DRS TECHNOLOGIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2002

COMMISSION FILE NUMBER 1-8533

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DRS TECHNOLOGIES, INC.

DELAWARE 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
(973) 898-1500

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The market value of shares of common stock held by non-affiliates, based on
the closing prices for such stock on the New York Stock Exchange on June 20,
2002, was approximately $714,017,000. The number of shares of common stock
outstanding as of June 20, 2002 was 16,859,912.

DOCUMENTS INCORPORATED BY REFERENCE

1. Definitive Proxy Statement, dated June 27, 2002, for the Annual Meeting
of Stockholders, incorporated in Part III of this Form 10-K.

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DRS TECHNOLOGIES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2002

TABLE OF CONTENTS

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ITEM 1. BUSINESS

References in this Annual Report on Form 10-K to "DRS," "we," "our" and "us"
are to DRS Technologies, Inc. and its subsidiaries.

GENERAL

DRS Technologies 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, communications
systems, high-speed digital imaging systems, 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, CVN aircraft
carriers, SSN submarines, the M1A2 Abrams Main Battle Tank, the M2A3 Bradley
Fighting Vehicle, the OH-58D Kiowa Warrior helicopter, the AH-64 Apache
helicopter and the F/A-18E/F Super Hornet jet fighter, as well as for other
military and non-military applications.

Over the past five years, we increased our annual revenues at a compounded
annual growth rate of approximately 31% and our operating income at a compounded
annual growth rate of approximately 34%. For the year ended March 31, 2002, we
had revenues of $517.2 million and operating income of $49.8 million.

COMPANY ORGANIZATION

We operate in three principal business segments on the basis of products and
services offered. Each operating segment is comprised of separate and distinct
businesses: the Electronic Systems Group, the Electro-Optical Systems Group and
the Flight Safety and Communications Group. All other operations are grouped in
Other.

Financial information on our reportable business segments is presented in
Note 16 to our Consolidated Financial Statements which are included in this Form
10-K (see Item 8. Financial Statements and Supplementary Data). Additional
financial data and commentary on the results of operations for the operating
segments are included in Management's Discussion and Analysis of Financial
Condition and Results of Operations, which is also included in this Form 10-K
(see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations). These data and comments should be referred to in
conjunction with the summary description of our operating segments, which
follows.

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
international 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 digitization 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

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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, Northrop Grumman 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 ten 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, CVN carriers and amphibious
assault ships. We have provided these systems since 1996 as the sole
source provider under an open, indefinite delivery, indefinite quantity
contract that 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 as well as
other international naval platforms.

- ANTENNA PRODUCTS. We provide positioning equipment for a variety of
antenna systems, including the FPS-117, COBRA and SPS-67 radar's and the
U.S. Navy's EHF satellite communications system.

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.

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

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ELECTRO-OPTICAL SYSTEMS GROUP. Our Electro-Optical Systems Group is a
leader in second generation electro-optical infrared sighting, targeting and
weapons guidance systems, high performance focal plane arrays and infrared
uncooled sensors, 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, the OH-58D Kiowa Warrior and the
HMMWV scout vehicle and are also used on sea and airborne platforms, such as
Aegis class destroyers and OH-58D Kiowa Warrior helicopters. Our Electro-Optical
Systems Group is leveraging its technology base by pursuing commercial
opportunities, including the manufacture of 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 (FLIR) 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.

- MAST MOUNTED SIGHT (MMS). MMS is a multisensor, fully integrated
electro-optical sighting system with visible and infrared capability.
Designed to be mounted above a helicopter's rotor or on a ground combat
vehicle, MMS increases survivability through its capacity to identify and
target potential threats in day, night, and adverse weather conditions.
MMS uses a combination of high-resolution television camera, thermal
imaging sensors and a laser rangefinder/designator to accomplish its
mission. The imaging sensor package provides detection and recognition at
night and in inclement weather, while the laser rangefinder/designator
achieves precise target designation for laser-guided weapons. Mounted
above the rotor of a helicopter, MMS provides natural stealth and extended
standoff range by allowing the craft to hide behind existing terrain while
maintaining 360-degree surveillance.

- 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, increasing troop survivability.

- THERMAL IMAGING SENSOR SYSTEM (TISS). TISS is a second generation forward
looking infrared targeting system for detecting threats, including
floating mines, swimmers, speedboats and low flying aircraft. It features
an advanced stabilization technology that results in exceptional
stability, even when exposed to dynamic environments. TISS is useful in
navigation and search-and-seizure operations, as well as in threat
location and identification. It can provide high-

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quality video for surveillance and 3-D targeting data for use with
existing weapon control systems.

- 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 AH-66 Comanche.

- SURVEILLANCE AND TARGETING SYSTEMS. Our Electro-Optical Systems Group 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 high-resolution surveillance
and targeting systems, which include exceptionally stabilized surveillance
and targeting systems mounted on airborne and naval platforms.

- INFRARED UNCOOLED SENSORS. Our Electro-Optical Systems Group has
established a position in the uncooled focal plane array market segment by
employing advanced technology to create uncooled focal plane arrays that
provide high-resolution imaging with software that makes costly cryogenic
cooling unnecessary. These lower-cost sensors are used in commercial and
military applications.

- 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 March 31, 2002 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. Our Electro-Optical Systems
Group 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. 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.

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

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 and data link 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 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 avoid 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 from the recorders. These
systems present a significant market opportunity as an increasing number
of aircraft incorporate these advanced systems.

- INTEGRATED SHIPBOARD COMMUNICATIONS SYSTEMS. These systems form the basis
for the voice and data backbone of future shipboard communication systems.
They handle 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 in battle groups. These systems provide enabling technology for
battlefield systems integration by providing data links to components and
systems, modems, digital telephone and radar surveillance systems.

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- 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:

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OTHER. "Other" includes the activities of 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 (DRS Ahead Technology was sold on May 29, 2002. See Subsequent Events
below).

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 existing customers. 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 financial risk. In fiscal year 2002, our
total research and development spending was $45.8 million, with
$36.2 million funded by our customers.

- PURSUE STRATEGIC ACQUISITIONS. We plan to continue participating 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.

- 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.

- 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.

RECENT ACQUISITIONS

On September 28, 2001, we acquired certain assets and assumed certain
liabilities of the Sensors and Electronic Systems business of The Boeing Company
(SES Business), for approximately $60.1 million in cash, net of a $7.0 million
favorable working capital adjustment received in the fourth quarter of fiscal
2002, and $4.0 million in acquisition-related costs. Production, engineering and
management of the contracts acquired in the SES acquisition have been assigned,
based on operational synergies, to two previously existing Electro-Optical
Systems Group operating units, as well as to a new

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operating unit called DRS Sensors & Targeting Systems, Inc. (DRS STS). DRS STS
was created as a result of the SES Acquisition, and it is also an operating unit
of EOSG.

SES designs, manufactures and services helicopter and surface ship mounted
surveillance and targeting systems designed for use by the U.S. and allied
governments. SES 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.

SES' products are also used in remote sensing applications for military and
commercial space missions, as well as in other classified applications.

On August 22, 2001, we acquired certain assets and liabilities of the
Electro-Mechanical Systems Unit of Lockheed Martin Corporation for approximately
$4.0 million in cash, subject to adjustment. This unit now operates as DRS
Surveillance Support Systems, Inc. (DRS SSS), a unit of our Electronic Systems
Group, and is located in Largo, Florida. DRS SSS produces pedestals and support
systems and antennae for radar and other surveillance sensor systems. This
acquisition provides certain product synergies and vertical business integration
opportunities for us.

SUBSEQUENT EVENTS

On May 28, 2002, we announced that we signed a definitive agreement to
acquire the assets and certain liabilities of the Navy Controls Division of
Eaton Corporation (NCD) for $92.2 million in cash. We will finance the
acquisition with existing cash on hand. NCD, located in Milwaukee, Wisconsin,
and Danbury, Connecticut, is a leading supplier of high-performance power
conversion and instrumentation and control systems for the U.S. Navy's combatant
fleet, including nuclear-powered and conventionally powered ships, in addition
to specialized customers. Products include ship electric propulsion equipment,
power electronics equipment, high-performance networks, shipboard control
equipment and control panels, tactical displays and specialty reactor
instrumentation and control equipment. NCD will be managed as a part of our
Electronic Systems Group. The acquisition is subject to customary closing
conditions, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act. We expect to complete the acquisition in June or July of
fiscal 2003.

On May 29, 2002, we announced that we sold the assets of our DRS Ahead
Technology operating unit. DRS Ahead Technology contributed approximately 2% of
consolidated revenues in fiscal 2002, 2001 and 2000, and recorded operating
(losses)/income of $(369,000), $70,000 and $(749,000) in fiscal 2002, 2001 and
2000, respectively. The operating unit was sold at book value.

CUSTOMERS

We sell a significant portion of our products to agencies of the U.S.
government, primarily the Department of Defense, to foreign government agencies
or to prime contractors or their subcontractors. Approximately 78%, 78% and 80%
of total consolidated revenues for fiscal 2002, 2001 and 2000, respectively,
were derived directly or indirectly from defense contracts for end use by the
U.S. government and its agencies. See Foreign Operations and Export Sales below
for information concerning sales to foreign governments.

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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.

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 $36.2 million, $32.9 million, and $23.5 million for fiscal 2002,
2001 and 2000, 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. Such expenditures were
approximately $9.5 million, $8.0 million and $9.9 million for fiscal 2002, 2001
and 2000, 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 20%, represented more
than 15% of our revenue in the year ended March 31, 2002. The AN/UYQ-70 program
is diversified, with over 50 unique products manufactured under it which are
used by a diverse group of ten 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, 2002, 87% of our revenues came from fixed-price contracts and
13% 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.

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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.

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 during fiscal 2002, 2001 and 2000 attributable
to our contracts by contract type were as follows:

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 $20.4 million, $9.5
million and $13.7 million as March 31, 2002, 2001 and 2000, 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
$16.3 million and $14.5 million at March 31, 2002 and 2001, 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

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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 customer.

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 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.

16

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.

EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

The names of our executive officers, their positions and offices with us,
and their ages are set forth below:

MARK S. NEWMAN joined us in 1973 and was named Vice President-Finance, Chief
Financial Officer and Treasurer in 1980 and Executive Vice President in 1987. In
May 1994, Mr. Newman became the President and Chief Executive Officer of DRS and
in August 1995 he became Chairman of the Board. Mr. Newman is a director of
Congoleum Corporation, SSG Precision Optronics, Inc., Opticare Health Systems,
Inc., the American Electronics Association, the New Jersey Technology Council
and is a member of the Board of Governors of the Aerospace Industries
Association.

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

17

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.

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.

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.

EMPLOYEES

As of March 31, 2002, we had approximately 2,780 employees, approximately
2,330 of whom are located in the United States. None of our our employees are
represented by labor unions, and we have experienced no work stoppages.
Approximately 70 manufacturing employees at our Anaheim, California facility
were represented by the United Autoworkers, Local 887 until April 17, 2002, when
the employees voted to decertify the union. The employees were formerly employed
by The Boeing Company at our Anaheim facility and represented by the union.
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.

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ITEM 2. PROPERTIES

We lease the following properties:

We own the following properties:

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.

19

Substantially all of our assets, including those properties identified
above, are pledged as collateral on our borrowings (See Note 10 to our
Consolidated Financial Statements in this Form 10-K).

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.

ITEM 3. LEGAL PROCEEDINGS

We are 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 believe that their ultimate disposition will not
have a material adverse effect on our consolidated financial position or results
of operations.

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. (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 us on August 12, 1999 and May 10, 2000, relating to the ongoing investigation
of DRS Photronics and one or more of its then employees. On May 17, 2002, DRS
Photronics announced that it had entered into a global settlement with the
government, resolving all potential allegations related to the investigation.
Under the terms of the settlement, DRS Photronics agreed to pay $2.5 million in
restitution and pleaded guilty to a violation of the False Claims Act.

We are currently involved in a dispute with Spar Aerospace Ltd. (Spar) with
respect to the working capital adjustment, 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. On
January 11, 2002, we were notified that an arbitrator awarded Spar $4,616,000
Canadian (or approximately $2,890,000 U.S.) plus interest in respect of such
working capital adjustment. As of March 31, 2002, we had accrued approximately
$3.9 million, including interest, associated with the potential award. On
February 5, 2002, we filed a notice of appeal of such arbitral award with the
Ontario Superior Court of Justice.

20

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, Inc. 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 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 seek damages of not
less than $5.0 million for each of the claims. 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 claim. In addition, plaintiffs
seek punitive and treble damages, injunctive relief and attorney's fees. In its
answer, the Company has denied the plaintiffs' allegations and intends to
vigorously defend this action. In February 2002, plaintiffs filed an amended
complaint, which eliminated the patent infringement claims and added claims
related to statutory and common law trademark infringement, which superseded
plaintiffs' original complaint. Although this action is in its early stages, we
believe we have meritorious defenses and we do not believe the action will have
a material adverse effect on our earnings or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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. The indenture relating to our bank
borrowings restricts our ability to pay dividends or make other distributions on
our Common Stock. See Note 10 to our Consolidated Financial Statements in this
Form 10-K for information concerning restrictions on the declaration or payment
of dividends. Any future declaration of dividends will be subject to the
discretion of our Board of Directors. The timing, amount and form of any future
dividends will depend, among other things, on our results of operations,
financial condition, cash requirements, plans of expansion and other factors
deemed relevant by our Board of Directors.

Effective April 30, 2002, the Company's Common Stock is traded on the New
York Stock Exchange (NYSE) under the symbol "DRS". Prior to April 30, 2002, the
Company's Common Stock traded on the American Stock Exchange. The following
table sets forth, for the periods indicated, the high and low reported sale
price per share for DRS's Common Stock.

The closing sale price of our Common Stock as reported by the New York Stock
Exchange on June 20, 2002 was $42.35 per share. As of that date there were 459
holders of record of the Company's Common Stock.

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ITEM 6. SELECTED FINANCIAL DATA

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

(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 in the
five-year period ended March 31, 2002.

(3) Earnings from continuing operations before extraordinary item, net interest
and related expenses (primarily amortization of debt issuance costs),
income taxes (EBIT), depreciation and amortization (EBITDA). EBIT and
EBITDA are not substitutes for operating income, net earnings or cash flows
from operating activities, as determined in accordance with accounting
principles generally accepted in the United States of America, or as a
measure of our profitability or liquidity. We present EBIT and EBITDA as
additional information because we believe it to be a useful indicator of
our ability to meet debt service and capital expenditure requirements. EBIT
and EBITDA, as we define them, may differ from similarly named measures
used by other entities.

(4) Net cash provided by (used in) operating activities less capital
expenditures.

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

(6) Ratio of EBITDA to interest and related expenses.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is management's discussion and analysis of the consolidated
financial condition and results of operations of DRS Technologies, Inc. and
Subsidiaries (hereinafter, we, us, our, the Company or DRS) as of March 31,2002
and 2001, and for each of the fiscal years in the three-year period ended March
31, 2002. This discussion should be read in conjunction with the audited
consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

The following discussion and analysis contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Persons reading this report
are cautioned that risks and uncertainties are inherent in forward-looking
statements. Accordingly, our actual results could differ materially from those
suggested by such statements. Risks include, without limitation: the effect of
our acquisition strategy on future operating results; the uncertainty of
acceptance of new products and successful bidding for new contracts; the effect
of technological changes or obsolescence relating to our products and services;
the effects of government regulation or shifts in government policy, as they may
relate to our products and services; competition; and other matters referred to
in this report.

OVERVIEW

We are a leading supplier of defense electronic 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, DRS has 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 OH-58D Kiowa
Warrior helicopter, the AH-64 Apache helicopter and the F/A-18E/F Super Hornet
jet fighter, as well as in other military and non-military applications.

We have increased our annual revenues and operating income at compounded
annual growth rates of 31% and 34%, respectively, over the last five years. In
addition, from fiscal 2001 to fiscal 2002, operating income increased
approximately 33% and net earnings increased approximately 70%. For the year
ended March 31, 2002, we generated sales of $517.2 million and operating income
of $49.8 million.

Funded backlog increased substantially in fiscal 2002, primarily as a result
of our acquisitions. At March 31, 2002, our funded backlog was approximately
$595.3 million, an increase of 30% from March 31, 2001. As of March 31, 2002,
approximately 53% and 23% of our backlog related to products and services for
the U.S. Army and U.S. Navy, respectively, as compared with 41% and 30% at
March 31, 2001.

COMPANY ORGANIZATION AND PRODUCTS

We operate in three principal operating segments on the basis of products
and services offered. Each operating segment is comprised of separate and
distinct businesses: the Electronic Systems Group, the Electro-Optical Systems
Group and the Flight Safety and Communications Group. All other operations are
grouped in Other.

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Our Electronic Systems Group (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, radar
support and antennae 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

ESG provided $206.6 million, or 40% of total sales, for the year ended
March 31, 2002.

Our Electro-Optical Systems Group (EOSG) produces systems and subsystems for
infrared night vision and targeting on the U.S. Army's Abrams Main Battle Tanks,
Bradley Fighting Vehicles, OH-58D Kiowa Warrior helicopters, Aegis destroyers
and cruisers, and High-Mobility Multipurpose Wheeled Vehicle Scouts. EOSG
designs, manufactures and markets these and other products that allow operators
to detect, identify and target objects based upon their infrared signatures,
regardless of the ambient light level. The Group is one of two key suppliers to
the U.S. government for advanced focal plane array technology. In addition to
the Group's military applications, EOSG also manufactures electro-optical
modules for commercial devices used in corrective laser eye surgery and provides
system integration for retinal scanning and imaging devices.

EOSG provided $208.2 million, or 40% of total sales, for the year ended
March 31, 2002.

Our Flight Safety and Communications Group (FSCG) is a manufacturer of
airborne deployable recorders and surveillance and communications systems.
FSCG's products are used by U.S. and international militaries, as well as
commercial customers. FSCG produces integrated naval ship communications
systems, information management systems, mission recorders, coastal and border
radar surveillance systems, ultra high-speed digital imaging systems for F/A-18
aircraft and industrial purposes, and multi ple-platform weapons calibration
systems for air platforms, such as the AH-64 Apache attack helicopter and the
AC-130U gunship. FSCG also provides electronics manufacturing services to the
defense and space industries.

FCSG provided $93.2 million, or 18% of total sales, for the year ended
March 31, 2002.

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 (DRS Ahead Technology was sold on
May 29, 2002. See "Subsequent Events").

SUBSEQUENT EVENTS

On May 28, 2002, we announced that we signed a definitive agreement to
acquire the assets and certain liabilities of the Navy Controls Division of
Eaton Corporation (NCD) for $92.2 million in cash. We will finance the
acquisition with existing cash on hand. NCD, located in Milwaukee, Wisconsin,
and Danbury, Connecticut, is a leading supplier of high-performance power
conversion and instrumentation and control systems for the U.S. Navy's combatant
fleet, including nuclear-powered and conventionally powered ships, in addition
to specialized customers. Products include ship electric propulsion equipment,
power electronics equipment, high-performance networks, shipboard control
equipment and control panels, tactical displays and specialty reactor
instrumentation and control equipment. NCD will be managed as a part of our
Electronic Systems Group. The acquisition is subject to customary closing
conditions, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act. We expect to complete the acquisition in June or July of
fiscal 2003.

On May 29, 2002, we announced that we sold the assets of our DRS Ahead
Technology operating unit. DRS Ahead Technology contributed approximately 2% of
consolidated revenues in fiscal 2002,

24

2001 and 2000, and recorded operating (losses)/income of $(369,000), $70,000 and
$(749,000) in fiscal 2002, 2001 and 2000, respectively. The operating unit was
sold at book value.

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. The magnetic tape head
business units recorded a $1.3 million loss from discontinued operations for the
fiscal year ended March 31, 2000. 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 defense 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.

The acquisitions discussed below 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.

FISCAL 2002 TRANSACTIONS On September 28, 2001, we acquired certain assets
and liabilities of the Sensors and Electronic Systems business of The Boeing
Company (SES business). We paid approximately $60.1 million in cash, net of a
$7.0 million favorable working capital adjustment received in the fourth quarter
of fiscal 2002, and $4.0 million in acquisition-related costs. Based upon
preliminary allocations, we have estimated the goodwill and acquired intangible
assets to be approximately $64.6 million and $14.0 million, respectively. In
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (see Critical Accounting Policies below), goodwill
is no longer amortized. The acquired intangible assets with finite lives are
being amortized on a straight-line basis over approximately 17 years. The
purchase price allocation is subject to change, as we are in the process of
refining our estimates to complete on certain acquired contracts. We will
finalize the purchase price allocation in the second quarter of fiscal 2003.

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. Production,
engineering and management of the contracts acquired in the SES acquisition have
been assigned, based on operational synergies, to two previously existing
Electro-Optical Systems Group operating units, as well as to a new operating
unit called DRS Sensors & Targeting Systems, Inc. (DRS STS). DRS STS was created
as a result of the SES acquisition, and it is also an operating unit of EOSG.
This acquisition broadens the product lines and customer base of EOSG,
particularly in those areas associated with naval and air-based applications,
and provides a strong complement to our existing products in ground-based
Forward Looking Infrared technology.

On August 22, 2001, we acquired certain assets and liabilities of the
Electro Mechanical Systems unit of Lockheed Martin Corporation for approximately
$4.0 million in cash, subject to adjustment, and approximately $300,000 in
acquisition-related costs. This unit now operates as DRS Surveillance Support
Systems, Inc. (DRS SSS), a unit of our Electronic Systems Group, and is located
in Largo, Florida. DRS SSS produces pedestals, support systems and antennae for
radar and other surveillance

25

sensor systems. This acquisition provides certain product synergies and vertical
business integration opportunities for us.

FISCAL 2001 TRANSACTION On June 14, 2000, we 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), and approximately $420,000
in acquisition-related costs. 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. We recorded
approximately $6.8 million of goodwill in connection with this acquisition.

FISCAL 2000 TRANSACTION On July 21, 1999, we acquired Global Data
Systems Ltd. and its wholly-owned subsidiary, European Data Systems Ltd., for
approximately $7.8 million in cash. The company designs and develops rugged
computers and peripherals primarily for military applications. We recorded
approximately $8.7 million in goodwill in connection with this acquisition.

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

During the third and fourth quarters of fiscal 2000, we announced plans to
restructure our operations, which resulted in restructuring charges totaling
approximately $2.2 million. Our restructuring initiatives impacted our FSCG
operating segment and DRS Corporate. FSCG recorded restructuring charges
totaling approximately $1.6 million at its DRS Photronics, Inc., DRS Hadland
Ltd. and DRS Precision Echo, Inc. operating units for facility consolidation,
severance and other employee-related costs. 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 estimate relating to our
facility consolidation efforts and recorded an additional charge of $525,000 at
FSCG. table above reconciles the restructuring liability at March 31, 2000 to
the restructuring liability at March 31, 2002 The balance of the restructuring
liability at March 31, 2002 will be utilized in the first quarter of fiscal
2003.

CRITICAL ACCOUNTING POLICIES

The SEC recently issued disclosure guidance for "critical accounting
policies." The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.

26

The following is not intended to be a comprehensive list of all of our
accounting policies. Our significant accounting policies are more fully
described in Note 1 to the Consolidated Financial Statements. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States of America, with
no need for management's judgment in their application. There are also areas in
which management's judgment in selecting an available alternative would not
produce a materially different result.

We have identified the following accounting policies as critical to us:

REVENUE RECOGNITION ON CONTRACTS AND CONTRACT ESTIMATES 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 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.

Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and realization is
probable. Incentives or penalties and awards applicable to performance on
contracts are considered in estimating sales and profit rates, and are 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.

Recognition of profit on long-term contracts requires estimates of: the
contract value or total contract revenue; the total cost at completion; and the
measurement of progress towards completion. The estimated profit or loss on a
contract is equal to the difference between the contract value and the estimated
total cost at completion. Due to the long-term nature of our programs,
developing the estimated total cost at completion often requires significant
judgment. Factors that must be considered in estimating the work to be completed
include labor productivity and availability of labor, the nature and complexity
of the work to be performed, availability of materials, the impact of delayed
performance, availability and timing of funding from the customer, and the
recoverability of claims included in any estimate to complete.

We review cost performance and estimates to complete on our ongoing and
acquired 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 positive or negative adjustment to earnings in the current period.
We record contracts acquired in connection with a business combination at
remaining contract value less our estimate of costs to complete and a profit
margin commensurate with the profit margin we earn on similar contracts.
Revisions to cost estimates subsequent to the date of acquisition may be
recorded as an adjustment to goodwill or earnings, depending on the nature and
timing of the revision. A significant change in an estimate on one or more
programs could have a material effect on our statement of financial position and
results of operations.

We provide for future warranty costs upon product delivery with warranty
periods generally ranging up to one year. Because our products are manufactured,
in many cases, to customer specifications requiring significant engineering, we
historically have experienced minimal warranty costs. We expect that this trend
will continue.

We often enter into contracts that provide for significant engineering as
well as the production of finished units with the expectation that we will incur
substantial up-front costs to engineer the product to meet customer
specifications. These arrangements typically provide us the opportunity to be
awarded

27

add-on contracts requiring the delivery of additional finished units. Our
ability to recover up-front costs and earn a reasonable overall profit margin
often is contingent on our ability to recover the up-front costs over multiple
deliverable awards. Prior to entering into such arrangements, we estimate the
amount of up-front costs to be incurred and evaluate the likelihood of being
awarded the add-on contracts. Inaccurate estimates of upfront costs, coupled
with the failure to obtain or delays in obtaining add-on contracts, could have a
material effect on the timing of revenue and/or profit recognition.

GOODWILL AND INTANGIBLE ASSETS In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires
that goodwill and identifiable intangible assets with indefinite useful lives no
longer be amortized, but tested for impairment annually. SFAS 142 also requires
the amortization of identifiable intangible assets with finite lives, although
the statement no longer limits the amortization period to 40 years. Identifiable
intangible assets that are subject to amortization are to be tested for
impairment in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long- Lived Assets" (see
Long-lived Assets and Intangible Assets below). As of March 31, 2002, we had
$142.6 million of net goodwill and $34.1 million of net acquired identifiable
intangible assets subject to amortization and no identifiable intangible assets
with indefinite lives. In accordance with SFAS 142, goodwill is to be tested for
impairment at a level of reporting referred to as a "reporting unit."

We elected to early-adopt the provisions of SFAS 142 as of April 1, 2001 and
have identified our reporting units to be our operating segments. 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. In connection with our adoption of SFAS
142, we were required to perform a transitional goodwill impairment assessment
within six months of adoption. We completed the transitional goodwill impairment
assessment with no adjustment to the carrying value of our goodwill as of April
1, 2001. The annual impairment test is performed after completion of our annual
financial operating plan, which occurs in the fourth quarter of our fiscal year.
We completed our annual impairment test with no adjustment to the carrying value
of our goodwill as of March 31, 2002.

The annual goodwill impairment assessment involves estimating the fair value
of the reporting unit and comparing it with its carrying amount. If the carrying
value of the reporting unit exceeds its fair value, additional steps are
followed to recognize a potential impairment loss. Calculating the fair value of
the reporting units requires significant estimates and assumptions by
management. Should our estimates and assumptions regarding the fair value of our
reporting units prove to be incorrect, we may be required to record an
impairment loss to our goodwill in future periods and such impairment loss could
be material. We estimate the fair value of our reporting units by applying third
party market value indicators to the reporting unit's projected revenues,
earnings before net interest and taxes (EBIT), and earnings before net interest,
taxes, depreciation and amortization (EBITDA), and calculating an average of the
three extended market values.

LONG-LIVED ASSETS AND ACQUIRED INTANGIBLE ASSETS We assess the
recoverability of our long-lived assets and acquired identifiable intangible
assets with finite useful lives whenever events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. Factors we
consider important which could trigger an impairment review include:

- Significant under performance relative to expected historical performance
or projected future operating results;

- Significant changes in the manner or use of the acquired assets or the
strategy of our overall business;

28

- Significant adverse changes in the business climate in which we operate;
and

- Loss of a significant contract.

If we determine that the carrying value of the long- lived assets and
identifiable intangible assets may not be recoverable based upon the existence
of one or more of the above indicators of impairment, we would measure any
impairment based on the projected undiscounted cash flows, less the carrying
amount of the asset. If the expected future cash flows were less than the
carrying value of the asset, we would record an impairment loss based on the
difference between the estimated fair value and the carrying value.

VALUATION OF DEFERRED TAX ASSETS AND LIABILITIES At March 31, 2002, we had
net deferred tax assets of $13.9 million representing net operating loss
carryforwards, which are subject to various limitations and will expire if
unused within their respective carryforward periods. As of March 31, 2002, we
have provided a $5.4 million valuation allowance against our net deferred tax
assets. Deferred taxes are determined separately for each of our tax paying
entities in each tax jurisdiction. Future realization of deferred tax assets
ultimately depends on the existence of sufficient taxable income of the
appropriate character (for example, ordinary income or capital gain) within the
carryback and carryforward periods available under the tax law. Based on our
estimates of the amounts and timing of future taxable income, we believe we will
realize our recorded net deferred tax assets. A change in the ability of our
operations to continue to generate future taxable income could affect our
ability to realize the future tax deductions underlying our net deferred tax
assets and require us to increase our valuation allowance against our net
deferred tax assets. Such changes, if significant, could have a material impact
on our effective tax rate, results of operations and financial position in any
given period.

MANAGEMENT ESTIMATES The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent expenses during
the reporting period. Some of the more significant estimates made by management
involve percentage of completion on long-term contracts, recoverability of
long-lived and intangible assets, and the valuation of deferred tax assets and
liabilities, as discussed above. We also make estimates regarding the
recoverability of assets, including accounts receivable and inventories and for
litigation and contingencies.

A substantial majority of our revenues and, consequently, our outstanding
accounts receivables are directly or indirectly with the United States
government. Therefore, our risk of not collecting amounts due us under such
arrangements is minimal. We generally require letters of credit or deposit
payments prior to the commencement of work or obtain progress payments upon the
achievement of certain milestones from our other commercial customers. In
addition, our revenues are supported by contractual arrangements specifying the
timing and amounts of payments. Consequently, we historically have experienced
and expect to continue to experience a minimal amount of uncollectible accounts
receivable. Changes in the underlying financial condition of our customers or
changes in the industry in which we operate necessitating revisions to our
standard contractual terms and conditions could have an impact on our results of
operations in the future.

Our inventory consists of work-in-process, raw materials and finished goods,
including subassemblies principally for use in our products. We continually
evaluate the adequacy of our reserves on our raw materials and finished goods
inventory by reviewing historical rates of scrap, on-hand quantities, as
compared with historical and projected usage levels and other anticipated
contractual requirements.

We record a liability pertaining to pending litigation based on our best
estimate of potential loss, if any, or at the minimum end of the range of loss
in circumstances where the range of loss reasonably

29

can be estimated. Because of uncertainties surrounding the nature of litigation
and the cost to us, if any, we continually revise our estimated losses as
additional facts become known.

RESULTS OF OPERATIONS

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

FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001

Revenues and operating income for the year ended March 31, 2002 were
$517.2 million and $49.8 million, respectively, increasing approximately
$89.6 million and $12.2 million, respectively, as compared with the prior fiscal
year. The increase in revenues was driven by our fiscal 2002 second quarter
acquisitions of the SES business and DRS SSS, increased shipments of our second
generation infrared sighting and targeting systems, and combat display
workstations, as well as a complete fiscal year of revenues generated by
DRS Communications Company, which we acquired at the end of the first quarter of
fiscal 2001. The 33% increase in operating income was due primarily to the
overall increase in revenues and the impact of our fiscal 2002 first quarter
adoption of SFAS 142 (see Note 3 of Notes to Consolidated Financial Statements).
In accordance with the provisions of these standards, we ceased amortizing
goodwill effective April 1, 2001. The adoption of SFAS 142 contributed
approximately $4.7 million to our fiscal 2002 operating income. Had SFAS 142
been effective in the prior year, our operating income would have been
$5.3 million higher for the year ended March 31, 2001. 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).

Interest income increased approximately $942,000 to $1.1 million for the
year ended March 31, 2002, as compared with the prior fiscal period. The
increase in interest income reflects a higher average cash and cash equivalents
balance in fiscal 2002, due to our secondary common stock offering in the third
quarter of this fiscal year.

Interest and related expenses decreased approximately $507,000 for the year
ended March 31, 2002, as compared with the prior fiscal year period. The
decrease in interest expense in fiscal 2002 was primarily the result of an
overall decrease in average working capital borrowings outstanding during the
year, 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 overall decrease in average working capital borrowings in
fiscal 2002 was due to our repayments of amounts outstanding under our revolving
credit line with proceeds from our secondary common stock offering. As of March
31, 2002, we had no borrowings outstanding under our revolving credit facility.
Partially offsetting the overall decrease in interest and related expenses were
interest charges of approximately $1.6 million associated with actual and
estimated working capital adjustments in connection with certain previous
acquisitions (See Note 3 of Notes to Consolidated Financial Statements).

Minority interest was approximately $1.6 million and $1.4 million in fiscal
2002 and 2001, respectively. The increase was due to higher operating income
generated by ESG's DRS Laurel Technologies unit, in which we have an 80%
interest.

The provision for income taxes for the year ended March 31, 2001 reflects an
annual estimated effective income tax rate of approximately 47%, as compared
with 52% in the prior fiscal year. The decrease in our effective tax rate is
primarily due to the cessation of goodwill amortization pursuant to the adoption
of SFAS 142. It is anticipated that our effective tax rate will decline
moderately in future years as we continue to grow.

30

EBITDA for the year ended March 31, 2002 was $62.0 million, an increase of
approximately 18% over the prior fiscal year. EBITDA is not a substitute for
operating income, net earnings or cash flows from operating activities, as
determined in accordance with accounting principles generally accepted in the
United States of America, or as measures of our profitability or liquidity. We
present EBITDA as additional information because we believe it to be a useful
indicator of our ability to meet debt service and capital expenditure
requirements. EBITDA, as we define it, may differ from similarly named measures
used by other entities.

FISCAL YEAR ENDED MARCH 31, 2001 COMPARED WITH 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 $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, $1.6 million contributed by DRS Communications Company and the
year-over-year net impact of changes in estimated profitability on certain
long-term contracts. 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.
This 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 $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 $305,000 relating to the conversion of $8.7 million of the
debentures during the second quarter of fiscal 2001.

Our effective tax rate from continuing operations 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.

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 ESG's DRS Laurel Technologies unit, in which we have an 80%
interest.

EBITDA for the year ended March 31, 2001 was $52.5 million, an increase of
approximately 24% over the prior fiscal year.

31

OPERATING SEGMENTS

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

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

* Revenues are net of intersegment eliminations.

FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001

ELECTRONIC SYSTEMS GROUP Revenues increased $20.1 million, or 11%, to
$206.6 million in fiscal 2002, as compared with the corresponding prior-year
period. Operating income increased $2.7 million, or 18%, to $18.1 million.
Revenues increased primarily as a result of internal growth from our combat
display workstations and components, as well as the inclusion of $8.0 million of
revenue contributed by DRS SSS, which we acquired during the second quarter of
fiscal 2002. These increases were partially offset by decreases in revenues from
certain search and navigation radar systems and rugged computers and peripherals
sold to international militaries. The increase in fiscal 2002 operating income
resulted from the net increase in revenues and the favorable impact of the
elimination of $1.8 million in goodwill amortization due to the adoption of
SFAS 142, partially offset by operating margin decreases on certain search and
navigation radar systems. DRS SSS contributed $926,000 to fiscal 2002 operating
income. Had SFAS 142 been effective in the prior fiscal year, ESG's fiscal 2001
operating income would have been $1.9 million higher.

32

ELECTRO-OPTICAL SYSTEMS GROUP Revenues increased $60.1 million, or 41%, to
$208.2 million in fiscal 2002, as compared with the corresponding prior-year
period. Operating income increased $3.7 million to $27.4 million. The increase
in revenues was driven by growth in our second generation infrared targeting and
imaging systems programs and $45.1 million in revenues generated by programs
acquired with our purchase of the SES business at the end of the second quarter
of fiscal 2002. The increase in fiscal 2002 operating income, as compared with
the corresponding prior-year period, was primarily due to $4.3 million of
operating income contributed by the SES business, as well as the positive impact
of the elimination of $1.5 million of goodwill amortization. Fiscal 2002 and
2001 operating income reflects $1.7 million and $7.0 million, respectively, of
net favorable program adjustments on certain long-term programs. Had SFAS 142
been effective in the prior fiscal year, EOSG's fiscal 2001 operating income
would have been $2.1 million higher.

FLIGHT SAFETY & COMMUNICATIONS GROUP Revenues increased $9.8 million, or
12%, to $93.2 million in fiscal 2002, as compared with the corresponding
prior-year period. Operating income increased $5.8 million to $5.1 million. The
revenue increase was driven primarily by the inclusion of a full year of
revenues generated by DRS Communications Company, which we acquired at the end
of the first quarter of fiscal 2001, greater volume of contract manufacturing
services, and shipments of infrared search and tracking systems. The
year-over-year growth in operating income was a result of the overall increase
in revenues and the elimination of $1.4 million of goodwill amortization. Fiscal
2002 operating income reflects charges of $2.5 million, $1.3 million and
$1.2 million for the settlement of litigation (see Industry/Business
Considerations below), cost growth on a mission data recorder program and costs
incurred in connection with closing FSCG's Santa Clara, California production
and engineering facility, respectively. Fiscal 2001 charges of $4.2 million
included accruals for a contract pricing dispute, which was settled in the first
quarter of fiscal 2003, and certain program issues (see FSCG prior-year
discussion below). Had SFAS 142 been effective in the prior fiscal year, FSCG's
fiscal 2001 operating income would have been $1.3 million higher.

OTHER Revenues in fiscal 2002 decreased 5%, as compared with the
corresponding prior-year period. The overall fiscal 2002 operating loss was
relatively flat, as compared with fiscal 2001. Fiscal 2001 operating income
included a $1.1 million charge for a potentially uncollectible note receivable.
DRS Ahead Technology, an operating unit included in "Other", was sold on May 29,
2002 (see Subsequent Events above).

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

ELECTRONIC SYSTEMS GROUP Our Electronic Systems Group's revenues decreased
$1.3 million, or 1%, to $186.5 million in fiscal 2001, as compared with the
corresponding prior-year period. 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 increased 5%
and 6%, respectively, 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 $17.5 million, or 13%, to $148.2 million in fiscal 2001, as compared
with the corresponding prior-year period. 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

33

increased $9.8 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. EOSG 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.
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 $18.7 million, or 29%, to $83.3 million in fiscal
2001, as compared with the corresponding prior-year period. 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 FSCG's electronic manufacturing and shipboard communications systems
businesses. In the year ended March 31, 2001, DRS Communications Company
contributed to the FSCG operating segment $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 $1.0 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; $525,000 for additional costs expected to be incurred in
connection with a manufacturing facility in Oakland, New Jersey that was vacated
during fiscal 2000; 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 over all profit margins in
FSCG's electronic manufacturing business. In an effort to reduce costs and take
advantage of certain manufacturing efficiencies, we announced in April 2001 the
closure of our Santa Clara, California facility and the moving of its production
and engineering operations to other DRS facilities. Partially offsetting the
fiscal 2001 decrease in operating income was the positive effect of DRS
Communications Company, which contributed $1.6 million in operating income to
FSCG for the fiscal year ended March 31, 2001.

OTHER Revenues increased $1.3 million in fiscal 2001, as compared with the
corresponding prior-year period. 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.

34

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS The following table provides our cash flow data for the fiscal
years ended March 31, 2002, 2001 and 2000:

OPERATING ACTIVITIES For the fiscal year ended March 31, 2002, we generated
$27.8 million of operating cash flow, $6.0 million less than the $33.9 million
reported in fiscal year 2001. Cash provided by earnings, net of adjustments for
non-cash items, increased $4.9 million to $37.3 million from the $32.3 million
reported during the prior year. Increases in our net operating assets and
liabilities used approximately $9.4 million of cash during the current year, as
compared with the approximately $1.5 million of cash provided in the prior year.
During fiscal 2002, we used cash to build inventories to meet customer
requirements, offset in part, by increases in certain current liabilities used
to acquire and build those inventories and increases in advanced payments from
customers.

For the fiscal year ended 2001, operating cash flow increased $26.4 million
to $33.9 million, up from $7.4 million reported in fiscal 2000. Cash provided by
earnings, net of adjustments for non-cash items, increased $4.4 million to $32.3
million from the $27.9 million reported during the prior year. Decreases in our
net operating assets and liabilities provided approximately $1.5 million of cash
during the year, as compared with the $19.9 million of cash used in the prior
year. During fiscal year 2001, we used cash for increases in inventories and
receivables. These uses were more than offset by sources of cash resulting from
increases in certain current liabilities and increased advance payments from
customers.

INVESTING ACTIVITIES During fiscal 2002, we paid $64.1 million and $4.3
million for our acquisitions of the SES business and DRS SSS, respectively,
including acquisition- related costs. The acquisitions were financed with
borrowings under our credit facility. The amount paid for the SES business is
net of a $7.0 million favorable working capital adjustment we received from
Boeing in the fourth quarter. We also paid Raytheon Company (Raytheon) $3.8
million, plus interest, for our settlement of a dispute over a working capital
adjustment related to our acquisition of certain assets of the ground-based
Electro-Optical Systems and Focal Plane Array businesses of Raytheon in
October 1998. On May 28, 2002, we entered into a definitive agreement to acquire
NCD for $92.2 million in cash (see Subsequent Events). We intend to finance the
acquisition with available cash on hand, principally representing the balance of
the remaining proceeds we received from the sale of our common stock in fiscal
2002.

Continuation of our acquisition program will depend, in part, on the
availability of financial resources at interest rates and costs of capital that
are acceptable to us. We would expect to utilize cash generated by operations,
as well as cash available under our credit facility, which also may include the
renegotiation of our credit limit to finance such acquisitions. Other sources of
capital could include proceeds from a sale of our common stock and the placement
of convertible or high-yield debt. We believe that sufficient capital resources
will be available to us from one or several of these sources to finance future
acquisitions that we believe to be strategic and accretive to our net earnings.
However, no assurances can be provided that such financing will be available and
at a cost that is acceptable to us.

We paid $13.6 million for capital improvements made primarily to our
manufacturing facilities and equipment during fiscal 2002, as compared with
$16.2 million and $6.2 million for the fiscal years ended 2001 and 2000,
respectively. We expect to increase capital expenditures to approximately
$20-$25

35

million in fiscal 2003.The anticipated increase in capital expenditures is
principally due to increased expenditures for the SES business, as we relocate
production of certain acquired contracts to other DRS production facilities, and
our acquisition of the Navy Controls Division of Eaton Corporation.

Net cash used in investing activities for fiscal 2001 included $7.5 million
used to acquire DRS Communications Company, and payments totaling $3.6 million
received in connection with our sale of our magnetic tape head business units.
Net cash used in investing activities for fiscal 2000 included $8.4 million to
acquire Global Data Systems Ltd. and its wholly-owned subsidiary, European Data
Systems Ltd.

FINANCING ACTIVITIES On December 19, 2001, we sold 3,755,000 shares of our
common stock in a public offering for $32.00 per share, including shares related
to an over-allotment option that was granted to our underwriters. Upon closing,
we received net proceeds of $112.6 million, net of underwriters' fees and other
costs associated with the offering. Approximately $24.0 million of the net
proceeds of the offering were used to repay the outstanding balance of our
revolving line of credit. The balance will be used to fund future acquisitions
and working capital needs.

On September 28, 2001, simultaneously with the SES business acquisition, we
entered into a $240 million credit agreement with a syndicate of lenders, with
Wachovia Bank, N.A. as the lead lender, 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 of $350,000, which began on December 31, 2001.
Borrowings under the Credit Facility bear interest, at our option, at either: a
"base rate" (as defined in the Credit Agreement) equal to the higher of 0.50%
per annum above the latest Prime Rate and Federal Funds Rate plus a spread
ranging from 1.25% to 2.25% per annum, depending on our Total Leverage Ratio
(TLR) at the time of determination; or a LIBOR rate (as defined in the Credit
Agreement) plus a spread ranging from 2.25% to 3.25% per annum depending on our
TLR. The TLR is defined as total debt minus performance-based letters of credit,
as compared with EBITDA (as defined in the Credit Agreement). The Credit
Facility is secured by substantially all of the assets of DRS. There were no
borrowings under our revolving line of credit as of March 31, 2002. The interest
rate on our outstanding Term Loan was approximately 5.3% at March 31, 2002.

There are certain covenants and restrictions placed on us under our Credit
Facility, including a maximum TLR 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, a requirement that we offer to make prepayments
on our term loans outstanding with 50% of the aggregate net cash proceeds from
any equity offering, and certain other restrictions. In connection with the
issuance of our common stock in December 2001, we made the required prepayment
offers to the Term Loan lenders; none of the lenders in the syndicate accepted
such prepayment offers. Our ability to continue to borrow under the Credit
Facility will depend upon on our remaining in compliance with the limitations
imposed by our lenders. The Company was in compliance with all covenants under
its credit agreements at March 31, 2002 and 2001.

The proceeds of the Credit Facility of $161 million were used to acquire the
SES business, repay the balance of the debt outstanding under our previous
credit facility with Mellon Bank, N.A. (the Mellon Facility) in the amount of
$88.5 million and pay for costs associated with issuing the debt.

During fiscal 2002, under both the Mellon Facility and the current Credit
Facility, we remitted approximately $2.5 million in principal payments against
our term loans and had net borrowings under our lines of credit of approximately
$8.2 million. The borrowings under our revolving lines of credit were used to
meet temporary working capital requirements and to pay for the acquisition of
DRS SSS.

36

We use "free cash flow" as a measure to evaluate our performance. The
calculation of free cash flow is net cash provided by operating activities less
capital expenditures. Free cash flow was $14.3 million, $17.7 million and $1.2
million for fiscal 2002, 2001 and 2000, respectively.

CONTRACTUAL OBLIGATIONS Our contractual obligations and commitments
principally include obligations associated with our outstanding indebtedness and
future minimum operating lease obligations as set forth in the table below:

We enter into standby letter of credit agreements with financial
institutions and customers primarily relating to the guarantee of future
performance on certain contracts to provide products and services and to secure
advance payments we have received from customers. At March 31, 2002, we had
contingent liabilities on outstanding letters of credit as follows:

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 12 months and the foreseeable future. Consistent with our desire to
generate cash to invest in our core businesses and reduce debt, we anticipate
that, subject to prevailing financial, market and economic conditions, we may
divest certain non-core businesses. There can be no assurance, however, that our
business will continue to generate cash flow at current levels, or that
anticipated operational improvements will be achieved. If we are unable to
generate sufficient cash flow from operations to service our debt, we may be
required to sell assets, reduce capital expenditures, refinance all or a portion
of our existing debt or obtain additional financing. Our ability to make
scheduled principal payments or pay interest on or refinance our indebtedness
depends on our future performance and financial results, which, to a certain
extent, are subject to general conditions in or affecting the defense industry
and to general economic, political, financial, competitive, legislative and
regulatory factors beyond our control.

BACKLOG Funded backlog represents products or services that our customers
have committed by contract to purchase from us. Due to the general nature of
defense procurement and contracting, the operating cycle for our military
business typically has been long term. Military backlog currently consists of
various production and engineering development contracts with varying delivery
schedules and project timetables. Our backlog also includes a significant amount
of commercial off-the-shelf (COTS)-based systems for the military, 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 March 31, 2002 was $595.3 million, as compared with $456.5
million at March 31, 2001. We booked $577.2 million in new orders in fiscal
2002. The increase in backlog was due to the net effect of bookings and $75.5
million and $11.6 million of acquired backlog obtained through our

37

acquisitions of the SES business and DRS SSS, respectively. Approximately 73% of
backlog as of March 31, 2002 is expected to result in revenues during fiscal
2003.

EOSG booked $264.2 million in fiscal 2002, including contracts valued at
approximately $122.1 million from the U.S. Army to provide Second Generation
Thermal Imaging Acquisition and Targeting Systems used on its M2 Bradley
Fighting Vehicles, M1 Abrams Battle Tanks and Long Range and HMMWV Scouts. An
additional $41.2 million of awards was booked, predominantly with the U.S. Army,
for Fire Control Targeting and Acquisition Systems. Leveraging our acquisition
of the SES business, EOSG booked approximately $70.5 million in awards,
predominantly with the U.S. Army. Of the total $70.5 million, $47.7 million in
awards came from the U.S. Army to provide First Generation Surveillance and
Targeting Systems and Second Generation Forward Looking Infrared surveillance
and targeting system upgrades for its Kiowa Warrior Helicopter and $5.5 million
from the U.S. Navy to provide Second Generation Forward Looking Surveillance and
Targeting Systems used on its VISUAL Aircraft Landing System.

ESG secured $194.9 million in new contracts, including significant awards of
$106.7 million for production and engineering of the AN/UYQ-70 Advanced Display
Systems used in U.S. Navy surface ships, aircraft and submarines and $39.0
million for rugged computers, servers and peripheral equipment, consisting of
$25.2 million for computers used in intelligence applications and international
battlefield digitization programs and $13.8 million for production of rugged
portable computers for the U.S. Army. DRS SSS, acquired in the second quarter of
fiscal 2002, booked $5.0 million in awards to produce pedestals, support systems
and antennae for radar and other surveillance sensor systems.

FSCG received a total of $109.2 million in new awards in fiscal 2002,
including $43.6 million in contracts for communications and surveillance
systems, $37.1 million in awards for high-speed cameras and flight and mission
data recorders, and $28.5 million for advanced electronic manufacturing services
for major aerospace prime contractors.

DRS Ahead Technology, included in the operations of Other, booked $8.9
million in new orders for magnetic burnish, glide and test verification heads
used in the manufacture of computer disk drives.

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 fiscal 2002, 2001 and 2000 were $9.5 million, $8.0 million and
$9.9 million, respectively.

INDUSTRY/BUSINESS CONSIDERATIONS We are primarily engaged in the design and
manufacture of high-technology systems and products used for the processing,
display and storage of electronic data. Although we have diversified into
commercial products and markets, the majority of our revenues are derived
directly or indirectly from defense industry contracts with the U.S. government.

The landscape of the global defense industry continues to evolve as new
events, such as those of September 11, 2001, demand alternative strategic
defense initiatives. The defense requirements of the Unites States have shifted
from defending against Cold War era threats to a focus upon the management of
one or more regional conflicts, homeland security and proactive threat
identification. 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 which will assist in upgrading and replacing aging military
systems and implementing new technologies to meet modern threats.

- Increased focus by the Department of Defense on "best value" instead of
lowest cost. Best value procurement considers development and life-cycle
costs in the evaluation of a system's price.

38

- Consolidation within the industry. 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.

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

We are subject to certain inherent risks associated with defense
contracting, including changes in government policies and dependence on
congressional support, primarily for appropriations and allocation of funds to
products and programs that we support. In recent years, our products and
programs have been well supported. However, uncertainty exists with respect to
the size and scope of future defense budgets and their possible impact on
existing or future products and programs. Further, our existing defense
contracts are subject to termination, either at the convenience of the customer
or as a result of cancellation of funding. Our contracts and operations also are
subject to governmental oversight, particularly with respect to business
practices, contract performance and cost accounting practices. Governmental
investigations may lead to claims against us, the outcome of which cannot be
predicted. As described in Note 15 to the consolidated financial statements, 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. (DRS
Photronics). These subpoenas were issued in connection with United States v.
Tress, a criminal complaint against a then employee of our DRS Photronics
operating unit, 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 DRS Photronics and one or more of its then employees.
On May 17, 2002, DRS Photronics announced that it had entered into a global
settlement with the government, resolving all potential allegations related to
the investigation. Under the terms of the settlement, DRS Photronics agreed to
pay $2.5 million in restitution and pleaded guilty to a violation of the False
Claims Act.

We are 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.

The addition of international businesses involves additional risks, such as
exposure to currency fluctuations and changes in foreign economic and political
environments. International transactions frequently involve increased financial
and legal risks arising from stringent contractual terms and conditions, and
widely differing legal systems, customs and practices in foreign countries. We
expect that international sales as a percentage of our over-all sales will
continue to increase in future years as a result of, among other factors, our
growth strategy and continuing changes in the United States defense industry.

Our future operating results depend on our ability to successfully compete
in a highly competitive industry that is characterized by rapid technology
change and to effectively integrate acquired companies into our existing
operations. Our growth depends primarily on our ability to identify and acquire
suitable acquisition targets. We have participated successfully in the defense
industry consolidation through strategic business acquisitions and by
streamlining our existing operations;

39

however, we cannot guarantee that we will have sufficient funds available to us
to continue investing in business acquisitions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK In the normal course of business, we are exposed to market
risks relating to fluctuations in interest rates and foreign currency exchange
risk. We do not enter into derivatives or other financial instruments for
trading or speculative purposes.

INTEREST RATE RISK As we seek debt financing to maintain our ongoing
operations and sustain our growth, we are exposed to interest rate risk on our
variable rate borrowings. Our earnings are affected by changes in interest rates
due to the impact those changes have on our outstanding variable rate debt. If
interest rates average 12.5 basis points more in fiscal 2003 than in fiscal
2002, our interest expense would be increased by approximately $175,000. This
amount was determined based on the hypothetical interest rates on our variable
debt at March 31, 2002.

In an effort to limit our cash flow and interest expense exposure to
interest rate fluctuations, we have entered into interest rate collar agreements
with notional amounts covering a limited amount of the aggregate outstanding
principal balance of our Term Loan. A summary of the interest rate collar
agreements in place as of March 31, 2002 and 2001 follows:

The weighted average three-month LIBOR rate in effect for our collars
outstanding as of March 31, 2002 was 1.87%.

FOREIGN CURRENCY EXCHANGE RISK We operate and conduct business in foreign
countries and, as a result, are exposed to movements in foreign currency
exchange rates. More specifically, our net equity is impacted by the conversion
of the net assets of foreign subsidiaries for which the functional currency is
not the U.S. Dollar for U.S. reporting purposes. Our exposure to foreign
currency exchange risk related to our foreign operations is not material to our
results of operations, cash flows or financial position. We, at present, do not
hedge this risk, but continue to evaluate such foreign currency translation risk
exposure.

We have experienced the effects of inflation through increased costs of
labor, services and raw materials. Although a majority of our revenues is
derived from long-term contracts, the selling prices of such contracts generally
reflect estimated costs to be incurred in the applicable future periods.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation and its associated
asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. We currently are evaluating the statement, and we do not
expect that the provisions of SFAS 143 will have a material impact on our
consolidated financial statements.

40

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes
SFAS 121, but retains its fundamental provisions for the (a)
recognition/measurement of impairment of long-lived assets to be held and used,
and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144
also supersedes the accounting/reporting provisions of Accounting Principles
Board Opinion (APB) 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
became effective for us on April 1, 2002. We do not expect the adoption of this
standard to have a material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS 145). SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds Statement No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses
because Statement No. 4 has been rescinded. Statement No. 44 was issued to
establish accounting requirements for the effects of transition to provisions of
the Motor Carrier Act of 1980. Because the transition has been completed,
Statement No. 44 is no longer necessary.

SFAS 145 amends Statement No.13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This amendment is
consistent with the FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects. SFAS 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
We are required to adopt SFAS 145, effective for fiscal 2003. We do not expect
the adoption of SFAS 145 to have a material impact on our consolidated financial
statements.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

42

INDEPENDENT AUDITORS' REPORT

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

We have audited the consolidated financial statements of DRS Technologies,
Inc. and subsidiaries as listed in the accompanying index. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2002, 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.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" for all business combinations consummated after
June 30, 2001 and the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" effective April 1, 2001.

/s/ KPMG LLP

Short Hills, New Jersey
May 16, 2002, except for the first paragraph
of Note 18 which is as of May 28, 2002 and the
second paragraph of Note 18 which is as of May 29, 2002

43

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

See accompanying Notes to Consolidated Financial Statements.

44

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)

See accompanying Notes to Consolidated Financial Statements.

45

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying Notes to Consolidated Financial Statements.

46

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying Notes to Consolidated Financial Statements.

47

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. ORGANIZATION DRS Technologies, Inc. and subsidiaries (hereinafter, DRS
or the Company) is a supplier of defense electronic 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 electronic systems and subsystems are sold to all branches of
the U.S. military, U.S. government intelligence agencies, major aerospace and
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 inter-company transactions and
balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant of these estimates
and assumptions relate to contract estimates of sales and estimated costs to
complete contracts in process, market values of inventories reported at lower of
cost or market, recoverability of reported amounts of fixed assets, goodwill and
intangible assets, and valuation of deferred tax assets and liabilities. Actual
results could differ from these 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 classifies its revolving line of credit borrowings as long-term
debt, excluding current installments. This classification reflects the intent of
the borrowings and their maturity date, which as of March 31, 2002 and 2001, was
greater than one year.

Certain other amounts for prior years have been reclassified to conform with
the fiscal 2002 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 statements of earnings. Gains or losses resulting from these translation
adjustments are included in the accompanying Consolidated Balance Sheets as a
component of accumulated other comprehensive losses. Foreign exchange
transaction gains and losses in fiscal 2002, 2001 and 2000 were not material.

48

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 and included in costs and expenses in the
Consolidated Statements of Earnings.

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 ACQUIRED INTANGIBLE ASSETS In July 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141 and 142, "Business Combinations" and "Goodwill and
Other Intangible Assets" (SFAS 141 and SFAS 142), respectively. SFAS 141
replaces Accounting Principles Board Opinion No. 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 requires that goodwill and identifiable acquired intangible
assets with indefinite useful lives shall no longer be amortized, but tested for
impairment annually and whenever events or circumstances occur indicating that
goodwill might be impaired. SFAS 142 also requires the amortization of
identifiable assets with finite useful lives, although the statement no longer
limits the amortization period to forty years. Identifiable acquired intangible
assets, which are subject to amortization, are to be tested for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."

The Company elected to adopt the provisions of SFAS 142 as of April 1, 2001
and has identified its reporting units to be its operating segments. The Company
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

49

Company was required to perform a transitional goodwill impairment assessment
within six months of adoption. The Company completed its transitional goodwill
impairment assessment, with no adjustment to the carrying value of its goodwill
as of April 1, 2001. The annual impairment test is performed after completion of
the Company's annual financial operating plan, which occurs in the fourth
quarter of its fiscal year. The Company completed its annual impairment test
with no adjustment to the carrying value of its goodwill as of March 31, 2002.
The annual goodwill impairment assessment involves estimating the fair value of
the reporting unit and comparing it with its carrying amount. If the fair value
of the reporting unit exceeds its fair value, additional steps are followed to
recognize a potential impairment loss. Calculating the fair value of the
reporting units requires significant estimates and assumptions by management.
The Company estimates the fair value of its reporting units by applying third
party market value indicators to the reporting unit's projected revenues,
earnings before net interest and taxes (EBIT) and earnings before net interest,
taxes, depreciation and amortization (EBITDA) and calculating an average of the
three extended market values.

The Company is amortizing its acquired intangibles on a straight-line basis
over 4-30 years. See Note 3 for additional information on goodwill and acquired
intangible assets.

J. IMPAIRMENT OF LONG-LIVED ASSETS AND ACQUIRED INTANGIBLE ASSETS The
Company assesses the recoverability of the carrying value of its long-lived
assets and identifiable acquired intangible assets with finite useful lives,
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 from such
assets. 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 DRS does not use derivative financial
instruments for speculative purposes. The Company utilizes variable rate debt to
fund 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, and in accordance
with certain covenants in DRS's previous credit facility, 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 (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 within 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 LIBOR rate (London
Interbank Offered 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 adopted SFAS No. 133 (SFAS 133). This
Statement requires the recognition of all derivative instruments as either
assets or liabilities in the Consolidated Balance Sheets 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.

On April 1, 2001, in accordance with the provisions of 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 accumulated other comprehensive losses. Due to the nature and
characteristics of the Company's designated hedging instruments, all adjustments
to the fair values of such instruments are adjusted via accumulated other
comprehensive losses. 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 year ended March 31, 2002, were not material to the Company's

50

consolidated financial position and did not impact the Company's consolidated
results of operations or cash flows.

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 its
ongoing and acquired 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. The Company records contracts acquired in
connection with a business combination at remaining contract value less DRS's
estimate to complete and a profit margin commensurate with the profit margin the
Company earns on similar contracts. Revisions to cost estimates subsequent to
the date of acquisition may be recorded as an adjustment to goodwill or
earnings, depending on the nature and timing of the revision.

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 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 2002, 2001 and 2000 were $36.2 million,
$32.9 million and $23.5 million, respectively, of customer-sponsored research
and development.

Approximately 78%, 78% and 80% of the revenues in fiscal 2002, 2001 and
2000, respectively, were derived directly or indirectly from defense-industry
contracts with the United States government. In addition, approximately 11% in
fiscal 2002, and 12% in fiscal 2001 and fiscal 2000 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 APB 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 is amortized on a straight-line basis over the
vesting periods. 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).

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N. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income
Taxes" (SFAS 109), 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.

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:

52

P. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and other current liabilities
reported in the Consolidated Balance Sheets equal or approximate fair values.
The fair value of the Company's outstanding term loan approximates its recorded
value, based on the variable rates of the facility and currently available terms
and conditions for similar debt at March 31, 2002. The market values of the
Company's interest rate collars are disclosed herein (see Note 10).

Q. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS
No. 143, "Accounting for Retirement Obligations" (SFAS 143). SFAS 143
establishes accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. SFAS 143 is effective for fiscal years beginning
after June 15, 2002, with early adoption permitted. The Company currently is
evaluating the provisions of SFAS 143, but expects that the provisions will not
have a material impact on its consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes
SFAS 121, but retains its fundamental provisions for the (a)
recognition/measurement of impairment of long-lived assets to be held and used,
and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144
also supersedes the accounting/reporting provisions of APB 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 became effective for us on April 1, 2002.
The Company does not expect the adoption of this standard to have a material
impact on its consolidated financial statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS 145). SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements. SFAS 145 rescinds Statement No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses because Statement No. 4 has been
rescinded. Statement No. 44 was issued to establish accounting requirements for
the effects of transition to provisions of the Motor Carrier Act of 1980.
Because the transition has been completed, Statement No. 44 is no longer
necessary.

SFAS 145 amends Statement No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This amendment is
consistent with the FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects. SFAS 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
We are required to adopt SFAS 145, effective for fiscal 2003.The Company does
not expect the adoption of SFAS 145 to have a material impact on its
consolidated financial statements.

NOTE 2. BUSINESS COMBINATIONS

On September 28, 2001, DRS acquired certain assets and liabilities of the
Sensors and Electronic Systems business of The Boeing Company (SES business).
The Company paid approximately $60.1 million in cash, net of a $7.0 million
favorable working capital adjustment received in the fourth quarter of fiscal
2002 for the acquisition. In addition to the purchase price, the estimated costs
related to the acquisition, including professional fees, approximated $4.0
million. SES, located in Anaheim, California, is a leading provider of advanced
electro-optical airborne and naval surveillance and

53

targeting systems, high-performance military infrared cooled sensor systems, and
infrared uncooled sensor products for military and commercial applications.
Production, engineering and management of the contracts acquired in the SES
acquisition have been assigned, based on operational synergies, to two
previously existing Electro-Optical Systems Group operating units, as well as a
new operating unit called DRS Sensors & Targeting Systems, Inc. (DRS STS). DRS
STS was created as a result of the SES acquisition, and it is also an operating
unit of the Company's Electro-Optical Systems Group (EOSG). This acquisition
broadens the product lines and customer base of EOSG, particularly in those
areas associated with naval and air-based applications, and provides a strong
complement to DRS's existing products in ground-based forward looking infrared
technology. The results of the acquired business have been included in the
consolidated financial statements of the Company since the acquisition date.

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The Company is in
the process of refining its estimates to complete on certain acquired contracts
and, as such, the purchase price allocation is subject to change. The Company
will finalize the purchase price allocation upon completion of its internal
assessment of the estimates to complete on the acquired contracts. The Company
will complete its internal assessment of all acquired contracts in the second
quarter of fiscal 2003.

$64.6 million of goodwill was allocated to the EOSG operating segment, all
of which is expected to be deductible for tax purposes. $14.0 million in
acquired intangible assets was assigned to customer-related intangibles, which
are subject to amortization, and they have a weighted-average useful life of
approximately 17 years.

The following unaudited pro forma financial information shows the results of
operations for the years ended March 31, 2002 and 2001, as though the SES
acquisition had occurred on April 1, 2000.

54

The unaudited pro forma presentation reflects adjustments for the capitalization
of general and administrative costs, amortization of acquired intangible assets
and increased interest expense.

The unaudited pro forma financial information shown above 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.

On August 22, 2001, the Company acquired certain assets and liabilities of
the Electro Mechanical Systems unit of Lockheed Martin Corporation for $4.0
million in cash, subject to adjustment, and $300,000 in acquisition-related
costs. This unit now operates as DRS Surveillance Support Systems, Inc. (DRS
SSS), a unit of the Company's Electronic Systems Group (ESG), and is located in
Largo, Florida. DRS SSS produces pedestals, support systems and antennae for
radar and other surveillance sensor systems.

On June 14, 2000, the Company acquired the assets of General Atronics
Corporation for $7.5 million in cash, $4.0 million in common stock, representing
355,359 shares of common stock, and $420,000 in acquisition-related costs. 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 the Company's Flight
Safety and Communications Group (FSCG).The Company recorded $6.8 million of
goodwill in connection with the acquisition.

On July 21, 1999, the Company acquired Global Data Systems Ltd. and its
wholly-owned subsidiary, European Data Systems Ltd., for $7.8 million in cash.
Located in Farnham, Surrey, U.K., the company designs and develops rugged
computers and peripherals primarily for military applications. The Company
recorded $8.7 million of goodwill in connection with the acquisition.

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 SES acquisition, 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.

55

NOTE 3. GOODWILL AND RELATED INTANGIBLE ASSETS

The following disclosure presents certain information on the Company's
acquired intangible assets as of March 31, 2002 and 2001. All intangible assets
are being amortized over their estimated useful lives, as indicated below, with
no estimated residual values.

The aggregate acquired intangible asset amortization expense for the fiscal
years ended March 31, 2002, 2001 and 2000 was $1.8 million, $2.1 million and
$1.9 million, respectively. The estimated acquired intangible asset annual
amortization expense for each of the subsequent five fiscal years ending March
31, 2007 will be approximately $2.2 million.

The table below reconciles the change in the carrying amount of goodwill by
operating segment for the period from March 31, 2001 to March 31, 2002,
including the effect of the allocation of the purchase price for the SES
acquisition, which is subject to change in fiscal 2003, as discussed in Note 2.
During fiscal 2002, the Company recorded a $12.7 million reduction in goodwill
in connection with the reduction of accruals on certain acquired contracts. Also
during fiscal 2002, DRS recorded increases to goodwill of $3.8 million and $2.9
million, plus interest, for the settlement of a working capital adjustment with
Raytheon Company (Raytheon) and an estimated working capital adjustment with
Spar Aerospace Ltd. (Spar), respectively. The Raytheon working capital
adjustment is associated with the fiscal 1999 acquisition of certain assets of
the ground-based Electro-Optical Systems and Focal Plane

56

Array businesses of Raytheon, and the Spar working capital adjustment is a
result of the fiscal 1998 acquisition of certain assets of the Applied Systems
division of Spar.

The following pro forma information reconciles the net earnings reported for
the years ended March 31, 2002, 2001 and 2000 to adjusted net earnings,
reflecting the impact of SFAS 142:

57

NOTE 4. DISCONTINUED OPERATIONS

On May 18, 2000, the Company's Board of Directors approved an agreement to
sell DRS's 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,
reported as discontinued operations for the year ended March 31, 2000, are
summarized as follows:

NOTE 5. RESTRUCTURING

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 $2.2 million. The Company's restructuring
initiatives impacted FSCG and DRS Corporate. FSCG recorded restructuring charges
totaling $1.6 million at its DRS Photronics, Inc., DRS Hadland Ltd. and DRS
Precision Echo, Inc. operating units for facility consolidation, severance and
other employee-related costs. In addition, DRS Corporate recorded a
restructuring charge of $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 in Oakland, New Jersey and recorded an
additional charge of $525,000 at FSCG. The table below reconciles the
restructuring liability at March 31, 2000 to the restructuring liability at
March 31, 2002. The balance of the restructuring liability at March 31, 2002
will be utilized in the first quarter of fiscal 2003. The restructuring charge
liability is included in accrued expenses and other current liabilities in the
accompanying Consolidated Balance Sheets.

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NOTE 6. ACCOUNTS RECEIVABLE

The component elements of accounts receivable, net of allowances for
doubtful accounts of $1.4 million and $1.1 million at March 31, 2002 and 2001,
respectively, are as follows:

Included in accounts receivable is $269,000 and $644,000 at March 31, 2002
and 2001, 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 approximately 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.

NOTE 7. INVENTORIES

Inventories are summarized as follows:

General and administrative costs included in inventory were $16.3 million
and $14.5 million at March 31, 2002 and 2001, respectively. General and
administrative costs included in costs and expenses amounted to $99.0 million,
$78.6 million and $69.5 million in fiscal 2002, 2001 and 2000, respectively.
Included in these amounts are expenditures for internal research and
development, amounting to $9.5 million, $8.0 million and $9.9 million in fiscal
2002, 2001 and 2000, respectively.

59

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

Annual depreciation and amortization of property, plant and equipment
amounted to $10.7 million,$8.6 million and $9.5 million in fiscal 2002, 2001 and
2000, respectively.

NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

NOTE 10. DEBT

A summary of debt is as follows:

60

In fiscal 1996, DRS issued 9% Senior Subordinated Convertible Debentures,
due October 1, 2003 (9% Debentures), for an aggregate principal amount of $25.0
million. The 9% Debentures were convertible at their face amount any time prior
to maturity into shares of DRS 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% 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 $305,000 in fiscal
2001 in connection with certain conversions.

On September 28, 2001, simultaneously with the SES business acquisition, the
Company entered into a $240 million credit agreement with a syndicate of
lenders, with Wachovia Bank, N.A. as the lead lender, 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 of $350,000, which began on December 31, 2001.
Borrowings under the Credit Facility bear interest, at the Company's option, at
either: a "base rate" (as defined in the Credit Agreement) equal to the higher
of 0.50% per annum above the latest Prime Rate and Federal Funds Rate plus a
spread ranging from 1.25% to 2.25% per annum, depending on the Company's Total
Leverage Ratio (TLR) at the time of determination; or a LIBOR rate (as defined
in the Credit Agreement) plus a spread ranging from 2.25% to 3.25% per annum,
depending on the Company's TLR. The TLR is defined as total debt minus
performance-based letters of credit, as compared with EBITDA (as defined in the
Credit Agreement).The Credit Facility is secured by substantially all of the
assets of DRS. There were no borrowings under the Company's revolving line of
credit as of March 31, 2002.The interest rate on the Company's outstanding Term
Loan was approximately 5.3% at March 31, 2002.

There are certain covenants and restrictions placed on DRS under its Credit
Facility, including a maximum TLR and a minimum fixed-charge ratio, a
restriction on the payment of dividends on DRS's capital stock, a limitation on
the issuance of additional debt, a requirement that the Company offer to make
prepayments on its term loans outstanding with 50% of the aggregate net cash
proceeds from any equity offering, and certain other restrictions. In connection
with the issuance of its common stock in December 2001, the Company made the
required prepayment offers to the term loan lenders; none of the lenders in the
syndicate accepted such prepayment offers.

The Company used $88.5 million from the Credit Facility to repay the balance
of the debt outstanding under DRS's previously existing $160 million credit
facility with Mellon Bank, N.A. (Mellon Facility). The Mellon Facility consisted
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 (Mellon Line of Credit) for $80 million, subject
to a borrowing base calculation.

The Company was in compliance with all covenants under its credit agreements
at March 31, 2002 and 2001. As of March 31, 2002, the Company had approximately
$88.4 million of additional available credit, after satisfaction of its
borrowing base requirement.

As of March 31, 2002, $139.3 million of term loans were outstanding against
the Credit Facility, in addition to which $11.6 million was contingently payable
under letters of credit, as compared with amounts outstanding and contingently
payable under the Mellon Facility at March 31, 2001 of $82.1 million and
$6.2 million, respectively. The Company enters into standby letter of credit
agreements with financial institutions and customers primarily relating to the
guarantee of future performance on certain contracts to provide products and
services and to secure advanced payments it has received from customers.

Weighted average borrowings under revolving lines of credit for the fiscal
years ended March 31, 2002 and 2001 were $12.7 million and $24.5 million,
respectively. The weighted average interest rate on

61

outstanding revolving line of credit borrowings as of March 31, 2001 was 7.8%.
The effective interest rate on the Term Loan was 5.3% as of March 31, 2002, and
the rates on the First and Second Term Loans were 7.5% and 9.45%, respectively,
as of March 31, 2001.

The aggregate maturities of long-term debt for fiscal 2003 are $1.7 million,
$1.4 million per year for fiscal 2004-2007 and $132.3 million thereafter.

As discussed in Note 1, the Company entered into interest rate collar
agreements with notional amounts covering a limited amount of the aggregate
outstanding principal balance of the term loans. A summary of the interest rate
collar agreements in place as of March 31, 2002 and 2001 follows:

The weighted average three-month LIBOR rate in effect for the Company's
collars outstanding as of March 31, 2002 was 1.87%.

NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION

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NOTE 12. INCOME TAXES

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

Income tax expense from continuing operations consists of the following:

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

63

temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities at March 31, 2002 and 2001 are as follows:

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, 2002 and 2001, due to the uncertainty of future earnings of certain
subsidiaries of the Company and the status of applicable statutory regulations
that could limit or preclude utilization of these benefits in future periods.
During the fiscal year ended March 31, 2002, the valuation allowance increased
by a net amount of $1.0 million as follows. The valuation allowance attributable
to certain temporary differences in the amount of $1.3 million was released due
to a change in the expectation of the utilization of such temporary differences,
primarily as a result of 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 Company's fiscal 1999 NAI Technologies, Inc.
(NAI) acquisition, the change of such valuation allowance did not reduce income
tax expense, but rather reduced goodwill. The $600,000 valuation allowance
associated with the U.K. NOL for DRS Hadland Ltd. was released, due to the
operating unit's increased profitability. There was a $2.9 million increase in
the valuation allowance associated with the U.K. NOL and temporary differences
for DRS Rugged Systems (Europe) Ltd., due to the uncertainty of the operating
unit's future profitability. During the fiscal year ended March 31, 2001, the
valuation allowance decreased by approximately $3.6 million, primarily as a
result of a change in the expectation of the utilization of a U.S. federal NOL
acquired as a result of the NAI acquisition. 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,
2002 and 2001.

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

64

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 practicable to estimate.

Current and noncurrent deferred tax assets of $3.4 million and $4.9 million,
and $6.3 million and $1.6 million, respectively, are included in the
Consolidated Balance Sheets as of March 31, 2002 and 2001, respectively. At
March 31, 2002, $18.4 million of U.S. federal and $25.2 million of state NOL
carryforwards, which expire between fiscal years 2003 and 2022, and $12.3
million of foreign NOLs, which carry forward indefinitely, were available. All
of the Company's U.S. federal and $8.9 million of its state NOL carryforwards
were acquired in connection with the NAI acquisition. 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 rate to the actual
(effective) income tax rate from continuing operations is as follows:

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

NOTE 13. COMMON STOCK AND STOCK COMPENSATION PLANS

COMMON STOCK As of March 31, 2002, the authorized capital of the Company
was composed of 30.0 million shares of common stock (16,834,052 shares issued)
and 2.0 million shares of preferred stock (no shares issued). During fiscal
2001, the Company cancelled all stock held in treasury.

On December 19, 2001, the Company issued 3,755,000 shares of its common
stock in a public offering for $32.00 per share, including shares related to an
over-allotment option that was granted to the underwriters. Upon closing, the
Company received net proceeds of $112.6 million, net of underwriters' fees and
other costs associated with the offering. The Company used $24.0 million of the
net proceeds of the offering to repay the outstanding balance of its revolving
line of credit and retained the balance to fund future acquisitions and working
capital needs.

In connection with the acquisition of General Atronics Corporation, the
Company issued 355,359 shares of common stock.

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
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

65

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 on February 6, 2001, a total
of 161,550 shares of common stock remained ungranted. Options still outstanding
at the time of the Plan's expiration remain in effect, as granted, and are no
longer reserved for future grants.

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, 2002, 102,306 shares were reserved for future grants
under the Omnibus Plan.

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 2002, 2001 and 2000 was approximately
$218,000, $112,000 and $155,000, respectively.

A summary of stock option activity is as follows:

66

In connection with the NAI acquisition, 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. These warrants expired on
February 15, 2002 and were exercised in full with the exception of 401 shares
that were not presented for exercise. Each issued and outstanding NAI stock
option, whether vested or unvested, was assumed by DRS using the same conversion
ratio as was used for the warrants, but rounded down to the nearest whole
number. The terms and conditions under which the stock options were granted
prior to the acquisition, with the exception of the exercise price and number of
shares, remained the same. The Company issued 603,175 warrants and assumed
161,230 converted stock options, respectively.

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 31,2002. 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, 2002 follows:

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 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 4.5%, 5.7% and 6.0% in fiscal 2002, 2001 and 2000, respectively; dividend
yield of 0%; volatility factor related to the expected market price of the
Company's common stock of 0.4418 in fiscal 2002, 0.2893 in fiscal 2001 and
0.2953 in fiscal 2000; and weighted-average expected option life of five years.

The weighted-average fair values of options granted at market during fiscal
2002, 2001 and 2000 were $11.90, $4.85 and $2.71 per share, respectively. For
purposes of pro forma disclosures, the options' estimated fair values were
amortized to expense over the options' vesting periods. Accordingly, the pro
forma results for fiscal 2002, 2001 and 2000 presented below include 27%, 48%
and 107%, respectively, of the total pro forma expense for options awarded in
each year. The pro forma amounts may not be

67

representative of the effects on reported earnings for future years. The
Company's pro forma information is as follows:

NOTE 14. PENSIONS AND OTHER EMPLOYEE BENEFITS

In connection with DRS's acquisition of the Boeing SES business (see
Note 2), the Company established a defined benefit plan (the Plan) for certain
of those employees who transferred to DRS at the time of the acquisition on
September 28, 2001. Participants are non-union employees who were enrolled in
Boeing pension plans. Benefits are based on years of service. The Company's
funding policy is to make contributions to the extent such contributions are
actuarially determined and tax deductible. Plan assets are invested primarily in
U.S. government and agency instruments, as well as listed stocks and bonds.

The Company also maintains two non-contributory and unfunded supplemental
retirement plans: the Supplemental Executive Retirement Plan (the DRS SERP),
which was established on February 1, 1996 for the benefit of certain key
executives; and the DRS Supplemental Retirement Plan (DRS SRP), which was
established for the benefit of certain employees who were transferred to DRS in
connection with the Company's fiscal 1998 acquisition of certain assets of the
Electro-Optical Systems and Focal Plane Array businesses of Raytheon Company.
Pursuant to the DRS SERP, the Company will provide retirement benefits to each
key executive, based on years of service and final average annual compensation
as defined therein. The DRS SRP benefits are based on the eligible employees'
final average earnings and their Social Security benefit.

68

The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans:

The net pension cost related to the plans includes the following components:

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The following weighted average actuarial assumptions were used to determine
the benefit obligation and the net costs related to the plans:

The Company maintains defined contribution plans covering substantially all
domestic full-time eligible employees. The Company's contributions to these
plans for fiscal 2002, 2001 and 2000 amounted to $3.3 million, $2.3 million and
$1.9 million, respectively.

As required by FASB SFAS No. 87, "Employers' Accounting for Pensions"
(SFAS 87) for pension plans, where the accumulated benefit obligation exceeds
the fair value of plan assets, the Company has recognized in the Consolidated
Balance Sheets at March 31, 2002 the additional minimum liability of the
unfunded accumulated benefit obligation of $1.7 million as a long-term liability
with an offset to intangible assets.

NOTE 15. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

At March 31, 2002, the Company was party to various noncancellable operating
leases (principally for administration, engineering and production facilities)
with minimum rental payments as follows:

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 $14.3 million, $11.3 million and $8.7 million
in fiscal 2002, 2001and 2000, respectively.

Effective July 20, 1994, the Company entered into an Employment,
Non-Competition and Termination Agreement with David E. Gross (the Gross
Agreement), who retired as President and Chief Technical Officer of the Company
on May 12, 1994. Under the terms of the Gross Agreement, Mr. Gross received
compensation for his services under a five-year consulting agreement and 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. Upon conclusion of the initial five-year period, Mr. Gross began
receiving an aggregate of $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.

70

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. On May 17, 2002, DRS Photronics announced that it had entered
into a global settlement with the government, resolving all potential
allegations related to the investigation. Under the terms of the settlement, DRS
Photronics agreed to pay $2.5 million in restitution and pleaded guilty to a
violation of the False Claims Act.

The Company currently is involved in a dispute with Spar Aerospace Ltd.
(Spar) with respect to the working capital adjustment, 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. On January 11, 2002, the Company was
notified that an arbitrator awarded Spar $4,616,000 Canadian (or approximately
$2,890,000 U.S.) plus interest in respect of such working capital adjustment. As
of March 31, 2002, the Company had accrued approximately $3.9 million, including
interest associated with the potential award. On February 5, 2002, the Company
filed a notice of appeal of such arbitral award with the Ontario Superior Court
of Justice.

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, Inc. The plaintiffs allege claims against the Company of infringement
of a number of patents, breach of a confidentiality agreement, misappropriation
of trade secrets, unjust enrichment and unfair competition. The claims relate
generally to the activities of certain former employees of IV Phoenix Group and
the hiring of some of those employees by DRS. The plaintiffs seek damages of not
less than $5.0 million for each of the claims. 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 claim. In addition, plaintiffs
seek punitive and treble damages, injunctive relief and attorney's fees. In its
answer, the Company has denied the plaintiffs' allegations and intends to
vigorously defend this action. In February 2002, plaintiffs filed an amended
complaint, which eliminated the patent infringement claims and added claims
related to statutory and common law trademark infringement, which superseded
plaintiffs' original complaint. Although this action is in its early stages, the
Company believes it has meritorious defenses and does not believe the action
will have a material adverse effect on its earnings or financial condition.

The Company is a party to various legal actions and claims arising in the
ordinary course of its business. In the Company's opinion, the Company 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.

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NOTE 16. 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: ESG, EOSG and 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, radar support and antennae 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 for the U.S. Army's Abrams Main Battle Tanks, Bradley Fighting Vehicles,
the OH-58D Kiowa Warrior helicopters, Aegis destroyers and cruisers, and the
High-Mobility Multipurpose Wheeled Vehicle Scouts. EOSG designs, manufactures
and markets these and other products that allow operators to detect, identify
and target objects based upon their infrared signatures, regardless of the
ambient light level. The Group is one of two key suppliers to the U.S.
government for advanced focal plane array technology. In addition to the Group's
military applications, EOSG also manufactures electro-optical modules for
commercial devices used in corrective laser eye surgery and provides system
integration for retinal scanning and imaging devices.

FSCG is a manufacturer of airborne deployable recorders and surveillance and
communications systems. FSCG's products are used by U.S. and international
militaries, as well as commercial customers. The Group produces integrated naval
ship communications systems, information management systems, mission recorders,
coastal and border surveillance and radar systems, ultra high-speed digital
imaging systems for F/A-18 aircraft and industrial purposes, and
multiple-platform weapons calibration systems for air platforms, such as the
AH-64 Apache attack helicopter and the AC-130U gunship. FSCG also provides
electronic manufacturing services to the defense and space industries.

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 (DRS Ahead Technology was sold on
May 29, 2002. See Note 18).

Transactions between segments generally are negotiated and accounted for
under terms and conditions that are similar to other government and commercial
contracts; however, these inter-company 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.

72

Information about the Company's continuing operations in these segments for
each of the three years ended March 31, 2002 is as follows:

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 $1.7 million, $7.0 million and $1.6 million in fiscal 2002, 2001
and 2000, respectively. Similarly, operating income for FSCG included the effect
of a negative program adjustment of $1.3 million and $1.9 million in fiscal 2002
and 2001, respectively.

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, 2002 is as follows:

73

NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited quarterly financial information for
fiscal 2002 and 2001:

NOTE 18. SUBSEQUENT EVENTS

On May 28, 2002, he Company announced that it signed a definitive agreement
to acquire the assets and certain liabilities of the Navy Controls Division of
Eaton Corporation (NCD) for $92.2 million in cash. NCD, located in Milwaukee,
Wisconsin, and Danbury Connecticut, is a leading supplier of high-performance
power conversion and instrumentation and control systems for the U.S. Navy's
combatant fleet, including nuclear-powered and conventionally powered ships, in
addition to specialized customers. Products include ship electric propulsion
equipment, power electronics equipment, high-performance networks, shipboard
control equipment and control panels, tactical displays and specialty reactor
instrumentation and control equipment. NCD will be managed as part of the
Electronic Systems Group. The acquisition is subject to customary closing
conditions, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act. The Company expects to complete the acquisition during June or
July of fiscal 2003.

On May 29, 2002, the Company announced that it sold the assets of its DRS
Ahead Technology operating unit. DRS Ahead Technology contributed approximately
2% of consolidated revenues in fiscal 2002, 2001 and 2000 and recorded operating
(losses)/income of $(369,000), $70,000 and $(749,000) in fiscal 2002, 2001 and
2000, respectively. The operating unit was sold at book value.

74

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS YEARS
ENDED MARCH 31, 2002, 2001 AND 2000

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

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

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

(c) Represents amounts reclassified from related reserve accounts.

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

(e) Represents amounts reclassified to related reserve accounts.

75

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III

The information required by Items 10 through 13 of this Part is incorporated
herein by reference to our Definitive Proxy Statement, dated June 27, 2002, for
the 2002 Annual Meeting of Stockholders. Reference also is made to the
information under Executive Officers of the Registrant in Part I of this report.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following are documents filed as part of this report:

1. Financial Statements

See Item 8. Financial Statements and
Supplementary Data........................ 42

2. Financial Statement Schedules

Schedule II--Valuation and Qualifying
Accounts.................................. 75

All other financial statement schedules have
been omitted because they are either not
required, not applicable or the required
information is shown in the Consolidated
Financial Statements or Notes thereto.

3. Exhibits filed as part of this report are
listed in the Exhibit Index at the end of
this report................................. 79

(b) Reports on Form 8-K

None.

76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

DRS TECHNOLOGIES, INC.

Dated: June 26, 2002

/s/ MARK S. NEWMAN
-----------------------------------------------
Mark S. Newman, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

78

EXHIBIT INDEX

Certain of the following exhibits, designated with an asterisk (*) are filed
herewith. Certain of the following exhibits, designated with a P, are being
filed on paper, pursuant to a hardship exemption under Rule 202 of Regulaton
S-T. The exhibits not so designated have been previously filed with the
Commission and are incorporated herein by reference to the documents indicated
in brackets following the descriptions of such exhibits.