Edgar Filing: DRS TECHNOLOGIES INC

As filed pursuant to Rule 424(b)(1)
Registration No. 333-72912

PROSPECTUS

3,500,000 SHARES

[DRS TECHNOLOGIES LOGO]

COMMON STOCK
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We are offering 3,500,000 shares of our common stock.

Our common stock is traded on the American Stock Exchange under the symbol
"DRS." The last reported sale price of our common stock on the American Stock
Exchange on December 13, 2001 was $32.50 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT THE RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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PER SHARE TOTAL
--------- -----

Public offering price.................................... $32.00 $112,000,000
Underwriting discounts and commissions................... $ 1.76 $ 6,160,000
Proceeds, before expenses, to us......................... $30.24 $105,840,000

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We and the selling stockholders have granted the underwriters a 30-day
option to purchase from us and such selling stockholders up to an additional
525,000 shares of our common stock to cover any over-allotments.
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BEAR, STEARNS & CO. INC. WACHOVIA SECURITIES

The date of this Prospectus is December 14, 2001.

INSIDE FRONT COVER

Top: Picture of Aegis DDG-51 destroyer with smaller pictures on the bottom,
left and right side of the page of (with captions):

AN/UYQ-70 Embedded Processor System, Opus Console, Aegis Display System,
Flat Panel Display, Shipboard Integrated Communications System, AN/UYQ-70
Next Generation Peripheral OJ-721(V), Aegis Command and Decision Console,
AN/SPS-67(V)3 Surface Search Radar System, Acoustic Display Console,
Mission Essential Variant

Bottom: Picture of soldier with rifle with smaller pictures on the bottom of
the page of (with captions):

Nightengale Computer, Tempest Workstation, Explorer MP Portable
Workstation, RP8200 Portable Rugged Computer, Rugged Thin Client
Computer, LXI Computer, IBOX Rugged Computer

INSIDE FRONT COVER FOLD-OUT LEFT:

Top: Picture of M1114 HMMWV vehicle with smaller picture on the left side of
the page of (with caption):

Long-Range Advanced Scout Surveillance System (LRAS3)

Bottom: Picture of Bradley M2A3 tank with smaller pictures on the left and
right side of the page of (with captions):

Improved Bradley Acquisition System (IBAS), Cable and Harness Assembly,
Second Generation Thermal Imaging System (TIS), SADA II

INSIDE FRONT COVER FOLD-OUT RIGHT

Top: Picture of F/A-18 aircraft with smaller pictures on top of the page of
(with captions):

Deployable Flight Incident Recorder, WRR-812 Airborne Video Tape
Recorder, Airborne Digital Imaging System, AN/URT-43 Crash Position
Locator System, Digital Cassette Mission Recorder, 480 x 640 Focal Plane
Array

Bottom: Picture of Kiowa helicopter with smaller picture on the left side of
the page of (with caption):

Mast Mounted Sight

PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION MORE FULLY DESCRIBED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE
INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK IN THIS
OFFERING. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK
FACTORS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED IN THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON
STOCK. REFERENCES IN THIS PROSPECTUS TO "DRS," "WE," "OUR" AND "US" ARE TO DRS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES.

DRS TECHNOLOGIES, INC.

DRS is a leading supplier of defense electronics products and systems. We
provide high-technology products and services to all branches of the U.S.
military, major aerospace and defense prime contractors, government intelligence
agencies, international military forces and consumer markets. Incorporated in
1968, we have served the defense industry for over thirty years. We are a
leading provider of thermal imaging devices, combat display workstations,
electronic sensor systems, ruggedized computers, mission recorders and
deployable flight incident recorders. Our products are deployed on a wide range
of high profile military platforms such as the DDG-51 Aegis destroyer, the M1A2
Abrams Main Battle Tank, the M2A3 Bradley Fighting Vehicle, the AH-64 Apache
helicopter and the F/A-18 E/F Super Hornet jet fighter, as well as in other
military and non-military applications.

Over the past five years, we increased our annual revenues at a compounded
annual growth rate of approximately 33% and our operating income at a compounded
annual growth rate of approximately 34%. For the year ended March 31, 2001, we
had revenues of $427.6 million and operating income of $37.5 million.

On September 28, 2001, we acquired certain assets and assumed certain
liabilities of the Sensors and Electronic Systems business from The Boeing
Company for approximately $67.1 million. The Sensors and Electronic Systems
business is primarily engaged in the design and manufacture of surveillance and
targeting systems, cooled infrared sensor systems and uncooled infrared sensors.
We expect the acquisition of the Sensors and Electronic Systems business to
reinforce our status as a leading provider of thermal imaging devices and to
position us for further growth on certain high priority military platforms, such
as the U.S. Army's Kiowa helicopter and U.S. Navy aircraft carriers. In
addition, our acquisition of the Sensors and Electronic Systems business will
further diversify our product, customer and revenue bases and we believe the
acquisition will provide us with significant cost-reduction opportunities. For
the year ended March 31, 2001, on a pro forma basis to include our acquisition
of the Sensors and Electronic Systems business, our revenues and operating
income would have been $535.9 millon and $33.4 million, respectively.

We operate primarily in three groups: the Electronic Systems Group, the
Electro-Optical Systems Group and the Flight Safety and Communications Group.

ELECTRONIC SYSTEMS GROUP. We are a leader in the development, production
and support of high-performance combat display workstations used by the U.S.
Navy. In addition, we supply the military and intelligence communities with
signal processing systems and computer systems adapted, or "ruggedized," for
harsh environments. By incorporating advanced commercial computing technology,
we provide rapidly fielded and cost-effective system solutions to enhance the
military's ability to attain information dominance in land, sea and air
applications. Our systems are used by the U.S. Navy and other military and
intelligence communities and are deployed on a number of front-line platforms,
including the DDG-51 Aegis destroyer, aircraft carriers, submarines and
surveillance aircraft. Our family of rugged computer products is also used in
the U.S. Army's ongoing battlefield digitization program.

Our Electronic Systems Group provided $186.5 million, or 35%, of our total
revenues for the year ended March 31, 2001, on a pro forma basis to include our
acquisition of the Sensors and Electronic Systems business.

ELECTRO-OPTICAL SYSTEMS GROUP. We are a leading provider of sophisticated
thermal imaging and targeting systems. Our Electro-Optical Systems Group is one
of only two key suppliers to the U.S. government for advanced focal plane array
technology. We design, manufacture and market thermal imaging systems that allow
the operator to detect, identify and target objects based upon their infrared
signatures under adverse conditions such as darkness, fog, smoke and dust. These
systems are used in many of the U.S. Army's battlefield platforms, including the
M1A2 Abrams Main Battle Tank, the M2A3 Bradley Fighting Vehicle, the HMMWV scout
vehicle and the Javelin missile program.

In addition to military applications, we are leveraging our technology base
by expanding our products into related non-defense markets. For example, we
manufacture electro-optical modules for commercial devices used in corrective
laser eye surgery.

We are integrating the Sensors and Electronic Systems business into our
Electro-Optical Systems Group. On a pro forma basis to include this acquisition,
our Electro-Optical Systems Group provided $268.9 million, or 50%, of our total
revenues for the year ended March 31, 2001.

FLIGHT SAFETY AND COMMUNICATIONS GROUP. Our Flight Safety and
Communications Group supplies airborne deployable recorders and surveillance and
communications systems. We are the leading manufacturer of deployable flight
emergency, or "black box," voice and data recording equipment for the U.S. and
international militaries, as well as for commercial customers. The recorder
ejects automatically from an aircraft prior to impact, minimizing the damage to
the recorder and facilitating its recovery. We have provided over 4,000
deployable recorders for military and search and rescue aircraft. We also
manufacture integrated naval ship communications systems, information management
systems, coastal border surveillance radar systems, ultra high-speed digital
imaging systems and multiple-platform weapons calibration systems for diverse
air platforms such as the AH-64 Apache attack helicopter and the AC-130U
gunship. In addition, we provide electronics manufacturing services, often with
value-added engineering content, to the defense and space industries.

Our Flight Safety and Communications Group provided $70.9 million, or 13%,
of our total revenues for the year ended March 31, 2001, on a pro forma basis to
include our acquisition of the Sensors and Electronic Systems business.

INDUSTRY BACKGROUND

The U.S. military has worked to meet the changing threats that have evolved
since the mid-1980s with a focus on lighter, faster and more intelligent weapons
and an emphasis on intelligence, surveillance and reconnaissance. This change in
focus, the end of the Cold War, and the subsequent reduction in defense
spending, led to consolidation in the defense industry. Today, the industry is
dominated by a small number of large domestic prime contractors and a few large
European defense companies with an increasing presence in the U.S. markets.
These large prime contractors have shifted their business strategies to focus on
platforms and systems integration and consequently subcontract the development
of many systems and subsystems.

For the first time in almost a decade, the defense procurement budget has
increased. Due to the historical lack of procurement spending, increased funding
by the U.S. government is now necessary to develop new combat systems and
upgrade existing platforms with new technology. We believe that the current
business, political and global environments will create new opportunities for
mid-tier defense companies to develop strategic relationships with prime
contractors. Through these relationships, we believe we can provide new systems
and subsystems which are capable of meeting the military's evolving
requirements.

BUSINESS STRATEGY

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

- LEVERAGE INCUMBENT RELATIONSHIPS. We intend to leverage our relationships
with government and industry decision-makers by continuing to deliver high
levels of performance on our existing contracts.

- PURSUE STRATEGIC ACQUISITIONS. We plan to continue our active
participation in the ongoing consolidation of the aerospace and defense
industry. Through selective acquisitions, we aim to broaden our existing
product base and enhance our ability to enter new markets.

- CONTINUE TO REACT QUICKLY TO THE CHANGING DEFENSE ENVIRONMENT. In addition
to being well positioned for conventional warfare roles, we intend to
continue to adapt our products, such as thermal imaging, ruggedization and
communication products, to address evolving military requirements such as
rapid deployment and containment of non-conventional threats such as
terrorism.

COMPETITIVE STRENGTHS

Our competitive strengths include:

- TECHNICAL EXPERTISE. We have state-of-the art, government-qualified
electronics systems development and manufacturing capabilities.

- HIGH PROPORTION OF LONG-TERM PRODUCTION PROGRAMS. A significant proportion
of our revenue is generated by continuing, long-term production programs.

- SUCCESSFUL ACQUISITION TRACK RECORD. Having made 19 acquisitions since
1993, we have demonstrated that we can successfully integrate acquired
companies into our corporate structure.

- EMPHASIS ON RESEARCH AND DEVELOPMENT EFFORTS. In fiscal year 2001, we
spent approximately $41 million on research and development, of which our
customers funded approximately $33 million.

- EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over
20 years of experience in the defense electronics industry.

We are incorporated in Delaware and the address of our principal executive
office is 5 Sylvan Way, Parsippany, New Jersey 07054. Our telephone number is
(973) 898-1500. Our Internet address is www.drs.com. drs.com is an interactive
textual reference only, meaning that the information contained on the website is
not part of this prospectus and is not incorporated in this prospectus by
reference.

THE OFFERING

Common stock offered by DRS.................. 3,500,000 shares

Common stock to be outstanding after this
offering................................... 15,902,573 shares

Use of proceeds.............................. For repayment of approximately $24 million
under our revolving credit facility and for
general corporate purposes. See "Use of
Proceeds" for a description of the mandatory
offer to prepay the outstanding term loans
under our credit facility following this
offering.

American Stock Exchange Symbol............... DRS

Risk Factors................................. You should carefully read and consider the
information provided in the section entitled
"Risk Factors" and all other information in
this prospectus before investing in our
common stock.

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The above table is based on shares of our common stock outstanding as of
December 12, 2001. This table excludes:

- 60,000 shares of our common stock issuable under our 1991 Stock Option
Plan upon exercise of outstanding options at a weighted average exercise
price of $7.75 per share as of September 30, 2001;

- 2,204,363 shares of our common stock reserved for issuance under our 1996
Omnibus Plan, of which 1,487,850 shares are issuable upon exercise of
outstanding options at a weighted average exercise price of $10.22 per
share as of September 30, 2001. In addition, on November 16, 2001, we
granted 610,950 options to purchase shares of our common stock, at an
exercise price of $33.96 per share;

- up to 255,000 shares of our common stock issuable by us if the
underwriters exercise their over-allotment option;

- 581,313 shares of our common stock issuable upon exercise of warrants
outstanding at an exercise price of $10.00 per share as of September 30,
2001;

- 23,802 shares of our common stock reserved for issuance pursuant to
options assumed in connection with our 1999 merger with NAI
Technologies, Inc., all of which had vested as of September 30, 2001, at a
weighted average exercise price of $14.20 per share; and

- 250,000 shares of our common stock issuable to Mark S. Newman not pursuant
to any stock option plan, of which 125,000 options to purchase shares had
vested as of September 30, 2001, at a weighted average exercise price of
$10.44 per share.

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SUMMARY CONSOLIDATED FINANCIAL DATA

We derived the summary of earnings and per share data presented below for
the years ended March 31, 1999, 2000 and 2001 and the summary of financial
position data as of March 31, 2000 and 2001 presented below from our audited
consolidated financial statements included in this prospectus. The summary of
earnings, per share data and summary of financial position data as of and for
the six months ended September 30, 2001 and 2000 have been derived from our
unaudited consolidated financial statements which appears elsewhere in this
prospectus. You should read the summary consolidated financial data with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is included elsewhere in this prospectus. The summary
consolidated financial data also includes unaudited pro forma information for
our acquisition of the Sensors and Electronic Systems business as if it occurred
on April 1, 2000, which has been derived from, and should be read with the "Pro
Forma Financial Information" included elsewhere in this prospectus. As adjusted
results give effect to the net proceeds to be received by us from this offering,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us, and the use of such proceeds as described under
"Use of Proceeds."

YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1999 2000 2001 2001 2000 2001 2001
-------- -------- -------- --------- --------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)

SUMMARY OF EARNINGS DATA:
Revenues..................................... $265,849 $391,467 $427,606 $535,949 $201,748 $219,530 $273,087
Operating income............................. 15,301 26,178 37,531 33,423 15,658 20,387 16,846
Earnings from continuing operations before
income taxes and extraordinary item........ 5,780 12,832 24,954 16,388 8,461 15,813 10,043
Net earnings from continuing operations
before extraordinary item.................. 3,865 7,661 11,978 7,010 4,137 8,381 5,034
Net earnings................................. $ 680 $ 4,310 $ 11,978 $ 7,010 $ 4,137 $ 8,381 $ 5,034

PER SHARE DATA--FROM CONTINUING
OPERATIONS(1),(2)
Basic........................................ $ 0.58 $ 0.83 $ 1.14 $ 0.67 $ 0.43 $ 0.69 $ 0.42
Diluted...................................... $ 0.57 $ 0.76 $ 1.01 $ 0.61 $ 0.38 $ 0.64 $ 0.38

FINANCIAL RATIOS AND SUPPLEMENTAL INFORMATION:
EBIT(3)...................................... $ 15,137 $ 25,432 $ 36,415 $ 32,307 $ 15,105 $ 19,776 $ 16,236
EBITDA(4).................................... 26,738 42,502 52,540 N/A 23,558 25,738 N/A
Free cash flow(5)............................ 20,184 36,292 36,355 N/A 15,146 18,258 N/A
Cash flow from operating activities.......... 15,081 7,427 33,875 N/A 13,442 3,853 N/A
Capital expenditures......................... 6,554 6,210 16,185 N/A 8,412 7,480 N/A
Depreciation and amortization................ 11,601 17,070 16,245 N/A 8,544 5,962 N/A
Internal research and development............ 5,104 9,867 8,027 N/A 4,135 4,562 N/A
Interest and related expenses................ 9,357 12,600 11,461 15,919 6,644 3,963 6,193
Interest coverage ratio(6)................... 2.9x 3.4x 4.6x N/A 3.5x 6.5x N/A
Long-term debt to EBITDA..................... 4.0x 2.4x 1.6x N/A N/A N/A N/A
Net debt to EBITDA(7)........................ 3.7x 2.3x 1.5x N/A N/A N/A N/A

AS OF MARCH 31, AS OF SEPTEMBER 30, 2001
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2000 2001 ACTUAL AS ADJUSTED
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SUMMARY OF FINANCIAL POSITION DATA:
Working capital(8)........................................ $ 21,384 $ 43,686 $ 98,724 $179,564
Net property, plant and equipment......................... 29,006 37,639 51,531 51,531
Total assets.............................................. 320,098 334,940 419,341 500,181
Long-term debt(8)......................................... 103,394 82,293 161,220 140,220
Total stockholders' equity................................ 78,184 111,947 122,055 226,895

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(1) Earnings per share and financial ratios from continuing operations are
presented and calculated before extraordinary item in fiscal 1999.
(2) No cash dividends have been distributed in any of the years presented.
(3) Earnings from continuing operations before extraordinary items, interest and
related expenses, and income taxes.
(4) EBITDA represents earnings from continuing operations before extraordinary
items, interest and related expenses, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations and should not be considered as an alternative to net
earnings as an indicator of our operating performance or to cash flows as a
measure of liquidity. We believe that EBITDA is widely used by analysts,
investors and others in the defense industry. EBITDA is not necessarily
comparable with similarly titled measures used by other companies.
(5) EBITDA less capital expenditures.
(6) Ratio of EBITDA to interest and related expenses (primarily amortization of
debt issuance costs).
(7) Ratio of long-term debt net of cash balance to EBITDA.
(8) As described in "Use of Proceeds" we intend to utilize a portion of the
proceeds from the offering to pay down our revolving credit commitment under
our credit facility, which is approximately $24 million as of December 12,
2001.

RISK FACTORS

ANY INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER
WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE BUYING SHARES OF
OUR COMMON STOCK.

RISKS RELATED TO OUR BUSINESS

OUR REVENUES DEPEND ON OUR ABILITY TO MAINTAIN OUR LEVEL OF GOVERNMENT BUSINESS.

We derive a significant portion of our revenues from contracts or
subcontracts with domestic and non-U.S. government agencies. A reduction in the
purchase of our products by these agencies and principally by the U.S. Army and
U.S. Navy would have a material adverse effect on our business. In the fiscal
years ended March 31, 2001, 2000 and 1999, approximately 78%, 80% and 81%,
respectively, of our revenues were derived directly or indirectly from
defense-industry contracts with the U.S. government. In addition, in each of the
fiscal years ended March 31, 2001, 2000 and 1999 less than 13% of our revenues
were derived directly or indirectly from sales to non-U.S. governments.
Therefore, the development of our business in the future will depend upon the
continued willingness of the U.S. government to commit substantial resources to
defense programs and, in particular, upon continued purchase of our products,
and other products which incorporate our products, by the U.S. government.

The risk that governmental purchases of our products may decline stems from
the nature of our business with the U.S. government, in which the U.S.
government may:

- terminate contracts at its convenience;

- terminate, reduce or modify contracts or subcontracts if its requirements
or budgetary constraints change;

- cancel multi-year contracts and related orders if funds become
unavailable;

- shift its spending priorities; and

- adjust contract costs and fees on the basis of audits done by its
agencies.

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

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

- the difficulty in forecasting long-term costs and schedules and the
potential obsolescence of products related to long-term fixed price
contracts; and

- when we act as a subcontractor, the failure or inability of the primary
contractor to perform its prime contract, which may result in our
inability to obtain payment of our fees and contract costs.

OUR REVENUES WILL BE ADVERSELY AFFECTED IF WE FAIL TO RECEIVE RENEWAL OR
FOLLOW-ON CONTRACTS.

Renewal and follow-on contracts are important because our contracts are for
fixed terms. These terms vary from shorter than one year to over five years,
particularly for contracts with options. The typical term of our contracts with
the U.S. government is between one and three years. The loss of revenues from
our possible failure to obtain renewal or follow-on contracts may be significant
because our U.S. government contracts account for a substantial portion of our
revenues. For example, in the fiscal years ended 2001, 2000 and 1999, the
AN/UYQ-70 advanced display system program accounted for approximately 22%, 21%
and 28%, respectively, of our total revenues.

OUR OPERATING RESULTS MAY FLUCTUATE.

Our results of operations have fluctuated in the past and may continue to
fluctuate in the future as a result of a number of factors, many of which are
beyond our control. These factors include:

- the termination of a key government contract;

- the size and timing of new contract awards to replace completed or expired
contracts; and

- changes in U.S. Department of Defense policies and budgetary priorities.

WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY IF WE ARE UNABLE TO
IDENTIFY AND ACQUIRE SUITABLE ACQUISITION TARGETS.

Finding and consummating acquisitions is an important component of our
growth strategy. Our continued ability to grow by acquisition is dependent upon
the availability of acquisition candidates at reasonable prices and our ability
to obtain additional acquisition financing on acceptable terms. We experience
competition in making acquisitions from larger companies with significantly
greater resources. We are likely to use significant amounts of cash, issue
additional equity securities or incur debt in connection with future
acquisitions, each of which could have a material adverse effect on our
business.

WE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY OUR ACQUIRED COMPANIES.

Our growth through acquisition may place significant demands on our
management and our operational and financial resources. Acquisitions involve
numerous risks, including:

- difficulties in assimilating and integrating the operations, technologies
and products acquired;

- the diversion of our management's attention from other business concerns;

- current operating and financial systems and controls may be inadequate to
deal with our growth;

- the risks of entering markets in which we have limited or no prior
experience; and

- the potential loss of key employees.

Our failure to successfully integrate acquired businesses, especially the
Sensors and Electronic Systems business, and manage our growth could have a
material adverse effect on our business. Further, there can be no assurance that
we will be able to maintain or enhance the profitability of any acquired
business or consolidate its operations to achieve cost savings.

In addition, there may be liabilities that we fail or are unable to discover
in the course of performing due diligence investigations on each company or
business we have already acquired or may acquire in the future. Such liabilities
could include those arising from employee benefits contribution obligations of a
prior owner or non-compliance with applicable federal, state or local
environmental requirements by prior owners for which we, as a successor owner,
may be responsible. In addition, there may be additional costs relating to
acquisitions including, but not limited to, possible purchase price adjustments.
We cannot assure you that rights to indemnification by sellers of assets to us,
even if obtained, will be enforceable, collectible or sufficient in amount,
scope or duration to fully offset the possible liabilities associated with the
business or property acquired. Any such liabilities, individually or in the
aggregate, could have a material adverse effect on our business.

OUR SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT US.

We have indebtedness that is substantial in relation to our stockholders'
equity. As of March 31, 2001, 2000 and 1999, our debt to equity ratios were
0.74x, 1.55x and 1.59x, respectively. The debt to equity ratio at September 30,
2001 was 1.33x. Our high degree of leverage could:

- impair our future ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate purposes or
other purposes;

- hinder our ability to adjust rapidly to changing market conditions; and

- make us more vulnerable if a downturn in general economic conditions or
our business occurs.

In addition, a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our indebtedness. During
the fiscal year ended March 31, 2001, we used approximately $29.9 million, or
88%, of our cash flow from operations, for principal and interest payments on
our debt obligations, net of borrowings. This use of our cash flow reduces the
funds available for other purposes, which may adversely affect the continued
success of our business.

We have a $240 million credit agreement with First Union National Bank, as
administrative agent for our lenders, which also imposes significant operating
and financial restrictions on us. The restrictions affect, and often
significantly limit or prohibit, our ability to incur additional indebtedness
and pay dividends. The credit agreement also contains covenants limiting, among
other things, fundamental changes, such as a merger or sale of substantially all
of our assets.

FAILURE TO ANTICIPATE TECHNICAL PROBLEMS, ESTIMATE COSTS ACCURATELY OR CONTROL
COSTS DURING PERFORMANCE OF A FIXED-PRICE CONTRACT MAY REDUCE OUR PROFIT OR
CAUSE A LOSS.

We provide our services primarily through two types of contracts: firm
fixed-price and cost-type contracts. Approximately 94% of our total revenues for
the fiscal year ended March 31, 2001, were derived from firm fixed-price
contracts which require us to perform services under a contract at a stipulated
price. We derived approximately 6% of our revenues during that period from
cost-type contracts by which we are reimbursed for incurred costs and receive a
fee that, depending on the contract, is either dependent on cost savings and/or
performance or is a fixed fee which is negotiated but limited by statutes.

We assume greater financial risk on firm fixed-price contracts than on
cost-type contracts. Failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed-price contract will
reduce our profit or cause a loss. In particular, because of their inherent
uncertainties and consequent cost overruns, development contracts have
historically been less profitable than production contracts. Although we believe
that adequate provision for our costs of performance is reflected in our
financial statements, we can give no assurance that this provision is adequate
or that losses on fixed-price and cost-type contracts will not occur in the
future.

WE MAY EXPERIENCE PRODUCTION DELAYS IF SUPPLIERS FAIL TO DELIVER MATERIALS TO
US.

Our manufacturing process for certain products consists primarily of the
assembly of purchased components and testing of the product at various stages in
the assembly process.

Although we can obtain materials and purchase components generally from a
number of different suppliers, several suppliers are our sole source of certain
components. If a supplier should cease to deliver such components, we would
probably find other sources; however, this could result in added cost and
manufacturing delays. We have not experienced significant production delays
attributable to supply shortages, but we occasionally experience procurement
problems with respect to certain components, such as semiconductors and
connectors. In addition, with respect to our electro-optical

products, certain materials, such as germanium, zinc sulfide and cobalt, may not
always be readily available.

OUR BACKLOG IS SUBJECT TO REDUCTION AND CANCELLATION.

Backlog represents products or services that our customers have committed by
contract to purchase from us. Our backlog as of September 30, 2001 was
approximately $569.2 million, which consisted of $493.7 million from our
business before the acquisition of the Sensors and Electronic Systems business
and $75.5 million from the acquisition of the Sensors and Electronic Systems
business. Our backlog is subject to fluctuations and is not necessarily
indicative of future sales. Moreover, cancellations of purchase orders or
reductions of product quantities in existing contracts could substantially and
materially reduce our backlog and, consequently, future revenues. Our failure to
replace canceled or reduced backlog could result in lower revenues.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS OF LOSSES.

Approximately 12%, 12% and 8% of our revenues in the years ended March 31,
2001, 2000 and 1999, respectively, were derived from sales to foreign
governments. We are exploring the possibility of expansion into additional
international markets. We cannot assure you that we will maintain significant
operations internationally or that any such operations will be successful. Any
international operations we establish will be subject to risks similar to those
affecting our North American operations in addition to a number of other risks,
including lack of local business experience, foreign currency fluctuations,
difficulty in enforcing intellectual property rights, language and other
cultural barriers and political and economic instability.

WE FACE COMPETITION IN THE MILITARY ELECTRONICS INDUSTRY.

The military electronics industry in which we participate is highly
competitive and characterized by rapid technological change. Our potential
inability to improve existing product lines and develop new products and
technologies could have a material adverse effect on our business. In addition,
our competitors could introduce new products with greater capabilities which
could have a material adverse effect on our business.

There are many competitors in the markets in which we sell our products.
Many of these competitors are substantially larger than us, devote substantially
greater resources to research and development and generally have greater
resources. Consequently, these competitors may be better positioned to take
advantage of economies of scale and develop new technologies. Some of these
competitors are also our suppliers and customers.

In the military sector, we compete with many large and mid-tier defense
contractors on the basis of product performance, cost, overall value, delivery
and reputation. As U.S. defense spending has decreased in past years, the
industry experienced substantial consolidation, increasing the market share of
certain companies.

WE ARE DEPENDENT IN PART UPON OUR RELATIONSHIPS AND STRATEGIC ALLIANCES WITH
INDUSTRY PARTICIPANTS IN ORDER TO GENERATE REVENUE.

We rely on the strength of our relationships with military industry
organizations to form strategic alliances. Some of our strategic partners assist
us in the development of some of our products through teaming arrangements.
Under these teaming arrangements, our partners usually have borne a majority of
the expenses associated with our research and development of new products which
are the subject of such agreements. We cannot assure you that our strategic
partners will continue to bear these expenses in the future. If any of our
existing relationships with our strategic partners were impaired or terminated,
we could experience significant delays in the development of our new products
ourselves

and we would incur additional development costs. We would need to fund the
development of our new products internally or identify new strategic partners.

Some of our likely partners are also potential competitors, which may impair
the viability of new strategic relationships. While we must compete effectively
in the marketplace, our future alliances may depend on our strategic partners'
perception of us. As a result, our ability to win new and/or follow-on contracts
may be dependent upon our relationships within the military industry.

THE U.S. GOVERNMENT'S RIGHT TO USE TECHNOLOGY DEVELOPED BY US LIMITS OUR
INTELLECTUAL PROPERTY RIGHTS.

We seek to protect the competitive benefits we derive from our patents,
proprietary information and other intellectual property. However, we do not have
the right to prohibit the U.S. government from using certain technologies
developed by us or to prohibit third party companies, including our competitors,
from using those technologies in providing products and services to the U.S.
government. The government has the right to royalty-free use of technologies
that we have developed under government contracts. We are free to commercially
exploit those government-funded technologies and may assert our intellectual
property rights to seek to block other non-government users thereof, but we
cannot assure you we could successfully do so.

WE ARE SUBJECT TO GOVERNMENT REGULATION WHICH MAY REQUIRE US TO OBTAIN
ADDITIONAL LICENSES AND COULD LIMIT OUR ABILITY TO SELL OUR PRODUCTS OUTSIDE THE
UNITED STATES.

The sale of certain of our products outside the United States is subject to
compliance with the United States Export Administration Regulations. Our failure
to obtain the requisite licenses, meet registration standards or comply with
other government export regulations, may affect our ability to generate revenues
from the sale of our products outside the U.S., which could have a material
adverse effect on our business, financial condition and results of operations.
Compliance with the government regulations may also subject us to additional
fees and costs. The absence of comparable restrictions on competitors in other
countries may adversely affect our competitive position.

In order to sell our products in European Union countries, we must satisfy
certain technical requirements. If we were unable to comply with those
requirements with respect to a significant quantity of our products, our sales
in Europe could be restricted, which could have a material adverse effect on our
business.

WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS AND OUR ONGOING OPERATIONS
MAY EXPOSE US TO ENVIRONMENTAL LIABILITIES.

Our operations are subject to federal, state, foreign and local
environmental laws and regulations. As a result, we are involved from time to
time in administrative or legal proceedings relating to environmental matters.
We cannot assure you that the aggregate amount of future clean-up costs and
other environmental liabilities will not be material. We cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist. Enactment of more stringent
laws or regulations or more strict interpretation of existing laws and
regulations may require us to make additional expenditures, some of which could
be material.

A FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL COULD REDUCE OUR REVENUES
AND OUR OPERATIONAL EFFECTIVENESS.

There is a continuing demand for qualified technical personnel and we
believe that our future growth and success will depend upon our ability to
attract, train and retain such personnel. Competition for personnel in the
military industry is intense and there is a limited number of persons with
knowledge of, and experience in, this industry. Although we currently experience
relatively low

rates of turnover for our technical personnel, the rate of turnover may increase
in the future. An inability to attract or maintain a sufficient number of
technical personnel could have a material adverse effect on our contract
performance or on our ability to capitalize on market opportunities.

OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE.

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

RISKS RELATED TO THIS OFFERING

FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER THE STOCK
PRICE.

As of December 12, 2001, we had approximately 12,402,573 shares of our
common stock outstanding. We may, in the future, sell additional shares of
common stock in subsequent public offerings. We may also issue additional shares
of common stock to finance future acquisitions. Additionally, a substantial
number of shares of our common stock underlying outstanding options and warrants
will be available for future sale upon exercise of those instruments. Future
sales and issuances of shares of our common stock (including shares issued upon
the exercise of stock options and warrants or as acquisition financing) or the
perception that such sales could occur, may adversely affect prevailing market
prices for our common stock.

THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY AFTER THIS OFFERING.

A number of factors could cause the market price of our common stock to
fluctuate significantly after this offering, including:

- our quarterly operating results or those of other defense companies;

- the public's reaction to our press releases, announcements and our filings
with the Securities and Exchange Commission;

- changes in earnings estimates or recommendations by research analysts;

- changes in general conditions in the U.S. economy, financial markets or
defense industry;

- natural disasters, terrorist attacks or acts of war; and

- other developments affecting us or our competitors.

In recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to the operating
performance of these companies.

DELAWARE LAW AND OUR CHARTER DOCUMENTS MAY IMPEDE OR DISCOURAGE A TAKEOVER,
WHICH COULD CAUSE THE MARKET PRICE OF OUR SHARES TO DECLINE.

We are a Delaware corporation and the anti-takeover provisions of Delaware
law impose various impediments to the ability of a third party to acquire
control of us, even if a change in control would

be beneficial to our existing shareholders. Our certificate of incorporation and
by-laws provide for a classified board of directors serving staggered three-year
terms, restrictions on who may call a special meeting of stockholders and a
prohibition on stockholder action by written consent. All options issued under
our stock option plans automatically vest upon a change in our control. Our
incorporation under Delaware law, the ability of our board of directors to
create and issue a new series of preferred stock, the acceleration of the
vesting of the outstanding stock options that we have granted upon a change in
control of us, and certain provisions of our certificate of incorporation and
by-laws could impede a merger, takeover or other business combination involving
us or discourage a potential acquirer from making a tender offer for our common
stock, which, under certain circumstances, could reduce the market value of our
common stock.

WE HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING.

We will retain broad discretion to expend a significant portion of the net
proceeds of this offering. As described in "Use of Proceeds," the terms of our
credit facility require us to make an offer to prepay the $140 million aggregate
principal amount of the term loans outstanding under such facility with 50% of
the net cash proceeds of this offering. However, any term loan lender has the
right to refuse its PRO RATA share of any such mandatory prepayment. Therefore,
we cannot estimate at this time how much of the proceeds of this offering will
be applied to the prepayment of the term loans under our credit facility. Any
remaining proceeds from this offering will be used for general corporate
purposes, including potential acquisitions. Although we regularly evaluate
potential acquisitions, we have not entered into any agreements with respect to
any material transactions at this time. Our failure to use the funds effectively
could have a material adverse effect on our business, financial condition and
results of operations.

THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK.

Our common stock is currently listed on the American Stock Exchange. The
market for our common stock has historically been characterized by limited
trading volume and a limited number of holders. There can be no assurance that a
more active trading market for our common stock will develop or be sustained
after this offering.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This prospectus
contains these types of statements, which are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. We
make these statements directly in this prospectus and in the documents filed
with the Securities and Exchange Commission that are incorporated by reference
in this prospectus.

Words such as "anticipates," "estimates," "expects," "projects," "intends,"
"plans," "believes" and words or terms of similar substance used in connection
with any discussion of future operating results or financial performance
identify forward-looking statements. All forward-looking statements reflect our
management's present expectations of future events and are subject to a number
of important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. The factors
listed in the "Risk Factors" section of this prospectus, as well as any
cautionary language in this prospectus, provide examples of these risks and
uncertainties.

You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this prospectus or the date of
the document incorporated by reference, in this prospectus. We are under no
obligation, and expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise.

For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 3,500,000 shares of
common stock offered hereby will be approximately $104.8 million, or
approximately $112.6 million if the underwriters exercise their over-allotment
option in full, based upon the public offering price per share of $32.00 after
deducting the underwriting discounts and the estimated offering expenses payable
by us.

We expect to use the net proceeds from this offering to repay approximately
$24 million outstanding, as of December 12, 2001, under the revolving credit
commitment under our credit facility, and the balance for general corporate
purposes, including for future acquisitions, strategic alliances, joint
ventures, investments in property or assets used in our business or otherwise.
Although we regularly evaluate potential acquisitions, we have not entered into
any agreements with respect to any material transactions at this time.

The terms of our credit facility require us to offer to make prepayments on
our term loans outstanding with 50% of the aggregate net cash proceeds from any
equity offering. However, any term loan lender has the right to refuse its PRO
RATA share of any such mandatory prepayment offer. Therefore, we cannot estimate
at this time if any of the net proceeds of this offering will need to be applied
to the prepayment of the term loans under our credit facility. Where we discuss
in this prospectus our intended use of the net proceeds from this offering, we
have assumed that none of such net proceeds will be applied to repay the term
loans outstanding under our credit facility. In the event that all or any
portion of the mandatory prepayment offer is accepted by lenders, the actual
amount of revolving loans repaid by us may decrease.

On September 30, 2001, borrowings outstanding under our credit facility were
$161 million. We will begin making quarterly repayments against the outstanding
balance of our term loans on December 31, 2001, which include principal
installment payments of $350,000. Our quarterly payments increase to $32,900,000
for the last four quarterly payments, commencing on December 31, 2007. The term
loans are due to be paid in full on September 30, 2008. The interest rates on
our outstanding term loan and line of credit borrowings were approximately 5.9%
and 5.7%, respectively, at September 30, 2001. The proceeds of the credit
facility at the date of the acquisition of the Sensors and Electronic Systems
business of $161 million were used to acquire the Sensors and Electronic Systems
business and repay the balance of the debt outstanding under our previous credit
facility with Mellon Bank, N.A. in the amount of $88.5 million.

Pending the above uses, we intend to invest our net proceeds from this
offering in short-term, interest-bearing investment grade securities, including
taxable securities such as governmental securities, asset-backed securities,
corporate bonds and certificates of deposits and tax exempt securities such as
municipal bonds and notes.

DIVIDEND POLICY

We have not paid any cash dividends since 1976. We intend to retain future
earnings for use in our business and do not expect to declare cash dividends on
our common stock in the foreseeable future. Any future declaration of dividends
will be subject to the discretion of our board of directors. The terms of our
credit facility prohibit us from paying dividends in cash while the credit
facility is in effect unless we receive the prior consent of the lenders.

PRICE RANGE OF COMMON STOCK

Our common stock is quoted on the American Stock Exchange under the symbol
"DRS." The following table sets forth, for the periods indicated, the high and
low reported sale prices per share for our common stock as reported on the
American Stock Exchange, which prices are believed to represent actual
transactions.

HIGH LOW
-------- --------

YEAR ENDED MARCH 31, 2000:
First quarter............................................. $10.94 $ 6.88
Second quarter............................................ $10.63 $ 8.94
Third quarter............................................. $10.00 $ 6.88
Fourth quarter............................................ $10.38 $ 8.25
YEAR ENDED MARCH 31, 2001:
First quarter............................................. $12.25 $ 9.88
Second quarter............................................ $16.25 $10.25
Third quarter............................................. $16.50 $12.63
Fourth quarter............................................ $18.90 $12.25
YEAR ENDING MARCH 31, 2002:
First quarter............................................. $23.65 $14.50
Second quarter............................................ $40.00 $18.50
Third quarter through December 13, 2001................... $46.10 $29.80

On December 13, 2001, the last reported sale price of our common stock on
the American Stock Exchange was $32.50. The number of stockholders of record of
our common stock on December 12, 2001 was approximately 485.

CAPITALIZATION

The following table sets forth our consolidated capitalization and cash
position as of September 30, 2001 on an actual basis and on an as adjusted basis
to give effect to the sale of the 3,500,000 shares of common stock offered by us
in this offering at the public offering price of $32.00 per share and the
application of the estimated net proceeds as described under "Use of Proceeds,"
assuming our term loan lenders do not require us to make a mandatory prepayment
as described under "Use of Proceeds." The following table should be read in
conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
other financial information and accompanying notes appearing elsewhere in this
prospectus.

AS OF SEPTEMBER 30, 2001
------------------------
($ IN THOUSANDS)
ACTUAL AS ADJUSTED
---------- -----------

Cash and cash equivalents................................... $ 4,162 $ 85,002
======== ========
Short-term borrowings....................................... 1,312 1,312
-------- --------
Long-term obligations:
Revolving credit facility(1).............................. 21,000 0
Term loan................................................. 140,000 140,000
Other long-term obligations............................... 220 220
-------- --------
Total long-term obligations............................... 161,220 140,220
-------- --------
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,189,335 shares issued and outstanding,
actual; 15,689,335 shares issued and outstanding, as
adjusted................................................ 122 157
Additional paid-in capital................................ 73,695 178,500
Retained earnings......................................... 52,406 52,406
Less:
Accumulated other comprehensive losses.................. (3,960) (3,960)
Unamortized stock compensation.......................... (208) (208)
-------- --------
Total stockholders' equity.................................. 122,055 226,895
-------- --------
Total capitalization........................................ $284,587 $368,427
======== ========

--------------------------
(1) As described in "Use of Proceeds" we intend to utilize a portion of the
proceeds from the offering to pay down our revolving credit commitment under
our credit facility, which is approximately $24 million as of December 12,
2001.
--------------------------

The table set forth above is based on shares of our common stock outstanding
as of September 30, 2001. This table excludes:

- 60,000 shares of our common stock issuable under our 1991 Stock Option
Plan upon exercise of outstanding options at a weighted average exercise
price of $7.75 per share as of September 30, 2001;

- up to 255,000 shares of our common stock issuable by us if the
underwriters exercise their over-allotment option;

- 581,313 of shares of our common stock issuable upon exercise of warrants
outstanding at an exercise price of $10.00 per share as of September 30,
2001;

SELECTED CONSOLIDATED FINANCIAL DATA

We derived the summary of earnings and per share data presented below for
the years ended March 31, 1999, 2000 and 2001 and the summary of financial
position data as of March 31, 2000 and 2001 from our audited consolidated
financial statements included in the prospectus, which have been audited by KPMG
LLP, independent auditors, whose report thereon appears elsewhere in this
prospectus. We derived such data presented below as of March 31, 1997, 1998 and
1999, and for the years ended March 31, 1997 and 1998 from our audited
consolidated financial statements not included in this prospectus. We derived
such data as of and for the six month periods ended September 30, 2000 and 2001
from our unaudited consolidated financial statements included elsewhere in this
prospectus. You should read the selected consolidated financial data with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is included elsewhere in this prospectus.

SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2000 2001
-------- -------- -------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)

SUMMARY OF EARNINGS DATA:
Revenues...................................... $135,226 $180,750 $265,849 $391,467 $427,606 $201,748 $219,530
Operating income.............................. 11,551 14,419 15,301 26,178 37,531 15,658 20,387
Earnings from continuing operations before
income taxes and extraordinary item......... 8,256 9,706 5,780 12,832 24,954 8,461 15,813
Net earnings from continuing operations before
extraordinary item.......................... 5,047 6,634 3,865 7,661 11,978 4,137 8,381
Net earnings.................................. $ 5,663 $ 6,372 $ 680 $ 4,310 $ 11,978 $ 4,137 $ 8,381
PER SHARE DATA--FROM CONTINUING
OPERATIONS(1),(2):
Basic earnings per share...................... $ 0.91 $ 1.18 $ 0.58 $ 0.83 $ 1.14 $ 0.43 $ 0.69
Diluted earnings per share.................... $ 0.77 $ 0.96 $ 0.57 $ 0.76 $ 1.01 $ 0.38 $ 0.64
SUMMARY OF FINANCIAL POSITION DATA:
Working capital............................... $ 32,838 $ 42,126 $ 13,491 $ 21,384 $ 43,686 $ 24,346 $ 98,724
Net property, plant and equipment............. 17,944 20,783 32,124 29,006 37,639 34,028 51,531
Total assets.................................. 96,408 162,813 329,639 320,098 334,940 336,917 419,341
Long-term debt, excluding current
installments................................ 30,801 56,532 102,091 97,695 75,076 89,195 159,784
Total stockholders' equity.................... 32,987 44,335 73,442 78,184 111,947 93,257 122,055
FINANCIAL RATIOS AND SUPPLEMENTAL INFORMATION:
EBIT (3)...................................... $ 11,838 $ 14,804 $ 15,137 $ 25,432 $ 36,415 $ 15,105 $ 19,776
EBITDA (4).................................... 16,450 20,992 26,738 42,502 52,540 23,558 25,738
Free cash flow (5)............................ 11,347 14,733 20,184 36,292 36,355 15,146 18,258
Cash flows from operating activities.......... 1,438 (257) 15,081 7,427 33,875 13,442 3,853
Capital expenditures.......................... 5,103 6,259 6,554 6,210 16,185 8,412 7,480
Depreciation and amortization................. 4,612 6,188 11,601 17,070 16,245 8,544 5,962
Internal research and development............. 3,852 3,919 5,104 9,867 8,027 4,135 4,562
Net debt (6).................................. 24,555 54,352 97,904 99,616 79,969 87,193 157,058
Interest coverage ratio (7)................... 4.6x 4.1x 2.9x 3.4x 4.6x 3.5x 6.5x
Long-term debt to total capitalization........ 48.6% 56.4% 56.6% 51.9% 42.2% 46.0% 56.7%
Long-term debt to EBITDA...................... 2.0x 3.0x 4.0x 2.4x 1.6x N/A N/A
Net debt to EBITDA............................ 1.5x 2.6x 3.7x 2.3x 1.5x N/A N/A

------------------------------
(1) Earnings per share and financial ratios from continuing operations are
presented and calculated before extraordinary item in fiscal 1999.

(2) No cash dividends have been distributed in any of the years presented.

(3) Earnings from continuing operations before extraordinary items, interest and
related expenses, and income taxes.

(4) EBITDA represents earnings from continuing operations before extraordinary
items, interest and related expenses, income taxes, depreciation and
amortization. EBITDA is not the measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations and should not be considered as an alternative to net
earnings as an indicator of our operating performance or to cash flow as a
measure of liquidity. We believe that EBITDA is widely used by analysts,
investors and others in the defense industry. EBITDA is not necessarily
comparable with similarly titled measures used by other companies.

(5) EBITDA less capital expenditures.

(6) Long-term debt net of cash balance.

(7) Ratio of EBITDA to interest and related expenses (primarily amortization of
debt issuance costs).

PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated financial information set
forth below is presented to reflect the pro forma effects of our acquisition of
the Sensors and Electronic Systems business of The Boeing Company, completed on
September 28, 2001.

The unaudited pro forma condensed consolidated financial information is
based on, and should be read together with, our historical consolidated
financial statements as of and for the year ended March 31, 2001, and our
unaudited consolidated financial statements as of and for the six months ended
September 30, 2001, and the statement of assets to be acquired and liabilities
to be assumed of certain operations of the Sensors and Electronic Systems
business as of and for the year ended December 31, 2000, and its direct revenues
and direct operating expenses for the year then ended, and its unaudited
statements of direct revenues and direct operating expenses for the six months
ended June 30, 2001.

As the acquisition of the Sensors and Electronic Systems business was
completed on September 28, 2001, our consolidated balance sheet as of
September 30, 2001 includes the assets acquired and liabilities assumed of the
Sensors and Electronic Systems business. The unaudited pro forma condensed
combined statements of earnings for the year ended March 31, 2001 and for the
six months ended September 30, 2001 are prepared as if the acquisition had taken
place on April 1, 2000. For accounting purposes, the acquisition has been
accounted for as a purchase in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations."

The pro forma adjustments reflected in the pro forma condensed consolidated
financial information represent estimated values and amounts based on available
information and do not reflect any cost savings that we believe would have
resulted had the acquisition occurred on April 1, 2000. The allocation of the
purchase price to the assets acquired and the liabilities assumed has not yet
been completed. The actual adjustments that will result from the acquisition
will be based on a third-party valuation as well as internal assessments of the
assets acquired and liabilities assumed and may differ substantially from the
adjustments presented herein. The unaudited pro forma condensed combined
financial information is presented for illustrative purposes only and is not
necessarily indicative of the financial position or operating results that would
have been achieved had the acquisition been completed as of the dates indicated
above or of the results that may be attained in the future.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

FISCAL YEAR ENDED MARCH 31, 2001

(IN THOUSANDS, EXCEPT PER SHARE DATA)

HISTORICAL
------------------- PRO FORMA PRO FORMA
DRS SES (1) ADJUSTMENTS DRS
-------- -------- ----------- ---------

Revenues....................................... $427,606 $108,343 -- $535,949
Costs and expenses............................. 390,075 112,696 (245)(2),(4) 502,526
-------- -------- ------- --------
Operating income (loss)...................... 37,531 $ (4,353) 245 33,423
========
Other income, net.............................. (310) -- (310)
Interest and related expenses.................. 11,461 4,458 (3) 15,919
-------- ------- --------
Earnings before minority interests and income
taxes...................................... 26,380 (4,213) 17,814
Minority interest.............................. 1,426 -- 1,426
-------- ------- --------
Earnings before income taxes................. 24,954 (4,213) 16,388
Income taxes................................... 12,976 (3,598)(5) 9,378
-------- ------- --------
Net earnings................................. $ 11,978 $ (615) $ 7,010
======== ======= ========
Earnings per share of common stock:
Basic earnings per share..................... $ 1.14 $ .67
Diluted earnings per share................... $ 1.01 $ .61
Weighted average number of shares of common
stock outstanding:
Basic........................................ 10,485 10,485
Diluted...................................... 12,435 12,435

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

SIX MONTHS ENDED SEPTEMBER 30, 2001

(IN THOUSANDS, EXCEPT PER SHARE DATA)

HISTORICAL
------------------- PRO FORMA PRO FORMA
DRS SES (1) ADJUSTMENTS DRS
-------- -------- ----------- ---------

Revenues...................................... $219,530 $53,557 -- $273,087
Costs and expenses............................ 199,143 54,370 2,728 (2),(4) 256,241
-------- ------- ------- --------
Operating income (loss)..................... 20,387 $ (813) (2,728) 16,846
=======
Other income, net............................. (15) -- (15)
Interest and related expenses................. 3,963 2,230 (3) 6,193
-------- ------- --------
Earnings before minority interests and
income taxes.............................. 16,439 (4,957) 10,668
Minority interest............................. 626 -- 626
-------- ------- --------
Earnings before income taxes................ 15,813 (4,957) 10,043
Income taxes.................................. 7,432 (2,423)(5) 5,009
-------- ------- --------
Net earnings................................ $ 8,381 $(2,534) $ 5,034
======== ======= ========
Earnings per share of common stock
Basic earnings per share.................... $ 0.69 $ 0.42
Diluted earnings per share.................. $ 0.64 $ 0.38
Weighted average number of shares of common
stock outstanding
Basic....................................... 12,118 12,118
Diluted..................................... 13,107 13,107

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1. On September 28, 2001, we acquired certain assets and liabilities of the
Sensors and Electronic Systems business of The Boeing Company. We paid
approximately $67.1 million in cash, subject to adjustment, for the acquisition.
In addition to the purchase price, the estimated costs related to the
acquisition, including professional fees, is $4.0 million. We financed the
acquisition with borrowings under our credit facility (See Note 3 below).

The acquired portion of the Sensors and Electronic Systems business did not
operate as a stand-alone business within The Boeing Company. Because the Sensors
and Electronic Systems business did not operate on a stand-alone basis, the
historical financial statements may not be representative of the complete
results of operations of the Sensors and Electronic Systems business for the
periods presented.

The unaudited pro forma condensed combined financial information of DRS and
the Sensors and Electronic Systems business have been prepared by combining our
historical consolidated financial statements with the historical financial
statements of the Sensors and Electronic Systems business. The unaudited pro
forma statements of earnings give effect to the acquisition as if it had taken
place on April 1, 2000. We prepare consolidated financial statements on the
basis of a fiscal year ending March 31, whereas the historical financial
statements of the Sensors and Electronic Systems business have been prepared on
a calendar year basis. As permitted under United States Securities and Exchange
Commission Regulation S-X, Article 11, the unaudited pro forma condensed
combined consolidated statement of earnings (the pro forma statement of
earnings) for the year ended March 31, 2001 has been prepared by combining our
consolidated financial statements for the fiscal year ended March 31, 2001,
together with the financial statements of the Sensors and Electronic Systems
business for the year ended December 31, 2000. Similarly, the pro forma
statement of earnings for the six-month period ended September 30, 2001 has been
prepared by combining our consolidated financial statements for the six months
ended September 30, 2001, together with the financial statements of the Sensors
and Electronic Systems business for the six months ended June 30, 2001. As a
result, the historical financial statements of the Sensors and Electronic
Systems business for the period July 1, 2001 to September 28, 2001 are not
included in the pro forma statement of earnings.

As the acquisition was completed on September 28, 2001, our historical
balance sheet as of September 30, 2001 includes the assets acquired and
liabilities assumed of the Sensors and Electronic Systems business.

The Sensor and Electronic Systems business is part of our Electro-Optical
Systems Group. On a pro forma basis, for the year ended March 31, 2001, the
revenues for our three primary operating segments would have been as follows:
Electronic Systems Group--$186.5 million, Electro-Optical Systems
Group--$268.9 million, and Flight Safety and Communications
Group--$70.9 million.

2. The Sensors and Electronic Systems business acquisition is being
accounted for using the purchase method of accounting under Statement of
Financial Accounting Standards No. 141, "Business Combinations." A third-party
valuation, as well as our own internal assessment, is being performed on the
assets acquired and liabilities assumed in the acquisition. As a result, the
purchase price allocation has not been finalized and actual purchase price
allocation will differ from that used for purposes of this pro forma financial
information.

The purchase price of $67.1 million, combined with an estimated
$4.0 million of acquisition related costs, exceeds the value of tangible net
assets acquired by $30.1 million. For purposes of the pro forma financial
information we estimated that the value of acquired intangible assets from the
acquisition to be approximately $10.0 million, with a useful life of 10 years,
and the excess of cost over the fair value of acquired net assets (i.e.,
goodwill) to be approximately $20.1 million. The pro forma statements of
earnings for the year ended March 31, 2001, and the six months ended
September 30, 2001, reflect pro

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)

forma adjustments of $1.0 million and $500,000 respectively, for the
amortization of acquired intangible assets. The third-party valuation, as well
as the internal assessment, could result in a different portion of the purchase
price being allocated to goodwill, tangible and intangible assets and acquired
in-process research and development. Any identified in-process research and
development would be expensed immediately. A $1.0 million increase/decrease in
acquired intangible assets would result in an increase/ decrease in amortization
expense of approximately $100,000 per year. In connection with the acquisition,
we may also incur costs associated with exiting certain activities of the
Sensors and Electronic Systems business, including severance costs.

Under Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", which is applicable for all acquisitions consummated
subsequent to June 30, 2001, we are not required to amortize goodwill or
intangible assets with indefinite useful lives. We adopted the provisions of
SFAS 142 on April 1, 2001. With the adoption of the statement, we are no longer
required to amortize goodwill as of April 1, 2001. However, for purposes of
presenting the pro forma results for the year ended March 31, 2001, we are not
permitted to make an adjustment for our historical goodwill amortization.

3. In connection with the acquisition, on September 28, 2001 we entered
into a new credit facility with First Union National Bank, whereby we obtained a
$240 million secured credit facility consisting of a term loan in the principal
amount of $140 million and a $100 million revolving line of credit. The proceeds
of this borrowing of $161 million were used to repay the balance of the debt
outstanding under our previously existing credit facility in the amount of
$88.5 million and to fund the acquisition. The pro forma statements of earnings
include adjustments for additional interest expense of $4.3 million and
$2.1 million for the year ended March 31, 2001 and the six months ended
September 30, 2001, respectively. A 0.125% percent increase/decrease in interest
rates would result in an increase/decrease in interest expense of approximately
$89,000 and $45,000 for the corresponding year and six months. The pro forma
statements of earnings for the year and six months ended March 31, 2001 and
September 30, 2001 also include adjustments of $197,000 and $99,000,
respectively, for a portion of the amortization of deferred financing fees
incurred in connection with the new credit agreement. Pro forma interest expense
was calculated using our September 30, 2001 average interest rate of
approximately 5.9% on $71.1 million, the amount of the borrowing for the
acquisition.

4. The Sensors and Electronic Systems business historically recognized
general and administrative expenses as a period cost. To be consistent with our
accounting practice, certain amounts of the general and administrative expenses
were capitalized into inventory for this pro forma financial statement
presentation. The pro forma statements of earnings reflect a reduction in costs
and expenses of $1.2 million for the year ended March 31, 2001 and an increase
in costs and expenses of $2.2 million for the six-months ended September 30,
2001, to conform to this change.

5. The adjustment to the provision for income taxes represents the income
tax effect on the pro forma adjustments related to the acquisition, and the
historical net loss of the Sensors and Electronic Systems business, using a
statutory (federal and state) tax rate of 42%.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a leading supplier of defense electronics products and systems. We
provide high-technology products and services to all branches of the U.S.
military, major aerospace and defense prime contractors, government intelligence
agencies, international military forces and consumer markets. Incorporated in
1968, we have served the defense industry for over thirty years. We are a
leading provider of thermal imaging devices, combat display workstations,
electronic sensor systems, ruggedized computers, mission recorders and
deployable flight incident recorders. Our products are deployed on a wide range
of high profile military platforms such as the DDG-51 Aegis destroyer, the M1A2
Abrams Main Battle Tank, the M2A3 Bradley Fighting Vehicle, the AH-64 Apache
helicopter and the F-18/E-F Super Hornet jet fighter, as well as in other
military and non-military applications.

We operate in three principal business segments on the basis of products and
services offered. Separate and distinct businesses comprise each operating
segment: the Electronic Systems Group, the Electro-Optical Systems Group and the
Flight Safety and Communications Group. All of our other operations and
activities are combined in "Other." "Other" includes the activities of DRS
Corporate Headquarters and DRS Ahead Technology. DRS Ahead Technology is a
commercial operation that produces magnetic head components used in the
manufacturing process of computer disk drives, which burnish and verify the
quality of disk surfaces. DRS Ahead Technology also services and manufactures
magnetic video recording heads used in broadcast television equipment.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142),
"Business Combinations" and "Goodwill and Other Intangible Assets,"
respectively. SFAS 141 replaces APB 16 and requires the use of the purchase
method for all business combinations initiated after June 30, 2001. It also
provides guidance on purchase accounting related to the recognition of
intangible assets, noting that any purchase price allocated to an assembled
workforce may not be accounted for separately, and accounting for negative
goodwill. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired.

We elected to adopt the provisions of SFAS 141 and 142 as of April 1, 2001.
We have identified our reporting units to be our operating segments and we have
determined the carrying value of each reporting unit by assigning assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of April 1, 2001. Upon adoption of SFAS 142, amortization of
goodwill recorded for business combinations consummated prior to July 1, 2001
ceased, and intangible assets acquired prior to July 1, 2001 that did not meet
the criteria for recognition apart from goodwill under SFAS 141 were
reclassified to goodwill. We completed our transitional goodwill impairment
assessment in the second quarter of fiscal 2002 with no adjustment to our
April 1, 2001 goodwill necessary. The annual impairment test will be performed
in the fourth quarter of each fiscal year, after completion of our annual
operating plan.

In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, (SFAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121 but
retains its fundamental provisions for (a) the recognition/ measurement of
impairment to be held and used and (b) the measurement of long-lived assets to
be disposed of by sale. SFAS 144 also supersedes the accounting/reporting
provisions of APB Opinion No. 30 for segments of a business to be disposed of
but retains the requirement to report discontinued operations separately from
continuing operations and extends that reporting to a component of an

entity that either has been disposed of or is classified as held for sale.
SFAS 144 is effective for us on April 1, 2002. We are currently evaluating the
impact of this new standard.

DISCONTINUED OPERATIONS

On May 18, 2000, our board of directors approved an agreement to sell our
magnetic tape head business units located in St. Croix Falls, Wisconsin, and
Razlog, Bulgaria. These operations produced primarily magnetic tape recording
heads for transaction products that read data from magnetic cards, tapes and
ink. In fiscal 2000, in anticipation of the sale, we recorded a $2.1 million
charge, net of tax, on the disposal of these operations. On August 31, 2000, we
completed the sale of these business units. The sale of the magnetic tape head
business was a strategic decision by us to focus our resources on our core
businesses. All financial information presented in this discussion and analysis
reflects these business units as discontinued operations.

BUSINESS COMBINATIONS

The following summarizes certain business combinations and transactions we
completed which significantly affect the comparability of the period-to-period
results presented in this discussion and analysis. These acquisitions have been
accounted for using the purchase method of accounting. Accordingly, the results
of operations of the acquired businesses were included in our reported operating
results from their respective effective dates of acquisition. Except for our
acquisitions of assets from Raytheon and Boeing and our merger with NAI, the
financial position and results of operations of these businesses were not
significant to ours as of their respective effective dates of acquisition.

FISCAL 2002 TRANSACTIONS

On September 28, 2001, we acquired certain assets and liabilities of the
Sensors and Electronic Systems business of The Boeing Company. We paid
approximately $67.1 million in cash, subject to adjustment, for this
acquisition. In addition to the purchase price, we have estimated that costs
related to the acquisition, including professional fees, will be approximately
$4.0 million. The Sensors and Electronic Systems business assets acquired and
liabilities assumed have been included in our consolidated financial statements
as of the date of acquisition.

We are in the process of obtaining a third-party valuation of the assets
acquired and the liabilities assumed as well as performing our own internal
assessment, thus, the allocation of the purchase price is subject to adjustment.
In addition, in connection with the acquisition, we may incur costs associated
with exiting certain activities, including severance costs. It is our
expectation that a certain amount of the purchase price will be allocated to
acquired identifiable intangible assets, with such assets requiring
amortization. As we are unable to estimate the amount of acquired identifiable
intangible assets at this time, the entire excess of purchase price over the
tangible net assets acquired has been included as a separate line item on the
balance sheet as of September 30, 2001. In addition, since the acquisition was
completed at the end of the quarter and we are unable to estimate the ultimate
amount of acquired intangibles at this time, there is no amortization expense
related to this acquisition in the results of operations. This allocation will
be adjusted during the second half of fiscal 2002.

On August 22, 2001, we acquired certain assets and liabilities of the
Electro-Mechanical Systems business of Lockheed Martin for approximately
$4.0 million in cash, subject to adjustment. The Electro-Mechanical Systems
business, located in Largo, Florida, produces systems and antenna for radar and
other surveillance sensor systems. The acquisition of the Electro-Mechanical
Systems business provides certain product synergies and vertical business
integration opportunities for us. The Electro-Mechanical Systems business is now
operating as DRS Surveillance Support Systems, Inc., a unit of our Electronic
Systems Group. The financial position and results of operations of DRS

Surveillance Support Systems, Inc. were not significant to those of DRS as of
the acquisition date or for the period ended September 30, 2001.

FISCAL 2001 TRANSACTION

On June 14, 2000, a newly formed subsidiary of ours acquired the assets of
General Atronics Corporation for $7.5 million in cash and $4.0 million in stock
(approximately 355,000 shares of our common stock). We funded the cash portion
of this acquisition through borrowings under our revolving line of credit.
Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications
Company, LLC, the company designs, develops and manufactures military data link
components and systems, high-frequency communication modems, tactical and secure
digital telephone components and radar surveillance systems for U.S. and
international militaries. The excess of costs over the estimated fair value of
identifiable net assets acquired and the appraised value of certain identified
intangible assets were originally approximately $3.5 million and $3.3 million,
respectively, and were being amortized on a straight-line basis over twenty
years and ten years, respectively through March 31, 2001. As of April 1, 2001,
with the adoption of SFAS 141 and SFAS 142, we reclassified $3.1 million to
goodwill and ceased amortization of goodwill. In connection with the
acquisition, we incurred approximately $420,000 in transaction costs.

FISCAL 2000 TRANSACTION

On July 21, 1999, our subsidiary, DRS Rugged Systems (Europe) Ltd., acquired
Global Data Systems Ltd. and its wholly-owned subsidiary, European Data
Systems Ltd., for approximately $7.8 million in cash. Located in Chippenham,
Wiltshire, U.K., and now operating as DRS Rugged Systems (Europe)
Products Ltd., this subsidiary designs and develops rugged computers and
peripherals primarily for military applications. The excess of cost over the
estimated fair value of net assets acquired was approximately $8.7 million and
was being amortized on a straight-line basis over twenty years until our
adoption of SFAS 142 on April 1, 2001.

FISCAL 1999 TRANSACTIONS

On October 20, 1998, we acquired, through certain of our subsidiaries,
certain assets of Raytheon Company's Second Generation Ground-Based
Electro-Optical Systems and Focal Plane Array businesses, which we refer to as
the EOS business. We paid approximately $45 million in cash for the acquisition
at closing; the purchase price is subject to a post-closing working capital
adjustment, as provided for in the asset purchase agreement, not to exceed
$7 million. The amount of such working capital adjustment, if any, is the
subject of arbitration between us and Raytheon. Although we cannot, at this
time, predict the outcome of such arbitration, we do not expect that the final
adjustment will have a material impact on our consolidated financial position or
results of operations. The excess of cost over the estimated fair value of
identifiable net assets acquired (goodwill) and the appraised value of certain
identified intangible assets were originally approximately $34.1 million and
$30.8 million, respectively, and were being amortized on a straight-line basis
over twenty years. We incurred professional fees and other costs related to the
acquisition from Raytheon of approximately $2.0 million, which also were
capitalized as part of the total purchase price. We valued acquired contracts in
process at their remaining contract prices, less estimated costs to complete,
and an allowance for normal profits on our effort to complete such contracts. As
of April 1, 2001, with the adoption of SFAS 142, we ceased amortizing the
goodwill and reclassified $8.4 million to goodwill. During fiscal 2001 and 2002,
we recorded $9.8 million and $11.5 million reductions to goodwill. The
reductions to goodwill were due to accruals for future contract costs that are
no longer required on acquired contracts. The EOS business, operating as DRS
Sensor Systems, Inc. and DRS Infrared Technologies, LP, provides products used
in the detection, identification and acquisition of targets based on infrared
data.

On February 19, 1999, one of our wholly-owned subsidiaries merged with and
into NAI Technologies, Inc., a New York corporation, with NAI being the
surviving corporation and continuing as our direct wholly-owned subsidiary, for
stock and other consideration valued at approximately $24.8 million. In
connection with our merger with NAI, we issued 2,858,266 shares of common stock.
The excess of cost over the estimated fair value of identifiable net assets
acquired was approximately $26.7 million and was being amortized on a
straight-line basis over twenty years through March 31, 2001. During fiscal
2001, new tax regulations became effective which changed the rules for
determining how net operating loss carryforwards of an acquired company could be
utilized. As a result of this tax law change, we recorded a $3.2 million
reduction to our deferred tax asset valuation allowance and goodwill during
fiscal 2001. Prior to our merger with NAI, we began to assess and formulate a
plan to close NAI's Longmont, Colorado facility and transfer engineering and
production to our other locations. In January 2000, we announced our plan, which
included relocating/terminating approximately 45 employees. A cost of
approximately $1.5 million was recorded as an adjustment to the acquisition cost
during fiscal 2000. We completed our exit plan in the first quarter of fiscal
2001. The following table reconciles the related liability at March 31, 2000 to
the liability as of March 31, 2001:

LIABILITY AT UTILIZED IN LIABILITY AT
MARCH 31, FISCAL MARCH 31,
2000 2001 2001
------------ ----------- ------------
($ IN THOUSANDS)

Severance/employee costs............... $1,195 $1,195 $--
Estimated lease commitments and related
facility costs....................... 215 215 --
------ ------ ---
TOTAL.................................. $1,410 $1,410 $--
====== ====== ===

We also incurred professional fees and other costs related to our merger
with NAI of approximately $2.8 million, which were capitalized as part of the
total purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS
Rugged Systems (Europe) Ltd., provides rugged computers, peripherals and
integrated systems primarily for military and special government applications.

We selectively target acquisition candidates that complement or expand our
product lines, services or technical capabilities. We continue to seek
acquisition opportunities consistent with our overall business strategy.

RESTRUCTURING

In addition to the closure of the Longmont, Colorado facility described
above, during the third and fourth quarters of fiscal 2000, we announced plans
to restructure our operations, which resulted in our recording of restructuring
charges totaling approximately $2.2 million. Our restructuring initiatives
impacted our Electro-Optical Systems Group and Flight Safety and Communications
Group operating segments and DRS Corporate. The Electro-Optical Systems Group
recorded a restructuring charge of approximately $831,000 primarily for costs
relating to consolidating two facilities into one in Oakland, New Jersey. The
Flight Safety and Communications Group recorded a restructuring charge of
approximately $669,000 and $143,000 at its DRS Hadland Ltd. and DRS Precision
Echo, Inc. operating units, respectively, for severance and other employee
related costs. The DRS Hadland restructuring charge was recorded in connection
with the transition of the day-to-day management of DRS Hadland's operations
from the Electro-Optical Systems Group to the Flight Safety and Communications
Group in the second half of fiscal 2000. In addition, DRS Corporate recorded a
restructuring charge of approximately $560,000 for severance and other
employee-related costs. Severance and other employee costs were recorded in
connection with the termination of 13 employees. As of March 31, 2000, all
terminations had occurred.

In the third quarter of fiscal 2001, we revised our estimate relating to our
facility consolidation efforts in Oakland, New Jersey and recorded a charge of
$525,000. At March 31, 2001, the majority of the restructuring liability shown
below represents termination benefits to be paid in accordance with contractual
terms over the next thirteen months and lease commitments over the next fifteen
months. The following table reconciles the restructuring liability at March 31,
2000 to the restructuring liability as of September 30, 2001:

UTILIZED IN
FIRST SIX
LIABILITY AT FISCAL UTILIZED LIABILITY AT MONTHS LIABILITY AT
MARCH 31, 2001 IN FISCAL MARCH 31, FISCAL SEPTEMBER 30,
2000 CHARGES 2001 2001 2002 2001
------------ -------- --------- ------------ ----------- -------------
($ IN THOUSANDS)

Estimated lease commitments and related
facility costs............................ $ 328 $525 ($396) $457 ($181) $276
Severance/employee costs.................... 690 -- (434) 256 (127) 129
------ ---- ----- ---- ----- ----
TOTAL....................................... $1,018 $525 ($830) $713 ($308) $405
====== ==== ===== ==== ===== ====

The overall reduction in direct and indirect operating expenses resulting
from these actions has had a positive effect on our fiscal 2001 and fiscal
2002 year-to-date operating results and should continue to benefit future
periods.

RESULTS OF OPERATIONS

Our operating cycle is long-term and involves various types of production
contracts and varying production delivery schedules. Accordingly, operating
results of a particular quarter, year-to-date or year-to-year comparisons of
recorded revenues and earnings, may not be indicative of future operating
results. The following comparative analysis should be viewed in this context.

SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2000

Consolidated revenues for the six-month period ended September 30, 2001
increased approximately $17.8 million as compared with the corresponding
prior-year period. The increase in revenues was driven by increased shipments of
combat display workstations and the continued growth of our second generation
infrared sighting and targeting systems programs. The revenue increase was also
favorably impacted by the inclusion of six months of revenues generated by DRS
Communications Company, which we acquired at the end of the first quarter of
fiscal 2001. Partially offsetting the revenue increases were decreases in
mission data recording systems. Operating income increased approximately 30% to
$20.4 million from the same six-month period in fiscal 2001. The increase in
operating income was due primarily to the overall increases in revenues and the
positive impact of our fiscal 2002 first quarter adoption of SFAS 141 and 142.
In accordance with the provisions of these standards, we ceased amortizing
goodwill effective April 1, 2001. The adoption of SFAS 141 and 142 contributed
approximately $2.5 million to our fiscal 2002 year-to-date operating income. Had
these standards been effective in the prior year, our operating income, for the
six-month period ended September 30, 2000, would have been $2.7 million higher.
Partially offsetting the increase in operating income was the impact of certain
charges at our operating segments. See discussion of operating segments below
for additional information. Also impacting the overall increase in revenues and
operating income was the inclusion of the operating results of our fiscal 2002
second quarter acquisition of DRS Surveillance Support Systems, Inc.

Interest and related expenses decreased approximately $2.7 million for the
six-month period ended September 30, 2001 as compared with the corresponding
prior-year period. This decrease was primarily the result of a 47% decrease in
average working capital borrowings outstanding during the six-month period ended
September 30, 2001 as compared with the corresponding prior-year period, the
favorable impact of the conversion of all of our 9% Senior Subordinated
Convertible Debentures during the

second half of fiscal 2001, and an overall decrease in weighted average interest
rates in fiscal 2002, as compared with fiscal 2001.

The provision for income taxes for the year-to-date period ended
September 30, 2001 reflects an annual estimated effective income tax rate of
approximately 47%, as compared with 51% in the comparable prior year period of
fiscal 2001. The decrease in our effective tax rate is primarily due to the
adoption of SFAS 142. It is anticipated that our effective tax rate may also
decline moderately in future years as we continue to grow.

Earnings before interest, income taxes, depreciation and amortization
(EBITDA) for the six-month period ended September 30, 2001 was $25.7 million, an
increase of approximately 9% over the corresponding prior year period.

FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000

Revenues and operating income for the year ended March 31, 2001 increased
approximately $36.1 million and $11.4 million, respectively, as compared with
the prior fiscal year. The increase in revenues was primarily attributable to
increased shipments of infrared detectors, search and navigation radar systems,
increased volume in electro-optical contract manufacturing and military display
workstation engineering services, as well as to $17.8 million in revenues from
our fiscal 2001 acquisition of DRS Communications Company. These increases in
revenues were partially offset by a decrease in shipments of certain rugged
computers and peripherals in Europe, decreased orders for high-speed cameras and
later-than-anticipated orders received for certain mission data recording
systems. The 43% increase in operating income was driven by the overall increase
in revenues, a $1.6 million operating income contribution from DRS
Communications Company, and the year-over-year net impact of changes in
estimated profitability on certain long-term contracts. Most of our contracts
are long-term in nature, spanning multiple years. We review cost performance and
estimates to complete on these contracts at least quarterly and, in many cases,
more frequently. If the estimated cost to complete a contract changes from the
previous estimate, we will record a favorable or unfavorable adjustment to
earnings in the current period. Partially offsetting the fiscal 2001 increase in
operating income was the impact of certain charges at our operating segments.
See discussion of operating segments below for additional information.

Interest and related expenses decreased approximately $1.1 million for the
year ended March 31, 2001, as compared with the corresponding prior-year period.
The decrease was primarily the result of a 56% decrease in average working
capital borrowings outstanding during the year ended March 31, 2001, as compared
with the corresponding prior year period and the favorable impact of the fiscal
2001 conversion of approximately $19.1 million of our previously outstanding 9%
senior subordinated convertible debentures into approximately 2.2 million shares
of our common stock. Partially offsetting the decrease in interest expense was a
non-cash charge of approximately $305,000 relating to the conversion of
$8.7 million of the debentures during the second quarter of fiscal 2001.

Our effective tax rate was 52% and 40% in the fiscal years ended March 31,
2001 and 2000, respectively. The increase in the effective tax rate for fiscal
2001 was primarily due to the following: the continued increase in domestic
earnings, which are taxed at higher overall rates in comparison with our foreign
tax jurisdictions; losses in our U.K. operations for which the full tax benefit
has not yet been recognized; the effects of non-deductible goodwill and lobbying
expenses; and the impact of certain domestic and foreign tax benefits utilized
in fiscal 2000. It is anticipated that our effective tax rate will decline
moderately in future years as we continue to grow and our U.K. operations return
to profitability.

Minority interest was approximately $1.4 million and $1.3 million in fiscal
2001 and 2000, respectively. The increase was due to higher operating income
generated by the Electronic Systems Group's DRS Laurel Technologies unit, in
which we have an 80% interest.

FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999

Revenues and operating income for the year ended March 31, 2000 increased
approximately $126.0 million and $11.0 million, respectively, as compared with
the prior fiscal year. These increases were primarily attributable to the
inclusion of a full year of operations of our fiscal 1999 third quarter
acquisition from Raytheon and the fiscal 1999 fourth quarter merger with NAI. In
addition to the impact of the fiscal 1999 acquisitions, fiscal 2000 revenues and
operating income were positively impacted by our second quarter acquisition of
DRS Rugged Systems (Europe) Products Ltd. Fiscal 2000 consolidated operating
income also was impacted by the approximately $2.2 million charge recorded in
connection with restructuring certain operations (see Restructuring). See
discussion of operating segments below for additional information.

Interest and related expenses increased approximately $3.2 million for the
year ended March 31, 2000, as compared with the corresponding prior-year period.
The increase was primarily due to higher average borrowings outstanding in
fiscal 2000 related to the fiscal 1999 EOS acquisition and the impact of the
fiscal 2000 second quarter acquisition of DRS Rugged Systems (Europe)
Products Ltd. Our interest expense also increased as a result of higher average
working capital borrowings in fiscal 2000, as compared with fiscal 1999.

Our effective tax rate was 40% and 33% in the fiscal years ended March 31,
2000 and 1999, respectively. The effective rate for fiscal 2000 reflected the
continued growth in domestic earnings, which were taxed at higher overall rates
in comparison to our foreign tax jurisdictions. The effective rate also
increased due to the effect of non-deductible goodwill.

Minority interest was approximately $1.3 million and $1.0 million in fiscal
2000 and 1999, respectively. The increase was due to higher operating income
generated by our DRS Laurel Technologies unit, in which we have an 80% interest.

In fiscal 2000, we recorded a $1.3 million loss, net of tax, from
discontinued operations and a $2.1 million loss, net of tax, on the disposal of
discontinued operations relating to the then pending sale of our magnetic tape
head business.

In fiscal 1999, we recorded an extraordinary charge of approximately
$2.3 million, net of tax, in connection with a modification of our credit
facility.

OPERATING SEGMENTS

The following tables set forth, by operating segment, revenues, operating
income, operating margin and the percentage increase or decrease of those items
as compared with the prior period:

SIX MONTHS
ENDED
SEPTEMBER 30,
SIX MONTHS ENDED PERCENT
YEARS ENDED MARCH 31, PERCENT CHANGES SEPTEMBER 30, CHANGES
------------------------------ ------------------- ---------------------- --------------
2000 2001 2001
1999 2000 2001 VS. 1999 VS. 2000 2000 2001 VS. 2000
-------- -------- -------- -------- -------- -------- -------- --------------
($ IN THOUSANDS)

ESG
Revenues....................... $123,558 $187,794 $186,474 52% (1)% $87,225 $91,199 5%
Operating income before
amortization of goodwill and
related intangibles.......... $ 9,497 $ 16,370 $ 17,244 72% 5% $ 8,052 $ 9,843 22%
Operating income............... $ 9,292 $ 14,593 $ 15,336 57% 5% $ 6,262 $ 9,034 44%
Operating margin............... 8% 8% 8% 4% 5% 7% 10% 38%
EOSG
Revenues....................... $ 69,972 $141,108 $160,603 102% 14% $72,527 $82,206 13%
Operating income before
amortization of goodwill and
related intangibles.......... $ 5,077 $ 14,804 $ 26,232 192% 77% $12,591 $12,536 (.4)%
Operating income............... $ 3,581 $ 11,404 $ 22,691 219% 99% $ 9,100 $ 9,817 8%
Operating margin............... 5% 8% 14% 59% 74% 13% 12% (5)%
FSCG
Revenues....................... $ 60,438 $ 54,209 $ 70,878 (10)% 31% $37,178 $41,641 12%
Operating income before
amortization of goodwill and
related intangibles.......... $ 5,672 $ 3,799 $ 2,125 (33)% (44)% $ 2,269 $ 3,956 74%
Operating income............... $ 4,684 $ 2,762 $ 208 (41)% (93)% $ 108 $ 2,284 2015%
Operating margin............... 8% 5% 0.3% (35)% (94)% 0.3% 6% 1733%
OTHER
Revenues....................... $ 11,881 $ 8,356 $ 9,651 (30)% 16% $ 4,818 $ 4,484 (7)%
Operating (loss) before
amortization of goodwill and
related intangibles.......... $ (2,022) $ (2,391) $ (450) (18)% 81% $ 1,290 $ 194 (85)%
Operating (loss)............... $ (2,256) $ (2,581) $ (704) (14)% 73% $ 188 $ (748) (498)%
Operating margin............... (19)% (31)% (7)% (63)% 76% 4% (17)% (528)%

During the first quarter of fiscal 2002, one of our operating subsidiaries,
DRS Photronics, Inc. was combined with our Flight Safety and Communications
Group for management purposes based primarily on operational synergies. DRS
Photronics, Inc. had previously been managed as part of the Electro-Optical
Systems Group. Prior-year balances and results of operations disclosed in this
section have been restated to give effect to this change.

SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2000

ELECTRONIC SYSTEMS GROUP. Our Electronic Systems Group's revenues increased
$4.0 million, or approximately 5%, for the six-month period ended September 30,
2001, as compared with the corresponding prior year period. The increase in
revenues was due primarily to increased shipments of combat display workstations
as well as approximately $1.5 million of revenue contributed by DRS Surveillance
Support Systems, Inc., which we acquired during the second quarter of this
fiscal year. This increase was partially offset by decreases in revenues from
certain rugged computer systems and peripherals. Operating income increased
$2.8 million for the year-to-date period ended September 30, 2001, as compared
with the respective fiscal 2001 period. The increase in operating income during
the first half of fiscal 2002, as compared with the corresponding prior year
period, was primarily driven by the increase in revenues, operating margin
improvements due to a change in product mix, as well as the favorable impact of
the elimination of approximately $896,000 in goodwill amortization. Had

SFAS 142 been effective in the prior year, operating income would have been
$969,000 higher for the six-month period ended September 30, 2000.

ELECTRO-OPTICAL SYSTEMS GROUP. Our Electro-Optical Systems Group's revenues
and operating income increased $9.7 million and $717,000, or approximately 13%
and 8%, respectively for the six-month period ended September 30, 2001, as
compared to the corresponding prior year period. The increase in revenues is
attributed to the continued growth in sales of our second generation electro-
optical targeting and imaging systems offset, in part, by decreased shipments of
certain commercial electro-optical products during the first quarter of fiscal
2002. The elimination of goodwill amortization contributed approximately
$888,000 to the Electro-Optical Systems Group operating segment in the six-month
period ended September 30, 2001. Had this standard been effective in the prior
year, operating income would have been $1.1 million higher for the six-month
period ended September 30, 2000. Excluding the benefit of eliminating goodwill
amortization, operating income in the first half of the current fiscal year
would have been relatively flat due to the $1.1 million favorable program
adjustment recorded in the second quarter of fiscal 2001 as well as the impact
of a fiscal 2002 first quarter charge of $650,000 for a certain commercial
product line.

FLIGHT SAFETY AND COMMUNICATIONS GROUP. Our Flight Safety and
Communications Group's revenues increased approximately $4.5 million for the
six-month period ended September 30, 2001, as compared to the corresponding
prior year period. The increase in revenues was primarily driven by our
acquisition of DRS Communications Company in the latter part of the first
quarter of fiscal 2001. Excluding the results of DRS Communications Company, the
Flight Safety and Communications Group's revenues decreased $1.7 million, or 6%.
This decrease is attributable to a decrease in shipments of communications data
links and airborne separation video systems. Operating income increased
approximately $2.2 million for the six-month period ended September 30, 2001, as
compared to the corresponding prior year period. The increase in operating
income is a result of the increase in revenues and improved operating margins on
certain products, off-set in part by a fiscal 2002 first quarter charge of
$765,000 associated with shutting down the Group's Santa Clara, California
production and engineering facility. The elimination of goodwill amortization
contributed approximately $700,000 in operating income to the Flight Safety and
Communications Group operating segment in the six-month period ended
September 30, 2001. Had this standard been effective in the prior year,
operating income would have been $628,000 higher for the six-month period ended
September 30, 2000.

OTHER. Revenues for the six-month period ended September 30, 2001 decreased
7%, as compared to the corresponding prior year period. Operating loss increased
by approximately $936,000 in the six months ended September 30, 2001 as compared
with the prior year period. The decrease in revenue and increase in the
operating loss was primarily due to the continued soft demand in the disk drive
marketplace.

FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000

ELECTRONIC SYSTEMS GROUP. Our Electronic Systems Group's revenues decreased
$1.3 million, or 1%, in fiscal 2001, as compared with fiscal 2000. Lower
revenues for the year ended March 31, 2001 were due primarily to a decrease in
shipments of certain rugged computers and peripherals in the U.K. This decrease
was partially offset by increases in revenues from shipments of search and
navigation radar systems and military display workstations, in addition to
engineering services for display workstation product lines. Operating income and
operating margin both increased 5% in fiscal 2001, as compared with the prior
fiscal year. The increases in operating income and operating margin were driven
by a change in product mix to higher margin programs, coupled with operating
efficiencies and the cost savings derived from the closure of the Longmont,
Colorado production facility. The Longmont facility ceased operations on
March 31, 2000 and production was moved into our new electronic manufacturing
facility in Johnstown, Pennsylvania in fiscal 2001.

ELECTRO-OPTICAL SYSTEMS GROUP. Our Electro-Optical Systems Group's revenues
increased $19.5 million, or 14%, in fiscal 2001, as compared with fiscal 2000.
The increase in revenues was driven by increased volume in commercial
electro-optical contract manufacturing and shipments of infrared detectors and
fire control systems. Operating income increased $11.3 million in fiscal 2001,
as compared with the prior fiscal year. The increase in operating income
reflected the increase in revenues and the impact of $8.3 million in favorable
program adjustments recorded in fiscal 2001 on certain long-term production
programs. Estimates to complete these programs were revised to reflect lower
than anticipated overhead costs and the benefit of certain productivity
improvements. We recorded a $2.9 million favorable adjustment on a long-term
production contract in fiscal 2000. Estimates to complete this contract were
revised in the third quarter of fiscal 2000 to reflect the benefit of
management's efforts to reduce overall production costs, primarily by
identifying and procuring certain materials and subassemblies from alternate
suppliers. The benefits of management's cost reduction initiatives began to be
realized in the third quarter of fiscal 2000, as shipments of certain units
commenced, and in fiscal 2001, with increased quantities of units shipped.
Partially offsetting these increases were fiscal 2001 charges of $1.3 million
for changes in estimates on certain long-term production programs and $525,000
for additional costs expected to be incurred in connection with a facility that
was vacated during fiscal 2000. Fiscal 2000 operating income reflected charges
of $1.3 million for certain product warranty reserves and additional development
costs for a commercial product line.

FLIGHT SAFETY AND COMMUNICATIONS GROUP. Our Flight Safety and
Communications Group's revenues increased $16.7 million, or 31%, in fiscal 2001,
as compared with fiscal 2000. The increase in revenues was primarily
attributable to the acquisition of DRS Communications Company at the end of the
first quarter of fiscal 2001, as well as continued growth in the Flight Safety
and Communications Group's electronic manufacturing and shipboard communications
systems businesses. In the year ended March 31, 2001, DRS Communications Company
contributed to the Flight Safety and Communications Group operating segment
approximately $17.8 million in revenues. The increase in revenues was partially
offset by decreased orders for this group's high-speed digital cameras and
temporarily delayed orders for certain mission data recording systems. Operating
income decreased approximately $2.6 million in fiscal 2001, as compared with the
prior fiscal year. The decrease in operating income was attributed to several
factors: a $1.3 million charge in the third quarter of fiscal 2001 for estimated
excess inventories associated with a specific product line for which the
anticipated future sales are less than previously estimated; a $1.0 million
charge for a contract pricing dispute between us and a prime contractor on a
U.S. Navy program; a charge of $1.9 million for additional costs incurred to
complete the development of a new mission data recording system for the U.S.
Navy; less favorable absorption of fixed operating expenses associated with
lower production volumes for certain mission data recording systems and
high-speed digital cameras; and lower overall profit margins in the Flight
Safety and Communication Group's electronic manufacturing business. In an effort
to reduce costs and take advantage of certain manufacturing efficiencies, we
announced in April 2001 that we would be closing our Santa Clara, California
facility and moving production and engineering operations to other DRS
facilities. We anticipate that the cost savings associated with this effort will
offset the cost to implement the plan and that there should not be any adverse
impact to our fiscal 2002 earnings. Partially offsetting the fiscal 2001
decrease in operating income was the positive effect of DRS Communications
Company, which contributed approximately $1.6 million in operating income to the
Flight Safety and Communications Group for the fiscal year ended March 31, 2001.

OTHER. Revenues increased $1.3 million in fiscal 2001, as compared with
fiscal 2000. The increase in revenues was primarily due to increased shipments
of components used to manufacture disk drive media. This revenue growth resulted
from certain improvements and opportunities in the computer disk drive
marketplace and improved marketing of DRS Ahead Technology's products and
services.

The decrease in the operating loss in fiscal 2001, as compared with the
prior fiscal year, was driven by the increase in revenues discussed above, a
reduction in general and administrative expenses at DRS Ahead Technology and the
allocation of certain costs to the operating units which previously had been
recorded at DRS Corporate. This improvement was partially offset by a
$1.1 million charge recorded in fiscal 2001 to fully reserve for a note
receivable that may not be collectible.

FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999

ELECTRONIC SYSTEMS GROUP. Our Electronic Systems Group's increase in
revenues and operating income for the year ended March 31, 2000, as compared
with the prior year, was due primarily to the inclusion of the full-year
operating results of our fiscal 1999 fourth quarter merger with NAI. Revenues
and operating income for the year ended March 31, 2000 attributable to our
merger with NAI increased by $51.8 million and $3.8 million, respectively, as
compared with the prior-year period. Following its acquisition in July 1999, DRS
Rugged Systems (Europe) Products Ltd. contributed approximately $7.4 million and
$1.4 million in additional revenues and operating income, respectively, for the
year ended March 31, 2000. The overall increase in this group's revenues and
operating income also was attributable to continued growth of our military
display workstation programs.

ELECTRO-OPTICAL SYSTEMS GROUP. The Electro-Optical Systems Group's increase
in revenues and operating income for the year ended March 31, 2000 was primarily
attributable to our October 1998 acquisition of certain assets of Raytheon
Company's Second Generation Ground-Based Electro-Optical Systems and Focal Plane
Array businesses. This acquisition contributed approximately $117.5 million in
revenues and $13.9 million of operating income for the year ended March 31,
2000. Operating income for the year ended March 31, 2000 included a
$2.9 million favorable program adjustment, as discussed above. Revenues and
operating income for the year ended March 31, 2000 attributable to the EOS
acquisition increased by $70.2 million and $10.4 million, respectively, as
compared with the corresponding prior period. Exclusive of the contributions of
the EOS business, this group's operating income decreased by $2.5 million for
the year ended March 31, 2000. The decrease in operating income was primarily
attributable to the following factors: restructuring charges totaling $831,000
(see Restructuring); $830,000 for anticipated costs to be incurred in connection
with certain product warranty issues associated with a specific product line;
and a charge of approximately $500,000 relating to additional development costs
associated with one of this group's commercial product lines.

FLIGHT SAFETY AND COMMUNICATIONS GROUP. The Flight Safety and
Communications Group's revenues and operating income for the year ended
March 31, 2000 decreased by approximately $6.2 million and $1.9 million,
respectively. The decrease in revenues was primarily due to a decrease in
shipments of airborne video tape recording systems, and the fact that fiscal
1999 revenues included approximately $1.7 million relating to an equitable
adjustment claim settlement between us and the U.S. Navy. The decrease in
revenues was partially offset by increased revenues from contract manufacturing
and surface ship systems. The decrease in operating income and operating margin
was primarily due to the decrease in revenues, a change in product mix and
restructuring charges of approximately $812,000 recorded by the Flight Safety
and Communications Group (see Restructuring). In addition, during fiscal 2000,
the group's management provided $1.6 million for estimated excess inventory and
obsolescence relating to certain products.

OTHER. DRS Ahead Technology's revenues for the year ended March 31, 2000
decreased by $3.5 million, resulting from the effects of the sluggish global
computer disk drive marketplace. Operating losses of DRS Ahead Technology for
the year ended March 31, 2000 were approximately $721,000 less than those posted
in the prior year. The improvement resulted from the cumulative effect of DRS
Ahead Technology's ongoing cost reduction initiatives. The loss at DRS Corporate
increased $1.0 million, primarily relating to $0.6 million of restructuring
charges and increased general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

CASH AND CASH FLOW. The following table provides our cash flow data for
fiscal years ended March 31, 1999, 2000 and 2001 and the six-month periods ended
September 30, 2000 and 2001:

SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
------------------------------ -------------------
1999 2000 2001 2000 2001
-------- -------- -------- -------- --------
($ IN THOUSANDS)

Net cash provided by operating activities........... $ 15,081 $ 7,427 $ 33,875 $ 13,442 $ 3,853
Net cash used in investing activities............... $(60,912) $(14,956) $(19,260) $(12,030) $(79,340)
Net cash (used in) provided by financing
activities........................................ $ 46,448 $ 2,245 $(16,056) $ 3,123 $ 76,350

OPERATING ACTIVITIES. Operating cash flow for the six-month period ended
September 30, 2001 decreased by approximately $9.6 million as compared with the
corresponding prior-year period. Increases in earnings (net of adjustments for
non-cash items), receivable collections and customer advances were more than
offset by increases in inventories and other current assets and a decrease in
certain current liabilities.

Operating cash flow for the fiscal year ended March 31, 2001 improved by
approximately $26.4 million, as compared with the corresponding prior-year
period. This improvement was driven by increased earnings (net of adjustments
for non-cash items), increases in certain liabilities and increased advanced
payments from customers.

In fiscal 2000, net cash provided by operating activities decreased by
approximately $7.7 million. This decrease was primarily driven by a significant
decrease in accounts payable, accrued expenses and other current liabilities,
and the liquidation of customer advances.

INVESTING ACTIVITIES. Cash used in investing activities for the six-month
period ended September 30, 2001 consisted of payments made to acquire the
Sensors and Electronic Systems business and the Electro-Mechanical Systems
business of $67.1 million and $4.0 million, respectively. The remaining uses
were comprised of capital expenditures.

Net cash used in investing activities for the fiscal year ended March 31,
2001 included $7.5 million used to acquire DRS Communications Company and
$16.2 million for capital expenditures. Payments totaling $3.6 million received
in connection with the sale of our magnetic tape head business units partially
offset the cash flows used in investing activities. The $16.2 million capital
expenditure outlay was significantly higher than in prior years, as a result of
us upgrading our manufacturing and information technology capabilities. Future
annual capital expenditures are expected to be higher than in the past, but less
than the fiscal 2001 figure.

FINANCING ACTIVITIES. In connection with the acquisition of the Sensors and
Electronic Systems business, we entered into a $240 million credit agreement
with First Union National Bank, as the lead bank, consisting of a term loan in
the aggregate principal amount of $140 million and a $100 million revolving line
of credit. The maturity dates of the term loan and the line of credit are
September 30, 2008, and September 30, 2006, respectively. The term loan requires
quarterly principal payments beginning on December 31, 2001. Borrowings under
the credit facility bear interest at variable rates. The credit facility is
secured by substantially all of our assets. There are certain covenants and
restrictions placed on us under the credit facility, including a maximum total
leverage ratio and a minimum fixed charge ratio, a restriction on the payment of
dividends on our capital stock, a limitation on the issuance of additional debt
and certain other restrictions. The interest rates on our outstanding term loan
and line of credit borrowings were approximately 5.9% and 5.7%, respectively, at
September 30, 2001.

The proceeds of the credit facility at the date of the acquisition of the
Sensors and Electronic Systems business of $161 million were used to acquire the
Sensors and Electronic Systems business and repay the balance of the debt
outstanding under our previous credit facility with Mellon Bank, N.A. in the
amount of $88.5 million. At September 30, 2001, the $161 million outstanding
under the credit facility consisted of a $140 million term loan and a
$21 million borrowing under the revolving line of credit. As of September 30,
2001, we had approximately $51.0 million available under the revolving line of
credit, after satisfaction of our borrowing base requirement and certain
restrictions.

Under the previous credit facility with Mellon Bank, N.A., we paid
approximately $1.8 million in principal payments against our two term loans,
borrowed approximately $48.6 million under the revolving line of credit and
repaid approximately $40.4 million. The borrowings under our revolving line of
credit were used to meet temporary working capital requirements and to pay for
the acquisition of the Electro-Mechanical Systems business.

During the fiscal year ended March 31, 2001, we paid approximately
$7.8 million in principal payments against our term loans, borrowed
approximately $44.8 million under our line of credit and repaid approximately
$53.7 million. Of the total $44.8 million borrowed in fiscal 2001, $7.5 million
was used to acquire the net assets of DRS Communications Company, with the
balance used to meet temporary working capital requirements. Other than cash
flows from operations, the line of credit is our primary source of liquidity. In
2001, we reclassified our entire line of credit borrowings as long-term debt,
excluding current installments to reflect the intent of the borrowings and their
maturity date of October 1, 2003. Weighted average borrowings under revolving
lines of credit for the fiscal years ended March 31, 2001 and 2000 were
approximately $24.5 million and $33.0 million, respectively. The weighted
average interest rates on outstanding revolving line of credit borrowings as of
March 31, 2001 and 2000 were 7.8% and 8.1%, respectively. The effective interest
rates on the term loans were 7.5% and 9.45%, as of March 31, 2001 and 7.6% and
10.4% as of March 31, 2000.

CAPITAL RESOURCES. The terms of our credit facility require us to offer to
make prepayments of the $140 million aggregate principal amount of the term
loans outstanding thereunder with 50% of the net cash proceeds of this offering.
However, any term loan lender has the right to refuse its PRO RATA share of any
such mandatory prepayment. Therefore, we cannot estimate at this time how much
of the proceeds of this offering will need to be applied to the prepayment of
the term loans under our credit facility.

On September 30, 2001, borrowings outstanding under our credit facility were
$161 million. Our quarterly repayments of the term loans commence on
December 31, 2001, which include principal installment payments of $350,000. Our
quarterly payments increase to $32,900,000 for the last four quarterly payments,
commencing on December 31, 2007. The term loans are due to be paid in full on
September 30, 2008.

We actively seek to finance our business in a manner that preserves
financial flexibility, while minimizing borrowing costs to the extent
practicable. We continually review the changing financial, market and economic
conditions to manage the types, amounts and maturities of our indebtedness. Cash
and cash equivalents, internally generated cash flow from operations and other
available financing resources are expected to be sufficient to meet anticipated
operating, capital expenditure and debt service requirements during the next
twelve months and the foreseeable future.

BACKLOG AND ORDERS. Due to the general nature of defense procurement and
contracting, the operating cycle for our military business typically has been
long term. Military backlog currently consists of various production and
engineering development contracts with varying delivery schedules and project
timetables. However, there has been a recent trend in our backlog to include a
higher percentage of commercial product orders and commercial
off-the-shelf-based systems for the military,

both of which favor shorter delivery times. Accordingly, revenues for a
particular year, or year-to-year comparisons of reported revenues and related
backlog positions, may not be indicative of future results.

Backlog at September 30, 2001 was approximately $569.2 million, which
consisted of $480.6 million before our acquisitions of the Sensors and
Electronic Systems and Electro-Mechanical Systems businesses, which contributed
approximately $75.1 million and $13.1 million, respectively, of backlog as of
September 30, 2001, as compared with a total backlog of $456.5 million at
March 31, 2001. We booked approximately $244.9 million in new orders in the
first six months of fiscal 2002. We booked $478.8 million in new orders in
fiscal 2001. The increase in backlog during fiscal 2001 was due to the net
effect of bookings and $27.2 million in backlog contributed by DRS
Communications Company, as a result of our acquisition of this operation in
June 2000, partially offset by increased revenues. Approximately 87% of backlog
as of March 31, 2001 is expected to result in revenues during fiscal 2002.

INTERNAL RESEARCH AND DEVELOPMENT. In addition to customer-sponsored
research and development, we also engage in internal research and development.
These expenditures reflect our continued investment in new technology and
diversification of our products. Expenditures for internal research and
development in the six months ended September 30, 2001 and in fiscal 2001, 2000
and 1999 were $4.6 million, $8.0 million, $9.9 million and $5.2 million,
respectively. The decline in internal research and development in fiscal 2001
was more than offset by a $9.4 million increase in customer-sponsored research
and development.

BUSINESS

DRS is a leading supplier of defense electronics products and systems. We
provide high-technology products and services to all branches of the U.S.
military, major aerospace and defense prime contractors, government intelligence
agencies, international military forces and consumer markets. Incorporated in
1968, we have served the defense industry for over thirty years. We are a
leading provider of thermal imaging devices, combat display workstations,
electronic sensor systems, ruggedized computers, mission recorders and
deployable flight incident recorders. Our products are deployed on a wide range
of high profile military platforms such as the DDG-51 Aegis destroyer, the M1A2
Abrams Main Battle Tank, the M2A3 Bradley Fighting Vehicle, the AH-64 Apache
helicopter and the F/A-18 E/ F Super Hornet jet fighter, as well as in other
military and non-military applications.

RECENT ACQUISITION--SENSORS AND ELECTRONIC SYSTEMS BUSINESS

On September 28, 2001, we acquired certain assets and assumed certain
liabilities of the Sensors and Electronic Systems business, a division of The
Boeing Company, for approximately $67.1 million and $4.0 million in
acquisition-related costs. We intend to integrate this acquisition into our
existing Electro-Optical Systems Group operations.

The Sensors and Electronic Systems business designs, manufactures and
services helicopter and surface ship mounted surveillance and targeting systems
designed for use by the U.S. and allied governments. The Sensors and Electronic
Systems business produces state-of-the-art focal plane arrays, dewar assemblies
and forward-looking infrared sensors. Key programs include:

- Mast Mounted Sight--a sensor system mounted atop the Kiowa Warrior scout
helicopter;

- Thermal Imaging Sensor System--an electro-optical surveillance and
targeting system used on surface ships;

- Virtual Imaging System for Approach and Landing--provides aircraft
carriers with imaging capabilities; and

- Directed Infrared Countermeasures--a cooperative effort between the U.S.
Department of Defense and the United Kingdom Ministry of Defense to defend
aircraft against guided missile threats.

The Sensors and Electronic Systems business' products are also used in
remote sensing applications for military and commercial space missions, as well
as in other classified applications.

By capitalizing on previous research and development spending and core
competencies and increasing the scope of its product offerings, the Sensors and
Electronic Systems business has expanded into new areas. The Sensors and
Electronic Systems business has been selected by the U.S. government for its
most advanced satellite and space telescope programs, proving our products'
performance and reliability. Additionally, the development of uncooled focal
plane arrays and other infrared sensors has resulted in a lower cost product
than traditional, cryogenically cooled sensors. Having worked with the
Department of Defense and NASA on numerous defense and scientific programs for
over thirty years, we believe the Sensors and Electronic Systems business is
well positioned to gain entry to new military, commercial or scientific sensor
programs. The large installed base of products offers significant aftermarket
servicing opportunities. Similarly, the opportunity to retrofit existing
platforms with new Sensors and Electronic Systems technology exists and offers a
cost-effective weapons upgrade solution to the military.

INDUSTRY BACKGROUND

Since the end of the Cold War, the U.S. defense industry has been driven by
changing strategic and political threats and budgetary instability. For the
first time in almost a decade, the U.S. defense procurement budget has
increased, providing new funding for the acquisition and development of

weapons and supporting systems. As a result of this change, the defense industry
is now influenced by several key factors:

- New funding will assist in upgrading and replacing aging military systems
and implementing new technologies to meet modern threats.

- To help increase efficiency, the Department of Defense is increasingly
focusing on "best value" instead of lowest cost. Best value procurement
considers development and lifecycle costs in the evaluation of a system's
price.

- The U.S. defense industry has dramatically consolidated since the early
1990s and European companies are increasingly competing in the U.S.
defense market. As a result of this consolidation, domestic prime
contractors are now focused on providing weapons platforms and systems
integration, while relying on others to provide subsystems and components.

- In contrast to the Cold War era, the primary threat facing world stability
comes from terrorism and smaller, yet more numerous, enemies. In response,
the U.S. military is developing lighter, faster defense mechanisms which
are able to react quickly to regional conflict. These highly mobile,
rapidly deployable forces must rely on the latest technologies to provide
a full awareness of the battlefield and its associated threats.

Despite the focus on these new capabilities, traditional platforms remain
important as well. As many of these systems were neglected during the years of
reduced defense spending, the U.S. military is now faced with the need to
refurbish these weapons and upgrade their weapons systems with improved
technology.

BUSINESS STRATEGY

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

- LEVERAGE INCUMBENT RELATIONSHIPS. We intend to leverage our relationships
with government and industry decision-makers by continuing to deliver high
levels of performance on our existing contracts. Our experience has shown
that strong performance on existing contracts greatly enhances our ability
to obtain additional business with our existing customer base. To
accomplish this, we intend to continue to position ourselves as the "best
value" provider for our customers. Our strong internal revenue growth rate
over the past five years reflects our ability to generate repeat business
from existing customers.

- DEVELOP AND EXPAND EXISTING TECHNOLOGIES. Through a combination of
customer-funded research and development and our own internal research and
development efforts, we intend to continue to focus on the development and
commercialization of our technology. Customer-funded development contracts
enable us to work with our customers to design and manufacture new systems
and components, while minimizing our financial risk. In fiscal year 2001,
our total research and development spending was approximately
$41 million, with approximately $33 million funded by our customers.

- PURSUE STRATEGIC ACQUISITIONS. We plan to continue our participation in
the ongoing consolidation of the aerospace and defense industry. Through
selective acquisitions, we aim to broaden our existing product base and
enhance our ability to enter new markets. Through teaming agreements,
joint ventures and strategic alliances, we intend to continue to exploit
specific programs and product opportunities to obtain new contracts and
expand our global reach. Our recent acquisition of the Sensors and
Electronic Systems business from The Boeing Company is consistent with
this strategy.

requirements such as rapid deployment and containment of non-conventional
threats such as terrorism.

- PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue
commercial applications for selected products and technologies where we
can add value based on our related technological and manufacturing
expertise. An example of this is our
LADARVision-Registered Trademark-program that was developed through our
Electro-Optical Systems Group.

COMPETITIVE STRENGTHS

Our competitive strengths include:

- TECHNICAL EXPERTISE. We have state-of-the art, government-qualified
electronics systems development and manufacturing capabilities. In
April 2001, we opened a new 130,000 square-foot facility for our
Electronic Systems Group in Johnstown, Pennsylvania where we have a full
range of capabilities including long and short run production, hardware
assembly, software integration, comprehensive environmental testing and
full-service engineering. In addition, we have highly capable
manufacturing facilities for our Electro-Optical Systems Group and Flight
Safety and Communications Group in Palm Bay, Florida and Carleton Place,
Canada, respectively.

- HIGH PROPORTION OF LONG-TERM PRODUCTION PROGRAMS. Programs in production
are a good source of consistent revenue and typically provide higher
margins. A significant proportion of our revenue is generated by
continuing, long-term production programs. For the six months ended
September 30, 2001, 82% of our revenue was from production programs. In
addition, we currently have a strong backlog of production programs. At
September 30, 2001, 90% of our backlog consisted of production programs.

- DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer
base, with only one program, the AN/UYQ-70, at approximately 18%,
representing more than 15% of our fiscal year 2001 revenue on a pro forma
basis to include our acquisition of the Sensors and Electronic Systems
business. The AN/UYQ-70 contract, which provides high performance combat
display work stations used by the U.S. Navy, itself is diversified, with
over 50 unique products manufactured under it which are used by a diverse
group of 10 platforms, or customers, each of which has its own budget and
requirements. The AN/UYQ-70 contract is structured as an indefinite
delivery/indefinite quantity contract which allows the various customers
to order the products without new bidding for the contract.

- LONG-STANDING INDUSTRY RELATIONSHIPS. During our 30-year history, we have
established long-standing relationships with the U.S. government and other
key organizations in the aerospace and defense industry. Over this period,
we have become recognized for our ability to develop new technologies and
meet stringent program requirements.

- SUCCESSFUL ACQUISITION TRACK RECORD. Having made 19 acquisitions since
1993, we have demonstrated that we can successfully integrate acquired
companies into our corporate structure. We are experienced at evaluating
prospective operations in order to increase efficiencies and capitalize on
market and technological synergies.

- EMPHASIS ON RESEARCH AND DEVELOPMENT EFFORTS. In fiscal year 2001, we
spent over $40 million on research and development, of which our customers
funded approximately $33 million. Our investment in research and
development enables us to maintain our technological leadership in current
products and to develop new capabilities. This spending helps solidify and
strengthen our position on different programs and may serve as a barrier
to entry for competitors.

- EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over
20 years of experience in the defense electronics industry.

PRODUCTS AND SERVICES BY GROUP

We operate primarily in three groups: the Electronic Systems Group, the
Electro-Optical Systems Group and the Flight Safety and Communications Group.

ELECTRONIC SYSTEMS GROUP. Our Electronic Systems Group is a world leader in
high-performance combat display systems, digital information processing systems
and rugged computer systems for sea, air and land applications. The Electronic
Systems Group also produces surveillance, radar and tracking systems, acoustic
signal processing and display equipment, and combat control systems for U.S. and
overseas military organizations. By incorporating advanced commercial computing
technology, we provide innovative, rapid and cost-effective defense solutions
for dominating the 21st century's digital battlespace. Our Electronic Systems
Group is a leading provider of naval computer workstations which are used to
process and display integrated combat information. Our electronic systems are
compatible with both new and legacy systems and are vital tools used by the
military to make strategic command decisions. Various front-line platforms
utilize our Electronic Systems Group's products, including the DDG-51 Aegis
destroyer, aircraft carriers, submarines and surveillance aircraft. Our
Electronic Systems Group's products are also used in the U.S. Army's ongoing
battlefield digitalization programs. Our Electronic Systems Group also performs
field service and depot level repairs for its products, as well as for other
manufacturers' systems, and also provides systems and software engineering
support to the U.S. Navy for the testing of shipboard combat systems. We market
our products directly to various U.S. government agencies and team with leading
corporations, such as Boeing, Lockheed Martin and General Dynamics.

Our Electronic Systems Group's major products include:

- AN/UYQ-70. Under a subcontract with Lockheed Martin, we are the only
supplier of AN/UYQ-70 Advanced Display Systems. These systems are supplied
to 10 customers within the U.S. Navy and are deployed on numerous naval
platforms, including the DDG-51 Aegis destroyer, the E-2C Hawkeye, the New
Attack Submarine Demonstration Program, CEC carriers and amphibious
assault ships. We have provided this system since 1996 as the sole source
provider under an open indefinite delivery, indefinite quantity contract
which does not expire until 2006.

- RUGGED COMPUTER PRODUCTS. Our rugged computer products are used by the
U.S. Military and in a number of non-U.S. military programs focused on the
digitization of the 21st century's global battlespace and demonstrate the
benefit of several years of front-line battlefield operations.

- AN/SPS-67. This radar system forms an integral part of the command and
control combat system on the U.S. Navy's new Aegis class ships and the
Spanish Navy's F-100 class ships. It also has a potential market
application on numerous surface ships in the U.S. Navy's fleet, as well as
on aircraft carriers and amphibious operation assault ships and other
international naval platforms.

- AN/SQR-17A. This program provides harbor surveillance to protect naval
forces from the increasing threat of terrorist attacks to harbored
vessels.

Our Electronic Systems Group provides technical support services and
electronic manufacturing and systems integration for a range of customers
including the U.S. military, General Dynamics, United Defense, Lockheed Martin
and Northrop Grumman. These services consist primarily of the following
activities:

- TECHNICAL SUPPORT SERVICES. We provide naval support, including integrated
logistics support, technical manuals, repair, system installation, drawing
packages, training, maintenance planning, configuration management,
on-line and phone support and research and development capabilities.

- ELECTRONIC MANUFACTURING AND SYSTEMS INTEGRATION SERVICES. Using our
advanced ISO 9000 and AS-9000 Quality System Standards certified
manufacturing, testing and system integration facilities, our Electronic
Systems Group specializes in the production of computer workstations,
rugged computers, cable and wire harness assembly for tanks and aircraft,
printed circuit card production, and full system integration and test
services for military and commercial customers.

Our Electronic Systems Group's products and services, their applications and
platforms or end-users are summarized in the table below:

--------------------------------------------------------------------------------

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

Tactical/Sensor Combat AN/UYQ-70 Advanced Display - U.S. Navy Aegis cruisers/
Display Systems Systems family of products destroyers
comprised of commercial off-the- - U.S. Navy Aircraft carriers
shelf-based systems integrating - U.S. Navy NSSN, Trident and
the latest information processing other attack submarines
and display technology for - U.S. Navy E-2C Hawkeye
combat, command and control, and surveillance aircraft
mission-essential applications. - U.S. Navy LHA Amphibious
assault ships
- U.S. Navy/Marine Corps
Cooperative Engagement
Capability platforms
Rugged Computer Systems and Commercial off-the-shelf-based - U.S. Army
Peripherals computers, servers and other - U.S. Navy
peripheral equipment in - Range of international military
battlefield-ready hardware that ground mobile, airborne,
meets reliability and durability surface, subsurface platforms
standards of harsh environments. - Government intelligence
agencies
- CIA, FBI, NSA and State
Department Tempest applications
Radar Products:
AN/SPS-67(V)3 Naval surveillance radar with - U.S. Navy Aegis cruisers/
Radar System automatic target detection, destroyers
digital moving target - Spanish Navy F-100 ships
indications, track-while-scan - Other international surface
capability for surface and low ships
flying object detection.

Antennas and Antennas and antenna positioning - International Military FPS-117
Positioning Systems platforms for shipboard and land- air defense radar
based radar and communications - International Military Cobra
systems. Radar System
- U.S. Navy EHF Satellite program
AN/SQR-17A Sonar Signal State-of-the-art string array - U.S. Navy MIUW shore
Processing System sonar sensors and multi-sensor surveillance vans
processing systems for mobile - U.S. Navy Harbor and coastal
in-shore warfare, amphibious defense
operations and harbor defense. - U.S. Navy Amphibious operation
surveillance

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

Technical Support Services Naval support, including - U.S. and international naval
Integrated Logistics Support, bases
technical manuals, system repair - Worldwide field support
and installation, drawing
packages, training, maintenance
planning, configuration
management, on-line and phone
support, R&D capabilities.
Electronic Manufacturing, Value-added electronic - General Dynamics' rugged
Integration and Testing manufacturer for our products, computer systems for U.S. Army
Services including computer workstations - United Defense M2A3 Bradley
and rugged computers, as well as Fighting Vehicles for U.S. Army
for others, including cable and - U.S. Navy AN/UYQ-70 Display
wire harness assembly, printed Systems for Lockheed Martin
circuit cards, full system - Northrop Grumman E-8C Joint
integration and test services. STARS aircraft for U.S. Air
Force

ELECTRO-OPTICAL SYSTEMS GROUP. Our Electro-Optical Systems Group is a
leader in second generation electro-optical infrared sighting, targeting and
weapons guidance systems, assemblies and components which are used primarily in
the aerospace and defense industries. Our Electro-Optical Systems Group designs,
manufactures and markets products that allow operators to detect, identify and
target objects based upon their infrared signatures regardless of the ambient
light level. Our Electro-Optical Systems Group is one of only two key suppliers
to the U.S. government for advanced focal plane array technology and produces
other night vision, eye-safe and laser-based products for military and
commercial applications. These systems are used on the most critical front-line
ground vehicle and weapons systems platforms such as the M1A2 Abrams Main Battle
Tank, the M2A3 Bradley Fighting Vehicle and the HMMWV scout vehicle. Our
Electro-Optical Systems Group is leveraging its technology base by pursuing
commercial opportunities as evidenced by our electro-optical modules used in
corrective laser eye surgery.

Our Electro-Optical Systems Group's major products and contracts include:

- HORIZONTAL TECHNOLOGY INTEGRATION SECOND GENERATION FORWARD LOOKING
INFRARED; THERMAL IMAGING SYSTEMS (HTI). HTI is the U.S. Army's program to
provide common second-generation FLIR modules to its ground based combat
platforms. Our Electro-Optical Systems Group is one of the two suppliers
of these products to the U.S. Army. This technology extends targeting
ranges beyond enemy weapon limits and meets the increasing need to see
further on the battlefield.

- IMPROVED BRADLEY ACQUISITION SYSTEM (IBAS). We have provided this system
to the U.S. Army since 1997 under a production contract that does not
expire until 2005. Using our second generation FLIR technology, the
Improved Bradley Acquisition Subsystem integrates a complete fire control
system for the Bradley Fighting Vehicle. IBAS uses modules from the HTI
program coupled with new optics and electronics to provide thermal imaging
capability to the Bradley fighting vehicles.

- LONG RANGE ADVANCED SCOUT SURVEILLANCE SYSTEM (LRAS3). LRAS3 provides
real-time detection, recognition, identification and pinpointing of
distant target locations for the U.S. Army's scout vehicles. LRAS3 bridges
the gap between currently fielded systems and the Future Scout and Cavalry
System. In contrast to obsolete systems that forced scouts to come within
direct-fire range of the detected threat, this system provides for
long-range surveillance capabilities in the battlespace.

- STANDARD ADVANCED DEWAR ASSEMBLY II DETECTOR (SADA II). Our
Electro-Optical Systems Group has been chosen to provide the SADA II as
the functional cooler dewar assembly for the U.S. Army's Horizontal
Technology Integration program. This program further solidifies our
position as a key supplier for the Army's thermal imaging equipment.

- STANDARD ADVANCED DEWAR ASSEMBLY I DETECTOR (SADA I). Similar to the HTI,
SADA I provides the common cooler dewar system for use in helicopters,
including the AH-64 Apache and Comanche.

- DAY/NIGHT VISION BINOCULARS. Since 1995, our Electro-Optical Systems Group
has been under contract to develop and manufacture these units for the
U.S. and international militaries, including U.S. border patrol and
special forces. As of September 30, 2001 we had approximately 1,450 units
in the field. We have become recognized as one of the leaders in night
vision technology.

- IMPROVED TOW ACQUISITION SYSTEM (ITAS). Our Electro-Optical Systems Group
is currently the only U.S. qualified producer of two of the three critical
assemblies in the TOW. The complex electro-optical system produced by our
Electro-Optical Systems Group is an essential component of this premier
ground antitank weapons system used by the U.S. Army and Marine Corps.

- INFRARED FOCAL PLANE ARRAYS. Focal plane arrays are the basis of many of
our Electro-Optical Systems Group's products. We have the unique ability
to design and manufacture focal plane arrays directly for our products
which provides us with both a cost and technological advantage over our
competition.

- LADARVISION-REGISTERED TRADEMARK-. Our Electro-Optical Systems Group is
the exclusive manufacturer of electro-optical modules for the
LADARVision-Registered Trademark-System manufactured by Alcon
Laboratories, an international leader in laser vision correction systems.
Only the LADARVision-Registered Trademark- System combines a laser radar
eye tracker with narrow-beam shaping technology for the correction of
near-sightedness and astigmatism. It is the only FDA-approved laser system
to incorporate an eye tracker during surgery. This partnership is an
example of our ability to find commercial applications for our technology.

Our Electro-Optical Systems Group's products, their applications and
platforms or end-users are summarized in the table below:

--------------------------------------------------------------------------------

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

Horizontal Technology Second Generation Forward Looking - U.S. Army M1 Abrams Battle
Integration Second Infrared thermal imaging and Tanks
Generation FLIR Thermal sighting systems providing common - U.S. Army M2 Bradley Fighting
Imaging Systems thermal imaging technology across Vehicles
ground vehicles using SADA II. - U.S. Army M1025 and M1114 Long
Range Scouts
Improved Bradley Acquisition Second Generation targeting - U.S. Army Bradley M2A3 TOW
System system with FLIR, TV, laser range vehicle
finder and tracker.
Long Range Advanced Scout Long-range multi-sensor system - U.S. Army HMMWV Scout
Surveillance System for the U.S. Army's scout
(LRAS3) vehicles, which provide real-time
detection, recognition,
identification and location of
ground targets.
Standard Advanced Dewar Detector Dewar cooler module for - U.S. Army AH-64 Apache, Apache
Assembly I (SADA I) U.S. Army's Thermal Imaging Longbow and RAH-66 Comanche
equipment. helicopters
Standard Advanced Dewar Detector Dewar cooler assembly - U.S. Army HTI program for
Assembly II (SADA II) for U.S. Army's HTI program, used ground combat vehicles (M1
in Second Generation thermal tanks and Bradley combat
imaging equipment upgrades. vehicles)
Day/Night Vision Binoculars Binoculars that incorporate an - U.S. Army ground troops and
image intensifier tube, laser special operations units
range finder and digital compass. - Border patrol forces
Improved Tow Acquisition System Tracker, electronics unit and - U.S. Army TOW missile system
(ITAS) eye- safe laser range finder.
Focal Plane Arrays (FPAs) Infrared sensor components for - Scanning and staring FPAs used
sighting, targeting, weapons in cooler assemblies of thermal
systems. imaging systems
- FPAs used in heat seeking
missile guidance systems and
missile warning systems
LADARVision-Registered Trademark- Upper optics modules of the - Alcon Laboratories optical
LADARVision-Registered Trademark- products company
System used in laser vision
correction surgery.

The Sensors and Electronic Systems business that we acquired from The Boeing
Company is a leading provider of surveillance and targeting systems, infrared
cooled sensor systems and infrared uncooled sensors and high-performance focal
plane arrays. Having worked for over 30 years with the Department of Defense and
NASA on numerous defense and scientific programs, the Sensors and Electronic
Systems business is well positioned to gain entry to any new commercial,
military or scientific sensor programs. In addition, the Sensors and Electronic
Systems business provides customers with product support capabilities such as
refurbished spares, modification work, and repair and overhaul capabilities.

The major products of the Sensors and Electronic Systems business include:

- SURVEILLANCE AND TARGETING SYSTEMS. The Sensors and Electronic Systems
business has delivered over 500 surveillance and targeting systems for the
U.S. Army, Navy and Air Force and international military helicopters,
surface ships and patrol boats. It is a market leader in surveillance and
targeting systems, such as high-resolution products, which include
exceptionally stabilized surveillance and targeting systems mounted on
airborne and naval platforms.

- INFRARED COOLED SENSOR SYSTEMS. The Sensors and Electronic Systems
business has provided infrared focal plane arrays for various platforms
including the Defense Support Program satellites that were used during the
Persian Gulf War. In addition to surveillance, early warning,
identification and tracking, focal plane arrays are utilized in a variety
of non-military space applications, such as remote sensing, earth
observations and astronomy.

- INFRARED UNCOOLED SENSORS. The Sensors and Electronic Systems has
established a position in the uncooled focal plane array arena by
employing advanced technology to create uncooled focal plane arrays that
provide high resolution imaging with software that makes costly cryogenic
cooling unnecessary. These sensors are used in commercial and military
applications.

The Sensors and Electronic Systems business' products, their applications
and platforms or end-users are summarized in the table below:

--------------------------------------------------------------------------------

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

AN/SAY-1 Thermal Imaging Sensor Second Generation Forward Looking - U.S. Navy frigates and other
System Infrared surveillance and surface combatants
targeting system for detecting - U.S. Special Operations Command
threats, including floating and non-U.S. navies, special
mines, swimmers, speedboats and operations and patrol boats
low flying aircraft.
Mast-Mounted Sight First Generation surveillance and - U.S. Army OH-58D Kiowa Warrior
targeting system for detecting, helicopter fleet
identifying and destroying enemy
targets during reconnaissance
missions.
NightHawk Second Generation Forward Looking - Korean Light Helicopter
Infrared surveillance and - Mast-Mounted Sight Upgrade for
targeting system for detecting, replacement of MMS on Kiowa
identifying and destroying enemy Warrior helicopter
targets during armed helicopter
reconnaissance missions.
Virtual Imaging System for Aircraft carrier surveillance and - U.S. Navy aircraft carriers and
Approach and Landing tracking system for air traffic amphibious ships
control of aircraft takeoffs and
landings.
Space-Based Sensors Focal plane arrays for strategic - NASA platforms, such as the
space applications. Hubble Space Telescope, weather
satellites and surveillance
satellites for remote sensing
missions
Uncooled Focal Plane Arrays Affordable infrared sensors for - Various customers and various
commercial and military applications, including
applications involving the research organizations, fire
detection of heat, temperature departments, candy producers,
maintenance and short-range automobile manufacturers,
surveillance. short-range military
surveillance and targeting
missions
Staring Mid-Wave FLIRs Major subsystem for surveillance - U.S. Navy Aegis destroyers
and targeting systems for (DDG-51 class) providing
military airborne and surface surveillance for MK-46 weapon
ships. system

FLIGHT SAFETY AND COMMUNICATIONS GROUP. Our Flight Safety and
Communications Group is a leader in deployable flight incident recorders and
emergency locator beacon systems used by military and commercial search/rescue
aircraft to locate downed aircraft. Deployable recorders eject automatically
from an aircraft prior to impact so they can easily be located by search and
rescue teams. These complete emergency avionics systems combine the
functionality of a crash locator beacon with a flight incident recorder for
search, recovery and crash analysis. Our Flight Safety and Communications Group
also produces high-performance cockpit video and mission recording systems,
integrated shipboard communications systems, ultra high-speed digital imaging
systems and other advanced electronics primarily for defense and aerospace
tactical, reconnaissance and training applications. Our Flight Safety and
Communications Group uses advanced commercial technology in the design and
manufacture of multi-sensor digital, analog and video data capture and recording
products, as well as high-capacity data storage devices for harsh aerospace and
defense environments. In addition, we provide electronics manufacturing
services, often with value-added engineering content, to the defense and space
industries.

Our Flight Safety and Communications Group major products and services
include:

- DEPLOYABLE FLIGHT INCIDENT RECORDERS AND AIRCRAFT CRASH LOCATOR BEACONS.
Designed to withstand the destruction associated with an aircraft crash,
deployable flight incident recorders and crash locator beacons enable the
rapid location of downed aircraft, timely rescue of survivors as well as
provide for readily recoverable data recorders. These systems present a
significant market opportunity as an increasing number of aircraft
incorporate these advanced systems.

- INTEGRATED SHIPBOARD COMMUNICATIONS SYSTEMS. This product forms the basis
for providing the voice and data backbone for future shipboard
communication systems. These systems are capable of handling shipboard
interior communications and exterior communications with other aircraft,
surface and undersea vessels and UHF/VHF and broadband communications via
satellite with shore stations and cooperating units. These systems provide
enabling technology for battlefield systems integration by providing data
links to components and systems, modems, digital telephone and radar
surveillance systems.

- MULTIPLE PLATFORM BORESIGHTING EQUIPMENT (MPBE). The MPBE is the product
of 20 years of experience with boresighting technology. With deployment on
platforms such as the U.S. Army's AH-64 Apache and Apache Longbow
helicopters, the Marine Corps' Cobra helicopters, the Air Force's AC-130
Spectre gunship and the F-16, the MPBE is evidence of our ability to
leverage products and solutions across multiple high priority platforms.

Our Flight Safety and Communications Group's products, their applications
and platforms or end-users are summarized in the table below:

--------------------------------------------------------------------------------

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

EAS 3000 Emergency Deployable, crash-survivable - U.K. Royal Air Force & U.K.
Avionics Systems systems for helicopters Navy EH-101 Merlin and variants
incorporating flight data - Canadian Cormorant search and
recorder, cockpit voice recorder rescue helicopters
and emergency locator beacon. - Italian MMI helicopter
- Tokyo metropolitan police
helicopters
ELB 3000 Emergency Locator Variant of the EAS 3000 enabling - U.S. Army Sikorsky S-92
Beacon rapid location of downed aircraft helicopters
and timely rescue of survivors. - Various helicopters flown by
commercial North Sea Heavy Lift
operators
Deployable Flight Incident Deployable systems for fixed-wing - U.S. Navy and international
Recorders Systems aircraft incorporating flight F/A-18 Hornet strike aircraft
data recorder, cockpit voice - German Air Force/Navy Tornado
recorder and emergency locator - U.S. Air Force RC-135
beacon; variant used for cockpit surveillance aircraft
voice recording. - Canadian CP-140 Aurora patrol
aircraft
Aircraft Crash Locator Beacons Deployable systems for fixed-wing - Wide variety of military
aircraft incorporating radio aircraft, including P-3, EA-3,
transmitter and power source to AWACS, C-130 and others
alert search and rescue
operators.
Airborne Video Recorders Capture various sensor and video - U.S. Air Force A-10 Thunderbolt
input to provide airborne and
ground imagery.
Airborne Mission Recorders Digital recorders with - U.S. Navy P-3C Orion and S-3
ground-based relay stations that Viking patrol aircraft
capture and record mission sensor - Japanese Navy SH-60F Inner Zone
data, including sonar, radar, helicopters
sonobuoy data.
Multiplexed Airborne Video System for replay and - U.K. Ministry of Defence for
Analysis System reconstruction of mission data. the Tornado aircraft
Airborne Separation Video Digital Imaging System designed - U.S. Navy F/A-18 Hornet
System to replace high-speed film aircraft
cameras in weapons release - U.S. Air Force F-16
testing. - Republic of Korea Air Force
Common Boresight System DRS proprietary laser-based - U.S. Army and U.S. Air Force
triaxial measurement system with aircraft
aircraft-specific adapters. - Various Boeing-produced
aircraft
- Various BAE-produced aircraft
- NATO militaries

PRODUCT DESCRIPTION PLATFORMS/CUSTOMERS

Integrated Shipboard Tactical and secure interior ship - U.S. Navy George Washington
Communications Systems communication systems. aircraft carrier
- Canadian patrol frigates, Trump
destroyers and AOR supply ships
- Venezuelan Mariscal Sucre class
ships
- U.S. Navy Aegis class ships
Communications Data Links Data terminal sets and data - NATO and other allied
modems for tactical network militaries
interconnections.
Coastal Border Surveillance Surveillance systems and radar - U.S. government foreign
Systems equipment for vehicle platforms military funding programs
comprising radar, thermal imaging associated with Republic of
and other sensor equipment. China, Greece, Egypt, Israel
Sensor Signal Processing/ Sophisticated sensor signal - Joint Dutch/Canadian SIRIUS
Electro-Optical Imaging processing subsystems for naval program
infrared search-and-track and - Canadian Department of National
thermal observation devices. Defence
- Republic of Korea
Framing and Ballistic Range Ultra high-speed cameras used - Wide variety of military,
Cameras primarily for capturing images industrial and university
relating to electrical breakdown/ research laboratories
discharge, ballistics, detonics
and combustion.
Electronic Manufacturing and Electronic manufacture of DRS - Boeing spacecraft
Integration Services products and turn-key - Smiths Industries for F/A-18
manufacturing services for other and AV-8B aircraft
manufacturers in the aerospace, - Eastman Kodak spacecraft
defense and space markets. - General Motors Defense Light
Armored Vehicle
- Northrop Grumman
- Lockheed Martin
- Honeywell
- L-3 Communications

OTHER. "Other" includes the activities of our parent company, DRS Corporate
Headquarters, DRS Ahead Technology and certain of our non-operating
subsidiaries. DRS Ahead produces magnetic head components used in the
manufacturing process of computer disk drives, which burnish and verify the
quality of disk surfaces. DRS Ahead also services and manufactures video heads
used in broadcast television equipment.

CUSTOMERS

We sell a significant portion of our products to agencies of the U.S.
government, primarily the Department of Defense, to non-U.S. government agencies
or to prime contractors or their subcontractors. Approximately 78%, 80% and 81%
of total consolidated revenues for fiscal 2001, 2000

and 1999, respectively, were derived directly or indirectly from defense
contracts for end use by the U.S. government and its agencies.

BACKLOG

The following table sets forth our backlog by major product group (including
enhancements, modifications and related logistics support) at the dates
indicated. "Backlog" refers to the aggregate revenues remaining to be earned at
a specified date under contracts held by us, including, for U.S. government
contracts, the extent of the funded amounts under such a contract, which have
been appropriated by Congress and allotted to the contract by the procuring
government agency. Our backlog does not include the full value of contract
awards nor does it include the sales value of unexercised options that may be
exercised in the future. Backlog also includes all firm orders for commercial
products. Fluctuations in backlog generally relate to the timing and amount of
defense contract awards.

MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2001 SEPTEMBER 30, 2001
-------------- -------------- -------------- ------------------
($ IN THOUSANDS)

Government Products:
U.S. Government................... $293,400 $303,600 $363,800 $421,300
International Government.......... 48,400 56,200 55,400 86,100
-------- -------- -------- --------
Total Government Backlog.......... 341,800 359,800 419,200 507,400
Commercial Products................. 20,900 28,300 37,300 61,800
-------- -------- -------- --------
Total Backlog..................... $362,700 $388,100 $456,500 $569,200
======== ======== ======== ========

RESEARCH AND DEVELOPMENT

We conduct research and development programs to maintain and advance our
technology base. Our research and development efforts are funded by both
internal sources and as part of customer-funded development contracts. We
recorded revenues for customer-sponsored research and development of
approximately $15.4 million, $32.9 million, $23.5 million and $15.4 million for
the six months ended September 30, 2001, fiscal 2001, 2000 and 1999,
respectively. Such customer-sponsored activities are primarily the result of
contracts directly or indirectly with the U.S. government. We also invest in
internal research and development. Expenditures for internal research and
development amounted to approximately $4.6 million and $4.1 million for the six
months ended September 30, 2001 and 2000, respectively. Such expenditures were
approximately $8.0 million, $9.9 million and $5.2 million for fiscal 2001, 2000
and 1999, respectively.

CONTRACTS

A significant portion of our revenue is derived from strategic, long-term
programs and from programs for which we are the incumbent supplier or have been
the sole or dual supplier for many years. A large percentage of our revenue is
derived from programs that are in the production phase. These contracts provide
us with a strong basis for projecting future business and the ability to control
our cost structure.

We have a diverse business mix with limited dependence on any single
program. Only one program, the AN/UYQ-70, at approximately 18%, represented more
than 15% of our revenue in the year ended March 31, 2001, on a pro forma basis
to include our acquisition of the Sensors and Electronic Systems business. The
AN/UYQ-70 program is diversified, with over 50 unique products manufactured
under it which are used by a diverse group of 10 platforms, or customers, each
of which has its own budget and requirements.

Our contracts are normally for production, service or development.
Production and service contracts are typically of the fixed-price variety with
development contracts currently of the cost-type variety. For the fiscal year
ended March 31, 2001, on a pro forma basis to include our acquisition of the
Sensors and Electronic Systems business, 88% of our revenues came from
fixed-price contracts and 12% from cost-type contracts. The consistent
percentage and continued predominance of firm fixed-price contracts are
reflective of the fact that production contracts comprise a significant portion
of our U.S. government contract portfolio.

Fixed-price contracts may provide for a firm fixed price or they may be
fixed-price incentive contracts. Under the firm fixed-price contracts, we agree
to perform for an agreed-upon price. Accordingly, we derive benefits from cost
savings, but bear the risk of cost overruns. Under the fixed-price incentive
contracts, if actual costs incurred in the performance of the contracts are less
than estimated costs for the contracts, the savings are apportioned between the
customer 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-type contracts typically provide for reimbursement of allowable costs
incurred plus a fee (profit). Unlike fixed-price contracts in which we are
committed to deliver without regard to cost, cost-type contracts normally
obligate us to use our best efforts to accomplish the scope of work within a
specified time and a stated contract dollar limitation. In addition, U.S.
government procurement regulations mandate lower profits for cost-type contracts
because of our reduced risk. Under cost-plus-incentive-fee contracts, the
incentive may be based on cost or performance. When the incentive is based on
cost, the contract specifies that we are reimbursed for allowable incurred costs
plus a fee adjusted by a formula based on the ratio of total allowable costs to
target cost. Target cost, target fee, minimum and maximum fee and adjustment
formulae are agreed upon when the contract is negotiated. In the case of
performance-based incentives, we are reimbursed for allowable incurred costs
plus an incentive, contingent upon meeting or surpassing stated performance
targets. The contract provides for increases in the fee to the extent that such
targets are surpassed and for decreases to the extent that such targets are not
met. In some instances, incentive contracts also may include a combination of
both cost and performance incentives. Under cost-plus-fixed-fee contracts, we
are reimbursed for costs and receive a fixed fee, which is negotiated and
specified in the contract. Such fees have statutory limits.

The percentages of revenues for the six months ended September 30, 2001, on
an actual and pro forma basis to include our acquisition of the Sensors and
Electronic Systems business, and percentages of revenues during fiscal years
ended March 31, 1999, 2000 and 2001, and fiscal year ended March 31, 2001 on a
pro forma basis, attributable to our contracts by contract type were as follows:

PRO FORMA PRO FORMA
FISCAL YEARS ENDED FISCAL YEAR SIX MONTHS SIX MONTHS
MARCH 31, ENDED ENDED ENDED
------------------------------ MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2001 2001 2001 2001
-------- -------- -------- ----------- ------------- -------------

Firm-fixed-price............ 84% 88% 94% 88% 85% 80%
Cost-type................... 16% 12% 6% 12% 15% 20%

We negotiate for and generally receive progress payments from our customers
of between 75-90% of allowable costs incurred on the previously described
contracts. Included in our reported revenues are

certain amounts which we have not billed to customers. These amounts,
approximately $11.1 million, $9.5 million, $13.7 million and $12.8 million as of
September 30, 2001 and March 31, 2001, 2000 and 1999, respectively, consist of
costs and related profits, if any, in excess of progress payments for contracts
on which revenues are recognized on a percentage-of-completion basis.

Under accounting principles generally accepted in the United States,
contract costs, including applicable general and administrative expenses, are
charged to work-in-progress inventory and are written off to costs and expenses
as revenues are recognized. The Federal Acquisition Regulations, incorporated by
reference in U.S. government contracts, provide that internal research and
development costs are allowable general and administrative expenses. To the
extent that general and administrative expenses are included in inventory,
research and development costs also are included. Unallowable costs, pursuant to
the Federal Acquisition Regulations, are excluded from costs accumulated on U.S.
government contracts. Work-in-process inventory included general and
administrative costs (which include internal research and development costs) of
$17.5 million, $14.5 million, $12.7 million and $13.6 million at September 30,
2001 and March 31, 2001, 2000 and 1999, respectively.

Our defense contracts and subcontracts are subject to audit, various profit
and cost controls, and standard provisions for termination at the convenience of
the customer. Multi-year U.S. government contracts and related orders are
subject to cancellation if funds for the contract for any subsequent year become
unavailable. In addition, if certain technical or other program requirements are
not met in the developmental phases of the contract, then the follow-on
production phase may not be realized. Upon termination other than for a
contractor's default, the contractor normally is entitled to reimbursement for
allowable costs, but not necessarily all costs, and to an allowance for the
proportionate share of fees or earnings for the work completed.

Upon the termination of a contract with the U.S. government, a defense
contractor is entitled to reimbursement for allowable costs and an allowance for
the proportionate share of fees or earnings for the work completed if the
contract was not terminated due to the contractor's default. International
defense contracts generally also contain comparable provisions relating to
termination at the convenience of the international government.

COMPETITION

Our products are sold in markets containing competitors which are
substantially larger than we are, devote substantially greater resources to
research and development and generally have greater financial resources. Certain
competitors are also our customers and suppliers. The extent of competition for
any single project generally varies according to the complexity of the product
and the dollar volume of the anticipated award. We believe that we compete on
the basis of:

- the performance and flexibility of our products;

- reputation for prompt and responsive contract performance;

- accumulated technical knowledge and expertise; and

- breadth of our product line.

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

In the military sector, we compete with large and mid-tier defense
contractors on the basis of product performance, cost, overall value, delivery
and reputation. As the size of the overall defense industry has decreased in
recent years, the number of consolidations and mergers of defense suppliers has
increased. We expect this consolidation trend to continue. As the industry
consolidates, the large defense contractors are narrowing their supplier base
and awarding increasing portions of projects to

strategic mid- and lower-tier suppliers, and, in the process, are becoming
oriented more toward systems integration and assembly. We believe that we have
benefited from this trend, as evidenced by the formation of strategic alliances
with several large suppliers.

PATENTS AND LICENSES

We have patents on certain of our commercial and data recording products,
semi-conductor devices, rugged computer related items, and electro-optical and
focal plane array products. We and our subsidiaries have certain registered
trademarks, none of which are considered significant to our current operations.
We believe our patent position and intellectual property portfolio, in the
aggregate, is valuable to our operations. We do not believe that the conduct of
our business as a whole is materially dependent on any single patent, trademark
or copyright.

MANUFACTURING AND SUPPLIES

Our manufacturing processes for most of our products, include the assembly
of purchased components and testing of products at various stages in the
assembly process. Purchased components include integrated circuits, circuit
boards, sheet metal fabricated into cabinets, resistors, capacitors,
semiconductors, silicon wafers and other conductive materials, insulated wire
and cables. In addition, many of our products use machine castings and housings,
motors and recording and reproducing heads. Many of the purchased components are
fabricated to our designs and specifications. The manufacturing process for
certain of our optic products includes the grinding, polishing and coating of
various optical materials and the machining of metal components.

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

INTERNATIONAL OPERATIONS AND EXPORT SALES

We currently sell several of our products and services internationally, such
as sales to Canada, Israel, the Republic of China, Spain, Australia, and other
countries in Europe and Southeast Asia. International sales are subject to
export licenses granted on a case-by-case basis by the United States Department
of State. Our international contracts generally are payable in United States
dollars. Export sales accounted for 10% or less of total revenues in the fiscal
years ended March 31, 2001 and 2000.

We operate outside the United States through our Flight Safety and
Communications Group in Canada and the United Kingdom and through our Electronic
Systems Group primarily in the United Kingdom.

The addition of international businesses involves additional risks for us,
such as exposure to currency fluctuations, future investment obligations and
changes in international economic and political environments. In addition,
international transactions frequently involve increased financial and legal
risks arising from stringent contractual terms and conditions and widely
different legal systems, customs and practices in foreign countries.

PROPERTIES

We lease the following properties:

APPROXIMATE
SQUARE LEASE
LOCATION ACTIVITIES DIVISION FOOTAGE EXPIRATION
---------------------------- ---------------------------- --------- ----------- -----------

Parsippany, New Jersey...... Corporate Corporate 18,900 Fiscal 2011
Headquarters
Arlington, Virginia......... Administrative Corporate 4,300 Fiscal 2007
Gaithersburg, Maryland...... Administrative, ESG 42,500 Fiscal 2006
Engineering and
Manufacturing
Johnstown, Pennsylvania..... Administrative and ESG 130,000 Fiscal 2011
Manufacturing
San Diego, California....... Engineering ESG 7,200 Fiscal 2005
Support Services
Chesapeake, Virginia........ Field Service and ESG 22,000 Fiscal 2005
Engineering
Support
Columbia, Maryland.......... Administrative, ESG 25,000 Fiscal 2002
Engineering and
Manufacturing
Farnham, Surrey,
United Kingdom.............. Administrative, ESG 26,000 Fiscal 2015
Engineering and
Manufacturing
Chippenham, Wiltshire,
United Kingdom.............. Administrative, ESG 1,400 Fiscal 2007
Engineering and
Manufacturing
Gaithersburg, Maryland...... Administrative, ESG 10,700 Fiscal 2008
Engineering and
Product Development
Palm Bay, Florida........... Administrative, EOSG 85,200 Fiscal 2011
Engineering and
Manufacturing
Melbourne, Florida.......... Administrative, EOSG 93,500 Fiscal 2011
Engineering and
Manufacturing
Dallas, Texas............... Administrative, EOSG 117,000 Fiscal 2008
Engineering and
Manufacturing
Torrance, California........ Administrative, EOSG 33,800 Fiscal 2009
Engineering and
Manufacturing
Anaheim, California......... Administrative, EOSG 61,200 Fiscal 2003
Manufacturing and
Engineering
Anaheim, California......... Administrative, EOSG 106,500 Fiscal 2003
Manufacturing and
Engineering

APPROXIMATE
SQUARE LEASE
LOCATION ACTIVITIES DIVISION FOOTAGE EXPIRATION
---------------------------- ---------------------------- --------- ----------- -----------

Nepean, Ontario,
Canada...................... Administrative and FSCG 21,200 Fiscal 2004
Engineering
Kanata, Ontario,
Canada...................... Administrative and FSCG 62,000 Fiscal 2012
Engineering
Santa Clara, California..... Administrative, FSCG 33,200 Fiscal 2006
Engineering and
Manufacturing
Wyndmoor, Pennsylvania...... Administrative and FSCG 92,200 Fiscal 2002
Manufacturing
Oakland, New Jersey......... Administrative, FSCG 61,000 Fiscal 2003
Engineering and
Manufacturing
San Jose, California........ Administrative, Other 32,000 Fiscal 2006
Product Development
and Manufacturing

We own the following properties:

APPROXIMATE
SQUARE
LOCATION ACTIVITIES DIVISION FOOTAGE
------------------------------ ------------------------------ -------- -----------

Largo, Florida................ Administrative and ESG 120,000
Manufacturing
Carleton Place, Ontario,
Canada........................ Administrative and FSCG 128,500
Manufacturing
Tring, Hertfordshire,
United Kingdom................ Administrative, FSCG 7,500
Engineering and
Manufacturing

Substantially all of our assets, including those properties identified
above, are pledged as collateral on our borrowings.

We believe that all our facilities are in good condition, adequate for our
intended use and sufficient for our immediate needs. It is not certain whether
we will negotiate new leases as existing leases expire. Such determinations will
be made as existing leases approach expiration 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 on prior experience and current
real estate market conditions.

ENVIRONMENTAL PROTECTION

We believe that our manufacturing operations and properties are, in all
material respects, in compliance with existing federal, state and local
provisions enacted or adopted to regulate the discharge of materials into the
environment or otherwise protect the environment. Such compliance has been
achieved without material effect on our earnings or competitive position.

LEGAL PROCEEDINGS

In April and May 1998, subpoenas were issued to us by the United States
Attorney for the Eastern District of New York seeking documents related to a
governmental investigation of certain equipment

manufactured by DRS Photronics, Inc. (Photronics). These subpoenas were issued
in connection with United States v. Tress, a criminal complaint against a then
employee of Photronics, alleging that improper test data was provided in
connection with boresighting equipment furnished to the U.S. Army. On June 26,
1998, the complaint against the employee was dismissed without prejudice.
Additional subpoenas were issued to us on August 12, 1999 and May 10, 2000,
relating to the ongoing investigation of Photronics and one or more of its then
employees; however, to date, no charges have been made against us, Photronics or
any of our employees. During the government's investigation, until October 29,
1999, Photronics was unable to ship certain equipment related to the case,
resulting in delays in our recognition of revenues. On October 29, 1999,
Photronics received authorization to ship its first boresighting system since
the start of the investigation. We cannot assess the outcome of this
investigation or the effect of this investigation on us.

We are currently involved in a dispute in arbitration with Spar Aerospace
Limited (Spar) with respect to the working capital adjustment (not to exceed
approximately $4 million), if any, provided for in the purchase agreement
between us and Spar dated as of September 19, 1997, pursuant to which we
acquired, through certain of our subsidiaries, certain assets of Spar. We are
also involved in a dispute with Raytheon Company with respect to the working
capital adjustment (not to exceed $7.0 million), if any, provided for in the
purchase agreement between DRS and Raytheon dated as of July 28, 1998, pursuant
to which we acquired, through certain subsidiaries, certain assets of Raytheon.
Management does not believe that the resolution of these claims will result in a
material adverse effect on our earnings or financial condition.

On October 3, 2001, a lawsuit was filed in the United States District Court
of the Eastern District of New York by Miltope Corporation, a corporation of the
State of Alabama, and IV Phoenix Group, Inc., a corporation of the State of New
York, against DRS Technologies, Inc., DRS Electronic Systems, Inc., and a number
of individual defendants, several of whom are employed by DRS Electronic
Systems. The plaintiffs allege claims against us of infringement of a number of
patents, breach of a confidentiality agreement, misappropriation of trade
secrets, unjust enrichment and unfair competition. The plaintiffs seek damages
of not less than $5 million for each such claim. The claims relate generally to
the activities of certain former employees of IV Phoenix Group and the hiring of
some of those employees by us. The plaintiffs also allege claims for tortious
interference with business relationships, tortious interference with contracts
and conspiracy to breach fiduciary duty. The plaintiffs seek damages of not less
than $47.1 million for each such claim. In addition, plaintiffs seek punitive
and treble damages, injunctive relief and attorneys' fees. In our answer filed
on November 12, 2001, we have denied the plaintiffs' allegations and we intend
to vigorously defend this action. Although this action is in its early stages,
management believes it has meritorious defenses. However, we cannot assure you
that we will ultimately prevail in this action.

We are also a party to various legal actions and claims arising in the
ordinary course of our business. In our opinion, we have adequate legal defenses
for each of the actions and claims, and we believe that their ultimate
disposition will not have a material adverse effect on our consolidated
financial position or results of operations.

EMPLOYEES

As of September 30, 2001, we had approximately 2,600 employees, 2,150 of
whom are located in the United States. There is a continuing demand for
qualified technical personnel, and we believe that our future growth and success
will depend upon our ability to attract, train and retain such personnel. None
of our employees is represented by a labor union with the exception of
approximately 70 manufacturing employees at our Anaheim facility who are
represented by the United Autoworkers, Local 887. The employees were formerly
employed by The Boeing Company at the Anaheim facility and represented by the
union. After we hired the employees effective September 28, 2001, the union
requested recognition to bargain on their behalf. We are in negotiations with
the union for a first contract and we have not experienced any work stoppages
nor do we expect to experience any.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table lists our current executive officers and directors:

NAME AGE POSITION
---- -------- ------------------------------------------

Mark S. Newman............................ 52 Chairman of the Board, President and Chief
Executive Officer

Paul G. Casner, Jr........................ 63 Executive Vice President, Chief Operating
Officer

Nina Laserson Dunn........................ 55 Executive Vice President, General Counsel
and Secretary

Richard A. Schneider...................... 48 Executive Vice President, Chief Financial
Officer and Treasurer

Robert F. Mehmel.......................... 39 Executive Vice President, Business
Operations and Strategy

Ira Albom................................. 72 Director

Dr. Donald C. Fraser...................... 60 Director

William F. Heitmann....................... 52 Director

Steven S. Honigman........................ 53 Director

C. Shelton James.......................... 62 Director

Mark N. Kaplan............................ 71 Director

Rear Admiral Stuart F. Platt.............. 68 Director

General Dennis J. Reimer.................. 62 Director

Eric J. Rosen............................. 40 Director

MARK S. NEWMAN joined us in 1973 and became a director in 1988. He was named
Vice President, Finance, Chief Financial Officer and Treasurer in 1980 and
Executive Vice President in 1987. In May 1994, Mr. Newman became our President
and Chief Executive Officer and in August 1995 became Chairman of the Board.
Mr. Newman is a director of Congoleum Corporation and the American Electronics
Association. He also serves as a director of the New Jersey Technology Council.

PAUL G. CASNER, JR. joined us in 1993 as President of Technology
Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he
became one of our Vice Presidents and President of the DRS Electronic Systems
Group. In 1998, he became Executive Vice President, Operations, and in May 2000
he became our Executive Vice President, Chief Operating Officer. Mr. Casner has
over 30 years of experience in the defense electronics industry and has held
positions in engineering, marketing and general management.

NINA LASERSON DUNN joined us as Executive Vice President, General Counsel
and Secretary in July 1997. Prior to joining us, Ms. Dunn was a Director in the
corporate law department of Hannoch Weisman, a Professional Corporation, where
she served as our outside legal counsel. Ms. Dunn is admitted to practice law in
New York and New Jersey and is a member of the American, New York State and New
Jersey State Bar Associations.

RICHARD A. SCHNEIDER joined us in 1999 as Executive Vice President, Chief
Financial Officer and Treasurer. He held similar positions at NAI
Technologies, Inc. (NAI) and was a member of its board of directors prior to its
acquisition by us in February 1999. Mr. Schneider has over 20 years of
experience in corporate financial management, including ten years with NAI.

ROBERT F. MEHMEL joined us as Executive Vice President, Business Operations
and Strategy, in January 2001. Before joining us, he was Director, Corporate
Development, at Jabil Circuit, Inc. Prior to that, he was Vice President,
Planning, at L-3 Communications Corporation from its inception in April 1997
until June 2000. Earlier, Mr. Mehmel held various positions in divisional and
corporate financial management with Lockheed Martin Corporation, Loral
Corporation and Lear Siegler, Inc.

IRA ALBOM became a director in February 1997. Mr. Albom has been employed
since 1977 by Teleflex, Inc., a defense and aerospace company, and has been
Senior Vice President at Teleflex since 1987. Mr. Albom has over forty years of
operations and management experience in the defense and aerospace industry.
Since 1987, he has been actively involved in leading diligence teams and
negotiating terms of mergers and acquisitions, as well as negotiating major
contracts for Teleflex's Defense/ Aerospace Group. Mr. Albom also serves as a
director of Klune Industries, Inc.

DR. DONALD C. FRASER became a director in 1993. He currently serves as
Director of the Boston University Photonics Center and as Professor of
Engineering and Physics at that university. From 1991 to 1993, Dr. Fraser was
the Principal Deputy Under Secretary of Defense, Acquisition, with primary
responsibility for managing the Department of Defense acquisition process,
including setting policy and executing programs. He also served as Deputy
Director of Operational Test and Evaluation for Command, Control, Communication
and Intelligence from 1990 to 1991, a position which included top level
management and oversight of the operational test and evaluation of all major
Department of Defense communication, command and control, intelligence,
electronic warfare, space and information management system programs. From 1981
to 1988, Dr. Fraser was employed as Vice President, Technical Operations at
Charles Stark Draper Laboratory and, from 1988 to 1990, as its Executive Vice
President.

WILLIAM F. HEITMANN became a director in February 1997. Mr. Heitmann has
been employed by Verizon Communications, Inc. since its formation in June 2000
through the merger of Bell Atlantic Corp. and GTE Corp. He was employed by Bell
Atlantic Corp. and its predecessors since 1971, serving as a Vice President from
1996 and as Treasurer from June 1999. Previously, he was President and Chief
Investment Officer of NYNEX Asset Management Company and President of NYNEX
Credit Company. Mr. Heitmann serves as Chairman of Verizon Capital Corp. and
Exchange Indemnity Corp. He is a member of the Real Estate Advisory Board of the
New York Common Fund and The Financial Executives Institute and a Director of
its New York City chapter.

STEVEN S. HONIGMAN became a director in 1998. Mr. Honigman has been a
partner of the law firm of Thelen Reid & Priest LLP since August 1998.
Previously, he served as General Counsel to the Department of the Navy for five
years. As chief legal officer of the Department of the Navy and the principal
legal advisor to the Secretary of the Navy, Mr. Honigman was recognized as a
leader in acquisition reform, procurement related litigation and the
accomplishment of national security objectives in the context of environmental
compliance. He also exercised Secretariat oversight of the Naval Criminal
Investigative Service and served as the Department's Designated Agency Ethics
Officer and Contractor Suspension and Debarment Official. For his service,
Mr. Honigman received the Department of the Navy Distinguished Public Service
Award. Prior to that, he was a partner of the law firm of Miller, Singer,
Raives & Brandes. Mr. Honigman is a director of The Wornick Company, a producer
of combat rations for the Department of Defense.

C. SHELTON JAMES became a director in February 1999. Mr. James is currently
President of C.S. James and Associates, business advisors, and has served in
that position since May 2000. Until

June 1999, he served as President of Fundamental Management Corporation, an
investment management company. Mr. James was Chairman of the Board of
Elcotel, Inc., a public communications company, until February 2000. He serves
as a director of Concurrent Computer Systems, Inc., SK Technologies, CSPI, Inc.
and Technisource, Inc.

MARK N. KAPLAN became a director in 1986. Mr. Kaplan was a member of the law
firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1979 to 1998 and is now of
counsel to the firm. Mr. Kaplan also serves as a director of American
Biltrite Inc., Autobytel Inc., Grey Advertising Inc., REFAC Technology Inc.,
Congoleum Corporation and Volt Information Sciences, Inc.

REAR ADMIRAL STUART F. PLATT became a director in 1991. From May 1994 until
1999, he served as a Vice President and also as the President of our Data
Systems Group. Admiral Platt also served as President of our wholly owned
subsidiary, DRS Precision Echo, Inc. from July 1992 to August 1998. He currently
is Chairman of The Wornick Company, a producer of combat rations for the
Department of Defense, Chairman of Discover RV, an Arizona based dealer network
company and Chairman of CDCOM, a Washington State based data storage company.
Admiral Platt held various high level positions as a military officer in the
Department of the Navy, retiring as Competition Advocate General of the Navy in
1987. He also serves as Chairman of The Historic Battleship Society and Chairman
of Hydro Wing Hawaii.

GENERAL DENNIS J. REIMER became a director in 2000. Since April 2000, he has
served as Director of the National Memorial Institute for the Prevention of
Terrorism, located in Oklahoma City, OK. General Reimer served as the 33rd Chief
of Staff, U.S. Army, from June 20, 1995 until June 21, 1999. Prior to that, he
was Commanding General of United States Army Forces Command, Fort McPherson,
Georgia. From August 1, 1999 until March 31, 2000, General Reimer served as
Distinguished Fellow of the Association of the U.S. Army. He is a member of the
Editorial Board of the Armed Forces Journal and the Advisory Committee for Media
and Security of the Fund for Peace Project. General Reimer also serves as a
director of Microvision, Inc., Mutual of America and Plato Learning, Inc.

ERIC J. ROSEN became a director in August 1998. He is a Managing Director of
Onex Investment Corp. and has been with Onex Investment Corp. since 1989.
Previously, he worked at Kidder, Peabody & Co. in both the Mergers and
Acquisitions and Merchant Banking Groups. Mr. Rosen also serves as a director of
Dura Automotive Systems. Mr. Rosen and Mark S. Newman, our Chairman of the
Board, President and Chief Executive Officer, are first cousins.

THE BOARD OF DIRECTORS AND COMMITTEES

Our board of directors has appointed from its members an audit committee, an
executive compensation committee and an ethics committee with the following
areas of responsibility:

AUDIT COMMITTEE. The audit committee oversees and reports to the board
concerning our general policies and practices with respect to accounting,
financial reporting and internal controls as well as such policies and practices
of our subsidiaries. It also recommends appointment of our independent auditors
and maintains a direct exchange of information between the board and the
independent auditors. The audit committee operates under a written charter
adopted by the board of directors. The members of the audit committee are
Messrs. Fraser, Heitmann, James and Rosen.

EXECUTIVE COMPENSATION COMMITTEE. The executive compensation committee
establishes policies and programs that govern the compensation of the Chief
Executive Officer and our other executive officers and administers our 1991
Stock Option Plan and the 1996 Omnibus Plan. The members of the executive
compensation committee are Admiral Platt and Messrs. Albom, Honigman and Kaplan.

ETHICS COMMITTEE. The ethics committee provides oversight with respect to
issues involving compliance with law and our ethics program. During fiscal 2001
the ethics committee was comprised of Messrs. Newman and Honigman, Ms. Dunn and
General Reimer.

COMPENSATION OF DIRECTORS

Directors who are our employees or employees of our subsidiaries do not
receive directors' fees. During fiscal year 2001, each director who was not an
employee of us or one of our subsidiaries received a retainer of $25,000 for his
services, plus a fee of $2,500 for each meeting of the board attended. Such
directors who also served on committees of the board received an additional
$1,250 for services rendered in connection with committee meetings attended
which were not held on the same day as meetings of the full board.

On February 7, 1996, the then-existing Stock Option Committee of the board
adopted, and the board ratified, resolutions which instituted an arrangement
under our 1991 Stock Option Plan by which each director who was not or has never
been our employee or an employee of one of our subsidiaries, a non-employee
director, as of such date would be (a) immediately granted a non-qualified stock
option to purchase 5,000 shares of our common stock and (b) on the date of each
annual meeting, commencing with the annual meeting following the annual meeting
at which these resolutions were approved, granted a non-qualified stock option
to purchase 2,500 shares of our common stock. Our stockholders approved these
resolutions on August 7, 1996. Under our 1996 Omnibus Plan, the non-employee
directors described above are eligible to receive grants of options to purchase
2,500 shares of our common stock on the dates described above. However,
provisions in each of the resolutions and the 1996 Omnibus Plan state that a
non-employee director may not be granted options to purchase more than 2,500
shares of our common stock under the 1996 Omnibus Plan or any other stock option
plan of ours during any tax year of ours, thus avoiding any potential for
overlap.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to us for the fiscal years
ended March 31, 2001, 2000 and 1999, of those persons who were, at March 31,
2001, (1) our chief executive officer and (2) our four most highly compensated
executive officers other than the chief executive officer, together the named
officers.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION(A) LONG-TERM COMPENSATION
---------------------------------- ------------------------------------
ALL OTHER
SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) STOCK OPTIONS(#) ($)(B)(C)(D)
--------------------------- ----------- --------- -------- --------------------- ------------

Mark S. Newman........................ 2001 $555,000 $505,000 90,000(e) $32,345
Chairman of the Board, 2000 475,000 415,000 90,000(e) 30,816
President & Chief 1999 450,000 285,600(h) 450,000(f) 34,667
Executive Officer

Paul G. Casner, Jr.................... 2001 $350,000 $248,000 40,000(e) $20,824
Executive Vice President, 2000 300,000 175,000 30,000(e) 16,979
Chief Operating Officer 1999 250,000 125,000(h) 30,000(g) 18,634

Nina Laserson Dunn.................... 2001 $280,000 $169,600 30,000(e) $17,187
Executive Vice President, 2000 260,000 154,200 30,000(e) 16,266
General Counsel & Secretary 1999 250,000 85,000(h) 30,000(g) 16,069

Richard A. Schneider(i)............... 2001 $233,000 $169,600 30,000(e) $14,069
Executive Vice President, 2000 220,000 154,200 30,000(e) 7,696
Chief Financial Officer 1999 29,615 50,000 18,750(j) 846

Robert F. Mehmel(k) .................. 2001 $ 55,385 $ 14,423 50,000(l) $ --
Executive Vice President,
Business Operations & Strategy

------------------------

(a) The dollar value of perquisites and other personal benefits provided for the
benefit of the named officers during the fiscal years ended March 31, 2001,
2000 and 1999, respectively, did not exceed the lesser of either $50,000 or
10% of the total annual salary and bonus reported for the named officers in
those periods. There were no other amounts of compensation required to be
reported as "Other Annual Compensation" by Item 402 of Regulation S-K of the
Securities and Exchange Commission earned by the named officers.

(b) Includes the amounts of employer contributions to our Retirement/Savings
Plan (see "Retirement/ Savings Plan") in the fiscal years ended March 31,
2001, 2000 and 1999, respectively, in the accounts of the named officers, as
follows: Mr. Newman, $4,872, $4,250 and $4,250; Mr. Casner, $4,872, $4,250
and $4,250; Ms. Dunn, $4,872, $4,250 and $4,250; and Mr. Schneider, $4,872,
$4,250 and $846.

(c) Includes the fixed annual amounts, computed on a fiscal year basis, provided
by us for the benefit of the named officers, to reimburse such officers for
the amounts of medical and hospital expenses actually incurred by them which
are not covered or paid to them under our group medical and hospitalization
plans during the fiscal years ended March 31, 2001, 2000 and 1999,
respectively, as follows: Mr. Newman, $10,000, $10,000 and $10,000;
Mr. Casner, $7,500, $5,625 and $5,625; Ms. Dunn, $7,500, $7,500 and $7,500;
and Mr. Schneider, $7,500, $1,877 and $0.

(d) We pay the cost of policies of life insurance and long-term disability
insurance, in excess of the amounts furnished under the group coverage
provided to all employees, for the benefit of the named officers. In
addition, we pay premiums on policies maintained in connection with its
Supplemental Executive Retirement Plan (see "Supplemental Executive
Retirement Plan" below). Under certain of the life insurance policies, we
are a beneficiary to the extent of the premiums paid. The total amounts of
the premiums paid by us or the economic benefit to the named officers for
such insurance policies during the fiscal years ended March 31, 2001, 2000
and 1999,

respectively, were as follows: Mr. Newman, $17,474, $16,566 and $20,417;
Mr. Casner, $8,452, $7,104 and $8,759; Ms. Dunn, $4,815, $4,516 and $4,319;
and Mr. Schneider, $1,697, $1,569 and $0.

(e) Represents non-qualified stock options to purchase shares of common stock
under our 1996 Omnibus Plan. Those options, with grant dates of
November 14, 2000 and November 10, 1999, respectively, become exercisable on
the first four anniversaries of the dates of grant at 25% per year.

(f) Represents non-qualified stock options to purchase 90,000 and 110,000 shares
of common stock issued to Mr. Newman under our 1996 Omnibus Plan. Those
options, with a grant date of February 11, 1999, become exercisable on the
first four anniversaries of the date of grant at 25% per year. Also
represents options to purchase 70,000 and 180,000 shares of common stock
issued to Mr. Newman by the Board of Directors. Those options, with a grant
date of October 26, 1998, become exercisable on the first four anniversaries
of the date of grant at 25% per year.

(g) Represents non-qualified stock options to purchase shares of common stock
under our 1996 Omnibus Plan. Those options, with a grant date of
October 26, 1998, become exercisable on the first four anniversaries of the
date of grant at 25% per year.

(h) A portion of the fiscal year 1999 cash bonus awards include amounts
originally intended to be paid out in shares of our restricted stock as
follows: Mr. Newman, $37,120; Mr. Casner, $21,940; and Ms. Dunn, $15,720.
Participants vest, in equal amounts, over three years and are paid their
respective amounts as they become vested. In the event a named officer
leaves our employ before the end of the vesting period, all rights to
remaining unvested cash awards may be forfeited.

(i) Mr. Schneider's employment with us commenced on February 19, 1999.

(j) Represents non-qualified stock options to purchase shares of common stock
under our 1996 Omnibus Plan. Such options, granted on March 3, 1999, were
exercisable as to 20% upon the date of grant and become exercisable
cumulatively at 20% per year on each of the first four anniversaries of the
date of grant.

(k) Mr. Mehmel's employment with us commenced on January 8, 2001. For the fiscal
year ended March 31, 2001, Mr. Mehmel's salary, on an annualized basis,
would have been $240,000, plus bonus.

(l) Represents non-qualified stock options to purchase shares of common stock
under our 1996 Omnibus Plan. Such options, granted on January 8, 2001,
became exercisable on the first four anniversaries of the date of grant at
25% per year.

STOCK OPTIONS

The following table contains information concerning the grant of stock
options to the named officers during our last fiscal year.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION TERM ($)
UNDERLYING GRANTED TO EXERCISE ---------------------------------
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL 2001 ($/SH) DATE 5%(A) 10%(A)
----------------------------- ------------ ------------ -------- ---------- --------------- ---------------

Mark S. Newman............... 90,000(b) 17.73% $13.50 11/13/10 $1,092,492 $2,459,296
Paul G. Casner, Jr........... 40,000(b) 7.88% 13.50 11/13/10 485,552 1,093,020
Nina Laserson Dunn........... 30,000(b) 5.91% 13.50 11/13/10 364,164 819,765
Richard A. Schneider......... 30,000(b) 5.91% 13.50 11/13/10 364,164 819,765
Robert F. Mehmel............. 50,000(c) 9.85% 13.50 1/07/11 606,940 1,366,275

--------------------------

(a) The amounts shown under these columns are the result of calculations at the
5% and 10% rates required by the Securities and Exchange Commission and are
not intended to forecast future appreciation of our stock price.

(b) The options granted were for shares of our common stock under our 1996
Omnibus Plan at an exercise price equal to the fair market value of our
common stock on the date of grant. The options become exercisable on the
first four anniversaries of the date of grant at 25% per year. The grant
date of the options is November 14, 2000.

(c) The options granted were for shares of our common stock under our 1996
Omnibus Plan at an exercise price equal to the fair market value of our
common stock on the date of grant. The options become exercisable on the
first four anniversaries of the date of grant at 25% per year. The grant
date of the options is January 8, 2001.

OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

Shown below is information with respect to the aggregate stock options
exercised by the named officers during fiscal 2001 as well as the unexercised
options to purchase our common stock granted through March 31, 2001 under our
1991 Stock Option Plan and our 1996 Omnibus Plan to the named officers and held
by them at that date.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT MARCH 31, 2001 AT MARCH 31, 2001 ($)(A)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------

Mark S. Newman................ -- -- 317,500 382,500 $1,981,669 $2,180,081
Paul G. Casner, Jr............ -- -- 42,500 77,500 292,856 404,694
Nina Laserson Dunn............ 10,000 $ 93,400 52,500 72,500 494,471 439,704
Richard A. Schneider.......... 11,000 $ 78,104 39,000 60,000 269,829 312,994
Robert F. Mehmel.............. -- -- -- 50,000 -- 112,000

--------------------------

(a) Based on the difference between the exercise price of each grant and the
closing price on the American Stock Exchange-Composite Transactions of our
common stock on March 31, 2001, which was $15.74.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

MARK S. NEWMAN. In November 1996, we entered into an employment agreement
with Mr. Newman, our Chairman, President and Chief Executive Officer, which
provides for an initial term of three years (which automatically renews each
year for subsequent two-year periods, unless either party gives notice of its
intent to terminate at least 90 days prior to the expiration of the term), and a
base salary at annual rate of not less than $320,000 and appropriate executive
level benefits, which base salary amount is subject to automatic increase on an
annual basis for years after 1998 by the percentage change in the consumer price
index for urban wage earners in the New York area. Mr. Newman is also eligible
to receive an annual incentive bonus pursuant to our Incentive Compensation
Plan. Mr. Newman was granted an option to purchase 50,000 shares of our common
stock on the effective date of his employment agreement and is entitled to
receive a "reload option" for the number of shares surrendered by him upon the
exercise of all or part of the option.

The agreement also provides for severance benefits in the event of:
(1) termination of his employment by us other than for cause, (2) termination of
his employment agreement by Mr. Newman for good reason, as defined in the
agreement, or (3) a change in our control. We have also agreed to maintain
adequate "key-man" life insurance in an amount sufficient to cover certain
severance obligations under the agreement. Severance benefits in the event of
termination include continuation of salary and certain benefits for the
remaining term of the employment agreement or 12 months, whichever is greater,
plus payment of a pro-rata portion of the bonus earned for the previous fiscal
year. In the event of a change in control, the severance benefit would be equal
to 2.99 times Mr. Newman's base salary plus the bonus earned in the previous
fiscal year. In either case, we also would be required to provide outplacement
assistance to Mr. Newman. In addition, all stock options granted to Mr. Newman
would immediately vest and would become exercisable during the 12 month period
following termination.

OTHER NAMED EXECUTIVE OFFICERS. In August 2000, we entered into an
employment agreement with Paul G. Casner, Jr., our Executive Vice President,
Chief Operating Officer, which provides for an initial term of two years (which
automatically renews each year for subsequent one-year periods, unless either
party gives notice of its intent to terminate at least 90 days prior to the
expiration of the term), and a base salary at an annual rate of not less than
$350,000 and appropriate executive level benefits. Mr. Casner is also entitled
to $30,000 per year in deferred compensation for each full year of the first
five years of his employment with us. Such deferred compensation is paid to
Mr. Casner in quarterly installments until the amount is exhausted, with the
first payment of $7,500 beginning on the first day of January following his
retirement from us or his 65th birthday, whichever is earlier. In April 1997, we
entered into an employment agreement with Nina Laserson Dunn, our Executive Vice
President, General Counsel and Secretary, which provides for an initial term of
three years (which automatically renews each year for subsequent two-year
periods, unless either party gives notice of its intent to terminate at least
90 days prior to the expiration of the term), and a base salary at annual rate
of not less than $240,000 and appropriate executive level benefits. Ms. Dunn was
granted an option to purchase 50,000 shares of our common stock in conjunction
with her employment agreement. In February 1999, we entered into an employment
agreement with Richard A. Schneider, our Executive Vice President, Finance and
Chief Financial Officer, which provides for an initial term of one year (which
automatically renews each year for subsequent one-year periods, unless either
party gives notice of its intent to terminate at least 90 days prior to the
expiration of the term), and a base salary at annual rate of not less than
$220,000 and appropriate executive level benefits. Mr. Schneider was granted an
option to purchase 18,750 shares of our common stock on the effective date of
his employment agreement.

As provided in the employment agreements for Mr. Casner, Ms. Dunn and
Mr. Schneider, each executive is eligible to receive an annual incentive bonus
pursuant to our Incentive Compensation Plan. The actual amount of such bonus
shall based upon each executive's individual performance and our

attainment of certain operating goals. The employment agreements also provide
for severance benefits in the event of: (1) termination of his or her employment
by us other than for cause, (2) termination of his or her employment agreement
by him or her for good reason, as defined in their respective employment
agreements, or (3) a change in our control. Severance benefits in the event of
termination include continuation of salary and certain benefits for the
remaining terms of the employment agreement or 12 months (24 months for
Ms. Dunn), whichever is greater, plus payment of a pro-rata portion of the
current year's bonus, which could have been paid for the year of termination. In
the event of a change in control, the severance benefit would be equal to 2.0
times (2.99 times for Ms. Dunn) their respective base salaries plus the bonus
earned in the previous fiscal year. In either case, we also would be required to
provide outplacement assistance to each of them. In addition, all stock options
granted to each of them would immediately vest and would become exercisable
during the 12 month period following termination.

Robert K. Mehmel, our Executive Vice President, Business Operations and
Strategy, commenced his employment with us on January 8, 2001. We do not have an
employment agreement in place with Mr. Mehmel.

1996 OMNIBUS PLAN

In 1996 we adopted the 1996 Omnibus Plan. The Omnibus Plan was initially
limited to 500,000 shares and has since been increased, with stockholder
approval, to 2,375,000 shares. Awards under the Omnibus Plan are at the
discretion of the Stock Option Committee and may be made to our employees,
officers, directors and consultants in the form of (i) incentive stock options,
(ii) non-qualified stock options, (iii) stock appreciation rights,
(iv) restricted stock, (v) phantom stock, (vi) stock bonuses and (vii) other
awards, except that incentive stock options may be granted only to employees.
Unless the Stock Option Committee expressly provides otherwise, options granted
under the Omnibus Plan are not exercisable prior to one year after the date of
grant and become exercisable as to 25% of the shares granted on each of the
first four anniversaries of the date of grant. With respect to any participant
who owns stock possessing more than 10% of the total combined voting power of
all classes of our stock, the exercise price of any stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
the incentive stock option may not exceed 5 years from the date of grant. The
exercise price and term of stock options for all other participants is
determined by the Stock Option Committee, except that in the case of an
incentive stock option, the exercise price cannot be less than 100% of the fair
market value per share on the date of grant and the option term may not exceed
10 years from the date of grant. In the event that a participant terminates
employment with us, the Omnibus Plan provides for a stipulated period of
exercisability for outstanding options which varies depending on the form of
award and reason for termination. In the event of a change in control all
outstanding awards will become fully vested and/or immediately exercisable. The
board of directors may amend or terminate the plan at any time, without
stockholder approval, unless required by law. However, no amendment or
termination may adversely affect rights and obligations with respect to
outstanding options. As of March 31, 2001, 735,913 shares were reserved for
future grants under the Omnibus Plan.

RETIREMENT/SAVINGS PLAN

The Summary Compensation Table above includes amounts deferred by the named
officers pursuant to our Retirement/Savings Plan under Section 401(k) of the
Internal Revenue Code of 1986. The value of a participant's contributions to the
Retirement/Savings Plan is fully vested at all times; the value of employer
contributions becomes 50% vested after the employee has completed three years of
service, 75% vested after completion of four years of service, and 100% vested
after completion of five years of service.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

On February 1, 1996, we established a Supplemental Executive Retirement
Plan, commonly referred to as a SERP, for the benefit of certain key executives,
which include our chief executive officer and our four other most highly
compensated executive officers. Pursuant to the SERP, we will provide retirement
benefits to each key executive, based on years of service and final average
annual compensation, as defined therein. In addition, we advance premiums for
life insurance policies, which provide a death benefit equal to five times the
participants' salary at time of death. In the event of a change in control, as
defined therein, benefits become fully vested. The SERP is non-contributory and
unfunded.

MEDICAL REIMBURSEMENT PLAN

At the beginning of each calendar year, we accrue fixed annual amounts for
the benefit of certain officers to be paid as needed to reimburse those officers
for the amounts of medical and hospital expenses actually incurred by those
officers which are not covered under our group medical and hospitalization
plans. The amount accrued for the benefit of each such officer is included in
that officer's compensation for tax purposes regardless of whether that accrued
amount is actually paid to him or her. The excess of the amount accrued over the
amounts paid is used to offset the administrative expenses payable by us to the
medical insurance carrier.

TRANSACTIONS WITH RELATED PARTIES

We currently lease a building at 138 Bauer Drive owned by LDR Realty Co., a
partnership that was wholly owned, in equal amounts, by David E. Gross, our
co-founder and the former President and Chief Technical Officer, and the late
Leonard Newman, our co-founder and the former Chairman of the Board, Chief
Executive Officer and Secretary and the father of Mark Newman, our current
Chairman of the Board, President and Chief Executive Officer. The renegotiated
lease agreement at a monthly rental of $19,439 expires on June 30, 2002. We are
required to pay all real estate taxes and are responsible for all repairs and
maintenance, structural and otherwise, subject to no cumulative limits. We
believe that this lease was consummated on terms no less favorable than those
that we could have obtained from an unrelated third party in a transaction
negotiated on an arm's-length basis. Following Leonard Newman's death in
November 1998, Mrs. Ruth Newman, the wife of Leonard Newman and the mother of
Mark Newman, succeeded to Leonard Newman's interest in LDR Realty Co.

Skadden, Arps, Slate, Meagher & Flom LLP, a law firm to which Mark N.
Kaplan, a member of our board of directors, is of counsel, provided legal
services to us during the 2001 fiscal year and is currently representing us in
this offering and other matters.

Kronish, Lieb, Weiner & Hellman LLP, a law firm of which Alison Newman,
sister of Mark Newman, is a partner, provided legal services to us during the
2001 fiscal year.

In June, 1999, we entered into a consulting agreement with Mr. Honigman
pursuant to which Mr. Honigman agreed to provide consulting services to us
concerning international business opportunities. Under the terms of the
consulting agreement, consulting services are to be provided to us on an
as-requested basis, for a fee of $250 per hour to a maximum of $2,000 per day
plus approved travel and miscellaneous expenses. During fiscal 2001, there was
no remuneration paid to Mr. Honigman under this arrangement.

Thelen Reid & Priest LLP, a law firm of which Mr. Honigman is a partner,
provided legal services to us during our 2001 fiscal year.

In July 1993, we entered into a consulting agreement with Dr. Fraser
pursuant to which Dr. Fraser will provide consultation to us concerning defense
technologies. Under the terms of the consulting agreement, as amended,
consulting services are to be provided to us on an as-requested basis, for a fee
of $1,500 per day plus approved travel and miscellaneous expenses. During fiscal
2001, there was no remuneration paid to Dr. Fraser under this agreement.

In May 1995, we became a party to a loan with Mr. Newman to provide an
amount equal to the exercise price of incentive stock options which had been
granted to him under our 1981 Incentive Stock Option Plan. The loan is evidenced
by a promissory note in the principal amount of $104,100 and, effective
April 1, 1998, bears interest at the applicable federal rate necessary under the
Internal Revenue Code of 1986, as amended, to avoid an imputed rate of interest.
One-half of the outstanding principal balance $52,050 was forgiven during fiscal
2000 and the balance of the outstanding principal and accrued interest $60,378
was forgiven during fiscal 2001.

During fiscal 2001, we paid Admiral Platt to provide consulting services to
us in connection with new business initiatives. These consulting services were
provided to us on an as-requested basis, for a fee of $2,000 per day plus
approved travel and miscellaneous expenses. During fiscal 2001, total
remuneration paid to Admiral Platt under this arrangement approximated $45,323.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table shows as of December 12, 2001, the number of shares and
percentage of our outstanding common stock beneficially owned by

- each person, entity or group known by us to own beneficially more than 5%
of our outstanding common stock;

- each director and nominee, each named executive officer and by each of our
directors and nominees; and

- executive officers as a group.

In addition, up to 200,000 shares owned by Mark S. Newman, 5,000 shares
owned by Stuart F. Platt, 25,000 shares owned by Paul G. Casner, Jr.,
25,000 shares owned by Nina Laserson Dunn and 15,000 shares owned by Richard A.
Schneider, may be sold as part of the underwriters' over-allotment option.
Ms. Dunn and Messrs. Newman, Platt, Casner and Schneider are together referred
to in this prospectus as the selling stockholders.

Unless otherwise indicated, the address of each person identified is c/o DRS
Technologies, Inc., 5 Sylvan Way, Parsippany, N.J. 07054.

The percentages shown are based on 12,402,573 shares of common stock
outstanding prior to this offering as of December 12, 2001, and 15,902,573
shares of common stock outstanding after this offering. A person is deemed as of
any date to have "beneficial ownership" of any security that such person has a
right to acquire within 60 days after such date. Pursuant to Rule 13d-3 under
the Exchange Act, shares of common stock that a person has the right to acquire
pursuant to the exercise of stock options held by that holder that are
exercisable within 60 days of December 12, 2001 are deemed outstanding for the
purpose of computing the percentage ownership of that person, but are not deemed
outstanding for computing the percentage ownership of any other person. Except
as indicated by footnote, and subject to community property tax where
applicable, the persons named in the table have sole voting and investment power
for all shares of common stock shown as beneficially owned by them. Unless
otherwise noted, each beneficial owner had sole voting power and investment
power over the shares of common stock indicated opposite such beneficial owner's
name.

AMOUNT OF PERCENT OF CLASS PERCENT OF CLASS
SHARES BEFORE OFFERING AFTER OFFERING
--------- ---------------- ----------------

Lancer Partners, Limited Partnership
(f/k/a Lancer Partners(a), L.P., a New York
limited partnership)............................ 1,728,900(b) 13.9% 10.9%
Palisade Capital Management, L.L.C.(c)............ 668,000(d) 5.4% 4.2%
Mark S. Newman.................................... 674,418(e)(f)(g)(i) 5.4% 4.2%
Ira Albom......................................... 27,000(f) * *
Donald C. Fraser.................................. 15,000(f) * *
William F. Heitmann............................... 16,000(f) * *
Steven S. Honigman................................ --(f) * *
C. Shelton James.................................. 5,600(f) * *
Mark N. Kaplan.................................... 16,000(f) * *
Stuart F. Platt................................... 88,150(f)(j) * *
Eric J. Rosen..................................... 10,000(f) * *
Dennis J. Reimer.................................. 5,000(f) * *
Paul G. Casner, Jr................................ 84,130(f)(k) * *
Nina Laserson Dunn................................ 54,642(f)(l) * *
Richard A. Schneider.............................. 47,510(e)(f)(m) * *
Robert F. Mehmel.................................. 12,500(f)(h) * *
All directors and executive officers as a group
(14 persons).................................... 1,055,950(e)(f)(g)(n) 8.5% 6.6%

------------------------
* Less than 1%.

(a) Lancer Partners, L.P. has its principal executive offices at 475 Steamboat
Road, Greenwich, CT 06930.

(b) Consists of 1,151,350 shares of common stock held by Lancer Offshore, Inc.
("Lancer Offshore"), a private investment company, 549,750 shares of common
stock held by Lancer Partners, LP ("Lancer Partners"), a private investment
limited partnership, and 27,800 shares of common stock held by Michael
Lauer. We have been advised that Mr. Lauer has sole voting power and sole
dispositive power with respect to 27,800 shares. Mr. Lauer serves as the
general partner of Lancer Partners and is the managing partner of Lancer
Offshore. We have has been advised that Mr. Lauer also has sole voting and
dispositive authority over the shares held by Lancer Partners and Lancer
Offshore with respect to a total of 1,701,100 shares.

(c) Palisade Capital Management, L.L.C. has its principal executive offices at
One Bridge Plaza, Suite 695, Fort Lee, NJ 07024.

(d) We have been advised that Palisade Capital Management, L.L.C., acting as an
investment advisor, has sole voting power with respect to 596,000 shares and
sole dispositive power with respect to 668,000 shares.

(e) Does not include 6,532 shares of common stock held by the trustee of our
Retirement/Savings Plan. Mr. Newman and Mr. Schneider share the power to
direct the voting of such shares with members of the administrative
committee of such plan. Mr. Newman and Mr. Schneider disclaim beneficial
ownership as to and of such shares.

(f) Includes shares of common stock that might be purchased upon exercise of
options that were exercisable on December 12, 2001 or within 60 days
thereafter, as follows: Mr. Newman, 475,000 shares; Mr. Albom, 15,000
shares; Dr. Fraser, 15,000 shares; Mr. Heitmann, 15,000 shares;
Mr. Honigman, 0 shares; Mr. James, 5,600 shares; Mr. Kaplan, 15,000 shares;
Admiral Platt, 77,500 shares; Mr. Rosen, 10,000 shares; General Reimer,
5,000 shares; Mr. Casner, 67,500 shares; Ms. Dunn, 52,500 shares;
Mr. Schneider, 39,000 shares; Mr. Mehmel, 12,500 shares and all directors,
nominees and executive officers as a group, 802,100 shares.

(g) Includes 4,800 shares of common stock held by Mr. Newman as custodian for
his daughter, over which Mr. Newman has sole voting and investment power,
and 50,000 shares of common stock the receipt of which has been deferred by
Mr. Newman.

(h) Mr. Mehmel's employment with us commenced on January 8, 2001.

(i) If the over-allotment option is exercised in full, Mr. Newman's ownership
will decrease to 474,418 shares, or 2.9% of the common stock outstanding.

(j) If the over-allotment option is exercised in full, Adm. Platt's ownership
will decrease to 83,150 shares.

(k) If the over-allotment option is exercised in full, Mr. Casner's ownership
will decrease to 59,130 shares.

(l) If the over-allotment option is exercised in full, Ms. Dunn's ownership will
decrease to 29,642 shares.

(m) If the over-allotment option is exercised in full, Mr. Schneider's ownership
will decrease to 32,510 shares.

(n) If the over-allotment option is exercised in full, the ownership of all
directors and executive officers as a group will decrease to 785,950 shares,
or 4.9% of the common stock outstanding.

DESCRIPTION OF THE CAPITAL STOCK

Our authorized capital stock consists of 30,000,000 shares of common stock,
par value $.01 per share, and 2,000,000 shares of undesignated preferred stock,
$10.00 par value per share. As of December 12, 2001, 12,402,573 shares of common
stock, were issued and outstanding and 2,796,877 shares were reserved for future
issuance upon exercise of outstanding warrants and stock options. There were no
shares of preferred stock designated or issued. All of our outstanding shares of
common stock are fully paid and non-assessable.

Under the terms of our corporate charter, our board of directors is
authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our board of directors has discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption rights and liquidation
preferences of each series of preferred stock.

The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
stockholder approval of specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of our
outstanding voting common stock. We have no present plans to issue any shares of
preferred stock.

In connection with our acquisition in February 1999 of NAI
Technologies, Inc., we assumed warrants issued by NAI, which were outstanding
and unexercised immediately prior to the effective time of the merger. We issued
warrants to purchase our common stock to replace these assumed NAI warrants.
Each warrant entitles the registered holder of the warrant to purchase one share
of our common stock at $10.00 per share at any time on or before February 15,
2002. As of September 30, 2001, 581,313 shares of common stock were issuable
upon exercise of outstanding warrants.

The holders of our common stock have one vote per share with respect to
matters submitted to a vote of the stockholders. Under our bylaws, any action
that may be taken at a meeting of our stockholders may be taken without a
meeting, without prior notice and without a vote, if a written consent setting
forth the action to be taken is signed by the holders of not less than the
minimum number of votes that could be necessary to take such action at a meeting
of the stockholders at which all shares entitled to vote thereon were present
and voted. The bylaws also provide that prompt notice of the taking of corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.

UNDERWRITING

Subject to the terms and conditions of an underwriting agreement, dated
December 14, 2001, the underwriters named below have severally agreed with us
and the selling stockholders to purchase from us the number of shares of common
stock set forth below opposite their respective names. Bear,
Stearns & Co. Inc. and First Union Securities, Inc. are the representatives of
the underwriters.

UNDERWRITER NUMBER OF SHARES
----------- ----------------

Bear, Stearns & Co. Inc..................................... 2,450,000
First Union Securities, Inc................................. 1,050,000
----------
Total..................................................... 3,500,000
==========

The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters and to other conditions set forth in the underwriting agreement. The
underwriters are obligated to purchase and accept delivery of all the shares of
common stock offered hereby, other than those shares covered by the
over-allotment option described below, if any are purchased.

The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
indicated on the cover page of this prospectus and to certain dealers at that
price less a concession of not in excess of $1.06 per share, of which $0.10 may
be reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as
indicated on the cover page of this prospectus. The common stock is offered by
the underwriters as stated in this prospectus, subject to receipt and acceptance
by them and subject to their right to reject any order in whole or in part. The
underwriters have informed us that they do not intend to confirm sales of common
stock to any accounts over which they exercise discretionary authority.

We and the selling stockholders have granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase from
time to time up to an aggregate of 525,000 shares of our common stock to cover
over-allotments, if any, at the public offering price less underwriting
discounts and commissions. If the underwriters exercise their over-allotment
option to purchase any of the additional 525,000 shares of common stock, each
underwriter, subject to certain conditions, will become obligated to purchase
its pro-rata portion of these additional shares based on the underwriter's
percentage purchase commitment in the offering as indicated in the table above.
If purchased, these additional shares will be sold by the underwriters on the
same terms as those on which the shares offered by this prospectus are being
sold. We and the selling stockholders will be obligated, pursuant to the
over-allotment option, on a pro-rata basis, to sell shares to the underwriters
to the extent the over-allotment option is exercised. The underwriters may
exercise the over-allotment option only to cover over-allotments made in
connection with the sale of the shares of common stock offered in this offering.

The following table summarizes the underwriting compensation to be paid to
the underwriters by us and the selling stockholders the proceeds of the
offering, before expenses, to us. Such amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.

TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------

Underwriting discounts and commissions payable by
us................................................. $1.76 $6,160,000 $6,608,800
Underwriting discounts and commissions payable by the
selling stockholders............................... $1.76 $ -- $ 475,200

The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.

We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $1,000,000.

We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments that the underwriters may be required to make in
respect of those liabilities.

Each of our executive officers and directors including, without limitation,
the selling stockholders, have agreed, subject to specified exceptions, not to:

- offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of common stock or
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock
owned as of the date of this prospectus or thereafter acquired directly by
those holders or with respect to which they have the power of disposition;
or

- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock (regardless of whether any of these transactions are to be settled
by the delivery of common stock, or such other securities, in cash or
otherwise) for a period of 90 days after the date of this prospectus
without the prior written consent of Bear, Stearns & Co. Inc. This
restriction terminates after the close of trading of the common stock on
and including the 90th day after the registration statement relating to
the offering has been declared effective by the staff of the Securities
and Exchange Commission. However, Bear, Stearns & Co. Inc. may, in its
sole discretion and at any time or from time to time before the
termination of the 90-day period, without notice, release all or any
portion of the securities subject to lock-up agreements. There are no
existing agreements between the representatives and any of our
stockholders who have executed a lock-up agreement, other than the selling
stockholders, providing consent to the sale of shares prior to the
expiration of the lock-up period.

In addition, we have agreed that, subject to certain exceptions, during the
lock-up period we will not, without the prior written consent of Bear,
Stearns & Co. Inc., consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options or shares of common stock under existing
stock option and incentive plans.

Other than in the United States, no action has been taken by us, the selling
stockholders, or the underwriters that would permit a public offering of the
shares of common stock offered by this prospectus in any jurisdiction where
action for that purpose is required. The shares of common stock offered by this
prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of common stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction.
Persons into whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering and
the distribution of this prospectus. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any shares of common stock
offered by this prospectus in any jurisdiction in which such an offer or a
solicitation is unlawful.

OUR COMMON STOCK IS TRADED ON THE AMERICAN STOCK EXCHANGE UNDER THE SYMBOL
"DRS."

A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters of this offering, or by their affiliates. In

those cases, prospective investors may view offering terms online and, depending
upon the particular underwriter, prospective investors may be allowed to place
orders online. The underwriters may agree with us to allocate a specific number
of shares for sale to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the same basis as
other allocations. Other than the prospectus in electronic format, the
information on any underwriter's web site and any information contained in any
other web site maintained by an underwriter is not part of the prospectus or the
registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.

The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act, some participants in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised us that such transactions may be effected on the
American Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.

First Union Securities, Inc., one of the underwriters, is an indirect,
wholly-owned subsidiary of Wachovia Corporation, which conducts its investment
banking, institutional, and capital markets businesses under the trade name of
Wachovia Securities. Any references to Wachovia Securities in this prospectus,
however, does not include Wachovia Securities, Inc., a member of NASD/SIPC and a
separate broker-dealer subsidiary of Wachovia Corporation and an affiliate of
First Union Securities, Inc.

Bear, Stearns & Co. Inc. and First Union Securities, Inc. from time to time
perform investment banking and other financial services for us for which they
have received advisory or transaction fees, as applicable, plus out-of-pocket
expenses, of the nature and in amounts customary in the industry for these
financial services. First Union National Bank, an affiliate of First Union
Securities, Inc., is the administrative agent for our lenders under our credit
facility and will receive a portion of the net proceeds of this offering in
repayment of amounts outstanding owed to it under the credit facility.

LEGAL MATTERS

The validity of the shares of our common stock offered hereby will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Mark N. Kaplan, a member of our board of directors, is of counsel to Skadden,
Arps, Slate, Meagher & Flom LLP. Mr. Kaplan holds shares and options to purchase
shares of our common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Fulbright & Jaworski
L.L.P., New York, New York.

EXPERTS

The consolidated financial statements and financial statement schedule of
DRS Technologies, Inc. and subsidiaries as of March 31, 2001 and 2000, and for
each of the years in the three-year period ended March 31, 2001, have been
included herein and in the registration statement in reliance upon the report,
appearing elsewhere herein, of KPMG LLP, independent accountants, and upon the
authority of said firm as experts in accounting and auditing.

The statement of assets to be acquired and liabilities to be assumed of
certain operations of the Sensors and Electronic Systems organization of The
Boeing Company as of December 31, 2000, and its direct revenues and direct
operating expenses for the year then ended, included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report expresses an unqualified opinion and
includes an explanatory paragraph describing the basis upon which these
statements were prepared), and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our filings with the SEC are available to the public
over the Internet at the SEC website at http://www.sec.gov. You may also read
and copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. These documents are also available at the
public reference rooms at the SEC's regional office in New York, New York.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006, on which
our common stock is listed.

We are "incorporating by reference" in the prospectus the information we
file with the SEC, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We are
incorporating by reference the documents listed below and any future filings we
make with the SEC under Section 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 prior to the termination of this offering.

- Annual Report on Form 10-K for the fiscal year ended March 31, 2001.

- The Proxy Statement, dated June 27, 2001, for the Annual Meeting of
Stockholders.

- Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

- Amended Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 2001.

- Current Report on Form 8-K, filed October 12, 2001.

- Current Report on Form 8-K/A, filed November 21, 2001.

You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:

DRS Technologies, Inc.
Corporate Headquarters
5 Sylvan Way
Parsippany, NJ 07054
Tel. No.: (973) 898-1500

INDEX TO FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

PAGE
DRS TECHNOLOGIES, INC.: --------

March 31, 2001:

Independent Auditors' Report.............................. F-2

Consolidated Balance Sheets as of March 31, 2001 and
2000.................................................... F-3

Consolidated Statements of Earnings for the years ended
March 31, 2001, 2000 and 1999........................... F-4

Consolidated Statements of Stockholders' Equity and
Comprehensive Earnings for the years ended March 31,
2001, 2000 and 1999..................................... F-5

Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999........................... F-6

Notes to Consolidated Statements.......................... F-7

Financial Statement Schedule--Schedule II--Valuation and
Qualifying Accounts for the years ended March 31, 2001,
2000 and 1999........................................... F-32

September 30, 2001:

Condensed Consolidated Balance Sheets--September 30, 2001
(Unaudited) and March 31, 2001.......................... F-33

Unaudited Condensed Consolidated Statements of
Earnings--three and six months ended September 30, 2001
and 2000................................................ F-34

Unaudited Condensed Consolidated Statements of Cash
Flows--six months ended September 30, 2001 and 2000..... F-35

Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. F-36

THE SENSOR AND ELECTRONIC SYSTEMS BUSINESS:

Independent Auditors' Report................................ F-48

Statements of assets to be acquired and liabilities to be
assumed as of December 31, 2000 and June 30, 2001
(unaudited)............................................... F-49

Statements of direct revenues and direct operating expenses
for the year ended December 31, 2000 and the six months
ended June 30, 2001 and 2000 (unaudited).................. F-50

Notes to financial statements for the year ended
December 31, 2000 and the six months ended June 30, 2001
and 2000 (unaudited)...................................... F-51

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
DRS Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of DRS
Technologies, Inc. and subsidiaries as of March 31, 2001 and 2000, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive earnings, and cash flows for each of the years in the three-year
period ended March 31, 2001. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DRS
Technologies, Inc. and subsidiaries as of March 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP

Short Hills, New Jersey
May 17, 2001

F-2

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

MARCH 31,
-------------------
2001 2000
-------- --------

ASSETS
Current Assets
Cash and cash equivalents................................. $ 2,324 $ 3,778
Accounts receivable, net (Note 5)......................... 97,645 80,894
Inventories, net of progress payments (Note 6)............ 74,327 62,326
Prepaid expenses, deferred income taxes and other current
assets (Note 12)........................................ 8,697 6,326
Net current assets of discontinued operations (Note 4).... -- 5,309
-------- --------
Total current assets.................................... 182,993 158,633
-------- --------
Property, plant and equipment, net (Note 7)................. 37,639 29,006
Goodwill and related intangible assets, net (Note 8)........ 109,302 125,321
Deferred income taxes and other noncurrent assets
(Note 12)................................................. 5,006 7,138
-------- --------
Total assets............................................ $334,940 $320,098
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt (Note 10).......... $ 7,217 $ 5,699
Short-term bank debt (Note 10)............................ 831 17,781
Accounts payable.......................................... 40,089 28,295
Accrued expenses and other current liabilities
(Note 9)................................................ 91,170 85,474
-------- --------
Total current liabilities............................... 139,307 137,249
-------- --------
Long-term debt, excluding current installments (Note 10).... 75,076 97,695
Other liabilities (Notes 13 and 14)......................... 8,610 6,970
-------- --------
Total liabilities....................................... 222,993 241,914
-------- --------
Stockholders' equity (Notes 10 and 13)
Preferred Stock, no par value. Authorized 2,000,000
shares; none issued at March 31, 2001 and 2000.......... -- --
Common Stock, $.01 par value per share. Authorized
20,000,000 shares; issued 12,058,057 and 9,717,020
shares at March 31, 2001 and 2000, respectively......... 121 97
Additional paid-in capital................................ 72,033 48,584
Retained earnings......................................... 44,025 32,047
Accumulated other comprehensive losses.................... (3,968) (86)
Treasury Stock, at cost: 440,939 shares of common stock at
March 31, 2000.......................................... -- (1,988)
Unamortized stock compensation............................ (264) (470)
-------- --------
Total stockholders' equity.............................. 111,947 78,184
-------- --------
Commitments and contingencies (Notes 3 and 14)
Total liabilities and stockholders' equity.............. $334,940 $320,098
======== ========

See accompanying Notes to Consolidated Financial Statements.

F-3

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PER-SHARE DATA)

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------

Revenues.................................................... $427,606 $391,467 $265,849
Costs and expenses (Note 6)................................. 389,550 363,086 250,548
Restructuring charges (Note 2).............................. 525 2,203 --
-------- -------- --------
Operating income.......................................... 37,531 26,178 15,301
Interest and other income, net.............................. (310) (572) (857)
Interest and related expenses............................... 11,461 12,600 9,357
-------- -------- --------
Earnings from continuing operations before extraordinary
item, minority interests and income taxes............... 26,380 14,150 6,801
Minority interests.......................................... 1,426 1,318 1,021
-------- -------- --------
Earnings from continuing operations before extraordinary
item and income taxes................................... 24,954 12,832 5,780
Income taxes (Note 12)...................................... 12,976 5,171 1,915
-------- -------- --------
Earnings from continuing operations before extraordinary
item.................................................... 11,978 7,661 3,865
Loss from discontinued operations, net of tax (Note 4)...... -- (1,255) (879)
Loss on disposal of discontinued operations, net of tax
(Note 4).................................................. -- (2,096) --
Extraordinary item, net of tax (Note 10).................... -- -- (2,306)
-------- -------- --------
Net earnings.............................................. $ 11,978 $ 4,310 $ 680
======== ======== ========
Net earnings per share of common stock (Note 1)

Basic earnings per share:
Earnings from continuing operations before extraordinary
item.................................................. $ 1.14 $ 0.83 $ 0.58
Loss from discontinued operations, net of tax........... -- (0.14) (0.13)
Loss on disposal of discontinued operations, net of
tax................................................... -- (0.23) --
Extraordinary item, net of tax.......................... -- -- (0.35)
-------- -------- --------
Net earnings.............................................. $ 1.14 $ 0.47 $ 0.10
-------- -------- --------
Diluted earnings per share:
Earnings from continuing operations before extraordinary
item.................................................. $ 1.01 $ 0.76 $ 0.57
Loss from discontinued operations, net of tax........... -- (0.11) (0.13)
Loss on disposal of discontinued operations, net of
tax................................................... -- (0.18) --
Extraordinary item, net of tax.......................... -- -- (0.34)
-------- -------- --------
Net earnings.............................................. $ 1.01 $ 0.47 $ 0.10
======== ======== ========

See accompanying Notes to Consolidated Financial Statements.

F-4

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS

(IN THOUSANDS, EXCEPT SHARE DATA)

ACCUMULATED TREASURY STOCK
COMMON STOCK ADDITIONAL OTHER (NOTE 13)
--------------------- PAID-IN RETAINED COMPREHENSIVE -------------------
YEARS ENDED MARCH 31, 2001, 2000 AND 1999 SHARES AMOUNT CAPITAL EARNINGS LOSSES SHARES AMOUNT
----------------------------------------- ---------- -------- ---------- -------- -------------- -------- --------

Balances at March 31, 1998............. 6,596,237 $ 66 $19,399 $27,057 $ (135) 402,461 $(1,561)
Comprehensive earnings
Net earnings......................... -- -- -- 680 -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- (4) -- --
---------- ---- ------- ------- ------- -------- -------
Total comprehensive earnings....... -- -- -- 680 (4) -- --
---------- ---- ------- ------- ------- -------- -------
Stock options exercised................ 63,600 1 143 -- -- -- --
Compensation relating to stock options and
other stock awards, net.............. -- -- 427 -- -- -- --
Restricted stock bonus awards.......... -- -- 173 -- -- (17,297) 68
Conversion of 9% Debentures (Note 10)... 97,830 1 855 -- -- -- --
Equity issued in connection with the NAI
Merger (Notes 3 and 13)............ 2,858,266 28 27,041 -- -- -- --
---------- ---- ------- ------- ------- -------- -------
Balances at March 31, 1999............. 9,615,933 96 48,038 27,737 (139) 385,164 (1,493)
---------- ---- ------- ------- ------- -------- -------
Comprehensive earnings
Net earnings......................... -- -- -- 4,310 -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- 53 -- --
---------- ---- ------- ------- ------- -------- -------
Total comprehensive earnings....... -- -- -- 4,310 53 -- --
---------- ---- ------- ------- ------- -------- -------
Stock options exercised................ 101,087 1 502 -- -- 55,775 (495)
Compensation relating to stock options and
other stock awards, net.............. -- -- 44 -- -- -- --
---------- ---- ------- ------- ------- -------- -------
Balances at March 31, 2000............. 9,717,020 97 48,584 32,047 (86) 440,939 (1,988)
---------- ---- ------- ------- ------- -------- -------
Comprehensive earnings
Net earnings......................... -- -- -- 11,978 -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- (3,882) -- --
---------- ---- ------- ------- ------- -------- -------
Total comprehensive earnings....... -- -- -- 11,978 (3,882) -- --
---------- ---- ------- ------- ------- -------- -------
Stock options and warrants exercised... 248,391 2 2,289 -- -- -- --
Income tax benefit from stock options
exercised............................ -- -- 607 -- -- -- --
Compensation relating to stock options and
other stock awards, net of
forfeitures.......................... (10,465) -- (105) -- -- -- --
Conversion of 9% Debentures (Note 10)... 2,188,691 22 18,645 -- -- -- --
Equity issued in connection with the GAC
acquisition (Notes 3 and 13)....... 355,359 4 3,997 -- -- -- --
Cancellation of treasury stock......... (440,939) (4) (1,984) -- -- (440,939) 1,988
---------- ---- ------- ------- ------- -------- -------
Balances at March 31, 2001............. 12,058,057 $121 $72,033 $44,025 $(3,968) -- $ --
========== ==== ======= ======= ======= ======== =======

UNAMORTIZED TOTAL
STOCK STOCKHOLDERS'
YEARS ENDED MARCH 31, 2001, 2000 AND 1999 COMPENSATION EQUITY
----------------------------------------- ------------- -------------

Balances at March 31, 1998............. $(491) $ 44,335
Comprehensive earnings
Net earnings......................... -- 680
Foreign currency translation
adjustment......................... -- (4)
----- --------
Total comprehensive earnings....... -- 676
----- --------
Stock options exercised................ -- 144
Compensation relating to stock options and
other stock awards, net.............. (314) 113
Restricted stock bonus awards.......... 8 249
Conversion of 9% Debentures (Note 10)... -- 856
Equity issued in connection with the NAI
Merger (Notes 3 and 13)............ -- 27,069
----- --------
Balances at March 31, 1999............. (797) 73,442
----- --------
Comprehensive earnings
Net earnings......................... -- 4,310
Foreign currency translation
adjustment......................... -- 53
----- --------
Total comprehensive earnings....... -- 4,363
----- --------
Stock options exercised................ -- 8
Compensation relating to stock options and
other stock awards, net.............. 327 371
----- --------
Balances at March 31, 2000............. (470) 78,184
----- --------
Comprehensive earnings
Net earnings......................... -- 11,978
Foreign currency translation
adjustment......................... -- (3,882)
----- --------
Total comprehensive earnings....... -- 8,096
----- --------
Stock options and warrants exercised... -- 2,291
Income tax benefit from stock options
exercised............................ -- 607
Compensation relating to stock options and
other stock awards, net of
forfeitures.......................... 206 101
Conversion of 9% Debentures (Note 10)... -- 18,667
Equity issued in connection with the GAC
acquisition (Notes 3 and 13)....... -- 4,001
Cancellation of treasury stock......... -- --
----- --------
Balances at March 31, 2001............. $(264) $111,947
===== ========

See accompanying Notes to Consolidated Financial Statements.

F-5

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------

Cash Flows from Operating Activities:

Net earnings................................................ $ 11,978 $ 4,310 $ 680

Adjustments to reconcile net earnings to cash flows from
operating activities:

Loss from discontinued operations, net of tax............. -- 1,255 879
Loss on disposal of discontinued operations, net of tax... -- 2,096 --
Extraordinary item, net of tax............................ -- -- 2,306
Depreciation and amortization............................. 16,245 17,070 11,601
Inventory reserves and provision for doubtful accounts.... 2,103 2,906 4,037
Deferred income taxes..................................... (287) (550) (3,364)
Other, net................................................ 1,856 1,382 373

Changes in assets and liabilities, net of effects from
business combinations:
Increase in accounts receivable........................... (15,926) (4,200) (21,002)
(Increase) decrease in inventories........................ (9,456) 7,052 (22,750)
Decrease (increase) in prepaid expenses and other current
assets.................................................. 354 1,573 (646)
Increase (decrease) in accounts payable................... 11,007 (15,450) 12,202
Increase (decrease) in accrued expenses and other current
liabilities............................................. 6,916 (3,750) 16,168
Increase (decrease) in customer advances.................. 7,057 (6,518) 14,613
Other, net................................................ 2,028 841 461
-------- -------- --------
Net cash provided by operating activities of continuing
operations.............................................. 33,875 8,017 15,558
Net cash used in operating activities of discontinued
operations.............................................. -- (590) (477)
-------- -------- --------
Net cash provided by operating activities................. 33,875 7,427 15,081
-------- -------- --------
Cash Flows from Investing Activities:

Capital expenditures...................................... (16,185) (6,210) (6,554)
Payments pursuant to business combinations, net of cash
acquired................................................ (6,979) (8,386) (54,176)
Proceeds from sale of business............................ 3,575 -- --
Other, net................................................ 329 (230) 103
-------- -------- --------
Net cash used in investing activities from continuing
operations.............................................. (19,260) (14,826) (60,627)
Net cash used in investing activities from discontinued
operations.............................................. -- (130) (285)
-------- -------- --------
Net cash used in investing activities..................... (19,260) (14,956) (60,912)
-------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from acquisition-related debt................ 7,500 8,000 47,075
Payments on long-term debt................................ (63,130) (10,096) (1,193)
Proceeds from long-term debt borrowings................... 37,284 4,925 5,367
Retirement of convertible debt............................ -- (690) (4,992)
Proceeds from exercise of stock options and warrants...... 2,188 8 144
Other, net................................................ 102 98 47
-------- -------- --------
Net cash (used in) provided by financing activities....... (16,056) 2,245 46,448
-------- -------- --------
Effect of exchange rates on cash and cash equivalents....... (13) (969) (280)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (1,454) (6,253) 337
Cash and cash equivalents, beginning of year................ 3,778 10,031 9,694
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 2,324 $ 3,778 $ 10,031
======== ======== ========

See accompanying Notes to Consolidated Financial Statements.

F-6

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. ORGANIZATION

DRS Technologies, Inc. and Subsidiaries (hereinafter, DRS or the Company) is
a supplier of defense electronics systems and components and has served the
defense industry for over thirty years. The Company provides advanced technology
products and services to government and commercial customers worldwide,
developing and manufacturing a broad range of mission-critical products in the
areas of communications, combat systems, rugged computers, electro-optics, data
storage, digital imaging, flight safety and space. The Company's defense
electronics systems and subsystems are sold to all branches of the U.S.
military, U.S. government intelligence agencies, major aerospace/defense
contractors and international military forces.

B. BASIS OF PRESENTATION AND USE OF ESTIMATES

The consolidated financial statements include the accounts of DRS
Technologies, Inc., its subsidiaries (all of which are wholly or majority owned)
and a joint venture consisting of an 80% controlling partnership interest. All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company's magnetic tape head business units, which were sold,
are reflected as discontinued operations for all periods presented (see
Note 4).

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, including estimates of anticipated contract costs and
revenues utilized in the revenue recognition process, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

C. CLASSIFICATIONS

Unbilled receivables, inventories, accrual for future costs on uncompleted
contracts, unearned income and accrual for future costs related to acquired
contracts are primarily attributable to long-term contracts or programs in
progress for which the related operating cycles are longer than one year. In
accordance with industry practice, these items are included in current assets
and liabilities, respectively.

The Company has reclassified its Mellon Bank, N.A. working capital
obligations (see Note 10) from short-term bank debt to long-term debt, excluding
current installments, on the March 31, 2001 Consolidated Balance Sheet to
reflect the intent of the borrowings and their maturity date of October 1, 2003.
Certain other amounts for prior years have been reclassified to conform with the
fiscal 2001 presentation.

D. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY
TRANSACTIONS

Transactions in foreign currencies are translated into U.S. dollars at the
approximate prevailing rate at the time of the transaction. The operations of
the Company's foreign subsidiaries are translated from the local (functional)
currencies into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." The rates of
exchange at each balance sheet date are used for translating certain balance
sheet accounts, and a weighted average rate of exchange is used for translating
the statement of earnings. Gains or losses resulting from these

F-7

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

translation adjustments are included in the accompanying Consolidated Balance
Sheets as a separate component of stockholders' equity.

E. CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

F. RECEIVABLES

Receivables consist of amounts billed and currently due from customers, and
unbilled costs and accrued profits primarily related to revenues on long-term
contracts that have been recognized for accounting purposes, but not yet billed
to customers.

G. INVENTORIES

Commercial and other non-contract inventories are stated at the lower of
cost (which includes material, labor and manufacturing overhead) or net
realizable value. Costs accumulated under contracts are stated at actual cost,
not in excess of estimated net realizable value, including, for long-term
government contracts, applicable amounts of general and administrative expenses
which include research and development costs, where such costs are recoverable
under customer contracts. General and administrative expenses related to
commercial products and services provided essentially under commercial terms and
conditions are expensed as incurred.

Pursuant to contract provisions, agencies of the U.S. Government and certain
other customers have title to, or a security interest in, inventories related to
such contracts as a result of progress payments and advances. Accordingly, such
progress payments and certain advances are reflected as an offset against the
related inventory balances. To the extent that customer advances exceed related
inventory levels, such advances are classified as current liabilities.

H. PROPERTY, PLANT AND EQUIPMENT

Depreciation and amortization are calculated on the straight-line method.
The ranges of estimated useful lives are: office furnishings, laboratory,
production and other equipment, 3-10 years; building and building improvements,
15-40 years; and leasehold improvements, over the shorter of the estimated
useful lives of the improvements or the life of the lease.

Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. Costs of assets retired, sold or otherwise disposed
of are removed from the accounts, and any gains or losses thereon are reflected
in results of operations.

I. GOODWILL AND RELATED INTANGIBLE ASSETS

Goodwill and related intangible assets consist primarily of intangible
assets resulting from acquisitions. Goodwill represents the excess of cost of
the investments over the fair values of the underlying net assets at the dates
of investment and certain identifiable acquired intangible assets (see Note 3).
Goodwill and related intangible assets are being amortized on a straight-line
basis over appropriate periods, generally 10 to 30 years.

F-8

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

The Company assesses the recoverability of the carrying value of its
long-lived assets, including goodwill and other related intangibles, whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. The Company evaluates the recoverability of such
assets based upon the expectations of undiscounted cash flows for each
subsidiary or acquired business having a material acquisition-related intangible
asset balance. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss would be recognized for the
difference between the fair value and the carrying amount.

K. DERIVATIVE FINANCIAL INSTRUMENTS

The Company does not use derivative financial instruments for speculative
purposes. The Company utilizes, on a limited basis, derivative financial
instruments in the form of interest rate collars to manage its exposure to
interest rates (see Note 10). An interest rate collar is a combination of an
interest rate cap and an interest rate floor. The collars in place allow the
Company to manage a portion of its variable rate borrowings to an acceptable,
predetermined range. Under the collar, no payments are required to be made by
the Company or paid to the Company unless the prevailing market rate (based on
the London Interbank Offered Rate or U.S. Prime Rate) drops below the floor or
exceeds the ceiling. Any payment made or received by the Company in connection
with the settlement of a collar is reflected as an adjustment to interest
expense in the period in which it is settled. Effective April 1, 2001, the
Company began to account for its derivative financial instruments in accordance
with Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (see New Accounting
Pronouncements for additional discussion).

L. REVENUE RECOGNITION

Revenues related to long-term, firm fixed-price contracts, which principally
provide for the manufacture and delivery of finished units, are recognized as
shipments are made and, in certain circumstances, when all applicable revenue
recognition criteria are met, prior to shipment to the customer. The estimated
profits applicable to shipments are recorded pro rata based upon estimated total
profit at completion of the contracts. Revenues from commercial product sales
also are recognized upon shipment.

Revenues on contracts with significant engineering as well as production
requirements are recorded using the percentage-of-completion method measured by
the costs incurred on each contract to estimated total contract costs at
completion (cost-to-cost) with consideration given for risk of performance and
estimated profit.

Revenues from cost-reimbursement contracts are recorded, together with the
fees earned, as costs are incurred.

Most of the Company's contracts are long-term in nature, spanning multiple
years. The Company reviews cost performance and estimates to complete on these
contracts at least quarterly and in many cases more frequently. If the estimated
cost to complete a contract changes from the previous estimate, the Company will
record a positive or negative adjustment to earnings in the current period.

Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and realization is
probable, and are determined on a percentage-of-completion basis measured by the
cost-to-cost method. Incentives or penalties and awards applicable to
performance on contracts are considered in estimating sales and profit rates,
and are

F-9

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

recorded when there is sufficient information to assess anticipated contract
performance. Incentive provisions which increase or decrease earnings based
solely on a single significant event generally are not recognized until the
event occurs.

Included in revenues for fiscal 2001, 2000 and 1999 were $32.9 million,
$23.5 million and $15.4 million, respectively, of customer-sponsored research
and development.

Approximately 78%, 80% and 81% of the Company's revenues in fiscal 2001,
2000 and 1999, respectively, were derived directly or indirectly from
defense-industry contracts with the United States Government. In addition,
approximately 12% in fiscal 2001, 12% in fiscal 2000 and 8% in fiscal 1999 of
the Company's revenues were derived directly or indirectly from sales to foreign
governments.

M. STOCK-BASED COMPENSATION

As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), the Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option plans and, accordingly, compensation cost is
recognized for its stock options in the financial statements only as it relates
to non-qualified stock options for which the exercise price was less than the
fair market value of the Company's Common Stock as of the date of grant. The
compensation cost of these grants are amortized on a straight-line basis over
the lives of the respective grants. The Company follows the provisions of
SFAS 123 and provides pro forma disclosures of net earnings and earnings per
share as if the fair value-based method of accounting for stock options, as
defined in SFAS 123, had been applied (see Note 13).

N. INCOME TAXES

In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
recognizes deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. A valuation
allowance is provided when it is more likely than not that some portion or all
of a deferred tax asset will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

F-10

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net earnings by the
weighted average number of shares of Common Stock outstanding during each
period. The computation of diluted earnings per share includes the effect of
shares from the assumed exercise of dilutive stock options and warrants and,
when dilutive, the effect of the assumed conversion of the Company's previously
outstanding 9% Senior Subordinated Debentures (see Note 10). The following table
provides the components of the per-share computations:

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER-SHARE DATA)

Basic EPS Computation
Earnings from continuing operations before extraordinary
item.................................................... $11,978 $7,661 $3,865
Loss from discontinued operations, net of tax............. -- (1,255) (879)
Loss on disposal of discontinued operations, net of tax... -- (2,096) --
Extraordinary item, net of tax............................ -- -- (2,306)
------- ------ ------
Net earnings.............................................. $11,978 $4,310 $ 680
------- ------ ------
Weighted average common shares outstanding.................. 10,485 9,268 6,618
------- ------ ------
Basic earnings (losses) per share:
Earnings from continuing operations before extraordinary
item.................................................... $ 1.14 $ 0.83 $ 0.58
Loss from discontinued operations, net of tax............. -- (0.14) (0.13)
Loss on disposal of discontinued operations, net of tax... -- (0.23) --
Extraordinary item, net of tax............................ -- -- (0.35)
------- ------ ------
Net earnings.............................................. $ 1.14 $ 0.47 $ 0.10
======= ====== ======
Diluted EPS Computation
Earnings from continuing operations before extraordinary
item.................................................... $11,978 $7,661 $3,865
Interest and expenses related to convertible debentures... 574 1,130 --
------- ------ ------
Adjusted net earnings from continuing operations before
extraordinary item...................................... 12,552 8,791 3,865
Loss from discontinued operations, net of tax............. -- (1,255) (879)
Loss on disposal of discontinued operations, net of tax... -- (2,096) --
Extraordinary item, net of tax............................ -- -- (2,306)
------- ------ ------
Adjusted net earnings..................................... $12,552 $5,440 $ 680
------- ------ ------
Diluted common shares outstanding:
Weighted average common shares outstanding................ 10,485 9,268 6,618
Stock options and warrants................................ 642 172 214
Convertible debentures.................................... 1,308 2,162 --
------- ------ ------
Diluted common shares outstanding........................... 12,435 11,602 6,832
------- ------ ------
Diluted earnings (losses) per share:
Earnings from continuing operations before extraordinary
item.................................................... $ 1.01 $ 0.76 $ 0.57
Loss from discontinued operations, net of tax............. -- (0.11) (0.13)
Loss on disposal of discontinued operations, net of tax... -- (0.18) --
Extraordinary item, net of tax............................ -- -- (0.34)
------- ------ ------
Net earnings.............................................. $ 1.01 $ 0.47 $ 0.10
======= ====== ======

F-11

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current liabilities, and certain debt reported in the
Consolidated Balance Sheets equal or approximate fair values. The market values
of the Company's convertible debentures and interest rate collars are disclosed
herein (see Note 10).

Q. NEW ACCOUNTING PRONOUNCEMENTS

Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
classification of gains and losses resulting from changes in the fair values of
derivatives is dependent on the intended use of the derivative and its resulting
designation. Adjustments to reflect changes in fair values of derivatives that
are not considered "highly effective hedges" are reflected in earnings.
Adjustments to reflect changes in fair values of derivatives that are considered
highly effective hedges are either reflected in earnings and largely offset by
corresponding adjustments related to the fair values of the hedged items, or
reflected in comprehensive earnings until the hedged transaction matures and the
entire transaction is recognized in earnings. The change in fair value of the
ineffective portion of a hedge is immediately recognized in earnings. The
adoption of SFAS 133 did not have any impact on the Company's results of
operations or financial position.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101, as amended, summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001,
and its adoption did not have any impact on the Company's results of operations
or financial position.

2. RESTRUCTURING

In addition to the closure of the Longmont, Colorado facility, as described
in Note 3, during the third and fourth quarters of fiscal 2000, the Company
announced plans to restructure its operations, which resulted in the Company
recording restructuring charges totaling approximately $2.2 million. The
Company's restructuring initiatives impacted the EOSG and FSCG operating
segments and DRS Corporate. EOSG recorded a restructuring charge of
approximately $831,000 primarily for costs relating to consolidating two
facilities into one in Oakland, New Jersey. FSCG recorded a restructuring charge
of approximately $669,000 and $143,000 at its DRS Hadland Ltd. (DRS Hadland) and
DRS Precision Echo, Inc. (DRS Precision Echo) operating units, respectively, for
severance and other employee-related costs. The DRS Hadland restructuring charge
was recorded in connection with the transition of the day-to-day management of
DRS Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In
addition, DRS Corporate recorded a restructuring charge of approximately
$560,000 for severance and other employee-related costs. Severance and other
employee costs were recorded in connection with the termination of 13 employees.
As of March 31, 2000, all terminations had occurred.

In the third quarter of fiscal 2001, the Company revised its estimate
relating to its facility consolidation efforts in Oakland, New Jersey and
recorded a charge of $525,000. At March 31, 2001, the majority of the
restructuring liability shown below represents termination benefits to be paid
in

F-12

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

accordance with contractual terms over the next thirteen months and lease
commitments over the next fifteen months. The following table reconciles the
restructuring liability at March 31, 2000 to the restructuring liability as of
March 31, 2001:

LIABILITY AT FISCAL 2001 UTILIZED IN LIABILITY AT
MARCH 31, 2000 CHARGES FISCAL 2001 MARCH 31, 2001
--------------- ----------- ----------- ---------------
(IN THOUSANDS)

Estimated lease commitments and related
facility costs............................ $ 328 $525 $396 $457
Severance /employee costs................... 690 -- 434 256
------ ---- ---- ----
Total....................................... $1,018 $525 $830 $713
====== ==== ==== ====

3. BUSINESS COMBINATIONS

On October 20, 1998, the Company acquired, through certain of its
subsidiaries, certain assets of the Second Generation Ground-Based
Electro-Optical Systems and Focal Plane Array businesses (together, the EOS
Business) of Raytheon Company and certain of its subsidiaries (Raytheon),
pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the
Company and Raytheon, as amended (the EOS Acquisition). The Company paid
approximately $45 million in cash for the acquisition at closing; the purchase
price is subject to a post-closing working capital adjustment, as provided for
in the Asset Purchase Agreement, not to exceed $7 million. The amount of such
working capital adjustment, if any, is the subject of arbitration between DRS
and Raytheon. Although the Company cannot, at this time, predict the outcome of
such arbitration, management does not expect that the final adjustment will have
a material impact on the Company's consolidated financial position or results of
operations. The excess of cost over the estimated fair value of identifiable net
assets acquired (goodwill) and the appraised value of certain identified
intangible assets were approximately $34.1 million and $30.8 million,
respectively, and are being amortized on a straight-line basis over twenty
years. DRS incurred professional fees and other costs related to the EOS
Acquisition of approximately $2.0 million, which were also capitalized as part
of the total purchase price. The Company has valued acquired contracts in
process at their remaining contract prices, less estimated costs to complete,
and an allowance for normal profits on the Company's effort to complete such
contracts. During fiscal 2001, the Company recorded a $9.8 million reduction to
goodwill. The reduction to goodwill was due to accruals for future contract
costs that are no longer required on acquired contracts. The EOS Business,
operating as DRS Sensor Systems, Inc. and DRS Infrared Technologies, LP,
provides products used in the detection, identification and acquisition of
targets based on infrared data.

On February 19, 1999, a wholly-owned subsidiary of the Company merged with
and into NAI Technologies, Inc., a New York corporation (NAI), with NAI being
the surviving corporation and continuing as a direct wholly-owned subsidiary of
DRS, for stock and other consideration valued at approximately $24.8 million
(the NAI Merger). In connection with the NAI Merger, the Company issued
2,858,266 shares of Common Stock. The excess of cost over the estimated fair
value of identifiable net assets acquired was approximately $26.7 million and is
being amortized on a straight-line basis over twenty years. During fiscal 2001,
new tax regulations became effective which changed the rules for determining how
net operating loss carryforwards of an acquired company could be utilized. As a
result of this tax law change, the Company recorded a $3.2 million reduction to
its deferred tax asset valuation allowance and goodwill during fiscal 2001.
Prior to the NAI Merger, the Company began to assess and formulate a plan to
close NAI's Longmont, Colorado facility and transfer

F-13

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

engineering and production to other DRS locations. In January 2000, the Company
announced its plan, which included relocating/terminating approximately 45
employees. A cost of approximately $1.5 million was recorded as an adjustment to
the acquisition cost during fiscal 2000. The Company completed its exit plan in
the first quarter of fiscal 2001. The following table reconciles the related
liability at March 31, 2000 to the liability as of March 31, 2001:

LIABILITY AT UTILIZED IN LIABILITY AT
MARCH 31, 2000 FISCAL 2001 MARCH 31, 2001
--------------- ----------- ---------------
(IN THOUSANDS)

Severance / employee costs............................. $1,195 $1,195 $ --
Estimated lease commitments and related facility
costs................................................ 215 215 --
------ ------ ----------
Total.................................................. $1,410 $1,410 $ --
====== ====== ==========

DRS also incurred professional fees and other costs related to the NAI
Merger of approximately $2.8 million, which were capitalized as part of the
total purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS
Rugged Systems (Europe) Ltd., provides rugged computers, peripherals and
integrated systems primarily for military and special government applications.

On July 21, 1999, a subsidiary of the Company, DRS Rugged Systems
(Europe) Ltd., acquired Global Data Systems Ltd. and its wholly-owned
subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash
and potential future consideration, not to exceed a total purchase price of
$10.2 million. Located in Chippenham, Wiltshire, U.K., the company designs and
develops rugged computers and peripherals primarily for military applications.
The excess of cost over the estimated fair value of identifiable net assets
acquired was approximately $8.7 million and is being amortized on a
straight-line basis over twenty years. Any additional consideration paid by the
Company would be an adjustment to goodwill.

On June 14, 2000, a newly formed subsidiary of the Company acquired the
assets of General Atronics Corporation for $7.5 million in cash and
$4.0 million in Common Stock. The Company funded the cash portion of this
acquisition through borrowings under its revolving line of credit. Located in
Wyndmoor, Pennsylvania, and now operating as DRS Communications Company, LLC
(DRS Communications Company), the company designs, develops and manufactures
military data link components and systems, high-frequency communication modems,
tactical and secure digital telephone components and radar surveillance systems
for U.S. and international militaries. DRS Communications Company is being
managed as part of FSCG. The acquisition has been accounted for using the
purchase method of accounting. The excess of costs over the estimated fair value
of identifiable net assets acquired and the appraised value of certain
identified intangible assets were approximately $3.5 million and $3.3 million,
respectively, and are being amortized on a straight-line basis over twenty years
and ten years, respectively. In connection with the acquisition, the Company
incurred approximately $420,000 in transaction costs.

All of the aforementioned acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the results of operations of the
acquired businesses were included in the Company's reported consolidated
operating results from their respective effective dates of acquisition. Except
for the EOS Acquisition and the NAI Merger, the financial position and results
of operations of these businesses were not significant to those of the Company
as of their respective effective dates of acquisition.

F-14

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. DISCONTINUED OPERATIONS

On May 18, 2000, the Company's Board of Directors approved an agreement to
sell its magnetic tape head business units located in St. Croix Falls,
Wisconsin, and Razlog, Bulgaria. These operations produced primarily magnetic
tape recording heads for transaction products that read data from magnetic
cards, tapes and ink. In fiscal 2000, in anticipation of the sale, the Company
recorded a $2.1 million charge, net of tax, on the disposal of these operations.
On August 31, 2000, the Company completed the sale and received $3.0 million of
cash and a note receivable of $1.7 million. Actual income from discontinued
operations for the five months ended August 31, 2000 was $135,000 greater than
estimated at March 31, 2000. Other costs associated with the disposal
substantially offset the improvement in operating results and, therefore, no
adjustment to the loss on disposal of discontinued operations recorded at
March 31, 2000 was required in fiscal 2001.

The results of operations of these magnetic tape head business units are
reported as discontinued operations for the years ended March 31, 2000 and 1999
and are summarized as follows:

YEARS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)

Revenues.................................................. $ 9,572 $ 7,579

Loss before income taxes.................................. (1,788) (1,038)
Income tax benefit........................................ 533 159
------- -------
Loss from discontinued operations......................... $(1,255) $ (879)
======= =======

F-15

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The net assets of the discontinued operations in the March 31, 2000
consolidated balance sheet is comprised of:

MARCH 31, 2000
---------------
(IN THOUSANDS)

Accounts receivable, net.................................... $ 1,522
Inventories................................................. 2,671
Property, plant and equipment, net.......................... 1,568
Goodwill, net............................................... 1,349
Accounts payable............................................ (339)
Accrued expenses............................................ (106)
Accrued loss on disposal, net of tax benefit of $935........ (2,096)
Other, net.................................................. 740
-------
Net assets of discontinued operations..................... $ 5,309
=======

5. ACCOUNTS RECEIVABLE

The component elements of accounts receivable, net of allowances for
doubtful accounts of $1.1 million and $1.4 million, at March 31, 2001 and 2000,
respectively, are as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

U.S. Government:
Amounts billed.......................................... $37,835 $22,462
Recoverable costs and accrued profit on progress
completed, not billed................................. 3,043 3,968
------- -------
40,878 26,430
------- -------
Other Defense Contracts:
Amounts billed.......................................... 42,041 37,489
Recoverable costs and accrued profit on progress
completed, not billed................................. 6,506 9,690
------- -------
48,547 47,179
------- -------
Other trade receivables................................... 8,220 7,285
------- -------
Total................................................... $97,645 $80,894
======= =======

Included in accounts receivable are $644,000 and $391,000 at March 31, 2001
and 2000, respectively, arising from retainage provisions and holdbacks in
certain contracts with the United States and Canadian governments which may not
be collected within one year. The Company receives progress payments on certain
contracts of 75-90% of allowable costs incurred; the remainder, including
profits and incentive fees, if any, is billed upon delivery and final acceptance
of the product. In addition, the Company bills based upon units delivered.

F-16

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVENTORIES

Inventories are summarized as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Work-in-process........................................... $83,058 $79,058
Raw material and finished goods........................... 7,992 10,917
------- -------
91,050 89,975
Less progress payments.................................... (16,723) (27,649)
------- -------
Total..................................................... $74,327 $62,326
======= =======

General and administrative costs included in inventory were $14.5 million
and $12.7 million at March 31, 2001 and 2000, respectively. General and
administrative costs included in costs and expenses amounted to $78.6 million,
$69.5 million and $49.0 million in fiscal 2001, 2000 and 1999, respectively.
Included in these amounts are expenditures for internal research and
development, amounting to approximately $8.0 million, $9.9 million and
$5.2 million in fiscal 2001, 2000 and 1999, respectively.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Laboratory and production equipment....................... $44,927 $32,540
Computer equipment........................................ 12,499 9,740
Buildings and improvements and leasehold improvements..... 13,725 9,995
Office furnishings, equipments and other.................. 5,630 4,764
------- -------
76,781 57,039
Less accumulated depreciation and amortization............ 39,142 28,033
------- -------
Total..................................................... $37,639 $29,006
======= =======

In connection with the EOSG restructuring charge discussed in Note 2, the
Company wrote off $17.6 million of gross ($503,000, net) property, plant and
equipment in the fourth quarter of fiscal 2000.

Annual depreciation and amortization of property, plant and equipment
amounted to $8.6 million, $9.5 million and $7.1 million in fiscal 2001, 2000 and
1999, respectively.

F-17

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. GOODWILL AND RELATED INTANGIBLE ASSETS

Goodwill and related intangible assets are summarized as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Goodwill................................................ $ 90,144 $102,977
Identifiable intangible assets.......................... 40,463 37,165
-------- --------
130,607 140,142
Less accumulated amortization........................... (21,305) (14,821)
-------- --------
Total................................................... $109,302 $125,321
======== ========

9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Payroll, other compensation and related expenses.......... $13,492 $11,063
Income taxes payable (Note 12)............................ 4,329 2,484
Customer advances......................................... 18,796 9,724
Accrual for future costs on uncompleted contracts......... 8,032 4,971
Unearned income and accrual for future costs related to
acquired contracts (Note 3)............................. 26,720 42,027
Other..................................................... 19,801 15,205
------- -------
Total................................................... $91,170 85,474
======= =======

10. DEBT

A summary of debt is as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

9% Senior Subordinated Convertible Debentures due
October 1, 2003......................................... $ -- $19,134
Term notes................................................ 68,019 75,750
Revolving lines of credit................................. 14,274 25,247
Other obligations......................................... 831 1,044
------- -------
83,124 121,175

Less:
Current installments of long-term debt.................... 7,217 5,699
Short-term bank debt...................................... 831 17,781
------- -------
Total long-term debt.................................... $75,076 $97,695
======= =======

F-18

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 9% Senior Subordinated Convertible Debentures, due October 1, 2003 (9%
Convertible Debentures) were issued in fiscal 1996 for an aggregate principal
amount of $25.0 million and were convertible at their face amount any time prior
to maturity into shares of Common Stock, unless previously redeemed, at a
conversion price of $8.85 per share, subject to adjustment under certain
circumstances. In fiscal 2001, the remaining balance of the 9% Convertible
Debentures was converted into approximately 2.2 million shares of the Company's
Common Stock. The Company recorded a non-cash charge to interest expense of
approximately $305,000 in fiscal 2001 in connection with certain conversions.
Prior to their redemption, the 9% Convertible Debentures were listed for trading
on the American Stock Exchange. The aggregate market values, based on closing
prices, of the then outstanding principal amount was approximately
$20.5 million as of March 31, 2000.

The Company has a $160 million secured credit facility (Facility) with
Mellon Bank, N.A., consisting of two term loans: the first in the principal
amount of $30 million (First Term Loan), and the second in the principal amount
of $50 million (Second Term Loan); and a revolving line of credit (Line of
Credit) for $80 million, subject to a borrowing base calculation. The maturity
dates of the First Term Loan and the Second Term Loan are October 20, 2003 and
October 20, 2005, respectively, with quarterly principal payments which began on
June 30, 1999. The Line of Credit matures on October 20, 2003. The Facility is
secured by substantially all of the assets of the Company. Borrowings can be
made in United States dollars at rates based on LIBOR (London Interbank Offering
Rate) or United States Prime or in Canadian dollars at rates based on LIBOR,
Canadian Prime or the Canadian Bankers Acceptance Rate. The Facility contains
certain covenants and restrictions, including maintenance of a minimum level of
consolidated net worth, a restriction on the payment of dividends on the capital
stock of the Company, a limitation on the issuance of additional debt and
certain other restrictions.

The Facility amended, restated and replaced the Company's previously
existing $60 million secured credit facility, consisting of a $20 million term
loan and a $40 million revolving line of credit. For accounting purposes, the
modification of the facility was accounted for as an extinguishment of debt
pursuant to the guidance of the Emerging Issues Task Force of the Financial
Accounting Standards Board (Issue No. 96-19). Accordingly, the unamortized
balance of deferred financing costs relating to the previous credit facility,
plus fees paid in connection with the modification, were recorded as an
extraordinary charge in the amount of $2.3 million, net of tax of $1.3 million,
during the year ended March 31, 1999.

The Company was in compliance with all covenants under its credit agreements
at March 31, 2001 and 2000. As of March 31, 2001, the Company had approximately
$59.5 million of additional available credit, after satisfaction of its
borrowing base requirement.

As of March 31, 2001, approximately $82.1 million was outstanding against
the Facility, in addition to which $6.2 million was contingently payable under
letters of credit, as compared with amounts outstanding and contingently payable
at March 31, 2000 of $101.0 million and $6.1 million, respectively. Weighted
average borrowings under revolving lines of credit for the fiscal years ended
March 31, 2001 and 2000 were approximately $24.5 million and $30.1 million,
respectively. The weighted average interest rates on outstanding revolving line
of credit borrowings as of March 31, 2001 and 2000 were 7.8% and 8.1%,
respectively. The effective interest rates on the First and Second Term Loans
were 7.5% and 9.45%, respectively, as of March 31, 2001 and 7.6% and 10.4%,
respectively, as of March 31, 2000.

The aggregate maturities of long-term debt for each of the next five years
are as follows: 2002, $7.2 million; 2003, $9.2 million; 2004, $18.7 million;
2005, $22.8 million; and 2006, $24.4 million.

F-19

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Borrowings under the Facility are sensitive to changes in interest rates, as
such borrowings bear interest at variable rates. In an effort to limit its cash
flow and interest expense exposure to interest rate fluctuations, and in
accordance with certain covenants in the Facility agreement, the Company has
entered into interest rate collar agreements with notional amounts covering a
limited amount of the aggregate outstanding principal balance of the First and
Second Term Loans. A summary of the interest rate collar agreements in place as
of March 31, 2001 and 2000 follows:

ESTIMATED
NOTIONAL AMOUNT FAIR VALUE
------------------- -------------------
MARCH 31, MARCH 31,
EFFECTIVE EXPIRATION ------------------- REFERENCE CEILING FLOOR -------------------
DATE DATE 2001 2000 RATE RATE RATE 2001 2000
--------- ---------- -------- -------- ------------------ -------- -------- -------- --------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)

4/8/98.. 1/8/01 $ -- $ 6,200 3 Month CAD-BA* 6.35% 4.84% $ -- $ 4
4/22/99.. 1/26/02 $20,000 $20,000 3 Month LIBOR 5.75% 4.80% $ (74) $426
1/26/01.. 1/30/03 $10,000 $ -- 3 Month LIBOR 6.50% 5.09% $(110) $ --
1/29/01.. 1/31/03 $10,000 $ -- 3 Month LIBOR 6.50% 5.05% $(105) $ --

------------------------

* Canadian Bankers Acceptance Rate

The weighted average three-month LIBOR rate in effect for the Company's
collars outstanding as of March 31, 2001 was 4.98%.

11. SUPPLEMENTAL CASH FLOW INFORMATION

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Supplemental disclosure of cash flow information:
Cash paid for:
Interest....................................... $11,518 $11,055 $7,978
Income taxes................................... $ 9,175 $ 6,382 $3,577

Supplemental disclosure of noncash investing and
financing activities:
Common Stock issued for purchase of GAC.......... $ 4,000 $ -- $ --
Common Stock issued for purchase of NAI.......... $ -- $27,069 $ --
Note receivable--sale of magnetic tape head
business....................................... $ 1,741 $ -- $ --
Conversion of 9% Convertible Debentures.......... $18,870 $ -- $ 856

F-20

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES

Earnings from continuing operations before extraordinary item and income
taxes consist of the following:

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Earnings from continuing operations before
extraordinary item and income taxes:
Domestic earnings............................... $29,384 $ 9,594 $3,307
Foreign (losses) earnings....................... (4,430) 3,238 2,473
------- ------- ------
Total......................................... $24,954 $12,832 $5,780
======= ======= ======

Income tax expense from continuing operations before extraordinary item
consists of the following:

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Income Tax Expense (Benefit)
Current:
Federal........................................ $ 8,962 $2,728 $2,418
State.......................................... 2,654 885 448
Foreign........................................ 1,647 2,108 2,413
------- ------ ------
13,263 5,721 5,279
------- ------ ------
Deferred:
Federal........................................ 844 804 (1,946)
State.......................................... 928 (492) 58
Foreign........................................ (2,059) (862) (1,476)
------- ------ ------
(287) (550) (3,364)
------- ------ ------
Total........................................ $12,976 $5,171 $1,915
======= ====== ======

F-21

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effects of temporary differences that
gave rise to significant portions of the deferred tax assets and deferred tax
liabilities at March 31, 2001 and 2000 are as follows:

MARCH 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Deferred tax assets:
Acquired federal net operating loss (NOL)
carryforwards......................................... $ 4,814 $ 5,062
State NOL carryforwards................................. 3,808 5,340
Costs accrued on uncompleted contracts.................. 3,845 2,974
Deferred financing costs................................ 628 874
Inventory capitalization................................ 3,359 2,577
Other................................................... 5,495 4,858
------- -------
Total gross deferred tax assets........................... 21,949 21,685
Less valuation allowance.................................. (4,395) (8,008)
------- -------
Deferred tax assets....................................... 17,554 13,677
------- -------
Deferred tax liabilities:
Depreciation and amortization........................... 1,062 1,014
General and administrative costs........................ 7,450 6,554
Federal impact of state benefits........................ 446 854
Other................................................... 745 746
------- -------
Deferred tax liabilities.................................. 9,703 9,168
------- -------
Net deferred tax assets................................... $ 7,851 $ 4,509
======= =======

A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company has
established a valuation allowance for a portion of the deferred tax asset
attributable to state and foreign net operating loss (NOL) carryforwards at
March 31, 2001, and a portion of the deferred tax asset attributable to U.S.
Federal and state NOL carryforwards as of March 31, 2000, due to the uncertainty
of future earnings of certain subsidiaries of the Company and the status of
applicable statutory regulation that could limit or preclude utilization of
these benefits in future periods. During the year ended March 31, 2001, the
valuation allowance attributable to the U.S. Federal NOL in the amount of
approximately $3.2 million was reduced to reflect a change in the expectation of
the utilization of such NOL, primarily due to a change in the Internal Revenue
Code with regard to the separate return limitation rules. Since the valuation
allowance was established as a result of the NAI Merger (see Note 3), the change
in such valuation allowance did not reduce income tax expense, but rather
reduced goodwill. Based upon the level of historical taxable income and
projections for future taxable income over the period in which the Company's
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at March 31, 2001 and 2000. During the year
ended March 31, 2001, the valuation allowance decreased by approximately
$3.6 million, primarily as a result of the above mentioned change in the
expectation of the utilization of the U.S. Federal NOL, and actual realizations
in other state NOLs, offset by an increase related to certain foreign NOLs.
During the year ended March 31, 2000,

F-22

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the valuation allowance increased by approximately $1.1 million, primarily as a
result of increases in state NOLs to the extent not anticipated to be realized.

The Company provides for the potential repatriation of certain undistributed
earnings of its foreign subsidiaries and considers earnings above the amounts on
which tax has been provided to be permanently reinvested. While these earnings
would be subject to additional tax if repatriated, such repatriation is not
anticipated. Any additional amount of tax is not practical to estimate.

Current and noncurrent deferred tax assets of $6.3 million and
$1.6 million, and $3.6 million and $0.9 million, respectively, are included in
the Consolidated Balance Sheets as of March 31, 2001 and 2000, respectively. At
March 31, 2001, approximately $15.3 million of U.S. Federal and $40.9 million of
state NOL carryforwards, which expire between fiscal years 2002 and 2020, and
$8.4 million of foreign NOLs, which carry forward indefinitely, were available.
All of the Company's U.S. Federal and $11.2 million of its state NOL
carryforwards were acquired in connection with the NAI Merger (see Note 3). The
annual utilization of these NOL carryforwards is limited under certain
provisions of the Internal Revenue Code. Any future utilization of these net
operating loss carryforwards will result in an adjustment to goodwill to the
extent it reduces the valuation allowance.

A reconciliation of the expected U.S. Federal income tax expense to the
actual (effective) income tax expense from continuing operations is as follows:

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Expected U.S. Federal income tax expense.......... $ 8,734 $4,491 $ 1,965
Difference between U.S. and foreign tax rates..... 386 185 (290)
State income tax, net of Federal income tax
benefit......................................... 1,985 256 334
Nondeductible expenses............................ 1,458 820 486
U.S. tax (benefit) expense on foreign
undistributed earnings.......................... -- (196) 196
U.S. tax benefits not previously recognized....... -- -- (629)
Other............................................. 413 (385) (147)
------- ------ -------
Total............................................. $12,976 $5,171 $ 1,915
======= ====== =======

The provision for income taxes includes all estimated income taxes payable
to Federal, state and foreign governments, as applicable.

F-23

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. COMMON STOCK, STOCK COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS

COMMON STOCK

As of March 31, 2001, the authorized capital of the Company was composed of
20.0 million shares of Common Stock (approximately 12.1 million shares issued),
and 2.0 million shares of Preferred Stock (no shares issued).

In connection with the NAI Merger, holders of NAI common stock received 0.25
of a share of DRS Common Stock for each share of NAI common stock, and each then
outstanding NAI 12% Convertible Subordinated Promissory Note (12% Notes) due
January 15, 2001 was convertible into 0.25 of a share of DRS Common Stock. In
connection with the NAI Merger, the Company issued 2,858,266 shares of Common
Stock, including 546,187 shares issued upon conversion of approximately $4.4
million of the 12% Notes.

In connection with the acquisition of General Atronics Corporation (see
Note 3), the Company issued approximately 355,000 shares of Common Stock. As of
March 31, 2001, approximately 89,000 of these shares were held in escrow. Such
shares will be held in escrow for a period of eighteen months from the
acquisition date and are subject to certain potential claims by DRS.

Also during fiscal 2001, the Company cancelled all shares of treasury stock
held by the Company.

STOCK COMPENSATION PLANS

The 1991 Stock Option Plan (the Plan), which was approved by the Company's
stockholders on August 8, 1991, provided for the grant of options to purchase a
total of 600,000 shares of DRS Common Stock through February 6, 2001. Under the
terms of the Plan, options were granted to key employees, directors and
consultants of the Company. Options granted under the Stock Option Plan were at
the discretion of the Board (Executive Compensation Committee) and could be
incentive stock options or non-qualified stock options, except that incentive
stock options could be granted only to employees. The option price was
determined by the Executive Compensation Committee and had to be a price per
share which was not less than the par value per share of the Common Stock, and
in the case of an incentive stock option, could not be less than the fair-market
value of the Common Stock on the date of the grant. Options could be exercised
during the exercise period, as determined by the Executive Compensation
Committee, except that no option could be exercised within six months of its
grant date, and in the case of an incentive stock option, generally, the
exercise period could not exceed ten years from the date of the grant. Upon the
expiration of the Plan, a total of 161,550 shares of Common Stock remained
ungranted. Options still outstanding at the time of the Plan's expiration on
February 6, 2001 remain in effect as granted.

On June 17, 1996, the Board adopted, and on August 7, 1996, the stockholders
approved, the 1996 Omnibus Plan (Omnibus Plan). The Omnibus Plan was initially
limited to 500,000 shares and has since been increased, with stockholder
approval, to 2,375,000 shares. Awards under the Omnibus Plan are at the
discretion of the Executive Compensation Committee and may be made in the form
of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock, (v) phantom stock, (vi) stock
bonuses and (vii) other awards. Unless the Executive Compensation Committee
expressly provides otherwise, options granted under the Omnibus Plan are not
exercisable prior to one year after the date of grant and become exercisable as
to 25% of the shares granted on each of the first four anniversaries of the date
of grant. As of March 31, 2001, 735,913 shares were reserved for future grants
under the Omnibus Plan.

F-24

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pursuant to the terms of exercise under the grant, the excess of the
fair-market value of shares under option at the date of grant over the option
price may be charged to unamortized restricted stock compensation or to earnings
as compensation expense and credited to additional paid-in capital. The
unamortized restricted stock compensation, if any, is charged to net earnings as
it becomes exercisable, in accordance with the terms of the grant. The amount of
compensation charged to earnings in fiscal 2001, 2000 and 1999 was $112,000,
$155,000 and $67,000, respectively.

In connection with the NAI Merger, each issued and outstanding NAI warrant
to purchase NAI common stock at an exercise price of $2.50 per share was
converted into DRS warrants at a conversion ratio of 0.25 of a share of DRS
Common Stock to one share of NAI common stock; each NAI stock option, whether
vested or unvested, was assumed by DRS and now constitutes an option to acquire,
on the same terms and conditions as were applicable under such option prior to
the Merger, the number of shares of DRS Common Stock equal to the product
(rounded down to the nearest whole number) of 0.25 of a share and the number of
shares of NAI common stock, subject to such option prior to the merger at a
per-share exercise price equal to four times the exercise price of such option
prior to the Merger. The Company issued stock options and warrants to purchase a
total of 161,230 and 603,175 shares, respectively, of DRS Common Stock (as
adjusted for the exchange ratio). The terms of the NAI stock options assumed,
except for the exercise price and number of shares, were not amended. As of
March 31, 2001, 581,313 warrants assumed in the Merger remained outstanding.
These warrants are exercisable at $10.00 per share and expire February 15, 2002.

The Board may, at its discretion, grant equity-based compensation awards,
subject to certain regulatory restrictions. In fiscal 1999, the Board issued
options to purchase up to 250,000 shares of DRS Common Stock with vesting terms
similar to awards issued in fiscal 1999 under the Omnibus Plan at exercise
prices in excess of the market price on the date of grant. The per-share
weighted-average fair value and exercise price of these options were $1.89 and
$10.44, respectively.

F-25

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of stock option activity is as follows:

NUMBER OF
SHARES OF WEIGHTED AVERAGE
COMMON STOCK EXERCISE PRICE
------------ ----------------

Outstanding at March 31, 1998 (of which 303,100 shares were
exercisable).............................................. 706,100 $ 7.33
Granted/Assumed........................................... 893,930 $ 9.34
Exercised................................................. (63,600) $ 2.24
Expired or cancelled...................................... (45,200) $10.27
--------- ------
Outstanding at March 31, 1999 (of which 461,579 shares were
exercisable).............................................. 1,491,230 $ 8.66
Granted................................................... 436,050 $ 7.25
Exercised................................................. (151,087) $ 3.33
Expired or cancelled...................................... (92,122) $ 8.91
--------- ------
Outstanding at March 31, 2000 (of which 611,446 shares were
exercisable).............................................. 1,684,071 $ 8.76
Granted................................................... 532,600 $13.42
Exercised................................................. (225,579) $ 9.15
Expired or cancelled...................................... (57,562) $ 8.55
--------- ------
Outstanding at March 31, 2001 (of which 792,668 shares were
exercisable).............................................. 1,933,530 $ 9.99
========= ======

The stock options exercised during fiscal 2000 include 50,000 shares, which
are being held by the Company in "book entry" form, and 100,000 shares, which
were exercised via a stock-for-stock transaction. Book entry shares are not
considered issued or outstanding as of March 31, 2001. However, these shares are
included in the Company's diluted earnings per share calculation. In connection
with the stock-for-stock transaction, 55,755 "mature shares" (i.e., common
shares held by the option holder for at least six months), with a fair value
equal to the aggregate exercise price of the stock options exercised, were
tendered by the option holder to the Company to satisfy the total exercise price
of the options.

Information regarding all options outstanding at March 31, 2001 follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES: OPTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
------------------------- --------- -------------- ---------------- --------- --------------

Less than $7.75.................. 378,400 $ 6.70 8.3 years 104,663 $ 6.01
$7.75............................ 332,050 $ 7.75 7.0 years 191,775 $ 7.75
$7.76 - $9.99.................... 329,800 $ 9.25 7.1 years 231,050 $ 9.35
$10.00 - $13.25.................. 370,050 $10.86 6.9 years 245,050 $10.77
Greater than $13.25.............. 523,230 $13.66 9.4 years 20,130 $16.65
--------- ------ ------------ ------- ------
Total............................ 1,933,530 $ 9.99 7.9 years 792,668 $ 9.15
========= =======

Pro forma information regarding net earnings and earnings per share, as
required by SFAS 123, has been determined as if the Company had accounted for
its employee stock options under the

F-26

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

fair-value method. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.7%, 6.0% and 5.0% in
fiscal 2001, 2000 and 1999, respectively; dividend yield of 0%; volatility
factor related to the expected market price of the Company's Common Stock of
.2893 in fiscal 2001, .2953 in fiscal 2000, and .2974 in fiscal 1999; and
weighted-average expected option life of five years.

The weighted-average fair values of options granted at market during fiscal
2001, 2000 and 1999 were $4.85, $2.71 and $2.95 per share, respectively. The
per-share weighted-average fair value and exercise price of options granted with
an exercise price less than market during 1999 were $3.96 and $8.20,
respectively. For purposes of pro forma disclosures, the options' estimated fair
values are amortized to expense over the options' vesting periods. Accordingly,
the pro forma results for fiscal 2001, 2000 and 1999 presented below include,
48%, 107% and 49%, respectively, of the total pro forma expense for options
awarded in each year. The pro forma amounts may not be representative of the
effects on reported earnings for future years. The Company's pro forma
information is as follows:

YEARS ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER-SHARE DATA)

Net income, as reported............................. $11,978 $4,310 $ 680
Net income, pro forma............................... $11,381 $3,579 $ 7
Earnings per share, as reported
Basic............................................. $ 1.14 $ 0.47 $0.10
Diluted........................................... $ 1.01 $ 0.47 $0.10
Earnings per share, pro forma
Basic............................................. $ 1.09 $ 0.39 $ --
Diluted........................................... $ 0.92 $ 0.41 $ --

EMPLOYEE BENEFIT PLANS

The Company maintains defined contribution plans covering substantially all
domestic full-time eligible employees. The Company's contributions to these
plans for fiscal 2001, 2000 and 1999 amounted to $2.3 million, $1.9 million and
$1.2 million, respectively.

Certain employees of the Company's foreign operating units participate in
defined benefit pension plans sponsored by the Company. Plan assets are invested
in publicly traded equity and fixed-income securities. Retirement benefits are
based on various factors, including remuneration and years of service. DRS funds
these plans based on independent actuarial valuations. The net pension
obligations and related expenses associated with these plans are not material to
the consolidated financial position and results of operations of the Company.

On February 1, 1996, the Company established a Supplemental Executive
Retirement Plan (the SERP) for the benefit of certain key executives. Pursuant
to the SERP, the Company will provide retirement benefits to each key executive,
based on years of service and final average annual compensation as defined
therein. In addition, the Company will advance premiums for life insurance
policies providing a death benefit equal to five times the participants' salary
at time of death. In the event of a change in control, as defined therein,
benefits become fully vested. The SERP is non-contributory and unfunded.
Benefits under the SERP currently are being funded from working capital. As of
March 31, 2001 and 2000, the Company's liability for benefits accrued under the
SERP was approximately $1.9 million and $1.7 million, respectively, and is
included in Other Liabilities in the

F-27

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Consolidated Balance Sheets. Charges of $549,000, $583,000 and $463,000,
relating to the SERP were included in the consolidated results of operations for
fiscal 2001, 2000 and 1999, respectively.

14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

At March 31, 2001, the Company was party to various noncancellable operating
leases (principally for administration, engineering and production facilities)
with minimum rental payments as follows:

(IN THOUSANDS)
--------------

2002........................................................ $11,929
2003........................................................ 9,303
2004........................................................ 8,128
2005........................................................ 7,701
2006........................................................ 7,245
Thereafter.................................................. 29,627
-------
Total....................................................... $73,933
=======

It is not certain as to whether the Company will negotiate new leases as
existing leases expire. Determinations to that effect will be made as existing
leases approach expiration and will be based on an assessment of the Company's
capacity requirements at that time.

Total rent expense aggregated $11.3 million, $8.7 million and $4.5 million
in fiscal 2001, 2000 and 1999, respectively.

Effective July 20, 1994, the Company entered into an Employment,
Non-Competition and Termination Agreement (the Gross Agreement) with David E.
Gross, who retired as President and Chief Technical Officer of the Company on
May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross has received a
total of $600,000 as compensation for his services under a five-year consulting
agreement with the Company and $750,000 as consideration for a five-year
non-compete arrangement. The payments were charged to expense over the five-year
term as services were performed and obligations were fulfilled by Mr. Gross. He
also will receive, at the conclusion of such initial five-year period, an
aggregate of approximately $1.3 million payable over a nine-year period as
deferred compensation. The approximate net present value of the deferred
compensation payments to be made to Mr. Gross is included in Other Liabilities
in the Consolidated Balance Sheets.

In April and May 1998, subpoenas were issued to the Company by the United
States Attorney for the Eastern District of New York seeking documents related
to a governmental investigation of certain equipment manufactured by DRS
Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection
with United States v. Tress, a criminal complaint against a then employee of DRS
Photronics, alleging that improper test data was provided in connection with
boresighting equipment furnished to the U.S. Army. On June 26, 1998, the
complaint against the employee was dismissed without prejudice. Additional
subpoenas were issued to the Company on August 12, 1999 and May 10, 2000,
relating to the ongoing investigation of DRS Photronics and one or more of its
then employees; however, to date, no charges have been made against the Company,
DRS Photronics or any of the Company's employees. During the government's
investigation, until October 29, 1999, DRS Photronics was unable to ship certain
equipment related to the case, resulting in delays in the Company's recognition
of revenues. On October 29, 1999, DRS Photronics received authorization to ship
its first boresighting system since the start of the investigation. The Company
cannot assess the outcome of this investigation or the effect of this
investigation on the Company.

F-28

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company is also a party to various legal actions and claims arising in
the ordinary course of its business. In the Company's opinion, it has adequate
legal defenses for each of the actions and claims and believes that their
ultimate disposition will not have a material adverse effect on the Company's
consolidated financial position or results of operations.

Since a substantial amount of the Company's revenues are derived from
contracts or subcontracts with the U.S. Government and foreign governments,
future revenues and profits will be dependent upon continued contract awards,
Company performance and volume of Government business. The books and records of
the Company are subject to audit and post-award review by the Defense Contract
Audit Agency and similar foreign agencies.

15. OPERATING SEGMENTS

DRS operates in three principal business segments on the basis of products
and services offered. Separate and distinct businesses comprise each operating
segment: the Electronic Systems Group (ESG), the Electro-Optical Systems Group
(EOSG), and the Flight Safety and Communications Group (FSCG). All other
operations are combined in "Other."

ESG is a supplier of computer workstations used to process and display
integrated combat information. ESG produces rugged computers and peripherals,
surveillance, radar and tracking systems, acoustic signal processing and display
equipment, and combat control systems. The Group's products are used on
front-line platforms, including Aegis destroyers and cruisers, aircraft
carriers, submarines and surveillance aircraft. ESG's products also are used in
U.S. Army and international battlefield digitization programs.

EOSG produces systems and subsystems for infrared night vision and targeting
systems used in the U.S. Army's Abrams Main Battle Tank, Bradley Fighting
Vehicle and the High-Mobility Multipurpose Wheeled Vehicle Scout. EOSG designs,
manufactures and markets products that allow operators to detect, identify and
target objects based upon their infrared signatures, regardless of the ambient
light level. This Group also designs and manufactures eye-safe laser range
finders and multi-platform weapons calibration systems for the AH-64 Apache
attack helicopter and AC-130U gunship.

FSCG is a manufacturer of deployable flight emergency or "black box"
recording equipment used by military and search and rescue aircraft. FSCG also
manufactures shipboard and data link communications systems and infrared
surveillance systems for the U.S., Canadian and other navies. This Group uses
advanced commercial technology in the design and manufacture of multi-sensor
digital, analog and video data capture recording products, as well as
high-capacity data storage devices for the harsh environments of aerospace and
defense applications. FSCG also provides advanced manufacturing services of
international military and space customers. FSCG products are used on such
platforms as the F/A-18 fighter, A-10 attack plane, P-3 reconnaissance aircraft
and EH-101 helicopter for surveillance, target verification and battle damage
assessment. FSCG is also a producer of ultra high-speed digital imaging systems
and is the leading supplier of Link 11 Data Terminal Systems for NATO and allied
international navies. FSCG manufactures and markets ship and ground surveillance
radar and infrared imaging systems.

"Other" includes the activities of DRS Corporate Headquarters, DRS Ahead
Technology and certain non-operating subsidiaries of the Company. DRS Ahead
Technology produces magnetic head components used in the manufacturing process
of computer disk drives, which burnish and verify the quality of disk surfaces.
DRS Ahead Technology also services and manufactures magnetic video recording
heads used in broadcast television equipment.

F-29

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Transactions between segments are generally negotiated and accounted for
under terms and conditions that are similar to other government and commercial
contracts; however, these intercompany transactions are eliminated in
consolidation. Other accounting policies of the segments are consistent with
those described in the summary of significant accounting policies (see Note 1).
The Company evaluates segment-level performance based on revenues and operating
income, as presented in the Consolidated Statements of Earnings. Operating
income, as shown, includes amounts allocated from DRS Corporate operations.

Information about the Company's continuing operations in these segments for
each of the three years ended March 31, 2001 is as follows:

ESG EOSG FSCG OTHER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)

Fiscal 2001:
Total revenues............................ $186,731 $160,825 $74,614 $ 9,651 $431,821
Intersegment revenues..................... $ (257) $ (222) $(3,736) $ -- $ (4,215)
-------- -------- ------- ------- --------
External revenues......................... $186,474 $160,603 $70,878 $ 9,651 $427,606
-------- -------- ------- ------- --------
Operating income (loss) before
amortization of goodwill and related
intangibles............................. $ 17,244 $ 26,232 $ 2,125 $ (450) $ 45,151
Operating income (loss)................... $ 15,336 $ 22,691 $ 208 $ (704) $ 37,531
Identifiable assets....................... $106,627 $120,684 $89,261 $18,368 $334,940
Depreciation and amortization............. $ 3,447 $ 7,711 $ 3,290 $ 1,797 $ 16,245
Capital expenditures...................... $ 2,239 $ 10,381 $ 1,934 $ 1,631 $ 16,185
-------- -------- ------- ------- --------

Fiscal 2000:
Total revenues............................ $187,971 $142,948 $54,596 $ 8,356 $393,871
Intersegment revenues..................... $ (177) $ (1,840) $ (387) $ -- $ (2,404)
-------- -------- ------- ------- --------
External revenues......................... $187,794 $141,108 $54,209 $ 8,356 $391,467
-------- -------- ------- ------- --------
Operating income (loss) before
amortization of goodwill and related
intangibles............................. $ 16,370 $ 14,804 $ 3,799 $(2,391) $ 32,582
Operating income (loss)................... $ 14,593 $ 11,404 $ 2,762 $(2,581) $ 26,178
Identifiable assets....................... $ 94,719 $137,075 $62,517 $20,478 $314,789
Depreciation and amortization............. $ 3,813 $ 8,136 $ 2,832 $ 2,289 $ 17,070
Capital expenditures...................... $ 1,722 $ 1,973 $ 525 $ 1,990 $ 6,210
-------- -------- ------- ------- --------

Fiscal 1999:
Total revenues............................ $123,558 $ 69,972 $60,768 $11,881 $266,179
Intersegment revenues..................... $ -- $ -- $ (330) $ -- $ (330)
-------- -------- ------- ------- --------
External revenues......................... $123,558 $ 69,972 $60,438 $11,881 $265,849
-------- -------- ------- ------- --------
Operating income (loss) before
amortization of goodwill and related
intangibles............................. $ 9,497 $ 5,077 $ 5,672 $(2,022) $ 18,224
Operating income (loss)................... $ 9,292 $ 3,581 $ 4,684 $(2,256) $ 15,301
Identifiable assets....................... $ 84,475 $151,313 $66,273 $19,638 $321,699
Depreciation and amortization............. $ 1,356 $ 5,001 $ 3,003 $ 2,241 $ 11,601
Capital expenditures...................... $ 1,916 $ 1,820 $ 2,177 $ 641 $ 6,554
-------- -------- ------- ------- --------

F-30

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As a result of changes in estimates to complete on certain long-term
programs, operating income for EOSG included the net effect of favorable program
adjustments of approximately $7.0 million and $1.6 million in fiscal 2001 and
fiscal 2000, respectively. Similarly, operating income for FSCG included the
effect of a negative program adjustment of approximately $1.9 million in fiscal
2001.

Revenues, total assets and property, plant and equipment by geographic
location are presented in the table below. Revenues are attributed to countries
based on the physical location of the operating unit generating the revenues.
Information about the Company's operations in these geographic locations for
each of the three years ended March 31, 2001 is as follows:

UNITED
TOTAL UNITED STATES CANADA KINGDOM
-------- ------------- -------- --------
(IN THOUSANDS)

Fiscal 2001:
Revenues.......................................... $427,606 $380,279 $26,964 $20,363
Total assets...................................... $334,940 $273,178 $33,162 $28,600
Property, plant and equipment..................... $ 37,639 $ 34,343 $ 2,046 $ 1,250
Fiscal 2000:
Revenues.......................................... $391,467 $319,331 $32,437 $39,699
Total assets...................................... $314,789 $245,450 $32,765 $36,574
Property, plant and equipment..................... $ 29,006 $ 25,465 $ 1,958 $ 1,583
Fiscal 1999:
Revenues.......................................... $265,849 $221,812 $29,554 $14,483
Total assets...................................... $321,699 $264,926 $30,679 $26,094
Property, plant and equipment..................... $ 32,124 $ 28,415 $ 2,240 $ 1,469

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited quarterly financial information for
fiscal 2001 and 2000:

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)

Fiscal year ended March 31, 2001
Revenues........................................... $94,521 $107,227 $ 95,935 $129,923
Operating income................................... $ 7,155 $ 8,503 $ 10,091 $ 11,782
Net earnings....................................... $ 1,898 $ 2,239 $ 3,479 $ 4,362
Basic earnings per share......................... $ 0.20 $ 0.22 $ 0.32 $ 0.37
Diluted earnings per share....................... $ 0.18 $ 0.20 $ 0.28 $ 0.34

Fiscal year ended March 31, 2000
Revenues........................................... $85,646 $ 88,253 $103,570 $113,998
Operating income................................... $ 5,274 $ 5,119 $ 7,120 $ 8,665
Net earnings....................................... $ 968 $ 1,060 $ 1,773 $ 509
Basic earnings per share......................... $ 0.10 $ 0.11 $ 0.19 $ 0.05
Diluted earnings per share....................... $ 0.10 $ 0.11 $ 0.18 $ 0.07

In connection with the then pending sale of the magnetic tape head business
units (see Note 4), the Company recorded a loss on the sale of discontinued
operations of approximately $2.1 million, net of tax, in the fiscal 2000 fourth
quarter results of operations. Also in the fourth quarter of fiscal 2000, the
Company recorded restructuring charges of approximately $1.8 million.

F-31

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

COL. C COL. D
COL. A COL. B ADDITIONS (A) DEDUCTIONS (B) COL. E
-------------------------- ------------ ----------------------- ------------------------- ----------
(1) (2) (1) (2)
CHARGED TO CREDITED TO
BALANCE AT CHARGED TO OTHER CREDITED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS-- COSTS AND ACCOUNTS-- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE EXPENSES DESCRIBE PERIOD
-------------------------- ------------ ---------- ---------- ----------- ----------- ----------

INVENTORY RESERVE
Year ended March 31,
2001.................... $5,340,000 $4,138,000 $ 437,000(c) $2,021,000 $2,434,000(d) $5,460,000
Year ended March 31,
2000.................... $3,166,000 $4,885,000 $ 151,000(c) $2,752,000 $ 110,000(d) $5,340,000
Year ended March 31,
1999.................... $1,545,000 $3,424,000 $ 266,000(c) $1,461,000 $ 608,000(d) $3,166,000

ACCRUAL FOR FUTURE COSTS
ON UNCOMPLETED CONTRACTS
Year ended March 31,
2001.................... $4,973,000 $6,576,000 $ 56,000(c) $2,562,000 $1,011,000(e) $8,032,000
Year ended March 31,
2000.................... $8,119,000 $3,491,000 $ 121,000(c) $4,269,000 $2,489,000(e) $4,973,000
Year ended March 31,
1999.................... $4,120,000 $2,717,000 $5,784,000(c) $1,197,000 $3,305,000(e) $8,119,000

ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year ended March 31,
2001.................... $1,140,000 $ 677,000 $ 2,000(c) $ 140,000 $ 875,000(d) $1,074,000
Year ended March 31,
2000.................... $1,182,000 $ 389,000 $ 7,000(c) $ 149,000 $ 19,000(d) $1,410,000
Year ended March 31,
1999.................... $ 486,000 $ 492,000 $ 258,000(c) $ 48,000 $ 6,000(d) $1,182,000

OTHER CURRENT ASSETS
Year ended March 31,
2001.................... $ 259,000 $1,116,000 $ 0 $ 0 $ 0 $1,375,000
Year ended March 31,
2000.................... $ 0 $ 259,000 $ 0 $ 0 $ 0 $ 259,000

--------------------------

(a) Represents, on a full-year basis, net credits to reserve accounts.

(b) Represents, on a full-year basis, net charges to reserve accounts.

(d) Represents amounts utilized and credited to related asset accounts.

(e) Represents amounts reclassified to related reserve accounts.

F-32

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30, MARCH 31,
2001 2001
------------- ---------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,162 $ 2,324
Accounts receivable, net.................................. 102,069 97,645
Inventories, net of progress payments..................... 110,906 74,327
Prepaid expenses and other current assets................. 12,426 8,697
-------- --------
Total current assets.................................... 229,563 182,993
-------- --------
Property, plant and equipment, less accumulated depreciation
and amortization of $43,667 and $39,142 at September 30,
2001 and March 31, 2001, respectively..................... 51,531 37,639
Goodwill, less accumulated amortization of $13,754 at March
31, 2001.................................................. 76,206 76,390
Acquired intangible assets, less accumulated amortization of
$5,911 and $7,551 at September 30, 2001 and March 31,
2001, respectively........................................ 21,144 32,912
Purchase price in excess of net tangible assets acquired.... 30,054 --
Deferred income taxes and other noncurrent assets........... 10,843 5,006
-------- --------
Total assets............................................ $419,341 $334,940
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 1,436 $ 7,217
Short-term bank debt...................................... 1,312 831
Accounts payable.......................................... 27,460 40,089
Accrued expenses and other current liabilities............ 100,631 91,170
-------- --------
Total current liabilities............................... 130,839 139,307
Long-term debt, excluding current installments.............. 159,784 75,076
Other noncurrent liabilities................................ 6,663 8,610
-------- --------
Total liabilities....................................... 297,286 222,993
-------- --------

Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at September 30, 2001 and March 31,
2001...................................................... -- --
Common Stock, $.01 par value per share Authorized 30,000,000
shares; issued 12,189,335 and 12,058,057 shares at
September 30, 2001 and March 31, 2001, respectively....... 122 121
Additional paid-in capital.................................. 73,695 72,033
Retained earnings........................................... 52,406 44,025
Accumulated other comprehensive losses...................... (3,960) (3,968)
Unamortized stock compensation.............................. (208) (264)
-------- --------
Net stockholders' equity................................ 122,055 111,947
-------- --------
Commitments and contingencies...............................
Total liabilities and stockholders' equity.............. $419,341 $334,940
======== ========

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

F-33

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------

Revenues....................................... $116,178 $107,227 $219,530 $201,748
Costs and expenses............................. 105,475 98,724 199,143 186,090
-------- -------- -------- --------
Operating income............................. 10,703 8,503 20,387 15,658
Other expense (income), net.................... 38 32 (15) (42)
Interest and related expenses.................. 1,838 3,537 3,963 6,644
-------- -------- -------- --------
Earnings before minority interests and income
taxes........................................ 8,827 4,934 16,439 9,056
Minority interests............................. 368 270 626 595
-------- -------- -------- --------
Earnings before income taxes................. 8,459 4,664 15,813 8,461
Income taxes................................... 3,976 2,425 7,432 4,324
-------- -------- -------- --------
Net earnings................................. $ 4,483 $ 2,239 $ 8,381 $ 4,137
======== ======== ======== ========
Earnings per share of common stock
Basic earnings per share:.................... $ 0.37 $ 0.22 $ 0.69 $ 0.43
Diluted earnings per share:.................. $ 0.34 $ 0.20 $ 0.64 $ 0.38

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

F-34

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------

Cash flows from operating activities:
Net earnings.............................................. $ 8,381 $ 4,137

Adjustments to reconcile net earnings to cash flows from
operating activities:
Depreciation and amortization........................... 5,962 8,544
Other, net.............................................. (191) (1,156)

Changes in assets and liabilities, net of effects from
business combinations:
Decrease in accounts receivable......................... 19,163 4,171
Increase in inventories................................. (15,260) (3,896)
(Increase) decrease in prepaid expenses and other
current assets........................................ (3,174) 765
Decrease in accounts payable............................ (12,588) (3,529)
(Decrease) increase in accrued costs on acquired
contracts............................................. (2,962) 11,564
Increase (decrease) in accrued expenses and other
current liabilities................................... 3,544 (3,078)
Increase (decrease) in customer advances................ 4,729 (3,187)
Other, net.............................................. (3,751) (893)
-------- --------
Net cash provided by operating activities................. 3,853 13,442

Cash flows from investing activities:
Capital expenditures...................................... (7,480) (8,412)
Payments pursuant to business combinations, net of cash
acquired................................................ (71,927) (6,979)
Proceeds from sale of discontinued operations............. -- 3,000
Other, net................................................ 67 361
-------- --------
Net cash used in investing activities..................... (79,340) (12,030)

Cash flows from financing activities:
Net borrowings of short-term debt......................... 481 1,478
Retirement of long-term debt.............................. (88,455) --
Net payments on long-term debt............................ (42,225) (5,487)
Additional borrowings of long-term debt................... 209,550 7,000
Deferred financing fees................................... (4,664) --
Other, net................................................ 1,663 132
-------- --------
Net cash provided by financing activities................. 76,350 3,123
-------- --------
Effect of exchange rates on cash and cash equivalents....... 975 253
-------- --------
Net increase in cash and cash equivalents................... 1,838 4,788
Cash and cash equivalents, beginning of period.............. 2,324 3,778
-------- --------
Cash and cash equivalents, end of period.................... $ 4,162 $ 8,566
======== ========

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

F-35

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of
DRS Technologies, Inc. and Subsidiaries (DRS or the Company) have been prepared
in accordance with accounting principles generally accepted in the United States
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
Company has continued to follow the accounting policies set forth in the
consolidated financial statements included in its fiscal 2001 Annual Report on
Form 10-K filed with the Securities and Exchange Commission, except for the
April 1, 2001 adoption of the provisions of Statement of Financial Accounting
Standards (SFAS) Nos. 133, "Accounting for Derivative Instruments and Hedging
Activities" (see Note 7 of Notes to Condensed Consolidated Financial
Statements), 141, "Business Combinations", and 142, "Goodwill and Other
Intangible Assets" (see Note 4 of Notes to Condensed Consolidated Financial
Statements). In the opinion of management, the interim financial information
provided herein reflects all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the Company's consolidated
financial position as of September 30, 2001, the results of operations for the
three- and six-month periods ended September 30, 2001 and 2000, and cash flows
for the six-month periods ended September 30, 2001 and 2000. The results of
operations for the three- and six-months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.

For further information, these interim financial statements should be read
in conjunction with the Consolidated Financial Statements of the Company for the
fiscal year ended March 31, 2001, included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001.

2. BUSINESS COMBINATIONS

On September 28, 2001, DRS acquired certain assets and liabilities of the
Sensors and Electronic Systems (SES) business of The Boeing Company (Boeing)
(the Acquisition). The Company paid approximately $67.1 million in cash, subject
to adjustment, for the Acquisition. In addition to the purchase price, the
estimated costs related to the Acquisition, including professional fees, will be
approximately $4.0 million. SES, located in Anaheim, California, is a leading
provider of advanced electro-optical airborne and naval surveillance and
targeting systems, high-performance military infrared cooled sensor systems, and
infrared uncooled sensor products for military and commercial applications. This
acquisition broadens the Company's product lines and customer base of its
Electro-Optical Systems Group, particularly in those areas associated with naval
and air-based applications, and provides a strong complement to DRS' existing
products in ground-based Forward Looking Infrared technology. SES is now
operating as DRS Sensors & Targeting Systems, Inc., a unit of the Company's
Electro-Optical Systems Group. The SES assets acquired and liabilities assumed
have been included in our consolidated financial statements as of the date of
acquisition.

The Company is in the process of obtaining a third-party valuation of the
assets acquired and the liabilities assumed as well as performing its own
internal assessment, thus, the allocation of the purchase price is subject to
adjustment. In addition, in connection with the Acquisition the Company may
incur costs associated with exiting certain activities, including severance
costs. It is management's expectation that a certain amount of the purchase
price will be allocated to acquired identifiable intangible assets, with such
assets requiring amortization. As the the Company is unable to estimate the
amount of acquired identifiable intangibles at this time, the entire excess of
purchase price over the tangible net assets acquired has been included as a
separate line item on the balance sheet as of

F-36

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. BUSINESS COMBINATIONS (CONTINUED)
September 30, 2001. In addition, since the Acquisition was completed at the end
of the second quarter, there is no amortization expense related to the
Acquisition in the results of operations. The purchase price allocation will be
adjusted during in the second half of fiscal 2002.

The following unaudited pro forma financial information shows the results of
operations for the three- and six-month periods ended September 30, 2001 and
2000, as though the Acquisition had occurred on April 1, 2000. For purposes of
the pro forma financial information shown below, DRS' operating results for the
three- and six-month periods ended September 30, have been combined with SES'
calendar year operating results for the three- and six-month periods ended June
30. As indicated above, the Company is in the process of obtaining a third-party
valuation of the assets acquired and the liabilities assumed as well as
performing its own internal assessment. This could result in a different portion
of the purchase price being allocated to goodwill, tangible and intangible
assets and acquired in-process research and development. Any identified
in-process research and development would be expensed immediately. Each
$1.0 million increase/decrease in the amount allocated to acquired identifiable
intangible assets, with an estimated ten year useful life, would result in an
increase/decrease in amortization expense of approximately $100,000 per year.

THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)

Revenues............................................ $142,908 $126,846 $273,087 $240,657
Net earnings (loss)................................. $ 3,233 $ (1,467) $ 5,034 $ (850)
-------- -------- -------- --------
Earnings (loss) per share of common stock
Basic earnings (loss) per share:.................. $ 0.27 $ (0.15) $ 0.42 $ (0.09)
Diluted earnings (loss) per share:................ $ 0.25 $ (0.15) $ 0.38 $ (0.09)

The unaudited pro forma financial information shown above is derived from
preliminary financial data, is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have been
achieved had the Acquisition been completed as of the dates indicated above or
of the results that may be obtained in the future.

In connection with the SES Acquisition, the Company entered into a
$240 million credit agreement with First Union National Bank, as the lead bank,
consisting of a term loan in the aggregate principal amount of $140 million
(Term Loan) and a $100 million revolving line of credit (Line of Credit)
(collectively referred to as the Credit Facility). The maturity dates of the
Term Loan and the Line of Credit are September 30, 2008, and September 30, 2006,
respectively. The Term Loan requires quarterly principal payments beginning on
December 31, 2001. Borrowings under the Credit Facility bear interest based on
LIBOR (London Interbank Offered Rate), United States Prime Rate or United States
Federal Funds Rate. The Credit Facility is secured by substantially all of the
assets of the Company. There are certain covenants and restrictions placed on
the Company under the Credit Facility, including a maximum total leverage ratio
and a minimum fixed charge ratio, a restriction on the payment of dividends on
the capital stock of the Company, a limitation on the issuance of additional
debt and certain other restrictions. In addition, the Company is required to
make an offer to prepay certain portions of the loan from the proceeds of
certain events, including an equity offering

F-37

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. BUSINESS COMBINATIONS (CONTINUED)
and sale of certain assets. The interest rates on the Company's outstanding Term
Loan and Line of Credit borrowings were approximately 5.9% and 5.7%,
respectively, at September 30, 2001.

The proceeds of the Credit Facility at the date of the SES Acquisition of
$161 million were used to acquire SES and repay the balance of the debt
outstanding under DRS's previous credit facility with Mellon Bank, N.A. (the
Mellon Facility) in the amount of $88.5 million. At September 30, 2001, the $161
million outstanding under the Credit Facility consisted of a $140 million term
loan and a $21 million borrowing under the revolving line of credit. As of
September 30, 2001, the Company had approximately $51.0 million available under
the revolving line of credit, after satisfaction of its borrowing base
requirement and certain restrictions.

On August 22, 2001, we acquired certain assets and liabilities of the
Electro-Mechanical Systems (EMS) business of Lockheed Martin for approximately
$4.0 million in cash, subject to adjustment. EMS, located in Largo, Florida,
produces systems and antenna for radar and other surveillance sensor systems.
The acquisition of EMS provides certain product synergies and vertical business
integration opportunities for DRS. EMS is now operating as DRS Surveillance
Support Systems, Inc. (SSS), a unit of the Company's Electronic Systems Group.
The Company is in the process of obtaining a third-party valuation of the assets
acquired and the liabilities assumed, thus the allocation of the purchase price
is subject to adjustment. The financial position and results of operations of
SSS were not significant to those of the Company as of the acquisition date or
for the period ended September 30, 2001.

3. INVENTORIES

Inventories are summarized as follows:

SEPTEMBER 30, 2001 MARCH 31, 2001
------------------ --------------
(IN THOUSANDS)

Work-in-process....................................... $127,688 $83,058
Raw material and finished goods....................... 14,159 7,992
-------- -------
141,847 91,050
-------- -------
Less progress payments................................ (30,941) (16,723)
-------- -------
Total................................................. $110,906 $74,327
======== =======

General and administrative costs included in work-in-process were
approximately $17.5 million and $14.5 million at September 30, 2001 and
March 31, 2001, respectively. General and administrative expenses included in
costs and expenses amounted to approximately $21.5 million and $19.9 million for
the three-month periods ended September 30, 2001 and 2000, respectively, and
approximately $42.2 million and $36.7 million for the six-month periods then
ended. Included in those amounts are expenditures for internal research and
development amounting to approximately $2.5 million and $2.0 million for the
fiscal quarters ended September 30, 2001 and 2000, respectively and
approximately $4.6 million and $4.1 million, respectively, for the six-month
periods then ended.

F-38

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. GOODWILL AND INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142),
"Business Combinations" and "Goodwill and Other Intangible Assets",
respectively. SFAS 141 replaces APB 16 and requires the use of the purchase
method for all business combinations initiated after June 30, 2001. It also
provides guidance on purchase accounting related to the recognition of
intangible assets, noting that any purchase price allocated to an assembled
workforce may not be accounted for separately, and accounting for negative
goodwill. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired.

The Company elected to adopt the provisions of SFAS 141 and 142 as of
April 1, 2001. The Company has identified its reporting units to be its
operating segments and has determined the carrying value of each reporting unit
by assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of April 1, 2001. Upon adoption
of SFAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 ceased, and intangible assets acquired prior
to July 1, 2001 that did not meet the criteria for recognition apart from
goodwill under SFAS 141 were reclassified to goodwill. In connection with the
adoption of SFAS 142, the Company was required to perform a transitional
goodwill impairment assessment within six months of adoption. The Company
completed its transitional goodwill impairment assessment in the second quarter
of fiscal 2002 with no adjustment to its April 1, 2001 goodwill. The annual
impairment test will be performed in the fourth quarter of each fiscal year,
after completion of the Company's annual operating plan.

F-39

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The following disclosure presents certain information on the Company's
acquired intangible assets as of September 30, 2001, and March 31, 2001: (All
intangible assets are being amortized over their estimated useful lives, as
indicated below, with no estimated residual values.)

WEIGHTED
AVERAGE GROSS
AMORTIZATION CARRYING ACCUMULATED
ACQUIRED INTANGIBLE ASSETS PERIOD AMOUNT AMORTIZATION NET BALANCE
-------------------------- ------------ -------- ------------ -----------
(IN THOUSANDS)

As of September 30, 2001
Amortized acquired intangible assets:
Technology based intangibles........... 22 years $19,425 $(4,560) $14,865
Customer related intangibles........... 21 years 7,630 (1,351) 6,279
------- ------- -------
$27,055 $(5,911) $21,144
======= ======= =======
As of March 31, 2001
Amortized acquired intangible assets:
Technology based intangibles........... 22 years $18,225 $(4,032) $14,193
Customer related intangibles........... 21 years 7,630 (1,166) 6,464
Workforce.............................. 16 years 7,628 (757) 6,871
Technical infrastructure............... 20 years 5,280 (638) 4,642
Other.................................. 30 years 1,700 (958) 742
------- ------- -------
$40,463 $(7,551) $32,912
======= ======= =======

The aggregate acquired intangible amortization expense for the three- and
six-month periods ended September 30, 2001 was approximately $316,000 and
$713,000, respectively. The estimated acquired intangible amortization expense
for the fiscal year ending March 31, 2002 and for each of the subsequent four
fiscal years ending March 31, 2006, excluding any amortization that may result
from the SES or EMS acquisitions, is $1.4 million and $1.3 million,
respectively.

The table below reconciles the change in the carrying amount of goodwill, by
operating segment, for the period from March 31, 2001 to September 30, 2001,
excluding the SES and EMS acquisitions. The Company recorded an $11.5 million
reduction in goodwill in the second quarter of fiscal 2002 in

F-40

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
connection with the reversal of an accrual for future costs on expired options
associated with certain acquired contracts.

ELECTRO-
ELECTRONIC OPTICAL
SYSTEMS SYSTEMS FLIGHT SAFETY AND
GROUP GROUP COMMUNICATIONS GROUP OTHER TOTAL
---------- -------- -------------------- -------- --------
(IN THOUSANDS)

Balance as of March 31, 2001.......... $31,450 $ 20,236 $24,661 $ 43 $76,390
Effect of adoption of SFAS 141 and
142:
Workforce........................... -- 3,807 3,064 -- 6,871
Technical infrastructure............ -- 4,642 -- -- 4,642
Other............................... -- -- 742 -- 742
Existing technology................... -- -- (1,155) -- (1,155)
Adjustments........................... -- -- -- (43) (43)
------- -------- ------- ---- -------
Balance as of April 1, 2001........... $31,450 $ 28,685 $27,312 $ -- $87,447
Adjustment on acquired contract....... -- (11,492) -- -- (11,492)
Foreign currency translation
adjustment.......................... 262 -- (11) -- 251
------- -------- ------- ---- -------
Balance as of September 30, 2001...... $31,712 $ 17,193 $27,301 $ -- $76,206
======= ======== ======= ==== =======

F-41

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The following pro forma information reconciles the net earnings reported for
the period ended September 30, 2001 and September 30, 2000 to adjusted net
earnings reflecting the adoption of SFAS 142:

THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Reported net earnings................................... $ 4,483 $ 2,239 $ 8,381 $ 4,137
Add back:
Goodwill and related intangible amortization, net of
tax benefit of $668 and $1,276...................... -- 754 -- 1,438
------- ------- ------- -------
Adjusted net earnings................................... $ 4,483 $ 2,993 $ 8,381 $ 5,575
======= ======= ======= =======

Basic earnings per share:
Reported net earnings................................... $ 0.37 $ 0.22 $ 0.69 $ 0.43
Add back:
Goodwill and related intangible amortization, net of
tax benefit of $.07 and $.13 per share,
respectively........................................ -- 0.08 -- 0.14
------- ------- ------- -------
Adjusted net earnings................................... $ 0.37 $ 0.30 $ 0.69 $ 0.57
======= ======= ======= =======

Diluted earnings per share:
Reported net earnings................................... $ 0.34 $ 0.20 $ 0.64 $ 0.38
Add back:
Goodwill and related intangible amortization, net of tax
benefit of $.05 and $.10 per share, respectively...... -- 0.06 -- 0.12
------- ------- ------- -------
Adjusted net earnings................................... $ 0.34 $ 0.26 $ 0.64 $ 0.50
======= ======= ======= =======

F-42

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5. EARNINGS PER SHARE

The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share (EPS):

THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Basic EPS computation:
Net earnings.......................................... $ 4,483 $ 2,239 $ 8,381 $ 4,137
------- ------- ------- -------
Weighted average common shares outstanding............ 12,142 10,001 12,118 9,677
------- ------- ------- -------
Basic earnings per share................................ $ 0.37 $ 0.22 $ 0.69 $ 0.43
======= ======= ======= =======
Diluted EPS computation:
Net earnings.......................................... 4,483 2,239 $ 8,381 $ 4,137
Interest and expenses related to convertible
debentures.......................................... -- 196 -- 436
------- ------- ------- -------
Adjusted net earnings................................. 4,483 2,435 8,381 4,573
------- ------- ------- -------
Diluted common shares outstanding:
Weighted average common shares outstanding............ 12,142 10,001 12,118 9,677
Stock options and warrants............................ 1,039 535 989 493
Convertible debentures................................ -- 1,808 -- 1,984
------- ------- ------- -------
Diluted common shares outstanding....................... 13,181 12,344 13,107 12,154
------- ------- ------- -------
Diluted earnings per share.............................. $ 0.34 $ 0.20 $ 0.64 $ 0.38
======= ======= ======= =======

6. COMPREHENSIVE EARNINGS

The components of comprehensive earnings for the three- and six-month
periods ended September 30, 2001 and 2000 consisted of the following:

THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)

Net earnings............................................ $ 4,483 $ 2,239 $ 8,381 $ 4,137
Other comprehensive earnings (losses):
Foreign currency translation adjustments.............. 587 (469) 802 (2,040)
Unrealized losses on hedging instruments:
Cumulative adjustment at April 1, 2001.............. -- -- (289) --
Unrealized losses arising during the period......... (434) -- (505) --
------- ------- ------- -------
Comprehensive earnings.................................. $ 4,636 $ 1,770 $ 8,389 $ 2,097
======= ======= ======= =======

At September 30, 2001, accumulated other comprehensive losses totaled
approximately $4.0 million and consisted of $3.2 million and $794,000 for
foreign currency translation adjustments and unrealized losses on hedging
instruments, respectively. At March 31, 2001, the $4.0 million balance consisted
of foreign currency translation adjustments.

F-43

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. DERIVATIVE FINANCIAL INSTRUMENTS

Effective April 1, 2001, the Company adopted SFAS 133. This Statement
requires the recognition of all derivative instruments as either assets or
liabilities in the consolidated balance sheet, and the periodic adjustment of
those instruments to fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on the
intended use of the derivative and its resultant designation.

The Company utilizes variable rate debt to maintain its operations and
sustain its growth. Such variable rate borrowings expose the Company to interest
rate risk and the related impact that changes in interest rates can have on the
Company's earnings and on its cash flows. In an effort to limit its interest
expense and cash flow exposure the Company entered into interest rate collar
agreements with notional amounts covering a limited amount of the aggregate
outstanding principal balance of the Company's term loans. The following is a
summary of the Company's interest rate collar agreements in place as of
September 30, 2001 and March 31, 2001:

NOTIONAL AMOUNT
EFFECTIVE EXPIRATION ----------------------------------- VARIABLE RATE CEILING FLOOR
DATE DATE SEPTEMBER 30, 2001 MARCH 31, 2001 BASE RATE RATE
---- ---------------- ------------------ -------------- --------------- -------- --------
(IN THOUSANDS)

April 22, 1999 January 26, 2002 $20,000 $20,000 3 Month LIBOR 5.75% 4.80%
January 26, 2001 January 30, 2003 $10,000 $10,000 3 Month LIBOR 6.50% 5.09%
January 29, 2001 January 31, 2003 $10,000 $10,000 3 Month LIBOR 6.50% 5.05%

On April 1, 2001, in accordance with the provisions in SFAS 133, the Company
designated its interest rate collars as cash flow hedges and recorded the fair
value of the instruments on the balance sheet at that date, with a corresponding
adjustment to comprehensive earnings. Due to the nature and characteristics of
the Company's designated hedging instruments, all adjustments to the fair values
of such instruments will be adjusted via comprehensive earnings. The effect of
adopting SFAS 133 at April 1, 2001, and the amounts recorded related to its
derivative financial instruments as of and for the three- and six-month periods
ended September 30, 2001, were not material to the Company's consolidated
financial position and did not impact the Company's consolidated results of
operations or cash flows.

8. OPERATING SEGMENTS

DRS operates in three principal business segments on the basis of products
and services offered: the Electronic Systems Group (ESG), the Electro-Optical
Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG). All
other operations are grouped in "Other." During the first quarter of fiscal
2002, the Company's operating subsidiary, DRS Photronics, Inc. (DRS Photronics)
was combined with DRS' Flight Safety and Communications Group for management
purposes, based primarily on operational synergies. DRS Photronics had
previously been managed as part of the Electro-Optical Systems Group. Prior-year
balances and results of operations disclosed herein have been restated to give
effect to this change.

F-44

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

8. OPERATING SEGMENTS (CONTINUED)
Information about the Company's segments for the fiscal quarters ended
September 30, 2001 and 2000 are as follows:

(IN THOUSANDS)
----------------------------------------------------
ESG EOSG FSCG OTHER TOTAL
-------- -------- -------- -------- --------

QUARTER ENDED SEPTEMBER 30, 2001
Total revenues............................ $ 53,120 $ 40,737 $22,013 $ 2,248 $118,118
Intersegment revenues................... -- (370) (1,570) -- (1,940)
-------- -------- ------- ------- --------
External revenues......................... $ 53,120 $ 40,367 $20,443 $ 2,248 $116,178
Operating income (loss)................... $ 4,226 $ 5,340 $ 1,483 $ (346) $ 10,703
Identifiable assets....................... $116,554 $179,446 $99,531 $23,810 $419,341
Depreciation and amortization............. $ 435 $ 1,268 $ 908 $ 470 $ 3,081
Capital expenditures...................... $ 424 $ 2,285 $ 389 $ 856 $ 3,954

QUARTER ENDED SEPTEMBER 30, 2000
Total revenues............................ $ 45,688 $ 36,879 $22,026 $ 2,636 $107,229
Intersegment revenues................... -- (2) -- -- (2)
-------- -------- ------- ------- --------
External revenues......................... $ 45,688 $ 36,877 $22,026 $ 2,636 $107,227
Operating income (loss)................... $ 3,762 $ 5,229 $ (796) $ 308 $ 8,503
Identifiable assets....................... $104,148 $128,709 $87,444 $16,616 $336,917
Depreciation and amortization............. $ 909 $ 1,755 $ 1,184 $ 554 $ 4,402
Capital expenditures...................... $ 1,019 $ 3,165 $ 834 $ 814 $ 5,832

SIX MONTHS ENDED SEPTEMBER 30, 2001
Total revenues............................ $ 91,216 $ 82,670 $44,310 $ 4,484 $222,680
Intersegment revenues................... (17) (464) (2,669) -- (3,150)
-------- -------- ------- ------- --------
External revenues......................... $ 91,199 $ 82,206 $41,641 $ 4,484 $219,530
Operating income (loss)................... $ 9,034 $ 9,817 $ 2,284 $ (748) $ 20,387
Identifiable assets....................... $116,554 $179,446 $99,531 $23,810 $419,341
Depreciation and amortization............. $ 809 $ 2,539 $ 1,672 $ 942 $ 5,962
Capital expenditures...................... $ 1,255 $ 4,049 $ 1,013 $ 1,163 $ 7,480

SIX MONTHS ENDED SEPTEMBER 30, 2000
Total revenues............................ $ 87,225 $ 72,538 $37,178 $ 4,818 $201,759
Intersegment revenues................... -- (11) -- -- (11)
-------- -------- ------- ------- --------
External revenues......................... $ 87,225 $ 72,527 $37,178 $ 4,818 $201,748
Operating income (loss)................... $ 6,262 $ 9,100 $ 108 $ 188 $ 15,658
Identifiable assets....................... $104,148 $128,709 $87,444 $16,616 $336,917
Depreciation and amortization............. $ 1,790 $ 3,491 $ 2,161 $ 1,102 $ 8,544
Capital expenditures...................... $ 1,514 $ 3,921 $ 1,964 $ 1,013 $ 8,412

F-45

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

9. SUPPLEMENTAL CASH FLOW INFORMATION

(IN THOUSANDS)
SIX MONTHS
ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------

Cash paid for:
Income taxes.............................................. $9,573 $4,917
Interest.................................................. $4,390 $6,686
Noncash Investing and Financing Activities:
Deferred acquisition costs for business combinations...... $3,461 $ --
Common stock issued for business combinations............. $ -- $4,000
Note receivable--sale of magnetic tape head business...... $ -- $1,741
Conversion of 9% convertible debentures................... $ -- $8,752

10. CONTINGENCIES

The Company is presently involved in a dispute in arbitration with Spar
Aerospace Limited (Spar) with respect to the working capital adjustment (not to
exceed approximately $4 million), if any, provided for in the purchase agreement
between the Company and Spar dated as of September 19, 1997, pursuant to which
the Company acquired, through certain of its subsidiaries, certain assets of
Spar. The Company is also in a dispute with Raytheon Company (Raytheon) with
respect to the working capital adjustment (not to exceed $7.0 million), if any,
provided for in the purchase agreement between the Company and Raytheon dated as
of July 28, 1998, pursuant to which the Company acquired, through certain
subsidiaries, certain assets of Raytheon. Management does not believe that the
resolution of these claims will result in a material adverse effect on our
earnings or financial condition.

F-46

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

10. CONTINGENCIES (CONTINUED)
claims relate generally to the activities of certain former employees of IV
Phoenix Group and the hiring of some of those employees by the Company. The
plaintiffs also allege claims for tortious interference with business
relationships, tortious interference with contracts and conspiracy to breach
fiduciary duty. The plaintiffs seek damages of not less than $47.1 million for
each such claim. In addition, plaintiffs seek punitive and treble damages,
injunctive relief and attorneys' fees. In the Company's answer filed on
November 12, 2001, it denied the plaintiffs' allegations and intends to
vigorously defend this action. Although this action is in its early stages,
management believes it has meritorious defenses. However, the Company cannot
assure you that it will ultimately prevail in this action.

The Company is also a party to various legal actions and claims arising in
the ordinary course of its business. In the Company's opinion, it has adequate
legal defenses for each of the actions and claims, and it believes that their
ultimate disposition will not have a material adverse effect on the Company's
consolidated financial position or results of operations.

F-47

INDEPENDENT AUDITORS' REPORT

The Boeing Company

We have audited the accompanying statement of assets to be acquired and
liabilities to be assumed of certain operations of the Sensors and Electronic
Systems organization of The Boeing Company as defined in the Asset Purchase
Agreement dated August 3, 2001 and described in Note 1 (the SES Business) as of
December 31, 2000, and its direct revenues and direct operating expenses for the
year then ended. These financial statements are the responsibility of The Boeing
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a
reasonable basis for our opinion.

The accompanying financial statements were prepared to present the assets to
be acquired and liabilities to be assumed and the direct revenues and direct
operating expenses of the SES Business, as described in Note 1 to the financial
statements, and may not necessarily be indicative of the conditions that would
have existed or the results of operations if the SES Business had been operated
as a stand-alone company during the period presented.

In our opinion, the accompanying statement of assets to be acquired and
liabilities to be assumed and the related statement of direct revenues and
direct operating expenses present fairly, in all material respects, the assets
to be acquired and liabilities to be assumed of the SES Business as of
December 31, 2000, and its direct revenues and direct operating expenses for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.

/s/ Deloitte & Touche LLP

Costa Mesa, California
November 15, 2001

F-48

SES BUSINESS OF THE BOEING COMPANY

STATEMENTS OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED

AS OF DECEMBER 31, 2000 AND JUNE 30, 2001 (UNAUDITED)

(DOLLARS IN THOUSANDS)

DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Billed accounts receivable................................ $21,248 $13,246
Unbilled accounts receivable.............................. 20,052 11,591
Inventory, net of progress payments....................... 32,422 21,786
Other current assets...................................... 495 149
------- -------
Total current assets.................................... 74,217 46,772

MACHINERY AND EQUIPMENT, net................................ 9,695 9,212

INTANGIBLE ASSET, net....................................... 2,087 1,834
------- -------
Total assets............................................ 85,999 57,818

LIABILITIES
CURRENT LIABILITIES:
Accrued vacation and sick pay............................. 1,093 1,265
Customer advances......................................... 5,798 3,031
Reserve for anticipated losses on contracts............... 7,970 7,970
Other..................................................... 302 276
------- -------
Total current liabilities............................... 15,163 12,542

COMMITMENTS AND CONTINGENCIES...............................
------- -------
NET ASSETS TO BE ACQUIRED................................... $70,836 $45,276
======= =======

See accompanying notes to financial statements.

F-49

SES BUSINESS OF THE BOEING COMPANY

STATEMENTS OF DIRECT REVENUES AND DIRECT OPERATING EXPENSES

FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE

SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)

(DOLLARS IN THOUSANDS)

SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
2000 2001 2000
------------ -------- --------
(UNAUDITED)

DIRECT REVENUES............................................. $108,343 $53,557 $38,908

DIRECT OPERATING EXPENSES:
Costs of revenues......................................... 99,373 48,706 39,492
Selling, general, and administrative...................... 13,323 5,664 5,732
-------- ------- -------

Total direct operating expenses......................... 112,696 54,370 45,224
-------- ------- -------

DIRECT REVENUES LESS THAN DIRECT OPERATING EXPENSES......... $ (4,353) $ (813) $(6,316)
======== ======= =======

See accompanying notes to financial statements.

F-50

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)

(DOLLARS IN THOUSANDS)

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

On September 28, 2001, The Boeing Company (Boeing or the Seller) sold
certain assets and liabilities of the Sensors and Electronic Systems business
(SES or the SES Business) to DRS Technologies, Inc. (DRS or the Buyer) pursuant
to an Asset Purchase Agreement dated as of August 3, 2001, between Boeing and
DRS (the Agreement).

The SES Business, located primarily in Anaheim, California, is a provider of
advanced electro-optical airborne and naval surveillance and targeting systems,
high-performance military infrared cooled sensor systems, and infrared uncooled
sensor products for military and commercial applications.

BASIS OF PRESENTATION--The assets to be acquired and liabilities to be
assumed of the SES business have not operated as a stand-alone business within
Boeing, and have been included within its Space and Communications segment. The
accompanying financial statements present the assets to be acquired and
liabilities to be assumed of SES based upon the structure of the transaction as
described in the Agreement and the direct revenues and direct operating expenses
corresponding to the assets to be acquired and liabilities to be assumed; assets
and liabilities of the Sensors and Electronic Systems business of The Boeing
Company which are not subject to the Agreement, and the related direct revenues
and direct operating expenses, have been excluded.

Costs other than direct labor and materials, are allocated to SES from
various Boeing overhead pools on the basis of direct labor costs or other
appropriate methodologies. Costs included in the various overhead pools include,
but are not limited to, depreciation and amortization, occupancy and facility
costs, employee benefit costs, and various services such as general management,
facilities management, human resources, data processing, security, payroll and
employee benefits administration, financial, legal, tax, insurance
administration, duplicating, telecommunications, and other miscellaneous
services. In the opinion of management, these methods of allocating indirect
costs are reasonable; however, they do not necessarily equal the costs that SES
would have incurred on a stand-alone basis. Therefore, the financial information
included herein may not necessarily reflect the financial position and results
of operations of SES on a stand-alone basis.

UNAUDITED INTERIM FINANCIAL INFORMATION--The accompanying interim financial
information as of June 30, 2001 and for the six months ended June 30, 2001 and
2000 are unaudited and, in the opinion of management, include all adjustments
necessary to present fairly the financial information for the periods presented
in accordance with accounting principles generally accepted in the United States
of America (generally accepted accounting principles).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make assumptions
and estimates that directly affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.

REVENUE RECOGNITION--Revenues under cost-reimbursement contracts are
accounted for under the percentage-of-completion method of accounting in which
revenues are recorded for costs, as incurred, plus a portion of profit expected
to be realized based on the ratio of costs incurred to estimated costs

F-51

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (CONTINUED)

(DOLLARS IN THOUSANDS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at completion. Revenues under fixed price contracts are recorded as deliveries
are made. Revenues for time and material contracts are recorded when the
services are performed. Anticipated losses on contracts are recognized in full
in the period that the losses become probable and estimable. Anticipated losses
in excess of the related accumulated cost is shown as a liability in the
accompanying financial statements.

Estimated profits for all long-term contracts are based on management
estimates of total sales values and costs at completion. These estimates are
reviewed and revised periodically throughout the lives of the contracts, and
adjustments resulting from such revisions are recorded in the periods in which
the revisions are made. When appropriate, increased funding is assumed based on
expected adjustments of contract prices for increases in scope and other changes
ordered by the customer. Since many contracts extend over a long period of time,
revisions in cost and funding estimates during the progress of work have the
effect of adjusting current period earnings for performance in prior periods.

Certain contracts contain cost or performance incentives or both. These
incentives provide for increases in fees or profits for surpassing stated
targets or other criteria, or for decreases in fees or profits for failure to
achieve such targets or other criteria. Cost and performance incentives are
included in revenues at the time there is sufficient information to relate
actual performance to targets or other criteria.

Cost of sales includes direct engineering and manufacturing costs and
certain overheads including fringe benefits and an allocated portion of costs
incurred by support departments.

CASH AND CASH EQUIVALENTS--SES participates in a centralized cash management
system wherein cash receipts are transferred to and cash disbursements are
funded by Boeing. Since cash and cash equivalents related to the operations of
SES are not to be acquired by DRS, they are excluded from the accompanying
financial statements.

ACCOUNTS RECEIVABLE--Billed accounts receivable are comprised of amounts due
from the United States Government (either directly, or indirectly through
commercial customers who are the prime contractor on contracts where SES is a
subcontractor and the United States Government is the sole end customer) and
from commercial customers principally related to long-term cost-reimbursement
contracts. These amounts are billed in accordance with contract terms. Amounts
billed under retainage provisions of contracts are not significant and
substantially all amounts are collectible within five years.

Unbilled receivables on fixed-price contracts arise as revenues are
recognized under the percentage-of-completion method. These amounts are billable
at specified dates, when deliveries are made or at contract completion, which is
generally expected to occur within one year. Amounts included in unbilled
receivables are related to long-term contracts and are reduced by appropriate
progress billings. Unbilled amounts on cost-reimbursement contracts represent
recoverable costs and accrued profits not yet billed. These amounts are billable
based on contract terms, final settlement of indirect expense rates, or contract
completion.

INVENTORY--Inventoried costs on long-term contracts include direct
engineering, production and tooling costs, and applicable overhead, not in
excess of estimated net realizable value, net of related progress payments
received. In accordance with industry practice, inventoried costs include
amounts

F-52

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (CONTINUED)

(DOLLARS IN THOUSANDS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
relating to contracts with long production cycles, a portion of which is not
expected to be realized within one year. Commercial spare parts and general
stock materials are stated at average cost not in excess of net realizable
value.

MACHINERY AND EQUIPMENT--Pursuant to the Agreement, certain machinery and
equipment owned by the Seller which is used in connection with SES was purchased
by the Buyer, and the cost and related accumulated depreciation of such
machinery and equipment is included in the accompanying financial statements.
Machinery and equipment is recorded at cost less accumulated depreciation.

Depreciation is computed using accelerated and straight-line methods over
the estimated useful lives (10 to 50 years) of the related assets.
Recoverability of machinery and equipment is periodically evaluated by assessing
whether the net book value can be recovered over its remaining life through
undiscounted cash flows generated by the asset.

INCOME TAXES--No provision or benefit for income taxes has been provided in
the accompanying financial statements due to the fact that SES was not operated
as a stand-alone company and no allocation of the Seller's income tax
provision/benefit has been made to SES.

Pursuant to the Agreement, no tax-related assets or liabilities have been
acquired or assumed by the Buyer and, accordingly, no tax-related assets or
liabilities are reflected in the accompanying financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS--Financial instruments of SES consist of
accounts receivable. The carrying amount of SES's financial instruments
approximate the fair values at December 31, 2000 based on the short-term nature
of these instruments.

INTANGIBLE ASSET--Intangible asset represents amounts paid pursuant to a
15-year technology license agreement. The amount is being amortized on a
straight-line method over the life of the license and is net of accumulated
amortization of $913 at December 31, 2000.

RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which the
SES adopted effective January 1, 2001. SFAS No. 133 required SES to record all
derivatives on the balance sheet at fair value. SFAS No. 133 did not have a
material impact on SES's financial statements.

In July 2001, the FASB issued two new pronouncements: SFAS No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SES will
be required to adopt SFAS No. 141 for all business combinations completed after
June 30, 2001. SES will be required to adopt SFAS No. 142 on January 1, 2002;
SES is evaluating the impact of the adoption of this standard and has not yet
determined the effect, if any, that this statement will have on its financial
statements.

F-53

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (CONTINUED)

(DOLLARS IN THOUSANDS)

3. ACCOUNTS RECEIVABLE

As of December 31, 2000 and June 30, 2001, accounts receivable are comprised
as follows:

DECEMBER 31, JUNE 30,
2000 2001
------------ --------

Billed accounts receivable:
United States Government............................. $16,768 $ 9,872
Other................................................ 4,480 3,374
------- -------
21,248 13,246

Unbilled accounts receivable:
United States Government............................. 18,413 10,617
Other................................................ 1,639 974
------- -------
20,052 11,591

$41,300 $24,837
======= =======

Accounts receivable at December 31, 2000 are expected to be collected in
2001 except for approximately $2,926 in 2002.

4. INVENTORY

As of December 31, 2000 and June 30, 2001, inventory is comprised as
follows:

DECEMBER 31, JUNE 30,
2000 2001
------------ --------

Inventoried costs related to long-term contracts....... $42,703 $30,025
Raw materials.......................................... 2,871 4,776
Less progress payments, principally related to
long-term contracts.................................. (13,152) (13,015)
------- -------

$32,422 $21,786
======= =======

5. MACHINERY AND EQUIPMENT

As of December 31, 2000 and June 30, 2001, machinery and equipment are
comprised as follows:

DECEMBER 31, JUNE 30,
2000 2001
------------ --------

Machinery and equipment............................... $ 35,203 $ 36,335
Less accumulated depreciation......................... (27,278) (28,366)
-------- --------
Machinery and equipment, net.......................... 7,925 7,969
Construction in progress.............................. 1,770 1,243
-------- --------
Machinery and equipment, net.......................... $ 9,695 $ 9,212
======== ========

F-54

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (CONTINUED)

(DOLLARS IN THOUSANDS)

5. MACHINERY AND EQUIPMENT (CONTINUED)
In addition to the assets recorded above, SES uses certain government-owned
equipment and shared Seller equipment for production of the contracts. The
shared Seller equipment has been excluded from the accompanying financial
statements as they are not to be acquired by DRS.

Acquisitions of machinery and equipment was $1,185 for the year ended
December 31, 2000.

6. EMPLOYEE BENEFIT PLANS

The employees of SES, along with eligible employees from other Boeing
operations, participate in various retirement and other benefit plans of Boeing.
The pension assets of the plans, which are in excess of the pension liabilities,
have not historically been specifically identified for, nor allocated to, SES or
to specific individual participants in the plans because the Plan's
administrator does not provide sufficient information for that purpose.
Therefore no calculated net pension asset/liability existed at December 31, 2000
or June 30, 2001 for SES.

In accordance with the Agreement, certain pension assets and liabilities
will be assumed by the Buyer in connection with the closing. The assets to be
transferred will be calculated by multiplying the total fair market value of the
Boeing plans' assets as of the closing date by a percentage computed as the
actuarially determined liability as of the closing date for the transferred
employees divided by the actuarially determined liability for all participants
in the plans. The assets to be transferred shall be made in cash or cash
equivalents. The liabilities to be transferred will be actuarially determined
based upon Seller's existing methodologies and the participant classifications
as of the closing date.

Costs attributable to SES's participation in the benefit plans have been
allocated to SES from Boeing as a non-specifically identifiable component of
certain overhead pools which are included in costs of revenues and selling,
general and administrative expenses in the statement of direct revenues and
direct operating expenses.

7. RISK CONCENTRATIONS, COMMITMENTS, AND CONTINGENCIES

GENERAL--Companies such as SES, which are engaged in supplying
defense-related equipment to the U.S. Government, are subject to certain
business risks peculiar to that industry. Sales to the U.S. Government may be
affected by changes in procurement policies, budget considerations, changing
concepts of national defense, political developments abroad and other factors.

CONTINGENCIES--The SES Business is subject to potential liability under
customer claims arising in the normal course of business. Management of the SES
Business and the Seller believe the disposition of matters which are pending or
asserted will not have a material adverse effect on the SES Business financial
statements.

CREDIT RISK--Financial instruments which subject SES to concentrations of
credit risk primarily relate to accounts receivable. Contracts involving the
U.S. Government do not require collateral or other security. Ongoing credit
evaluations of non-U.S. Government customers are conducted and generally
collateral or other security is not required from these customers. Historically,
no significant credit-related losses have been incurred by SES.

F-55

SES BUSINESS OF THE BOEING COMPANY

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000

AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (CONTINUED)

(DOLLARS IN THOUSANDS)

7. RISK CONCENTRATIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)
MARKET CONCENTRATIONS--For the year ended December 31, 2000, three customers
represented 58%, 13%, and 13% of direct revenues. At December 31, 2000, two
customers accounted for 69% and 14% of total accounts receivable.

Direct revenues under U.S. Governmental contracts (including contracts for
which SES is either the prime contractor or a subcontractor) were approximately
77% of total direct revenues for the year ended December 31, 2000. Direct
revenues under United States Government prime contracts and subcontracts
approximated $78,500 and $5,500, respectively, for the year ended December 31,
2000.

LEASES--Concurrent with the closing of the Acquisition, the Seller and the
Buyer entered into two lease agreements (the Leases) whereby the Seller agreed
to lease to the Buyer space occupied by SES in Anaheim, California. The Leases
contain certain renewal options and escalation clauses.

Minimum rental commitments under the Leases as of the closing date of the
Acquisition are as follows:

For the period from October 1, 2001 to December 31, 2001.... $1,829
For the year ending December 31, 2002....................... 3,394
For the year ending December 31, 2003....................... 167
------

$5,390
======

8. SERVICES AGREEMENT

Concurrent with the closing of the Acquisition, the Buyer entered into a
Transitional Services Agreement (TSA) whereby the Seller agreed to provide, and
the Buyer agreed to purchase, certain support services. The TSA will be in
effect upon the closing of the Acquisition until the agreed-upon service period,
which ranges between one to six months depending on the type of services; or
upon termination notice period, which ranges from 30 to 60 days.

F-56

BACK PAGE INSIDE COVER:

Picture of Virginia Class NSSN Submarine with smaller pictures on top of the
page of (with capitons):

Command Workstation, Control Display Workstation, Submarine
Workstation, Submarine Display System, Horizontal Large Screen
Display

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YOU MAY RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. NEITHER DRS TECHNOLOGIES, INC. NOR ANY UNDERWRITER HAS
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF THESE SECURITIES.

------------------------

TABLE OF CONTENTS

------------------------

PAGE
--------

Prospectus Summary................. 1
Summary Consolidated Financial
Data............................. 5
Risk Factors....................... 6
Special Note Regarding
Forward-Looking Statements....... 13
Use of Proceeds.................... 14
Dividend Policy.................... 15
Price Range of Common Stock........ 15
Capitalization..................... 16
Selected Consolidated Financial
Data............................. 17
Pro Forma Financial Information.... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 23
Business........................... 37
Management......................... 57
Transactions with Related
Parties.......................... 67
Principal and Selling
Stockholders..................... 68
Description of the Capital Stock... 70
Underwriting....................... 71
Legal Matters...................... 74
Experts............................ 74
Where You Can Find More
Information...................... 74
Index to Financial Statements and
Financial Statement Schedule..... F-1

[DRS TECHNOLOGIES LOGO]

3,500,000 SHARES

COMMON STOCK
---------------
PROSPECTUS
---------------

BEAR, STEARNS & CO. INC.
WACHOVIA SECURITIES

DECEMBER 14, 2001

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