at a competitive disadvantage relative to our competitors with lessindebtedness;

·       renderus more vulnerable to general adverse economic and industry conditions; and

·       makeit more difficult for us to satisfy our financial obligations.

In addition, the indentures governing the Senior Notesand the Senior Subordinated Notes, our amended and restated senior securedcredit facility and the terms of the agreements governing our other outstandingindebtedness contain financial and other restrictive covenants that will limitour ability to engage in activities that may be in our long-term bestinterests. Our failure to comply with those covenants could result in an eventof default which, if not cured or waived, could result in the acceleration ofall of our debts.

**Despite currentindebtedness levels, we and our subsidiaries still may be able to incur substantially more debt.This could further exacerbate the risks associated with our substantialleverage.**

We and our subsidiaries may be able to incursubstantial additional indebtedness in the future. The terms of the indenturesgoverning our notes do not fully prohibit us or our subsidiaries from doing so,and any restrictions potentially may be waived by our lenders to permitadditional borrowing beyond that which is permitted under our currentarrangements. Our amended and restated senior secured credit facility permitsadditional borrowing under such facility.

19

----

**Our ability to service our debt and meet our cashrequirements depends on many factors, some of which are beyondour control.**

Although therecan be no assurances, we believe that the level of borrowings available to us,combined with cash provided by our operations, will be sufficient to providefor our cash requirements for the foreseeable future. However, our ability tosatisfy our obligations will depend on our future operating performance andfinancial results, which will be subject, in part, to factors beyond our control,including interest rates and general economic, financial and businessconditions. If we are unable to generate sufficient cash flow to service ourdebt, we may be required to:

·       refinanceall or a portion of our debt;

·       obtainadditional debt or equity-based financing;

·       sellsome of our assets or operations;

·       reduceor delay capital expenditures and/or acquisitions; or

·       reviseor delay our strategic plans.

If we are required to take any ofthese actions, it could have a material adverse effect on our business,financial condition, results of operations and liquidity. In addition, wecannot assure you that we would be able to take any of these actions, thatthese actions would enable us to continue to satisfy our capital requirementsor that these actions would be permitted under the terms of our various debtinstruments, including our amended and restated senior secured credit facilityand the indentures governing our notes.

**The covenants in our amended and restated seniorsecured credit facility and the indentures governing our notes imposerestrictions that may limit our ability and the ability of most of oursubsidiaries to take certain actions.**

The covenantsin our amended and restated senior secured credit facility and the indenturesgoverning our notes restrict our ability and the ability of our restrictedsubsidiaries to, among other things:

·       incuradditional debt;

·       paydividends and make other restricted payments;

·       makecertain investments, loans and advances;

·       createor permit certain liens;

·       issueor sell capital stock of restricted subsidiaries;

·       usethe proceeds from sales of assets and subsidiary stock;

·       createor permit restrictions on the ability of our restricted subsidiaries to paydividends or make other distributions to us;

·       enterinto transactions with affiliates;

·       enterinto sale and leaseback transactions;

·       engagein certain business activities; and

·       consolidateor merge or sell all or substantially all of our assets.

Our amended and restated senior secured creditfacility contains other covenants customary for credit facilities of thisnature, including requiring us to meet specified financial ratios and financialtests. Our ability to borrow under our amended and restated senior securedcredit facility will depend upon satisfaction of these covenants. Events beyondour control could affect our ability to meet those covenants.

20

----

If we are unable to meet the terms of our financialcovenants, or if we breach any of these covenants, a default could occur underone or more of these agreements. A default, if not waived by our lenders, couldresult in the acceleration of our outstanding indebtedness and cause our debtto become immediately due and payable. If acceleration occurs, we would not beable to repay our debt, and it is unlikely that we would be able to borrowsufficient funds to refinance our debt. Even if new financing were madeavailable to us, it may not be on terms acceptable to us.

**Some of our debt, includingborrowings under our amended and restated senior secured credit facility, is basedon variable rates of interest, which could result in higher interest expensesin the event of an increase in interest rates.**

As of March 31, 2007, 16% of our total debt isexposed to fluctuations in variable interest rates. This increases our exposureto fluctuations in market interest rates. If we borrow additional amounts underthe revolving portion of our amended and restated senior secured creditfacility, the interest rates on those borrowings may vary depending on theprime rate, federal funds rate or LIBOR. If these interest rates rise, theinterest rate on our variable rate debt also may increase. Therefore, anincrease in these interest rates may increase our interest payment obligationsand have a negative effect on our cash flow, results of operations andfinancial position.

**Item 1B.**            UnresolvedStaff Comments

None

**Item 2.**                    Properties

The table below provides information about oursignificant leased and owned facilities and properties.

We lease the following significant properties:

| Location                        | ** ** | **Activities**                                   | ** ** | **Operating   Segment** | ** ** | **Approximate   Square Footage** | ** ** | **Lease   Expiration** |
|---------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|------------------------|
| Parsippany, New Jersey          |       | Corporate Headquarters                           |       | CORPORATE               |       | 50,812                           |       | Fiscal 2014            |
| Arlington, Virginia             |       | Administrative                                   |       | CORPORATE               |       | 19,912                           |       | Fiscal 2013            |
| Bethesda, Maryland              |       | Administrative and Marketing                     |       | C4I                     |       | 19,172                           |       | Fiscal 2014            |
| Buffalo, New York               |       | Engineering, Manufacturing and  Research         |       | C4I                     |       | 224,000                          |       | Fiscal 2008            |
| Colorado Springs, Colorado      |       | Administrative, Engineering and  Manufacturing   |       | C4I                     |       | 21,600                           |       | Fiscal 2012            |
| Columbia, Maryland              |       | Administrative and Manufacturing                 |       | C4I                     |       | 11,614                           |       | Fiscal 2008            |
| Danbury, Connecticut            |       | Administrative, Engineering and  Manufacturing   |       | C4I                     |       | 21,212                           |       | Fiscal 2008            |
| Dayton, Ohio                    |       | Administrative, Manufacturing and  Field Service |       | C4I                     |       | 20,076                           |       | Fiscal 2009            |
|                                 |       | Administrative, Manufacturing and  Field Service |       | C4I                     |       | 16,054                           |       | Fiscal 2010            |
| Farnham, Surrey, United Kingdom |       | Administrative, Engineering and  Manufacturing   |       | C4I                     |       | 26,000                           |       | Fiscal 2015            |
| Fitchburg, Massachusetts        |       | Administrative, Engineering and  Manufacturing   |       | C4I                     |       | 72,649                           |       | Fiscal 2012            |
|                                 |       | Administrative and Manufacturing                 |       | C4I                     |       | 22,000                           |       | Fiscal 2021            |
| Ft. Walton Beach, Florida       |       | Warehouse                                        |       | C4I                     |       | 11,374                           |       | Fiscal 2008            |

21

----

 

| Gaithersburg, Maryland   |   | Administrative, Engineering and  Product Development                |   | C4I  |   | 49,606  |   | Fiscal 2012    |
|--------------------------|--------|---------------------------------------------------------------------|--------|------|--------|---------|--------|----------------|
| Huntsville, Alabama      |   | Administrative, Manufacturing and  Warehouse                        |   | C4I  |   | 215,485 |   | Fiscal 2014    |
| Johnstown,               |   | Administrative and Manufacturing                                    |   | C4I  |   | 129,716 |   | Fiscal 2011    |
| Pennsylvania             |   | Warehouse                                                           |   | C4I  |   | 40,000  |   | Month To Month |
| Kanata, Ontario,         |   | Administrative and Engineering                                      |   | C4I  |   | 63,052  |   | Fiscal 2012    |
| Canada                   |   | Engineering and Manufacturing                                       |   | C4I  |   | 11,000  |   | Fiscal 2008    |
| Madison, Alabama         |   | Warehouse                                                           |   | C4I  |   | 11,250  |   | Fiscal 2019    |
| Melbourne, Florida       |   | Administrative and Marketing                                        |   | C4I  |   | 105,358 |   | Fiscal 2016    |
| Merrimack, New           |   | Engineering and Manufacturing                                       |   | C4I  |   | 34,000  |   | Fiscal 2011    |
| Hampshire                |   | Administrative and Marketing                                        |   | C4I  |   | 20,800  |   | Fiscal 2010    |
| Mineral Wells, Texas     |   | Administrative, Engineering,  Manufacturing and Product Development |   | C4I  |   | 42,000  |   | Fiscal 2013    |
| Oakland, New Jersey      |   | Administrative, Engineering and  Manufacturing                      |   | C4I  |   | 35,406  |   | Fiscal 2008    |
|                          |   | Administrative, Engineering and  Manufacturing                      |   | C4I  |   | 25,919  |   | Fiscal 2008    |
| Sunnyvale, California    |   | Engineering, Manufacturing and  Research                            |   | C4I  |   | 17,240  |   | Fiscal 2012    |
| Tucson, Arizona          |   | Administrative, Assembly and  Warehouse                             |   | C4I  |   | 12,664  |   | Fiscal 2008    |
| Wyndmoor, Pennsylvania   |   | Administrative and Manufacturing                                    |   | C4I  |   | 92,000  |   | Fiscal 2009    |
| Cypress, California      |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 91,506  |   | Fiscal 2016    |
| Dallas, Texas            |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 71,190  |   | Fiscal 2013    |
|                     |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 48,374  |   | Fiscal 2013    |
|                     |   | Administrative and Engineering                                      |   | RSTA |   | 15,815  |   | Fiscal 2013    |
| Irvine, California       |   | Administrative and Engineering                                      |   | RSTA |   | 40,125  |   | Fiscal 2010    |
| Melbourne, Florida       |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 141,376 |   | Fiscal 2011    |
| Palm Bay, Florida        |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 93,433  |   | Fiscal 2011    |
|                          |   | Administrative, Engineering and  Manufacturing                      |   | RSTA |   | 12,279  |   | Fiscal 2011    |
| Prescott Valley, Arizona |   | Research, Development, Manufacturing  and Administrative            |   | RSTA |   | 11,900  |   | Fiscal 2010    |

 

22

----

 

| Location                 | ** ** | **Activities**                                                 | ** ** | **Operating  Segment** | ** ** | **Approximate  Square Footage** | ** ** | **Lease  Expiration** |
|--------------------------|------------|----------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|-----------------------|
| Bridgeport, Connecticut  |       | Manufacturing / Warehouse                                      |       | SS                     |       | 26,413                          |       | Fiscal 2008           |
|                          |       | Manufacturing and  Warehouse                                   |       | SS                     |       | 16,824                          |       | Fiscal 2008           |
|                          |       | Manufacturing                                                  |       | SS                     |       | 11,400                          |       | Fiscal 2009           |
| Bridgeton, Missouri      |       | Administrative and Manufacturing                               |       | SS                     |       | 11,450                          |       | Fiscal 2009           |
| Chantilly, Virginia      |       | Administrative and Manufacturing                               |       | SS                     |       | 15,923                          |       | Fiscal 2010           |
| Cincinnati, Ohio         |       | Administrative and Manufacturing                               |       | SS                     |       | 95,200                          |       | Fiscal 2018           |
|                          |       | Administrative and Manufacturing                               |       | SS                     |       | 18,921                          |       | Fiscal 2009           |
|                          |       | Administrative and Manufacturing                               |       | SS                     |       | 11,700                          |       | Fiscal 2014           |
| Creve Coeur, Missouri    |       | Warehouse                                                      |       | SS                     |       | 13,514                          |       | Fiscal 2008           |
| Melbourne, Florida       |       | Administrative and Manufacturing                               |       | SS                     |       | 15,390                          |       | Fiscal 2009           |
| Alexandria, Virginia     |       | Administrative                                                 |       | TS                     |       | 29,913                          |       | Fiscal 2008           |
| Calverton, Maryland      |       | Administrative                                                 |       | TS                     |       | 14,401                          |       | Fiscal 2010           |
| Chesapeake, Virginia     |       | Field Service and Engineering  Support                         |       | TS                     |       | 19,631                          |       | Fiscal 2010           |
| Fairborn, Ohio           |       | Administrative                                                 |       | TS                     |       | 11,650                          |       | Fiscal 2010           |
| Herndon, Virginia        |       | Administrative, Engineering,  Engineering Support and Research |       | TS                     |       | 55,038                          |       | Fiscal 2013           |
| Sterling, Virginia       |       | Administrative                                                 |       | TS                     |       | 25,696                          |       | Fiscal 2010           |
| Tinton Falls, New Jersey |       | Administrative and Manufacturing                               |       | TS                     |       | 14,850                          |       | Fiscal 2008           |
| Troy, Michigan           |       | Administrative                                                 |       | TS                     |       | 19,575                          |       | Fiscal 2010           |
| Willoughby, Ohio         |       | Administrative                                                 |       | TS                     |       | 11,500                          |       | Fiscal 2009           |

 

We own thefollowing significant properties:

| **Location**                     | ** ** | **Activities**                                                                     | ** ** | **Operating  Segment** | ** ** | **Approximate  Square  Footage** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| Danbury, Connectictut            |       | Administrative, Engineering and  Manufacturing                                     |       |                   | C4I        |                             |       |   | 74,712 |   |   |
| Ft. Walton Beach, Florida        |       | Engineering, Manufacturing and  Research                                           |       |                   | C4I        |                             |       |   | 260,278 |   |   |
| Gaithersburg, Maryland           |       | Engineering, Manufacturing and  Research                                           |       |                   | C4I        |                             |       |   | 150,395 |   |   |
| Hudson, Massachusetts            |       | Administrative, Engineering,  Product Development and Manufacturing                |       |                   | C4I        |                             |       |   | 54,000 |   |   |
| Largo, Florida                   |       | Administrative and Manufacturing                                                   |       |                   | C4I        |                             |       |   | 120,000 |   |   |
| Milwaukee, Wisconsin             |       | Administrative, Engineering,  Field Service, Product Development and Manufacturing |       |                   | C4I        |                             |       |   | 615,000 |   |   |
| Carleton Place, Ontario,  Canada |       | Administrative and Manufacturing                                                   |       |                   | C4I        |                             |       |   | 128,540 |   |   |
| Palm Bay, Florida                |       | Administrative, Engineering and  Manufacturing                                     |       |                   | RSTA       |                             |       |   | 57,240 |   |   |
| Bridgeport, Connecticut          |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 134,686 |   |   |
| Cincinnati, Ohio                 |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 27,000 |   |   |
| Florence, Kentucky               |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 264,910 |   |   |
| Halifax, Novia Scotia,  Canada   |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 40,000 |   |   |
| High Ridge, Missouri             |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 214,000 |   |   |
| St. Louis-Valley Park,  Missouri |       | Subassembly / Administrative                                                       |       |                   | SS         |                             |       |   | 263,600 |   |   |
| West Plains, Missouri            |       | Manufacturing and Administrative                                                   |       |                   | SS         |                             |       |   | 391,000 |   |   |
| Elizabeth City, North  Carolina  |       | Hangar                                                                             |       |                   | TS         |                             |       |   | 80,000 |   |   |
| Polson, Montana                  |       | Manufacturing                                                                      |       |                   | TS         |                             |       |   | 19,979 |   |   |
| Warner Robins, Georgia           |       | Administrative                                                                     |       |                   | TS         |                             |       |   | 11,000 |   |   |

 

23

----

We believe that all of our facilities are in goodcondition, adequate for our intended use and sufficient for our immediateneeds. It is not certain whether we will negotiate new leases as existingleases expire. Such determinations will be made as existing leases approachexpiration and will be based on an assessment of our requirements at that time.Further, we believe that we can obtain additional space, if necessary, based onprior experience and current real estate market conditions.

The Company has a mortgage notepayable that is secured by a lien on its facility in Palm Bay, Florida.

**Item 3.**                    LegalProceedings

Various legal actions, claims, assessments and othercontingencies including certain matters described below, are pending against usand certain of our subsidiaries. These matters are subject to manyuncertainties, and it is possible that some of these matters ultimately couldbe decided, resolved or settled adversely. We have recorded accruals totaling $3.0million and $4.5 million at March 31, 2007 and March 31, 2006, respectively, forlosses related to those matters that we consider to be probable and that can bereasonably estimated (certain legal and environmental matters are discussed indetail below). Based on our ongoing analysis of various factual, legal andequitable considerations we also have recorded as of March 31, 2007 anaccrual of $12.5 million, $11.8 million was originally charged against goodwill,reflecting the probable income tax impact of information uncovered in ourongoing internal investigation of historical ESSI stock option practices.Although, at March 31, 2007, the precise amount of liability that may resultfrom those matters for which we have recorded accruals is not ascertainable, webelieve that any amounts exceeding our recorded accruals should not materiallyaffect our financial condition or liquidity. It is possible, however, that theultimate resolution of those matters could result in a material adverse effecton our results of operations and/or cash flows from operating activities for aparticular reporting period.

Some environmental laws, such as the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980 (also known asCERCLA or the Superfund law) and similar state statutes, can impose liabilityfor the entire cost of the clean up of contaminated sites upon any of thecurrent or former site owners or operators (or upon parties who send waste tothese sites), regardless of the lawfulness of the original activities that ledto the contamination. In July 2000, prior to its acquisition by IntegratedDefense Technologies Inc. (IDT), and prior to our acquisition of IDT, Tech-SymCorporation received a Section 104(e) Request for Information from the NationalPark Service (NPS), pursuant to CERCLA, regarding a site known as the OrphanMine site in the Grand Canyon National Park, Arizona, which is the subject ofan NPS investigation regarding the presence of residual radioactive materialsand contamination. A corporation of which Tech-Sym is an alleged successoroperated this uranium mine from 1956 to 1967. In 1962, the land was sold to theU.S. government and the alleged predecessor of Tech Sym was given a 25-yearmining lease. In 1967, the mining rights were transferred to a third party by atrustee in bankruptcy, and we believe that the mine was operated by such thirdparty until approximately 1969. We understand that there are other companies inthe chain of title to the mining rights subsequent to Tech-Sym’s allegedpredecessor, and, accordingly, that there are other potentially responsibleparties (PRPs) for the environmental conditions at the site, including the U.S.government as owner, operator and arranger at the site. During its period ofownership, IDT retained a technical consultant in connection with this matter,who conducted a limited, preliminary review of site conditions and communicatedwith the NPS regarding actions that may be required at the site by all of thePRPs. On February 6, 2005, the NPS sent us an Engineering Evaluation/CostAnalysis Work Plan (the NPS EE/CA) under CERCLA (the CERCLA Letter) withregards to Operable Unit 1 of the Orphan Mine site. In our view, the NPS EE/CAincluded additional clean up not covered by CERCLA. The CERCLA Letter alsorequested (a) payment of $0.5 million for costs incurred by the NPS related tothe Orphan Mine, and (b) a ‘‘good faith offer’’ to conduct the responseactivity outlined by the NPS and to reimburse the NPS for future 

24

----

costs. The NPS advised that asimilar letter had been sent to another PRP. We initiated discussions with theother PRP and with NPS, and engaged a technical consultant to evaluate theexisting documentation and the site in depth. As a result, on September 29,2005 the technical consultant submitted to the NPS, on behalf of us and theother PRP, an alternative Engineering Evaluation/Cost Analysis Work Plan (the“alternative EE/CA”) with regard to Operable Units 1 and 2 of the Orphan Minesite.

In December 2005 and August 2006, the PRPs and NPS metto discuss the technical merits of the alternative EE/CA and ways to resolvecertain differences between the alternative EE/CA and the NPS EE/CA providedwith the CERCLA Letter. Since late 2005, the parties have also discussedcertain legal issues relating to the process for implementing an alternativeEE/CA and entering into a settlement agreement that would memorialize theparties’ intent. The potential liability associated with implementation of anEE/CA can change substantially due to such factors as additional information onthe nature or extent of contamination, methods of remediation that might berecommended or required, changes in the apportionment of costs among theresponsible parties and other actions by governmental agencies or privateparties.

In connection with our acquisition of ESSI in January2006, we have been made aware of certain legal actions, claims, assessments andother contingencies, including those described below.

In December 2004, ESSI was notified by the EnforcementDivision of the SEC of the issuance of a formal order directing a privateinvestigation and was notified that the SEC had issued subpoenas to variousindividuals associated with ESSI to produce certain documents. The SEC staffalso requested that ESSI produce certain documents in connection with the investigation.The subpoenas related to trading in ESSI stock around ESSI’s earnings releasesin 2003 and to the adequacy of certain disclosures made by ESSI regardingrelated-party transactions in 2002 and 2003 involving insurance policies placedby ESSI through an insurance brokerage firm in which an ESSI director was aprincipal at the time of the transactions. In February 2007, the SEC filed acivil injunctive action in the United States District Court for the EasternDistrict of 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 advisedESSI’s counsel that it had issued a subpoena directed to ESSI and expanded itsinvestigation to include ESSI’s disclosure of a November 2004 stop work orderrelating to ESSI’s Deployable Power Generation and Distribution Systems(“DPGDS”) program for the U.S. Air Force, and relating to trading in ESSI stockby certain individuals associated with ESSI. In connection with the foregoingSEC investigation, ESSI and certain of its directors and officers have providedinformation and/or testimony to the SEC.

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

In May 2006, we were advised that the EnforcementDivision of the SEC and the U.S. Attorney’s office each had expanded itsinvestigation to include possible “backdating” of the timing of option grantsat ESSI prior to the time ESSI was acquired by us. As a part of itsinvestigation, the SEC issued subpoenas to certain officers and employees ofESSI to provide testimony and produce certain documents. 

In February 2007, the SEC filed civil injunctiveactions in the United States District Court for the Eastern District ofMissouri, Eastern Division, alleging that ESSI’s former Chief Financial 

25

----

Officer and former controller, inwhich each was alleged to have participated in a backdating scheme. In March2007, ESSI’s former Chief Financial Officer was indicted by the grand jury ofthe United States District Court for the Eastern District of Missouri on tencounts of fraud relating to the “backdating” of the timing of stock options atESSI prior to the time ESSI was acquired by DRS.  The indictment alleges that this former ESSIexecutive and others “backdated” stock options on at least eight occasionsbetween 1996 and 2002. In February 2007, the SEC reported ESSI’s former controller hadsettled its action against him by consenting to disgorgement, financialpenalties, an officer and director bar and a permanent suspension frompracticing before the SEC as an accountant. In March 2007, theformer controller pled guilty to a one-count information brought by the officeof the United States Attorney for the Eastern District of Missouri, charginghim with making false 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.

Although ESSI continues to be a subject of the U.S.Attorney’s office’s investigation, the U.S. Attorney’s office has advised usthat ESSI is not a target. Because the events being investigated occurred priorto 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 full cooperation with regard tothe foregoing investigations. We are unable to determine at this time eitherthe timing of the SEC or U.S. Attorney’s office investigations or the impact,if any, the investigations could have on us.

The Internal Revenue Service is in the process ofauditing ESSI’s federal tax returns for the tax periods ended October 31, 2004,October 31, 2005 and January 31, 2006. In connection with these audits, ESSIexpects that it will be required to amend previously filed Federal and statetax returns to reflect the disallowance of certain compensation deductionstaken during the periods under review. We have recorded an accrual againstgoodwill to reflect the anticipated disallowance.

In July 2006, we and one of our subsidiaries, DRSTraining & Control Systems, Inc. (TCS), each were issued a subpoena by theUnited States District Court for the Northern District of Florida (FloridaDistrict Court). The subpoenas were issued in connection with an inquiry beingconducted by the Antitrust Division of the U.S. Department of Justice (DOJ) andrequire TCS to produce certain documents related to an investigation we believeinvolves allegations of anticompetitive activity in certain internationalmarkets. In addition, certain employees and officers of TCS were served withsubpoenas to testify before the grand jury of the Florida District Court withregard to this matter. The DOJ is continuing its investigation, but we have noinformation as to when the DOJ will conclude this process. We have cooperatedwith the DOJ in producing documents in response to the subpoenas. We havecommenced an internal investigation regarding this matter, which we expect tocontinue through the conclusion of the DOJ’s investigatory process.

**Item 4.**                    Submissionof Matters to a Vote of Security Holders

None

26

----

**PART II**

**Item 5.**                    Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

OnMay 10, 2007, the Board of Directors declared a quarterly cash dividend of$0.03 per share on our common stock. The dividend is payable on June 29,2007 to stockholders of record as of the close of business on June 15,2007. Our credit facility allows the payment of dividends or  other distributions on our common stock,subject to certain restrictions. Any future declaration of dividends will besubject to the discretion of our Board of Directors. The timing, amount andform of any future dividends will depend, among other things, on our results ofoperations, financial condition, cash requirements, plans for expansion,limitations imposed by our amended and restated credit agreement and indenturesgoverning our notes and other factors deemed relevant by our Board ofDirectors.

The following table shows the high and low sale pricesper share of our common stock and dividends paid during fiscal 2007 and 2006,as reported on the NYSE.

| ** **                                                    | ** ** | **Fiscal 2007** | ** ** | **Dividends** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------|------------|
| **Fiscal Year Ended March 31, 2007** | ** ** | ** **           | ** ** | **High**      | ** ** | **Low** | ** ** | **Paid** | ** ** |
| First Quarter                                                 | ** ** | **$**                | **59.50**  | ** **    | **$**      | **45.27** |   |   | **$** | **0.03** |   |   |
| Second Quarter                                                | ** ** | **$**                | **48.72**  | ** **    | **$**      | **35.83** |   |   | **$** | **0.03** |   |   |
| Third Quarter                                                 | ** ** | **$**                | **53.18**  | ** **    | **$**      | **43.14** |   |   | **$** | **0.03** |   |   |
| Fourth Quarter                                                | ** ** | **$**                | **56.50**  | ** **    | **$**      | **51.02** |   |   | **$** | **0.03** |   |   |
|                                                               |            |                      |            |               |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                                    | ** ** | **Fiscal 2006** | ** ** | **Dividends** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------|------------|
| **Fiscal Year Ended March 31, 2006** | ** ** | ** **           | ** ** | **High**      | ** ** | **Low** | ** ** | **Paid** | ** ** |
| First Quarter                                                 |       | $                    | 51.80      |          | $          | 42.65 |   |   | $ | 0.03 |   |   |
| Second Quarter                                                |       | $                    | 53.90      |          | $          | 45.55 |   |   | $ | 0.03 |   |   |
| Third Quarter                                                 |       | $                    | 53.10      |          | $          | 46.68 |   |   | $ | 0.03 |   |   |
| Fourth Quarter                                                |       | $                    | 57.76      |          | $          | 47.41 |   |   | $ | 0.03 |   |   |
|                                                               |            |                      |            |               |            |  |  |  |  |  |  |  |  |  |

 

Theclosing sale price of our common stock, as reported by the NYSE Euronext on May 22,2007, was $48.96 per share. As of that date there were approximately 1,371holders of record of our common stock.

OnJanuary 31, 2006, in connection with our acquisition of Engineered SupportSystems, Inc., we sold $300 million aggregate principal amount of 2%Senior Convertible Notes (Convertible Notes) in a private placement pursuant toRule 144A under the Securities Act. On February 8, 2006, we sold anadditional $45 million in Convertible Notes, pursuant to an over-allotmentoption exercised by the initial purchasers of the Convertible Notes. The netproceeds of the offering of the Convertible Notes, including the over-allotmentoption, were $337.2 million after deducting $7.8 million in commissions andfees related to the offering. The Convertible Notes are contingentlyconvertible into shares of DRS common stock at an initial conversion price of$59.70, subject to adjustment in certain circumstances.

We did not repurchase any equity securities during theperiod covered by this report.

27

----

**Stock Performance Graph**

Set forth below is a line graphcomparing the yearly percentage change in the cumulative total stockholderreturn on DRS common stock against the total return of the NYSE Market Index,and the S&P 1500 Aerospace & Defense Index (the Peer Group). Alisting of the companies included in the Peer Group is available throughpublications from Standard & Poor’s and other licensed providers.

**COMPARE 5-YEARCUMULATIVE TOTAL RETURN*AMONG DRS TECHNOLOGIES, INC.NYSE MARKET INDEX AND S&P 1500 AEROSPACE & DEFENSE INDEX**

| ** **                                         | ** ** | **Fiscal Year Ended March 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Company/Index/Market**                           | ** ** | **2002**                                            | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| DRS  Technologies, Inc.                       |       | $                                                   | 100        |   | $ | 60.34 |   | $ | 67.50 |   | $ | 102.53 |   | $ | 132.68 |   | **$** | **126.47** |   |
| S&P 1500  Aerospace & Defense   Index |       | 100                                                 |       | 67.03 |   | 95.39 |   | 120.39 |   | 149.40 |   | **174.70** |   |
| NYSE Market Index                                  |       | 100                                                 |       | 76.68 |   | 107.07 |   | 116.11 |   | 133.66 |   | **150.85** |   |
|                                                    |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

28

----

**Item 6.**                    SelectedFinancial Data

In the following table, weprovide our selected historical consolidated financial and operating data as ofand for the fiscal years indicated. The selected summary of earnings data,earnings per share data from continuing operations and certain of the otherdata for the years ended March 31, 2007, 2006 and 2005 and the selectedbalance sheet data as of March 31, 2007 and 2006 presented below arederived from our audited consolidated financial statements included elsewherein Item 8 of this Form 10-K. The selected summary of earningsdata, earnings per share data from continuing operations and certain of theother data for the years ended March 31, 2004 and 2003 and selectedbalance sheet data as of March 31, 2005, 2004 and 2003 presented below arederived from our consolidated financial statements, which are not included inthis Form 10-K.

When you readthis selected historical financial data, it is important that you also readalong with it our historical consolidated financial statements and relatednotes included in this Form 10-K, as well as “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 of this Form 10-K.

| ** **                                                                          | ** ** | **Years Ended March 31,(1)**                   | ** **    |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|---------------|
| ** **                                                                          | ** ** | **2007**                                                      | ** **    | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                          | ** ** | **(in thousands, except per share data)** | ** **    |
| *Summary of Earnings Data*                                                          | * *   | * *                                                      | * *      | * * | * * | * * | * * | * * | * * | * * | * * |
| Revenues                                                                            |       | **$**                                                         | **2,821,113** |   | $ | 1,735,532 |   | $ | 1,308,600 |   | $ | 986,931 |   | $ | 675,762 |   |
| Operating income(2)                                                                 |       | **$**                                                         | **307,583**   |   | $ | 192,710 |   | $ | 143,132 |   | $ | 103,332 |   | $ | 67,684 |   |
| Earnings from continuing operations before income  taxes(2)                         |       | **$**                                                         | **187,164**   |   | $ | 133,488 |   | $ | 102,968 |   | $ | 77,331 |   | $ | 55,872 |   |
| Earnings from continuing operations(2)                                              |       | **$**                                                         | **127,060**   |   | $ | 81,494 |   | $ | 58,126 |   | $ | 43,542 |   | $ | 30,171 |   |
| Net earnings(2)                                                                     |       | **$**                                                         | **127,060**   |   | $ | 81,494 |   | $ | 60,677 |   | $ | 44,720 |   | $ | 30,171 |   |
| *Earnings Per Share Data from Continuing  Operations(2),(3),(4)*                    | * *   | *** ***                                                  | * *      | * * | * * | * * | * * | * * | * * | * * | * * |
| Basic earnings per share                                                            |       | **$**                                                         | **3.19**      |   | $ | 2.75 |   | $ | 2.15 |   | $ | 1.80 |   | $ | 1.64 |   |
| Diluted earnings per share                                                          |       | **$**                                                         | **3.12**      |   | $ | 2.67 |   | $ | 2.09 |   | $ | 1.76 |   | $ | 1.58 |   |
| *Balance Sheet Data (at period end)*                                                | * *   | *** ***                                                  | * *      | * * | * * | * * | * * | * * | * * | * * | * * |
| Working capital                                                                     |       | **$**                                                         | **355,130**   |   | $ | 200,427 |   | $ | 373,964 |   | $ | 145,315 |   | $ | 107,485 |   |
| Net property, plant and equipment                                                   |       | **$**                                                         | **231,206**   |   | $ | 220,506 |   | $ | 143,264 |   | $ | 142,378 |   | $ | 87,610 |   |
| Total assets                                                                        |       | **$**                                                         | **4,214,710** |   | $ | 4,019,119 |   | $ | 1,891,861 |   | $ | 1,625,390 |   | $ | 993,391 |   |
| Long-term debt, excluding current installments                                      |       | **$**                                                         | **1,783,046** |   | $ | 1,828,771 |   | $ | 727,611 |   | $ | 565,530 |   | $ | 216,837 |   |
| Total stockholders’ equity                                                     |       | **$**                                                         | **1,502,450** |   | $ | 1,351,580 |   | $ | 671,428 |   | $ | 595,625 |   | $ | 438,180 |   |
| *Supplemental Information*                                                          | * *   | *** ***                                                  | * *      | * * | * * | * * | * * | * * | * * | * * | * * |
| Net cash flows provided by operating activities of  continuing operations           |       | **$**                                                         | **195,235**   |   | $ | 157,062 |   | $ | 136,183 |   | $ | 104,717 |   | $ | 52,008 |   |
| Net cash flows used in investing activities of  continuing operations               |       | **$**                                                         | **(69,918**   | ) | $ | (1,467,396 | ) | $ | (53,573 | ) | $ | (273,859 | ) | $ | (278,631 | ) |
| Net cash flows (used in) provided by financing  activities of continuing operations |       | **$**                                                         | **(31,001**   | ) | $ | 1,004,222 |   | $ | 164,901 |   | $ | 131,613 |   | $ | 204,308 |   |
| Capital expenditures                                                                |       | **$**                                                         | **55,907**    |   | $ | 43,194 |   | $ | 34,521 |   | $ | 24,444 |   | $ | 21,526 |   |
| Depreciation and amortization                                                       |       | **$**                                                         | **76,663**    |   | $ | 48,985 |   | $ | 40,968 |   | $ | 28,436 |   | $ | 16,614 |   |
| Internal research and development                                                   |       | **$**                                                         | **50,881**    |   | $ | 47,600 |   | $ | 38,852 |   | $ | 27,387 |   | $ | 14,355 |   |
| Interest and related expenses                                                       |       | **$**                                                         | **119,912**   |   | $ | 64,186 |   | $ | 39,750 |   | $ | 24,259 |   | $ | 10,589 |   |
| EBITDA(5)                                                                           |       | **$**                                                         | **382,466**   |   | $ | 239,406 |   | $ | 181,226 |   | $ | 129,272 |   | $ | 81,896 |   |
| Free cash flow(6)                                                                   |       | **$**                                                         | **139,328**   |   | $ | 113,868 |   | $ | 101,662 |   | $ | 80,273 |   | $ | 30,482 |   |
| Cash  dividends declared per common share                                           |       | **$**                                                         | **0.12**      |   | $ | 0.12 |   | $ | — |   | $ | — |   | $ | — |   |

 

29

----

----

(1)            DRS’s selectedfinancial data includes the effect of the following purchase businesscombinations and divestitures from their date of acquisition or divestiture, byfiscal year:

a)               Fiscal Year 2006:Engineered Support Systems, Inc.—Acquired January 31, 2006, WalkAboutComputer Systems, Inc.—Acquired June 27, 2005, Codem Systems, Inc.—AcquiredApril 15, 2005.

b)              Fiscal Year2005: Night Vision Equipment Co., Inc. and Affiliate—Acquired December 14,2004. DRS Weather Systems, Inc.—Sold March 10, 2005; DRS BroadcastTechnology, Inc.—Sold March 10, 2005.

c)                Fiscal Year2004: Integrated Defense Technologies, Inc.—Acquired November 4,2003.

d)              Fiscal Year2003: The U.S.-based Unmanned Aerial Vehicle business of Meggitt DefenseSystems-Texas, Inc.—Acquired April 11, 2002; The Navy ControlsDivision of Eaton Corporation—Acquired July 1, 2002; DKD, Inc.—AcquiredOctober 15, 2002; Paravant Inc.—Acquired November 27, 2002; theElectromagnetics Development Center of Kaman Corporation—Acquired January 15,2003; and Power Technology Incorporated—Acquired February 14, 2003; DRSAdvanced Programs, Inc.—Sold November 22, 2002; DRS Ahead Technology, Inc.—SoldMay 27, 2002.

(2)            Includes the effect ofSFAS 123(R), “Share-based Compensation,” which was adopted by the Companyon April 1, 2006. As a result of applying SFAS 123R to our stockoptions, operating income, earnings from continuing operations before incometaxes, earnings from continuing operations and net earnings for fiscal 2007were $6.3 million, $6.3 million, $3.9 million and $3.9 millionlower, respectively, than if we had continued to apply our previous method ofaccounting for stock options. See Note 11 to our Consolidated FinancialStatements for further information.

(3)            Per share dataincludes the weighted average impact of the January 31, 2006 issuance of11,727,566 shares of common stock in connection with the ESSI acquisition, the November 4,2003 issuance of 4,323,172 shares of common stock in connection with the IDTacquisition, and the December 20, 2002 issuance of 5,462,500 shares ofcommon stock in a public offering.

(4)            DRS declared cashdividends of $0.03 per common share on a quarterly basis beginning June 30,2005. There were no cash dividends paid in fiscal 2005 or prior.

(5)            Earnings fromcontinuing operations before extraordinary items, net interest and relatedexpenses (primarily amortization of debt issuance costs), income taxes anddepreciation and amortization (EBITDA). See Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations Use of Non-GAAPFinancial Measures.”

(6)            Net cash provided byoperating activities of continuing operations less capital expenditures. See Item 7“Management’s Discussion and Analysis of Financial Condition and Results ofOperations, Use of Non-GAAP Financial Measures.”

30

----

**Item 7.**                    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

We begin the Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) of DRS Technologies, Inc. and its wholly-owned subsidiaries andcontrolling interests (hereinafter, we, us, our, the Company or DRS) with acompany overview, followed by defense industry considerations, a summary of ouroverall business strategy to provide context for understanding our business anda summary of our acquisitions and divestitures. This is followed by adiscussion of the critical accounting estimates that we believe are importantto understanding the assumptions and judgments incorporated in our reportedfinancial results, which we discuss under “Results of Continuing Operations.”We then provide an analysis of cash flow, and discuss our financial commitmentsunder “Liquidity and Financial Resources” and “Contractual Obligations.”

This MD&A should be read inconjunction with the other sections of this Annual Report on Form 10-K,including our Consolidated Financial Statements.

**Forward-Looking Statements**

The following discussion andanalysis contains forward-looking statements, within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, that are based on management’sbeliefs and assumptions, current expectations, estimates and projections. Suchstatements, including statements relating to the Company’s expectations forfuture financial performance, are not considered historical facts and areconsidered forward-looking statements under the federal securities laws.These statements may contain words such as “believes,” “anticipates,” “plans,” “expects,”“intends,” “estimates” or similar expressions. These statements are notguarantees of our future performance and are subject to risks, uncertaintiesand other important factors that could cause our actual performance orachievements to differ materially from those expressed or implied by theseforward-looking statements and include, without limitation: the effect ofour acquisition strategy on future operating results, including our ability toeffectively integrate acquired companies into our existing operations; theuncertainty of acceptance of new products and successful bidding for newcontracts; the effect of technological changes or obsolescence relating to ourproducts and services; and the effects of government regulation or shifts ingovernment policy, as they may relate to our products and services, and otherrisks or uncertainties detailed in Item 1A, “Risk Factors,” of this AnnualReport. Given these uncertainties, you should not rely on forward-lookingstatements. The Company undertakes no obligations to update any forward-lookingstatements, whether as a result of new information, future events or otherwise.

**Company Overview**

DRS is a supplier of defenseelectronic products, systems and military support services. We providehigh-technology products, services and support to all branches of the U.S.military, major aerospace and defense prime contractors, governmentintelligence agencies, certain international military forces and industrialmarkets.

On October 2, 2006, weimplemented a new organizational operating structure that realigned our threeoperating segments: the Command, Control, Communications, Computers andIntelligence Group, the Surveillance & Reconnaissance Group and theSustainment Systems & Services Group, into four operating segments.The four operating segments are the Command, Control, Communications, Computersand Intelligence (C4I) Segment, the Reconnaissance, Surveillance & TargetAcquisition (RSTA) Segment, the Sustainment Systems Segment and the TechnicalServices Segment. All other operations, primarily our Corporate Headquarters,are grouped in Other. All prior-year amounts presented by segment have beenreclassified to reflect the new operating segment structure.

31

----

On March 10, 2005, wecompleted the sale of two of our operating units, DRS Weather Systems, Inc.(DRS Weather) and DRS Broadcast Technology, Inc. (DRS Broadcast). Theoperating units were acquired in connection with our fiscal 2004 acquisition ofIntegrated Defense Technologies, Inc. (IDT). The results of operations of DRS Weather and DRS Broadcast for the fiscalyear ended March 31, 2005 are included in the Consolidated Statements ofEarnings as “Earnings from discontinued operations, net of income taxes.” Thecash flows of the discontinued operations also are presented separately in theConsolidated Statement of Cash Flows for the year ended March 31, 2005. Asummary of the operating results of the discontinued operations for the yearended March 31, 2005 is presented under “Acquisitions and Divestitures”below.

The C4I Segment is comprised ofthe following business areas: Command, Control and Communications (C3), whichincludes naval display systems, ship communications systems, radar systems,technical support, electronic manufacturing and system integration services,secure voice and data communications, air combat training, and electronicwarfare and ship network systems; Power Systems, which includes naval andindustrial power generation, conversion, propulsion, distribution and controlsystems; 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, anddiagnostics and vehicle electronics.

The RSTA Segment develops andproduces electro-optical sighting, targeting and weapon sensor systems,aircraft weapons alignment systems and image intensification (I2 ) night vision, combat identification andlaser aimer/illuminator products, and provides electronic manufacturingservices.

The Sustainment Systems Segmentdesigns, engineers and manufactures integrated military electronics and othermilitary 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 Technical Services Segmentprovides engineering services, logistics and training services, advancedtechnology services, asset protection systems and services, telecommunicationsystems integration and information technology services, power generation andvehicle armor kits for military, intelligence, humanitarian, disaster recoveryand emergency responder applications.

The substantial majority of theour revenue is generated pursuant to written contractual arrangements todesign, develop, manufacture and/or modify complex products and to providerelated engineering, technical and other services according to thespecifications of the buyers (customers). Our primary “end-use” customer is theDoD. For the year ended March 31, 2007, sales directly to the DoD andindirect sales to the DoD through its prime contractors and subcontractorsgenerated $2.5 billion, or 90%,of our consolidated revenues. Our other customers include certain U.S.government intelligence agencies, foreign governments, commercial andindustrial customers and other U.S. federal, state and local governmentagencies.

**Defense Industry Considerations and Business Strategy**

The Global War on Terrorism(GWOT), Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedomhave altered the global defense and security environment and have had, and forthe foreseeable future are likely to continue to have, a significant impact onthe markets for defense and advanced technology systems and products. The DoDcontinues to focus on both supporting ongoing operations in Afghanistan andIraq and transforming the U.S. military to confront future threats. Inaddition, the Office of Homeland Security and other U.S. government agenciescontinue to focus on enhancing the security of the United States. While thefuture direction of current operations remains unsettled, we believe that the2006 Quadrennial Defense Review, a comprehensive report issued by the DoD everyfour years on defense strategy, force structure, force modernization plans,infrastructure, budget plans, and other elements of 

32

----

U.S. defenseprograms and policies (the QDR), will continue to drive strategic thinking andbudget priorities in the near term. The QDR recommended certain changes toforce structure,  particularly withrespect to special operations forces, relating to the GWOT and the insurgencyin 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.

The 2008 budget submitted by thePresident requests $481.4 billion in discretionary authority for the DoD “baselinebudget.” The baseline budget excludes any funding for ongoing militaryoperations in Iraq and Afghanistan. These costs, discussed below, are requestedas emergency supplemental funding. The fiscal year 2008 DoD baseline budgetreflects an increase of 10.5% over the fiscal year 2007 baseline budget. The2008 baseline budget includes $101.7 billion for procurement of systems and$75.1 billion for research, development, test and evaluation (RDT&E).Projected 2008 spending in the procurement and RDT&E accounts, collectivelyknown as the investment accounts, represents nearly a 13.1% increase overfiscal year 2007 levels. The Operations and Maintenance accounts (O&M),which contain the bulk of funding for training, logistics, services and othersustainment activities, total approximately $164.7 billion for 2008, anincrease of nearly 11% over fiscal year 2007 levels. The investment accountsare a key source of funding for our programs. These investment accounts showcontinued growth throughout the FYDP, with some flattening in the latter years.Given the breadth of our programs, we also receive substantial revenue from theO&M accounts. We expect these accounts to be fully funded in the near-term,but their funding may decrease as the pace of current operations declines. Wealso anticipate that with the control of Congress shifting political parties,federal government contractors will become subject to increased scrutiny andoversight. Overall, however, we expect continued strong levels of DoD fundingfor ongoing operations.

During this wartime era, defensebudgets have evolved to include not only the President’s initial budgetsubmission, but also supplemental funds requested over the course of the fiscalyear. In addition to the baseline budget, the 2008 budget proposal includes$141.7 billion in funding to continue the GWOT in 2008. The 2008 GWOT requestfunds urgent needs associated with operations in Iraq, Afghanistan and othercosts of the GWOT, including the costs of repairing, replacing or replenishingequipment lost in combat by both active and reserve components. Accompanyingthe 2008 defense baseline budget and the President’s GWOT request is approximately$95.0 billion in approved emergency supplemental funding to cover equipmentreconstitution and the costs of operations in the GWOT for remainder of the U.S.government’s fiscal year 2007.

**Business Strategy**

Over the past several years, DoDbudgets have experienced 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, we believethe DoD philosophy has focused on a transformation strategy that balancesmodernization and recapitalization (or upgrading existing platforms), whileenhancing 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.

Our strategy is designed tocapitalize on the breadth of our technology and extensive expertise in order tomeet the evolving needs of our customers. We intend to expand our share ofexisting programs and participate in new programs by leveraging the strongrelationships that we have developed with the DoD, several other U.S.government agencies and all of the major U.S. defense prime contractors. Weplan to continue to align our research and development, 

33

----

manufacturingand new business efforts to complement our customers’ requirements and toprovide state-of-the-art products and services. We plan to maintain adiversified and broad business mix with limited reliance on any single program,significant follow-on business and an attractive customer profile. We alsointend to expand our technical services and support offerings to the DoD, thusdiversifying our business beyond the historical investment accounts and intoO&M funded activities.

A significant component of ourstrategy has been to enhance our existing product base through selectiveacquisitions that add new products, services and technologies in areas thatcomplement our present business base. We intend to continue acquiring selectpublicly and privately held companies, as well as defense businesses of largercompanies that (i) exhibit significant market position(s) in theirbusiness areas, (ii) offer products that complement and/or expand ourproduct offerings and (iii) display growing revenues and positiveoperating income and cash flow prospects.

**Acquisitions and Divestitures**

The following summarizes certainacquisitions and divestitures we completed, which significantly affect thecomparability of the period-to-period results presented in this discussion andanalysis. The acquisitions discussed below have been accounted for using thepurchase method of accounting. Accordingly, the results of operations of theacquired businesses are included in our reported operating results from theirrespective effective dates of acquisition. We selectively target acquisitioncandidates that complement or expand our product lines, services or technicalcapabilities. We continue to seek acquisition opportunities consistent with ouroverall business strategy.

**Fiscal 2006 Acquisitions—****On**January 31,2006, we completed our acquisition of Engineered Support Systems, Inc.(ESSI). The purchase price was $43.00 per share of ESSI common stock, which wascomprised of $30.10 in cash and a fraction of a share of DRS common stockvalued at $12.90. Total consideration for the acquisition was $1.93 billion.In addition to the purchase price, we assumed $78.5 million of ESSI’s debtat closing and recorded $27.1 million of acquisition-related costs,including professional fees. Upon closing of the acquisition, we repaid ESSI’scredit facility in the amount of $76.3 million. We financed the cashportion of the acquisition by utilizing cash and cash equivalents on hand,revolving credit borrowings, $275.0 million in term debt and $900 millionof new debt securities, including $350 million aggregate principal amountof 65¤8%senior notes due 2016, $250 million aggregate principal amount of 75¤8%senior subordinated notes due 2018 and $300.0 million aggregate principalamount of 2.0% convertible senior notes due 2026.

ESSI, headquartered in St. Louis,Missouri, is a supplier of integrated military electronics, support equipmentand technical services focused on advanced sustainment and logistics support solutionsfor all branches of the U.S. armed services, major prime defense contractors,certain international militaries, homeland security forces and selectedgovernment and intelligence agencies. ESSI also produces specialized equipmentand systems for commercial and industrial applications. We believe the additionof ESSI has contributed a significant base of systems, products and servicesfocused on military force sustainment, technical and logistics support,integrated military electronics and field support equipment. The entitiesacquired in the ESSI acquisition are being managed in our Sustainment Systemsand Technical Services Segments.

On June 27, 2005, we acquiredWalkAbout Computer Systems, Inc. (WalkAbout) in a stock purchasetransaction for approximately $13.8 million in cash, with additionalconsideration payable of up to $5.0 million upon achievement of certainrevenue targets for a period of two and a half years. We accrued $0.2 million and $0.4 million of additionalconsideration during fiscal 2006 and fiscal 2007, respectively, as a result ofachieving certain revenue targets. In addition to the purchase price, werecorded approximately $0.2 millionfor acquisition-related costs, including professional fees.

34

----

WalkAbout, formerly located inWest Palm Beach, Florida, is a manufacturer of several lines of rugged, mobiletablet PCs, serving industrial, municipal, military and government markets. Webelieve that the acquisition of WalkAbout has enhanced our position in thetactical computer systems business by broadening our product offerings.WalkAbout is being managed as part of our C4I Segment.

On April 15, 2005, weacquired Codem Systems, Inc. (Codem) in a stock purchase transaction forapproximately $31.6 million in cash, with additional consideration payableof up to $5.0 million upon achievement of certain annual bookings targetsfor a period of three years. We accrued $0.3 millionof additional consideration in fiscal 2006, and $1.0 million during fiscal2007 as a result of achieving certain bookings targets. In addition tothe purchase price, we recorded approximately $0.3 million foracquisition-related costs, including professional fees.

Codem, located in Merrimack, NewHampshire, is a provider of signals intelligence (SIGINT) systems, networkinterface modules and high-performance antenna control systems. Managementbelieves that the addition of Codem has enhanced our existing intelligenceproduct base. Codem is being managed as part of our C4I Segment.

**Fiscal2005 Acquisitions**   On December 14, 2004, we acquired certainassets and liabilities of Night Vision Equipment Co., Inc. and ExcaliburElectro Optics, Inc. (collectively, NVEC), a privately held businessheadquartered in Allentown, Pennsylvania. The purchase price was $47.2 millionin cash, including a $4.7 million working capital adjustment paid in thefourth quarter of fiscal 2005, with additional consideration of up to a maximumof $37.5 million payable upon achieving certain annual revenue targets fora period of three years. Approximately, $4.6 million and $6.6 millionof additional consideration were recorded and paid in the fourth quarter offiscal 2006 and 2007, respectively, as a result of achieving certain revenuetargets. In addition to the purchase price, we recorded approximately $0.1 million for acquisition-related costs.

NVEC, renamed Night Vision Systems(NVS), is a manufacturer and marketer of innovative night vision products andcombat identification systems. It focuses on the rapid development and deliveryof lightweight, affordable image intensification (I2) night vision, uncooled thermal imaging,reflective combat identification and laser-based products for U.S. andinternational militaries and paramilitary organizations. NVS maintainsresearch, development and production facilities in Prescott Valley, Arizona,and has production and sales agreements with infrared and thermal imagingdivisions of several major U.S. prime contractors. The acquisition of NVS hasenhanced DRS’s position in the uncooled infrared sensor and thermal imagingsystems market, as well as provided increased access to and participation inhomeland defense efforts at the federal, state and local levels. NVS is beingmanaged as part of our RSTA Segment.

**Fiscal 2005 Divestiture**   On March 10, 2005, we sold our DRSWeather Systems Inc. and DRS Broadcast Technology Inc. operating units for$29.0 million, net of transaction costs, and recorded a $0.7 millionafter-tax gain on the sale. DRS Weather designed, developed and producedmeteorological surveillance and analysis products, including Doppler weatherradar systems. DRS Broadcast manufactured radio frequency broadcasttransmission equipment. DRS Weather and DRS Broadcast operated as a part of ourC4I Segment. A summary of the results of discontinued operations for the fiscalyear ended March 31, 2005 follows:

| ** **                                                                                               | ** ** | **Year Ended**     | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                               | ** ** | **March 31,**      | ** ** |
| ** **                                                                                               | ** ** | **2005**                | ** ** |
| ** **                                                                                               | ** ** | **(in thousands)** | ** ** |
| Revenues                                                                                                 |       |                    | $          | 33,325 |   |   |
| Earnings before taxes                                                                                    |       |                    | $          | 3,601 |   |   |
| Income tax expense                                                                                       |       |                    | 1,050      |   |   |
| Earnings from discontinued  operations (including after-tax   gain on sale of $0.7 million in 2005) |       |                    | $          | 2,551 |   |   |

 

35

----

**Critical Accounting Policies**

The following is not intended to be a comprehensivelist of all of our accounting policies. Our significant accounting policies aremore fully described in Note 1 to the Consolidated Financial Statements.In many cases, the accounting treatment of a particular transaction is dictatedby accounting principles generally accepted in the United States of America,with no need for management’s judgment in their application. Other areasrequire management’s judgment to make estimates and assumptions that affect thereported amounts of assets and liabilities and the reported amounts of revenuesand costs and expenses during the reporting period. Ultimately, actual amountsmay differ from these estimates. We believe that critical accounting estimateshave the following attributes: (1) they require management to makeassumptions about matters that are uncertain at the time of the estimate; and (2) differentestimates we reasonably could have used, or changes in the estimates that arereasonably likely to occur, would have a material effect on our consolidatedfinancial condition or results of operations. We believe the following criticalaccounting policies contain the more significant judgments and estimates usedin the preparation of our Consolidated Financial Statements.

**ManagementEstimates**   The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Some of the more significantestimates made by management involve the percentage of completion and totalestimated costs at completion on long-term contracts, recoverability ofgoodwill and long-lived and intangible assets, the valuation of deferred taxassets and liabilities, the valuation of assets acquired and liabilitiesassumed in purchase business combinations, the valuation of pensions and otherpostretirement benefits, and the recognition of share-based compensation costs,as discussed below. We also make estimates regarding the recoverability ofassets, including accounts receivable and inventories, and liabilities forlitigation and contingencies. Actual results could differ from these estimates.

**RevenueRecognition on Contracts and Contract Estimates**   The substantial majority of our revenue isgenerated pursuant to written contractual arrangements to design, develop,manufacture and/or modify complex products, and to provide related engineering,technical and other services according to the specifications of the buyers(customers). These contracts may be fixed price, cost-reimbursable, or time andmaterial. These contract types are accounted for in accordance with AmericanInstitute of Certified Public Accountants Statement of Position 81-1, “Accountingfor Performance of Construction-Type and Certain Production-Type Contracts”(SOP 81-1). Cost-reimbursable type contracts also are specificallycovered by Accounting Research Bulletin No. 43, Chapter 11, Section A,“Government Contracts, Cost-Plus-Fixed Fee Contracts” (ARB 43), inaddition to SOP 81-1.

Revenues and profits on fixed-price contracts arerecognized using percentage-of-completion methods of accounting. Revenues andprofits on fixed-price production contracts, whose units are produced anddelivered in a continuous or sequential process, are recorded as units aredelivered based on their selling prices (the “units-of-delivery method’’). Revenuesand profits on other fixed-price contracts with significant engineeringas well as production requirements are recorded based on the ratio of totalactual incurred costs to date to the total estimated costs for each contract (“thecost-to-cost method’’). Under the percentage-of-completion method ofaccounting, a single estimated total profit margin is used to recognize profitfor each contract or profit center over its entire period of performance, whichcan exceed one year.

Accounting for revenues and profits on a fixed-pricecontract requires the preparation of estimates of (1) the total contractrevenue, (2) the total costs at completion, which is equal to the sum ofthe actual incurred costs to date on the contract and the estimated costs tocomplete the 

36

----

contract’s statement of work, and (3) themeasurement of progress towards completion. The estimated profit or loss atcompletion on a contract is equal to the difference between the total estimatedcontract revenue and the total estimated cost at completion. Under theunits-of-delivery method, sales on a fixed-price type contract are recorded asthe units are delivered during the period based on their contractual sellingprices. Under the cost-to-cost method, revenue on a fixed-price type contractare recorded at amounts equal to the ratio of actual cumulative costs incurred,divided by total estimated costs at completion, multiplied by (i) thetotal estimated contract revenue, less (ii) the cumulative revenuerecognized in prior periods. The profit recorded on a contract in any periodusing either the units-of-delivery method or cost-to-cost method is equal to (i) thecurrent estimated total profit margin multiplied by the cumulative revenuerecognized, less (ii) the amount of cumulative profit previously recordedfor the contract. In the case of a contract for which the total estimatedcontract costs (including overhead and general and administrative expenses)exceed the total estimated revenues, a loss arises, and a provision for theentire loss is recorded in the period that it becomes evident. Theunrecoverable costs on a loss contract that are expected to be incurred infuture periods are recorded as a component of other current liabilitiesentitled ‘‘Loss accrual for future costs on uncompleted contracts.’’

Revenue and profits on cost-reimbursable typecontracts are recognized as allowable costs are incurred on the contract, at anamount equal to the allowable costs plus the estimated profit on those costs.The estimated profit on a cost-reimbursable contract is fixed or variable,based on the contractual fee arrangement. Incentive and award fees on thesecontracts are recorded as revenue when the conditions under which they areearned are reasonably assured of being met and reasonably can be estimated. Revenueand profits on time-and-material type contracts are recognized on the basis ofdirect labor hours expended multiplied by the contractual fixed rate per hour,plus the actual costs of material and other direct non-labor costs. On atime-and-material-type contract, the fixed hourly rates include amounts for thecost of direct labor, indirect contract costs and profit.

We review cost performance and estimates to completeat least quarterly and in many cases more frequently. Adjustments to originalestimates for a contract’s revenue, estimated costs at completion and estimatedprofit or loss often are required as work progresses under a contract, asexperience is gained and as more information is obtained, even though the scopeof work required under the contract may not change, or if contractmodifications occur. The impact of revisions in profit estimates for all typesof contracts is recognized on a cumulative catch-up basis in the period inwhich the revisions are made. Amounts representing contract change orders orclaims are included in revenue only when they can be estimated reliably andtheir realization is probable, and are determined on a percentage-of-completionbasis measured by the cost-to-cost method. Incentives or penalties and awardsapplicable to performance on contracts are considered in estimating revenuesand profit rates, and are recorded when there is sufficient information toassess anticipated contract performance. Incentive provisions, which increaseor decrease earnings based solely on a single significant event, are notrecognized until the event occurs.

We record contract-related assets andliabilities acquired in business combinations at their fair value byconsidering the remaining contract amounts to be billed and collected, ourestimate to complete (including general and administrative expenses for governmentcontracts) and a profit allowance on the remaining contract amount to be billedand collected. Facts and circumstances specific to an acquired contract dictatethe profit allowance, if any, established at acquisition (certain contracts,including those in a loss position at the date of acquisition, may be adjustedto break-even by recording a reserve for anticipated costs at acquisition). Certainfactors influencing the profit allowance, if any, on an acquired contractinclude: contract type, margins earned on similar contracts, the original bidof the acquired entity and the life-cycle and related risk profile of thecontract. Revisions to cost estimates subsequent to the date of acquisition may

37

----

be recorded as an adjustment togoodwill or earnings, depending on the nature and timing of the revision.

Revenues on arrangements that are not within the scopeof SOP 81-1 or ARB 43 typically are recognized in accordance with the SECStaff Accounting Bulletin No. 104, “Revenue Recognition in FinancialStatements.” Revenues are recognized when there is persuasive evidence of anarrangement, delivery has occurred or services have been performed, the sellingprice to the buyer is fixed or determinable, and collectibility is reasonablyassured.

**Goodwill andAcquired Intangible Assets**   We allocate the cost of our acquiredbusinesses (commonly referred to as the purchase-price allocation) to theassets acquired and liabilities assumed based on their estimated fair values atthe date of acquisition. As part of the purchase-price allocations for ouracquired businesses, identifiable intangible assets are recognized as assetsapart from goodwill if they arise from contractual or other legal rights or ifthey are capable of being separated or divided from the acquired business andsold, transferred, licensed, rented or exchanged, unless the intangible assetis comprised of the assembled workforce of the acquired business.

Generally, the substantial majority of the intangibleassets from the businesses that we acquire are derived from the intellectualcapital of the management, administrative, scientific, engineering andtechnical employees of the acquired businesses. The success of our businessesis primarily dependent on the management, contracting, engineering and technicalskills and knowledge of our employees, rather than productive capital(machinery and equipment). Generally, patents, trademarks and licenses are notmaterial to our acquired businesses. Therefore, the substantial majority of theintangible assets for our acquired businesses is recognized as goodwill.

The values assigned to acquired identifiableintangible assets for customer and contract-related and technology-basedidentifiable assets are determined as of the date of acquisition, based onestimates and judgments regarding expectations of the estimated futureafter-tax cash flows from those assets over their lives, including theprobability of expected future contract renewals and sales, all of which arediscounted to present value. The value assigned to goodwill equals the amountof the purchase price of the business acquired in excess of the sum of theamounts assigned to identifiable acquired assets, both tangible and intangible,less liabilities assumed.

We assess the recoverability ofour long-lived assets and acquired identifiable intangible assets with finiteuseful lives whenever events or changes in circumstances indicate that thecarrying value of the asset may not be recoverable. Factors we considerimportant which could trigger an impairment review include:

·       Significantunder-performance relative to expected historical performance orprojected future operating results;

·       Significantchanges in the manner or use of the assets or the strategy that affects thatasset group;

·       Significantadverse changes in the business climate in which we operate; and

·       Lossof a significant contract or failure to be awarded add-on contracts.

If we identify the existence ofone or more of the above indicators, we would determine if the asset (or assetgroup) is impaired by comparing its expected future net undiscounted cash flowswith its carrying value. If the expected future net undiscounted cash flows areless than the carrying value of the asset, we would record an impairment lossbased on the difference between the asset’s estimated fair value and itscarrying value. The determination of the future net undiscounted cash flows andthe fair value of an asset involves estimates and assumptions 

38

----

regarding futureoperating results, all of which are impacted by economic conditions related tothe industries in which those assets operate. Inaccurate estimates could have amaterial effect on our results of operations and financial position. At March 31,2007, we had identifiable acquired intangible assets with finite useful livesof $197.0 million, net ofaccumulated amortization.

Goodwill is tested for impairmentat a level of reporting referred to as a “reporting unit.” We have identifiedfive reporting units for impairment testing purposes at March 31, 2007.

The annual goodwill impairmenttest is typically performed after completion of our annual financial operatingplan, which occurs in the fourth quarter of our fiscal year. In connection withthe new organizational structure implemented October 2, 2006, we testedgoodwill for impairment. The change in operating structure significantlychanged the composition of certain reporting units, which, under Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets,” required us to test for impairment. We completed ourimpairment tests in the third quarter of fiscal 2007 and our annual impairmenttests in the fourth quarter of fiscal 2007 and 2006 with no adjustment to thecarrying value of our goodwill.

The annual goodwill impairmentassessment involves estimating the fair values of each of our reporting unitsand comparing such fair values with the reporting unit’s respective carryingvalue. If the carrying value of the reporting unit exceeds its fair value,additional steps are followed to recognize a potential goodwill impairment loss.Fair value is estimated based upon two methodologies: a market approach and anincome approach. The market approach includes applying valuation multiples toeach reporting unit’s projected revenues, earnings before net interest andtaxes (EBIT), and earnings before net interest, taxes, depreciation andamortization (EBITDA). The income approach discounts future net cash flows totheir present value at a rate that reflects both the current returnrequirements of the market and the risks inherent in the reporting unit. Theresults of the two approaches are averaged and compared with the carrying valueof the reporting units. Estimating the fair value of the reporting unitsrequires significant estimates and assumptions by management, as thecalculation is dependent on estimates for our future revenues, EBIT, EBITDA andcash flows, and the appropriate discount rate to be applied, all of which areimpacted by economic conditions related to the industries in which we operate,as well as conditions in the U.S. capital markets.

The most significant assumptionsused in the income approach, regarding the estimated fair values of ourreporting units in connection with goodwill valuation assessments, are: (1) multi-yearcash flow projections for each of our reporting units, (2) a discount rateincluding the estimated risk-free rate of return, and (3) the expected long-term growth rate (beyond 5 years)of our businesses. The discount rate represents the estimated weightedaverage cost of capital (WACC). The WACC represents the estimated required rateof return on DRS’s total market capitalization. It is comprised of (1) anestimated required rate of return on equity, based on publicly traded companieswith business characteristics comparable to DRS, including a risk-free rate ofreturn and an equity-risk premium, and (2) the current after-tax marketrate of return on DRS’s debt, each weighted by the relative market valuepercentages of DRS’s equity and debt. In valuing our reporting units in fiscal2007, we used a weighted average discount rate of approximately 9.0%. Changesin our assumptions would affect the estimated fair values of our five reportingunits and could result in a goodwill impairment charge in a future period.Based upon the results of our most recent goodwill impairment test, a decreaseof approximately 5% in the estimated fair value of each of the reporting unitswould result in a goodwill impairment charge for the two reporting units thatare comprised primarily of operating units acquired in connection with the ESSIacquisition (the ESSI-related reporting units). The ESSI-related reportingunits currently are sensitive to a decrease in their fair value, as thepurchase price for ESSI was at fair value on January 31, 2006, with nosignificant change in industry valuations or discounted cash flows since theacquisition. For the fiscal2007 impairment test, the fair value of each of our other reporting unitsexceeded their carrying value by a significant amount. An impairment 

39

----

charge togoodwill could have a material adverse effect on our financial condition andresults of operations. At March 31, 2007, we had goodwill of $2.6 billion.

**Pension Plan and PostretirementBenefit Plan Obligations**   The obligations for ourpension plans and postretirement benefit plans and the related annual costs ofemployee benefits are calculated based on several long-term assumptions,including discount rates for employee benefit liabilities, rates of return on planassets, expected annual rates of salary increases for employee participants inthe case of pension plans, and expected annual increases in the costs ofmedical and other healthcare benefits in the case of postretirement benefitobligations. These long-term assumptions are subject to revision based onchanges in interest rates, financial market conditions, expected versus actualreturns on plan assets, participant mortality rates and other actuarialassumptions, including future rates of salary increases, benefit formulas andlevels, and rates of increase in the costs of benefits. Changes in theassumptions, if significant, materially can affect the amount of annual netperiodic benefit costs recognized in our results of operations from one year tothe next, the liabilities for the pension plans and postretirement benefitplans, changes to stockholders’ equity through accumulated other comprehensive earnings,and our annual cash requirements to fund these plans.

The fiscal 2007 discount rateassumptions used to determine the pension and postretirement benefitobligations were based on a hypothetical double-A yield curve represented by aseries of annualized individual discount rates. The current year’s discountrates were selected using a method that matches projected payouts from theplans with a zero-coupon double-A bond yield curve. This yield curve wasconstructed from the underlying bond price and yield data collected as of theplan’s measurement date and is represented by a series of annualized,individual discount rates with durations ranging from six months to thirtyyears. These individual discount rates are then converted into a singleequivalent discount rate.

Our benefit obligation and annualnet periodic expense significantly are affected by the discount rate assumptionwe use. For example, an additional reduction to the discount rate of25 basis points would have increased our benefit obligation at March 31,2007 by approximately $9.4 million and our net periodic expense for fiscal2007 by approximately $0.5 million. Conversely, an increase to thediscount rate of 25 basis points would have decreased our benefitobligation at March 31, 2007 by approximately $9.1 million and our netperiodic expense for fiscal 2007 by approximately $0.5 million.

As described in Note 12 to ourConsolidated Financial Statements, we adopted SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans-an Amendment of FinancialAccounting Standards Board (FASB) Statements No. 87, 88, 106 and132(R)” (SFAS No. 158) at the end of fiscal 2007, which resulted in a $4.0 millionincrease in accrued retiree benefits and other long-term liabilities, $5.1 million decrease to theintangible asset and a corresponding $5.7 million decrease, net of $3.4 millionof deferred taxes, in accumulated other comprehensive earnings in stockholders’equity.

***Share-BasedCompensation******  ***Asof April 1, 2006, we adopted the provisions of SFAS No. 123 (revised2004), “Share-Based Payment” (SFAS 123R), as interpreted by SEC StaffAccounting Bulletin No. 107, which requires that the cost resulting fromall share-based payment transactions be recognized in the financial statementsat their fair values. We adopted SFAS 123R using the modified prospectiveapplication method under which the provisions of SFAS 123R apply to new awardsand to awards modified, repurchased or cancelled after the adoption date. Underthe fair value recognition provisions of this statement, share-basedcompensation cost is measured at the grant date based on the value of the awardand is recognized as expense over the vesting period. Determining the fairvalue of share-based awards at the grant date requires judgment, includingestimating our stock price volatility and employee stock option exercisebehaviors. Our expected volatility is based upon the historical volatility ofour stock. The expected life of share-based awards is based on observedhistorical exercise patterns for different groups of employees and 

40

----

directors. As share-basedcompensation expense recognized in the consolidated statement of earnings isbased on awards ultimately expected to vest, the amount of expense has beenreduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

**Income Taxes**   AtMarch 31, 2007, we had net deferred tax assets of $26.5 million,including $23.4 million of loss and tax credit carryforwards, which aresubject to various limitations and will expire if unused within theirrespective carryforward periods. As of March 31, 2007, we provided a $15.8 millionvaluation allowance associated with the loss carryforwards and certain othertemporary differences that are included in our net deferred tax assets.Deferred taxes are determined separately for each of our tax paying entities ineach tax jurisdiction. Future realization of deferred tax assets ultimatelydepends on the existence of sufficient taxable income of the appropriatecharacter (for example, ordinary income or capital gain) within the carrybackand carryforward periods available under the tax law. At March 31, 2007, webelieve we will realize our recorded net deferred tax assets. A change in theability of our operations to continue to generate future taxable income couldaffect our ability to realize the future tax deductions underlying our netdeferred tax assets and require us to increase our valuation allowance againstour deferred tax assets. Such changes, if significant, could have a materialimpact on our effective tax rate, results of operations and financial positionin any given period.

Our annual effective tax rate isbased on expected pre-tax earnings, statutory tax rates and tax planningopportunities available in various jurisdictions in which we operate.Significant judgment is required in determining our annual effective tax rateand in evaluating our tax positions.

We establish accruals for taxcontingencies when, notwithstanding the reasonable belief that our tax returnpositions are supported fully, we believe that certain filing positions arelikely to be challenged and, moreover, that such filing positions are not probableof being sustained. We continually evaluate our tax contingency accruals andwill adjust such amounts in light of changing facts and circumstances,including but not limited to emerging case law, tax legislation, rulings byrelevant tax authorities and the progress of ongoing tax audits. Settlement ofa given tax contingency could impact the income tax provision in the year ofresolution. Our tax contingency accruals, including related interest andpenalties, are presented in the consolidated balance sheet within income taxespayable.

41

----

**Other Management Estimates**   A substantial majority of our revenues and,consequently, our outstanding accounts receivables is directly or indirectly relatedto the U.S. government. Therefore, our risk of not collecting amounts due us isminimal. We generally require letters of credit or deposit payments prior tothe commencement of work or obtain progress payments upon the achievement ofcertain milestones from our commercial customers. In addition, our revenues aresupported by contractual arrangements specifying the timing and amounts ofpayments. Consequently, we historically have experienced and expect to continueto experience a minimal amount of uncollectible accounts receivable. Changes inthe underlying financial condition of our customers or changes in the industryin which we operate necessitating revisions to our standard contractual termsand conditions could have an impact on our results of operations and cash flowsin the future.

Our inventory consists of work in process,general and administrative costs, raw materials and finished goods, includingsubassemblies principally for use in our products. We continually evaluate theadequacy of our reserves on our raw materials and finished goods inventory byreviewing historical rates of scrap, on-hand quantities, as compared withhistorical and projected usage levels, and other anticipated contractualrequirements.

We record a liability pertainingto pending litigation or contingencies based on our best estimate of potentialloss, if any, or at the minimum end of the range of loss in circumstances wherea range of loss reasonably can be estimated. Because of uncertaintiessurrounding the nature of litigation and other contingencies, and the cost tous, if any, we continually revise our estimated losses as additional factsbecome known.

**Results of Continuing Operations**

Our operating cycle is long-termand involves various types of production contracts and varying productiondelivery schedules. Accordingly, operating results of a particular year, oryear-to-year comparisons of recorded revenues and earnings, may notbe indicative of future operating results.

Members of oursenior management team regularly review key performance metrics and the statusof operating initiatives within our business. These key performance indicatorsare primarily revenues, operating income and bookings. We review thisinformation on a monthly basis through operating segment reviews, whichinclude, among other operating issues, discussions related to significantprograms, proposed investments in new business opportunities or property, plantand equipment, and integration and cost reduction efforts. The following tablepresents a summary comparison of the key performance metrics, other significantfinancial metrics and significant liquidity metrics monitored by our seniormanagement.

| ** **                              | ** ** | **For the Year Ended March 31,** | ** **    | **Percent Changes** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|---------------|--------------------------|------------|
| ** **                              | ** ** | **2007**                                                  | ** **    | **2006**                 | ** ** | **2005** | ** ** | **2007 vs.  2006** | ** ** | **2006 vs.  2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                   | ** **    | ** **               | ** ** | ** ** | ** ** |
| **Key performance metrics**             | ** ** | ** **                                                | ** **    | ** **               | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                                |       | **$**                                                     | **2,821,113** |                     | $          | 1,735,532 |   | $ | 1,308,600 |   |   | **62.6** | **%** |   |   | 32.6 | % |   |
| Operating income                        |       | **$**                                                     | **307,583**   |                     | $          | 192,710 |   | $ | 143,132 |   |   | **59.6** | **%** |   |   | 34.6 | % |   |
| Bookings                                |       | **$**                                                     | **3,489,167** |                     | $          | 2,172,905 |   | $ | 1,433,030 |   |   | **60.6** | **%** |   |   | 51.6 | % |   |
| **Other significant financial metrics** | ** ** | ** **                                                | ** **    | ** **               | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest and related expenses           |       | **$**                                                     | **119,912**   |                     | $          | 64,186 |   | $ | 39,750 |   |   | **86.8** | **%** |   |   | 61.5 | % |   |
| Income taxes                            |       | **$**                                                     | **60,104**    |                     | $          | 51,994 |   | $ | 44,842 |   |   | **15.6** | **%** |   |   | 15.9 | % |   |
| **Significant liquidity metrics(A)**    | ** ** | ** **                                                | ** **    | ** **               | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Free Cash Flow                          |       | **$**                                                     | **139,328**   |                     | $          | 113,868 |   | $ | 101,662 |   |   | **22.4** | **%** |   |   | 12.0 | % |   |
| EBITDA                                  |       | **$**                                                     | **382,466**   |                     | $          | 239,406 |   | $ | 181,226 |   |   | **59.8** | **%** |   |   | 32.1 | % |   |

----

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

42

----

**Fiscal Year Ended March 31,2007 Compared with Fiscal Year Ended March 31, 2006**

**Revenues andOperating Income****  **Consolidated revenues and operating incomefor the year ended March 31, 2007 increased $1.1 billion and $114.9million, respectively, to $2.8 billion and $307.6 million, respectively, ascompared with the prior fiscal year. The primary driver of the overall increase in revenues wasour fiscal 2006 acquisition of ESSI, which contributed incremental (fiscal 2007over corresponding prior fiscal year) revenues of $914.0 million. Alsocontributing to the increase in revenues were increased shipments of targetacquisition and missile control subsystems, uncooled thermal weapons sights,vision enhancement equipment for ground-based vehicles and chassismodernization kits, and increased engineering and development revenue from anaval infrared search and track program. Partially offsetting the overallincrease in revenues were lower volume from airborne electro-optical sightingsystems products and services, decreased shipments of combat displayworkstations and the cancellation of a test range support program. Also, we hadlower shipments of secure voice systems compared with the prior year.

The growth in operating income for the year ended March 31,2007, as compared with the corresponding prior fiscal year, was due primarilyto the overall increase in revenues from our ESSI acquisition, which contributedincremental operating income of $93.4 million, higher revenues in our RSTASegment and strong margins from our power systems business. Partiallyoffsetting the overall increase in operating income were overall net lowermargins from our intelligence businesses and certain rugged computer systems, whichwere under new contracts in fiscal 2007. During fiscal 2007, we also recorded$3.7 million of severance-related costs related to the new organizationaloperating structure announced October 2, 2006. See “Operating Segments”discussion below for additional information.

As described in Note 1.Q. to our ConsolidatedFinancial Statements, we adopted SFAS 123R, effective April 1, 2006, usingthe modified prospective method. For the year ended March 31, 2007, werecorded total share-based costs related to stock options and non-vested stockof $11.1 million, and $11.1 million was charged to operating income. At March 31,2007, there was $8.0 million of unrecognized compensation costs related tostock options, which are expected to be recognized over a weighted averageremaining period of 2.1 years. As of March 31, 2007, total unrecognizedcompensation costs related to non-vested stock awards was $11.7 million, which areexpected to be recognized over a weighted average remaining period of 2.0years.

As a result of applying SFAS 123R, our earnings beforeincome taxes for the fiscal year ended March 31, 2007 were $6.3 millionlower and net earnings during the same fiscal year was $3.9 million lower thanif we had continued to account for share-based compensation under AccountingPrinciples Bulletin (APB) Opinion No. 25.

Basic earnings per share for the fiscal year ended March 31,2007 would have been $3.29 per share and diluted earnings per share would havebeen $3.21 per share if we had not adopted SFAS 123R. For the fiscal year endedMarch 31, 2007, we reported basic earnings per share of $3.19 and dilutedearnings per share of $3.12.

**Bookings****  **We define bookings as the value of contractawards received from the U.S. government for which the U.S. government hasappropriated funds, plus the value of contract awards and orders received fromcustomers other than the U.S. government. Bookings for the year ended March 31,2007 increased $1.3 billion, versus the prior year, to $3.5 billion. Theprimary drivers of the increase were our ESSI acquisition, which contributedincremental bookings of $1.1 billion, as well as strong bookings associated with our uncooledthermal weapon sights and ground-based target acquisition and missile controlsubsystems, both in our RSTA Segment, and strong bookings for rugged computers inour C4I Segment.

**Interest andRelated Expenses**   Interest and related expenses increased$55.7 million for the year ended March 31, 2007, as compared with theprior year, to $119.9 million. The increase in interest and related expenseswas primarily the result of an increase in our average borrowings 

43

----

outstanding, due to thefull year impact of borrowings for the ESSI acquisition.  In connection with our acquisition of ESSI our averageborrowings increased due to our January 31, 2006 issuance of $350 millionof 65¤8%senior notes, $250 million of 75¤8%senior subordinated notes and $300 million of 2% senior convertible notes andthe February 8, 2006 exercise of an overallotment option for an additional$45 million of 2% senior convertible notes. In addition, since the acquisition,we have utilized our revolving line of credit to meet certain working capitalneeds (see “Liquidity and Capital Resources” below). At March 31, 2007, wehad no borrowings outstanding under our revolving credit facility. At March 31,2006, we had $40 million outstanding under our revolving credit facility.

**Income taxes**   Theeffective income tax rate for fiscal 2007 was approximately 32%, compared withapproximately 39% for last fiscal year. The lower fiscal 2007 tax rate was dueto the recording of $11.6 million in discrete cumulative tax benefitsthroughout the year, primarily related to a multiyear redetermination of ourExtra-Territorial Income (ETI) exclusion. The lower tax rate also reflectedthe reinstatement of the Research and Development Credit as part of the TaxRelief and Health Care Act of 2006, a reduction in certain state income taxexpense resulting from our internal integration and operational realignmentannounced in October 2006, as well as other individually insignificant items.The U.S. enacted the American Jobs Creation Act of 2004 (the Jobs Act) inOctober 2004 which contains many provisions affecting our income taxes. TheJobs Act contains a provision that eliminated the benefits of the ETI exclusionfor export sales subsequent to 2006 and phases in a new tax deduction forincome from qualified domestic production activities over a transition periodthat began in 2005. We anticipate that our effective tax rate for fiscal 2008will approximate 38%.

**Fiscal Year Ended March 31,2006, Compared with Fiscal Year Ended March 31, 2005**

**Revenues andOperating Income****  **Consolidatedrevenues and operating income for the year ended March 31, 2006 increased$426.9 million and $49.6 million, respectively, to $1.7 billion and $192.7million, respectively, as compared with the prior fiscal year. The increase inrevenues was largely driven by our fiscal 2006 acquisitions of ESSI, Codemand WalkAbout and fiscal 2005 acquisition of NVEC, which, combined, contributedincremental (2006 fiscal over prior fiscal year) revenues of $256.8 million.Also contributing to the overall increase in revenues were increased shipmentsof certain rugged computer systems, airborne training pods, target acquisitionand missile control subsystems, and vision enhancement equipment forground-based vehicles. Partially offsetting the overall increase in revenueswere decreased DDG-1000-related ship propulsion engineering services, lower shipments of certain turbinegenerator sets****and lowervolume from a light armored vehicle service life extension program, which substantiallywas completed in fiscal 2005.

The growth in operating income for the year ended March 31,2006, as compared with the corresponding prior fiscal year, was due primarilyto the overall increase in revenues and favorable margins on certain control cabinets for nuclearfacilities, vision enhancement equipment for ground-based vehicles, and flightcontrol computer contract manufacturing. Our acquisitions of****ESSI, NVEC, Codem and WalkAbout contributed $30.2 millionof incremental operating income for the year ended March 31, 2006.Partially offsetting the overall increase in operating income were losses from DDG-1000-relatedship propulsion engineering. See “Operating Segments” discussion below foradditional information.

**Bookings****  **We define bookings as the value of contract awardsreceived from the U.S. government for which the U.S. government hasappropriated funds, plus the value of contract awards and orders received fromcustomers other than the U.S. government. Bookings for the year ended March 31,2006 increased $739.9 million, versus the same period in the prior year, to$2.2 billion. The primary drivers of the increase were significant bookings fortarget acquisition and missile control subsystems, long-range infrared searchand tracking systems and 

44

----

rugged computers. Our ESSI, NVEC, Codem and WalkAboutacquisitions contributed combined incremental bookings of $275.5 million.

**Interest andRelated Expenses**   Interest and related expensesincreased $24.4 million for the year ended March 31, 2006, as comparedwith the same period in the prior year, to $64.2 million. The increase ininterest and related expenses was primarily the result of an increase in ouraverage borrowings outstanding for the year ended March 31, 2006, ascompared with the previous fiscal year. The increase in average borrowings wasdue to our December 23, 2004 issuance of $200 million of 67¤8% seniorsubordinated notes, incremental borrowings under our amended and restatedcredit agreement, $900 million of new debt securities issued on January 31,2006 relating to our acquisition of ESSI and the exercise of a $45 millionover-allotment option on our convertible debt (see “Liquidity and CapitalResources” below).

**Income Taxes**   Theprovision for income taxes for fiscal year ended March 31, 2006 reflectsan annual effective income tax rate of approximately 39.0%, as compared with43.5% in the prior year. Factors contributing to the decrease in our effectivetax rate included a favorable resolution of an IRS examination, an increase inbenefit from the research and development credit, a benefit from the domesticmanufacturing deduction and a reduction in the state tax rate, offset, in part,by an increase in valuation allowances.

***Operating Segments***

The followingtables set forth, by operating segment, revenues, operating income, and operatingmargin and the percentage increase or decrease of those items, as compared withthe prior fiscal year:

| ** **                       | ** ** | **Years Ended March 31,** | ** **    | **Percent Changes** | ** ** |
|----------------------------------|------------|------------------------------------------|---------------|--------------------------|------------|
| ** **                       | ** ** | **2007**                                 | ** **    | **2006**                 | ** ** | **2005** | ** ** | **2007 vs.  2006** | ** ** | **2006 vs.  2005** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**     | ** **    | ** **               | ** ** | ** ** | ** ** |
| **C4I  Segment**                 |       |                                     |          |                     |       |   |   |   |   |   |   |   |   |   |   |
| Revenues*                        |       | **$**                                    | **1,139,462** | ** **               | $          | 1,123,101 |   | $ | 975,097 |   |   | **1.5** | **%** |   |   | 15.2 | % |   |
| Operating income                 |       | **$**                                    | **130,046**   | ** **               | $          | 125,936 |   | $ | 96,603 |   |   | **3.3** | **%** |   |   | 30.4 | % |   |
| Operating margin                 |       | **11.4**                                 | **%**         | 11.2                     | %          | 9.9 | % |   | **1.8** | **%** |   |   | 13.2 | % |   |
| **RSTA  Segment**                |       | ** **                               | ** **    |                     |       |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Revenues*                        |       | **$**                                    | **599,581**   | ** **               | $          | 444,404 |   | $ | 333,503 |   |   | **34.9** | **%** |   |   | 33.3 | % |   |
| Operating income                 |       | **$**                                    | **68,670**    | ** **               | $          | 54,510 |   | $ | 46,855 |   |   | **26.0** | **%** |   |   | 16.3 | % |   |
| Operating margin                 |       | **11.5**                                 | **%**         | 12.3                     | %          | 14.0 | % |   | **(6.6** | **)%** |   |   | (12.7 | )% |   |
| **Sustainment  Systems Segment** |       | ** **                               | ** **    |                     |       |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Revenues*                        |       | **$**                                    | **400,785**   | ** **               | $          | 69,404 |   | $ | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| Operating income                 |       | **$**                                    | **59,319**    | ** **               | $          | 8,261 |   | $ | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| Operating margin                 |       | **14.8**                                 | **%**         | 11.9                     | %          | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| **Technical  Services Segment**  |       | ** **                               | ** **    |                     |       |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Revenues*                        |       | **$**                                    | **681,285**   | ** **               | $          | 98,623 |   | $ | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| Operating income                 |       | **$**                                    | **49,169**    | ** **               | $          | 6,833 |   | $ | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| Operating margin                 |       | **7.2**                                  | **%**         | 6.9                      | %          | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| **Other**                        |       | ** **                               | ** **    |                     |       |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Revenues*                        |       | **$**                                    | **—**    | ** **               | $          | — |   | $ | — |   |   | **n/m** | ** ** |   |   | n/m |   |   |
| Operating income (loss)          |       | **$**                                    | **379**       | ** **               | $          | (2,830 | ) | $ | (326 | ) |   | **113.4** | **%** |   |   | (768.1 | )% |   |
| Operating margin                 |       | **n/m**                                  | ** **    | n/m                      |       | n/m |   |   | **n/m** | ** ** |   |   | n/m |   |   |

----

*     Revenues are net of intersegment eliminations.

n/m - not meaningful

45

----

** Fiscal YearEnded March 31, 2007, Compared with Fiscal Year Ended March 31, 2006**

**C4I Segment**   Revenuesincreased $16.4 million, or 1.5%, to $1.1 billion for the year ended March 31,2007, as compared with the prior fiscal year. Operating income increased $4.1 million,or 3.3%, to $130.0 million. The key drivers of the increase in revenueswere increased shipments of chassis modernization kits, higher engineering anddevelopment revenue from a naval infrared search and track program, increasedshipments of reactor monitoring equipment and power conversion equipment, aswell as higher revenues from tactical intelligence and targeting equipment, anda cable assembly program. Partially offsetting overall higher revenues weredecreased shipments of combat display workstations, the cancellation of a testrange support program and the April 1, 2006 transfer of the TechnicalServices, Inc. operating unit to the Technical Services Segment, as describedin Note 3 to our Consolidated Financial Statements included herein.

The increase in operating incomefor the year ended March 31, 2007, as compared with the prior fiscal year,was driven primarily by improved margins in the power systems business, offset,in part, by lower margins from C4I’s intelligence business and from certainrugged computer systems, which were performed under a new contract in fiscal2007.

**RSTA Segment**   Revenues increased $155.2 million, or 34.9%,to $599.6 million for the year ended March 31, 2007, as compared with theprior fiscal year. Operating income increased $14.2 million, or 26.0%, to$68.7 million. The increase in revenues was primarily attributable to increased shipments ofground-based target acquisition and missile control subsystems, uncooledthermal weapons sights, vision enhancement equipment for ground-based vehicles,thermal imaging systems and subsystems for a long-range surveillance system.Partially offsetting the overall increase in revenues were lower volumes fromairborne electro-optical sighting systems products and services, and laseraimers and illuminators.

The increase in operating incomefor the fiscal year ended March 31, 2007, as compared with the priorfiscal year, was largely due to higher overall revenues, offset in part by a $3.5 millionunfavorable program adjustment recorded in the fourth quarter of fiscal 2007 onan uncooled thermal weapon sights program, due to manufacturing issues causingtemporary delays in shipments, and $2.0 million in severance-related costsrelated to the new organizational operating structure announced October 2,2006. We anticipate resolution of the thermal weapon sights program issues inthe first half of fiscal 2008, with shipments expected to resume in the secondquarter.

**Sustainment Systems Segment**   For the year ended March 31, 2007, theSustainment Systems Segment, which was acquired in connection with the ESSIacquisition on January 31, 2006, recorded revenues of $400.8 million, $331.4million of which were incremental, compared with the prior year, which includedonly two months of operations. Theprimary revenue and operating income drivers were higher demand for a heavyequipment transport refurbishment program for the U.S. Army, tactical quietgenerator sets and battlefield digital command, control and communicationsystems.

Operating income for the yearended March 31, 2007 was $59.3 million, $51.1 million greaterthan the prior year. Operating income was driven by the full-year effect of theprograms highlighted above, offset, in part by $1.2 million inseverance-related costs associated with the new organizational operatingstructure announced October 2, 2006.

**Technical Services Segment**   For the year ended March 31, 2007, theTechnical Services Segment, which was acquired in connection with the ESSIacquisition on January 31, 2006, recorded revenues $681.3 million, $582.7million of which were incremental, compared with the prior year, which includedonly two months of operations. Theprimary revenue and operating income drivers in the segment were higher demandfor equipment and services provided under the Rapid Response (R2) contractualinstrument, defense satellite transmission services, mobile power generationand distribution equipment for the U.S. Air Force and commercial vehicle armorkits.

46

----

Operating income for the yearended March 31, 2007 was $49.2 million, $42.3 million greater thanthe prior year. Operating income was driven by the full-year effect of theprograms highlighted above, offset, in part by $0.5 million inseverance-related costs associated with the new organizational operatingstructure announced October 2, 2006. Typical margins on contracts withinthis segment are from 5% to 8%.

**Other**   Otherconsistsof certain non-allocable general and administrative expenses at DRS Corporate,offset by a $1.3 million gain on the collection of a note receivable that previouslyhad been written off.

**Fiscal Year Ended March 31, 2006, Compared withFiscal Year Ended March 31, 2005**

**C4I Segment**   Revenues increased $148.0 million, or 15.2%,to $1.12 billion for the year ended March 31, 2006, as compared with theprior fiscal year. Operating income increased $29.3 million, or 30.4%, to$125.9 million. The increase in revenue was largely attributable to increasedproduction of certain rugged computer systems, airborne training pods, advancedpropulsion steam turbines, combat display workstations, power conversion, distributionand control systems, flight range test and evaluation equipment, chassismodernization kits, and communications intelligence and signals intelligenceprograms. Our acquisitions of Codem and WalkAbout contributed aggregate incremental(fiscal 2006 over prior fiscal year) revenues of $41.3 million to the yearended March 31, 2006. Partially offsetting the overall increase inrevenues were decreased DDG-1000-relatedship propulsion engineering services, decreased shipments of certain turbinegenerator sets, lower volume from a light armored vehicle service lifeextension program, which substantially was completed in fiscal 2005, anddecreased shipments of certain satellite communication equipment and motorcontrol subassemblies.

The increase in operating incomefor the year ended March 31, 2006, as compared with the prior fiscal year,was primarily driven by the overall increase in revenues, $7.5 million of aggregate incremental operatingincome contribution from our acquisitions of Codem and WalkAbout, and favorablemargins on vision enhancement equipment and certain launch control electronics.Partially offsetting the overall increase in operating income were losses from DDG-1000-related ship propulsion engineering,cost growth on an advanced propulsion steam turbine program and a powerconversion, distribution and control program. Operating income for fiscal 2005was unfavorably impacted by a $6.5 million charge to increase the accrualfor the settlement of litigation with Miltope Corporation and IV PhoenixGroup, Inc., pursuant to which the Company agreed to pay $7.5 millionto resolve all outstanding claims. Also impacting fiscal 2005 was$1.2 million in severance-related charges.

**RSTA Segment**   Revenues increased $110.9 million, or 33.3%,to $444.4 million for the year ended March 31, 2006, as compared with theprior fiscal year. Operating income increased $7.7 million, or 16.3%, to$54.5 million. The increase in revenues was primarily attributable to ourfiscal 2005 acquisition of NVEC, which contributed incremental revenues of$47.5 million. Revenues also were favorably impacted by increases from targetacquisition and missile control subsystems, vision enhancement equipment forground-based vehicles, electro-opticalsensors and space electronics, and focal plane arrays. Partially offsetting theoverall increase in revenues were lower revenues from certain maritimeforward-looking infrared sighting systems and thermal imaging systems.

The increase in operating incomefor the year ended March 31, 2006, as compared with the prior fiscal year,was primarily driven by our fiscal 2005 acquisition of NVEC, whichcontributed $7.6 million to operating income.

**Sustainment Systems Segment**   The Sustainment Systems segment, which consistsof certain operating units acquired from our acquisition of ESSI on January 31,2006, recorded revenues and operating income of $69.4 million and $8.3 million,respectively. The primary revenue and operating income drivers in the segmentwere demand for heavy equipment transport refurbishment program for the U.S.Army, power generator spares and tactical quiet generators.

47

----

**Technical Services Segment**   The Technical Services Segment, which substantiallyconsists of certain operating units acquired from our acquisition of ESSI on January 31,2006, recorded revenues and operating income of $98.6 million and $6.8 million,respectively. The primary revenue and operating income drivers in the segmentwere the R2 contractual instrument, mobile power generation and distributionequipment for the U.S. Air Force, and defense satellite transmission services.

**Other**   The $2.8 million operating loss in Other forthe year ended March 31, 2006 was driven primarily by a $2.0 millioncharge recorded in the second quarter of fiscal 2006 in connection with acontingent liability.

**Results of Discontinued Operations**

A consolidatedsummary of the operating results of the discontinued operations for the yearended March 31, 2005 is as follows:

| ** **                                                                                        | ** ** | **Year Ended**     | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**      | ** ** |
| ** **                                                                                        | ** ** | **2005**                | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)** | ** ** |
| Revenues                                                                                          |       |                    | $          | 33,325 |   |   |
| Earnings before taxes                                                                             |       |                    | $          | 3,601 |   |   |
| Income tax expense                                                                                |       |                    | 1,050      |   |   |
| Earnings from discontinued operations (including  after-tax gain on sale of $0.7 million in 2005) |       |                    | $          | 2,551 |   |   |

 

**Liquidity and Capital Resources**

Cash and cash equivalents,internally generated cash flow from operations and other available financingresources are expected to be sufficient to meet anticipated operating, capitalexpenditure and debt service requirements, and expected dividend paymentsduring the next 12 months. There can be no assurance, however, that ourbusiness will continue to generate cash flow at current levels or thatanticipated operational improvements will be achieved. If we are unable togenerate sufficient cash flow from operations to service our debt, we may berequired to sell assets, reduce capital expenditures, refinance all or aportion of our existing debt or obtain additional financing. Our ability tomake scheduled principal payments or pay interest on or refinance ourindebtedness depends on our future performance and financial results, which, toa certain extent, are subject to general conditions in or affecting the defenseindustry and are subject to general economic, political, financial,competitive, legislative and regulatory factors that are beyond our control.

**Cash Flows**   Thefollowing table provides our cash flow data for the fiscal years ended March 31,2007, 2006 and 2005:

| ** **                                                                    | ** ** | **Years Ended March 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                 | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)**                  | ** **  |
| Net cash  provided by operating activities of continuing operations           |       | **$**                                    | **195,235** | ** ** | $ | 157,062 |   | $ | 136,183 |   |
| Net cash provided by operating  activities                                    |       | **$**                                    | **195,235** | ** ** | $ | 157,062 |   | $ | 138,410 |   |
| Net cash used in investing  activities of continuing operations               |       | **$**                                    | **(69,918** | **)** | $ | (1,467,396 | ) | $ | (53,573 | ) |
| Net cash used in investing  activities                                        |       | **$**                                    | **(69,918** | **)** | $ | (1,467,396 | ) | $ | (54,398 | ) |
| Net cash (used in) provided by  financing activities of continuing operations |       | **$**                                    | **(31,001** | **)** | $ | 1,004,222 |   | $ | 164,901 |   |
| Net cash (used in) provided by financing activities                           |       | **$**                                    | **(31,001** | **)** | $ | 1,004,222 |   | $ | 164,871 |   |

 

**Operating activities of ContinuingOperations**   During fiscal 2007, we generated$195.2 million of operating cash flow, $38.1 million more than the$157.1 million reported in the prior fiscal year. Earnings from continuingoperations increased $45.6 million to $127.1 million. Non-cashadjustments to reconcile net earnings to cash flows from operating activitiesincreased $32.3 million over the corresponding prior fiscal period. Thesenon-cash adjustments primarily consist of depreciation and amortization offixed assets and acquired intangible assets, share-based compensation,changes in deferred income taxes, non-cash adjustments to inventory 

48

----

reservesand provisions for doubtful accounts, and amortization of deferred financingfees and amortization of bond premium, which are recognized as a component ofinterest and related expenses. The primary drivers of the increase in thesenon-cash adjustments were depreciation of acquired property, plant andequipment and amortization of identified acquired intangible assets anddeferred financing fees related to the financing of the ESSI acquisition,offset by an increase in net deferred tax liabilities resulting primarily fromthe utilization of certain net operating losses and tax credit carry forwards, andthe realization and adjustment of certain deferred tax assets.

Changes in assets and liabilities,net of effects from business combinations, used $37.7 million for thefiscal year ended March 31, 2007. Accounts receivable increased $100.8million, mainly due to higher sales volume in the fourth quarter. Inventoryused $51.3 million of cash, due to the increase in certain of our electro-opticalsighting and targeting surveillance and acquisition inventories. Accountspayable increased $68.1 million, as purchases required to buildinventories exceeded related payments. Accrued expenses and other currentliabilities used $10.1 million of cash during the year as a result of theliquidation of certain contract-related reserves and the payment of vendor-relatedaccrued expenses offset, in part, by the increase in warranty-related accrualsand in income taxes payable. Net customer advances provided $44.3 millionin cash and are related directly to the inventory increases. Other currentassets provided $17.4 million, as we received proceeds after the close ofthe acquisition from the exercise of ESSI stock options exercised prior to theacquisition, offset by expenditures for prepaid job costs.

**Investing activities**   The following table summarizes the cash flow impactof our business combinations for the fiscal years ended March 31, 2007,2006 and 2005:

| **Fiscal 2007**                              | ** ** | ** **              | ** ** | **Date of  Original  Transaction** | ** ** | **Paid to  Sellers, Net  of Cash  Acquired** | ** ** | **Earn-Out  Payments** | ** ** | **Working  Capital  Adjustment** | ** ** | **Acquisition-  Related  Payments** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|-------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| ESSI                                              |       |                    | 1/31/2006  |                                    |       |                                                        | $          | —                 |       |                             |       | $                                   | —     |      |       |      | $          | — |   |   |   | $ | 1,817 |   |   |   | $ | — |   |   | **$** | **1,817** |   |
| Codem                                             |       |                    | 4/15/2005  |                                    |       |                                                        | —     |                   |       |                             | 1,153      |                                |       |      | —     |      |       |   | — |   |   |   | — |   |   | **1,153** |   |
| DKD, Inc (Nytech)                                 |       |                    | 10/15/2002 |                                    |       |                                                        | —     |                   |       |                             | 6,627      |                                |       |      | —     |      |       |   | — |   |   |   | — |   |   | **6,627** |   |
| Night Vision Equipment Co.  (NVEC)                |       |                    | 12/14/2004 |                                    |       |                                                        | —     |                   |       |                             | 7,140      |                                |       |      | —     |      |       |   | — |   |   |   | — |   |   | **7,140** |   |
| Total payments pursuant to  business combinations |       |                    |       |                                    |       |                                                        | $          | —                 |       |                             |       | $                                   | 14,920     |      |       |      | $          | — |   |   |   | $ | 1,817 |   |   |   | $ | — |   |   | **$** | **16,737** |   |

 

| **Fiscal 2006**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ESSI                                              |       |       | 1/31/2006  |       |       |       | $          | 1,343,338  |       |       |       | $          | —     |       |       |       | $          | — |   |   |   | $ | 25,223 |   |   |   | $ | — |   |   | **$** | **1,368,561** |   |
| Codem                                             |       |       | 4/15/2005  |       |       |       | 29,200     |       |       |       | —     |       |       |       | 2,363      |       |       |   | 374 |   |   |   | — |   |   | **31,937** |   |
| WalkAbout                                         |       |       | 6/27/2005  |       |       |       | 10,663     |       |       |       | —     |       |       |       | 3,065      |       |       |   | 164 |   |   |   | — |   |   | **13,892** |   |
| DKD, Inc (Nytech)                                 |       |       | 10/15/2002 |       |       |       | —     |       |       |       | 6,742      |       |       |       | —     |       |       |   | — |   |   |   | — |   |   | **6,742** |   |
| Night Vision Equipment Co.  (NVEC)                |       |       | 12/14/2004 |       |       |       | —     |       |       |       | 4,564      |       |       |       | —     |       |       |   | — |   |   |   | — |   |   | **4,564** |   |
| Total payments pursuant to  business combinations |       |       |       |       |       |       | $          | 1,383,201  |       |       |       | $          | 11,306     |       |       |       | $          | 5,428 |   |   |   | $ | 25,761 |   |   |   | $ | — |   |   | **$** | **1,425,696** |   |

 

| **Fiscal 2005**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Electro Mechanical Systems  unit of Lockheed Martin Corporation (DRS SSS) |       |       | 9/28/2001  |       |       |       | $          | —     |       |       |       | $          | —     |       |       |       | $          | — |   |   |   | $ | — |   |   |   | $ | (500 | ) |   | **$** | **(500** | ) |
| DKD, Inc (Nytech)                                                         |       |       | 10/15/2002 |       |       |       | —     |       |       |       | 3,118      |       |       |       | —     |       |       |   | — |   |   |   | — |   |   | **3,118** |   |
| Night Vision Equipment Co.  (NVEC)                                        |       |       | 12/14/2004 |       |       |       | 42,500     |       |       |       | —     |       |       |       | 4,655      |       |       |   | 66 |   |   |   | — |   |   | **47,221** |   |
| Total payments pursuant to  business combinations                         |       |       |       |       |       |       | $          | 42,500     |       |       |       | $          | 3,118      |       |       |       | $          | 4,655 |   |   |   | $ | 66 |   |   |   | $ | (500 | ) |   | **$** | **49,839** |   |

 

The following table summarizes the net cash receivedfrom the sale of certain businesses for the year ended March 31, 2005:

| **Fiscal 2005 Divestiture**             | ** ** | ** ** | ** ** | **Date of  Transaction** | ** ** | **Amount** | ** ** |
|---------------------------------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **(in thousands)**       | ** ** |
| DRS Weather Systems and DRS  Broadcast Technology |       |       | 3/10/05    |                          |       |       | $          | 29,096 |   |   |
|                                                   |            |            |            |                               |            |            |            |  |  |  |  |  |

 

49

----

Our long-term growth strategyincludes a disciplined program of acquiring companies that are both strategicto our business and expected to be accretive to our earnings. Continuation ofour acquisition program will depend, in part, on the availability of financialresources at a cost of capital that is acceptable to us. We would expect toutilize cash generated by operations, as well as cash available under ourcredit facility, to finance such acquisitions. Other sources of capital couldinclude the issuance of common stock and/or preferred stock and the placementof debt. We continually evaluate the capital markets climate and may accesssuch markets when the circumstances appear favorable to us. We believe thatsufficient capital resources will be available to us from one or several ofthese sources to finance future acquisitions. However, no assurances can bemade that such financing will be available and at a cost that is acceptable tous, that we will identify acceptable acquisition candidates, or that suchacquisitions will be accretive to earnings.

We paid $55.9 million forcapital improvements made primarily to our manufacturing facilities andequipment during fiscal 2007, as compared with $43.2 million for fiscal 2006.We expect capital expenditures of approximately $70 million to$90 million in fiscal 2008, as we continue to upgrade our facilities, aswell as manufacturing and engineering capabilities.

**Financing Activities**   The followingtable summarizes the cash flow impact of our financing activities fromcontinuing operations for the fiscal years ended March 31, 2007, 2006 and2005:

| ** **                                                                        | ** ** | **For the Years Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------|-------------|
| ** **                                                                        | ** ** | **2007**                                                   | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                    | ** **  |
| **Sources of Cash**                                                               |       |                                                       |        |   |   |   |   |
| Proceeds from senior  subordinated notes                                          |       | **$**                                                      | **—**  | ** ** | $ | 945,000 |   | $ | 210,000 |   |
| Receipt of advanced interest on  senior subordinated notes                        |       | **—**                                                 | ** **  | — |   | 1,986 |   |
| Term loans                                                                        |       | **—**                                                 | ** **  | 275,000 |   | — |   |
| Borrowings from revolving line  of credit                                         |       | **—**                                                 | ** **  | 40,000 |   | — |   |
| Stock option exercises                                                            |       | **12,868**                                                 | ** **  | 12,540 |   | 8,097 |   |
| Excess tax benefit realized from  share-based payment arrangements                |       | **4,880**                                                  | ** **  | — |   | — |   |
| Investment from third party in  joint venture                                     |       | **480**                                                    | ** **  | — |   | — |   |
| Borrowings of other debt                                                          |       | **452**                                                    | ** **  | 9,853 |   | — |   |
| Total                                                                             |       | **$**                                                      | **18,680**  | ** ** | $ | 1,282,393 |   | $ | 220,083 |   |
| **Uses of  Cash**                                                                 |       | ** **                                                 | ** **  |   |   |   |   |
| Discretionary payments of DRS  term loans                                         |       | **—**                                                 | ** **  | (165,690 | ) | (45,000 | ) |
| Scheduled payments of DRS term  loan                                              |       | **(2,750**                                                 | **)**       | (1,770 | ) | (2,360 | ) |
| Net repayments on short-term  debt                                                |       | **(40,000**                                                | **)**       | — |   | — |   |
| Scheduled payment on Nytech Note                                                  |       | **—**                                                 | ** **  | — |   | (3,000 | ) |
| Payments on ESSI short-term debt                                                  |       | **—**                                                 | ** **  | (76,300 | ) | (82 | ) |
| Payments on other debt                                                            |       | **(1,969**                                                 | **)**       | (348 | ) | (547 | ) |
| Dividends                                                                         |       | **(4,962**                                                 | **)**       | (3,705 | ) | — |   |
| Return of advanced interest on  senior subordinated notes                         |       | **—**                                                 | ** **  | (1,986 | ) | — |   |
| Debt and bond issuance costs                                                      |       | **—**                                                 | ** **  | (28,372 | ) | (4,193 | ) |
| Total                                                                             |       | **$**                                                      | **(49,681** | **)** | $ | (278,171 | ) | $ | (55,182 | ) |
| **Net cash (used in) provided by financing  activities of continuing operations** |       | **$**                                                      | **(31,001** | **)** | $ | 1,004,222 |   | $ | 164,901 |   |

 

Simultaneously with the closing ofour acquisition of ESSI, on January 31, 2006 we entered into an amendedand restated credit facility for up to an aggregate amount of$675.0 million with a syndicate of lenders (the Credit Facility),replacing DRS’s previously existing credit facility. 

50

----

The CreditFacility consists of a $400.0 million senior secured revolving line ofcredit and a $275.0 million senior secured term loan. We are permitted, onno more than two occasions, to increase the aggregate  amount of the Credit Facility by up to $250.0million, subject to certain restrictions. Any increase in the aggregate amountof the Credit Facility may be borrowed in the form of either additional termloans or available amounts under the revolving line of credit. The CreditFacility is guaranteed by substantially all of DRS’s domestic subsidiaries. Inaddition, it is collateralized by liens on substantially all of the assets ofour subsidiary guarantors’ and certain of DRS’s other subsidiaries’ assets andby a pledge of a portion of certain of our non-guarantor subsidiaries’ capitalstock. The term loan and the revolving credit facility mature on January 31,2013 and 2012, respectively.

Revolving line of credit and termloan borrowings under the Credit Facility generally bear interest at our optionat either: 1) a base rate, which is defined as the higher of (a) the primerate or (b) the federal funds rate plus 0.50%, plus the applicable margin;or 2) the LIBOR rate plus the applicable margin. Revolving credit loans thatare base rate loans bear interest at the base rate plus a margin ranging from0.00% to 0.50% per annum, depending on our total leverage ratio (TLR), as theterm is defined in the credit agreement, at the time of determination.Revolving credit loans that are LIBOR rate loans bear interest at LIBOR plus amargin ranging from 1.00% to 1.75% per annum, depending on our TLR. Term loansthat are base rate loans bear interest at the base rate plus 0.25%, and termloans that are LIBOR rate loans bear interest at LIBOR plus 1.50%.

We pay commitment fees calculatedon the average daily unused portion of our revolving line of credit at a rateranging from 0.375% and 0.50% per annum, depending on our TLR. We paycommissions and issuance fees on our outstanding letters of credit and are obligatedto pay or reimburse the issuing lender for such normal and customary costs andexpenses incurred or charged by the issuing lender in issuing, effectingpayment under, amending or otherwise administering any letter of credit.****Letter-of-credit commissions arecalculated at a rate ranging from 1.00% to 1.75% per annum, depending on ourTLR ratio at the time of issuance, multiplied by the face amount of such letterof credit. Letter-of-credit issuance fees are charged at 0.125% per annum,multiplied by the face amount of such letter of credit. Both letter-of-creditcommissions and issuance fees are paid quarterly.

There are certain covenants andrestrictions placed on DRS under the Credit Facility, including, but notlimited to, quarterly financial covenants, which began with the quarter endedJune 30, 2006, specifying maximum total leverage ratio, maximum seniorleverage ratio, and minimum fixed charge coverage ratio and restrictions orlimitations on acquisitions and investments, equity issuances, sales of assets,dividends we may declare and pay on our common stock, issuance of additionaldebt or modifications of existing debt, incurrence of liens and capitalexpenditures.

The principal amount of anyoutstanding revolving credit loans is due and payable in full on January 31,2012, the sixth anniversary of the closing date of the Credit Facility. We are required to repay the aggregate outstandingprincipal amount of the initial term loan borrowings ($275.0 million) inconsecutive quarterly installments on the last business day of each December,March, June and September, which commenced June 30, 2006.****From June 30, 2006 through March 31,2012, each such principal payment is $0.7 million. Each principal paymentfrom June 30, 2012 through January 31, 2013 is $64.6 millionadjusted for any optional payments.

As of March 31, 2007, $272.3 million of termloans were outstanding against the Credit Facility. The weighted averageinterest rate on our term loan borrowings was 6.9% as of March 31, 2007(6.3% as of March 31, 2006). At March 31, 2007, there were nooutstanding revolving line of credit borrowings against the Credit Facility. Asof March 31, 2006, $275.0 million of term loans and $40.0 millionof revolving line of credit borrowings were outstanding against the CreditFacility. In April 2007, we prepaid, at our discretion, $50.0 million

51

----

of the outstanding term loan withproceeds from our revolving line of credit and recognized a $0.1 millioncharge to interest and related expenses in the first quarter of fiscal 2008.

From time to time, we enter into standbyletters-of-credit and bank guarantee agreements with financial institutions andcustomers, primarily relating to the guarantee of our future performance oncertain contracts to provide products and services and to secure advancepayments from our customers. As of March 31, 2007, $46.8 million wascontingently payable under letters of credit and bank guarantees (including animmaterial amount of letters of credit obtained outside the Credit Facility).At March 31, 2007, we had $354.5 million of availability under ourrevolving line of credit.

On March 29, 2006, DRS Technologies CanadaCompany (DRS Canada) established a five-year senior secured term loan (Canadianloan) for approximately $9.9 million (C$11.5 million), maturing onApril 1, 2011, payable in Canadian dollars. The proceeds of the loan wereutilized to allow repatriation of certain amounts from Canada to the U.S. whichwere subject to more favorable tax treatment under the Jobs Act (for furtherinformation see Notes 1.R. and 10.) The Canadian loan bears interest at ouroption at either: (i) prime rate or (ii) LIBOR rate plus 1.75%. Theweighted average interest rate on the term loan was 6.0% as of March 31,2007 (5.5% at March 31, 2006). DRS Canada is required to repay aggregate outstandingprincipal of C$575.0 thousand on the first business day of every January,April, July and October, which commenced July 1, 2006. The term debtunder the agreement ranks senior in priority of payment to all subordinateddebt of DRS Canada and the Company. The debt is collateralized by the assets ofDRS Canada and guaranteed by DRS Technologies, Inc. We are subject to thesame financial covenants under the Canadian loan as we are under the CreditFacility described above, and DRS Canada is subject to other non-financialcovenants that are similar to those described in the Credit Facility.

On January 31, 2006, in connection with theacquisition of ESSI, we issued $900.0 million of new debt securities,including $350.0 million aggregate principal amount of 65¤8%senior notes due 2016, $250.0 million aggregate principal amount of 75¤8%senior subordinated notes due 2018 (collectively called the January 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 anover-allotment option exercised by the initial purchasers of the ConvertibleNotes. The net proceeds of the January 2006 Notes and the ConvertibleNotes, together with a portion of our available cash and initial borrowingsunder the Credit Facility, were used to fund the ESSI acquisition, repaycertain of ESSI’s outstanding indebtedness, and pay related fees and expenses.

The January 2006 Notes are unsecured. The 75¤8%senior subordinated notes rank behind the Credit Facility, the 65¤8% senior notesand the Convertible Notes, and are pari passu with the 67¤8% seniorsubordinated notes.

The January 2006 Notes payinterest semi-annually in arrears on February 1 and August 1, whichcommenced August 1, 2006. The net proceeds of the offering of theJanuary 2006 Notes were $588.0 million after deducting $12.0 millionin commissions and fees related to the offerings. The January 2006 Noteswere issued under indentures with The Bank of New York. Subject to a number ofexceptions, the indentures restrict our ability and the ability of oursubsidiaries to incur more debt, pay dividends and make distributions, makecertain investments, repurchase stock, create liens, enter into transactionswith affiliates, enter into sale lease-back transactions, merge or consolidate,and transfer or sell assets. The January 2006 Notes are unconditionallyguaranteed, jointly and severally, by certain of DRS’s existing and futuredomestic subsidiaries. See Note 15, “Guarantor and Non-guarantor FinancialStatements,” of our Consolidated Financial Statements for additionaldisclosures.

52

----

At any time prior to February 1,2009, we may, on any one or more occasions, redeem up to 35% of the aggregateprincipal amount of the 65¤8% senior notesand 75¤8%senior subordinated notes with the net cash proceeds of one or more equityofferings at a redemption price of 106.625% and 107.625%, respectively, of theprincipal amount, plus accrued and unpaid interest, if any, subject to certainrestrictions.

At any time prior to February 1,2011, we may redeem the 65¤8% senior notesand 75¤8%senior subordinated notes for cash at our option, in whole or in part, at aredemption price equal to the greater of (1) 100% of the principal amountof the January 2006 Notes being redeemed and (2) the sum of (a) thepresent values of 103.313% of the principal amount of the 65¤8% senior notesand 103.813% of the principal amount of the 75¤8% seniorsubordinated notes being redeemed and (b) the scheduled payments ofinterest on the respective January 2006 Notes, discounted to the date of redemption,together with accrued and unpaid interest, if any.

On or after February 1,2011, we may redeem, at our option, all or a part of the January 2006Notes at the redemption prices (expressed as percentages of principal amount)set forth below plus accrued and unpaid interest, if any:

| **Year**            | ** ** | ** ** | ** ** | **6**5¤8% Senior  Notes | ** ** | **7**5¤8% Senior  Subordinated  Notes | ** ** |
|---------------------|------------|------------|------------|-----------------------------------|------------|-------------------------------------------------|------------|
| 2011                |       |       | 103.313    | %                                 |       |                                            | 103.813    | % |   |
| 2012                |       |       | 102.209    | %                                 |       |                                            | 102.542    | % |   |
| 2013                |       |       | 101.105    | %                                 |       |                                            | 101.271    | % |   |
| 2014 and thereafter |       |       | 100.000    | %                                 |       |                                            | 100.000    | % |   |

 

In certain instances of a changein control, we must offer to repurchase all or part of the January 2006Notes at a redemption price equal to 101% of the principal amount.

The net proceeds of the offeringof the Convertible Notes, including the over-allotment, were $337.2 millionafter deducting $7.8 million in commissions and fees related to theoffering. Certain of our existing and future wholly-owned domestic subsidiariesfully and unconditionally guarantee our payment obligations under theConvertible Notes, jointly and severally, on a senior unsecured basis. TheConvertible Notes will mature on February 1, 2026, unless earlierconverted, redeemed or repurchased. The Convertible Notes pay interestsemi-annually in arrears on February 1 and August 1, which commenced August 1,2006.

Commencing with the six-monthperiod beginning on February 1, 2011, we will pay contingent interest tothe holders of the Convertible Notes during any six-month period from February 1to July 31, and from August 1 to January 31, if the market priceof a Convertible Note for each of the days in the five trading-day periodending on the third trading day immediately preceding an interest payment dateequals 120% or more of the principal amount of the Convertible Note. The amountof any contingent interest payable will equal 0.50% per annum of the averagemarket price of a convertible note for the five trading-day period. Thecontingent interest feature of the Convertible Notes represents an embeddedderivative instrument. The value of the contingent interest feature was zero atthe date of the issuance of the Convertible Notes and at March 31, 2007.The amount recorded for the embedded derivative will be adjusted periodicallythrough interest expense for material changes in the fair value of the contingentinterest feature.

Upon conversion of a ConvertibleNote, we will deliver cash in an amount equal to the lesser of (a) theprincipal amount of the notes surrendered for conversion and (b) theconversion value (the applicable conversion rate multiplied by the average ofthe closing prices of DRS common stock for a defined 20-day period), andif the conversion value is greater than the principal amount, an amount of DRScommon stock equal to such excess. The initial conversion value is based on aconversion rate of 16.7504 shares per $1,000 principal amount of ConvertibleNotes (representing a conversion price of approximately $59.70 per share of DRScommon stock), subject to adjustment under certain circumstances.

53

----

We evaluated the accounting forthe conversion feature in accordance with EITF Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock,” and related issues, at the date of issuance of theConvertible Notes and determined that the conversion feature should beclassified as equity, and, therefore, it does not need to be accounted forseparately from the Convertible Notes. We update our analysis of the accountingfor the conversion feature as circumstances warrant. If the conversion featureis required to be bifurcated in the future, changes in the fair value of theconversion feature would be charged or credited to interest expense in eachperiod.

The shares of DRS common stockthat may be issued, if any, upon conversion of the Convertible Notes may beregistered or unregistered shares. At the date of issuance, the underlyingshares of DRS common stock have been registered through an automaticallyeffective registration statement filed with the SEC. We are obligated to useour reasonable best efforts to maintain such registration for two years or pay additionalinterest ranging from 0.25% to 1.00% per annum on the principal of theConvertible Notes.

On or prior toFebruary 1, 2010, the Convertible Notes may be converted by the holderonly under the following circumstances:

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the average trading price for the Convertible Noteswas less than 103% of the average of the closing sale price of our common stockduring such five trading-day period, multiplied by the applicable conversionrate;

·       Duringprescribed periods, upon the occurrence of specified corporate transactions orfundamental changes, as the term is defined in the Convertible Note agreement;or

·       Ifwe have called the Convertible Notes for redemption, until the second businessday immediately preceding the redemption date.

After February 1,2010, the Convertible Notes may be converted by the holder into cash andshares, if any, of DRS’s common stock, only under the following circumstances:

·       Duringany calendar quarter (and only during such calendar quarter) commencing after December 31,2009, if the closing sale price of DRS’s common stock for at least 20 tradingdays in the period of 30 consecutive trading days ending on the last tradingday of the preceding calendar quarter is greater than or equal to 110% of theapplicable conversion price;

·       Onor after February 1, 2025;

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the average trading price for the Convertible Noteswas less than 98% of the average of the closing sale price of DRS’s commonstock during such five trading-day period, multiplied by the applicable currentconversion rate;

·       Duringprescribed periods, upon the occurrence of specified corporate transactions or fundamentalchanges, as the term is defined in the Convertible Note agreement; or

·       Ifwe have called the Convertible Notes for redemption, until the second businessday immediately preceding the redemption date.

We may redeem the ConvertibleNotes in whole or in part for cash, with proper notice, at any time on or afterFebruary 1, 2009 and prior to February 4, 2011, if the sale price ofDRS’s common stock has exceeded 130% of the conversion price for at least 20trading days in any consecutive 30-day trading period ending on the tradingday prior to providing notice of redemption, at a redemption price equal to100% of the principal amount of the Convertible Notes to be redeemed plus anyaccrued and unpaid interest (including contingent interest and additionalinterest, if any) up to but not including the redemption date and a ‘‘make-whole’’premium. The make-whole premium is payable only in cash equal to the presentvalue of all 

54

----

remainingscheduled payments of interest on the Convertible Notes to be redeemed through February 2011.

We may, at any time after February 4,2011, redeem the Convertible Notes in whole or in part for cash at a redemptionprice equal to 100% of the principal amount of the Convertible Notes to beredeemed plus any accrued and unpaid interest (including contingent interestand additional interest, if any) up to but not including the redemption date.

Holders have the right to requireus to purchase all or a portion of their Convertible Notes for cash on February 1,2011, February 1, 2016 and February 1, 2021 at a purchase price equalto 100% of the principal amount of the Convertible Notes, plus accrued andunpaid interest (including additional interest, if any) up to but not includingthe purchase date.

On October 30, 2003, weissued $350.0 million aggregate principal amount of 67¤8%senior subordinated notes, due November 1, 2013 (the October 2003Notes). Interest, which is payable every six months on May 1 and November 1,commenced on May 1, 2004. The net proceeds from the offering of the October 2003Notes were $341.2 million, after deducting $8.8 million incommissions and fees related to the offering. The net proceeds of the October 2003Notes, together with a portion of our available cash and initial borrowingsunder the then existing credit facility, were used to fund the IDT acquisition,repay certain of DRS’s and IDT’s outstanding indebtedness, and pay related feesand expenses. The October 2003 Notes were issued under an indenture withThe Bank of New York. Subject to a number of exceptions, the indenturerestricts our ability and the ability of our subsidiaries to incur more debt,pay dividends and make distributions, make certain investments, repurchasestock, create liens, enter into transactions with affiliates, enter into salelease-back transactions, merge or consolidate, and transfer or sell assets. TheOctober 2003 Notes are unconditionally guaranteed, jointly and severally,by DRS’s current and future wholly-owned domestic subsidiaries. Theforeign subsidiaries and certain domestic subsidiaries of DRS do not guaranteethe October 2003 Notes. See Note 15, “Guarantor and Non-guarantorFinancial Statements,” of our Consolidated Financial Statements for additionaldisclosures. The Company is subject to liquidating damages (ranging from 0.25%to 1.00% of the outstanding principal) if we fail to maintain an effectiveregistration statement for the 67¤8 %senior subordinated notes.

On December 23, 2004, weissued an additional $200.0 million aggregate principal amount of 67¤8%Senior Subordinated Notes, due November 2013 (December 2004 Notes).The December 2004 Notes were offered as additional debt securities underour indenture with the Bank of New York with identical terms and the sameguarantors as the October 2003 Notes. The December 2004 Notes were pricedat 105% of the principal amount, reflecting an effective interest rate ofapproximately 6.13%. The net proceeds of the offering were approximately $208.3 million(including $2.0 million of advanced interest on the new notes that hadaccrued from November 1, 2004 to December 23, 2004), after deducting$3.7 million in commissions and other costs related to the debt issuance.

On or after November 1,2008, DRS may redeem, at our option, all or part of the 67¤8%senior subordinated notes at the redemption prices (expressed as percentages ofprincipal amount) set forth below, plus accrued and unpaid interest andliquidating damages.

| **Year**            | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------|------------|------------|------------|----------------|------------|
| 2008                |       |       | 103.438    | %              |       |
| 2009                |       |       | 102.292    | %              |       |
| 2010                |       |       | 101.146    | %              |       |
| 2011 and thereafter |       |       | 100.000    | %              |       |

 

At March 31, 2007, other obligationsconsisted of a mortgage on our Palm Bay, Florida facility of $2.6 million(Palm Bay Mortgage), $0.8 million for certain notes payable to the formerowners of DRS Mobile Environmental Systems, Co. (DRS MSC Note Payable) and$1.6 million of debt at our DRS Pivotal Power operating unit.

55

----

**Equity**   OnFebruary 8, 2007, our Board of Directors declared a $0.03 per common sharecash dividend, payable on March 30, 2007 to stockholders of record as ofMarch 15, 2007. On May 10, 2007, the Board of Directors declared a$0.03 per common share cash dividend, payable on June 29, 2007 tostockholders of record as of June 15, 2007.

**Free cash flow**   Free cash flowrepresents net cash provided by operating activities of continuing operationsless capital expenditures. Free cash flow for the fiscal year endedMarch 31, 2007 was $139.3 million, or $25.4 million greater thanfree cash flow of $113.9 million for fiscal 2006. Free cash flow for thefiscal year ended March 31, 2006 was $113.9 million, or$12.2 million greater than free cash flow of $101.7 million forfiscal 2005. See “Use of Non-GAAP Financial Measures” below for additionaldiscussion and information.

**EBITDA**   Earnings fromcontinuing operations before net interest and related expenses (primarily theamortization and write-off of debt premium and issuance costs), income taxes,depreciation and amortization (EBITDA) for the year ended March 31, 2007was $382.5 million, or $143.1 million greater than$239.4 million for fiscal 2006. EBITDA for the year ended March 31,2006 was $239.4 million, or $58.2 million greater than$181.2 million from fiscal 2005. See “Use of Non-GAAP Financial Measures”below for additional discussion and information.

**Off-BalanceSheet Financing Arrangements****  **We have $345 million of 2% senior convertible notes with aconversion price of $59.70 per share. Upon conversion we would satisfy ourobligation 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 the numberof shares to be issued upon conversion does not pose a reasonable likelihood ofpotential significant dilution over the next twelve months.  For further information on our ConvertibleNotes, see Note 8 to our Consolidated Financial Statements.

Inaddition, we have 2.4 million stock options outstanding to purchase DRS commonstock at a weighted average exercise price of $32.04 per share and 0.4 millionof non-vested stock awards outstanding at March 31, 2007 that representadditional potential dilution.

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

**Contractual Obligations**   Our contractualobligations and commitments are set forth in the table below:

| ** **                              | ** ** | ** **                     | ** **    | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|--------------------------------|---------------|-------------------------------------------|------------|
| ** **                              | ** ** | **Total**                      | ** **    | **Less than  1 year**           | ** ** | **1–3 years** | ** ** | **4–5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                              | ** ** | **($ in thousands)** | ** **    |
| Long-term debt(A)                       |       | **$**                          | **1,780,754** |                                      | $          | 5,160 |   | $ | 10,219 |   | $ | 8,740 |   | $ | 1,756,635 |   |
| Interest payments on  long-term debt(B) |       | **916,651**                    |          | 107,388                                   |       | 211,949 |   | 210,123 |   | 387,191 |   |
| Operating lease  commitments            |       | **135,227**                    |          | 33,492                                    |       | 49,967 |   | 29,586 |   | 22,182 |   |
| Acquisition earn-outs(C)                |       | **20,501**                     |          | 11,001                                    |       | 9,500 |   | — |   | — |   |
| Purchase obligations(D)                 |       | **94,534**                     |          | 71,586                                    |       | 17,658 |   | 5,290 |   | — |   |
| **Total contractual obligations**       |       | **$**                          | **2,947,667** |                                      | $          | 228,627 |   | $ | 299,293 |   | $ | 253,739 |   | $ | 2,166,088 |   |

----

(A)          The total amount oflong-term debt excludes unamortized premiums of $7.5 million.

(B)           Represents expectedinterest payments on our long-term debt balance, as of March 31, 2007, usingthe stated interest rate on our fixed-rate debt and the variable interest ratein effect at March 31, 2007 on the outstanding borrowings under our CreditFacility and Canadian term loan. The calculation assumes that currentborrowings are repaid based upon the scheduled repayment dates.

56

----

(C)           Representscontingent purchase price payments or “earn-outs” for certain of ouracquisitions that are contingent upon the receipt of post-acquisition revenuesand orders from those acquired businesses. Any amount that we pay for theearn-outs will be included in “payments pursuant to business combinations”within investing activities on the Consolidated Statement of Cash Flows andwill be recorded as an increase to goodwill for the acquisition. The lastearn-out period expires on December 31, 2009.

(D)          Includesamounts under legally enforceable agreements for goods and services withdefined terms as to quantity, price and timing of delivery. Excludes purchaseorders for products and services under firm government contracts for which wehave full recourse under normal contract termination clauses.

We enter intostandby letter-of-credit agreements 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 certain international customers.At March 31, 2007, we had contingent liabilities on outstanding letters ofcredit as follows:

| ** **                | ** ** | **Contingent Payments Due by Period** | ** ** |
|---------------------------|------------|-----------------------------------------------------------|------------|
| ** **                | ** ** | **Total**                                                 | ** ** | **Within  1 Year** | ** ** | **1–3 Years** | ** ** | **After  3 Years** | ** ** |
| ** **                | ** ** | **(in thousands)**                                   | ** ** |
| Standby letters of credit |       | **$**                                                     | **46,457** |   | $ | 44,040 |   |   | $ | 2,417 |   |   |   | $ | — |   |   |
| Bank guarantees           |       | **$**                                                     | **372**    |   | $ | 372 |   |   | $ | — |   |   |   | $ | — |   |   |

** **

**Backlog**   Funded backlogrepresents products or services that our customers have committed by contractto purchase from us. Due to the general nature of defense procurement andcontracting, the operating cycle for our military business typically has beenlong 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)-basedsystems 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 futureresults.

Backlog at March 31, 2007 was $3.0 billion,as compared with $2.4 billion at March 31, 2006. We booked$3.5 billion in new orders in fiscal 2007. The increase in backlog was dueto the net effect of bookings. Approximately 72% of backlog, as of March 31,2007, is expected to result in revenues during fiscal 2008.

**Internal Research and Development**   In addition tocustomer-funded research and development, we also engage in internalresearch and development. These expenditures reflect our continued investmentin new technology and diversification of our products. Expenditures forinternal research and development in fiscal 2007, 2006 and 2005 were $50.9 million,$47.6 million and $38.9 million, respectively.

57

----

**Use of Non-GAAP FinancialMeasures**   Certain disclosuresin this document include “non-GAAP (Generally Accepted Accounting Principles)financial measures.” A non-GAAP financial measure is defined as a numericalmeasure of the Company’s financial performance that excludes or includesamounts so as to be different than the most directly comparable measurecalculated and presented in accordance with GAAP in our Consolidated BalanceSheets, Statements of Earnings or Statements of Cash Flows. The components ofEBITDA and a reconciliation of EBITDA and “free cash flow” with the mostdirectly comparable GAAP measure follows:

| ** **                                                                                     | ** ** | **Year Ended March 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                                                                                     | ** ** | **2007**                                | ** **  | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                     | ** ** | **($ in thousands)**          | ** **  |
| Earnings from continuing  operations                                                           |       | **$**                                   | **127,060** | ** ** | $ | 81,494 |   | $ | 58,126 |   | $ | 43,542 |   | $ | 30,171 |   |
| Income taxes                                                                                   |       | **60,104**                              | ** **  | 51,994 |   | 44,842 |   | 33,789 |   | 25,701 |   |
| Interest income                                                                                |       | **(1,273**                              | **)**       | (7,253 | ) | (2,460 | ) | (754 | ) | (1,179 | ) |
| Interest and related  expenses                                                                 |       | **119,912**                             | ** **  | 64,186 |   | 39,750 |   | 24,259 |   | 10,589 |   |
| Depreciation and  amortization                                                                 |       | **76,663**                              | ** **  | 48,985 |   | 40,968 |   | 28,436 |   | 16,614 |   |
| EBITDA(A)                                                                                      |       | **$**                                   | **382,466** | ** ** | $ | 239,406 |   | $ | 181,226 |   | $ | 129,272 |   | $ | 81,896 |   |
| Income taxes                                                                                   |       | **(60,104**                             | **)**       | (51,994 | ) | (44,842 | ) | (33,789 | ) | (25,701 | ) |
| Interest income                                                                                |       | **1,273**                               | ** **  | 7,253 |   | 2,460 |   | 754 |   | 1,179 |   |
| Interest and related  expenses                                                                 |       | **(119,912**                            | **)**       | (64,186 | ) | (39,750 | ) | (24,259 | ) | (10,589 | ) |
| Deferred income taxes                                                                          |       | **10,620**                              | ** **  | 15,454 |   | 24,660 |   | (5,558 | ) | 203 |   |
| Changes in assets and  liabilities, net of effects from business combinations and divestitures |       | **(37,673**                             | **)**       | 2,015 |   | 4,605 |   | 32,743 |   | 585 |   |
| Other, net                                                                                     |       | **18,565**                              | ** **  | 9,114 |   | 7,824 |   | 5,554 |   | 4,435 |   |
| Net  cash provided by operating activities of continuing operations                            |       | **195,235**                             | ** **  | 157,062 |   | 136,183 |   | 104,717 |   | 52,008 |   |
| Capital expenditures                                                                           |       | **(55,907**                             | **)**       | (43,194 | ) | (34,521 | ) | (24,444 | ) | (21,526 | ) |
| Free cash flow(B)                                                                              |       | **$**                                   | **139,328** | ** ** | $ | 113,868 |   | $ | 101,662 |   | $ | 80,273 |   | $ | 30,482 |   |

----

(A)          We define EBITDA as earningsfrom continuing operations 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 of continuing operations. EBITDA is presented asadditional information because we believe it to be a useful indicator of ourdebt capacity and our ability to service our debt. EBITDA is not a substitutefor operating income, net earnings or cash flows from operating activities ofcontinuing operations, as determined in accordance with GAAP. EBITDA is not acomplete net cash flow measure because EBITDA is a measure of liquidity thatdoes not reflect cash flows from discontinued operations, and does not includereductions for cash payments for an entity’s obligation to service debt, fundworking capital, business acquisitions and capital expenditures, and pay incometaxes. Rather, EBITDA is one potential indicator of an entity’s ability to fundthese cash requirements. EBITDA also is not a complete measure of an entity’sprofitability because it does not include costs and expenses for depreciationand amortization, interest and related expenses and income taxes, and it alsodoes not include the results of operations of discontinued operations. EBITDA,as we defined it, may differ from similarly named measures used by otherentities and, consequently, could be misleading unless all entities calculateand define EBITDA in the same manner.

(B)           Freecash flow is defined as net cash provided by operating activities of continuingoperations less capital expenditures. We disclose free cash flow because webelieve that it is useful in evaluating our financial performance and measuringcash flows generated that are available for investing and financing activities.We believe that the most directly comparable GAAP financial measure to freecash flow is net cash provided by operating activities of 

58

----

continuing operations. Freecash flow represents cash generated after paying for interest on borrowings,income taxes, capital expenditures and changes in working capital, but beforerepaying outstanding debt, investing cash to acquire businesses and making otherstrategic investments, and it does not reflect cash flows of discontinuedoperations. Thus, key assumptions underlying free cash flow are that we will beable to refinance our existing debt when it matures with new debt and that wewill be able to finance any new acquisitions we make by raising new debt orequity capital. We also use free cash flow as a performance measure and acomponent of our management incentive compensation program. Free cash flow, aswe define it, may differ from similarly named measures used by other entitiesand, consequently, could be misleading unless all entities calculate and definefree cash flow in the same manner.

**OTHER MATTERS**

***New Accounting Pronouncements***

New accounting pronouncements have been issued by theFinancial Accounting Standards Board which are not effective until after March 31,2007. For further discussion of new accounting standards, see Note 1.V. toour Consolidated Financial Statements in Part II, Item 8.

**Item 7A.**           Quantitativeand Qualitative Disclosures About Market Risk

**Market Risk**   In the normalcourse of business, we are exposed to market risks relating to fluctuations ininterest rates and foreign currency exchange rates.

**Interest Rate Risk**   Simultaneouslywith the closing of our acquisition of ESSI on January 31, 2006, theCompany entered into an amended and restated senior secured credit facility forup to an aggregate amount of $675.0 million, replacing the Company’s thenexisting credit facility. The amended and restated senior secured creditfacility consists of (i) a seven-year term loan facility in an aggregateprincipal amount equal to $275.0 million, with principal repayable inquarterly installments for the first five years at a rate of 1.00% per year andthe balance to be repaid in equal quarterly installments beginning six yearsfollowing the completion of the acquisition, and (ii) a six-year revolvingcredit facility in an aggregate principal amount of $400.0 million, to berepaid in full on the sixth anniversary of the closing date of the facility.Borrowings under the Credit Facility generally bear interest as either:1) base rate loans, which are defined as the higher of (a) the primerate or (b) the federal funds rate plus 0.50%, plus the applicable margin;or 2) LIBOR rate loans plus the applicable margin. Revolving credit loansthat are base rate loans bear interest at the base rate plus a margin rangingfrom 0.00% to 0.50% per annum, depending on the Company’s total leverage ratio(TLR), as the term is defined in the credit agreement, at the time ofdetermination. Revolving credit loans that are LIBOR rate loans bear interestat LIBOR plus a margin ranging from 1.00% to 1.75% per annum, depending on theCompany’s TLR. Term loans that are base rate loans bear interest at the baserate plus 0.25%, and term loans that are LIBOR rate loans bear interest atLIBOR plus 1.50%.

On March 29, 2006, DRS Technologies CanadaCompany (DRS Canada) entered into a five-year senior secured term loan forapproximately $9.9 million (C$11.5 million) maturing on April 1,2011. The term loan bears interest at our option at either: 1) prime rate or (ii) LIBORrate plus 1.75%. We are required to repay aggregate outstanding principal ofapproximately C$575.0 thousand on the first business day of every January,April, July and October, which commenced July 1, 2006.

A 0.5% increase/decrease in the weighted averageinterest rate on our variable rate debt outstanding at March 31, 2007would result in an incremental increase/decrease in annual interest expense ofapproximately $1.4 million. The carrying values of the Company’sborrowings under the amended and restated credit facility and Canadian termloan approximate their fair values at March 31, 2007.

59

----

Simultaneously with the closing of our acquisition ofESSI, we also issued $900 million of new debt securities, including $350 millionaggregate principal amount of 65¤8% senior notesdue 2016, $250 million aggregate principal amount of 75¤8% seniorsubordinated notes due 2018 and $300 million aggregate principal amount of2.0% convertible senior notes due 2026. On February 8, 2006, we sold anadditional $45.0 million of convertible senior notes pursuant to anover-allotment option exercised by the initial purchasers of the convertiblesenior notes. The interest rates on our senior notes, convertible notes andsenior subordinated notes are fixed. Assuming other factors are held constant,an increase in interest rates generally results in a decrease in the fair valueof fixed-rate convertible debt, but does not impact the carrying value, and anincrease in our stock price generally results in an increase in the fair valueof convertible debt, but does not impact the carrying value.

In connection with our IDT acquisition, on October 30,2003 we issued $350.0 million of 67¤8% senior subordinatednotes, due 2013. On December 23, 2004, we issued an additional $200.0 millionaggregate principal amount of 67¤8%senior subordinated notes due 2013. The additional notes were offered asadditional debt securities under the indenture with identical terms as theexisting notes. The interest rate on these notes is fixed.

Themarket-based fair value of our notes are as follows:

| ** **                | ** ** | **March 31,**      | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** |
| Senior Notes              |       |                    | **$**      | **350,000** | ** ** | ** ** | **$** | **353,500** |   |   | $ | 350,000 |   |   | $ | 348,250 |   |
| Senior Subordinated Notes |       |                    | **$**      | **807,453** | ** ** | ** ** | **$** | **815,500** |   |   | $ | 808,585 |   |   | $ | 808,438 |   |
| Senior Convertible Notes  |       |                    | **$**      | **345,000** | ** ** | ** ** | **$** | **363,975** |   |   | $ | 345,000 |   |   | $ | 365,269 |   |

** **

The senior convertible notes contain a contingentinterest feature which represents an embedded derivative instrument, as it isbased on DRS’s stock price. The value of the contingent interest was zero atthe date of the issuance of the senior convertible notes and at March 31,2007. The amount recorded for the embedded derivative will be adjustedperiodically through interest expense for material changes in its fair value.

**Foreign Currency Exchange Risk**   Weoperate and conduct business in foreign countries and, as a result, are exposedto fluctuations in foreign currency exchange rates. More specifically, ourstockholders’ equity is impacted by the conversion of the net assets of foreignsubsidiaries for which the functional currency is not the U.S. dollar for U.S.reporting purposes. Our exposure to foreign currency exchange risk related toour foreign operations is not material to our results of operations, cash flowsor financial position. Beginning in January 2006, in order to mitigate therisk associated with certain of these contracts denominated in foreigncurrency, we entered into foreign currency forward contracts. We account forthese contracts as cash flow hedges. At March 31, 2007, there were no openforeign currency forward contracts.

60

----

**Item 8.**                    FinancialStatements and Supplementary Data

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULE**

|                                                                                                                                              | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                     |       | 62       |       |
| Consolidated Balance Sheets as of March 31, 2007  and 2006                                                                              |       | 63       |       |
| Consolidated Statements of Earnings for the years  ended March 31, 2007, 2006 and 2005                                                  |       | 64       |       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Earnings for the years ended March 31, 2007, 2006 and 2005      |       | 65       |       |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2007, 2006 and 2005                                                |       | 66       |       |
| Notes to Consolidated Financial Statements                                                                                                   |       | 67       |       |
| Financial Statement Schedule—Schedule II—Valuation and  Qualifying Accounts for the years ended March 31, 2007, 2006 and 2005 |       | 127      |       |

 

61

----

**Report of IndependentRegistered Public Accounting Firm**

**The Boardof Directors and StockholdersDRS Technologies, Inc:**

We have audited the accompanying consolidated balancesheets of DRS Technologies, Inc. and subsidiaries as of March 31, 2007 and 2006and the related consolidated statements of earnings, stockholders’ equity andcomprehensive earnings, and cash flows for each of the years in the three-yearperiod ended March 31, 2007. In connection with our audits of the consolidatedfinancial statements, we also have audited financial statement schedule II.These consolidated financial statements and the financial statement schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements and financialstatement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of DRS Technologies, Inc. and subsidiaries as of March 31, 2007and 2006, and the results of their operations and their cash flows for each ofthe years in the three-year period ended March 31, 2007, in conformity withU.S. generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

As discussed in Notes 1.Q. and 11 to the consolidatedfinancial statements, the Company adopted the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,”effective April 1, 2006.  Also asdiscussed in Note 12 to the consolidated financial statements, the Companyadopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an Amendment of FASB Statements No. 87,88, 106 and 132R,” at the end of the fiscal year ended March 31, 2007.

We also haveaudited, in accordance with standards of the Public Company AccountingOversight Board (United States), the effectiveness of DRS Technologies, Inc.and subsidiaries’ internal control over financial reporting as of March 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated May 29, 2007 expressed an unqualified opinionon management’s assessment of, and the effective operation of, internal controlover financial reporting.
| /s/ KPMG LLP            |   |
|-------------------------|--------|
| Short Hills, New Jersey |
| May 29, 2007            |

 

62

----

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

| ** **                                                                                                                                                                            | ** ** | **March 31,** | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------|
| ** **                                                                                                                                                                            | ** ** | **2007**           | ** **    | **2006** | ** ** |
| **Assets**                                                                                                                                                                            | ** ** | ** **         | ** **    | ** ** | ** ** |
| Current assets                                                                                                                                                                        |       |               |          |   |   |
| Cash  and cash equivalents                                                                                                                                                            |       | **$**              | **95,833**    | ** ** | $ | 1,293 |   |
| Accounts  receivable, net                                                                                                                                                             |       | **535,242**        | ** **    | 432,678 |   |
| Inventories,  net                                                                                                                                                                     |       | **367,612**        | ** **    | 331,206 |   |
| Prepaid  expenses, deferred income taxes and other current assets                                                                                                                     |       | **126,975**        | ** **    | 135,613 |   |
| Total  current assets                                                                                                                                                                 |       | **1,125,662**      | ** **    | 900,790 |   |
| Property, plant and equipment,  net                                                                                                                                                   |       | **231,206**        | ** **    | 220,506 |   |
| Acquired intangible  assets, net                                                                                                                                                      |       | **196,984**        | ** **    | 231,139 |   |
| Goodwill                                                                                                                                                                              |       | **2,616,642**      | ** **    | 2,608,068 |   |
| Deferred income taxes and  other noncurrent assets                                                                                                                                    |       | **44,216**         | ** **    | 58,616 |   |
| **Total assets**                                                                                                                                                                      |       | **$**              | **4,214,710** | ** ** | $ | 4,019,119 |   |
| **Liabilities and Stockholders' Equity**                                                                                                                                              | ** ** | ** **         | ** **    | ** ** | ** ** |
| Current liabilities                                                                                                                                                                   |       | ** **         | ** **    |   |   |
| Current  installments of long-term debt                                                                                                                                               |       | **$**              | **5,161**     | ** ** | $ | 4,622 |   |
| Accounts  payable                                                                                                                                                                     |       | **297,427**        | ** **    | 224,673 |   |
| Accrued  expenses and other current liabilities                                                                                                                                       |       | **467,944**        | ** **    | 471,068 |   |
| Total  current liabilities                                                                                                                                                            |       | **770,532**        | ** **    | 700,363 |   |
| Long-term  debt, excluding current installments                                                                                                                                       |       | **1,783,046**      | ** **    | 1,828,771 |   |
| Other liabilities                                                                                                                                                                     |       | **158,682**        | ** **    | 138,405 |   |
| **Total liabilities**                                                                                                                                                                 |       | **2,712,260**      | ** **    | 2,667,539 |   |
| Commitments and  contingencies                                                                                                                                                        |       | ** **         | ** **    |   |   |
| Stockholders’ equity                                                                                                                                                             |       | ** **         | ** **    |   |   |
| Preferred  stock, $10 par value per share. Authorized 2,000,000 shares; none issued at  March 31, 2007 and 2006                                                                       |       | **—**         | ** **    | — |   |
| Common  stock, $.01 par value per share. Authorized 100,000,000 shares at March 31,  2007 and 2006; 40,673,944 and 39,912,541 shares issued at March 31, 2007 and  2006, respectively |       | **407**            | ** **    | 399 |   |
| Additional  paid-in capital                                                                                                                                                           |       | **1,099,991**      | ** **    | 1,076,786 |   |
| Retained  earnings                                                                                                                                                                    |       | **399,793**        | ** **    | 277,706 |   |
| Accumulated  other comprehensive earnings                                                                                                                                             |       | **2,259**          | ** **    | 3,885 |   |
| Unamortized  stock compensation                                                                                                                                                       |       | **—**         | ** **    | (7,196 | ) |
| **Total stockholders’ equity**                                                                                                                                                   |       | **1,502,450**      | ** **    | 1,351,580 |   |
| **Total  liabilities and stockholders’ equity**                                                                                                                                  |       | **$**              | **4,214,710** | ** ** | $ | 4,019,119 |   |

 

See accompanying Notes to Consolidated Financial Statements.

63

----

**DRS TECHNOLOGIES, INC.AND SUBSIDIARIES**

**Consolidated Statements ofEarnings**

**(in thousands, exceptper-share data)**

| ** **                                                                                                          | ** ** | **Year Ended March 31,** | ** **    |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|---------------|
| ** **                                                                                                          | ** ** | **2007**                                | ** **    | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                                                                                       |       |                                    |          |   |   |   |   |
| Products                                                                                                            |       | **$**                                   | **2,084,765** |   | $ | 1,520,508 |   | $ | 1,177,849 |   |
| Services                                                                                                            |       | **736,348**                             |          | 215,024 |   | 130,751 |   |
| **Total revenues**                                                                                                  |       | **2,821,113**                           |          | 1,735,532 |   | 1,308,600 |   |
| Costs and expenses                                                                                                  |       | **2,513,530**                           |          | 1,542,822 |   | 1,165,468 |   |
| **Operating income**                                                                                                |       | **307,583**                             |          | 192,710 |   | 143,132 |   |
| Interest income                                                                                                     |       | **1,273**                               |          | 7,253 |   | 2,460 |   |
| Interest and related  expenses                                                                                      |       | **119,912**                             |          | 64,186 |   | 39,750 |   |
| Other expense, net                                                                                                  |       | **350**                                 |          | 727 |   | 719 |   |
| Earnings from continuing operations before non-controlling interests  and income taxes                              |       | **188,594**                             |          | 135,050 |   | 105,123 |   |
| Non-controlling interests                                                                                           |       | **1,430**                               |          | 1,562 |   | 2,155 |   |
| Earnings from continuing operations before income taxes                                                             |       | **187,164**                             |          | 133,488 |   | 102,968 |   |
| Income taxes                                                                                                        |       | **60,104**                              |          | 51,994 |   | 44,842 |   |
| Earnings from continuing operations                                                                                 |       | **127,060**                             |          | 81,494 |   | 58,126 |   |
| Earnings from  discontinued operations (including gain on disposal of $700 in 2005), net of  income taxes           |       | **—**                              |          | — |   | 2,551 |   |
| **Net earnings**                                                                                                    |       | **$**                                   | **127,060**   |   | $ | 81,494 |   | $ | 60,677 |   |
| **Net  earnings per share of common stock:**                                                                        | ** ** | ** **                              | ** **    | ** ** | ** ** | ** ** | ** ** |
| Basic earnings per share**:**                                                                                       |       | ** **                              |          |   |   |   |   |
| Earnings from continuing operations                                                                                 |       | **$**                                   | **3.19**      |   | $ | 2.75 |   | $ | 2.15 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.03 per share in 2005), net of income taxes |       | **$**                                   | **—**    |   | $ | — |   | $ | 0.09 |   |
| Net earnings                                                                                                        |       | **$**                                   | **3.19**      |   | $ | 2.75 |   | $ | 2.24 |   |
| Diluted earnings per  share**:**                                                                                    |       | ** **                              |          |   |   |   |   |
| Earnings from continuing operations                                                                                 |       | **$**                                   | **3.12**      |   | $ | 2.67 |   | $ | 2.09 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.02 per share in 2005), net of income taxes |       | **$**                                   | **—**    |   | $ | — |   | $ | 0.09 |   |
| Net earnings                                                                                                        |       | **$**                                   | **3.12**      |   | $ | 2.67 |   | $ | 2.18 |   |
| **Dividends  per share of common stock**                                                                            |       | **$**                                   | **0.12**      |   | $ | 0.12 |   | $ | — |   |

 

See accompanying Notes to Consolidated Financial Statements.

64

----

**DRSTECHNOLOGIES, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Earnings**

**(in thousands, except sharedata)**

| ** **                                                                                     | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive**Earnings | ** ** | **Unamortized  Stock** | ** ** | **Total  Stockholders’** | ** **  |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|------------------------|------------|-------------------------------|-------------|
| ** **                                                                                     | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**                                  | ** ** | **(Losses)**           | ** ** | **Compensation**              | ** **  | **Equity** | ** ** |
| **Balances at March 31, 2004**                                                                 |       | 27,063,093            |       |                    | $          | 271          |       |                                          | $          | 456,664                |       | $                             | 139,247     |   |   | $ | 3,035 |   |   |   | $ | (3,592 | ) |   |   | $ | 595,625 |   |   |
| Net earnings                                                                                   |       | —                |       |                    | —     |         |       | —                                        |       | 60,677                 |       |                          | —      |   |   |   | — |   |   |   | 60,677 |   |   |
| Unrealized gains on hedging  instruments, net of $515 of income taxes                          |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | 754         |   |   |   | — |   |   |   | 754 |   |   |
| Minimum pension liability,  net of $525 income tax benefit                                     |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | (956        | ) |   |   | — |   |   |   | (956 | ) |   |
| Foreign currency  translation adjustments                                                      |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | 3,365       |   |   |   | — |   |   |   | 3,365 |   |   |
| Total comprehensive  earnings                                                                  |       |                  |       |                    |       |         |       |                                          |       |                   |       |                          |        |   |   |   |   |   |   |   | 63,840 |   |   |
| Stock options exercised                                                                        |       | 426,742               |       |                    | 4          |         |       | 8,093                                         |       | —                 |       |                          | —      |   |   |   | — |   |   |   | 8,097 |   |   |
| Income tax benefit from  stock options exercised                                               |       | —                |       |                    | —     |         |       | 2,778                                         |       | —                 |       |                          | —      |   |   |   | — |   |   |   | 2,778 |   |   |
| Restricted stock grants                                                                        |       | 2,400                 |       |                    |       |         |       | 69                                            |       | —                 |       |                          | —      |   |   |   | (69 | ) |   |   | — |   |   |
| Restricted stock  cancellations                                                                |       | (19,740               | )          |                    | —     |         |       | (577                                          | )          | —                 |       |                          | —      |   |   |   | 577 |   |   |   | — |   |   |
| Compensation relating to  restricted stock                                                     |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | —      |   |   |   | 1,088 |   |   |   | 1,088 |   |   |
| **Balances at March 31, 2005**                                                                 |       | 27,472,495            |       |                    | $          | 275          |       |                                          | $          | 467,027                |       | $                             | 199,924     |   |   | $ | 6,198 |   |   |   | $ | (1,996 | ) |   |   | $ | 671,428 |   |   |
| Net earnings                                                                                   |       | —                |       |                    | —     |         |       | —                                        |       | 81,494                 |       |                          | —      |   |   |   | — |   |   |   | 81,494 |   |   |
| Reclassification adjustment  for gain on hedging instrument, net of $751 of income tax benefit |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | (1,052      | ) |   |   | — |   |   |   | (1,052 | ) |   |
| Unrealized gains on hedging  instruments, net of $10 of income tax                             |       |                  |       |                    |       |         |       |                                          |       |                   |       |                          | 20          |   |   |   |   |   |   |   | 20 |   |   |
| Minimum pension liability,  net of $1,142 income tax benefit                                   |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | (2,646      | ) |   |   | — |   |   |   | (2,646 | ) |   |
| Foreign currency  translation adjustments                                                      |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | 1,365       |   |   |   | — |   |   |   | 1,365 |   |   |
| Total comprehensive  earnings                                                                  |       |                  |       |                    |       |         |       |                                          |       |                   |       |                          |        |   |   |   |   |   |   |   | 79,181 |   |   |
| Dividends declared                                                                             |       | —                |       |                    | —     |         |       | —                                        |       | (3,712                 | )          |                          | —      |   |   |   | — |   |   |   | (3,712 | ) |   |
| Issuance of shares to  purchase Engineered Support Systems, Inc.                               |       | 11,727,566            |       |                    | 117        |         |       | 587,143                                       |       | —                 |       |                          | —      |   |   |   | — |   |   |   | 587,260 |   |   |
| Stock options exercised                                                                        |       | 563,620               |       |                    | 5          |         |       | 12,535                                        |       | —                 |       |                          | —      |   |   |   | — |   |   |   | 12,540 |   |   |
| Income tax benefit from  stock options exercised                                               |       | —                |       |                    | —     |         |       | 5,540                                         |       | —                 |       |                          | —      |   |   |   | — |   |   |   | 5,540 |   |   |
| Restricted stock grants                                                                        |       | 166,880               |       |                    | 2          |         |       | 8,694                                         |       | —                 |       |                          | —      |   |   |   | (8,696 | ) |   |   | — |   |   |
| Restricted stock  cancellations                                                                |       | (18,020               | )          |                    | —     |         |       | (640                                          | )          | —                 |       |                          | —      |   |   |   | 640 |   |   |   | — |   |   |
| Compensation relating to  restricted stock                                                     |       | —                |       |                    | —     |         |       | —                                        |       | —                 |       |                          | —      |   |   |   | 2,856 |   |   |   | 2,856 |   |   |
| Other                                                                                          |       | —                |       |                    | —     |         |       | (3,513                                        | )          | —                 |       |                          | —      |   |   |   | — |   |   |   | (3,513 | ) |   |
| **Balances at March 31, 2006**                                                                 |       | 39,912,541            |       |                    | $          | 399          |       |                                          | $          | 1,076,786              |       | $                             | 277,706     |   |   | $ | 3,885 |   |   |   | $ | (7,196 | ) |   |   | $ | 1,351,580 |   |   |
| Adjustment for the adoption of SFAS 123R                                                       |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **(7,196)**                                   | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **7,196** | ** ** | ** ** | ** ** | **—** | ** ** |   |
| **Net earnings**                                                                               |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **127,060**            | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **127,060** | ** ** |   |
| Unrealized losses on hedging instruments, net of $10  of income tax benefit                    |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **—**             | ** ** | ** **                    | **(20**     | **)** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **(20** | **)** |   |
| Minimum pension liability, net of $1,209 income tax                                            |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **—**             | ** ** | ** **                    | **2,260**   | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **2,260** | ** ** |   |
| Foreign currency translation adjustments                                                       |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **—**             | ** ** | ** **                    | **1,872**   | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **1,872** | ** ** |   |
| Total comprehensive earnings                                                                   |       | ** **            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                                    | ** ** | ** **             | ** ** | ** **                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **131,172** | ** ** |   |
| Adjustment for the adoption of SFAS 158 net of $3,418  of income tax benefit                   |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **—**             | ** ** | ** **                    | **(5,738**  | **)** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **(5,738** | **)** |   |
| Dividends declared                                                                             |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **(4,973)**            | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **(4,973)** | ** ** |   |
| Adjustment of shares to purchase Engineered Support  Systems, Inc.                             |       | ** **            | ** ** | ** **              | ** ** | ** **   | ** ** | **(78)**                                      | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **(78)** | ** ** |   |
| Stock options exercised                                                                        |       | **575,152**           | ** ** | ** **              | **6**      | ** **   | ** ** | **12,862**                                    | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **12,868** | ** ** |   |
| Income tax benefit from share-based payment  arrangements                                      |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **4,880**                                     | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **4,880** | ** ** |   |
| Restricted stock grants                                                                        |       | **247,906**           | ** ** | ** **              | **2**      | ** **   | ** ** | **(2)**                                       | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** |   |
| Restricted stock cancellations                                                                 |       | **(61,655**           | **)**      | ** **              | **—** | ** **   | ** ** | **—**                                    | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** |   |
| Share-based compensation                                                                       |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **11,114**                                    | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **11,114** | ** ** |   |
| Other                                                                                          |       | **—**            | ** ** | ** **              | **—** | ** **   | ** ** | **1,625**                                     | ** ** | **—**             | ** ** | ** **                    | **—**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **1,625** | ** ** |   |
| **Balances  at March 31, 2007**                                                                |       | **40,673,944**        | ** ** | ** **              | **$**      | **407**      | ** ** | ** **                                    | **$**      | **1,099,991**          | ** ** | **$**                         | **399,793** | ** ** | ** ** | **$** | **2,259** | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **1,502,450** | ** ** |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

65

----

**DRS TECHNOLOGIES, INC.AND SUBSIDIARIES**

**Consolidated Statements ofCash Flows**

**(in thousands)**

| ** **                                                                                                                        | ** ** | **Year Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                                                                                                                        | ** ** | **2007**                                | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Cash Flows from Operating Activities**                                                                                          | ** ** | ** **                              | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net Earnings                                                                                                                      |       | **$**                                   | **127,060** | ** ** | $ | 81,494 |   | $ | 60,677 |   |
| Earnings from discontinued  operations                                                                                            |       | **—**                              | ** **  | — |   | (2,551 | ) |
| Earnings from continuing  operations                                                                                              |       | **127,060**                             | ** **  | 81,494 |   | 58,126 |   |
| Adjustments to reconcile net earnings of continuing operations to cash  flows from operating activities of continuing operations: |       | ** **                              | ** **  |   |   |   |   |
| Depreciation and amortization                                                                                                     |       | **76,663**                              | ** **  | 48,985 |   | 40,968 |   |
| Share-based compensation                                                                                                          |       | **11,114**                              | ** **  | 2,060 |   | 1,191 |   |
| Deferred income taxes                                                                                                             |       | **10,620**                              | ** **  | 15,454 |   | 24,660 |   |
| Inventory reserves and  provision for doubtful accounts                                                                           |       | **1,319**                               | ** **  | 3,147 |   | 1,519 |   |
| Amortization and write-off  of deferred financing fees                                                                            |       | **5,892**                               | ** **  | 6,632 |   | 3,765 |   |
| Other, net                                                                                                                        |       | **240**                                 | ** **  | (2,725 | ) | 1,349 |   |
| Changes in assets and liabilities, net of effects from business  combinations and divestitures:                                   |       | ** **                              | ** **  |   |   |   |   |
| (Increase) decrease in  accounts receivable                                                                                       |       | **(100,797**                            | **)**       | (26,196 | ) | 155 |   |
| Increase in inventories                                                                                                           |       | **(51,276**                             | **)**       | (35,439 | ) | (29,922 | ) |
| Decrease in prepaid  expenses and other current assets                                                                            |       | **17,364**                              | ** **  | 2,783 |   | 1,073 |   |
| Increase in accounts  payable                                                                                                     |       | **68,107**                              | ** **  | 51,008 |   | 27,109 |   |
| (Decrease) increase in  accrued expenses and other current liabilities                                                            |       | **(10,101**                             | **)**       | 5,792 |   | (6,725 | ) |
| Increase in customer  advances                                                                                                    |       | **44,303**                              | ** **  | 4,055 |   | 7,200 |   |
| (Decrease) increase in pension  and postretirement liability                                                                      |       | **(121**                                | **)**       | 1,338 |   | (2,372 | ) |
| Other, net                                                                                                                        |       | **(5,152)**                             | ** **  | (1,326 | ) | 8,087 |   |
| **Net cash  provided by operating activities of continuing operations**                                                           |       | **195,235**                             | ** **  | 157,062 |   | 136,183 |   |
| **Net cash  provided by operating activities of discontinued operations**                                                         |       | **—**                              | ** **  | — |   | 2,227 |   |
| **Net cash  provided by operating activities**                                                                                    |       | **195,235**                             | ** **  | 157,062 |   | 138,410 |   |
| **Cash Flows from Investing Activities**                                                                                          |       | ** **                              | ** **  |   |   |   |   |
| Capital expenditures                                                                                                              |       | **(55,907**                             | **)**       | (43,194 | ) | (34,521 | ) |
| Payments pursuant to  business combinations, net of cash acquired                                                                 |       | **(16,737**                             | **)**       | (1,425,696 | ) | (49,839 | ) |
| Proceeds from sales of  businesses                                                                                                |       | **—**                              | ** **  | — |   | 29,096 |   |
| Investment in short-term  notes                                                                                                   |       | **—**                              | ** **  | — |   | (10,000 | ) |
| Proceeds from sale of  short-term notes                                                                                           |       | **—**                              | ** **  | — |   | 10,000 |   |
| Other, net                                                                                                                        |       | **2,726**                               | ** **  | 1,494 |   | 1,691 |   |
| **Net cash  used in investing activities of continuing operations**                                                               |       | **(69,918**                             | **)**       | (1,467,396 | ) | (53,573 | ) |
| **Net cash  used in investing activities of discontinued operations**                                                             |       | **—**                              | ** **  | — |   | (825 | ) |
| **Net cash  used in investing activities**                                                                                        |       | **(69,918**                             | **)**       | (1,467,396 | ) | (54,398 | ) |
| **Cash Flows from Financing Activities**                                                                                          |       | ** **                              | ** **  |   |   |   |   |
| Net repayments of  short-term debt                                                                                                |       | **(40,000**                             | **)**       | (36,300 | ) | (82 | ) |
| Borrowings of long-term  debt                                                                                                     |       | **452**                                 | ** **  | 1,229,853 |   | 210,000 |   |
| (Return of) receipt of  advanced interest on senior subordinated notes                                                            |       | **—**                              | ** **  | (1,986 | ) | 1,986 |   |
| Debt issuance costs                                                                                                               |       | **—**                              | ** **  | (28,372 | ) | (4,193 | ) |
| Repayments of long-term  debt                                                                                                     |       | **(4,719**                              | **)**       | (167,808 | ) | (50,907 | ) |
| Excess tax benefit  realized from share-based payment arrangements                                                                |       | **4,880**                               | ** **  | — |   | — |   |
| Dividends paid                                                                                                                    |       | **(4,962**                              | **)**       | (3,705 | ) | — |   |
| Proceeds from exercise of  stock options                                                                                          |       | **12,868**                              | ** **  | 12,540 |   | 8,097 |   |
| Other                                                                                                                             |       | **480**                                 | ** **  | — |   | — |   |
| **Net cash  (used in) provided by financing activities of continuing operations**                                                 |       | **(31,001**                             | **)**       | 1,004,222 |   | 164,901 |   |
| **Net cash  used in financing activities of discontinued operations**                                                             |       | **—**                              | ** **  | — |   | (30 | ) |
| **Net cash  (used in) provided by financing activities**                                                                          |       | **(31,001**                             | **)**       | 1,004,222 |   | 164,871 |   |
| **Effect  of exchange rates on cash and cash equivalents**                                                                        |       | **224**                                 | ** **  | 553 |   | 1,179 |   |
| **Net  increase (decrease) in cash and cash equivalents**                                                                         |       | **94,540**                              | ** **  | (305,559 | ) | 250,062 |   |
| **Cash and  cash equivalents, beginning of year**                                                                                 |       | **1,293**                               | ** **  | 306,852 |   | 56,790 |   |
| **Cash and  cash equivalents, end of year**                                                                                       |       | **$**                                   | **95,833**  | ** ** | $ | 1,293 |   | $ | 306,852 |   |

 

See accompanying Notes to Consolidated Financial Statements.

66

----

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

**1.**   Summaryof Significant Accounting Policies

**A.****  ****Organization**   DRS Technologies, Inc., its wholly-ownedsubsidiaries and its controlling interests (hereinafter, DRS or the Company) isa leading 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 ofimportance to the U.S. Department of Defense (DoD), such as command andcontrol, intelligence, surveillance, reconnaissance, power management,battlefield digitization, advanced communications and networks, military vehiclediagnostics, troop sustainment and technical support. Incorporated in 1968, wehave served the defense industry for over 38 years. The Company is a providerof thermal imaging devices, combat display workstations, electronic sensorsystems, power systems, rugged computer systems, air combat training systems,mission recorders, deployable flight incident recorders, environmental andtelecommunication systems, aircraft loaders, military trailers and shelters,and integrated logistics support services. The Company’s products are deployedon a wide range of high-profile military platforms, such as DDG-51 Aegis destroyers, M1A2 Abrams MainBattle Tanks, M2A3 Bradley FightingVehicles, OH-58D Kiowa Warrior helicopters, AH-64 Apache helicopters, F/A-18E/F Super Hornet and F-16 Fighting Falcon jet fighters, F-15 Eagle tactical fighters, C-17 Globemaster II and C-130 Hercules cargo aircraft, Ohio, LosAngeles and Virginia class submarines,and on several other platforms for military and non-militaryapplications. The Company has contracts that support future military platforms,such as the DDG-1000 Zumwalt destroyer, CVN-78 next-generation aircraft carrier and Future CombatSystem. The Company providessustainment products that support military forces, such as environmentalcontrol systems, power generators, water and fuel distribution systems,chemical/biological decontamination systems and heavy equipment transportsystems. The Company also provides support services to the military, includingsecurity and asset protection system services, telecommunication andinformation technology services, training and logistics support services forall branches of the U.S. armed forces and certain foreign militaries, homelandsecurity forces, and selected government and intelligence agencies.

On October 2, 2006, theCompany implemented a new organizational operating structure that realigned itsthree previously existing operating segments - the Command, Control,Communications, Computers & Intelligence Group, the Surveillance &Reconnaissance Group and the Sustainment Systems & Services Group,into four operating segments. The four operating segments are the Command,Control, Communications, Computers & 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. SeeNote 14 for a description of each segment. All prior-year amountspresented by segment have been reclassified to reflect the new operatingstructure.

As more fully described in Note 2,“Acquisitions,” on January 31, 2006 the Company acquired all of theoutstanding stock of Engineered Support Systems, Inc. (ESSI). The entitiesacquired from ESSI are managed as the Company’s Sustainment Systems Segment andthe Technical Services Segment. The total transaction value, excludingacquisition-related costs of $27.1 million, was approximately $1.93billion.

On March 10, 2005, theCompany completed the sale of two of its operating units—DRS Weather Systems, Inc.(DRS Weather) and DRS Broadcast Technology (DRS Broadcast), and recorded anafter-tax gain of $0.7 million in the fourth quarter of fiscal 2005. Bothoperating 

67

----

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

units were partof the Company’s C4I Segment. The operating units were acquired in connectionwith the Company’s fiscal 2004 acquisition of Integrated Defense Technologies, Inc.(IDT). The results of operations of DRS Weather and DRS Broadcast for thefiscal year ended March 31, 2005 are included in the ConsolidatedStatements of Earnings as “Earnings from discontinued operations.” The cashflows of the discontinued operations also are presented separately in theConsolidated Statements of Cash Flows for the year ended March 31, 2005.All corresponding footnotes reflect the discontinued operations presentation. Theresults of discontinued operations for the year ended March 31, 2005 areas follows:

| ** **                                                                                        | ** ** | **Year Ended**     | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**      | ** ** |
| ** **                                                                                        | ** ** | **2005**                | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)** | ** ** |
| Revenues                                                                                          |       |                    | $          | 33,325 |   |   |
| Earnings before taxes                                                                             |       |                    | $          | 3,601 |   |   |
| Income tax expense                                                                                |       |                    | 1,050      |   |   |
| Earnings from discontinued  operations (including after-tax gain on sale of $0.7 million in 2005) |       |                    | $          | 2,551 |   |   |

 

**B.****  ****Variable Interest Entities**   The Company evaluates its relationship with otherentities to identify whether they are variable interest entities, as defined byFASB Interpretation No. 46 (revised), “Consolidation of Variable Interest Entities”(FIN 46R), and assesses whether it is the primary beneficiary of suchentities. If the determination is made that the Company is the primary beneficiary,then that entity is included in the Company’s Consolidated Financial Statementsin accordance with FIN 46R.

During fiscal 2005, theCompany entered into a joint venture agreement with a third party tomanufacture and market high-performance, lightweight motors, generators anddrive electronics to the industrial market. The joint venture is still in itsearly stages of development and has not had significant activities since itsinception. The joint venture is considered a variable interest entity becauseit is a development stage enterprise and its equity is not sufficient tofinance its activities without additional subordinated financial support. Basedupon a review of the provisions of FIN 46R, the structure of the agreementand activities of the entity, the Company determined that it is not the primarybeneficiary of the joint venture at March 31, 2007 and 2006. If the factsand circumstances change in the future, the Company could determine that it hasbecome the primary beneficiary, which would require DRS to consolidate the fairvalue of the assets, liabilities and noncontrolling interest of the jointventure. The Company currently accounts for its 50% ownership interest in thejoint venture under the equity method of accounting. The Company’s investmentin the joint venture was immaterial as of March 31, 2007 and 2006.

**C.****  ****Basis of Presentation and Use of Estimates**   The consolidated financial statements include theaccounts of DRS Technologies, Inc., its wholly-owned subsidiariesand its controlling interests. All intercompany transactions and balances havebeen eliminated in consolidation.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The most significant of these estimates and assumptionsrelate to the recognition of contract revenues and estimated costs to completecontracts in process, valuation of inventories reported at lower of cost ormarket, recoverability 

68

----

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

of reported amounts of goodwill, long-lived assets and intangibleassets, valuation of pensions and other postretirement benefits, the valuationof assets acquired and liabilities assumed in purchase business combinations, thevaluation of deferred tax assets and liabilities and the recognition ofshare-based compensation costs. Actual results could differ from theseestimates.

**D.****  ****Classifications**   Unbilledreceivables, inventories, accrual for future costs on uncompleted contracts andaccrual for future costs related to acquired contracts are primarilyattributable to long-term contracts or programs in progress for which therelated operating cycles may be longer than one year. In accordance withindustry practice, these items are included in current assets and liabilities.

Certainamounts for prior years have been reclassified to conform with the fiscal 2007presentation. 

**E.****  ****Translation of Foreign Currency FinancialStatements and Foreign Currency Transactions**   Significanttransactions in foreign currencies are translated into U.S. dollars at theapproximate prevailing rate at the time of the transaction. Foreign exchangetransaction gains and losses in fiscal 2007, 2006 and 2005 are immaterial tothe Company’s results of operations. The operations of the Company’s foreignsubsidiaries are translated from the local (functional) currencies into U.S.dollars using weighted average rates of exchange during each monthly period.The rates of exchange at each balance sheet date are used for translatingcertain balance sheet accounts, and gains or losses resulting from thesetranslation adjustments are included in the accompanying Consolidated BalanceSheets as a component of accumulated other comprehensive earnings. The Companyhas accumulated exchange gains resulting from the translation of foreignsubsidiaries financial statements of $9.8 million and $11.1 millionas of March 31, 2007 and 2006, respectively.

**F.****  ****Cash and Cash Equivalents**   The Companyconsiders all highly liquid investments purchased with an original maturity ofthree months or less to be cash equivalents.

**G.****  ****Receivables**   Receivablesconsist of amounts billed and currently due from customers, and unbilled costsand accrued profits primarily related to revenues on contracts that have beenrecognized for accounting purposes, but not yet billed to customers, net ofprogress payments and advance payments, and net of allowance for uncollectibleaccounts.

**H.****  ****Inventories**   Inventoriedcontract costs (i.e., work in process) represent incurred costs on contracts inprocess that have not yet been recognized as costs and expenses because therelated revenues, which are primarily recorded using the units-of-deliverypercentage-of-completion method, have not been recognized. As discussed belowin Note 5 “Inventories,” the Company’s inventoried contract costs forcertain government contracts and contracts with prime contractors orsubcontractors of the government, include direct and indirect costs andallocated general and administrative costs, independent research anddevelopment costs and bid and proposal costs. Total expenditures for internalresearch and development amounted to approximately $50.9 million, $47.6 millionand $38.9 million for fiscal 2007, 2006 and 2005, respectively. Generaland administrative expenses related to commercial-type products and servicesprovided under commercial terms and conditions are expensed as incurred and areincluded in costs and expenses in the Consolidated Statements of Earnings.

Pursuant to contractprovisions, agencies of the U.S. government and certain other customers havetitle to, or a security interest in, inventories related to certain contractsas a result of progress payments and advance payments. Accordingly, suchprogress payments and advances are reflected as an offset, first against therelated unbilled receivables, then against the related inventory balances. Tothe extent that customer advances exceed related unbilled receivables andinventory levels, such excess advances are classified as current liabilities.

69

----

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

Inventories other thaninventoried contract costs are stated at the lower of cost, primarily using theaverage cost method, or market.

The Company records contract-relatedassets and liabilities acquired in business combinations at their fair value byconsidering the remaining contract amounts to be billed and collected, DRS’s estimate tocomplete (including general and administrative expenses for government-related contracts)and a profit allowance on the remaining contract amount to be billed andcollected. Facts and circumstances specific to an acquired contract dictate theprofit allowance, if any, established at acquisition (certain contracts,including those in a loss position at the date of acquisition, may be adjustedto break-even by recording a reserve for anticipated costs at acquisition).Certain factors influencing the profit allowance, if any, on an acquiredcontract include: contract type, margins earned on similar contracts, theoriginal bid of the acquired entity and the life-cycle and related risk profileof the contract. Revisions to cost estimates subsequent to the date ofacquisition may be recorded as an adjustment to goodwill or earnings, dependingon the nature and timing of the revision.

**The Companymay, from time to time, incur costs in anticipation of a specific contract thatis still being negotiated with the customer. If it is probable that the Companywill be awarded the specific anticipated contract, the precontract costs(excluding any start-up costs, which are expensed as incurred) would becapitalized into inventory. Capitalized precontract costs at March 31,2007 and 2006 were immaterial.**

**I.****  ****Property, Plant and Equipment**   Property, plantand equipment are stated at cost less accumulated depreciation. Depreciation iscalculated on the straight-line method. The ranges of estimated useful livesare: office furnishings, laboratory, production, computer and other equipment,3-10 years; building and building improvements, 15-40 years;and leasehold improvements, over the shorter of the estimated useful lives ofthe improvements or the remaining life of the lease. When property, plant andequipment are retired or otherwise disposed of, the net book value of the assetis removed from the Consolidated Balance Sheet, and the net gain or loss isincluded in the determination of net earnings. Maintenance and repairs arecharged to operations as incurred; renewals and betterments are capitalized.

**J.****  ****Software Capitalization**   Internally usedsoftware, whether purchased or developed, is capitalized and amortized usingthe straight-line method over an estimated useful life of three to eight years.Capitalized software costs are included in machinery and equipment. Inaccordance with American Institute of Certified Public Accountants (AICPA)Statement of Position 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use,” the Company capitalizescertain costs associated with internal-use software, such as the payroll costsof employees devoting time to the projects and external direct costs formaterials and services. Costs associated with internal-use software areexpensed during the design phase until the point at which the project hasreached the development stage. Subsequent additions, modifications or upgradesto internal-use software are capitalized only to the extent that they allow thesoftware to perform a task it previously did not perform. Software maintenanceand training costs are expensed in the period in which they are incurred. Thecapitalization of software requires judgment in determining when a project hasreached the development stage and the period over which the Company expects tobenefit from the use of that software. The Company capitalized $11.8 million,$3.8 million and $4.0 million of internal-use software for the years ended March 31,2007, 2006 and 2005, respectively. Depreciation expense for capitalizedsoftware was approximately $3.7 million, $3.4 million and $2.9 million infiscal 2007, 2006 and 2005, respectively.

The Company’s software developmentcosts for computer software products to be sold, leased or marketed that areincurred after establishing technological feasibility for the computer 

70

----

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

softwareproducts are capitalized as other assets and amortized on a product by productbasis using the amount that is the greater of the straight-line method over theuseful life or the ratio of current revenues to total estimated revenues inaccordance with SFAS No. 86, “Accounting for the Costs of ComputerSoftware to Be Sold, Leased or Otherwise Marketed.” Capitalized softwaredevelopment costs was $2.4 million at March 31, 2007.

**K.****  ****Bond Premium and Debt Issuance Costs**   Bond premium anddebt issuance costs are amortized as a component of interest expense over theterm of the related debt using the effective interest method. The nature andextent of subsequent modifications to the Company’s term loans and lines ofcredit affect whether debt issuance costs are expensed or capitalized. If theCompany prepays its term loans or portions thereof, the debt issuance costsassociated with such term loans are written-off in proportion to the decreasein term loan borrowings, as compared with the total borrowings outstandingprior to the prepayment.

**L.****  ****Goodwill**   The Companyannually reviews goodwill for impairment by “reporting unit” or whenever eventsor changes in circumstances indicate that the carrying amount of these assetsmay not be recoverable. A reporting unit is an operating segment or a componentof an operating segment. A component of an operating segment is a reportingunit if the component constitutes a business for which discrete financialinformation is available and is reviewed. Two or more components of an operatingsegment may be aggregated and deemed a single reporting unit if the componentshave similar economic characteristics. As a result of the October 2006change in organizational operating structure that realigned the Company’s threeoperating groups into four operating segments, the Company concluded it hadfive reporting units at the end of fiscal 2007 versus six reporting units priorto the reorganization, based upon the aggregation criteria.

The annual impairment test istypically performed after completion of the Company’s annual financialoperating plan, which occurs in the fourth quarter of its fiscal year. Theannual goodwill impairment assessment involves estimating the fair values ofthe Company’s reporting units and comparing such fair values with the reportingunit’s respective carrying value. If the carrying value of the reporting unitexceeds its fair value, additional steps are followed to recognize a potentialgoodwill impairment loss. Calculating the fair value of a reporting unitrequires significant estimates and assumptions by management*.*Fair values are estimated based upon thetwo methodologies, a market approach and an income approach. The marketapproach includes applying valuation multiples to each reporting unit’sprojected revenues, earnings before net interest and taxes (EBIT), and earningsbefore net interest, taxes, depreciation and amortization (EBITDA). The incomeapproach discounts future net cash flows to their present value at a rate thatreflects both the current return requirements of the market and the risksinherent in the reporting unit. The results of the two approaches are averaged andcompared with the carrying value of each respective reporting unit. The October 2006change in operating structure significantly changed the composition of certainreporting units, which, under SFAS No. 142, “Goodwill and Other IntangibleAssets” (SFAS 142), required the Company to test goodwill for impairment. TheCompany completed the impairment tests in the third quarter of fiscal 2007 and inthe fourth quarter of fiscal 2007 and 2006 with no adjustment to the carryingvalue of goodwill.

**M.****  ****Long-Lived Assets and Acquired IdentifiableIntangible Assets**   Identifiable intangible assets represent assetsacquired as part of the Company’s business acquisitions and include customer-and contract-related and technology-based intangibles. The values assignedto acquired identifiable intangible assets are determined, as of the date ofacquisition, based on estimates and judgments regarding expectations for theestimated future after-tax cash flows 

71

----

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

**fromthose assets over their lives, including the probability of expected futurecontract renewals and revenues, all of which are discounted to present value.**

The Company assesses therecoverability of the carrying value of its long-lived assets and acquiredintangible assets with finite useful lives whenever events or changes incircumstances indicate that the carrying amount of the assets or asset groupmay not be recoverable. If there are any indicators of impairment present, theCompany would then evaluate the recoverability of the potentially impairedlong-lived assets and acquired identifiable intangible assets based upon theexpectations of undiscounted cash flows from such assets. If the sum of the expected futureundiscounted net cash flows is less than the carrying amount of the asset orasset group, a loss would be recognized for the difference between the fairvalue and the carrying amount of the assets. Assets to be disposed of,including those of discontinued operations, are reported at the lower of thecarrying amount or fair value, less the costs to sell.

**N.****  ****Derivative Financial Instruments**   The Company does not use derivative financialinstruments for trading purposes. The Company utilizes some variable rate debtto fund its operations and sustain its growth. Such variable rate borrowingsexpose the Company to interest rate risk and the related impact that changes ininterest rates can have on the Company’s earnings and on its cash flows. TheCompany also operates and conducts business in foreign countries and, as aresult, is exposed to movements in foreign currency exchange rates. Morespecifically, the Company’s net equity is impacted by the conversion of the netassets of foreign subsidiaries for which the functional currency is not theU.S. dollar for U.S. reporting purposes. In an effort to limit interestexpense, cash flow exposure and foreign currency exposure, the Company has inthe past and may in the future enter into various derivative instruments thatmeet the criteria, including the related hedge documentation, to be accountedfor as cash flow hedges. The Company does not enter into derivatives designatedas fair value hedges. Derivative financial instruments also include embeddedderivatives. The embedded derivatives related to the issuance of the Company’s2% convertible notes are recorded at fair value with changes reflected in thestatement of earnings (See Note 8, “Debt,” for additional information).

All derivative instruments arecarried on the Consolidated Balance Sheets as either assets or liabilities atfair value. The classification of gains and losses resulting from changes inthe fair values of derivatives is dependent on the intended use of thederivative and its resultant designation.

The Company’s derivative andhedging activity in fiscal years 2007 and 2006 was immaterial.

**O.****  ****Revenue Recognition**   The substantialmajority of the Company’s direct and indirect revenues from the U.S. governmentand certain of the Company’s revenues from foreign governments and commercialcustomers are earned pursuant to written contractual arrangements to design,develop, manufacture and/or modify complex products and to provide relatedengineering and technical or other services according to the specifications ofthe buyers (customers). These contracts are generally fixed price,cost-reimbursable, or time and material. These contract types are accounted forin accordance with AICPA Statement of Position 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).Cost-reimbursable type contracts also are specifically covered by AccountingResearch Bulletin No. 43, Chapter 11, Section A, “GovernmentContracts, Cost-Plus Fixed-Fee Contracts” (ARB 43), in addition to SOP 81-1.

72

----

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

Revenues and profits on fixed-price contracts arerecognized using the percentage-of-completion method of accounting. Revenuesand profits on fixed-price production contracts, whose units are producedand delivered in a continuous or sequential process, are recorded as units aredelivered based on their selling prices (the units-of-delivery method).  Revenues and profits on other fixed-pricecontracts with significant engineering as well as production requirements arerecorded based on the ratio of total actual incurred costs to date to the totalestimated costs for each contract (cost-to-cost method). Under thepercentage-of-completion method of accounting, a single estimated totalprofit margin is used to recognize profit for each contract over its entireperiod of performance, which can exceed one year.

Accounting for the revenues and profits on afixed-price contract, requires the preparation of estimates of (1) thetotal contract revenue, (2) the total costs at completion, which is equalto the sum of the actual incurred costs to date on the contract and theestimated costs to complete the contract’s statement of work, and (3) themeasurement of progress towards completion. The estimated profit or loss atcompletion on a contract is equal to the difference between the total estimatedcontract revenue and the total estimated cost at completion. Under theunits-of-delivery method, revenues on a fixed-price type contract are recordedas the units are delivered during the period based on their contractual sellingprices. Under the cost-to-cost method, revenues on a fixed-price type contractare recorded at amounts equal to the ratio of actual cumulative costs incurreddivided by total estimated costs at completion, multiplied by (i) thetotal estimated contract revenue, less (ii) the cumulative revenuesrecognized in prior periods. The profit recorded on a contract in any periodusing either the units-of-delivery method or cost-to-cost method is equal to (i) thecurrent estimated total profit margin multiplied by the cumulative revenuesrecognized, less (ii) the amount of cumulative profit previously recordedfor the contract. In the case of a contract for which the total estimatedcontract costs (including overhead and general and administrative expenses)exceed the totalestimated revenues, a loss arises, and a provision for the entire loss isrecorded in the period that it becomes evident. The unrecoverable costs on aloss contract that are expected to be incurred in future periods are recordedas a component of other current liabilities.

Revenue and profits on cost-reimbursable typecontracts are recognized as allowable costs are incurred on the contract, at anamount equal to the allowable costs plus the estimated profit on those costs.The estimated profit on a cost-reimbursable contract may be fixed or variablebased on the contractual fee arrangement. Incentive and award fees on thesecontracts are recorded as revenue when the conditions under which they areearned reasonably are assured of being met and reasonably can be estimated.Revenue and profits on time-and-material type contracts are recognized on thebasis of direct labor hours expended multiplied by the contractual fixed rateper hour, plus the actual costs of material and other direct non-labor costs.On a time-and-material type contract, the fixed hourly rates include amountsfor the cost of direct labor, indirect contract costs and profit.

The Company reviews cost performance and estimates tocomplete on its contracts at least quarterly and in many cases more frequently.Adjustments to original estimates for a contract’s revenue, estimated costs atcompletion and estimated profit or loss often are required as work progressesunder a contract, as experience is gained and as more information is obtained,even though the scope of work required under the contract may not change, or ifcontract modifications occur. The impact of revisions in profit estimates forall types of contracts is recognized on a cumulative catch-up basis in theperiod in which the revisions are made. Amounts representing contract changeorders or claims are included in revenue only when they 

73

----

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

can be estimated reliably andtheir realization is probable, and are determined on a percentage-of-completionbasis measured by the cost-to-cost method. Incentives or penalties and awardsapplicable to performance on contracts are considered in estimating revenuesand profit rates, and are recorded when there is sufficient information toassess anticipated contract performance. Incentive provisions, which increaseor decrease earnings based solely on a single significant event, are notrecognized until the event occurs.

Revenues on arrangements that are not within the scopeof SOP 81-1 or ARB 43 typically are recognized in accordance with theSecurities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104,“Revenue Recognition in Financial Statements” (SAB 104). Revenues arerecognized when there is persuasive evidence of an arrangement, delivery hasoccurred or services have been performed, the selling price to the buyer isfixed or determinable, and collectibility reasonably is assured.

Included in revenues for fiscal years 2007, 2006 and2005 were $110.4 million, $106.1 million and $93.1 million,respectively, of customer-sponsored research and development, whichprincipally are accounted for under the cost-reimbursement method.

Approximately 90%, 87% and 84% of total consolidatedrevenues for fiscal years 2007, 2006 and 2005, respectively, were deriveddirectly or indirectly from defense contracts for end use by the U.S.government and its agencies. Direct Foreign Sales, which are sales to foreigngovernments, accounted for approximately 7%, 9% and 12% of total consolidatedrevenues in the fiscal years ended March 31, 2007, 2006 and 2005,respectively. One contractual instrument accounted for approximately 11% ofrevenues for the fiscal year ended March 31, 2007. There were no contracts thatwere greater than 10% of revenues during the fiscal years ended March 31, 2006and 2005.

**P.****  ****Pension and Other Postretirement Benefits**   Theobligations for the Company’s pension plans and postretirement benefit plansand the related annual costs of employee benefits are calculated based onseveral long-term assumptions, including discount rates for employee benefitliabilities, rates of return on plan assets, expected annual rates for salaryincreases for employee participants in the case of pension plans, and expectedannual increases in the costs of medical and other health care benefits in thecase of postretirement benefit obligations. These long-term assumptions aresubject to revision based on changes in interest rates, financial marketconditions, expected versus actual returns on plan assets, participantmortality rates and other actuarial assumptions, including future rates ofsalary increases, benefit formulas and levels, and rates of increase in thecosts of benefits. Changes in the assumptions, if significant, materially can affectthe amount of annual net periodic benefit costs recognized in the Company’sresults of operations from one year to the next, the liabilities for thepension plans and postretirement benefit plans, and the Company’s annual cashrequirements to fund these plans. See Note 12, “Pensions—Other EmployeeBenefits,” for further information on the Company’s pension and postretirementplans.

**Q.****   Share-BasedCompensation**   In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R replaces SFAS No. 123,“Accounting for Stock-Based Compensation” (SFAS No. 123), and supercedesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB No. 25). SFAS 123R addresses the accounting fortransactions in which an enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. 

74

----

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

**SFAS 123Rrequires companies to recognize compensation cost in an amount equal to thefair value of share-based awards expected to vest.**

On April 1, 2006, DRS adopted SFAS 123R, asinterpreted by SEC Staff Accounting Bulletin No. 107, using the modifiedprospective method. Under this method, the Company is required to recordcompensation cost for the unvested portion of previously granted awards thatwere outstanding as of April 1, 2006. Results for prior periods have notbeen restated.

**Prior to April 1, 2006, the Company applied theintrinsic-value-based method of accounting prescribed by APB No. 25 andits related interpretations. Compensation expense for stock options granted toan employee or director was recognized in earnings based on the excess, if any,of the quoted market price of DRS common stock at the date of grant, or othermeasurement date, over the amount an employee or director must pay to acquirethe common stock. When the exercise price of the option granted to an employeeor director equaled or exceeded the quoted market price of DRS common stock atthe date of grant, the Company did not recognize compensation expense.Compensation cost for restricted stock and restricted stock units (collectively“non-vested stock”) was recorded based on the closing market value on the lasttrading day of DRS common stock prior to the date of grant and forfeitures wereaccounted for as they occurred. Compensation cost for non-vested stock wascharged to unamortized stock compensation in stockholders’ equity and amortizedto expense over the requisite vesting periods.**

The tablebelow compares the “as reported” net earnings and earnings per share to the “proforma” net earnings and earnings per share for the fiscal years ended March 31,2006 and 2005, respectively, that the Company would have reported if it hadelected to recognize compensation expense in accordance with thefair-value-based method of accounting of SFAS No. 123. For purposes ofdetermining the pro forma effects of SFAS No. 123, the estimated fairvalue of options granted was calculated using the Black-Scholes option pricingvaluation model. For purposes of the pro forma table below, forfeitures wereaccounted for as they occurred, and no amount of stock option expense wascapitalized into inventory or other assets, but instead was considered a periodexpense.

| ** **                                                                                                           | ** ** | **Year Ended March, 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Net earnings, as reported                                                                                            |       | $                                       | 81,494     |   | $ | 60,677 |   |
| Add: Stock-based  compensation expense included in reported net earnings, net of taxes                               |       | 1,744                                   |       | 657 |   |
| Less: Total stock-based  compensation expense determined under fair-value-based method for all awards,  net of taxes |       | (9,466                                  | )          | (5,180 | ) |
| Pro forma net earnings                                                                                               |       | $                                       | 73,772     |   | $ | 56,154 |   |
| Earnings per share:                                                                                                  |       |                                    |       |   |   |
| Basic—as reported                                                                                               |       | $                                       | 2.75       |   | $ | 2.24 |   |
| Basic—pro forma                                                                                                 |       | $                                       | 2.49       |   | $ | 2.07 |   |
| Diluted—as reported                                                                                             |       | $                                       | 2.67       |   | $ | 2.18 |   |
| Diluted—pro forma                                                                                               |       | $                                       | 2.42       |   | $ | 2.03 |   |

** **

**R.****   Income Taxes**   The Company accounts for income taxes in accordancewith the asset-and-liability method. The Company recognizesdeferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying 

75

----

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

**amounts ofexisting assets and liabilities and their respective tax basis. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in earnings in the periodthat includes the enactment date. A valuation allowance is provided when it ismore likely than not that some portion or all of a deferred tax asset will notbe realized. The ultimate realization of deferred tax assets is dependent uponthe generation of future taxable income and the reversal of deferred taxliabilities during the period in which related temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment.**

**The Company establishes accruals for taxcontingencies when the tax return filing position is not probable of beingsustained. Tax contingency accruals, including related interest and penalties,are presented within income taxes payable on the Consolidated Balance Sheet.**

The U.S. enacted the American Jobs Creation Act of 2004(the Jobs Act) in October 2004, which contains many provisions affectingcorporate taxation. The Jobs Act containsa provision that eliminates the benefits of the Extraterritorial income (ETI) exclusionfor export sales subsequent to 2006 and phases in a new tax deduction forincome from qualified domestic production activities over a transition periodthat began in 2005. In response to the Jobs Act, the FASB issued FASB StaffPosition 109-1, "Application of FASBStatement No. 109, *Accounting for IncomeTaxes*, to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004" (FSP 109-1). FSP No.109-1 clarifies how to apply SFAS No. 109 to the new law's tax deduction forincome attributable to "domestic production activities." The fullyphased-in tax deduction is up to 9% of the lesser of taxable income or"qualified production activities income," as defined by the Jobs Act.The FSP requires that the deduction be accounted for as a special deduction inthe period earned, not as a tax-rate reduction. As a result, the Companyrecognized a reduction in its fiscal years 2007 and 2006 provision for income taxes for the domestic productionactivities in the quarterly periods in which the Company was eligible for thededuction.

The Jobs Act also included a provision that encouragescompanies to reinvest foreign earnings in the U.S. by temporarily makingcertain dividends received by a U.S. corporation from controlled foreign corporationseligible for an 85% dividends-received deduction. In accordance with the JobsAct, the Company elected to take the special one-time 85% deduction fordividends received, and accordingly, repatriated $14.0 millionin dividends during the fourth quarter of fiscal 2006 (see Note 10). As aresult of the repatriation, the Company recorded total taxes of $1.4 million,consisting of taxes on income of $0.7 million and foreign withholding taxes of$0.7 million in 2006. The Company has not changed its intention to indefinitelyreinvest other accumulated earnings of its foreign subsidiaries. Accordingly,no provision has been made for income taxes that would be payable upondistribution of such earnings, and it is not practicable to determine therelated unrecognized deferred income tax liability.

76

----

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

**S.****   Earningsper Share**   Basic earnings per share (EPS) iscomputed by dividing net earnings by the weighted average number of shares ofcommon stock outstanding during each period. The computation of dilutedearnings per share includes the effect of shares from the assumed exercise ofdilutive stock options, convertible debt (if dilutive), restricted stock andrestricted stock units using the treasury stock method. The following tablepresents the components of basic and diluted earnings per share:

| ** **                                                                                                              | ** ** | **Year Ended March 31,**                       | ** **  |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                                                                                              | ** ** | **2007**                                                      | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                              | ** ** | **(in thousands, except per-share data)** | ** **  |
| **Basic EPS Computation**                                                                                               |       |                                                          |        |   |   |   |   |
| Earnings from continuing operations                                                                                     |       | **$**                                                         | **127,060** |   | $ | 81,494 |   | $ | 58,126 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.7 million in fiscal 2005), net of income taxes |       | **—**                                                    |        | — |   | 2,551 |   |
| Net earnings                                                                                                            |       | **$**                                                         | **127,060** |   | $ | 81,494 |   | $ | 60,677 |   |
| Weighted average common shares outstanding                                                                              |       | **39,855**                                                    |        | 29,623 |   | 27,096 |   |
| Basic earnings per share                                                                                                |       | ** **                                                    |        |   |   |   |   |
| Earnings from continuing operations                                                                                     |       | **$**                                                         | **3.19**    |   | $ | 2.75 |   | $ | 2.15 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.03 per share in 2005), net of income taxes     |       | **$ **                                                   | **—**  |   | $  | — |   | $  | 0.09 |   |
| Net earnings                                                                                                            |       | **$**                                                         | **3.19**    |   | $ | 2.75 |   | $ | 2.24 |   |
| **Diluted EPS Computation**                                                                                             |       | ** **                                                    |        |   |   |   |   |
| Earnings from continuing operations                                                                                     |       | **$**                                                         | **127,060** |   | $ | 81,494 |   | $ | 58,126 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.7 million in fiscal 2005), net of income taxes |       | **—**                                                    |        | — |   | 2,551 |   |
| Net earnings                                                                                                            |       | **$**                                                         | **127,060** |   | $ | 81,494 |   | $ | 60,677 |   |
| Diluted common shares  outstanding                                                                                      |       | ** **                                                    |        |   |   |   |   |
| Weighted average common shares outstanding                                                                              |       | **39,855**                                                    |        | 29,623 |   | 27,096 |   |
| Stock options and restricted stock                                                                                      |       | **923**                                                       |        | 953 |   | 737 |   |
| Diluted common shares outstanding                                                                                       |       | **40,778**                                                    |        | 30,576 |   | 27,833 |   |
| Diluted earnings per  share                                                                                             |       | ** **                                                    |        |   |   |   |   |
| Earnings from continuing operations                                                                                     |       | **$**                                                         | **3.12**    |   | $ | 2.67 |   | $ | 2.09 |   |
| Earnings from discontinued operations (including gain on disposal of  $0.02 per share in 2005), net of income taxes     |       | **$ **                                                   | **—**  |   | $  | — |   | $  | 0.09 |   |
| Net earnings                                                                                                            |       | **$**                                                         | **3.12**    |   | $ | 2.67 |   | $ | 2.18 |   |

 

77

----

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

At March 31, 2006 and 2005,there were 22,500 and 2,500 options to acquire DRS common stock outstanding,respectively, with weighted average exercise prices of $53.56 and $41.89 peroption, respectively, that are excluded from the above calculations becausetheir inclusion would have had an antidilutive effect on EPS in theirrespective fiscal years. At March 31, 2007, all outstanding options areincluded in the diluted EPS calculation.

For the years ended March 31,2007 and 2006, DRS’s 2% Convertible Senior Notes due 2026 had no impact ondiluted EPS because the average stock price during such periods was below$59.70 per share, and the Convertible Notes, if converted, would require onlycash at settlement. See Note 8, “Debt," for further information on theConvertible Notes.

**T.****   FairValue of Financial Instruments**   Cash and cashequivalents, accounts receivable, accounts payable, accrued expenses and othercurrent liabilities, and derivative instruments reported in the ConsolidatedBalance Sheets equal or approximate their fair values. The fair value of theCompany’s revolving credit facility and term loans approximate their recordedvalue, based on the variable interest rates of the facility and currentlyavailable terms and conditions for similar debt at March 31, 2007 and2006. Long-term debt is reflected on the Consolidated Balance Sheets atamortized cost. Below is a summary of carrying value and fair value of the Company’snotes. Fair values are determined through information obtained from thirdparties using the latest available market data.

| ** **                | ** ** | **March 31,**      | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** |
| Senior Notes              |       |                    | **$**      | **350,000** |   |   | **$** | **353,500** |   |   | $ | 350,000 |   |   | $ | 348,250 |   |
| Senior Subordinated Notes |       |                    | **$**      | **807,453** |   |   | **$** | **815,500** |   |   | $ | 808,585 |   |   | $ | 808,438 |   |
| Senior Convertible Notes  |       |                    | **$**      | **345,000** |   |   | **$** | **363,975** |   |   | $ | 345,000 |   |   | $ | 365,269 |   |

 

**U.****   ProductWarranties**   Product warranty costs generally areaccrued when the covered products are delivered to the customer. Productwarranty expense is recognized based on the terms of the product warranty andthe related estimated costs, considering historical claims expense. Accruedwarranty costs are reduced as these costs are incurred and as the warrantyperiod expires, and otherwise may be modified as specific product performanceissues are identified and resolved. The table below presents the changes in theCompany’s accrual for product warranties for the years ended March 31,2007, 2006 and 2005, which are included in accrued expenses and other currentliabilities:

| ** **                                                | ** ** | **Years Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(in thousands)**              | ** ** |
| Balance at beginning of  year                             |       | **$**                                | **29,829** | ** ** | $ | 21,839 |   | $ | 23,279 |   |
| Acquisitions during the  period                           |       | **932**                              | ** ** | 10,730 |   | 25 |   |
| Accruals for product  warranties issued during the period |       | **18,835**                           | ** ** | 9,235 |   | 8,687 |   |
| Settlements made during  the period                       |       | **(18,501**                          | **)**      | (12,011 | ) | (10,296 | ) |
| Other                                                     |       | **85**                               | ** ** | 36 |   | 144 |   |
| Balance at the end of year                                |       | **$**                                | **31,180** | ** ** | $ | 29,829 |   | $ | 21,839 |   |

 

**V.****  **NewAccounting Pronouncements   InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements 

78

----

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

No. 133 and140” (SFAS No. 155). SFAS No. 155 permits a fair value remeasurementfor any hybrid financial instrument that contains an embedded derivative thatwould otherwise require bifurcation. This accounting standard will be effectivefor the Company beginning April 1, 2007. SFAS No. 155 is not expectedto have an impact on the Company’s financial position or results of operations.

In July of 2006, the FASBissued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (FIN 48).FIN 48 prescribes a comprehensive model for how a company should recognize,measure, present and disclose in its financial statements uncertain taxpositions that the company has taken or expects to take on a tax return. FIN 48states that a tax benefit from an uncertain position may be recognized only ifit is “more likely than not” that the position is sustainable, based on itstechnical merits. The tax benefit of a qualifying position is the largestamount of tax benefit that is greater than 50% likely of being realized upon ultimatesettlement with a taxing authority having full knowledge of all relevantinformation. The Company currently recognizes a tax position if it is probableof being sustained. FIN 48 is effective beginning April 1, 2007 for DRS. TheCompany currently is evaluating the impact that adopting FIN 48 will have onits operations and financial condition and does not believe the adoption ofthis interpretation will have a material effect on its results of operations.The Company expects to reclassify a portion of its tax contingency reserves tonon-current liabilities upon adoption of FIN 48.

In May 2007, the FASB issuedFASB Staff Position No. FIN 48-1, “Definition of Settlement in FASBInterpretation No. 48” (FIN 48-1). FIN 48-1 further clarifiesif it is appropriate for an entity to recognize a previously unrecognized taxbenefit when the only change since the initial determination was that the benefitshould not be recognized is the completion of an examination or audit by ataxing authority. FIN 48-1 provides that the determination of whether theposition is effectively settled should be taken on a case by case basis;however, positions may be grouped by tax year and considered effectivelysettled. FIN 48-1 is effective April 1, 2007 for the Company and isnot expected to have a material impact on the Company’s results of operations.

In September of 2006, theFASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157). SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue 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, 2007 for DRS. The Company currently is evaluating theimpact that adopting SFAS No. 157 will have on its results of operationsand financial condition.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities—Including an amendment of FASB Statement No. 115” (SFAS No.159). SFAS No. 159 permits entities to choose to measure eligible items atfair value at specified election dates and report unrealized gains and losseson items for which the fair value option has been elected in earnings at eachsubsequent reporting date. SFAS No. 159 is effective for DRS beginning April 1,2008. Management currently is evaluating the effect that adoption of thisstatement will have on the Company’s consolidated financial position andresults of operations.

79

----

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

In December 2006, the FASB issued FASB Staff Positionon Emerging Issues Task Force (EITF) No. 00-19-2, *“*Accounting for Registration PaymentArrangements” (FSP EITF 00-19-2). FSP EITF 00-19-2 provides that thecontingent obligation to make future payments or otherwise transferconsideration under a registration payment arrangement should be recognized separatelyand measured in accordance with Statement of Financial Accounting StandardsSFAS No. 5, “Accounting forContingencies,” which provides that loss contingencies should berecognized as liabilities if they are probable and reasonably estimable.Subsequent to the adoption of FSP EITF 00-19-2, any changes in the carryingamount of the contingent liability will result in a gain or loss that will berecognized in the consolidated statement of earnings in the period the changesoccur. The guidance in FSP EITF 00-19-2 is effective for the Company beginningin fiscal 2008 and interim periods within that year. The adoption of EITF00-19-2 is not expected to have an impact on the Company’s financial positionor results of operations.

**2.   Acquisitions**

All of the Company’s acquisitionshave been accounted for as purchase business combinations and are included inthe Company’s results of operations from their respective acquisition dates.The Company considered a variety of factors, including appraisals, comparabletransactions, and other discounted cash flow approaches in determining the fairvalue of assets acquired and liabilities assumed. Any additional payments ofcontingent consideration (e.g., earn-outs) are payable in cash and will berecorded as additional goodwill when the contingencies for such payments havebeen satisfied (also see Note 13, “Commitments and Contingencies”).

***ESSI:***

On January 31, 2006, theCompany completed its acquisition of all of the outstanding common stock andoptions to acquire the common stock of ESSI. In the transaction, a wholly-owned subsidiary of DRS was merged with and intoESSI (the acquisition), forming the Sustainment Systems Segment and substantiallyall of the Technical Services Segment. The purchase price was $43.00 per shareof ESSI common stock, which was comprised of $30.10 in cash and a fraction of ashare of DRS common stock valued at $12.90. Total consideration for the acquisitionconsisted of $1.34 billion in cash and 11.7 million shares of DRS common stock,or an aggregate value of $1.93 billion. In addition to the purchase price, theCompany assumed $78.5 million in debt and recorded $27.0 millionof acquisition-related costs, including professional fees. The stock component of the consideration was valuedat $50.08 per share, using the average price of DRS common stock on themeasurement date (January 27, 2006, the date the number of shares wasknown) and a few days before and after the measurement date. Upon closing ofthe Acquisition, the Company repaid ESSI’s credit facility in the amount of$76.3 million. The Company financed the cash portion of the acquisitionby utilizing cash and cash equivalents on hand, revolving credit borrowings,$275.0 million in term debt and $900 million of new debt securities, including$350 million aggregate principal amount of 65¤8% senior notesdue 2016, $250 million aggregate principal amount of 75¤8% seniorsubordinated notes due 2018 and $300.0 million aggregate principal amountof 2.0% convertible senior notes due 2026. SeeNote 8, “Debt,” for a description of the amended and restated creditfacility and the new debt securities.

ESSI, headquartered in St. Louis,Missouri, is a supplier of integrated military electronics, support equipmentand technical services focused on advanced sustainment and logistics supportsolutions for all branches of the U.S. armed services, major prime defensecontractors, certain 

80

----

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

internationalmilitaries, homeland security forces and selected government and intelligenceagencies. ESSI also produces specialized equipment and systems for commercialand industrial applications. The addition of ESSI has provided for a larger,more competitive and more diversified company through the contribution of asignificant base of systems, products and services focused on military forcesustainment, technical and logistics support, integrated military electronicsand field support equipment.

The Companyfinalized its purchase price allocation in fiscal 2007 and recorded $0.4 millionnet increase to goodwill, as compared with the preliminary purchase priceallocation at March 31, 2006. Goodwill of $1.0 billion and $0.7 billionwas allocated to the Company’s Sustainment Systems and Technical ServicesSegments, respectively, of which approximately $282.6 million is expectedto be deductible for tax purposes. The assets acquired also reflect $133.4 millionin customer and contract-related intangibles with weighted average useful livesof 6.9 years. The table below summarizes the estimated fair value of theassets acquired and liabilities assumed in the acquisition. As illustrated, thesubstantial majority of ESSI’s purchase price was allocated to goodwill. Theprimary factors that contributed to the recognition of goodwill for ESSI aresimilar to those discussed in Note 3, “Goodwill and Related IntangibleAssets.”

| ** **                                                         | ** ** | **January 31,  2006** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **(in thousands)**    | ** ** |
| Accounts receivable                                                |       |                       | $          | 166,537 |   |   |
| Inventory                                                          |       |                       | 77,251     |   |   |
| Other current assets                                               |       |                       | 61,417     |   |   |
| Current deferred tax  asset                                        |       |                       | 56,502     |   |   |
| Property, plant and  equipment                                     |       |                       | 68,200     |   |   |
| Other assets                                                       |       |                       | 2,767      |   |   |
| Long-term deferred tax  asset                                      |       |                       | 6,120      |   |   |
| Acquired intangible  assets                                        |       |                       | 133,380    |   |   |
| Goodwill                                                           |       |                       | 1,780,710  |   |   |
| Total assets acquired                                              |       |                       | 2,352,884  |   |   |
| Short-term debt                                                    |       |                       | 76,300     |   |   |
| Accrual for future costs and  unearned proft on acquired contracts |       |                       | 75,700     |   |   |
| Other current liabilities                                          |       |                       | 144,149    |   |   |
| Long-term debt                                                     |       |                       | 2,229      |   |   |
| Benefit plan obligations                                           |       |                       | 54,083     |   |   |
| Long-term deferred tax  liability                                  |       |                       | 37,644     |   |   |
| Other liabilities                                                  |       |                       | 6,624      |   |   |
| Total liabilities assumed                                          |       |                       | 396,729    |   |   |
| **Net assets acquired**                                            | ** ** | ** **                 | **$**      | **1,956,155** | ** ** | ** ** |

 

81

----

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

In accordancewith EITF 95-3, “Recognition of Liabilities in Connection with a PurchaseBusiness Combination,” the Company recorded a $5.7 million liability inconnection with involuntarily terminating approximately 190 employees of ESSI,as well as exiting certain leased facilities. The Company expects payments tobe completed in the second quarter of fiscal 2008.

| ** **                                   | ** ** | **Balance at  March 31,** | ** ** | **Year Ended  March 31, 2007 ,** | ** ** | **Balance at  March 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **2006**                            | ** ** | **Additions**                                        | ** ** | **Payments**                        | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(in thousands)**             | ** ** |
| Employee severance and  termination benefits |       |                                | $          | 5,129                                                |       |                                |       | $ | — |   |   |   | $ | (4,732 | ) |   |   | $ | 397 |   |   |
| Facility and other exit  costs               |       |                                | —     |                                                 |       |                                | 554        |   |   |   | (526 | ) |   |   | 28 |   |   |
| **Total**                                    | ** ** | ** **                          | **$**      | **5,129**                                            | ** ** | ** **                          | ** ** | **$** | **554** | ** ** | ** ** | ** ** | **$** | **(5,258** | **)** | ** ** | ** ** | **$** | **425** | ** ** | ** ** |

 

***WalkAbout:***

On June 27, 2005, the Companyacquired WalkAbout Computer Systems, Inc. (WalkAbout) in a stock purchasetransaction for $13.8 million in cash, with additional consideration payable ofup to $5.0 million upon achievement of certain revenue targets for a period oftwo and a half years (i.e., earn-out). In addition to the purchase price, theCompany paid $0.2 million for acquisition-related costs, including professionalfees.

WalkAbout, formerly located inWest Palm Beach, Florida, is a manufacturer of several lines of rugged, mobiletablet PCs, serving industrial, municipal, military and government markets.Management believes that the acquisition of WalkAbout has enhanced the Company’sposition in the tactical computer systems business by broadening the Company’sproduct offerings. WalkAbout is being managed as a part of the C4I Segment.

The Company recorded a total of $9.2 millionof goodwill (including $0.6 million of earn-out adjustments recorded in fiscal2006 and 2007), all of which has been allocated to the C4I Segment. Of thetotal goodwill recorded, $2.3 million is expected to be deductible for taxpurposes. The Company recorded $1.3 million of customer andcontract-related intangibles that have weighted-average useful lives of 5years.

***Codem:***

On April 15, 2005, theCompany acquired Codem Systems, Inc. (Codem) in a stock purchasetransaction for $31.6 million in cash, with additional consideration payable ofup to $5.0 million upon achievement of certain annual bookings targets for aperiod of three years. In addition to the purchase price, the Company paid $0.3million for acquisition-related costs, including professional fees.

Codem, located in Merrimack, NewHampshire, is a provider of signals intelligence (SIGINT) systems, networkinterface modules and high-performance antenna control systems. Managementbelieves that the addition of Codem has enhanced the Company’s existingintelligence product base. Codem is being managed as a part of the Company’sC4I Segment.

The Company recorded a total of $26.7million of goodwill (including $1.3 million of earn-out adjustments recorded infiscal 2006 and 2007), all of which has been allocated to the C4I Segment. Noneof Codem’s goodwill is expected to be deductible for tax purposes. The Companyrecorded $1.9 million and $4.2 million of technology-based and customer andcontract-related intangibles, respectively, both of which have weighted averageuseful lives of 9 years.

82

----

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

***NVEC:***

On December 14, 2004, theCompany acquired certain assets and liabilities of Night Vision Equipment Co., Inc.and Excalibur Electro Optics, Inc. (collectively, NVEC), a privately-heldbusiness headquartered in Allentown, Pennsylvania. The purchase price was$47.2 million in cash, including a $4.7 million working capitaladjustment paid in the fourth quarter of fiscal 2005, with additionalconsideration of up to a maximum of $37.5 million payable upon achievingcertain annual revenue targets for a period of three years. In addition to thepurchase price, the Company paid $0.1 million for acquisition-relatedcosts, including professional fees. The Company paid $4.6 million and $6.6million associated with achieving certain earn-out targets achieved in fiscal2006 and 2007, respectively.

NVEC, renamed Night Vision Systems(NVS), is a manufacturer and marketer of night vision products and combatidentification systems. It focuses on the rapid development and delivery oflightweight, affordable image intensification (I2) night vision, uncooled thermal imaging,reflective combat identification and laser-based products for U.S. andinternational militaries and paramilitary organizations. NVS maintainsresearch, development and production facilities in Prescott Valley, Arizona.The acquisition of NVS has enhanced DRS’s position in the uncooled infraredsensor and thermal imaging systems market, as well as provided increased accessto and participation in homeland defense efforts at the federal, state andlocal levels. NVS is being managed as part of the Company’s RSTA Segment.

The Company recorded $34.3 millionof goodwill in connection with the acquisition of NVS (including $11.2 millionof earn-out adjustments recorded in fiscal 2006 and 2007) all of which has beenallocated to the RSTA Segment. Approximately $34.3 million of goodwill isexpected to be deductible for tax purposes. The purchase price also reflects$8.9 million and $0.2 million of customer and contract-relatedand technology-based acquired intangible assets, respectively, which arebeing amortized over 8 and 12 years, respectively.

***Other:***

During fiscal 2006, the Companypaid $6.7 million in consideration to satisfy an earn-out obligation on its2002 acquisition of DKD, Inc. (now operating as a component of DRS Sensors& Targeting Systems, Inc.—Infrared Technologies Division). The earn-out wasrecorded as an increase to goodwill during the fourth quarter of fiscal 2005,when it became issuable. The Company also recorded an additional $7.1 millionincrease to goodwill in fiscal 2006 in final satisfaction of its earn-outobligations, which was paid in the first quarter of fiscal 2007.

***Pro Forma Results***

The followingpro forma financial information shows the results of continuing operations forthe year ended March 31, 2006, as though the acquisition of ESSI hadoccurred at the beginning of fiscal 2006 and as though ESSI’s acquisition ofSpacelink International, LLC (a significant purchase business combination byESSI in its fiscal 2005) occurred at the beginning of fiscal 2006. The proforma financial information does not reflect the WalkAbout and Codemacquisitions, as the effect of these acquisitions were not significant on anindividual or aggregate basis. The pro forma financial information includes,where applicable, adjustments for: (i) the capitalization of general andadministrative costs to be consistent with DRS’s accounting practice, (ii) theamortization of acquired intangible assets, (iii) additional net interestexpense on acquisition-related borrowings, (iv) the amendment andrestatement of certain DRS credit 

83

----

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

facilities, (v) the pay-down of acquired companies’ debt, (vi) theissuance of 11.7 million shares of DRS common stock, (vii) theelimination of certain of ESSI’s nonrecurring acquisition-related costsrecognized in its historical financial statements, and (viii) the incometax effect on the pro forma adjustments, using a statutory tax rate of 40%. Thepro forma financial information below is presented for illustrative purposesonly and is not necessarily indicative of the operating results that would havebeen achieved had the Acquisition been completed as of the date indicated aboveor the results that may be obtained in the future.

| ** **                                                      | ** ** | **Year Ended March 31,**                            | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                           | ** ** |
| ** **                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                                      | ** ** | **(unaudited)**                                                    | ** ** |
| Revenues                                                        |       |                                                               | $          | 2,559,500 |   |   |
| Earnings from continuing  operations                            |       |                                                               | $          | 89,442 |   |   |
| Earnings from continuing  operations per share of common stock: |       |                                                               |       |   |   |
| Basic earnings per share                                        |       |                                                               | $          | 2.27 |   |   |
| Diluted earnings per share                                      |       |                                                               | $          | 2.22 |   |   |

 

**3.**   Goodwilland Related Intangible Assets

**Goodwill**   In accordance with SFAS No. 141, “BusinessCombinations” (SFAS 141), the Company allocates the cost of businessacquisitions to the assets acquired and liabilities assumed based on theirestimated fair values at the date of acquisition (commonly referred to as thepurchase-price allocation). As part of the purchase-price allocations for ourbusiness acquisitions, identifiable intangible assets are recognized as assetsapart from goodwill if they arise from contractual or other legal rights, or ifthey are capable of being separated or divided from the acquired business andsold, transferred, licensed, rented or exchanged. However, in accordance withSFAS 141, the Company does not recognize any intangible assets apart fromgoodwill for the assembled workforces of its business acquisitions. At March 31,2007, the Company had approximately 9,700 employees, and the substantialmajority of the sales generated by the Company’s businesses are from theproductive labor efforts of its employees, as compared with sellingmanufactured products or right-to-use technology. Generally, the largestintangible asset of the businesses that the Company acquires is the value of thebusinesses’ assembled workforce, which includes the human capital of themanagement, administrative, marketing and business development, scientific,engineering and technical employees of the acquired businesses. The success ofthe Company’s business, including its ability to retain existing business andto successfully compete for and win new business, is primarily dependent on themanagement, marketing and business development, contracting, engineering andtechnical skills and knowledge of our employees, rather than on productivecapital (plant and equipment, and technology and intellectual property).Generally, patents, trademarks and licenses are not material for our acquiredbusinesses. Furthermore, our U.S. government contracts generally permit othercompanies to use our patents in most domestic work performed by such othercompanies for the U.S. government. Therefore, because intangible assets forassembled workforces are part of goodwill in accordance with paragraph 39 ofSFAS 141, the substantial majority of the intangible assets associated with thebusinesses DRS acquired is recognized as goodwill.

84

----

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

The tablebelow reconciles the change in the carrying amount of goodwill by operatingsegment for the period from March 31, 2005 to March 31, 2007:
|                                                                             | ** ** | **C4I**                 | ** **  | **RSTA**    | ** ** | **Sustainment  Systems** | ** ** | **Technical  Services** | ** **    | **Total**     | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|-------------|-------------|------------|--------------------------|------------|-------------------------|---------------|---------------|------------|
| ** **                                                                  | ** ** | **(in thousands)** | ** **  |
| **Balance  as of March 31, 2005**                                      | ** ** | **$**                   | **636,494** | ** **  | **$**      | **178,913**              | ** ** | **$**                   | **—**    | ** **    | **$**      | **—** | ** ** | **$** | **815,407** | ** ** |
| ESSI acquisition                                                            |       | —                  |        | —      |       | 1,045,535                |       | 735,527                 |          | 1,781,062     |       |
| Codem acquisition                                                           |       | 25,421                  |        | —      |       | —                   |       | —                  |          | 25,421        |       |
| WalkAbout acquisition                                                       |       | 8,642                   |        | —      |       | —                   |       | —                  |          | 8,642         |       |
| Deferred tax adjustments  related to prior acquisitions(A)                  |       | (11,534                 | )           | (21,703     | )          | —                   |       | —                  |          | (33,237       | )          |
| Acquisition earn-out,  NVEC                                                 |       | —                  |        | 4,564       |       | —                   |       | —                  |          | 4,564         |       |
| Accrued acquisition  earn-out, Nytech                                       |       | —                  |        | 7,140       |       | —                   |       | —                  |          | 7,140         |       |
| Accrued acquisition  earn-out, Codem                                        |       | 316                     |        | —      |       | —                   |       | —                  |          | 316           |       |
| Accrued acquisition  earn-out, WalkAbout                |       | 162                     |        | —      |       | —                   |       | —                  |          | 162           |       |
| Expiration of unexercised  contract options relating to the IDT acquisition |       | (1,745                  | )           | —      |       | —                   |       | —                  |          | (1,745        | )          |
| Other adjustments                                                           |       | 94                      |        | (328        | )          | —                   |       | —                  |          | (234          | )          |
| Foreign currency  translation adjustment           |       | 603                     |        | —      |       | (33                      | )          | —                  |          | 570           |       |
| **Balance  as of March 31, 2006**                                      | ** ** | **658,453**             | ** **  | **168,586** | ** ** | **1,045,502**            | ** ** | **735,527**             | ** **    | **2,608,068** | ** ** |
| ESSI acquisition                                                            |       | —                  |        | —      |       | (5,111                   | )          | 4,759                   |          | (352          | )          |
| Codem acquisition  earn-out                                                 |       | 1,005                   |        | —      |       | —                   |       | —                  |          | 1,005         |       |
| WalkAbout acquisition  earn-out                                             |       | 398                     |        | —      |       | —                   |       | —                  |          | 398           |       |
| Night Vision Equipment  earn-out                                            |       | —                  |        | 6,627       |       | —                   |       | —                  |          | 6,627         |       |
| Transfer of operating  unit(B)                                              |       | (4,929                  | )           | —      |       | —                   |       | 4,929                   |          | —        |       |
| Other adjustments                                                           |       | (1,921                  | )           | 1,163       |       | —                   |       | —                  |          | (758          | )          |
| Foreign currency  translation adjustment           |       | 1,440                   |        | —      |       | 214                      |       | —                  |          | 1,654         |       |
| **Balance as of March 31, 2007**                                       | ** ** | **$**                   | **654,446** | ** **  | **$**      | **176,376**              | ** ** | **$**                   | **1,040,605** | ** **    | **$**      | **745,215** | ** ** | **$** | **2,616,642** | ** ** |

----

(A)          The Company operates inmultiple taxing jurisdictions, both within the United States and outside theUnited States, and faces audits from these various tax authorities regardingthe amount of taxes due. Such audits can involve complex issues and may requirean extended period of time to resolve. In the second quarter of fiscal 2006,the Company’s income tax provision was reduced by $3.0 million predominantlydue to the resolution of the IRS’s examination of the fiscal 1999-2001tax years. Also in connection with the resolution of the fiscal 1999-2001tax audits, the Company adjusted certain acquired deferred tax assets andliabilities and certain other pre-acquisition related tax amounts, totaling$33.2 million, with a corresponding net decrease to goodwill.

(B)           On April 1, 2006,DRS Technical Services, Inc. (TSI), an operating unit of the C4I Segment,was consolidated into an operating unit of the Technical Services Segment toachieve certain operating synergies. For the year ended March 31, 2006,the TSI operating unit recorded $18.4 million in revenues and $0.9 million ofoperating income and had $8.0 million of assets 

85

----

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

at March 31, 2006, which was consideredimmaterial for purposes of restating prior-year goodwill balances and segmentinformation for both the C4I Segment and the Technical Services Segment.

**Identifiable Intangible Assets**   The mostsignificant identifiable intangible assets that are separately recognized inaccordance with SFAS 141 for the Company’s business acquisitions are customerrelationships and program backlog and related contracts. The fair value ofintangible assets typically is determined, as of the date of acquisition, basedon estimates and judgments regarding expectations for the estimated futureafter-tax earnings and cash flows (including cash flows for working capital)arising from backlog and follow-on sales to the customer over their estimatedlives, including the probability of expected future contract renewals andsales, less a contributory assets charge, all of which is discounted to presentvalue.

The followingdisclosure presents certain information regarding the Company’s acquiredintangible assets as of March 31, 2007 and 2006. All acquired intangibleassets are being amortized over their estimated useful lives, as indicatedbelow, with no estimated residual values.
| Acquired Intangible Assets             | ** ** | ** **              | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** **  | **Accumulated  Amortization** | ** ** | **Net Balance** | ** **  |
|--------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|-----------------------------|-------------|-------------------------------|------------|----------------------|-------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| **As of March 31, 2007**                    | ** ** |                    | ** ** | ** **                                      |       | ** **                  | ** **  |                          | ** ** | ** **           |        |   | ** ** | ** ** | ** ** |
| Technology-based intangibles                     |       |                    | 18 years   | ** **                                      |       | $                           | 47,859      |                          |       | $                    | (17,016     | ) |   |   | $ | 30,843 |   |   |
| Cutomer and program/contract-related intangibles |       |                    | 11 years   | ** **                                      |       | 214,439                     |        |                          | (48,298    | )                    |        |   | 166,141 |   |   |
| **Total**                                        |       |                    |       | ** **                                      |       | **$**                       | **262,298** | ** **                    | ** ** | **$**                | **(65,314** | **)** | ** ** | ** ** | **$** | **196,984** |   |   |
| **As of  March 31, 2006**                   | ** ** |                    | ** ** | ** **                                      |       | ** **                  | ** **  |                          | ** ** | ** **           |        |   | ** ** | ** ** | ** ** |
| Technology-based intangibles                     |       |                    | 18 years   | ** **                                      |       | $                           | 47,861      |                          |       | $                    | (14,100     | ) |   |   | $ | 33,761 |   |   |
| Cutomer and program/contract-related intangibles |       |                    | 11 years   | ** **                                      |       | 217,190                     |        |                          | (19,812    | )                    |        |   | 197,378 |   |   |
| **Total**                                        |       |                    |       | ** **                                      |       | **$**                       | **265,051** | ** **                    | ** ** | **$**                | **(33,912** | **)** | ** ** | ** ** | **$** | **231,139** |   |   |

 

The aggregate acquired intangibleasset amortization expense for the fiscal years ended March 31, 2007, 2006and 2005 was $31.4 million, $12.4 million and $7.0 million,respectively. The estimated acquired intangible asset annual amortizationexpense is expected to be approximately $29.2 million for fiscal year 2008,$29.2 million for fiscal year 2009, $28.3 million for fiscal year 2010,$27.5 million for fiscal year 2011 and $14.0 million for fiscal year 2012.

86

----

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

**4.**   AccountsReceivable

Unbilledreceivables represent revenues for which billings have not been presented tocustomers as of the end of the fiscal year, including retentions arising fromcontractual provisions. At March 31, 2007 and 2006, retentions amounted to$7.6 million and $12.4 million, respectively. Approximately $3.7 millionof March 31, 2007 retentions are anticipated to be collected beyond oneyear. The component elements of accounts receivable, net of allowances fordoubtful accounts of $1.7 million, at March 31, 2007 and 2006 are asfollows:
|                                  | ** ** | **March 31,**      | ** **  |
|----------------------------------|------------|-------------------------|-------------|
| ** **                       | ** ** | **2007**                | ** **  | **2006** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** **  |
| U.S. government contracts:       |       |                    |        |   |   |
| Billed  receivables              |       | **$**                   | **148,442** |   | $ | 130,242 |   |
| Unbilled  receivables            |       | **155,796**             |        | 91,899 |   |
|                             |       | **304,238**             |        | 222,141 |   |
| Other defense-related contracts: |       | ** **              |        |   |   |
| Billed  receivables              |       | **127,603**             |        | 124,576 |   |
| Unbilled  receivables            |       | **82,394**              |        | 60,370 |   |
|                             |       | **209,997**             |        | 184,946 |   |
| Other trade receivables          |       | **21,007**              |        | 25,591 |   |
| **Total**                        |       | **$**                   | **535,242** |   | $ | 432,678 |   |

 

**5.**   Inventories

Inventoriesare summarized as follows:
|                                   | ** **                                       | **March 31,**      | ** **  |
|-----------------------------------|--------------------------------------------------|-------------------------|-------------|
| ** **                        | ** **                                       | **2007**                | ** **  | **2006** | ** ** |
| ** **                        | ** **                                       | **(in thousands)** | ** **  |
| Work-in-process                   |                                             | **$**                   | **466,221** |   | $ | 368,991 |   |
| General and  administrative costs |                                             | **64,229**              |        | 63,836 |   |
| Raw material and finished  goods  |                                             | **53,158**              |        | 66,706 |   |
|                              |                                             | **583,608**             |        | 499,533 |   |
| Less:                             | Progress payments and  certain customer advances |                    | **206,746** |   | 158,966 |   |
|                              | Inventory reserve                                |                    | **9,250**   |   | 9,361 |   |
| **Tota**l                         |                                             | **$**                   | **367,612** |   | $ | 331,206 |   |

 

Inventoried contract costs for the Company’s businessesthat are primarily government contractors include certain general andadministrative (G&A) costs, including internal research and developmentcosts (IRAD) and bid and proposal costs (B&P). G&A, IRAD and B&Pare allowable, indirect contract costs under U.S. government regulations. TheCompany allocates these costs to government contracts and accounts for them asproduct costs, not as period expenses, at the majority of the Company’soperating units.

87

----

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

The table below presents asummary of G&A, IRAD and B&P costs included in inventoried contractcosts and changes to them, including amounts used in the determination of costsand expenses. The cost data in the tables below do not include the G&A,IRAD and B&P costs for the Company’s lines of businesses that are notprimarily contracted with the U.S. government, which are expensed as incurred:

| ** **                                    | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                 | ** ** |
| Balance in inventory at  beginning of year    |       | **$**                                   | **63,836** |   | $ | 47,365 |   | $ | 37,854 |   |
| Add: Acquired costs                           |       | **—**                              |       | 9,943 |   | — |   |
|   Incurred costs                         |       | **361,973**                             |       | 239,831 |   | 212,167 |   |
| Less: Amounts included in costs  and expenses |       | **361,580**                             |       | 233,303 |   | 202,656 |   |
| **Balance in inventory at end of year**       |       | **$**                                   | **64,229** |   | $ | 63,836 |   | $ | 47,365 |   |

 

**6.**   Property,Plant and Equipment

Property,plant and equipment are summarized as follows: 

| ** **                                      | ** ** | **March 31,**      | ** **  |
|-------------------------------------------------|------------|-------------------------|-------------|
| ** **                                      | ** ** | **2007**                | ** **  | **2006** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** **  |
| Land                                            |       | **$**                   | **19,579**  |   | $ | 20,242 |   |
| Machinery and equipment                         |       | **166,133**             |        | 144,966 |   |
| Computer equipment and  software                |       | **85,171**              |        | 69,328 |   |
| Buildings and  improvements                     |       | **79,160**              |        | 75,580 |   |
| Leasehold improvements                          |       | **32,044**              |        | 25,672 |   |
| Office furnishings,  equipment and other        |       | **27,360**              |        | 23,042 |   |
|                                            |       | **409,447**             |        | 358,830 |   |
| Less accumulated  depreciation and amortization |       | **178,241**             |        | 138,324 |   |
| **Total**                                       |       | **$**                   | **231,206** |   | $ | 220,506 |   |

                                                                                                                                                                       

Annual depreciation of property,plant and equipment amounted to $45.2 million, $36.6 million and$33.8 million in fiscal 2007, 2006 and 2005, respectively.

**7.**   AccruedExpenses and Other Current Liabilities

The component elements of accrued expenses and othercurrent liabilities are as follows:

| ** **                                                                   | ** ** | **March 31,**      | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                | ** **  | **2006** | ** ** |
| ** **                                                                   | ** ** | **(in thousands)** | ** **  |
| Accruals for future costs  and unearned profit related to acquired contracts |       | **$**                   | **55,452**  |   | $ | 102,990 |   |
| Customer advances                                                            |       | **137,248**             |        | 92,941 |   |
| Payroll, other  compensation and related expenses                            |       | **84,503**              |        | 92,872 |   |
| Accrued interest                                                             |       | **25,608**              |        | 27,270 |   |
| Accrued product warranty  (Note 1.U.)                                        |       | **31,180**              |        | 29,829 |   |
| Income taxes payable                                                         |       | **51,470**              |        | 34,560 |   |
| Loss accrual for future  costs on uncompleted contracts                      |       | **27,379**              |        | 16,223 |   |
| Other                                                                        |       | **55,104**              |        | 74,383 |   |
| **Total**                                                                    |       | **$**                   | **467,944** |   | $ | 471,068 |   |

 

88

----

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

Components in “Other” at March 31,2007 and 2006 include litigation and contingency related-accruals (seeNote 13), short-term pension liabilities (see Note 12), and accruedacquisition earn-outs (see Note 3).

**8.**   Debt

A summary ofdebt is as follows:

| ** **                                                         | ** ** | **March 31,**      | ** **    |
|--------------------------------------------------------------------|------------|-------------------------|---------------|
| ** **                                                         | ** ** | **2007**                | ** **    | **2006** | ** ** |
| ** **                                                         | ** ** | **(in thousands)** | ** **    |
| Credit Facility:                                                   |       |                    |          |   |   |
| Revolving  line of credit                                          |       | **$**                   | **—**    |   | $ | 40,000 |   |
| Term  loan                                                         |       | **272,250**             |          | 275,000 |   |
| Canadian Term Loan                                                 |       | **8,479**               |          | 9,853 |   |
| 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 |   |
| 2.0% Convertible Senior  Notes due 2026                            |       | **345,000**             |          | 345,000 |   |
| Unamortized bond premium  on 67¤8%  Senior Subordinated Notes |       | **7,453**               |          | 8,585 |   |
| Other obligations                                                  |       | **5,025**               |          | 4,955 |   |
|                                                               |       | **1,788,207**           |          | 1,833,393 |   |
| Less:                                                              |       | ** **              |          |   |   |
| Current installments of  long-term debt                            |       | **5,161**               |          | 4,622 |   |
| **Total long-term debt**                                           |       | **$**                   | **1,783,046** |   | $ | 1,828,771 |   |

 

**CreditFacility  **Simultaneously with the closing of the Company’sacquisition of ESSI, on January 31, 2006 the Company entered into anamended and restated credit facility for up to an aggregate amount of$675.0 million with a syndicate of lenders (the Credit Facility),replacing DRS’s previously existing credit facility. The Credit Facilityconsists of a $400.0 million senior secured revolving line of credit and a$275.0 million senior secured term loan. The Company is permitted, on nomore than two occasions, to increase the aggregate  amount of the Credit Facility by up to $250.0million, subject to certain restrictions. Any increase in the aggregate amountof the Credit Facility may be borrowed in the form of either additional termloans or available amounts under the revolving line of credit. The CreditFacility is guaranteed by substantially all of DRS’s domestic subsidiaries. Inaddition, it is collateralized by liens on substantially all of the assets ofthe Company’s subsidiary guarantors’ and certain of DRS’s other subsidiaries’assets and by a pledge of a portion of certain of the Company’s non-guarantorsubsidiaries’ capital stock. The term loan and the revolving credit facilitymature on January 31, 2013 and 2012, respectively.

The Company previously had acredit facility for up to an aggregate amount of $411.0 million. Thecredit facility consisted of a $175.0 million senior secured revolvingline of credit and a $236.0 million senior secured term loan. During theweek of January 9, 2006, the Company prepaid the remaining $135.7 millionbalance of its term loans at its discretion and recognized a $1.1 millioncharge to interest and related expenses in the fourth quarter of fiscal 2006for the write-off of the balance of the term loan debt issuance costs, net ofthe recognition of a previously deferred gain for the termination of relatedinterest rate swap agreements. There were no outstanding borrowings under theprevious revolving credit facility at the time the Company entered into the newCredit Facility.

89

----

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

Revolving line of credit and term loan borrowingsunder the Credit Facility generally bear interest at the Company’s option ateither: 1) a base rate, which is defined as the higher of (a) the primerate or (b) the federal funds rate plus 0.50%, plus the applicable margin;or 2) the LIBOR rate plus the applicable margin. Revolving credit loans thatare base rate loans bear interest at the base rate plus a margin ranging from0.00% to 0.50% per annum, depending on the Company’s total leverage ratio(TLR), as the term is defined in the credit agreement, at the time ofdetermination. Revolving credit loans that are LIBOR rate loans bear interestat LIBOR plus a margin ranging from 1.00% to 1.75% per annum, depending on theCompany’s TLR. Term loans that are base rate loans bear interest at the baserate plus 0.25%, and term loans that are LIBOR rate loans bear interest atLIBOR plus 1.50%. Borrowings under the previous credit facility bore interestin a similar manner with generally higher margins on each type of availableloan.

The Company pays commitment fees calculated on theaverage daily unused portion of its revolving line of credit at a rate rangingfrom 0.375% and 0.50% per annum, depending on the Company’s TLR. The Companypays commissions and issuance fees on its outstanding letters of credit and isobligated to pay or reimburse the issuing lender for such normal and customarycosts and expenses incurred or charged by the issuing lender in issuing,effecting payment under, amending or otherwise administering any letter ofcredit.****Letter-of-creditcommissions are calculated at a rate ranging from 1.00% to 1.75% per annum,depending on the Company’s TLR ratio at the time of issuance, multiplied by theface amount of such letter of credit. Letter-of-credit issuance fees arecharged at 0.125% per annum, multiplied by the face amount of such letter ofcredit. Both letter-of-credit commissions and issuance fees are paid quarterly.****The Company was subject to similarletter-of-credit commissions and issuance fees on its previous credit facility.

There are certain covenants and restrictions placed onDRS under the Credit Facility, including, but not limited to, quarterlyfinancial covenants, which commenced with the quarter ended June 30, 2006,specifying maximum total leverage ratio, maximum senior leverage ratio, andminimum fixed-charge coverage ratio and restrictions or limitations onacquisitions and investments, equity issuances, sales of assets, dividends theCompany may declare and pay on its common stock, issuance of additional debt ormodifications of existing debt, incurrence of liens and capital expenditures.

The principal amount of any outstanding revolvingcredit loans is due and payable in full on January 31, 2012, the sixthanniversary of the closing date of the Credit Facility. The Company is required to repay the aggregate outstanding principalamount of the initial term loan borrowings ($275.0 million) in consecutivequarterly installments on the last business day of each December, March, June andSeptember, which commenced June 30, 2006.****From June 30, 2006 through March 31, 2012, eachsuch principal payment is $0.7 million. Each principal payment from June 30,2012 through January 31, 2013 is $64.6 million adjusted for anyoptional payments.

As of March 31, 2007, $272.3 million of termloans were outstanding against the Credit Facility. The weighted averageinterest rate on the Company’s term loan borrowings was 6.9% as of March 31,2007 (6.3% as of March 31, 2006). At March 31, 2007, there were nooutstanding revolving line of credit borrowings against the Credit Facility. InApril 2007, the Company prepaid, at its discretion, $50.0 million of theoutstanding term loan with proceeds from the Company’s revolving line of creditand recognized a $0.1 million charge to interest and related expenses in thefirst quarter of fiscal 2008.

90

----

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

From time to time, the Company enters into standbyletters-of-credit and bank guarantee agreements with financial institutions andcustomers, primarily relating to the guarantee of its future performance oncertain contracts to provide products and services and to secure advancepayments from its customers. As of March 31, 2007, $46.8 million wascontingently payable under letters of credit and bank guarantees (including animmaterial amount of letters of credit obtained outside the Credit Facility).At March 31, 2007, the Company had $354.5 million of availability underits revolving line of credit.

**Canadian Loan  **On March 29, 2006, DRSTechnologies Canada Company (DRS Canada) established a five-year senior securedterm loan (Canadian loan) for approximately $9.9 million (C$11.5 million),maturing on April 1, 2011 payable in Canadian dollars. The proceeds of theloan were utilized to allow repatriation of certain amounts from Canada to theU.S., which were subject to more favorable tax treatment under the Jobs Act(for further information see Notes 1.R. and 10.) The Canadian loan bearsinterest at the Company’s option at either: (i) prime rate or (ii) LIBORrate plus 1.75%. The weighted average interest rate on the term loan was 6.0%as of March 31, 2007 (5.5% at March 31, 2006). DRS Canada is requiredto repay aggregate outstanding principal of C$575.0 thousand on the firstbusiness day of every January, April, July and October, which commenced July 1,2006. The term debt under the agreement ranks senior in priority of payment toall subordinated debt of DRS Canada and the Company. The debt is collateralizedby the assets of DRS Canada and guaranteed by DRS Technologies, Inc. TheCompany is subject to the same financial covenants under the Canadian loan, asit is under the Credit Facility described above, and DRS Canada is subject toother non-financial covenants that are similar to those described in the CreditFacility.

**Notes  **On January 31, 2006, in connectionwith the acquisition of ESSI, the Company issued $900.0 million of new debtsecurities, including $350.0 million aggregate principal amount of 65¤8%senior notes due 2016, $250.0 million aggregate principal amount of 75¤8%senior subordinated notes due 2018 (collectively called the January 2006Notes) and $300.0 million aggregate principal amount of 2.0% convertible seniornotes due 2026 (Convertible Notes). On February 8, 2006, the Company soldan additional $45.0 million of Convertible Notes pursuant to an over-allotmentoption exercised by the initial purchasers of the Convertible Notes. The netproceeds of the January 2006 Notes and the Convertible Notes, togetherwith a portion of the Company’s available cash and initial borrowings under theCredit Facility, were used to fund the ESSI acquisition, repay certain of ESSI’soutstanding indebtedness, and pay related fees and expenses.

The January 2006 Notes are unsecured. The 75¤8%senior subordinated notes rank behind the Credit Facility, the 65¤8% senior notesand the Convertible Notes, and are pari passu with the 67¤8% seniorsubordinated notes.

**January 2006 Notes  **The January 2006 Notespay interest semi-annually in arrears on February 1 and August 1,which commenced August 1, 2006. The net proceeds of the offering of the January 2006Notes were $588.0 million after deducting $12.0 million in commissions and feesrelated to the offerings. The January 2006 Notes were issued underindentures with The Bank of New York. Subject to a number of exceptions, theindentures restrict the Company’s ability and the ability of its subsidiariesto incur more debt, pay dividends and make distributions, make certaininvestments, repurchase stock, create liens, enter into transactions withaffiliates, enter into sale lease-back transactions, merge or consolidate, andtransfer or sell assets. The January 2006 Notes are unconditionallyguaranteed, jointly and severally, by certain of DRS’s 

91

----

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

existing and future domestic subsidiaries.See Note 15, “Guarantor and Non-guarantor Financial Statements,” foradditional disclosures.

At any time prior to February 1, 2009, theCompany may, on any one or more occasions, redeem up to 35% of the aggregateprincipal amount of the 65¤8% senior notesand 75¤8%senior subordinated notes with the net cash proceeds of one or more equityofferings at a redemption price of 106.625% and 107.625%, respectively, of theprincipal amount, plus accrued and unpaid interest, if any, subject to certain restrictions.

At any time prior to February 1, 2011, theCompany may redeem the 65¤8%senior notes and 75¤8%senior subordinated notes for cash at the Company’s option, in whole or inpart, at a redemption price equal to the greater of (1) 100% of theprincipal amount of the January 2006 Notes being redeemed and (2) thesum of (a) the present values of 103.313% of the principal amount of the 65¤8%senior notes and 103.813% of the principal amount of the 75¤8% seniorsubordinated notes being redeemed and (b) the scheduled payments ofinterest on the respective January 2006 Notes, discounted to the date ofredemption, together with accrued and unpaid interest, if any.

On or after February 1,2011, DRS may redeem, at its option, all or a part of the January 2006Notes at the redemption prices (expressed as percentages of principal amount)set forth below plus accrued and unpaid interest, if any:

| **Year**            | ** ** | ** ** | ** ** | **6**5¤8% Senior  Notes | ** ** | **7**5¤8% Senior  Subordinated  Notes | ** ** |
|---------------------|------------|------------|------------|-----------------------------------|------------|-------------------------------------------------|------------|
| 2011                |       |       | 103.313    | %                                 |       |                                            | 103.813    | % |   |
| 2012                |       |       | 102.209    | %                                 |       |                                            | 102.542    | % |   |
| 2013                |       |       | 101.105    | %                                 |       |                                            | 101.271    | % |   |
| 2014 and thereafter |       |       | 100.000    | %                                 |       |                                            | 100.000    | % |   |

 

In certain instances of a change in control, theCompany must offer to repurchase all or part of the January 2006 Notes ata redemption price equal to 101% of the principal amount.

**Convertible Notes  **The net proceeds of theoffering of the Convertible Notes, including the over-allotment, were $337.2 millionafter deducting $7.8 million in commissions and fees related to the offering.Certain of the Company’s existing and future wholly-owned domestic subsidiariesfully and unconditionally guarantee the Company’s payment obligations under theConvertible Notes, jointly and severally, on a senior unsecured basis. TheConvertible Notes will mature on February 1, 2026, unless earlierconverted, redeemed or repurchased. The Convertible Notes pay interestsemi-annually in arrears on February 1 and August 1, which commenced August 1,2006.

Commencing with the six-month period beginning on February 1,2011, the Company will pay contingent interest to the holders of theConvertible Notes during any six-month period from February 1 to July 31,and from August 1 to January 31, if the market price of a ConvertibleNote for each of the days in the five trading-day period ending on the thirdtrading day immediately preceding an interest payment date equals 120% or moreof the principal amount of the Convertible Note. The amount of any contingentinterest payable will equal 0.50% per annum of the average market price of aconvertible note for the five trading-day period. The contingent interestfeature of the Convertible Notes represents an embedded derivative instrument.The value of the contingent interest feature was zero at the date of the issuanceof the Convertible Notes and at March 31, 2007. The amount recorded forthe embedded derivative will be adjusted 

92

----

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

periodically through interestexpense for material changes in the fair value of the contingent interestfeature.

Upon conversion of a Convertible Note, the Companywill deliver cash in an amount equal to the lesser of (a) the principalamount of the notes surrendered for conversion and (b) the conversionvalue (the applicable conversion rate multiplied by the average of the closingprices of DRS common stock for a defined 20-day period), and if theconversion value is greater than the principal amount, an amount of DRS commonstock equal to such excess. The initial conversion value is based on aconversion rate of 16.7504 shares per $1,000 principal amount of ConvertibleNotes (representing a conversion price of approximately $59.70 per share of DRScommon stock), subject to adjustment under certain circumstances.

The Company evaluated the accounting for theconversion feature in accordance with EITF Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock,” and related issues, at the date of issuance of theConvertible Notes and determined that the conversion feature should beclassified as equity, and, therefore, it does not need to be accounted forseparately from the Convertible Notes. The Company updates its analysis of theaccounting for the conversion feature as circumstances warrant. If theconversion feature is required to be bifurcated in the future, changes in thefair value of the conversion feature would be charged or credited to interestexpense in each period.

The shares of DRS common stock that may be issued, ifany, upon conversion of the Convertible Notes may be registered or unregisteredshares. At the date of issuance, the underlying shares of DRS common stock havebeen registered through an automatically effective registration statement filedwith the Securities and Exchange Commission. The Company is obligated to useits reasonable best efforts to maintain such registration for two years or pay “additionalinterest” ranging from 0.25% to 1.00% per annum on the principal of theConvertible Notes.

On or prior to February 1,2010, the Convertible Notes may be converted by the holder only under thefollowing circumstances:

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the average trading price for the Convertible Noteswas less than 103% of the average of the closing sale price of the Company’scommon stock during such five trading-day period, multiplied by the applicableconversion rate;

·       Duringprescribed periods, upon the occurrence of specified corporate transactions orfundamental changes, as the term is defined in the Convertible Note agreement;or

·       Ifthe Company has called the Convertible Notes for redemption, until the secondbusiness day immediately preceding the redemption date.

After February 1,2010, the Convertible Notes may be converted by the holder into cash andshares, if any, of DRS’s common stock, only under the following circumstances:

·       Duringany calendar quarter (and only during such calendar quarter) commencing after December 31,2009, if the closing sale price of DRS’s common stock for at least 20 tradingdays in the period of 30 consecutive trading days ending on the last tradingday of the preceding calendar quarter is greater than or equal to 110% of theapplicable conversion price;

93

----

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

·       Onor after February 1, 2025;

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the average trading price for the Convertible Noteswas less than 98% of the average of the closing sale price of DRS’s common stockduring such five trading-day period, multiplied by the applicable currentconversion rate;

·       Duringprescribed periods, upon the occurrence of specified corporate transactions or “fundamentalchanges,” as the term is defined in the Convertible Notes agreement; or

·       Ifthe Company has called the Convertible Notes for redemption, until the secondbusiness day immediately preceding the redemption date.

The Company may redeem theConvertible Notes, in whole or in part, for cash, with proper notice at anytime on or after February 1, 2009 and prior to February 4, 2011, ifthe sale price of DRS’s common stock has exceeded 130% of the conversion pricefor at least 20 trading days in any consecutive 30-day trading periodending on the trading day prior to providing notice of redemption, at aredemption price equal to 100% of the principal amount of the Convertible Notesto be redeemed plus any accrued and unpaid interest (including contingentinterest and additional interest, if any) up to but not including theredemption date and a ‘‘make-whole’’ premium. The make-whole premium is payableonly in cash equal to the present value of all remaining scheduled payments ofinterest on the Convertible Notes to be redeemed through February 2011.

The Company may, at any time afterFebruary 4, 2011, redeem the Convertible Notes, in whole or in part, forcash at a redemption price equal to 100% of the principal amount of theConvertible Notes to be redeemed plus any accrued and unpaid interest(including contingent interest and additional interest, if any) up to but notincluding the redemption date.

Holders have the right to requirethe Company to purchase all or a portion of their Convertible Notes for cash onFebruary 1, 2011, February 1, 2016 and February 1, 2021 at a purchaseprice equal to 100% of the principal amount of the Convertible Notes plusaccrued and unpaid interest (including additional interest, if any) up to butnot including the purchase date.

**6****7****¤****8Senior Subordinated Notes  **On October 30, 2003, the Companyissued $350.0 million aggregate principal amount of 6**7****¤****8**%senior subordinated notes, due November 1, 2013 (the October 2003Notes). Interest, which is payable every six months on May 1 and November 1,commenced on May 1, 2004. The net proceeds from the offering of the October 2003Notes were $341.2 million, after deducting $8.8 million incommissions and fees related to the offering. The net proceeds of the October 2003Notes, together with a portion of the Company’s available cash and initialborrowings under the then existing credit facility, were used to fund the IDTacquisition, repay certain of DRS’s and IDT’s outstanding indebtedness, and payrelated fees and expenses. The October 2003 Notes were issued under an indenturewith The Bank of New York. Subject to a number of exceptions, the indenturerestricts the Company’s ability and the ability of its 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 October 2003 Notes are unconditionally guaranteed, jointly andseverally, by DRS’s current and future wholly-owned domesticsubsidiaries. The foreign subsidiaries and certain domestic subsidiaries of DRSdo not guarantee the October 2003 Notes. See Note 15, “Guarantor andNon-guarantor Financial Statements,” for additional disclosures. The Company issubject to liquidating damages (ranging from 0.25% to 1.00% of the outstandingprincipal) if the Company fails to maintain an effective registration statementfor the 6**7****¤****8**%senior subordinated notes.

94

----

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

On December 23, 2004, theCompany issued an additional $200.0 million aggregate principal amount of 67¤8%Senior Subordinated Notes, due November 2013 (December 2004 Notes).The December 2004 Notes were offered as additional debt securities underthe Company’s indenture with the Bank of New York with identical terms and thesame guarantors as the October 2003 Notes. The December 2004 Noteswere priced at 105% of the principal amount, reflecting an effective interestrate of approximately 6.13%. The net proceeds of the offering wereapproximately $208.3 million (including $2.0 million of advancedinterest on the new notes that had accrued from November 1, 2004 toDecember 23, 2004), after deducting $3.7 million in commissions andother costs related to the debt issuance.

On or afterNovember 1, 2008, DRS may redeem, at its option, all or part of the 67¤8%senior subordinated notes at the redemption prices (expressed as percentages ofprincipal amount) set forth below, plus accrued and unpaid interest andliquidating damages.

| **Year**            | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------|------------|------------|------------|----------------|------------|
| 2008                |       |       | 103.438    | %              |       |
| 2009                |       |       | 102.292    | %              |       |
| 2010                |       |       | 101.146    | %              |       |
| 2011 and thereafter |       |       | 100.000    | %              |       |

 

**Other**   AtMarch 31, 2007, other obligations consisted of a mortgage on our Palm Bay,Florida facility of $2.6 million (Palm Bay Mortgage), $0.8 million forcertain notes payable to the former owners of DRS Mobile Environmental Systems Co.(DRS MSC Note Payable), and $1.6 mllion of debt at our DRS Pivotal Power operatingunit. At March 31, 2006, other obligations consisted of $2.8 millionfor the Palm Bay Mortgage, $0.8 million for the DRS MSC note payable, and$1.3 million of debt at DRS Pivotal Power.

The aggregate maturities at March31, 2007 of long-term debt for fiscal 2008, 2009, 2010, 2011 and 2012 are $5.2 million,$5.1 million, $5.1 million, $5.1 million and $3.6 million peryear, respectively, and $1,756.6 million thereafter.

**9.****  **SupplementalCash Flow Information

| ** **                                                                           | ** ** | **Year Ended March 31,** | ** **  |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                                                                           | ** ** | **2007**                                | ** **  | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                 | ** **  |
| Supplemental disclosure of cash  flow information:                                   |       |                                    |        |   |   |   |   |
| Interest paid                                                                        |       | **$**                                   | **116,632** | ** ** | $ | 47,385 | * | $ | 32,603 |   |
| Income taxes paid                                                                    |       | **$**                                   | **34,956**  | ** ** | $ | 44,891 |   | $ | 8,588 |   |
| Income tax refunds                                                                   |       | **$**                                   | **34,145**  | ** ** | $ | 7,767 |   | $ | 10,928 |   |
| Supplemental disclosure of  significant non-cash investing and financing activities: |       | ** **                              | ** **  |   |   |   |   |
| Acquisition earn-out—Nytech                                                     |       | **$**                                   | **—**  | ** ** | $ | 7,140 |   | $ | 6,742 |   |
| Acquisition earn-out—Codem                                                      |       | **$**                                   | **167**     | ** ** | $ | 316 |   | $ | — |   |
| Acquisition earn-out—WalkAbout                                                  |       | **$**                                   | **398**     | ** ** | $ | 162 |   | $ | — |   |
| Acquisition costs for business  combinations                                         |       | **$**                                   | **—**  | ** ** | $ | 334 |   | $ | 613 |   |
| Common stock issued in ESSI  acquisition                                             |       | **$**                                   | **—**  | ** ** | $ | 587,260 |   | $ | — |   |
| Contribution of fixed assets to  joint venture                                       |       | **$**                                   | **1,000**   | ** ** | $ | — |   | $ | — |   |
| Fixed assets vouchered  but not paid                                                 |       | **$**                                   | **4,094**   | ** ** | $ | — |   | $ | — |   |

----

*                    Excludesthe advance interest of $2.0 million that was repaid on May 1, 2005 inconjunction with the semi-annual interest payments on the senior subordinatednotes (see Note 8, Debt).

95

----

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

**10.**   Income Taxes

**Earningsfrom continuing operations before income taxes consist of the following:**

| ** **                                                | ** ** | **Year Ended March 31,**                                                      | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                                                                      | ** ** |
| Earnings from continuing  operations before income taxes: | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Domestic earnings                                         | ** ** |                                                                                         | **$**      | **178,594** | ** ** |   |   | $ | 124,837 | ** ** |   |   | $ | 102,318 | ** ** |   |
| Foreign earnings                                          | ** ** |                                                                                         | **8,570**  | ** ** |   |   | 8,651 | ** ** |   |   | 650 | ** ** |   |
| **Total**                                                 | ** ** |                                                                                         | **$**      | **187,164** | ** ** |   |   | $ | 133,488 | ** ** |   |   | $ | 102,968 | ** ** |   |

 

**Incometax expense from continuing operations consists of the following:**

| ** **                                                            | ** ** | **Year Ended March 31,**                                                      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**                                                                      | ** ** |
| Income tax expense  (benefit) on earnings from continuing operations: | ** ** |                                                                                         | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current:                                                              | ** ** |                                                                                         | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** |   |
| Federal                                                               | ** ** |                                                                                         | **$**      | **42,620** | ** ** |   |   | $ | 24,897 |   |   |   | $ | 17,539 | ** ** |   |
| State                                                                 | ** ** |                                                                                         | **6,164**  | ** ** |   |   | 8,963 |   |   |   | 5,140 | ** ** |   |
| Foreign                                                               | ** ** |                                                                                         | **700**    | ** ** |   |   | 2,680 |   |   |   | (383 | **)** |   |
|                                                                  | ** ** |                                                                                         | **$**      | **49,484** | ** ** |   |   | $ | 36,540 |   |   |   | 22,296 | ** ** |   |
| Deferred:                                                             | ** ** |                                                                                         | ** ** | ** ** |   |   |   |   |   |   |   | ** ** |   |
| Federal                                                               | ** ** |                                                                                         | **7,088**  | ** ** |   |   | 13,067 |   |   |   | 17,934 | ** ** |   |
| State                                                                 | ** ** |                                                                                         | **3,312**  | ** ** |   |   | 2,790 |   |   |   | 3,597 | ** ** |   |
| Foreign                                                               | ** ** |                                                                                         | **220**    | ** ** |   |   | (403 | ) |   |   | 1,015 | ** ** |   |
|                                                                  | ** ** |                                                                                         | **10,620** | ** ** |   |   | 15,454 |   |   |   | 22,546 | ** ** |   |
| **Total**                                                             | ** ** |                                                                                         | **$**      | **60,104** | ** ** |   |   | $ | 51,994 |   |   |   | $ | 44,842 | ** ** |   |

 

**Income tax expense on earnings from discontinuedoperations was $1.1 million for the fiscal year ended March 31, 2005.**

96

----

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

**Deferredincome taxes reflect the impact of temporary differences between amounts ofassets and liabilities for financial reporting purposes and such amounts asmeasured by tax laws. The tax effects of temporary differences that give riseto significant portions of the deferred tax assets and deferred tax liabilitiesat March 31, 2007 and 2006 are as follows:**

| ** **                                         | ** ** | **March 31,**      | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Deferred tax assets:                               | ** ** | ** **              | ** ** | ** ** | ** ** |
| Acquired  federal net operating loss carryforwards | ** ** | **$**                   | **6,665**  | ** ** | $ | 7,360 |   |
| State  net operating loss carryforwards            | ** ** | **6,555**               | ** ** | 9,271 |   |
| Foreign  net operating loss carryforwards          | ** ** | **3,882**               | ** ** | 4,157 |   |
| Capital  loss carryforwards                        | ** ** | **4,381**               | ** ** | 3,994 |   |
| Tax  credit carryforwards                          | ** ** | **1,930**               | ** ** | 2,093 |   |
| Costs  accrued on uncompleted contracts            | ** ** | **35,670**              | ** ** | 39,982 |   |
| Inventory  capitalization                          | ** ** | **11,862**              | ** ** | 9,890 |   |
| Allowance  for doubtful accounts                   | ** ** | **823**                 | ** ** | 563 |   |
| Deferred  compensation                             | ** ** | **39,327**              | ** ** | 32,693 |   |
| Accrued  liabilities                               | ** ** | **33,243**              | ** ** | 37,543 |   |
| Other                                              | ** ** | **7,601**               | ** ** | 8,636 |   |
| Total gross deferred tax  assets                   | ** ** | **151,939**             | ** ** | 156,182 |   |
| Less valuation allowance                           | ** ** | **(15,813**             | **)**      | (15,850 | ) |
| Deferred tax assets                                | ** ** | **136,126**             | ** ** | 140,332 |   |
| Deferred tax liabilities:                          | ** ** | ** **              | ** ** |   |   |
| Depreciation  and amortization                     | ** ** | **11,534**              | ** ** | 11,027 |   |
| Long-term  contract costs                          | ** ** | **19,204**              | ** ** | 23,598 |   |
| Goodwill                                           | ** ** | **32,638**              | ** ** | 39,316 |   |
| Intangibles                                        | ** ** | **35,468**              | ** ** | 37,288 |   |
| Federal  impact of state benefits                  | ** ** | **2,111**               | ** ** | 1,943 |   |
| Contingent  convertible debt                       | ** ** | **7,693**               | ** ** | — |   |
| Other                                              | ** ** | **1,027**               | ** ** | 862 |   |
| Deferred tax liabilities                           | ** ** | **109,675**             | ** ** | 114,034 |   |
| Net deferred tax assets                            | ** ** | **$**                   | **26,451** | ** ** | $ | 26,298 |   |

 

Certain 2006 components of deferred tax assets andliabilities have been reclassified to conform to the 2007 presentation.

A valuation allowance is provided when it is morelikely than not that some portion or all of a deferred tax asset will not berealized. The Company has established a valuation allowance for a portion of itsfederal, state and foreign deferred tax assets at March 31, 2007 and 2006, dueto the uncertainty of future earnings of certain subsidiaries of the Companyand the status of applicable statutory regulations that could limit or precludeutilization of these benefits in future periods. During the fiscal year endedMarch 31, 2007, the valuation allowance substantially was unchanged due to offsettingchanges primarily attributable to a reduction in state tax rates and a changein estimates related to our realizability of deferred tax assets associatedwith state net operating loss carryforwards for ESSI.  During the fiscal year ended March 31, 2006,the valuation allowance increased by $11.0 million as follows: a $1.4 millionnet increase in the valuation allowance associated with certain temporarydifferences and various state net operating losses due to current year activityand assessment of future utilization, a $10.2 million increase associated withcapital loss carryforwards, state and foreign net operating losses andtemporary 

97

----

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

differences as a result of theacquisition of ESSI, offset, in part, by a $0.6 million net decrease in thevaluation allowance due to the utilization of U.K. net operating losses.  

Based upon the level of historical taxable income andprojections for future taxable income over the periods in which the Company'sdeferred tax assets are deductible, management believes it is more likely thannot the Company will realize the benefits of these deductible differences, netof the existing valuation allowances, at March 31, 2007 and 2006.

As of March 31, 2007, the Consolidated Balance Sheetincludes current deferred tax assets and (liabilities) of $71.5 and $(0.1)million and non-current deferred tax assets and (liabilities) of $1.6 millionand $(46.5) million, respectively.  As ofMarch 31, 2006, the Consolidated Balance Sheet includes current deferred taxassets and (liabilities) of $59.6 million and $(0.1) million, respectively, andnon-current deferred tax assets and (liabilities) of $2.4 million and $(35.6)million, respectively.

The loss carryforwards available at March 31, 2007include $18.9 million of U.S. federal net operating loss and a $10.6 millioncapital loss carryforward and $118.5 million of state net operating losscarryforwards, which expire between fiscal years 2008 and 2027, and $12.4million of foreign losses, of which the majority will carryforwardindefinitely. All of the Company's remaining U.S. federal net operating losscarryforwards as of March 31, 2007 were acquired in connection with the NAI andWalkAbout acquisitions, and approximately $6.9 million, $3.2 million, $7.0million and $17.2 million of its remaining state net operating losscarryforwards were acquired in connection with the NAI, IDT, WalkAbout and ESSIacquisitions, respectively. Future utilization of these acquired net operatingloss carryforwards may result in an adjustment to goodwill to the extent itreduces any related valuation allowance. The annual utilization of the NAI and WalkAbout federal net operatingloss carryforwards is subject to limitation under Section 382 of the InternalRevenue Code. 

During the second quarter of 2006, the InternalRevenue Service concluded its examination of the Company’s federal tax returnsfor the years ended March 31, 1999 through March 31, 2001.  As a result of the outcome of the audit, theCompany recorded a tax benefit of approximately $3.0 million in fiscal 2006.

The Company is currently under examination by theInternal Revenue Service for the years ended March 31, 2002 through March 31,2004 and ESSI is currently under examination for the periods ended October 31,2004, October 31, 2005 and January 31, 2006 (see note 13). TheCompany and ESSI are also under examination by various state jurisdictions forvarious fiscal years. Such examinations could result in challenges to taxpositions taken and, accordingly, the Company may record adjustments toprovisions based on the outcomes of such matters. However, at March 31,2007, the Company believes that the resolution of these matters, afterconsidering amounts accrued, will not have a material adverse effect on its ConsolidatedFinancial Statements.

In October 2004, the Jobs Act was signed intolaw.  The Jobs Act created a temporaryincentive for U.S. multinational corporations to repatriate accumulated incomeearned outside of the United States as of December 31, 2002. In accordance withthe Jobs Act, the Company repatriated $14.0 million during the fourth quarterof fiscal 2006. The Company recorded an income tax charge of $1.4 million, netof the 85% dividends-received deduction in 2006 related to the repatriation,approximately $0.7 million of which was paid in 2006 through withholding of tax,and $0.7 million was paid during the first quarter of fiscal 2007. Consistentwith FSP No. FAS 109-2 and APB No. 23, the Company has notprovided for income taxes on its residual 

98

----

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

international unrepatriatedearnings because all such earnings are expected to be indefinitely reinvested.

Areconciliation of the expected U.S. federal income tax rate to the actual(effective) income tax rate is as follows:

| ** **                                                | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected U.S. federal  income tax expense                 | ** ** | **35.0**                                | **%**      | 35.0 | % | 35.0 | % |
| Difference between U.S.  and foreign tax rates            | ** ** | **(0.5**                                | **)%**     | — |   | 0.1 | % |
| State income tax rate,  net of federal income tax benefit | ** ** | **3.2**                                 | **%**      | 4.8 | % | 7.6 | % |
| Nondeductible expenses                                    | ** ** | **1.0**                                 | **%**      | 1.4 | % | 1.2 | % |
| Change in valuation  allowance                            | ** ** | **0.2**                                 | **%**      | 0.9 | % | (0.3 | )% |
| Foreign investment tax  credits                           | ** ** | **(0.2**                                | **)%**     | (0.6 | )% | (0.5 | )% |
| Settlement of IRS audit                                   | ** ** | **—**                              | ** ** | (2.2 | )% | — |   |
| Extraterritorial income exclusion                         | ** ** | **(5.2**                                | **)%**     | — |   | — |   |
| Other                                                     | ** ** | **(1.4**                                | **)%**     | (0.3 | )% | 0.4 | % |
| Total                                                     | ** ** | **32.1**                                | **%**      | 39.0 | % | 43.5 | % |

 

**11.**   CommonStock and Share-Based Compensation Plans

**Common Stock**

During fiscal years 2006 and 2007,the Board of Directors declared the following quarterly cash dividends:

| **Record Date**    | ** ** | **Cash Dividends Per Share** | ** ** | **Date Paid** |
|-------------------------|------------|---------------------------------------------|------------|--------------------|
| June 15, 2005      |       |                                        | $          | 0.03               |   |   | June 30,  2005 |
| September 15, 2005 |       |                                        | $          | 0.03               |   |   | September 30,  2005 |
| December 15, 2005  |       |                                        | $          | 0.03               |   |   | December 30,  2005 |
| March 15, 2006     |       |                                        | $          | 0.03               |   |   | March 30,  2006 |
| June 15, 2006      |       |                                        | $          | 0.03               |   |   | June 30,  2006 |
| September 15, 2006 |       |                                        | $          | 0.03               |   |   | September 29,  2006 |
| December 15, 2006  |       |                                        | $          | 0.03               |   |   | December 29,  2006 |
| March 15, 2007     |       |                                        | $          | 0.03               |   |   | March 30, 2007 |

 

On May 10, 2007, the Companyannounced that its Board of Directors declared a quarterly cash dividend of$0.03 per share on the Company’s common stock. The dividend is payable on June 29,2007 to stockholders of record as of the close of business on June 15,2007.

On January 30, 2006, aspecial meeting of the Company’s stockholders was held at which the Company’sstockholders approved an amendment to its certificate of incorporation toincrease the Company’s authorized common stock from 50,000,000 shares to100,000,000 shares.

On January 31, 2006, theCompany issued 11,727,566 shares of DRS common stock in connection with theCompany’s acquisition of ESSI (see Note 2).

As of March 31, 2007 and2006, the authorized capital of the Company also included 2.0 millionshares of preferred stock with a par value of $10 per share (no shares issued).The terms of the preferred stock were not set at March 31, 2007.

**Stock Compensation Plans**   Withthe adoption of SFAS 123R on April 1, 2006 (see Note 1.Q.), unamortizedstock compensation relating to previous grants of non-vested stock of $7.2million was netted against additional paid-in capital, and forfeitures of non-vestedstock are estimated at the date of grant and adjusted as circumstances warrant.Additionally, prior to the adoption of 

99

----

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

SFAS 123R, the Companypresented all tax benefits of deductions resulting from the exercise of stockoptions as operating cash flows in the Consolidated Statements of Cash Flows.SFAS 123R requires excess tax benefits (i.e., the tax benefit recognized uponexercise of stock options in excess of the benefit recognized as compensationcost for those options) to be classified as financing cash flows in the ConsolidatedStatements of Cash Flows. Pursuant to SFAS 123R, tax benefits resulting fromthe exercise of stock options which have been presented as operating cash flowsprior to the adoption of SFAS 123R are not reclassified to financingactivities, but rather continue to be presented as operating cash flows.

Compensationexpense for all stock-based awards granted after April 1, 2006 and for allrestricted stock and restricted stock unit awards granted before April 1,2006, is recognized on a straight-line basis over the requisite service periodfor the entire award based upon the grant date fair value. Compensation expensefor all stock option awards granted prior to, but not vested as ofApril 1, 2006, is recognized on a straight-line basis over the requisiteservice period for each remaining vesting portion of the award.

The adoption of SFAS 123R resultedin a non-cash credit to Other expense, net, for the cumulative effect of achange in accounting principle of $0.2 million related to the recognition ofestimated forfeitures on non-vested stock, which was recorded during the firstquarter of fiscal 2007. The cumulative effect credit is immaterial for purposesof separate presentation on the Consolidated Statement of Earnings.

For fiscalyears ended March 31, 2007, 2006 and 2005, we recorded total share-basedcosts related to stock options and non-vested stock of $11.1 million, $2.9million and $1.1 million, respectively. Such amounts were recognized in theconsolidated financial statements as follows:

| ** **                                                                         | ** ** | **Year Ended March, 31** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                 | ** ** |
| Total cost of share-based  payment plans                                           |       | **$**                                   | **11,067** | ** ** | $ | 2,856 |   | $ | 1,088 |   |
| Amounts capitalized in inventory                                                   |       | **(4,804**                              | **)**      | (2,856 | ) | (1,088 | ) |
| Amounts charged against earnings  for amounts  previously capitalized in inventory |       | **4,851**                               | ** ** | 2,061 |   | 1,191 |   |
| Amounts charged against earnings  before  income tax benefit                       |       | **$**                                   | **11,114** | ** ** | $ | 2,061 |   | $ | 1,191 |   |

 

As a result of applying SFAS 123Rto the Company’s stock options, DRS’s earnings before income taxes and netearnings for the fiscal year ended March 31, 2007 were $6.3 million and $3.9 millionlower, respectively, than if the Company had continued to account forshare-based compensation under APB No. 25. Basic and diluted earnings pershare for the fiscal year ended March 31, 2007 would have been $3.29 pershare and $3.21 per share, respectively, if the Company had not adopted SFAS123R. Reported amounts for the fiscal year ended March 31, 2007 were $3.19per basic share and $3.12 per diluted share, respectively.

**Share-based Compensation Plans**   On August 7, 1996, the stockholders approvedthe 1996 Omnibus Plan (1996 Plan). Under the terms of the Omnibus Plan, whichexpired on June 16, 2006, options could be granted to key employees, directorsand consultants of the Company. The number of shares of DRS common stockauthorized for issuance under the 1996 Plan initially was 500,000, which ultimatelywas increased, with stockholder approval, to 5,875,000 shares of DRS commonstock. Awards under the 1996 Plan were at the discretion of the CompensationCommittee of the Board of Directors (the Compensation Committee) and could bemade in the form of incentive stock options, nonqualified stock options, stockappreciation rights, non-vested stock and non-vested stock units, phantomstock, stock bonuses and other awards. The Company historically has utilizednewly issued shares of DRS common stock to satisfy its equity-basedcompensation awards.

100

----

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

On August 3, 2006, thestockholders approved the 2006 Omnibus Plan (2006 Plan), which has similarterms to that of the 1996 Omnibus Plan. The 2006 Plan provides for the issuanceof up to 4,000,000 shares of DRS common stock for awards, provided that eachshare issued under the 2006 Plan pursuant to a Full Value Award (RestrictedStock and Restricted Stock Units) shall reduce the share limit by 2 sharesfor every share actually issued.

***Stock Options******  ***Unless theCompensation Committee expressly provides otherwise, options granted under boththe 1996 Plan and the 2006 Plan have a contractual term of ten years andgenerally are not exercisable prior to one year after the date of grant, with 25%of the options granted exercisable on each of the first four anniversaries ofthe date of grant. On July 6, 2005, the Company granted 209,500 stockoptions that fully vested on March 31, 2006. In accordance with the July 6,2005 stock option grant, recipients are required to hold any shares acquiredupon exercise of the options prior to March 31, 2008 (net of any sharessold or withheld to pay the exercise price and any applicable statutory minimumfederal, state and local tax requirements) for a period of one year followingthe date of exercise. The Compensation Committee’s decision to modify theCompany’s traditional vesting terms for the July 6, 2005 stock optiongrant was made pursuant to an evaluation of the Company’s overall incentivecompensation strategy. As a part of the evaluation, the Compensation Committeeconsidered the amount of compensation expense that would otherwise have beenrecognized in the Company’s results of operations in future periods under SFAS123R. The July 6, 2005 stock option grant had a $4.8 million impact on theCompany’s fiscal 2006 pro forma pre-tax compensation expense (SeeNote 1.Q.).

During fiscal 1999, theCompensation Committee issued options to purchase 250,000 shares of DRS commonstock with vesting terms similar to awards issued under the 1996 Plan atexercise prices in excess of the market price on the date of grant. During thefiscal year ended March 31, 2007, 70,000 of these options were exercised;the remaining options expire in fiscal year 2009.

The stock options exercised duringfiscal 2000 included 50,000 shares that are being held by the Company in “bookentry” form. Book entry shares are not considered issued or outstanding and areexcluded from the tables below. However, these shares are included in theCompany’s diluted earnings per share calculations for the fiscal years ended March 31,2007, 2006 and 2005.

The following tablesummarizes information regarding the Company’s stock option activity andamounts as of and for the fiscal years ended March 31, 2007, 2006 and2005.

| ** **                                    | ** ** | **2007**                   | ** **    | **2006**                               | ** ** | **2005**                                                     | ** ** |
|-----------------------------------------------|------------|----------------------------|---------------|----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of  Shares** | ** **    | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (years)** | ** ** | **Aggregate  Intrinsic Value  (In Thousands)** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at April 1                   |       | ** **                 | **2,913,358** | ** **                             | ** ** | ** **                                                   | **$**      | **29.08** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | 3,348,361 |   |   |   | $ | 26.52 |   |   |   | 3,241,225 |   |   |   | $ | 23.53 |   |   |
| Granted                                       |       | ** **                 | **232,412**   | ** **                             | ** ** | ** **                                                   | **$**      | **49.49** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | 237,000 |   |   |   | $ | 50.53 |   |   |   | 751,750 |   |   |   | $ | 36.30 |   |   |
| Exercised                                     |       | ** **                 | **(575,152**  | **)**                                  | ** ** | ** **                                                   | **$**      | **22.46** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | (563,620 | ) |   |   | $ | 22.29 |   |   |   | (426,742 | ) |   |   | $ | 18.98 |   |   |
| Cancelled                                     |       | ** **                 | **(176,304**  | **)**                                  | ** ** | ** **                                                   | **$**      | **37.04** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | (108,383 | ) |   |   | $ | 32.29 |   |   |   | (217,872 | ) |   |   | $ | 30.41 |   |   |
| Outstanding at  March 31                 |       | ** **                 | **2,394,314** | ** **                             | ** ** | ** **                                                   | **$**      | **32.04** | ** ** | ** ** | ** ** | **6.09** | ** ** | ** ** | ** ** | **$** | **48,230,779** | ** ** |   |   | 2,913,358 |   |   |   | $ | 29.08 |   |   |   | 3,348,361 |   |   |   | $ | 26.52 |   |   |
| Vested and expected to  vest at March 31 |       | ** **                 | **2,376,256** | ** **                             | ** ** | ** **                                                   | **$**      | **31.99** | ** ** | ** ** | ** ** | **6.08** | ** ** | ** ** | ** ** | **$** | **47,990,946** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable at March 31                  |       | ** **                 | **1,779,829** | ** **                             | ** ** | ** **                                                   | **$**      | **29.64** | ** ** | ** ** | ** ** | **5.49** | ** ** | ** ** | ** ** | **$** | **40,134,118** | ** ** |   |   | 1,945,915 |   |   |   | $ | 26.99 |   |   |   | 1,692,158 |   |   |   | $ | 20.64 |   |   |

----

(1)  Representsoutstanding options reduced by expected forfeitures.

101

----

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

The aggregate intrinsic values, disclosed in the tableabove, represent the difference between DRS’s closing stock price on the lasttrading day of the fourth quarter (March 30, 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 fiscal years ended March 31, 2007,2006 and 2005, was $16.1 million, $15.4 million and $6.9 million,respectively. Total compensation cost related to stock options was $6.3 millionfor the fiscal year ended March 31, 2007. At March 31, 2007,unrecognized compensation costs related to stock options was $8.0 million ($4.8million after income taxes), which is expected to be recognized over a weightedaverage remaining period of 2.1 years.

The estimated weighted average grant date fair valueof each stock option awarded was $21.44, $23.51 and $16.07 for the fiscal yearsended March 31, 2007, 2006 and 2005, respectively.

Informationregarding all options outstanding at March 31, 2007 follows:

|  

** **                           | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices:** | ** ** | ** **                   | ** ** | **Number of  Options**  | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $7.00–$14.00                            |       | 396,150                      |       |                         | $          | 11.85 |   |   |   | 2.48 |   |   | 396,150 |   |   | $ | 11.85 |   |   |
| $14.01–$28.00                           |       | 245,319                      |       |                         | $          | 25.45 |   |   |   | 6.20 |   |   | 168,482 |   |   | $ | 25.32 |   |   |
| $28.01–$32.00                           |       | 269,405                      |       |                         | $          | 28.58 |   |   |   | 6.82 |   |   | 197,923 |   |   | $ | 28.58 |   |   |
| $32.01–$33.00                           |       | 317,550                      |       |                         | $          | 32.08 |   |   |   | 5.61 |   |   | 317,550 |   |   | $ | 32.08 |   |   |
| $33.01–$37.00                           |       | 263,249                      |       |                         | $          | 34.11 |   |   |   | 4.82 |   |   | 261,249 |   |   | $ | 34.10 |   |   |
| $37.01–$38.00                           |       | 473,925                      |       |                         | $          | 37.30 |   |   |   | 7.39 |   |   | 221,475 |   |   | $ | 37.31 |   |   |
| $38.01 and over                              |       | 428,716                      |       |                         | $          | 49.53 |   |   |   | 8.63 |   |   | 217,000 |   |   | $ | 49.65 |   |   |
| **Total**                                    | ** ** | **2,394,314**                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **1,779,829** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                              |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cash received from stock option exercises for theyears ended March 31, 2007 and 2006 was $12.9 million and $12.5 million,respectively. The actual tax benefit realized for the tax deductions from stockoption exercises totaled $5.6 million and $5.5 million for the yearsended March 31, 2007 and 2006.

**Stock Option Fair Value EstimationAssumptions****  **TheCompany estimates the fair value of its stock options at the date of grantusing the Black-Scholes option-pricing valuation model. The Company’s valuationmodel is impacted by DRS’s stock price, as well as weighted average assumptionsfor a number of subjective variables described below.

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

·       *Expected Volatility*   Expected volatilityis based on historical daily volatility of DRS common stock over the expectedholding period.

102

----

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

·       *Expected Dividend Yield*   Expected dividendyield is based on DRS’s expected dividend payments.

·       *Risk-Free Interest Rate*   The risk-freeinterest rates for stock options are based on the U.S. Treasury yield curve ineffect at the time of grant for maturities similar to the expected holdingperiod 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.

Changes inassumptions can materially impact the estimated fair value of stock options.The weighted average assumptions used in the valuation model are presented inthe table below.

| ** **                                      | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected holding period  (in years)             |       | **5.63**                                | ** ** | 6.25 |   | 5.00 |   |
| Expected volatility                             |       | **38.91**                               | **%**      | 42.16 | % | 44.19 | % |
| Expected dividend yield                         |       | **0.24**                                | **%**      | 0.20 | % | — |   |
| Risk-free interest rate                         |       | **4.94**                                | **%**      | 4.04 | % | 3.54 | % |
| Weighted-average fair value of  options granted |       | **$**                                   | **21.44**  | ** ** | $ | 23.51 |   | $ | 16.07 |   |
|                                                 |            |                                         |            |  |  |  |  |  |  |  |

 

**Non-Vested Stockand Non-Vested Stock Units****  ****Non-vested******stock awards are granted to certain employees, as permittedunder the 2006 Plan, in the name of the employee, who has all the rights of astockholder, subject to certain restrictions. The n**on-vested** stockcliff vests three years from the date of grant. Restricted stock units aregranted in the name of the employee; however, the participant has no rights asa stockholder. These n**on-vested**stock units are redeemed for DRS common stock once a three year cliff vestingperiod has been satisfied. The cost of the grants, as determined by the marketprices of the common stock at the grant dates, net of expected forfeitures, isrecognized over the vesting periods.

Compensation cost for non-vested stock for the fiscalyears ended March 31, 2007, 2006 and 2005 was $4.8 million, $2.9 millionand $1.1 million, respectively. As of March 31, 2007, total unrecognizedcompensation costs related to non-vested stock awards was $11.7 million, andthat amount is expected to be recognized over a weighted average remainingperiod of 2.0 years.

The followingtable details the activity in non-vested stock awards for the fiscal year endedMarch 31, 2007.

| ** **                                        | ** ** | **Year Ended March 31, 2007** | ** **  |
|---------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                        | ** ** | **Number of  Shares**                        | ** **  | **Weighted  Average Grant  Date Fair Value** | ** ** |
| Nonvested—Balance at  March 31, 2006    |       |                                              | 281,590     |   |   |   | $ | 40.81 |   |   |
| Granted                                           |       |                                              | 247,208     |   |   |   | $ | 49.86 |   |   |
| Vested                                            |       |                                              | (101,460    | ) |   |   | $ | 27.33 |   |   |
| Forfeited/cancelled                               |       |                                              | (64,942     | ) |   |   | $ | 46.72 |   |   |
| **Nonvested—Balance at March 31, 2007** | ** ** | ** **                                        | **362,396** | ** ** | ** ** | ** ** | **$** | **49.86** | ** ** | ** ** |

 

103

----

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

**12.**   Pensionsand Other Employee Benefits

The Company maintains multiplepension plans, both contributory and non-contributory, covering employees atcertain locations. Eligibility for participation in the plans vary, andbenefits generally are based on the participant’s compensation and years ofservice, as defined in the respective plan. The Company’s funding policygenerally is to contribute in accordance with cost accounting standards thataffect government contractors, subject to the Internal Revenue Code andregulations thereunder. Plan assets are invested primarily in U.S. governmentand U.S. government-sponsored entity instruments, stocks, bonds and real estate.

The Company also providespostretirement medical benefits for certain retired employees and dependents atcertain locations. Participants are eligible for these benefits when theyretire from active service and meet the eligibility requirements for theCompany’s pension plans. The Company’s contractual arrangements with the U.S. governmentprovide for the recovery of contributions to a Voluntary Employees’ BeneficiaryAssociation (VEBA) trust and, for non-funded plans, recovery of claims on apay-as-you-go basis, subject to the Internal Revenue Code and regulations thereunder,with the retiree generally paying a portion of the costs through contributions,deductibles and coinsurance provisions.

The Company also maintains certainnon-contributory and unfunded supplemental retirement plans. Eligibility forparticipation in the supplemental retirement plans is limited and benefits generallyare based on the participant’s compensation and/or years of service.

In September 2006, the FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an Amendment of FASB Statements No. 87,88, 106 and 132R” (SFAS 158), which requires the recognition of theoverfunded or underfunded status of defined benefit pension and otherpostretirement benefit plans as an asset or liability on the Company’s ConsolidatedBalance Sheets. SFAS 158 requires recognition of the actuarial gains or lossesand prior service costs or credits that have not yet been included in net periodicbenefit cost as a component of accumulated other comprehensive earnings, net oftax. The Company adopted the recognition and disclosure provisions of SFAS 158,effective at the end of its fiscal year ended March 31, 2007. Theadditional minimum pension liability and related intangible assets have beenderecognized upon the adoption of SFAS 158. The requirement to measure planassets and benefit obligations as of the date of the employer’s fiscal year-endbalance sheet is effective for DRS in the fiscal year beginning April 1,2008.

The tablebelow presents the balance sheet account balances at March 31, 2007 priorto the initial adoption of SFAS 158, the effect of the adjustments to them andthe account balances subsequent to adoption of SFAS 158.

| ** **                                         | ** ** | **Before**                | ** ** | ** **      | ** ** | **After**                 | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-----------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **Application**           | ** ** | ** **      | ** ** | **Application**           | ** ** |
| ** **                                         | ** ** | **of SFAS 158** | ** ** | **Adjustments** | ** ** | **of SFAS 158** | ** ** |
| ** **                                         | ** ** | **(in thousands)**   | ** ** |
| Deferred income taxes and  other noncurrent assets |       | $                         | 45,925     |            |       | $                         | (1,709     | ) |   | $ | 44,216 |   |
| Other liabilities                                  |       | $                         | (154,653   | )               |       | $                         | (4,029     | ) |   | $ | (158,682 | ) |
| Accumulated other comprehensive earnings  (loss)   |       | $                         | (3,479     | )               |       | $                         | 5,738      |   |   | $ | 2,259 |   |

 

104

----

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

The followingtables provide certain information regarding the Company’s pension,postretirement and supplemental retirement plans. The Company utilizes aDecember 31 measurement date to calculate its end of year (March 31)benefit obligations, fair value of plan assets and annual net periodic benefitcost.

|  

** **                                                     | ** ** | **Funded**               | ** **  | ** **             | ** ** | ** **                | ** ** | **Unfunded** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|-------------|------------------------|------------|---------------------------|------------|--------------|------------|
| ** **                                                             | ** ** | **Defined Benefit** | ** **  | **Postretirement**     | ** ** | **Supplemental**          | ** ** |
| ** **                                                             | ** ** | **Pension Plans**   | ** **  | **Benefit Plans** | ** ** | **Retirement Plans** | ** ** |
| ** **                                                             | ** ** | **2007**                 | ** **  | **2006**               | ** ** | **2007**                  | ** ** | **2006**     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**  | ** **  |
| **Change in benefit obligation:**                                      | ** ** | ** **               | ** **  | ** **             | ** ** | ** **                | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation at beginning of year                                |       | **$**                    | **119,123** | ** **             | $          | 110,246                   |       | **$**        | **18,773** | ** ** | $ | 17,905 |   | **$** | **21,636** | ** ** | $ | 19,317 |   |
| Addition of ESSI plans acquired after fiscal 2006 measurement  date(1) |       | **131,794**              | ** **  | —                 |       | **7,900**                 | ** ** | —       |       | **3,498** | ** ** | — |   |
| Service cost                                                           |       | **7,353**                | ** **  | 3,958                  |       | **584**                   | ** ** | 598          |       | **572** | ** ** | 544 |   |
| Interest cost                                                          |       | **12,983**               | ** **  | 6,007                  |       | **1,280**                 | ** ** | 965          |       | **1,272** | ** ** | 1,116 |   |
| Plan participants’ contributions                                  |       | **127**                  | ** **  | 111                    |       | **589**                   | ** ** | —       |       | **—** | ** ** | — |   |
| Actuarial (gain) loss                                                  |       | **(10,254**              | **)**       | 4,052                  |       | **(2,219**                | **)**      | (1,532       | )          | **(2,381** | **)** | 878 |   |
| Benefits paid                                                          |       | **(8,999**               | **)**       | (4,343                 | )          | **(1,546**                | **)**      | (592         | )          | **(393** | **)** | (219 | ) |
| Change in plan provisions                                              |       | **119**                  | ** **  | —                 |       | **(178**                  | **)**      | —       |       | **—** | ** ** | — |   |
| Exchange rate differences and other                                    |       | **1,759**                | ** **  | (908                   | )          | **14**                    | ** ** | 1,429        |       | **—** | ** ** | — |   |
| Benefit obligation at end of year                                      |       | **254,005**              | ** **  | 119,123                |       | **25,197**                | ** ** | 18,773       |       | **24,204** | ** ** | 21,636 |   |
| **Change  in plan assets:**                                            | ** ** | ** **               | ** **  | ** **             | ** ** | ** **                | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan assets at beginning of year                         |       | **91,658**               | ** **  | 88,394                 |       | **4,041**                 | ** ** | 2,839        |       | **—** | ** ** | — |   |
| Fair value of plan assets  assumed through acquisition  of ESSI(1)     |       | **89,125**               | ** **  | —                 |       | **—**                | ** ** | —       |       | **—** | ** ** | — |   |
| Actual return on plan assets                                           |       | **18,297**               | ** **  | 4,003                  |       | **200**                   | ** ** | 88           |       | **—** | ** ** | — |   |
| Plan participants’ contributions                                  |       | **127**                  | ** **  | 111                    |       | **590**                   | ** ** | —       |       | **—** | ** ** | — |   |
| Employer contributions                                                 |       | **6,617**                | ** **  | 3,915                  |       | **1,536**                 | ** ** | 1,706        |       | **393** | ** ** | 219 |   |
| Benefits paid                                                          |       | **(8,999**               | **)**       | (4,343                 | )          | **(1,546**                | **)**      | (592         | )          | **(393** | **)** | (219 | ) |
| Exchange rate differences and other                                    |       | **1,032**                | ** **  | (422                   | )          | **—**                | ** ** | —       |       | **—** | ** ** | — |   |
| Fair value of plan assets at end of year                               |       | **197,857**              | ** **  | 91,658                 |       | **4,821**                 | ** ** | 4,041        |       | **—** | ** ** | — |   |
| Contributions between measurement date and year end                    |       | **3,033**                | ** **  | 428                    |       | **365**                   | ** ** | 85           |       | **225** | ** ** | 81 |   |
| Funded status of the plans at year end                                 |       | **$**                    | **(53,115** | **)**                  | (27,037    | )                         | **$**      | **(20,011**  | **)**      | (14,647 | ) | **$** | **(23,979** | **)** | (21,555 | ) |
| Unrecognized transition obligation                                     |       |                     |        | —                 |       |                      |       | 1,453        |       |   |   | — |   |
| Unrecognized loss                                                      |       |                     |        | 21,263                 |       |                      |       | 1,728        |       |   |   | 4,717 |   |
| Unrecognized prior service cost                                        |       |                     |        | 72                     |       |                      |       | —       |       |   |   | 7,107 |   |
| **Net  amount recognized**                                             |       |                     |        | $                      | (5,702     | )                         |       |         | $          | (11,466 | ) |   |   | $ | (9,731 | ) |

----

(1)            See ESSI Plansdiscussion below for additional information.

105

----

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

The amountsrecognized in the Consolidated Balance Sheets, as of March 31, consist of:

| ** **                                | ** ** | **Funded**               | ** **  | ** **             | ** ** | ** **                | ** ** | **Unfunded** | ** **  |
|-------------------------------------------|------------|--------------------------|-------------|------------------------|------------|---------------------------|------------|--------------|-------------|
| ** **                                | ** ** | **Defined Benefit** | ** **  | **Postretirement**     | ** ** | **Supplemental**          | ** ** |
| ** **                                | ** ** | **Pension Plans**   | ** **  | **Benefit Plans** | ** ** | **Retirement Plans** | ** ** |
| ** **                                | ** ** | **2007**                 | ** **  | **2006**               | ** ** | **2007**                  | ** ** | **2006**     | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**  | ** **  |
| Non-current assets(1)                     |       | **$**                    | **65**      | ** **             | $          | 72                        |       | **$**        | **—**  | ** ** | $ | — |   | **$** | **—** | ** ** | $ | 5,084 |   |
| Current liabilities(1)                    |       | **—**               | ** **  | (7,228                 | )          | **(1,265**                | **)**      | (1,601       | )           | **(724** | **)** | (273 | ) |
| Non-current liabilities(1)                |       | **(53,180**              | **)**       | (9,109                 | )          | **(18,746**               | **)**      | (9,865       | )           | **(23,255** | **)** | (14,542 | ) |
| Accumulated other  comprehensive earnings |       | **7,007**                | ** **  | 10,563                 |       | **764**                   | ** ** | —       |        | **8,478** | ** ** | — |   |
| Net amount recognized                     |       | **$**                    | **(46,108** | **)**                  | $          | (5,702                    | )          | **$**        | **(19,247** | **)** | $ | (11,466 | ) | **$** | **(15,501** | **)** | $ | (9,731 | ) |

----

(1)            The sum of the amountsrecognized as of March 31, 2007 equals $53.1 million, $20.0 millionand $24.0 million for the defined benefit pension plan, postretirementbenefit plan and supplemental retirement plans, respectively, and representsthe funded status of the plans.

Amountsrecognized in accumulated other comprehensive earnings (before taxes) atMarch 31, 2007 consist of:

| ** **                                    | ** ** | **Funded  Defined Benefit  Pension Plans** | ** ** | **Postretirement  Benefit Plans** | ** ** | **Unfunded  Supplemental  Retirement Plans** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2007**                               | ** ** | **2007**                                          | ** ** |
| ** **                                    | ** ** | **(in thousands)**                              | ** ** |
| Prior service cost                            |       |                                                 | $          | 186                                    |       |                                              |       | $ | (154 | ) |   |   | $ | 6,330 |   |   |
| Net loss                                      |       |                                                 | 6,821      |                                   |       |                                              | (436       | ) |   |   | 2,148 |   |   |
| Transition obligation                         |       |                                                 | —     |                                   |       |                                              | 1,354      |   |   |   | — |   |   |
| **Accumulated  other comprehensive earnings** | ** ** | ** **                                           | **$**      | **7,007**                              | ** ** | ** **                                        | ** ** | **$** | **764** | ** ** | ** ** | ** ** | **$** | **8,478** |   |   |

 

The aggregateaccumulated benefit obligation (ABO) for the Company’s pension plans combinedwas $247.9 million and $120.5 million at March 31, 2007 and2006, respectively. The table below presents information for the pension planswith an ABO in excess of the fair value of plan assets at March 31, 2007and 2006.
|                                 | ** ** | **2007**                | ** **  | **2006** | ** ** |
|---------------------------------|------------|-------------------------|-------------|----------|------------|
| ** **                      | ** ** | **(in thousands)** | ** **  |
| Projected benefit  obligation   |       | **$**                   | **196,256** |     | $          | 97,640 |   |
| Accumulated benefit  obligation |       | **$**                   | **178,890** |     | $          | 87,340 |   |
| Fair value of plan assets       |       | **$**                   | **125,227** |     | $          | 55,960 |   |

 

Because the ABO exceeded the fairvalue of plan assets at March 31, 2006, the Company had recognized anadditional minimum liability for the unfunded accumulated benefit obligation inaccumulated other comprehensive earnings. In fiscal 2006, the minimum liabilityrelated to the funded defined benefit pension plans increased$3.8 million.

106

----

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

The followingweighted average actuarial assumptions were used to determine the benefitobligation and funded status of the plans:

| ** **                              | ** ** | **Funded  Defined Benefit** | ** ** | **Postretirement**     | ** ** | **Unfunded  Supplemental** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Pension Plans**      | ** ** | **Benefit Plans** | ** ** | **Retirement Plans**  | ** ** |
| ** **                              | ** ** | **2007**                    | ** ** | **2006**               | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Rate  assumptions**                   |       |                        |       |                   |       |                       |       |   |   |   |   |   |   |
| Discount rate                           |       | **5.85**                    | **%**      | 5.40                   | %          | **5.75**                   | **%**      | 5.50 | % | **5.90** | **%** | 5.55 | % |
| Increase in future  compensation levels |       | **3.85**                    | **%**      | 3.90                   | %          | **—**                 | ** ** | — |   | **4.10** | **%** | 4.05 | % |

 

The followingtable summarizes the components of net periodic benefit cost for the Company’spension, postretirement and supplemental retirement plans.

| ** **                                         | ** ** | **Funded  Defined Benefit** | ** ** | **Postretirement**     | ** ** | **Unfunded Supplemental** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **Pension Plans**      | ** ** | **Benefit Plans** | ** ** | **Retirement Plans**      | ** ** |
| ** **                                         | ** ** | **2007**                    | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**     | ** ** |
| **Components  of net periodic benefit cost:**      |       |                        |       |                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                       |       | **$**                       | **7,353**  | ** **             | $          | 3,958                          |       | $ | 3,858 |   | **$** | **584** | ** ** | $ | 598 |   | $ | 535 |   | **$** | **572** |   | $ | 544 |   | $ | 416 |   |
| Interest cost                                      |       | **12,983**                  | ** ** | 6,007                  |       | 5,833                          |       | **1,280** | ** ** | 965 |   | 959 |   | **1,272** |   | 1,116 |   | 962 |   |
| Expected return on plan assets                     |       | **(14,008**                 | **)**      | (7,056                 | )          | (6,410                         | )          | **(225** | **)** | (167 | ) | (92 | ) | **—** |   | — |   | — |   |
| Amortization of unrecognized actuarial loss (gain) |       | **617**                     | ** ** | 165                    |       | 130                            |       | **(36** | **)** | (11 | ) | 54 |   | **188** |   | 167 |   | 5 |   |
| Transition obligation                              |       | **—**                  | ** ** | —                 |       | —                         |       | **114** | ** ** | 110 |   | 37 |   | **—** |   | — |   | — |   |
| Amortization of unrecognized prior-service cost    |       | **5**                       | ** ** | 5                      |       | 5                              |       | **(24** | **)** | — |   | — |   | **777** |   | 777 |   | 777 |   |
| Net periodic expense                               |       | **$**                       | **6,950**  | ** **             | $          | 3,079                          |       | $ | 3,416 |   | **$** | **1,693** | ** ** | $ | 1,495 |   | $ | 1,493 |   | **$** | **2,809** |   | $ | 2,604 |   | $ | 2,160 |   |

 

The followingtable summarizes the amounts expected to be amortized from accumulated othercomprehensive earnings and recognized as components of net periodic benefitcosts during fiscal 2008.

| ** **            | ** ** | **Funded  Defined Benefit  Pension Plans** | ** ** | **Postretirement  Benefit Plans** | ** ** | **Unfunded Supplemental  Retirement Plans** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **            | ** ** | **(in thousands)**                              | ** ** |
| Prior service cost    |       |                                                 | $          | 13                                     |       |                                                  |       | $ | (24 | ) |   |   | $ | 777 |   |   |
| Net actuarial losses  |       |                                                 | 452        |                                   |       |                                                  | (96        | ) |   |   | 121 |   |   |
| Transition obligation |       |                                                 | —     |                                   |       |                                                  | 111        |   |   |   | — |   |   |
|                  |       |                                                 | **$**      | **465**                                | ** ** | ** **                                            | ** ** | **$** | **(9** | **)** | ** ** | ** ** | **$** | **898** |   |   |

 

107

----

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

The followingweighted average actuarial assumptions were used to determine the net periodiccost of the plans:

| ** **                                | ** ** | **Funded**             | ** ** | **Postretirement**     | ** ** | **Unfunded Supplemental** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Pension Plans** | ** ** | **Benefit Plans** | ** ** | **Retirement Plans**      | ** ** |
| ** **                                | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Rate  assumptions**                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount  rate                            |       | **5.50**               | **%**      | 5.65                   | %          | 6.15                           | %          | **5.50** | **%** | 5.65 | % | 6.25 | % | **5.50** | **%** | 5.80 | % | 6.25 | % |
| Expected  long-term return on plan assets |       | **8.15**               | **%**      | 8.05                   | %          | 8.00                           | %          | **7.25** | **%** | 7.25 | % | 7.25 | % | **—** | ** ** | — |   | — |   |
| Increase in future  compensation levels   |       | **3.80**               | **%**      | 3.85                   | %          | 3.95                           | %          | **—** | ** ** | — |   | — |   | **4.10** | **%** | 4.05 | % | 4.10 | % |

 

The expected long-term return on plan assetsassumption represents the average rate that the Company expects to earn overthe long term on the assets of the Company’s benefit plans, including thosefrom dividends, interest income and capital appreciation. The assumption hasbeen determined based on expectations regarding future rates of return for theplans’ investment portfolio, with consideration given to the allocation ofinvestments by asset class and historical rates of return for each individualasset class.

The annual increase in cost of benefits (health carecost trend rate) is assumed to be an average of 11.0% in fiscal 2008 and isassumed to gradually decrease to a rate of 4.5% in fiscal 2012 andthereafter. Assumed healthcare cost trend rates have an effect on amountsreported for postretirement medical benefit plans. A one percentage pointdecrease in the assumed healthcare cost trend rates would have the effect ofdecreasing the annual aggregate service and interest cost by $22 thousandand the postretirement medical obligations by $234 thousand. A onepercentage point increase in the assumed healthcare cost trend rate would havethe effect of increasing the annual aggregate service and interest cost by $24 thousandand the postretirement medical obligations by $263 thousand.

**ESSI Plans**   Inconnection with the acquisition of ESSI on January 31, 2006, the Companyassumed certain defined benefit pension, postretirement and supplementalretirement plan liabilities for present and former employees of ESSI.

The followingtable provides a summary of the funded status of the ESSI plans atJanuary 31, 2006.

| ** **                      | ** ** | **January 31, 2006**                       | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **Funded  Defined Benefit  Pension Plans** | ** ** | **Postretirement  Benefit Plans** | ** ** | **Unfunded  Supplemental  Retirement Plans** | ** ** |
| ** **                      | ** ** | **(in thousands)**                              | ** ** |
| Projected benefit  obligation   |       |                                                 | $          | 131,810 |   |   |   | $ | 7,900 |   |   |   | $ | 3,498 |   |   |
| Less fair value of plan  assets |       |                                                 | 89,125     |   |   |   | — |   |   |   | — |   |   |
| Accrued benefit liability       |       |                                                 | $          | 42,685 |   |   |   | $ | 7,900 |   |   |   | $ | 3,498 |   |   |

 

108

----

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

The followingweighted average actuarial assumptions were used to determine theJanuary 31, 2006 benefit obligation and funded status of the ESSI plans.
|                                           | ** ** | **January 31, 2006** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Funded  Pension Plans** | ** ** | **Postretirement  Benefit Plans** | ** ** | **Unfunded  Supplemental  Retirement Plans** | ** ** |
| Discount  rate                            |       |                           | 5.60       | % |   |   | 5.40 | % |   |   | 5.60 | % |   |
| Increase  in future compensation levels   |       |                           | 3.75       | % |   |   | — |   |   |   | 3.75 | % |   |
| Expected long-term return  on plan assets |       |                           | 8.25       | % |   |   | — |   |   |   | — |   |   |

 

**Plan Assets**

The Company has the responsibility to formulate the investment policiesand strategies for each plan’s assets. The overall domestic plans’ policies andstrategies, which differ from plan to plan, include: maintaining the highestpossible return commensurate with the level of assumed risk, preserving thebenefit security for the plan’s participants and maintaining an appropriatelyfunded status (inclusive of fees).

The Companydoes not involve itself with the day-to-day operations and selection ofindividual securities and investments, and, accordingly, has retained theprofessional services of investment management organizations to fulfill thosetasks. The investment management organizations have investment discretion overthe assets placed under their management. The Company provides each investmentmanager with specific investment guidelines relevant to its asset class. Thetable below represents all of the Company’s funded pension plans’ and postretirement benefit plans’ weighted-averageasset allocation at March 31, 2007 and 2006 by asset category:
|                                                          | ** ** | **Asset Allocation** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|
| **Asset Category**                                  | ** ** | ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Equity securities                                        |       |                      | **59**     | **%** |   |   | 63 | % |   |
| Debt securities                                          |       |                      | **23**     | **%** |   |   | 29 | % |   |
| Other, primarily cash,  cash equivalents and real estate |       |                      | **18**     | **%** |   |   | 8 | % |   |
| Total                                                    |       |                      | **100**    | **%** |   |   | 100 | % |   |
|                                                          |            |                           |            |  |  |  |  |  |  |  |  |

 

The tablebelow presents the target allocation ranges for each major asset category forthe Company’s benefit plans for fiscal 2008.

| **Asset Category**                     | ** ** | ** ** | ** **   | **Target Asset  Allocation Range** | ** ** |
|---------------------------------------------|------------|------------|--------------|----------------------------------------------|------------|
| Equity securities                           |       |       | 30%–85% |                                         |       |
| Debt securities                             |       |       | 10%–60% |                                         |       |
| Real estate                                 |       |       | 0%–14%  |                                         |       |
| Other, primarily cash and  cash equivalents |       |       | 0%–25%  |                                         |       |

 

For fiscal 2008, the Companyexpects to contribute $15.9 million and $1.6 million to its pensionplans and postretirement plans, respectively.

109

----

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

The followingtable presents expected pension and post-retirement benefit payments
|                      | ** ** | **Pension  Benefits** | ** ** | **Postretirement  Payments** | ** ** | **Supplemental  Retirement  Plan  Payments** | ** ** |
|----------------------|------------|-----------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| **Fiscal Year**      | ** ** | ** **            | ** ** | **(in thousands)**      | ** ** |
| 2008                 |       | $                     | 10,966     |                         |       | $                                            | 1,627      |   |   |   | $ | 725 |   |   |
| 2009                 |       | $                     | 11,182     |                         |       | $                                            | 1,676      |   |   |   | $ | 745 |   |   |
| 2010                 |       | $                     | 12,134     |                         |       | $                                            | 1,756      |   |   |   | $ | 798 |   |   |
| 2011                 |       | $                     | 12,685     |                         |       | $                                            | 1,820      |   |   |   | $ | 763 |   |   |
| 2012                 |       | $                     | 13,442     |                         |       | $                                            | 1,929      |   |   |   | $ | 894 |   |   |
| Years 2013–2017 |       | $                     | 78,097     |                         |       | $                                            | 10,777     |   |   |   | $ | 8,463 |   |   |
|                      |            |                       |            |                              |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

**DefinedContribution Plans**   The Company maintains definedcontribution plans covering substantially all domestic full-time eligibleemployees. The Company’s contributions to these plans for fiscal 2007, 2006 and2005 amounted to $22.1 million, $16.8 million and $13.8 million,respectively.

**13.** Commitmentsand Contingencies

At March 31, 2007, the Company was party tovarious noncancellable operating leases that expire at various dates through2021 (principally for administration, engineering and production facilities)with minimum rental payments as follows:
| **Fiscal Year** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|-----------------|------------|------------|------------|-------------------------|------------|
| 2008            |       |       | $          | 33,492                  |       |   |
| 2009            |       |       | 26,818     |                    |       |
| 2010            |       |       | 23,149     |                    |       |
| 2011            |       |       | 16,661     |                    |       |
| 2012            |       |       | 12,925     |                    |       |
| Thereafter      |       |       | 22,182     |                    |       |
| Total           |       |       | $          | 135,227                 |       |   |

 

It is not certain as to whetherthe Company will negotiate new leases as existing leases expire. Determinationswill be made as existing leases approach expiration and will be based on anassessment of the Company’s capacity requirements at that time.

Rent expense was $31.5 million,$25.9 million and $26.3 million in fiscal 2007, 2006 and 2005,respectively.

As of March 31, 2007, $46.8 millionwas contingently payable under letters of credit and bank guarantees (seeNote 8).

In connection with variouspurchase business combinations, the Company may pay up to an aggregate of $11.0 millionin contingent purchase price earn-outs in fiscal 2007 and $9.5 millionwithin the following two fiscal years. Earn-outs are recorded as additionalgoodwill when the contingencies for such payments have been met.

The Company is subject to purchaseobligations for goods and services. The purchase obligations include amountsunder legally enforceable agreements for goods and services with defined termsas to quantity, price and timing of delivery and excludes purchase orders forproducts and services under firm government contracts for which the Company hasfull recourse under normal contract termination clauses. As of March 31,2007, the Company had purchase obligations of $94.5 million and expects tosatisfy $71.6 million in fiscal 2008 and $22.9 million within fiscal2009, 2010 and 2011.

110

----

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

Various legal actions, claims,assessments and other contingencies, including certain matters described below,are pending against the Company and certain of its subsidiaries. These mattersare subject to many uncertainties, and it is possible that some of thesematters could be ultimately decided, resolved or settled adversely. The Companyhas recorded accruals totaling $3.0 million and $4.5 million at March 31, 2007 andMarch 31, 2006, respectively, for losses related to those matters that itconsiders to be probable and that can be reasonably estimated (certain legaland environmental matters are discussed in detail below). Based on theCompany’s ongoing analysis of various factual, legal and equitableconsiderations, it has also recorded as of March 31, 2007 an accrual of $12.5 million,$11.8 million was originally charged against goodwill, reflecting theprobable income tax impact of information uncovered in our ongoing internalinvestigation of historical ESSI stock option practices. Although, at March 31,2007, the precise amount of liability that may result from those matters forwhich the Company has recorded accruals is not ascertainable, the Companybelieves that any amounts exceeding the Company’s recorded accruals should notmaterially affect the Company’s financial condition or liquidity. It ispossible, however, that the ultimate resolution of those matters could resultin a material adverse effect on the Company’s results of operations and/or cashflows from operating activities for a particular reporting period.

Some environmental laws, such asthe Comprehensive Environmental Response, Compensation and Liability Act of1980 (also known as CERCLA or the Superfund law) and similar state statutes,can impose liability for the entire cost of the clean up of contaminated sitesupon any of the current or former site owners or operators (or upon parties whosend waste to these sites), regardless of the lawfulness of the originalactivities that led to the contamination. In July 2000, prior to itsacquisition by Integrated Defense Technologies Inc. (IDT), and prior to DRS’sacquisition of IDT, Tech-Sym Corporation received a Section 104(e) Request forInformation from the National Park Service (NPS), pursuant to CERCLA, regardinga site known as the Orphan Mine site in the Grand Canyon National Park,Arizona, which is the subject of an NPS investigation regarding the presence ofresidual radioactive materials and contamination. A corporation of whichTech-Sym is an alleged successor operated this uranium mine from 1956 to 1967.In 1962, the land was sold to the U.S. government and the alleged predecessorof Tech Sym was given a 25-year mining lease. In 1967, the mining rights weretransferred to a third party by a trustee in bankruptcy, and the Companybelieves that the mine was operated by such third party until approximately1969. The Company understands that there are other companies in the chain oftitle to the mining rights subsequent to Tech-Sym’s alleged predecessor, and,accordingly, that there are other potentially responsible parties (PRPs) forthe 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. OnFebruary 6, 2005, the NPS sent the Company an Engineering Evaluation/CostAnalysis Work Plan (the NPS EE/CA) under CERCLA (CERCLA Letter) with regards toOperable Unit 1 of the Orphan Mine site. In the Company’s view, the NPS EE/CAincluded additional clean up not covered by CERCLA. The CERCLA Letter alsorequested (a) payment of $0.5 million for costs incurred by the NPS related tothe Orphan Mine, and (b) a ‘‘good faith offer’’ to conduct the responseactivity outlined by the NPS and to reimburse the NPS for future costs. The NPSadvised that a similar letter had been sent to another PRP. The Companyinitiated discussions with the other PRP and with NPS, and engaged a technicalconsultant to evaluate the existing documentation and the site in depth. As aresult, on September 29, 2005, the technical consultant submitted to the NPS,on behalf of the Company and the other PRP, an alternative EngineeringEvaluation/Cost Analysis Work Plan (alternative EE/CA) with regards to OperableUnits 1 and 2 of the Orphan Mine site.

111

----

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

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 also havediscussed 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 the Company’sacquisition of ESSI in January 2006, the Company has been made aware of certainlegal actions, claims, assessments and other contingencies, including thosedescribed below.

In December 2004, ESSI wasnotified by the Enforcement Division of the SEC of the issuance of a formalorder 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 brokerage firmin which an ESSI director was a principal at the time of the transactions. InFebruary 2007, the SEC filed a civil injunctive action in the United StatesDistrict Court for the Eastern District of Missouri, Eastern Division, againsta former director, officer and consultant of ESSI, alleging that he hadviolated the federal securities laws by “tipping” his financial advisor and closefriend by sharing material, nonpublic information regarding ESSI’s financialcondition shortly before certain 2003 earnings announcements.

On or about September 23, 2005,the SEC staff advised ESSI’s counsel that it had issued a subpoena directed to ESSIand expanded its investigation to include ESSI’s disclosure of a November 2004stop work order relating to ESSI’s Deployable Power Generation and DistributionSystems (DPGDS) program for the U.S. Air Force, and relating to trading in ESSIstock by certain individuals associated with ESSI.  In connection with the foregoing SECinvestigation, ESSI and certain of its directors and officers have providedinformation and/or testimony to the SEC.

In January 2006, ESSI was informedthat the Office of the U.S. Attorney for the Eastern District of Missouri wasinitiating an investigation into ESSI’s disclosure of the DPGDS stop-work orderand into trading in ESSI stock by ESSI insiders, which preceded suchdisclosure. The U.S. Attorney’s office advised ESSI that although it consideredESSI to be a subject of its investigation, ESSI was not a target. In connectionwith this investigation, the U.S. Attorney’s office issued ESSI a subpoenarequesting specified information, which ESSI has furnished.

In May 2006, the Company wasadvised 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 DRS. Asa part of its investigation, the SEC issued subpoenas to certain officers andemployees of ESSI to provide testimony and produce certain documents. 

In February 2007, the SEC filedcivil injunctive actions in the United States District Court for the Eastern Districtof Missouri, Eastern Division, against ESSI’s former Chief Financial Officerand former controller, in which each was alleged to have participated in abackdating scheme. The SEC reported that the former controller had settled thisaction by consenting to disgorgement, financial penalties, an officer anddirector bar and a permanent suspension from practicing 

112

----

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

before the SECas an accountant. In March 2007, ESSI’s former Chief Financial Officer wasindicted by the grand jury of the United States District Court for the EasternDistrict of Missouri on ten counts of fraud relating to the “backdating” of thetiming of stock options at ESSI prior to the time ESSI was acquired by DRS. Theindictment alleges that this former ESSI executive and others “backdated” stockoptions on at least eight occasions between 1996 and 2002. In February 2007,the SEC reported 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. InMarch 2007, the former controller pled guilty to a one-count information broughtby the office of the United States Attorney for the Eastern District ofMissouri, charging him with making false statements to the government. Inconnection with his plea, this former ESSI executive admitted that a number ofdocuments filed by ESSI with the SEC contained the materially false statementthat the option price of shares subject to the ESSI stock option plan was theclosing price of the stock on the date the options were awarded. 

Although ESSI continues to be asubject 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 committed to fullcooperation with regard to the foregoing investigations. The Company is unableto 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.

The Internal Revenue Service is inthe process of auditing ESSI’s federal tax returns for the tax periods endedOctober 31, 2004, October 31, 2005 and January 31, 2006. In connection withthese audits, ESSI expects that it will be required to amend previously filed Federaland state tax returns to reflect the disallowance of certain compensationdeductions taken during the periods under review. As noted above, the Companyhas recorded an accrual to reflect the anticipated disallowance.

In July 2006, DRS and one of theCompany’s subsidiaries, DRS Training & Control Systems, Inc. (TCS), eachwere issued a subpoena by the United States District Court for the NorthernDistrict of Florida (Florida District Court). The subpoenas were issued inconnection with an inquiry being conducted by the Antitrust Division of theU.S. Department of Justice (DOJ) and require TCS to produce certain documentsrelated to an investigation the Company believes involves allegations ofanticompetitive activity in certain international markets. In addition, certainemployees and officers of TCS were served with subpoenas to testify before thegrand jury of the Florida District Court with regard to this matter. The DOJ iscontinuing its investigation, but we have no information as to when the DOJwill conclude this process. The Company has cooperated with the DOJ inproducing documents in response to the subpoenas. The Company has commenced aninternal investigation regarding this matter, which the Company expects tocontinue through the conclusion of the DOJ’s investigatory process.

**14.** OperatingSegments

**As discussed inNote 1.A., on October 2, 2006, the Company implemented a new organizationaloperating structure, which realigned its three operating groups into fouroperating segments. The four operating segments are the Command, Control,Communications, Computers and Intelligence (C4I) Segment, the Reconnaissance,Surveillance & Target Acquisition (RSTA) Segment, the SustainmentSystems Segment and the Technical Services Segment. All other operations,primarily our Corporate Headquarters, are grouped in Other. Prior-year balancesand**

113

----

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

**resultsof operations for the C4I Group, SR Group and S3 Group have been reclassifiedto reflect this management reporting change.**

**In connectionwith the realignment, the Company recorded net severance-related charges of$4.0 million during fiscal 2007. During fiscal 2007, approximately $3.8 millionof the reserve was utilized, net of additions of $0.2 million. The Companyexpects to pay the remaining $0.4 million of severance in fiscal 2008.**

The C4I Segment is comprised ofthe following business areas: Command, Control & Communications, whichincludes naval display systems, ship communications systems, radar systems,technical support, electronic manufacturing and system integration services,secure voice and data communications, air combat training and electronicwarfare and ship network systems, Power Systems, which includes naval andindustrial power generation, conversion, propulsion, distribution and controlsystems; 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 develops andproduces electro-optical sighting, targeting and weapon sensor systems, andimage intensification (I2)night vision, combat identification and laser aimers/illuminator products, andprovides electronic manufacturing services.

The Sustainment Systems Segmentdesigns, engineers and manufactures integrated military electronics and othermilitary 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 Services Segmentprovides engineering services, logistics and training services, advancedtechnology services, security and asset protection systems and services, telecommunicationsystems, integration and information technology services, power generation andvehicle armor kits. The segment provides these services for military, intelligence,humanitarian, disaster recovery and emergency responder applications.

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

 

114

----

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

Transactionsbetween segments generally are negotiated and accounted for under terms andconditions that are similar to other government and commercial contracts;however, these intercompany transactions are eliminated in consolidation. Otheraccounting policies of the segments are consistent with those described in thesummary of significant accounting policies (see Note 1). The Companyevaluates segment-level performance based on revenues and operatingincome, as presented in the Consolidated Statements of Earnings. Operatingincome, as shown, includes amounts allocated from DRS Corporate operationsusing an allocation methodology prescribed by U.S. government regulations forgovernment contractors. The segment financial data excludes the assets and resultsof discontinued operations. Information about the Company’s operating segmentsfollows:
|                                   | ** ** | ** **              | ** **    | ** ** | ** ** | **Sustainment** | ** ** | **Technical** | ** **    | ** ** | ** ** | ** **  | ** ** |
|-----------------------------------|------------|-------------------------|---------------|------------|------------|-----------------|------------|---------------|---------------|------------|------------|-------------|------------|
| ** **                        | ** ** | **C4I**                 | ** **    | **RSTA**   | ** ** | **Systems**     | ** ** | **Services**  | ** **    | **Other**  | ** ** | **Total**   | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** **    |
| **Fiscal 2007:**                  | ** ** | ** **              | ** **    | ** ** | ** ** | ** **      | ** ** | ** **    | ** **    | ** ** | ** ** | ** **  | ** ** |
| **Total revenues**                | ** ** | **$**                   | **1,144,775** | ** ** | **$**      | **605,417**     | ** ** | **$**         | **448,113**   | ** ** | **$**      | **685,551** | ** ** | **$** | **—** | ** ** | **$** | **2,883,856** | ** ** |
| **Intersegment revenues**         | ** ** | **(5,313**              | **)**         | **(5,836** | **)**      | **(47,328**     | **)**      | **(4,266**    | **)**         | **—** | ** ** | **(62,743** | **)**      |
| **External revenues**             | ** ** | **$**                   | **1,139,462** | ** ** | **$**      | **599,581**     | ** ** | **$**         | **400,785**   | ** ** | **$**      | **681,285** | ** ** | **$** | **—** | ** ** | **$** | **2,821,113** | ** ** |
| **Operating income (loss)**       | ** ** | **$**                   | **130,046**   | ** ** | **$**      | **68,670**      | ** ** | **$**         | **59,319**    | ** ** | **$**      | **49,169**  | ** ** | **$** | **379** | ** ** | **$** | **307,583** | ** ** |
| **Total assets**                  | ** ** | **$**                   | **1,232,321** | ** ** | **$**      | **452,332**     | ** ** | **$**         | **1,299,714** | ** ** | **$**      | **997,595** | ** ** | **$** | **232,748** | ** ** | **$** | **4,214,710** | ** ** |
| **Depreciation and amortization** | ** ** | **$**                   | **25,100**    | ** ** | **$**      | **14,243**      | ** ** | **$**         | **18,393**    | ** ** | **$**      | **13,808**  | ** ** | **$** | **5,119** | ** ** | **$** | **76,663** | ** ** |
| **Capital expenditures**          | ** ** | **$**                   | **24,764**    | ** ** | **$**      | **14,113**      | ** ** | **$**         | **6,131**     | ** ** | **$**      | **3,747**   | ** ** | **$** | **7,152** | ** ** | **$** | **55,907** | ** ** |
| Fiscal 2006:                      |       |                    |          |       |       |            |       |          |          |       |       |        |       |
| Total revenues                    |       | $                       | 1,125,138     |       | $          | 448,656         |       | $             | 78,775        |       | $          | 99,030      |       | $ | — |   | $ | 1,751,599 |   |
| Intersegment revenues             |       | (2,037                  | )             | (4,252     | )          | (9,371          | )          | (407          | )             | —     |       | (16,067     | )          |
| External revenues                 |       | $                       | 1,123,101     |       | $          | 444,404         |       | $             | 69,404        |       | $          | 98,623      |       | $ | — |   | $ | 1,735,532 |   |
| Operating income (loss)           |       | $                       | 125,936       |       | $          | 54,510          |       | $             | 8,261         |       | $          | 6,833       |       | $ | (2,830 | ) | $ | 192,710 |   |
| Total assets                      |       | $                       | 1,192,823     |       | $          | 410,739         |       | $             | 1,281,229     |       | $          | 932,368     |       | $ | 201,960 |   | $ | 4,019,119 |   |
| Depreciation and amortization     |       | $                       | 25,827        |       | $          | 13,810          |       | $             | 2,939         |       | $          | 2,318       |       | $ | 4,091 |   | $ | 48,985 |   |
| Capital expenditures              |       | $                       | 18,821        |       | $          | 15,649          |       | $             | 932           |       | $          | 1,840       |       | $ | 5,952 |   | $ | 43,194 |   |
| Fiscal 2005:                      |       |                    |          |       |       |            |       |          |          |       |       |        |       |
| Total revenues                    |       | $                       | 976,038       |       | $          | 339,566         |       | $             | —        |       | $          | —      |       | $ | — |   | $ | 1,315,604 |   |
| Intersegment revenues             |       | (941                    | )             | (6,063     | )          | —          |       | —        |          | —     |       | (7,004      | )          |
| External revenues                 |       | $                       | 975,097       |       | $          | 333,503         |       | $             | —        |       | $          | —      |       | $ | — |   | $ | 1,308,600 |   |
| Operating income (loss)           |       | $                       | 96,603        |       | $          | 46,855          |       | $             | —        |       | $          | —      |       | $ | (326 | ) | $ | 143,132 |   |
| Total assets                      |       | $                       | 1,207,679     |       | $          | 323,083         |       | $             | —        |       | $          | —      |       | $ | 361,099 |   | $ | 1,891,861 |   |
| Depreciation and amortization     |       | $                       | 24,714        |       | $          | 13,149          |       | $             | —        |       | $          | —      |       | $ | 3,105 |   | $ | 40,968 |   |
| Capital expenditures              |       | $                       | 17,584        |       | $          | 11,581          |       | $             | —        |       | $          | —      |       | $ | 5,356 |   | $ | 34,521 |   |

 

115

----

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

Revenues bymajor product category is as follows:
|                                                             | ** ** | **Years Ended March 31,** | ** **    |
|-------------------------------------------------------------|------------|------------------------------------------|---------------|
| ** **                                                  | ** ** | **2007**                                 | ** **    | **2006** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                  | ** **    |
| Command,  Control & Communications                 |       | **$**                                    | **429,328**   |   | $ | 460,204 |   | $ | 415,895 |   |
| Power Systems                                               |       | **184,409**                              |          | 175,743 |   | 190,091 |   |
| Intelligence Technologies                                   |       | **209,088**                              |          | 206,025 |   | 172,384 |   |
| Tactical Systems                                            |       | **316,637**                              |          | 281,129 |   | 196,727 |   |
| Reconnaissance,  Surveillance & Target Acquisition |       | **599,581**                              |          | 444,404 |   | 333,503 |   |
| Sustainment Systems                                         |       | **400,785**                              |          | 69,404 |   | — |   |
| Technical Services                                          |       | **681,285**                              |          | 98,623 |   | — |   |
| **Total revenues**                                          |       | **$**                                    | **2,821,113** |   | $ | 1,735,532 |   | $ | 1,308,600 |   |

 

Revenues,total assets and long-lived assets by geographic location are presented in thetable below. Revenues are attributed to countries based on the physicallocation of the operating unit generating the revenues. Information about theCompany’s operations in these geographic locations for each of the three yearsended March 31, 2007 is as follows:
|                       | ** ** | **United States** | ** ** | **Canada**    | ** ** | **United Kingdom** | ** ** | **Total**  | ** ** |
|-----------------------|------------|------------------------|------------|---------------|------------|-------------------------|------------|------------|------------|
| **Fiscal 2007:**      | ** ** | ** **             | ** ** | ** **    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**          | ** ** | ** **             | **$**      | **2,735,502** | ** ** | ** **              | **$**      | **70,905** | ** ** | ** ** | **$** | **14,706** | ** ** | ** ** | **$** | **2,821,113** | ** ** |
| **Total assets**      | ** ** | ** **             | **$**      | **4,110,960** | ** ** | ** **              | **$**      | **71,797** | ** ** | ** ** | **$** | **31,953** | ** ** | ** ** | **$** | **4,214,710** | ** ** |
| **Long-lived assets** | ** ** | ** **             | **$**      | **2,997,359** | ** ** | ** **              | **$**      | **28,909** | ** ** | ** ** | **$** | **18,564** | ** ** | ** ** | **$** | **3,044,832** | ** ** |
| Fiscal 2006:          |       |                   |       |          |       |                    |       |       |       |   |   |   |   |
| Revenues              |       |                   | $          | 1,676,555     |       |                    | $          | 43,238     |       |   | $ | 15,739 |   |   | $ | 1,735,532 |   |
| Total  assets         |       |                   | $          | 3,929,678     |       |                    | $          | 59,730     |       |   | $ | 29,711 |   |   | $ | 4,019,119 |   |
| Long-lived  assets    |       |                   | $          | 3,019,849     |       |                    | $          | 22,696     |       |   | $ | 17,168 |   |   | $ | 3,059,713 |   |
| Fiscal 2005:          |       |                   |       |          |       |                    |       |       |       |   |   |   |   |
| Revenues              |       |                   | $          | 1,247,179     |       |                    | $          | 41,370     |       |   | $ | 20,051 |   |   | $ | 1,308,600 |   |
| Total  assets         |       |                   | $          | 1,813,849     |       |                    | $          | 49,577     |       |   | $ | 28,435 |   |   | $ | 1,891,861 |   |
| Long-lived assets     |       |                   | $          | 1,033,436     |       |                    | $          | 14,509     |       |   | $ | 10,757 |   |   | $ | 1,058,702 |   |

 

Export sales accounted forapproximately 8%, 10% and 14% of total revenues in the fiscal years ended March 31,2007, 2006 and 2005, respectively.

**15.** Guarantorand Non-Guarantor Financial Statements

As further discussed in Note 8, Debt, the Companyhas an aggregate of $350.0 million 65¤8% SeniorNotes, $550.0 million 67¤8%Senior Subordinated Notes, $250.0 million 75¤8% SeniorSubordinated Notes and $345.0 million 2.0% Convertible Senior Notesoutstanding (collectively, the Notes). The Notes are fully and unconditionallyguaranteed, jointly and severally, by the Company’s wholly-owned domesticsubsidiaries (the Guarantor Subsidiaries). The foreign subsidiaries and certaindomestic subsidiaries of DRS (the Non-Guarantor Subsidiaries) do not guaranteethe Notes.

The following condensedconsolidating financial information presents the Condensed ConsolidatingBalance Sheets as of March 31, 2007 and 2006, the related Condensed 

116

----

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

ConsolidatingStatements of Earnings and Condensed Consolidating Statements of Cash Flows forthe years ended March 31, 2007, 2006 and 2005 for:

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

b)              the GuarantorSubsidiaries,

c)                the Non-guarantorSubsidiaries, and

d)              DRS Technologies, Inc.on a consolidated basis.

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

The Guarantor and Non-guarantor subsidiaries arepresented on a combined basis. The principal elimination entries eliminateinvestments in subsidiaries and intercompany balances and transactions.Separate financial information for each of the Guarantor and Non-guarantorSubsidiaries are not presented because management believes such financialstatements would not be meaningful to investors.

117

----

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

**Condensed Consolidating Balance SheetsAs 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                                         |       | 2,107,049           |          | —                      |       |                              | 24,115      | ** **       |       | (2,131,164       | )          | — |   |
| **Total current assets**                                         |       | 2,208,395           |          | 1,124,802                   |       |                              | 136,618     | ** **       |       | (2,344,153       | )          | 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**                                                 | ** ** | **$**               | **3,588,055** | ** **                  | **$**      | **4,116,077**                     | ** **  | ** **       | **$**      | **197,095**      | ** ** | ** ** | **$** | **(3,686,517** | **)** | **$** | **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                   |       | 236,548             |          | 392,937                     |       |                              | 37,903      | ** **       |       | (199,444         | )          | 467,944 |   |
| Intercompany payables                                            |       | —              |          | 871,857                     |       |                              | 14,814      | ** **       |       | (886,671         | )          | — |   |
| **Total current liabilities**                                    |       | 250,320             |          | 1,518,778                   |       |                              | 87,549      | ** **       |       | (1,086,115       | )          | 770,532 |   |
| Long-term debt, excluding current installments                   |       | 1,771,953           |          | 3,242                       |       |                              | 7,851       | ** **       |       | —           |       | 1,783,046 |   |
| Other liabilities                                                |       | 63,332              |          | 239,653                     |       |                              | 19,723      | ** **       |       | (164,026         | )          | 158,682 |   |
| **Total liabilities**                                            | ** ** | **2,085,605**       | ** **    | **1,761,673**               | ** ** | ** **                        | **115,123** | ** **       | ** ** | **(1,250,141**   | **)**      | **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**                  | ** ** | **$**               | **3,588,055** | ** **                  | **$**      | **4,116,077**                     | ** **  | ** **       | **$**      | **197,095**      | ** ** | ** ** | **$** | **(3,686,517** | **)** | **$** | **4,214,710** | ** ** |

** **

118

----

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

**Condensed Consolidating Balance SheetsAs of March 31, 2006(in thousands)**

| ** **                                                       | ** ** | **Parent  Company** | ** **    | **Guarantor  Subsidiaries** | ** **     | **Non—  Guarantor  Subsidiaries** | ** **  | **Eliminations** | ** **  | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------------|---------------|-----------------------------|----------------|----------------------------------------|-------------|------------------|-------------|------------------|------------|
| **Assets**                                                       | ** ** | ** **          | ** **    | ** **                  | ** **     |                                   | ** **  | ** **       |        | ** **       | ** ** | ** ** | ** ** |
| **Current assets**                                               | ** ** | ** **          | ** **    | ** **                  | ** **     |                                   | ** **  | ** **       |        | ** **       | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                        |       | $                   | 15,905        |                        | $              | —                                 |        |             | $           | 4,908            | ** ** |   | $ | (19,520 | ) | $ | 1,293 |   |
| Accounts receivable, net                                         |       | 5                   |          | 401,958                     |           |                                   | 30,715      | ** **       |        | —           |       | 432,678 |   |
| Inventories, net                                                 |       | —              |          | 282,109                     |           |                                   | 49,109      | ** **       |        | (12              | )          | 331,206 |   |
| Prepaid expenses, deferred income taxes and other current assets |       | 10,525              |          | 123,684                     |           |                                   | 9,962       | ** **       |        | (8,558           | )          | 135,613 |   |
| Intercompany receivables                                         |       | 1,976,809           |          | —                      |           |                                   | 24,115      | ** **       |        | (2,000,924       | )          | — |   |
| **Total current assets**                                         |       | 2,003,244           |          | 807,751                     |           |                                   | 118,809     | ** **       |        | (2,029,014       | )          | 900,790 |   |
| Property, plant and equipment, net                               |       | 13,937              |          | 198,656                     |           |                                   | 7,913       | ** **       |        | —           |       | 220,506 |   |
| Acquired intangibles, net                                        |       | —              |          | 231,139                     |           |                                   | —      | ** **       |        | —           |       | 231,139 |   |
| Goodwill                                                         |       | 24,115              |          | 2,547,436                   |           |                                   | 36,517      | ** **       |        | —           |       | 2,608,068 |   |
| Deferred income taxes and  other noncurrent assets               |       | 54,234              |          | 7,443                       |           |                                   | 10,420      | ** **       |        | (13,481          | )          | 58,616 |   |
| Investment in  subsidiaries                                      |       | 1,140,066           |          | 46,635                      |           |                                   | —      | ** **       |        | (1,186,701       | )          | — |   |
| **Total assets**                                                 |       | $                   | 3,235,596     |                        | $              | 3,839,060                              |        |             | $           | 173,659          | ** ** |   | $ | (3,229,196 | ) | $ | 4,019,119 |   |
| **Liabilities and  Stockholders’ Equity**                   | ** ** | ** **          | ** **    | ** **                  | ** **     |                                   | ** **  | ** **       |        | ** **       | ** ** | ** ** | ** ** |
| **Current liabilities**                                          | ** ** | ** **          | ** **    | ** **                  | ** **     |                                   | ** **  | ** **       |        | ** **       | ** ** | ** ** | ** ** |
| Current installments of long-term debt                           |       | $                   | 2,750         |                        | $              | 194                                    |        |             | $           | 1,678            | ** ** |   | $ | — |   | $ | 4,622 |   |
| Accounts payable                                                 |       | 9,701               |          | 186,530                     |           |                                   | 28,442      | ** **       |        | —           |       | 224,673 |   |
| Accrued expenses and other current liabilities                   |       | 53,401              |          | 404,080                     |           |                                   | 22,151      | ** **       |        | (8,564           | )          | 471,068 |   |
| Intercompany payables                                            |       | —              |          | 1,689,575                   |           |                                   | 22,098      | ** **       |        | (1,711,673       | )          | — |   |
| **Total current liabilities**                                    |       | 65,852              |          | 2,280,379                   |           |                                   | 74,369      | ** **       |        | (1,720,237       | )          | 700,363 |   |
| Long-term debt, excluding current installments                   |       | 1,815,835           |          | 3,432                       |           |                                   | 9,504       | ** **       |        | —           |       | 1,828,771 |   |
| Other liabilities                                                |       | 2,329               |          | 127,026                     |           |                                   | 22,532      | ** **       |        | (13,482          | )          | 138,405 |   |
| **Total liabilities**                                            |       | **1,884,016**       | ** **    | **2,410,837**               | ** **     | ** **                             | **106,405** | ** **       | ** **  | **(1,733,719**   | **)**      | **2,667,539** | ** ** |
| **Total stockholders’ equity**                              |       | **1,351,580**       | ** **    | **1,428,223**               | ** **     | ** **                             | **67,254**  | ** **       | ** **  | **(1,495,477**   | **)**      | **1,351,580** | ** ** |
| **Total  liabilities and stockholders’ equity**             |       | **$**               | **3,235,596** | ** **                  | **$3,839,060** | ** **                             | ** **  | **$**            | **173,659** | ** **       | ** ** | **$(3,229,196** | **)** | **$** | **4,019,119** | ** ** |

 

 

119

----

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

**Condensed ConsolidatingStatements of EarningsYear Ended March 31, 2007(in thousands)**

| ** **                                                | ** ** | **Parent  Company** | ** **  | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------|-------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                              |       | $                   | —      |                        | $          | 2,596,026                         |       |             | $          | 244,454          |       |   |   | $ | (19,367 | ) |   | $ | 2,821,113 |   |
| Cost and expenses                                         |       | (500                | )           | 2,307,373                   |       |                              | 226,034    |             |       |             | (19,377    | ) |   | 2,513,530 |   |
| Operating income                                          |       | 500                 |        | 288,653                     |       |                              | 18,420     |             |       |             | 10         |   |   | 307,583 |   |
| Interest income                                           |       | 993                 |        | 117                         |       |                              | 163        |             |       |             | —     |   |   | 1,273 |   |
| Interest and related  expense                             |       | 119,046             |        | 265                         |       |                              | 601        |             |       |             | —     |   |   | 119,912 |   |
| Other income (expense),  net                              |       | 180                 |        | (1,030                      | )          |                              | 500        |             |       |             | —     |   |   | (350 | ) |
| Management fees                                           |       | 2,705               |        | (2,552                      | )          |                              | (153       | )                |       |             | —     |   |   | — |   |
| Royalties                                                 |       | 2,288               |        | (74                         | )          |                              | (2,214     | )                |       |             | —     |   |   | — |   |
| Intercompany interests                                    |       | 98,530              |        | (98,283                     | )          |                              | (247       | )                |       |             | —     |   |   | — |   |
| Earnings before non-controllinginterest  and income taxes |       | (13,850             | )           | 186,566                     |       |                              | 15,868     |             |       |             | 10         |   |   | 188,594 |   |
| Non-controlling interests                                 |       | —              |        |                        |       |                              | 1,430      |             |       |             | —     |   |   | 1,430 |   |
| Earnings before income taxes                              |       | (13,850             | )           | 186,566                     |       |                              | 14,438     |             |       |             | 10         |   |   | 187,164 |   |
| Income taxes                                              |       | (4,458              | )           | 59,911                      |       |                              | 4,641      |             |       |             | 10         |   |   | 60,104 |   |
| Earnings (losses) from  subsidiary entities               |       | 136,452             |        | —                      |       |                              | —     |             |       |             | (136,452   | ) |   | — |   |
| **Net  earnings**                                         |       | **$**               | **127,060** | ** **                  | **$**      | **126,655**                       | ** ** | ** **       | **$**      | **9,797**        | ** ** | ** ** | ** ** | **$** | **(136,452** | **)** | ** ** | **$** | **127,060** | ** ** |

 

120

----

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

**Condensed ConsolidatingStatements of Earnings Year Ended March 31, 2006  (in thousands)**

| ** **                                                  | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                                |       | $                   | —     |                        | $          | 1,528,458                         |       |             | $          | 230,826          |       |   |   | $ | (23,752 | ) |   | $ | 1,735,532 |   |
| Cost and expenses                                           |       | 2,794               |       | 1,347,349                   |       |                              | 216,418    |             |       |             | (23,739    | ) |   | 1,542,822 |   |
| Operating  income                                           |       | (2,794              | )          | 181,109                     |       |                              | 14,408     |             |       |             | (13        | ) |   | 192,710 |   |
| Interest income                                             |       | 6,801               |       | 80                          |       |                              | 372        |             |       |             | —     |   |   | 7,253 |   |
| Interest and related  expense                               |       | 63,996              |       | 184                         |       |                              | 6          |             |       |             | —     |   |   | 64,186 |   |
| Other income (expense),  net                                |       | 128                 |       | (782                        | )          |                              | (77        | )                |       |             | 4          |   |   | (727 | ) |
| Management fees                                             |       | 2,261               |       | (2,083                      | )          |                              | (178       | )                |       |             | —     |   |   | — |   |
| Royalties                                                   |       | 2,096               |       | (113                        | )          |                              | (1,983     | )                |       |             | —     |   |   | — |   |
| Intercompany interests                                      |       | 37,604              |       | (37,707                     | )          |                              | 99         |             |       |             | 4          |   |   | — |   |
| Earnings  before non-controlling interest  and income taxes |       | (17,900             | )          | 140,320                     |       |                              | 12,635     |             |       |             | (5         | ) |   | 135,050 |   |
| Non-controlling interests                                   |       | —              |       | —                      |       |                              | 1,562      |             |       |             | —     |   |   | 1,562 |   |
| Earnings before income taxes                                |       | (17,900             | )          | 140,320                     |       |                              | 11,073     |             |       |             | (5         | ) |   | 133,488 |   |
| Income taxes                                                |       | (6,969              | )          | 54,654                      |       |                              | 4,314      |             |       |             | (5         | ) |   | 51,994 |   |
| Earnings (losses) from  subsidiary entities                 |       | 92,425              |       | —                      |       |                              | —     |             |       |             | (92,425    | ) |   | — |   |
| **Net  earnings**                                           |       | **$**               | **81,494** | ** **                  | **$**      | **85,666**                        | ** ** | ** **       | **$**      | **6,759**        | ** ** | ** ** | ** ** | **$** | **(92,425** | **)** | ** ** | **$** | **81,494** | ** ** |

 

121

----

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

**Condensed ConsolidatingStatements of EarningsYear Ended March 31, 2005(in thousands)**

| ** **                                                                                 | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non—  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|----------------------------------------|------------|------------------|------------|------------------|------------|
| **Revenues**                                                                               |       | $                   | —     |                        | $          | 1,116,949                              |       |             | $          | 211,184          |       |   |   | $ | (19,533 | ) |   | $ | 1,308,600 |   |
| Cost and expenses                                                                          |       | 326                 |       | 983,589                     |       |                                   | 201,172    |             |       |             | (19,619    | ) |   | 1,165,468 |   |
| Operating income                                                                           |       | (326                | )          | 133,360                     |       |                                   | 10,012     |             |       |             | 86         |   |   | 143,132 |   |
| Interest income                                                                            |       | 2,246               |       | 97                          |       |                                   | 117        |             |       |             | —     |   |   | 2,460 |   |
| Interest and related  expense                                                              |       | 39,462              |       | 162                         |       |                                   | 126        |             |       |             | —     |   |   | 39,750 |   |
| Other income (expense),  net                                                               |       | 130                 |       | (161                        | )          |                                   | (641       | )                |       |             | (47        | ) |   | (719 | ) |
| Management fees                                                                            |       | 1,925               |       | (1,764                      | )          |                                   | (161       | )                |       |             | —     |   |   | — |   |
| Royalties                                                                                  |       | 1,890               |       | (185                        | )          |                                   | (1,705     | )                |       |             | —     |   |   | — |   |
| Intercompany interest                                                                      |       | 26,951              |       | (26,687                     | )          |                                   | (264       | )                |       |             | —     |   |   | — |   |
| Earnings from continuing operations before non—controlling interest  and income taxes |       | (6,646              | )          | 104,498                     |       |                                   | 7,232      |             |       |             | 39         |   |   | 105,123 |   |
| Non-controlling interest                                                                   |       | —              |       | —                      |       |                                   | 2,155      |             |       |             | —     |   |   | 2,155 |   |
| Earnings from continuing operations before income taxes                                    |       | (6,646              | )          | 104,498                     |       |                                   | 5,077      |             |       |             | 39         |   |   | 102,968 |   |
| Income taxes                                                                               |       | (2,917              | )          | 45,508                      |       |                                   | 2,212      |             |       |             | 39         |   |   | 44,842 |   |
| Earnings (losses) from  subsidiary entities                                                |       | 63,713              |       | —                      |       |                                   | —     |             |       |             | (63,713    | ) |   | — |   |
| Earnings (losses) from  continuing operations                                              |       | 59,984              |       | 58,990                      |       |                                   | 2,865      |             |       |             | (63,713    | ) |   | 58,126 |   |
| Earnings from discontinued  operations, net of tax                                         |       | 693                 |       | 1,858                       |       |                                   | —     |             |       |             | —     |   |   | 2,551 |   |
| **Net  earnings**                                                                          |       | **$**               | **60,677** | ** **                  | **$**      | **60,848**                             | ** ** | ** **       | **$**      | **2,865**        | ** ** | ** ** | ** ** | **$** | **(63,713** | **)** | ** ** | **$** | **60,677** | ** ** |

 

122

----

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

**CondensedConsolidating Statements of Cash FlowsYear Ended March 31, 2007(in thousands)**

| ** **                                                         | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Net cash provided by operating activities**                      |       | $                   | 145,533    |                        |       | $                                 | 20,822     |             |       |             | $          | 28,880 |   |   |   | $ | — |   |   |   | $ | 195,235 |   |   |
| **Cash flows from investing activities**                           |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                              |       | (7,492              | )          |                        | (44,528    | )                                 |       |             | (3,887     | )                |       |   | — |   |   |   | (55,907 | ) |   |
| Payments  pursuant to business combinations, net of cash acquired  |       | (5,169              | )          |                        | (11,568    | )                                 |       |             | —     |             |       |   | — |   |   |   | (16,737 | ) |   |
| Other,  net                                                        |       | 2,915               |       |                        | (189       | )                                 |       |             | —     |             |       |   | — |   |   |   | 2,726 |   |   |
| **Net cash used in investing activities**                          |       | (9,746              | )          |                        | (56,285    | )                                 |       |             | (3,887     | )                |       |   | — |   |   |   | (69,918 | ) |   |
| **Cash flows from financing activities**                           |       |                |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Net  repayments of short-term debt                                 |       | (40,000             | )          |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (40,000 | ) |   |
| Borrowings  of long-term debt                                      |       | —              |       |                        | —     |                              |       |             | 452        |             |       |   | — |   |   |   | 452 |   |   |
| Repayments  of long-term debt                                      |       | (2,750              | )          |                        | (239       | )                                 |       |             | (1,730     | )                |       |   | — |   |   |   | (4,719 | ) |   |
| Excess  tax benefit realized from share-based payment arrangements |       | 4,880               |       |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 4,880 |   |   |
| Dividends  paid                                                    |       | (4,962              | )          |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | (4,962 | ) |   |
| Proceeds  from exercise of stock options                           |       | 12,868              |       |                        | —     |                              |       |             | —     |             |       |   | — |   |   |   | 12,868 |   |   |
| Investments  from third party in joint venture                     |       | —              |       |                        | —     |                              |       |             | 480        |             |       |   | — |   |   |   | 480 |   |   |
| Net  (repayments to) borrowings from Parent company                |       | (28,933             | )          |                        | 35,702     |                              |       |             | (14,729    | )                |       |   | 7,960 |   |   |   | — |   |   |
| **Net cash (used in) provided by financing activities**            |       | (58,897             | )          |                        | 35,463     |                              |       |             | (15,527    | )                |       |   | 7,960 |   |   |   | (31,001 | ) |   |
| **Effects of exchange rates on cash and cash equivalents**         |       | **—**          | ** ** | ** **                  | **—** | ** **                        | ** ** | ** **       | **224**    | ** **       | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **224** | ** ** |   |
| **Net increase in cash and cash equivalents**                      |       | **76,890**          | ** ** | ** **                  | **—** | ** **                        | ** ** | ** **       | **9,690**  | ** **       | ** ** | ** ** | **7,960** | ** ** | ** ** | ** ** | **94,540** | ** ** |   |
| **Cash and cash equivalents, beginning of period**                 |       | **15,905**          | ** ** | ** **                  | **—** | ** **                        | ** ** | ** **       | **4,908**  | ** **       | ** ** | ** ** | **(19,520** | **)** | ** ** | ** ** | **1,293** | ** ** |   |
| **Cash  and cash equivalents, end of period**                      |       | **$**               | **92,795** | ** **                  | ** ** | **$**                             | **—** | ** **       | ** ** | ** **       | **$**      | **14,598** | ** ** | ** ** | ** ** | **$** | **(11,560** | **)** | ** ** | ** ** | **$** | **95,833** | ** ** |   |

 

123

----

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

**Condensed ConsolidatingStatements of Cash FlowsYear Ended March 31, 2006(in thousands)**

| ** **                                                        | ** ** | **Parent  Company** | ** ** | **Guarantor  Subsidiaries** | ** **  | **Non—  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|-------------|----------------------------------------|------------|------------------|-------------|------------------|------------|
| **Net  cash provided by operating activities**                    | ** ** | $              | 44,828     | ** **                  |        | $                                 | 106,167    | ** **       |        |             | $     | 6,067 | ** ** |   |   | $  | — | ** ** |   | $  | 157,062 | ** ** |
| **Cash flows  from investing activities**                         | ** ** | ** **          | ** ** |                        |        | ** **                             |       |             |        | ** **       |       |   |   | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                              |       | (5,953              | )          |                        | (34,142     | )                                      |       |             | (3,099      | )                |       |   | — | ** ** |   | (43,194 | ) |
| Payments pursuant to  business combinations, net of cash acquired |       | (1,425,696          | )          |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | (1,425,696 | ) |
| Other, net                                                        |       | 62                  |       |                        | 316         |                                   |       |             | 1,116       |             |       |   | — | ** ** |   | 1,494 |   |
| **Net  cash used in investing activities**                        |       | (1,431,587          | )          |                        | (33,826     | )                                      |       |             | (1,983      | )                |       |   | — | ** ** |   | (1,467,396 | ) |
| **Cash flows from financing activities**                          | ** ** | ** **          | ** ** |                        |        | ** **                             |       |             |        | ** **       |       |   |   | ** ** | ** ** | ** ** | ** ** |
| Net repayments of short-term  debt                                |       | (36,300             | )          |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | (36,300 | ) |
| Borrowings of long-term  debt                                     |       | 1,220,000           |       |                        | —      |                                   |       |             | 9,853       |             |       |   | — | ** ** |   | 1,229,853 |   |
| Return of advanced  interest on senior subordinated notes         |       | (1,986              | )          |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | (1,986 | ) |
| Debt issuance costs                                               |       | (28,372             | )          |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | (28,372 | ) |
| Repayments of long-term  debt                                     |       | (167,461            | )          |                        | (324        | )                                      |       |             | (23         | )                |       |   | — | ** ** |   | (167,808 | ) |
| Dividends paid                                                    |       | (3,705              | )          |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | (3,705 | ) |
| Proceeds from exercise of  stock options                          |       | 12,540              |       |                        | —      |                                   |       |             | —      |             |       |   | — | ** ** |   | 12,540 |   |
| Net borrowings from  (repayments to) Parent company               |       | **107,160**         | ** ** | ** **                  | **(72,017** | **)**                                  | ** ** | ** **       | **(23,895** | **)**            | ** ** | ** ** | **(11,248** | **)** | ** ** | **—** | ** ** |
| **Net  cash provided by (used in) financing activities**          | ** ** | **1,101,876**       | ** ** | ** **                  | **(72,341** | **)**                                  | ** ** | ** **       | **(14,065** | **)**            | ** ** | ** ** | **(11,248** | **)** | ** ** | **1,004,222** | ** ** |
| **Effects  of exchange rates on cash and cash equivalents**       | ** ** | **—**          | ** ** | ** **                  | **—**  | ** **                             | ** ** | ** **       | **553**     | ** **       | ** ** | ** ** | **—** | ** ** | ** ** | **553** | ** ** |
| **Net  (decrease) increase in cash  and cash equivalents**        | ** ** | **(284,883**        | **)**      | ** **                  | **—**  | ** **                             | ** ** | ** **       | **(9,428**  | **)**            | ** ** | ** ** | **(11,248** | **)** | ** ** | **(305,559** | **)** |
| **Cash  and cash equivalents, beginning of period**               |       | **300,788**         | ** ** | ** **                  | **—**  | ** **                             | ** ** | ** **       | **14,336**  | ** **       | ** ** | ** ** | **(8,272** | **)** | ** ** | **306,852** | ** ** |
| **Cash and cash equivalents, end of period**                      |       | **$**               | **15,905** | ** **                  | ** **  | **$**                                  | **—** | ** **       | ** **  | ** **       | **$**      | **4,908** | ** ** | ** ** | ** ** | **$** | **(19,520** | **)** | ** ** | **$** | **1,293** | ** ** |

 

124

----

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

**Condensed Consolidating Statements of Cash FlowsYear Ended March 31, 2005(in thousands)**

| ** **                                                                         | ** ** | **Parent  Company** | ** **  | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------|-------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| **Net cash provided by operating activities of  continuing operations**            | ** ** |                | $      | 32,032                      | ** ** |                              |        | $           | 89,936     | ** **       |       |   | $  | 14,215 | ** ** |   |   | $  | — | ** ** |   |   | $  | 136,183 | ** ** |   |
| **Net cash provided by operating activities of  discontinued operations**          | ** ** |                | —      | ** **                  |       |                              | 2,227       | ** **       |       |             | —     | ** ** |   |   | — | ** ** |   |   | 2,227 | ** ** |   |
| **Net cash provided by operating  activities**                                     | ** ** |                | 32,032      | ** **                  |       |                              | 92,163      | ** **       |       |             | 14,215     | ** ** |   |   | — | ** ** |   |   | 138,410 | ** ** |   |
| **Cash flows  from investing activities**                                          | ** ** |                |        | ** **                  |       |                              |        | ** **       |       |             |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Capital expenditures                                                               |       |                | (5,355      | )                           |       |                              | (27,412     | )                |       |             | (1,754     | ) |   |   | — | ** ** |   |   | (34,521 | ) |   |
| Payments pursuant to business combinations, net of  cash acquired                  |       |                | —      |                        |       |                              | (49,839     | )                |       |             | —     |   |   |   | — | ** ** |   |   | (49,839 | ) |   |
| Proceeds from sales of businesses                                                  |       |                | 29,096      |                        |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | 29,096 |   |   |
| Investments in short-term notes                                                    |       |                | (10,000     | )                           |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | (10,000 | ) |   |
| Proceeds from sales of short-term notes                                            |       |                | 10,000      |                        |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | 10,000 |   |   |
| Other, net                                                                         |       |                | 744         |                        |       |                              | 134         |             |       |             | 813        |   |   |   | — | ** ** |   |   | 1,691 |   |   |
| **Net cash provided by (used in) investing  activities of continuing operations**  | ** ** |                | 24,485      | ** **                  |       |                              | (77,117     | )                |       |             | (941       | ) |   |   | — | ** ** |   |   | (53,573 | ) |   |
| **Net cash used in investing activities of  discontinued operations**              | ** ** |                | —      | ** **                  |       |                              | (825        | )                |       |             | —     | ** ** |   |   | — | ** ** |   |   | (825 | ) |   |
| **Net cash provided by (used in) investing  activities**                           |       |                | 24,485      |                        |       |                              | (77,942     | )                |       |             | (941       | ) |   |   | — | ** ** |   |   | (54,398 | ) |   |
| **Cash flows  from financing activities**                                          | ** ** |                |        | ** **                  |       |                              |        | ** **       |       |             |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Net repayments of short-term debt                                                  |       |                | —      |                        |       |                              | —      |             |       |             | (82        | ) |   |   | — | ** ** |   |   | (82 | ) |   |
| Borrowings of long-term debt                                                       |       |                | 210,000     |                        |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | 210,000 |   |   |
| Receipt of advanced interest on senior subordinated  notes                         |       |                | 1,986       |                        |       |                              |        |             |       |             |       |   |   |   |   | ** ** |   |   | 1,986  |   |   |
| Debt issuance costs                                                                |       |                | (4,193      | )                           |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | (4,193 | ) |   |
| Repayment of long-term debt                                                        |       |                | (50,360     | )                           |       |                              | (547        | )                |       |             | —     |   |   |   | — | ** ** |   |   | (50,907 | ) |   |
| Proceeds from exercise of  stock options                                           |       |                | 8,097       |                        |       |                              | —      |             |       |             | —     |   |   |   | — | ** ** |   |   | 8,097 |   |   |
| Net borrowings from (repayments to) Parent Company                                 |       |                | 23,399      |                        |       |                              | (13,644     | )                |       |             | (7,113     | ) |   |   | (2,642 | **)** |   |   | — |   |   |
| **Net cash provided by (used in) financing  activities of  continuing operations** | ** ** |                | **188,929** | ** **                  | ** ** | ** **                        | **(14,191** | **)**            | ** ** | ** **       | **(7,195** | **)** | ** ** | ** ** | **(2,642** | **)** | ** ** | ** ** | **164,901** | ** ** |   |
| **Net cash used in financing  activities of discontinued operations**              | ** ** |                | **—**  | ** **                  | ** ** | ** **                        | **(30**     | **)**            | ** ** | ** **       | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **(30** | **)** |   |
| **Net cash provided by (used in) financing  activities**                           | ** ** |                | **188,929** | ** **                  | ** ** | ** **                        | **(14,221** | **)**            | ** ** | ** **       | **(7,195** | **)** | ** ** | ** ** | **(2,642** | **)** | ** ** | ** ** | **164,871** | ** ** |   |
| **Effects of exchange rates on cash and cash  equivalents**                        | ** ** |                | **—**  | ** **                  | ** ** | ** **                        | **—**  | ** **       | ** ** | ** **       | **1,179**  | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **1,179** | ** ** |   |
| **Net increase (decrease) in cash and  cash equivalents**                          | ** ** |                | **245,446** | ** **                  | ** ** | ** **                        | **—**  | ** **       | ** ** | ** **       | **7,258**  | ** ** | ** ** | ** ** | **(2,642** | **)** | ** ** | ** ** | **250,062** | ** ** |   |
| **Cash and cash equivalents, beginning  of period**                                |       |                | **55,342**  | ** **                  | ** ** | ** **                        | **—**  | ** **       | ** ** | ** **       | **7,078**  | ** ** | ** ** | ** ** | **(5,630** | **)** | ** ** | ** ** | **56,790** | ** ** |   |
| **Cash and  cash equivalents, end  of period**                                     |       |                | **$**       | **300,788**                 | ** ** | ** **                        | ** **  | **$**            | **—** | ** **       | ** ** | ** ** | **$** | **14,336** | ** ** | ** ** | ** ** | **$** | **(8,272** | **)** | ** ** | ** ** | **$** | **306,852** | ** ** |   |

 

125

----

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

**16.**   UnauditedQuarterly Financial Information

The followingtable sets forth unaudited quarterly financial information for fiscal 2007and 2006:

| ** **                                | ** ** | **First**                                                     | ** **  | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** **  |
|-------------------------------------------|------------|---------------------------------------------------------------|-------------|-------------|------------|-------------|------------|-------------|-------------|
| ** **                                | ** ** | **Quarter**                                                   | ** **  | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **  |
| ** **                                | ** ** | **(in thousands, except per-share data)** | ** **  |
| **Fiscal year ended March 31, 2007** | ** ** | ** **                                                    | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  |
| **Revenues**                              | ** ** | **$**                                                         | **630,265** | ** **  | **$**      | **711,538** | ** ** | **$**       | **680,361** | ** ** | **$** | **798,949** | ** ** |
| **Operating  income**                     | ** ** | **$**                                                         | **64,985**  | ** **  | **$**      | **71,888**  | ** ** | **$**       | **76,627**  | ** ** | **$** | **94,083** | ** ** |
| **Net  earnings**                         | ** ** | **$**                                                         | **21,258**  | ** **  | **$**      | **25,231**  | ** ** | **$**       | **35,094**  | ** ** | **$** | **45,477** | ** ** |
| **Basic earnings per share:**             | ** ** | ** **                                                    | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  |
| **Net  earnings**                         | ** ** | **$**                                                         | **0.54**    | ** **  | **$**      | **0.64**    | ** ** | **$**       | **0.88**    | ** ** | **$** | **1.13** | ** ** |
| **Diluted earnings per share:**           | ** ** | ** **                                                    | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  |
| **Net  earnings**                         | ** ** | **$**                                                         | **0.52**    | ** **  | **$**      | **0.62**    | ** ** | **$**       | **0.86**    | ** ** | **$** | **1.11** | ** ** |
| **Fiscal year ended March 31, 2006** | ** ** | ** **                                                    | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  |
| Revenues                                  |       | $                                                             | 338,459     |        | $          | 361,930     |       | $           | 389,490     |   | $ | 645,653 |   |
| Operating income                          |       | $                                                             | 35,058      |        | $          | 38,577      |       | $           | 44,827      |   | $ | 74,248 |   |
| Net earnings                              |       | $                                                             | 14,018      |        | $          | 18,954      |       | $           | 19,744      |   | $ | 28,778 |   |
| Basic earnings per share:                 |       |                                                          |        |        |       |        |       |        |        |
| Net earnings                              |       | $                                                             | 0.51        |        | $          | 0.68        |       | $           | 0.71        |   | $ | 0.81 |   |
| Diluted earnings per share:               |       |                                                          |        |        |       |        |       |        |        |
| Net earnings                              |       | $                                                             | 0.49        |        | $          | 0.66        |       | $           | 0.69        |   | $ | 0.79 |   |

 

**17.****  ****Related Party Transactions**

The Company currently leases a building in Oakland,New Jersey owned by LDR Realty Co., a partnership that was wholly owned, inequal amounts, by David E. Gross, DRS’s co-founder and former President andChief Technical Officer, and the late Leonard Newman, DRS’s co-founder and formerChairman of the Board, Chief Executive Officer and Secretary and the father ofMark S. Newman, DRS’s current Chairman of the Board, President and ChiefExecutive Officer. The lease agreement, with a monthly rental of$21.2 thousand, expired on April 30, 2007 and is being rented on amonth-to-month basis until June 1, 2007 when, under an amendment to thelease agreement, a three-year extended term will commence, with a monthlyrental of $21.8 thousand for the first year of the extended term.Following Leonard Newman’s death in November 1998, Mrs. Ruth Newman,the wife of Leonard Newman and the mother of Mark S. Newman, succeeded toLeonard Newman’s interest in LDR Realty Co.

Skadden, Arps, Slate, Meagher & Flom LLP, alaw firm to which a member of the Company’s Board is of counsel, provides legalservices to DRS. The Company paid $3.8 million, $2.3 million and $1.4 millionin fees to the firm during fiscal 2007, 2006 and 2005, respectively.

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

126

----

**DRS TECHNOLOGIES, INC. AND SUBSIDIARIESSchedule II—Valuation and Qualifying AccountsYears Ended March 31, 2007, 2006 and 2005**

| **Col. A**                                        | ** ** | **Col. B**         | ** ** | **Col. C  Additions(a)**                  | ** ** | **Col. D  Deductions(b)**                | ** ** | **Col. E**                                      | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | ** **              | ** ** | **(1)**                                        | ** ** | **(2)**                                       | ** ** | **(1)**                                              | ** ** | **(2)** | ** ** | ** ** | ** ** |
| **Description**                                        | ** ** | ** **              | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts—  Describe** | ** ** | **Credited to  Costs and  Expenses** | ** ** | **Credited to  Other  Accounts—  Describe** | ** ** | **Balance at  End of  Period** | ** ** |
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| **Inventory reserve**                                  | ** ** |                    | ** ** | ** **                                     |       |                                          | ** ** | ** **                                           |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Year ended March 31,  2007                        |       |                    | $          | 9,361                                          | ** ** |                                          |       | $3,508                                               | ** ** |   |   | $ | 150 | (c) |   |   | $1,435 |   |   |   | $ | 2,334 | (d) |   |   | $ | 9,250 | ** ** |   |
| Year ended March 31,  2006                        |       |                    | $          | 8,724                                          | ** ** |                                          |       | $                                                    | 3,437      | ** ** |   |   | $ | 1,197 | (c) |   |   | $ | 787 |   |   |   | $ | 3,210 | (d) |   |   | $ | 9,361 | ** ** |   |
| Year ended March 31,  2005                        |       |                    | $          | 7,060                                          | ** ** |                                          |       | $                                                    | 3,873      | ** ** |   |   | $ | 30 | (c) |   |   | $ | 1,098 |   |   |   | $ | 1,141 | (d) |   |   | $ | 8,724 | ** ** |   |
| **Allowance  for doubtful accounts**                   | ** ** |                    | ** ** | ** **                                     |       |                                          | ** ** | ** **                                           |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Year ended March 31,  2007                        |       |                    | $          | 1,668                                          | ** ** |                                          |       | $                                                    | 1,259      | ** ** |   |   | $ | 13 |   |   |   | $ | 682 |   |   |   | $ | 555 |   |   |   | $ | 1,703 | ** ** |   |
| Year ended March 31,  2006                        |       |                    | $          | 2,659                                          | ** ** |                                          |       | $                                                    | 964        | ** ** |   |   | $ | — |   |   |   | $ | 467 |   |   |   | $ | 1,488 | (d) |   |   | $ | 1,668 | ** ** |   |
| Year ended March 31,  2005                        |       |                    | $          | 3,890                                          | ** ** |                                          |       | $                                                    | 732        | ** ** |   |   | $ | 142 |   |   |   | $ | 1,314 |   |   |   | $ | 791 |   |   |   | $ | 2,659 | ** ** |   |
| **Other  current assets—note receivable reserve** | ** ** |                    | ** ** | ** **                                     |       |                                          | ** ** | ** **                                           |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Year ended March 31,  2007                        |       |                    | $          | 1,450                                          | ** ** |                                          |       | $                                                    | —     | ** ** |   |   | $ | — |   |   |   | $ | 1,330 | (f) |   |   | $ | 120 |   |   |   | $ | — | ** ** |   |
| Year ended March 31,  2006                        |       |                    | $          | 1,116                                          | ** ** |                                          |       | $                                                    | 750        | ** ** |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 416 | (e) |   |   | $ | 1,450 | ** ** |   |
| Year ended March 31, 2005                         |       |                    | $          | 816                                            | ** ** |                                          |       | $                                                    | 700        | ** ** |   |   | $ | — |   |   |   | $ | 400 |   |   |   | $ | — |   |   |   | $ | 1,116 | ** ** |   |
|                                                        |            |                         |            |                                                |            |                                               |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)            Represents, on a full-year basis, netcredits to reserve accounts.

(b)            Represents, on a full-year basis, netcharges to reserve accounts.

(c)              Represents amounts reclassified fromrelated reserve accounts.

(d)            Represents amounts utilized and creditedto related asset accounts.

(e)            Represents an uncollectible amount writtenoff.

(f)              Collection in full satisfaction of thenote, and a portion of the reserve was written off.

127

----

**Item 9.**     Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

**Item 9A.**        Controlsand Procedures

(a)           Disclosure Controls andProcedures. The Company’s management, with the participation of the Company’sChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this report. Based on such evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat, as of the end of such period, the Company’s disclosure controls andprocedures are effective in recording, processing, summarizing and reporting,on a timely basis, information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act.

(b)          Internal Control OverFinancial Reporting. There have not been any changes in the Company’s internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fourth quarter of thefiscal year ended March 31, 2007 that materially have affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

(c)            Section 404 ofthe Sarbanes-Oxley Act of 2002 requires that management document and testthe Company’s internal control over financial reporting and include in thisAnnual Report on Form 10-K a report on management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting.See “Management’s Report on Internal Control over Financial Reporting” below.The attestation report of our independent registered public accounting firm,KPMG LLP, on our management’s assessment of our internal control over financialreporting also is included below.

***Management’s Report onInternal Control over Financial Reporting.******  ***Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rule 13a-15(f) ofthe Exchange Act. Under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,we conducted an evaluation of the effectiveness of our internal control overfinancial reporting based upon the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on that evaluation, our management concluded that ourinternal control over financial reporting is effective, as of March 31,2007.

KPMG LLP, our independentregistered public accounting firm, has audited the consolidated financialstatements included in this Annual Report on Form 10-K and, as partof its audit, has issued its report, included herein, on (1) ourmanagement’s assessment of the effectiveness of our internal control over financialreporting and (2) the effectiveness of our internal control over financialreporting as of March 31, 2007.

128

----

**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors and StockholdersDRS Technologies, Inc.:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over Financial Reporting,that DRS Technologies, Inc. and subsidiaries maintained effective internalcontrol over financial reporting as of March 31, 2007, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). DRSTechnologies, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that DRSTechnologies, Inc. and subsidiaries maintained effective internal controlover financial reporting as of March 31, 2007, is fairly stated, in allmaterial respects, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Also, in our opinion, DRS Technologies, Inc. andsubsidiaries maintained, in all material respects, effective internal controlover financial reporting as of March 31, 2007, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

129

----

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of DRS Technologies, Inc. and subsidiaries asof March 31, 2007 and 2006, and the related consolidated statements ofearnings, stockholders’ equity and comprehensive earnings, and cash flows foreach of the years in the three-year period ended March 31, 2007, and ourreport dated May 29, 2007 expressed an unqualified opinion on thoseconsolidated financial statements.

/s/ KPMG LLP

Short Hills, New Jersey

May 29, 2007

**Item 9B.   OtherInformation**

None

130

----

**PART III**

Theinformation required by Items 10, 11, 12, 13 and 14 of Part III of thisReport, to the extent not set forth herein, is incorporated herein by referencefrom the registrant’s definitive proxy statement relating to the annual meetingof stockholders to be held in 2007, which definitive proxy statement shall befiled with the Securities and Exchange Commission within 120 days afterthe end of the fiscal year to which this report relates. Reference also is madeto the information under Executive Officers and Corporate Governance in Part Iof this report.

131

----

**PART IV**

**Item 15.**             Exhibitsand Financial Statement Schedules

| (a)    |   | The following are documents  filed as part of this report:   |                                                                                                                                                                                                              |   |
|--------|--------|--------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   | 1.                                                           | Financial Statements                                                                                                                                                                                              |   |   |
|   |   |                                                         | See Item 8. Financial Statements and Supplementary  Data                                                                                                                                                          |   | 61 |
|   |   | 2.                                                           | Financial Statement Schedules                                                                                                                                                                                     |   |   |
|   |   |                                                         | Schedule II—Valuation and Qualifying Accounts                                                                                                                                                           |   | 127 |
|   |   |                                                         | All other financial statement  schedules have been omitted because they are either not required, not  applicable or the required information is shown in the Consolidated Financial  Statements or Notes thereto. |   |   |
| (b)    |   | Exhibits                                                     |                                                                                                                                                                                                              |   |
|   |   | See Exhibits Index following the signature  page hereto |                                                                                                                                                                                                              | 134    |

 

132

----

**SIGNATURES**

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                          | **DRS TECHNOLOGIES, Inc.**          |
|--------------------------|------------------------------------------|
| Dated: May 29, 2007 |                                     |
|                     | /s/ MARK S. NEWMAN                       |
|                     | Mark S. Newman,*Chairman of the Board,*  |
|                     | *President  and Chief Executive Officer* |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

|                           | **Signature** | ** **                        | ** ** | ** **        | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|-----------------------------------|------------|-------------------|-----------|------------|------------|------------|----------|------------|
| /s/ MARK  S. NEWMAN       |          | Chairman of the Board,  President |       | May 29, 2007 |
| Mark S.  Newman           |          | and Chief Executive  Officer      |       |              |
| /s/ RICHARD A.  SCHNEIDER |          | Executive Vice President,         |       | May 29, 2007 |
| Richard A.  Schneider     |          | Chief Financial Officer           |       |              |
| /s/ IRA  ALBOM            |          | Director                          |       | May 29, 2007 |
| Ira Albom                 |          |                              |       |              |
| /s/ CHARLES G.  BOYD      |          | Director                          |       | May 29, 2007 |
| Charles G. Boyd           |          |                              |       |              |
| /s/ DONALD  C. FRASER     |          | Director                          |       | May 29, 2007 |
| Donald C.  Fraser         |          |                              |       |              |
| /s/ WILLIAM F.  HEITMANN  |          | Director                          |       | May 29, 2007 |
| William F.  Heitmann      |          |                              |       |              |
| /s/ STEVEN S.  HONIGMAN   |          | Director                          |       | May 29, 2007 |
| Steven S.  Honigman       |          |                              |       |              |
| /s/ C. SHELTON  JAMES     |          | Director                          |       | May 29, 2007 |
| C. Shelton  James         |          |                              |       |              |
| /s/ MARK  N. KAPLAN       |          | Director                          |       | May 29, 2007 |
| Mark N.  Kaplan           |          |                              |       |              |
| /s/ STUART  F. PLATT      |          | Director                          |       | May 29, 2007 |
| Stuart F.  Platt          |          |                              |       |              |
| /s/ DENNIS  J. REIMER     |          | Director                          |       | May 29, 2007 |
| Dennis J.  Reimer         |          |                              |       |              |
| /s/ ERIC  J. ROSEN        |          | Director                          |       | May 29, 2007 |
| Eric J.  Rosen            |          |                              |       |              |

 

133

----

**EXHIBIT INDEX**

Certain of thefollowing exhibits, designated with an asterisk (*) are filed herewith. Theexhibits not so designated have been filed previously by the Company with theSecurities and Exchange Commission and are incorporated herein by reference tothe documents indicated in brackets, following the descriptions of suchexhibits.

| Exhibit No. | ** ** | **Description** |
|------------------|------------|-----------------|
| 3.1              |       |            | Amended and Restated Certificate  of Incorporation of DRS Technologies, Inc. [Registration Statement on  Form S-1, File No. 33-64641, Post-Effective  Amendment No. 1 filed on May 10, 1996, Exhibit 3.4] |
| 3.2              |       |            | Certificate of Amendment of the  Amended and Restated Certificate of Incorporation of  DRS Technologies, Inc. [Form 8-K filed on  August 14, 1997, Exhibit 3.9] |
| 3.3              |       |            | Certificate of Amendment to the  Amended and Restated Certificate of Incorporation of  DRS Technologies, Inc. [Form 10-Q filed on  August 14, 2001, Exhibit 3.9] |
| 3.4              |       |            | Certificate of Amendment to the  Amended and Restated Certificate of Incorporation of  DRS Technologies, Inc. [Registration Statement on Form S-4,  File No. 333-112423 filed on February 2, 2004,  Exhibit 3.4] |
| 3.5              |       |            | Amended and Restated By-Laws  of the Company [Form 10-K filed on June 14, 2004,  Exhibit 3.5] |
| 3.6              |       |            | Certificate of Amendment to the  Amended and Restated Certificate of Incorporation of DRS  Technologies, Inc. [Form 10-K filed on June 9, 2006,  Exhibit 3.6] |
| 4.1              |       |            | Registration Rights Agreement,  dated as of September 22, 1995, between the Company and Forum Capital  Markets L.P., as initial purchaser [Registration Statement on Form S-2,  File No. 33-64641, filed on November 30, 1995,  Exhibit 4.3] |
| 4.2              |       |            | Registration Rights Agreement  dated as of October 30, 2003, by and among the Company, each of the  Guarantors (as defined therein), and Bear, Stearns & Co., Wachovia  Capital Markets, LLC and Fleet Securities, Inc., as initial  purchasers, relating to the Company’s 67¤8%  Senior Subordinated Notes due 2013 [Form 10-Q filed on  November 14, 2003, Exhibit 10.2] |
| 4.3              |       |            | Registration Rights Agreement,  dated as of December 23, 2004, by and among the Company, each of the  Guarantors (as defined therein), and Bear, Stearns & Co. Inc.,  Wachovia Capital Markets, LLC and Banc of America Securities, LLC, as initial  purchasers, relating to the Company’s 67¤8  Senior Subordinated Notes due 2013. [Form 10-K filed on  June 14, 2005, Exhibit 4.2] |
| 4.4              |       |            | Indenture, dated as of  October 30, 2003, among the Company, the Guarantors (as defined therein)  and The Bank of New York, as trustee, relating to the Company’s 67¤8%  Senior Subordinated Notes due 2013 [Form 10-Q filed on  November 14, 2003, Exhibit 4.1] |
| 4.5              |       |            | Form of Indenture, between  DRS Technologies, Inc. and The Bank of New York, as trustee, relating to  Senior Debt Securities [Registration Statement on Form S-3 ASR,  File No. 333-130926, filed on January 9, 2006,  Exhibit 4.1] |
| 4.6              |       |            | First Supplemental Indenture,  dated as of January 31, 2006, among DRS Technologies, Inc., the  Guarantors (as defined therein) and The Bank of New York, as trustee,  relating to $350,000,000 aggregate principal amount of 65¤8%  Senior Notes due 2016. [Form 8-K filed on February 6, 2006,  Exhibit 4.1] |

134

----

 

| 4.7   |   |   | Form of Indenture between  DRS Technologies, Inc. and The Bank of New York, as trustee, relating to  Subordinated Debt Securities [Registration Statement on Form S-3  ASR, File No. 333-130926, filed on January 9, 2006,  Exhibit 4.2]                                                                                 |
|-------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.8   |   |   | First Supplemental Indenture,  dated as of January 31, 2006, among DRS Technologies, Inc., the  Guarantors (as defined therein) and The Bank of New York, as trustee,  relating to $250,000,000 aggregate principal amount of 75¤8%  Senior Subordinated Notes due 2018. [Form 8-K filed  February 6, 2006, Exhibit 4.2] |
| 4.9   |   |   | Indenture, dated as of  January 31, 2006, among DRS Technologies, Inc., the Guarantors (as  defined therein) and The Bank of New York, as trustee, relating to  $300,000,000 aggregate principal amount of 2.00% Convertible Senior Notes due  2026. [Form 8-K filed February 6, 2006, Exhibit 4.3]                           |
| 4.10  |   |   | Registration Rights Agreement,  dated as of January 31, 2006, by and among DRS Technologies, Inc.  and the Initial Purchasers (as defined therein), relating to the $345,000,000  aggregate principal amount of 2.00% Convertible Senior Notes due 2026.  [Form 8-K filed February 6, 2006, Exhibit 4.4]                      |
| 10.1  |   |   | Amended and Restated 1996  Omnibus Plan [Registration Statement on Form S-4, File  No. 333-112423, filed on February 2, 2004, Exhibit 10.3]                                                                                                                                                                                        |
| 10.2  |   |   | Joint Venture Agreement, dated  as of November 3, 1993, by and between DRS Systems Management  Corporation and Laurel Technologies, Inc. [Form 10-Q, filed  on February 16, 1993, Exhibit 6(a)(3)]                                                                                                                       |
| 10.3  |   |   | Partnership Agreement dated  December 13, 1993, by and between DRS Systems Management  Corporation and Laurel Technologies, Inc. [Form 10-Q, filed  on February 16, 1993, Exhibit 6(a)(5)]                                                                                                                               |
| 10.4  |   |   | Waiver Letter dated as of  December 13, 1993, by and between DRS Systems Management  Corporation and Laurel Technologies, Inc. [Form 10-Q, filed  on February 16, 1993, Exhibit 6(a)(4)]                                                                                                                                 |
| 10.5  |   |   | Amendment to Partnership  Agreement of Laurel Technologies Partnership by and among Laurel  Technologies, Inc., now known as Sunburst Management Inc., and  DRS Systems Management Corporation, effective August 3, 1999.  [Form 10-K, filed on June 14, 2005, Exhibit 10.4]                                             |
| 10.6  |   |   | Employment, Non-Competition  and Termination Agreement, dated July 20, 1994, between  Diagnostic/Retrieval Systems, Inc. and David E. Gross [Form 10-Q,  filed on August 15, 1994, Exhibit 1]                                                                                                                            |
| 10.7  |   |   | Employment Agreement, dated as  of November 20, 1996, by and between the Company and Mark S. Newman  [Form 10-K filed on June 29, 1999, Exhibit 10.47]                                                                                                                                                                        |
| 10.8  |   |   | Amendment No. 1 to the  Employment Agreement between DRS Technologies, Inc. and Mark S.  Newman, dated August 18, 2004. [Form 10-Q filed on  November 11, 2004, Exhibit 10.1]                                                                                                                                       |
| 10.9  |   |   | Amended and Restated Employment  Agreement between DRS Technologies Inc. and Mark S. Newman, executed  June 10, 2005. [Form 10-K filed on June 14, 2005,  Exhibit 10.13]                                                                                                                                                           |
| 10.10 |   |   | Employment Agreement, dated as  of April 30, 1997, by and between the Company and Nina Laserson Dunn  [Form 10-K filed on June 29, 1999, Exhibit 10.48]                                                                                                                                                                            |
| 10.11 |   |   | Amendment No. 1 to the  Employment Agreement between DRS Technologies, Inc. and Nina Laserson  Dunn, dated August 18, 2004. [Form 10-Q filed on  November 9, 2004, Exhibit 10.3]                                                                                                                                         |

135

----

 

| 10.12                 |   |   | Employment Agreement, dated as  of February 19, 1999, by and between the Company and Richard A.  Schneider [Form 10-K filed on June 29, 1999,  Exhibit 10.49]                                                                                                                                                                                                                                                      |
|-----------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13                 |   |   | Amendment No. 1 to the  Employment Agreement between DRS Technologies, Inc. and Richard A.  Schneider, dated August 18, 2004. [Form 10-Q filed on  November 9, 2004, Exhibit 10.5]                                                                                                                                                                                                                       |
| 10.14                 |   |   | Amendment No. 2 to the  Employment Agreement between DRS Technologies, Inc. and Richard A.  Schneider, dated June 8, 2006. [Form 10-K filed on  June 9, 2006, Exhibit 10.14]                                                                                                                                                                                                                             |
| 10.15                 |   |   | Employment Agreement, dated as  of June 26, 2002, by and between the Company and Robert F. Mehmel  [Form 10-K filed on June 28, 2002, Exhibit 10.36]                                                                                                                                                                                                                                                          |
| 10.16                 |   |   | Amendment No. 1 to the  Employment Agreement between DRS Technologies, Inc. and Robert F. Mehmel,  dated August 18, 2004. [Form 10-Q filed on November 9,  2004, Exhibit 10.4]                                                                                                                                                                                                                      |
| 10.17                 |   |   | Agreement and Plan of Merger,  among DRS Technologies, Inc., Maxco, Inc. and Engineered Support  Systems, Inc., dated September 21, 2005 [Form 8-K filed  on September 23, 2005, Exhibit 2.1]                                                                                                                                                                                                       |
| 10.18                 |   |   | Third Amended and Restated  Credit Agreement, dated as of January 31, 2006, by and among DRS  Technologies, Inc., the lenders party to the agreement and the lenders  who may become party to the agreement, Wachovia Bank, National Association,  Bear Stearns Corporate Lending Inc., and Bank of America, N.A., BNP Paribas  and Calyon, New York Branch. [Form 8-K filed February 6,  2006, Exhibit 10.1] |
| 10.19                 |   |   | Modification Number 1 to  Amendment to Partnership Agreement of Laurel Technologies Partnership, dated  as of December 30, 2005, by and between Laurel Technologies, Inc.,  now known as Sunburst Management, Inc., and DRS Systems Management  Corporation [Form 10-K filed on June 9, 2006,  Exhibit 10.19]                                                                                            |
| 10.20                 |   |   | Amendment No. 2 to the DRS  Technologies, Inc. Amended and Restated 1996 Omnibus Plan Effective  July 6, 2005. [Form 10-K filed on June 9, 2006,  Exhibit 10.20]                                                                                                                                                                                                                                         |
| 10.21                 |   |   | Amendment to  DRS Technologies, Inc. Amended and Restated 1996 Omnibus Incentive  Plan [Form 10-K filed on June 14, 2004, Exhibit 10.18]                                                                                                                                                                                                                                                                      |
| 10.22                 |   |   | Amended and Restated DRS  Technologies, Inc. Supplemental Executive Retirement Plan, Effective  March 31, 2005. [Form 10-K filed on June 15, 2005,  Exhibit 10.27]                                                                                                                                                                                                                                            |
| 10.23                 |   |   | DRS Technologies, Inc. 2006  Omnibus Plan [Form 10-Q filed on August 9, 2006, Exhibit 10.1]                                                                                                                                                                                                                                                                                                                             |
| *10.24                |   |   | Amendment to DRS Technologies  Inc. 2006 Omnibus Plan effective April 5, 2007.                                                                                                                                                                                                                                                                                                                                                    |
| *21    |   |   | List of subsidiaries of the  Company, as of March 31, 2007                                                                                                                                                                                                                                                                                                                                                                        |
| *23.1                 |   |   | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *31.1                 |   |   | Certification of Chief Executive  Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of  the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                |
| *31.2                 |   |   | Certification of Chief Financial  Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of  the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                |
| *32.1                 |   |   | Certification of CEO Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         |
| *32.2                 |   |   | Certification of CFO Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         |

 

136

----