DIAGNOSTIC RETRIEVAL SYSTEMS INC, 424B3, 1996-02-26

DIAGNOSTIC RETRIEVAL SYSTEMS INC
424B3, 1996-02-26
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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PROSPECTUS Filed pursuant to Rule 424(b)(3);
Registration No. 33-64641

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.

$25,000,000 9% Senior Subordinated Convertible Debentures Due 2003

This Prospectus relates to $25,000,000 aggregate principal amount
of 9% Senior Subordinated Convertible Debentures Due 2003 (the
"Debentures") of Diagnostic/Retrieval Systems, Inc. (the "Company"), and
the shares of Class A Common Stock, par value $.01 per share (the "Class
A Common Stock"), of the Company which are issuable from time to time
upon conversion of the Debentures. The Debentures or Class A Common
Stock issued upon conversion may be offered from time to time for the
account of holders of the Debentures named herein (the "Selling Security
Holders"). The Debentures were originally issued by the Company on
September 29, 1995 in a private placement (including the over-allotment
option for $5,000,000 aggregate principal amount of the Debentures which
was exercised on November 3, 1995) (the "Debenture Offering"), and the
Company will not receive any proceeds from this offering.

Interest on the Debentures is payable semi-annually on April 1 and
October 1 of each year, commencing April 1, 1996. The Debentures are
convertible at any time prior to maturity, unless previously redeemed or
repurchased, into shares of Class A Common Stock of the Company, at a
conversion price of $8.85 per share, subject to adjustment under certain
circumstances. Prior to this offering there has not been any public
market for the Debentures. The Debentures are eligible for trading in
the Private Offerings, Resale and Trading through Automated Linkages
("PORTAL") Market. The Company has applied for listing of the
Debentures and the shares of Class A Common Stock which are issuable
upon conversion of the Debentures on the American Stock Exchange (the
"AMEX"). The Company has been advised by Forum Capital Markets L.P.
(the "Initial Purchaser") that it intends to make a market in the
Debentures. The Initial Purchaser is, however, under no obligation to
do so and may discontinue any such market making activity at any time
without notice. There can be no assurance that a secondary market in
the Debentures will develop or be maintained. The Company's Class A
Common Stock is listed on the AMEX under the symbol "DRSA." On February
20, 1996, the last reported sale price of the Class A Common Stock on
the AMEX was $7-3/4 per share.

The Debentures are unsecured and subordinate to all Senior
Indebtedness (as defined herein) and are effectively subordinated to all
obligations of the subsidiaries of the Company. The Indenture (as
defined herein) governing the Debentures provides that the Company will
not (i) issue or incur any Debt (other than Senior Indebtedness or
Capitalized Lease Obligations) unless such Debt is subordinate in right
of payment to the Debentures at least to the same extent that the
Debentures are subordinate to Senior Indebtedness or (ii) permit any of
its subsidiaries to issue or incur any Debt (other than Senior
Indebtedness or Capitalized Lease Obligations) unless such Debt provides
that it will be subordinate in right of payment to distributions and
dividends from such subsidiary to the Company in an amount sufficient to
satisfy the Company's obligations under the Debentures at least to the
same extent that the Debentures are subordinate to Senior Indebtedness.
At December 31, 1995, Senior Indebtedness (excluding current
installments) was approximately $2.8 million and the indebtedness
(excluding liability for income taxes) of the Company's subsidiaries was
approximately $16.6 million. The Debentures will mature on October 1,
2003. The Company may not redeem the Debentures prior to October 1,
1998. On or after such date, the Company may redeem the Debentures, in
whole or in part, at the redemption prices set forth herein plus accrued
but unpaid interest to the date of redemption. Upon a Change of Control
(as defined herein), the Company will offer to repurchase the Debentures
at 100% of the principal amount thereof plus accrued but unpaid interest
to the date of repurchase. In addition, upon a Net Worth Deficiency (as
defined herein), the Company will offer to repurchase up to 10% of the
aggregate principal amount of Debentures at 100% of the principal amount
thereof plus accrued but unpaid interest to the date of repurchase. See
"Description of the Debentures."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The Company has been advised by the Selling Security Holders that
the Selling Security Holders, acting as principals for their own
account, directly, through agents designated from time to time, or
through dealers or underwriters also to be designated, may sell all or a
portion of the Debentures or shares of Class A Common Stock offered
hereby from time to time on terms to be determined at the time of sale.
To the extent required, the aggregate principal amount of the Debentures
or the number of shares of Class A Common Stock to be sold, the names of
the Selling Security Holders, the purchase price, the name of any such
agent, dealer or underwriter and any applicable commissions with respect
to a particular offer will be set forth in an accompanying Prospectus
Supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. The
aggregate proceeds to the Selling Security Holders from the sale of
Debentures and Class A Common Stock offered by the Selling Security
Holders hereby will be the purchase price of such Debentures or Class A
Common Stock less any commissions. For information concerning
indemnification arrangements between the Company and the Selling
Security Holders, see "Plan of Distribution."

The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Debentures or shares of Class A Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), in which event any commissions
received by such broker-dealers, agents or underwriters and any profit
on the resale of the Debentures or shares of Class A Common Stock
purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.

The date of this Prospectus is February 23, 1996

AVAILABLE INFORMATION

The Company is subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the
"SEC") . Such reports and other information filed by the Company
with the SEC in accordance with the Exchange Act may be
inspected, without charge, at the Public Reference Section of the
SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies
of all or any portion of the material may be obtained from the
Public Reference Section of the SEC upon payment of the
prescribed fees. Materials can also be inspected at the offices
of the AMEX, 86 Trinity Place, New York, New York 10006, on which
exchange the Company's Class A Common Stock is listed.

The Company is required, pursuant to the terms of the
Indenture under which the Debentures were issued, to deliver to
the Trustee and the holders of the Debentures, within 15 days
after the Company has filed the same with the SEC, copies of the
annual reports and information, documents and other reports which
the Company is required to file with the SEC pursuant to Section
13 or 15(d) of the Exchange Act.

The Company has filed with the SEC a Registration Statement
on Form S-1 (the "Registration Statement") under the Securities
Act, with respect to the Debentures and shares of Class A Common
Stock offered pursuant to this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration
Statement, certain items of which are contained in the exhibits
and schedules thereto as permitted by the rules and regulations
of the SEC. For further information with respect to the Company,
the Debentures and the Class A Common Stock, reference is made to
the Registration Statement, including the exhibits and schedules
filed therewith. Statements contained in this Prospectus
concerning the provisions of certain documents filed with the
Registration Statement are not necessarily complete, each
statement being qualified in all respects by such reference.
Copies of all or any part of the Registration Statement,
including exhibits thereto, may be obtained, upon payment of the
prescribed fees, at the offices of the SEC as set forth above.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed information
and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless the context otherwise
requires, all references herein to the "Company" include
Diagnostic/Retrieval Systems, Inc. and its consolidated
subsidiaries.

THE COMPANY

Diagnostic/Retrieval Systems,Inc. ("DRS" or the "Company")
designs, manufactures and markets high-technology computer
workstations for the United States (the "U.S.") Department of
Defense, electro-optical targeting systems for military customers
and image and data storage products for both military and
commercial customers. In response to a 1992 mandate by the Joint
Chiefs of Staff, the Company focuses on "commercial-off-the-
shelf" ("COTS") product designs, whereby commercial electronic
components are adapted, upgraded and "ruggedized" for application
in harsh military environments. The Company believes that
military expenditures on electronic systems and equipment will
grow in coming years as the nature of modern warfare dictates
increasing reliance on real-time, accurate battlefield
information and the electronic content and sophistication of
defense systems increases.

During its last three fiscal years, the Company has
restructured its management team and implemented strategies to
exploit the changing nature of military procurement programs
brought on by the end of the cold war, military budget
constraints and the COTS mandate. The Company's strategies
include:

* expanding and diversifying the Company's
technology and product base into complementary
military and commercial markets primarily through
acquisitions and the forging of strategic
relationships;

* increasing revenue opportunities through the
design and adaptation of products for use by all
branches of the military; and

* enhancing financial performance through specific
cost reduction measures and increased
manufacturing efficiencies.

To effect these strategies, the Company has (i) acquired
several businesses with complementary military and commercial
products and technologies over the last three years; (ii) forged
strategic relationships with other defense suppliers such as
Loral Corporation and Westinghouse Electric Corporation, among
others; (iii) emphasized the development of COTS-based products
as well as products and systems that are easily adapted to
similar weapons platforms for use by all branches of the
military; and (iv) implemented cost reduction programs to reduce
its fixed-cost base, allow for growth and maintain the
flexibility of its operations.

The implementation of these strategies has resulted in
increasing revenues and profits over the last three fiscal years.
Although the Company experienced operating losses in fiscal 1990
through 1992, primarily due to cost overruns on a single fixed-
price development contract, a shift over the last several years
in the nature of military development contracting from fixed-
price to cost-type contracts has reduced the Company's exposure
in this area. For the fiscal year ended March 31, 1995, the
Company had revenues of $69.9 million, net income of $2.6
million and earnings per share of $.50, representing increases of
20.9%, 61.2% and 66.7%, respectively, compared with the year
ended March 31, 1994. For the nine months ended December 31,
1995 the Company had revenues of $65.6 million, net income of
$2.5 million and fully diluted earnings per share of $.44,
representing increases of 38.4%, 45.7% and 29.4%, respectively,
compared with the same nine-month period ended December 31, 1994.

<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION

Year Ended March 31, Nine Months
Ended December 31,
1995 1994 1993 1992 1991 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
DATA:

Revenues . . $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 28,925,000 $ 47,762,000 $ 65,628,000 $ 47,404,000
Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 60,289,000 44,143,000
Operating Income
(Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 5,339,000 3,261,000
Interest and Related
Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (1,675,000) (1,020,000)
Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 425,000 613,000
Earnings (Loss)
before Income Taxes
(Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 4,089,000 2,854,000
Income Taxes
(Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,594,000 1,142,000
Net Earnings (Loss) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 2,495,000 $ 1,712,000

Net Earnings (Loss)
per share of Class
A and Class B
Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34

OTHER OPERATIONS DATA:

EBITDA(2) . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 7,565,000 $ 5,228,000
Ratio of Earnings to
Fixed Charges(3)(4) 2.9x 2.3x 1.8x - - 2.8x 2.7x
Ratio of Earnings to
Fixed Charges, as
adjusted(3)(5) 1.8x 2.2x
</TABLE>

December 31, 1995
Actual As Adjusted(6)

BALANCE SHEET DATA:

Working Capital $ 40,585,000 $ 38,085,000
Net Property, Plant
and Equipment $ 14,728,000 $ 14,728,000
Total Assets $ 90,770,000 $ 85,631,000
Long-Term Debt,
Excluding Current
Installments $ 35,319,000 $ 32,819,000
Net Stockholders'
Equity $ 24,907,000 $ 24,907,000

(1) No cash dividends have been distributed during any of the years in
the five-year period ended March 31, 1995 or the nine months ended
December 31, 1995.

(2) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA is a widely accepted financial indicator of a

company's ability to service and incur debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash
flows or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.

(3) Earnings used in computing the ratio of earnings to fixed charges
consist of earnings before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of debt issuance
costs and the portion of the Company's rent expense that the
Company believes is representative of the interest factor.

(4) Earnings were inadequate to cover fixed charges in fiscal 1992 and
fiscal 1991. Earnings (Loss) before Income Taxes (Benefit) in
fiscal 1992 and fiscal 1991 include fixed charges of approximately
$2.7 million and $2.9 million, respectively.

(5) Adjusted to reflect the application of the proceeds from the
Debenture Offering, which was consummated on September 29, 1995
(including the over-allotment option which was exercised on
November 3, 1995). The ratio also assumes additional interest
income was earned on the proceeds remaining after the redemption of
the Company's 1998 Debentures (as defined herein). See "Use of
Proceeds."

(6) Adjusted to give effect to the use of the net proceeds from the
Debenture Offering to redeem $4,963,000 of the 1998 Debentures and
for the payment of $176,000 of accrued interest thereon as of
December 31, 1995. See "Use of Proceeds."

THE OFFERING

Debentures Offered . . . . . $25,000,000 principal amount
of Senior Subordinated
Convertible Debentures Due
2003.

Maturity Date . . . . . . . . October 1, 2003

Interest Payment Dates . . . April 1 and October 1

Interest . . . . . . . . . . 9.0% per annum

Conversion . . . . . . . . . Convertible into Class A
Common Stock at any time prior
to maturity, unless previously
redeemed or repurchased, at a
conversion price of $8.85 per
share, subject to adjustment
in certain circumstances.

Redemption at the Option
of the Company . . . . . . .
Redeemable at the option of the
Company, in whole or in part at any
time on or after October 1, 1998,
upon not less than 30 nor more than
60 days' notice, at the redemption
prices set forth herein plus
accrued but unpaid interest to the
date of redemption. See
"Description of the Debentures --
Redemption."

Redemption at the Option
of the Holders . . . . . . .
Upon a Change of Control (as
defined herein), the Company will
offer to repurchase the Debentures
at 100% of the principal amount
thereof plus accrued but unpaid
interest to the date of repurchase.
See "Description of the Debentures
-- Change of Control."

In the event the Company's
Consolidated Net Worth (as
defined herein) at the end of
any two consecutive fiscal
quarters is below $18.0
million (a "Net Worth
Deficiency"), the Company will
offer to repurchase up to 10%
of the aggregate principal
amount of Debentures at 100%
of the principal amount
thereof plus accrued but
unpaid interest to the date of
repurchase. See "Description
of the Debentures --
Maintenance of Consolidated
Net Worth."

Ranking . . . . . . . . . . . The Debentures are
subordinated to all Senior
Indebtedness (as defined
herein) and will be
effectively subordinated to
all obligations of the
subsidiaries of the Company.
The Indenture (as defined
herein) governing the
Debentures provides that the
Company will not (i) issue or
incur any Debt (other than
Senior Indebtedness or
Capitalized Lease Obligations)
unless such Debt (other than
Senior Indebtedness or
Capitalized Lease Obligations)
is subordinate in right of
payment to the Debentures at
least to the same extent that
the Debentures are subordinate
to Senior Indebtedness or (ii)
permit any of its subsidiaries
to issue or incur any Debt
(other than Senior
Indebtedness or Capitalized
Lease Obligations) unless such
Debt (other than Senior
Indebtedness or Capitalized
Lease Obligations) provides
that it will be subordinate in
right of payment to
distributions and dividends
from such subsidiary to the
Company in an amount
sufficient to satisfy the
Company's obligations under
the Debentures at least to the
same extent that the
Debentures are subordinate to
Senior Indebtedness. At
December 31, 1995, Senior
Indebtedness (excluding
current installments) was
approximately $2.8 million and
the indebtedness (excluding
liability for income taxes) of
the Company's subsidiaries was
approximately $16.6 million.
See "Description of the
Debentures -- Ranking."

Registration Rights . . . . . Pursuant to a registration
rights agreement (the
"Registration Rights
Agreement") between the
Company and the Initial
Purchaser, the Company has
agreed to file a shelf
registration statement (the
"Shelf Registration
Statement") relating to the
Debentures and the shares of
Class A Common Stock which are
issuable from time to time
upon conversion of the
Debentures. The Company has
agreed to use its reasonable
best efforts to maintain the
effectiveness of the Shelf
Registration Statement until
the third anniversary of the
issuance of the Debentures,
except that it will be
permitted to suspend the use
of the Shelf Registration
Statement during certain
periods under certain
circumstances. Upon default
by the Company with respect to
certain of its obligations
under the Registration Rights
Agreement, liquidated damages
will be payable on the
Debentures and Class A Common
Stock affected by such
default. See "Description of
the Debentures -- Registration
Rights; Liquidated Damages."

Restrictive Covenants . . . . The indenture under which the
Debentures were issued (the
"Indenture") limits (i) the
issuance of additional debt by
the Company, (ii) the payment
of dividends on the capital
stock of the Company and
investments by the Company,
(iii) certain transactions
with affiliates, (iv)
incurrence of liens, (v)
issuance of preferred stock by
the Company or its
subsidiaries, (vi) stock
splits, consolidations and
reclassifications and (vii)
sales of assets and subsidiary
stock. The Indenture also
prohibits certain restrictions
on distributions from
subsidiaries. However, all
these limitations and
prohibitions are subject to a
number of important
qualifications. See
"Description of the Debentures
-- Certain Covenants of the
Company."

Use of Proceeds . . . . . . . The Company will not receive
any proceeds from the sale of
the Debentures or shares of
Class A Common Stock offered
pursuant to this Prospectus.
The Selling Security Holders
will receive all of the net
proceeds from any sale of the
Debentures or shares of Class
A Common Stock offered hereby.
See "Use of Proceeds" and
"Selling Security Holders."

RISK FACTORS

In addition to the other information contained in this
Prospectus, prospective investors should consider carefully the
following factors before purchasing the Debentures offered
hereby.

AMOUNT AND RISKS OF GOVERNMENT BUSINESS

Substantially all the Company's revenues are derived from
contracts or subcontracts with domestic and foreign government
agencies of which a significant portion is attributed to United
States Navy (the "U.S. Navy") procurements. The development and
success of the Company's business in the future will depend upon
the continued willingness of the U.S. Government to commit
substantial resources to such U.S. Navy programs and, in
particular, upon continued purchases of the Company's products.
See "Business -- Company Organization and Products."

The Company's business with the U.S. Government is subject
to various risks, including termination of contracts at the
convenience of the U.S. Government; termination, reduction or
modification of contracts or subcontracts in the event of changes
in the U.S. Government's requirements or budgetary constraints;
shifts in spending priorities; and when the Company is a
subcontractor, the failure or inability of the prime contractor
to perform its prime contract. Certain contract costs and fees
are subject to adjustment as a result of audits by government
agencies. In addition, all defense businesses are subject to
risks associated with the frequent need to bid on programs in
advance of design completion (which may result in unforeseen
technological difficulties and/or cost overruns).

Multi-year U.S. Government contracts and related orders are
subject to cancellation if funds for contract performance for any
subsequent year become unavailable. In addition, if certain
technical or other program requirements are not met in the
developmental phases of the contract, then the follow-on
production phase may not be realized. Upon termination other
than for a contractor's default, the contractor normally is
entitled to reimbursement for allowable costs, but not
necessarily all costs, and to an allowance for the proportionate
share of fees or earnings for the work completed. Foreign
defense contracts generally contain comparable provisions
relating to termination at the convenience of the foreign
government. See "Business -- Contracts."

REDUCED SPENDING IN DEFENSE INDUSTRY

Reductions in U.S. Government expenditures for defense
products are likely to continue during the 1990's. These
reductions may or may not have an effect on the Company's
programs; however, in the event expenditures for products of the
type manufactured by the Company are reduced and not offset by
greater foreign sales or other new programs or products, there
will be a reduction in the volume of contracts or subcontracts

awarded to the Company. Unless offset, such reductions would
adversely affect the Company's earnings.

LIMITED TERM OF CONTRACTS

The Company's contracts with the U.S. Government are for
varying fixed terms, and there can be no assurance that a renewal
or follow-on contract will be awarded to the Company by the U.S.
Government upon the expiration of any such contract. Certain of
the Company's U.S. Government contracts account for a substantial
portion of the Company's revenues (i.e., the AN/UYQ-65 production
contract). The loss of revenue resulting from the failure to
obtain a renewal or follow-on contract with respect to any
significant contract or a number of lesser contracts, in either
case without the substitution of revenues from the award of new
contracts, would have a material adverse effect upon the
Company's results of operations and financial position. In
addition, from time to time the Company enters into U.S.
Government contracts with a full funded backlog but in which the
price per unit may not be determined at the time of award. If
the price per unit which is ultimately determined is
significantly less than anticipated by the Company, the net
revenues of the Company would be adversely affected.

HOLDING COMPANY STRUCTURE; SUBORDINATION

The Debentures are a direct obligation of DRS, which
derives a majority of its revenues from the operations of its
subsidiaries. The ability of DRS to make interest payments on or
redeem the Debentures and to pay dividends, if any, on the Class
A Common Stock will be primarily dependent upon the receipt of
dividends or other distributions from such subsidiaries. The
payment of dividends from the subsidiaries to the Company and the
payment of any interest on or the repayment of any principal of
any loans or advances made by the Company to any of its
subsidiaries may be subject to statutory or contractual
restrictions and are contingent upon the earnings of such
subsidiaries. Although the Company believes that distributions
and dividends from its subsidiaries will be sufficient to pay
interest on the Debentures as well as to meet the Company's other
obligations, there can be no assurance they will be sufficient.

The Debentures are subordinated in right of payment to
all existing and future Senior Indebtedness of the Company,
including all indebtedness under the Company's credit agreements.
By reason of such subordination, in the event of an insolvency,
liquidation or other reorganization of the Company, the Senior
Indebtedness must be paid in full before the principal of,
premium if any, and interest on the Debentures may be paid. At
December 31, 1995, Senior Indebtedness (excluding current
installments) was approximately $2.8 million. Because a majority
of the Company's operations are conducted through subsidiaries,
claims of the creditors of such subsidiaries will have priority
with respect to the assets and earnings of such subsidiaries over
the claims of the creditors of the Company, including holders of
the Debentures, even though such obligations do not constitute
Senior Indebtedness, except to the extent the Company is itself
recognized as a creditor of such subsidiary or such other
creditors have agreed to subordinate their claims to the payment
of the Debentures. The Company's subsidiaries had indebtedness
(excluding liability for income taxes) of approximately $16.6
million at December 31, 1995.

The Debentures are not secured by any of the assets of
the Company or its subsidiaries. In addition, certain
obligations of the Company are secured by pledges of certain
assets of the Company or its subsidiaries.

SUBSTANTIAL INDEBTEDNESS

Following the issuance of the Debentures, the Company
continues to have indebtedness that is substantial in relation to
its stockholders' equity. See "Capitalization." The Indenture
imposes significant operating and financial restrictions on the
Company. Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability
of the Company to incur additional indebtedness and pay
dividends. These restrictions, in combination with the leveraged
nature of the Company, could limit the ability of the Company to
effect future financings or otherwise may restrict corporate
activities. See "Description of the Debentures." The Indenture
permits the Company to incur additional indebtedness under
certain conditions, and the Company expects to obtain additional
indebtedness as so permitted.

The Company's high degree of leverage could have
important consequences to the holders of the Debentures,
including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for other purposes;
(iii) the Company's substantial degree of leverage may hinder its
ability to adjust rapidly to changing market conditions; and (iv)
could make it more vulnerable in the event of a downturn in
general economic conditions or its business. See "Description of
the Debentures."

COMPETITION

The military electronics industry is characterized by rapid
technological change. The Company's products are sold in markets
containing many competitors which are substantially larger than
the Company, devote substantially greater resources to research
and development and generally have greater resources. Certain of
such competitors are also suppliers to the Company. In the
military sector, the Company competes with many first- and
second-tier defense contractors on the basis of product
performance, cost, overall value, delivery and reputation. The
Company's future success will depend in large part upon its
ability to improve existing product lines and to develop new
products and technologies in the same or related fields. The
introduction by competitors of new products with greater
capabilities could adversely affect the Company's business.

RELIANCE ON SUPPLIERS

The Company's manufacturing process for its products,
excluding electro-optical products, consists primarily of the
assembly of purchased components and testing of the product at
various stages in the assembly process.

Although materials and purchased components generally are
available from a number of different suppliers, several suppliers
are the Company's 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. The Company has not
experienced significant production delays attributable to supply
shortages, but occasionally experiences procurement problems with
respect to certain components, such as semiconductors and
connectors. In addition, with respect to the Company's electro-
optical products, certain exotic materials, such as germanium,
zinc sulfide and cobalt, may not always be readily available.

ATTRACTING AND RETAINING TECHNICAL PERSONNEL

There is a continuing demand for qualified technical
personnel, and the Company believes that its future growth and
success will depend upon its ability to attract, train and retain
such personnel. An inability to maintain a sufficient number of
trained personnel could have a material adverse effect on the
Company's contract performance or on its ability to capitalize on
market opportunities.

FUNDING OF REPURCHASE OBLIGATIONS; ABSENCE OF SINKING FUND

There is no sinking fund with respect to the Debentures, and
at maturity the entire outstanding principal amount thereof will
become due and payable by the Company. Also, upon the occurrence
of certain events the Company will be required to offer to
repurchase all or a portion of the outstanding Debentures. The
source of funds for any such payment at maturity or earlier
repurchase will be the Company's available cash or cash generated
from operating or other sources, including, without limitation,
borrowings or sales of assets or equity securities of the
Company. There can be no assurance that sufficient funds will be
available at the time of any such event to pay such principal or
to make any required repurchase. See "Description of the
Debentures."

SHARES ELIGIBLE FOR FUTURE SALE

The sale, or availability for sale, of substantial amounts
of Class A Common Stock in the public market could adversely
affect the prevailing market price of the Debentures and the
Class A Common Stock into which the Debentures are convertible
and could impair the Company's ability to raise additional
capital through the sale of its securities. The Debentures
offered hereby are convertible at any time prior to maturity,
unless previously redeemed or repurchased, into shares of Class A
Common Stock, at a conversion price of $8.85 per share, subject
to adjustment under certain circumstances. As of February 20,
1996, there was an aggregate of 3,307,324 shares of Class A
Common Stock outstanding (excluding 432,639 shares of Class A
Common Stock in treasury) and an aggregate of 2,154,808 shares of
Class B Common Stock, par value $.01 per share (the "Class B
Common Stock") outstanding (excluding 65,795 shares of Class B
Common Stock in treasury). Of such shares, 760,168 shares of the
Class A Common Stock and 307,180 shares of the Class B Common
Stock are "restricted" under the Securities Act and are resalable
pursuant to the limitations of Rule 144 under the Securities Act.
After giving effect to the application of $5.0 million in net
proceeds acquired by the Company pursuant to the Debenture
Offering to repurchase approximately $5.0 million in principal
amount of the Company's 8-1/2% Convertible Subordinated
Debentures due August 1, 1998 (the "1998 Debentures"), the
remaining outstanding 1998 Debentures will be convertible into an
additional 333,333 shares of Class B Common Stock at $15 per
share. Each share of Class A Common Stock is convertible at any
time into one share of the Class B Common Stock, subject to
adjustment under certain circumstances. See "Description of
Capital Stock." The Company is considering setting forth a
proposal to its stockholders to amend the Company's Certificate
of Incorporation to convert the Class A Common Stock and Class B
Common Stock into a single class of common stock, as well as to
include certain other charter amendments.

LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE

At present, the Debentures are owned by a small number of
institutional investors, and prior to this offering there has not
been any public market for the Debentures. The Company has
applied for listing of the Debentures and the shares of Class A
Common Stock which are issuable upon conversion of the Debentures
on the AMEX. The Debentures are eligible for trading in the
PORTAL Market of the National Association of Securities Dealers,
Inc. There can be no assurance regarding the future development
of a market for the Debentures or the ability of holders of the
Debentures to sell their Debentures or the price at which such
holders may be able to sell their Debentures. If such a market
were to develop, the Debentures could trade at prices that may be
higher or lower than the initial offering price depending on many
factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. The
Initial Purchaser has advised the Company that it currently
intends to make a market in the Debentures. The Initial
Purchaser is not obligated to do so, however, and any market-
making with respect to the Debentures may be discontinued at any
time without notice. Therefore, there can be no assurance as to
the liquidity of any trading market for the Debentures or that an
active public market for the Debentures will develop.

The Class A Common Stock of the Company is listed on the
AMEX. The market for the Class A Common Stock has historically
been characterized by limited trading volume and a limited number
of holders. The Board of Directors of the Company has authorized
and is currently soliciting proxies from the stockholders of the
Company with respect to a proposal to amend the Company's
Certificate of Incorporation to convert the Class A Common Stock
and Class B Common Stock into a single class of common stock,
however, there can be no assurance that such proposal will be
approved by the stockholders, or if approved, that a more active
trading market for the resulting class of common stock will
develop.

THE COMPANY

GENERAL

The Company designs, manufactures and markets high-
technology computer workstations for the U.S. Department of
Defense, electro-optical targeting systems for military customers
and image and data storage products for both military and
commercial customers. In response to a 1992 mandate by the Joint
Chiefs of Staff, the Company focuses on "commercial-off-the-
shelf" ("COTS") product designs, whereby commercial electronic
components are adapted, upgraded and "ruggedized" for application
in harsh military environments. The Company believes that
military expenditures on electronic systems and equipment will
grow in coming years as the nature of modern warfare dictates
increasing reliance on real-time, accurate battlefield
information and the electronic content and sophistication of
defense systems increases.

Using COTS designs, the Company develops and delivers its
products with significantly less development time and expense
compared to traditional military product cycles, generally
resulting in shorter lead times, lower costs and the employment
of the latest information and computing technologies. The COTS
process entails the purchasing, refitting, upgrading (of both
hardware and software) and "ruggedization" (repackaging,
remounting and stress testing to withstand harsh military
environments) of readily available commercial components. The
design and manufacture of COTS-based products is a complex
process requiring specific engineering capabilities, extensive
knowledge of military platforms to which the equipment will be
applied and in-depth understanding of military operating
environments and requirements.

STRATEGY

* expanding and diversifying the Company's
technology and product base into complementary
military and commercial markets primarily through
acquisitions and the forging of strategic
relationships;

* increasing revenue opportunities through the
design and adaptation of products for use by all
branches of the military; and

* enhancing financial performance through specific
cost reduction measures and increased
manufacturing efficiencies.

as well as products and systems that are easily adapted to
similar weapons platforms for use by all branches of the
military; and (iv) implemented cost reduction programs to reduce
its fixed-cost base, allow for growth and maintain the
flexibility of its operations.

The implementation of these strategies has resulted in
increasing revenues and profits over the last three fiscal years.
Although the Company experienced operating losses in fiscal 1990
through 1992, primarily due to cost overruns on a single fixed-
price development contract, a shift over the last several years
in the nature of military development contracting from fixed-
price to cost-type contracts has reduced the Company's exposure
in this area. For the fiscal year ended March 31, 1995, the
Company had revenues of $69.9 million, net income of $2.6 million
and earnings per share of $.50, representing increases of 20.9%,
61.2% and 66.7%, respectively, compared with the year ended March
31, 1994. For the nine months ended December 31, 1995, the
Company had revenues of $65.6 million, net income of $2.5 million
and fully diluted earnings per share of $.44, representing
increases of 38.4%, 45.7% and 29.4%, respectively, compared with
the same nine-month period ended December 31, 1994.

COMPANY ORGANIZATION

The Company is organized into three operating groups:
Electronic Systems Group ("ESG," 54% of fiscal 1995 revenues),
Electro-Optical Systems Group ("EOSG," 18% of fiscal 1995
revenues) and Media Technology Group ("MTG," 28% of fiscal 1995
revenues). See "Business -- Company Organization and Products."

ESG designs and manufactures COTS-based computer
workstations designed for military information processing
applications. This equipment is designed to cost-effectively
replace and upgrade anti-submarine warfare ("ASW") systems,
tactical (combat/attack) workstations and training equipment.
ESG's products are a direct outgrowth of the ASW and Naval
systems expertise that has formed the core of DRS' business base
since the Company's inception. Major products include: (i)
computer workstations used in ASW systems for ship and land-based
(harbors and coastal areas) detection networks, (ii) tactical
workstations used to coordinate and control personnel and weapons
systems on the military's most advanced ship, air and submarine-
based platforms, and (iii) military display emulators ("MDE"),
which are used for combat system operator training at a fraction
of the cost of fully-militarized, field-ready versions of the
display. ESG's workstation products, which are PC-based, open
architecture, networked systems designed for flexibility and
adaptability to a wide variety of applications, have been
developed to replace many of the mainframe-based systems
currently in use, while preserving the U.S. Navy's existing
investment in such technology. ESG's systems process incoming
sonar, radar and other information through complex customized
software, enabling operators to interpret data quickly and relay
information to command personnel. These workstations are an
integral part of the U.S. Navy's Aegis defense program and the
U.S. coastal defense strategy. MDE systems are used for training
of combat system operators and to maintain and improve the
operation skills of naval reserve personnel. ESG operates a
field service division for system maintenance, installation and
upgrade services and general product support. ESG's
manufacturing division (which is 80% owned through a partnership)
produces ESG's new generation products and also supplies complex
wire harness assemblies and other products to the military and
commercial aerospace industry.

EOSG manufactures precision electro-optical assemblies used
in infrared seeker heads of Stinger, Sidewinder and new
generation missiles and produces proprietary Multiple Platform
Boresight Equipment ("MPBE") used to align the weapons systems
with the airframes and pilot sighting systems on Apache and Cobra
helicopters. Originally supplying only the primary mirror for
infrared seeker heads, EOSG now supplies the primary, secondary,
tertiary and fold mirrors, as well as the mirror housing and nose
domes. EOSG is currently under contract to produce infrared
components and subassemblies on many of the next generation
infrared missile systems. The MPBE boresight system was
originally deployed on the Army's Apache attack helicopters and
has been adapted for use on Marine Corps' Cobra helicopters.
EOSG is under contract to supply the next generation laser-based
MPBE for these platforms. Due to the inherent flexibility and
economics of MPBE's multiple platform design, EOSG has submitted
proposals to adapt the system for use on fixed-wing aircraft such
as the F-15 and C-130. The Company recently acquired
substantially all of the assets of Opto Mechanik, Inc. through
its subsidiary OMI Acquisition Corp. ("OMI"). Through OMI, EOSG
now supplies the electro-optical sighting and targeting systems
used on TOW anti-tank missiles, the military's primary anti-tank
weapon, and other electro-optical military products. The Company
is also under contract with the primary contractor for work on
the anti-tank Improved TOW Acquisition System.

MTG manufactures products used by military and commercial
customers for image and data storage. The group designs military
recorder systems by adapting commercial video recording products
to operate in and withstand harsh military environments. With
MTG's recorder products, the COTS process entails the purchasing,
refitting, upgrading (hardware and software) and "ruggedization"
(repackaging, remounting and vibration/thermal stress testing to
withstand harsh military operating environments) of readily
available commercial components. These systems are used to
record cockpit video of jet fighter, helicopter and light armored
vehicle missions. MTG's commercial operations manufacture
burnish, glide and test heads which are used in the manufacture
of computer hard disks, listing among its customers many of the
major disk drive manufacturers in the United States. MTG also
manufactures specialty recorder heads and refurbishes the head
assemblies of high-end video recording products used by
broadcasters worldwide.

The Company was incorporated in Delaware in June 1968. The
Company's executive offices are located at 5 Sylvan Way,
Parsippany, New Jersey, 07054, and its telephone number is (201)
898-1500.

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of
the Debentures or shares of Class A Common Stock offered pursuant
to this Prospectus. The Selling Security Holders will receive
all of the net proceeds from any sale of the Debentures or shares
of Class A Common Stock offered hereby.

The net proceeds received by the Company pursuant to the
Debenture Offering (including the exercise of the over-allotment
option) were approximately $23,750,000. On February 16, 1996,
the Company used approximately $5.0 million of such net proceeds
to redeem $4,963,000 aggregate principal amount of the Company's
1998 Debentures (of which $2,463,000 aggregate principal amount
was classified as current as of December 31, 1995), plus accrued
and unpaid interest thereon. The balance will be used for
general corporate purposes, including acquisitions. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition and Liquidity -- The
Debenture Offering." Although the Company continues to seek
acquisition opportunities consistent with its business strategy
and is engaged in discussions regarding potential acquisitions,
the Company does not currently have any agreement or
understanding regarding any potential acquisition.

CAPITALIZATION

The following table sets forth the consolidated
capitalization of the Company at December 31, 1995 as adjusted to
give effect to the use of net proceeds from the Debenture
Offering (including the over-allotment option for $5,000,000
aggregate principal amount of the Debentures which was exercised
on November 3, 1995). The information presented below should be
read in conjunction with the consolidated financial statements of
the Company included elsewhere in this Prospectus.

December 31, 1995
Actual As Adjusted
Long-term debt, excluding current
installments(1):
Senior Indebtedness(2) . . . $ 2,819,000 $ 2,819,000
81/2% Convertible Subordinated Debentures
due August 1, 1998 . . . . . 7,500,000 5,000,000
Senior Subordinated Convertible
Debentures due 2003 . . . . . 25,000,000 25,000,000
Total long-term debt . . . 35,319,000 32,819,000

Stockholders' equity:
Preferred Stock, $10 par value 2,000,000
shares authorized; no shares issued. . -- --
Class A Common Stock, $.01 par value,
10,000,000 shares authorized;
3,739,963 shares issued . . . 37,000 37,000
Class B Common Stock, $.01 par value,
20,000,000 shares authorized;
2,216,353 shares issued . . . 22,000 22,000
Additional paid-in capital . 13,579,000 13,579,000
Retained earnings . . . . . . 13,414,000 13,414,000
27,052,000 27,052,000

Less Treasury Stock -at cost:
432,639 shares of Class A
Common Stock and 21,619 shares
of Class B Common Stock . . (1,918,000) (1,918,000)
Less unamortized restricted stock
compensation . . . . . . . (227,000) (227,000)
Net stockholders' equity . . 24,907,000 24,907,000
Total capitalization . . . . . $ 60,226,000 $ 57,726,000

_________________

(1) See Note 6 to Consolidated
Financial Statements for further
information with respect to the
Company's debt obligations.

(2) Consisting of Industrial Revenue
Bonds due 1998 and other
obligations. See Note 6 to
Consolidated Financial
Statements.

MARKET PRICES OF CAPITAL STOCK

The Company's Class A Common Stock and Class B Common Stock
trades on the AMEX (Symbols: DRSA and DRSB, respectively). The
following table sets forth for each period indicated the high and
low closing sales prices of the Company's Class A Common Stock
and Class B Common Stock, as reported by the American Stock
Exchange Monthly Market Statistics:

Class A Common Stock* Class B Common Stock*
High Low High Low

Year Ended March 31, 1994:
First Quarter . . . . . . . . $ 4-3/8 $ 2-3/4 $ 4-1/4 $ 2-13/16
Second Quarter . . . . . . . 3-7/8 3-1/16 3-13/16 3
Third Quarter . . . . . . . . 3-11/16 2-15/16 3-1/2 2-3/4
Fourth Quarter . . . . . . . 4-1/16 3 4 3

Year Ended March 31, 1995:
First Quarter . . . . . . . . 5-1/4 3-5/8 5-1/8 3-3/4
Second Quarter . . . . . . . 4-3/4 3-3/4 4-5/8 3-3/4
Third Quarter . . . . . . . 4-5/16 3-15/16 4-3/8 3-7/8
Fourth Quarter . . . . . . . 5-1/4 4 5-1/2 3-7/8

Year Ended March 31, 1996:
First Quarter . . . . . . . . 6-5/8 4-3/4 6-13/16 4-7/8
Second Quarter . . . . . . . 7-13/16 6-3/16 7-7/8 5-3/4
Third Quarter . . . . . . . . 8 7 7-7/8 6-3/4
Fourth Quarter
(through February 20, 1996) 8-11/16 7-5/8 8-5/16 7-3/8
________________

* As of February 20, 1996, the Class A Common Stock was held
by 1,416 stockholders (of which 298 were registered holders
and 1,118 were beneficial holders) and the Class B Common
Stock was held by 845 stockholders (of which 207 were
registered holders and 638 were beneficial holders). See
"Risk Factors -- Lack of Public Market; Restrictions on
Resale."

DIVIDEND POLICY

The Company has not paid any cash dividends since 1976. The
Company intends to retain future earnings for use in its business
and does not expect to declare cash dividends in the foreseeable
future on the Class A Common Stock or the Class B Common Stock,
which rank pari passu as to dividends and distributions. The
Company's 1998 Debentures limit the Company's ability to pay
dividends or make other distributions on its Class A Common Stock
and Class B Common Stock. See Note 6 of Notes to Consolidated
Financial Statements for information concerning restrictions on
the declaration or payment of dividends. The Company's Restated
Certificate of Incorporation, as amended, also limits the payment
of dividends under certain circumstances. See "Description of
Capital Stock -- Dividends and Distributions." Any future
declaration of dividends will be subject to the discretion of the
Board of Directors of the Company. The timing, amount and form
of any future dividends will depend, among other things, on the
Company's results of operations, financial condition, cash
requirements, plans of expansion and other factors deemed
relevant by the Board of Directors.

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated
statements of operations and balance sheet data for the periods
indicated. The information for, and as of the end of, each of
the twelve months in the five year period ended March 31, 1995 is
derived from the consolidated financial statements of the Company
for such periods which have been audited by KPMG Peat Marwick
LLP. The selected consolidated statements of operations data for
the nine months ended December 31, 1995 and 1994 and the selected
consolidated balance sheet data as of December 31, 1995 are
derived from the unaudited consolidated statements of the
Company, which include all adjustments which management considers
necessary for a fair presentation of the data for such periods
and at such dates, all of which were of a normal recurring
nature. The results of the nine months ended December 31, 1995
are not necessarily indicative of results to be expected for the
full year. The selected consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated
financial statements of the Company and the notes thereto, and
other financial information included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Nine Months
Year Ended March 31, Ended December 31,
1995 1994 1993 1992 1991 1995 1994

SUMMARY OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 28,925,000 $ 47,762,000 $ 65,628,000 $ 47,404,000
Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 60,289,000 44,143,000
Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 5,339,000 3,261,000
Interest and Related
Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (1,675,000) (1,020,000)
Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 425,000 613,000
Earnings (Loss) before
Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 4,089,000 2,854,000
Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,594,000 1,142,000
Net Earnings (Loss ) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 2,495,000 $ 1,712,000

Net Earnings (Loss) per share
of Class A and Class B
Common Stock(1) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34

OTHER OPERATIONS DATA:

EBITDA(2) . . . . $ 7,574,000 $ 6,006,000 $ 5,513,000 $ (4,393,000) $ (973,000) $ 7,565,000 $ 5,228,000
Ratio of Earnings to
Fixed Charges(3)(4) . 2.9x 2.3x 1.8x - - 2.8x 2.7x
Ratio of Earnings to Fixed
Charges, as adjusted(3)(5) 1.8x 2.2x

March 31, December 31, l995
1995 1994 1993 1992 1991 Actual As Adjusted (6)
BALANCE SHEET DATA:

Working Capital . $ 20,317,000 $ 19,803,000 $ 17,994,000 $ 17,747,000 $ 24,833,000 $ 40,585,000 $ 38,085,000
Net Property, Plant
and Equipment 9,849,000 8,893,000 9,768,000 11,602,000 13,904,000 14,728,000 14,728,000
Total Assets . . 64,590,000 58,836,000 51,948,000 53,904,000 58,527,000 90,770,000 85,631,000
Long-Term Debt, Excluding
Current Installments 11,732,000 14,515,000 17,290,000 19,958,000 22,240,000 35,319,000 32,819,000
Net Stockholders' Equity 22,509,000 19,759,000 18,115,000 17,047,000 22,300,000 24,907,000 24,907,000
<FN>
____________________

(1) No cash dividends have been distributed during any
of the years in the five-year period ended March
31, 1995 or the nine months ended December 31,
1995.

(2) EBITDA is defined as operating income (loss) plus
depreciation and amortization. EBITDA is a widely
accepted financial indicator of a company's ability
to service and incur debt. EBITDA should not be
considered in isolation or as a substitute for net
income, cash flows or other consolidated income or
cash flow data prepared in accordance with
generally accepted accounting principles or as a
measure of a company's profitability or liquidity.

(3) Earnings used in computing the ratio of earnings to
fixed charges consist of earnings before income
taxes plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issuance
costs and the portion of the Company's rent expense
that the Company believes is representative of the
interest factor.

(4) Earnings were inadequate to cover fixed charges in
fiscal 1992 and fiscal 1991. Earnings (Loss)
before Income Taxes (Benefit) in fiscal 1992 and
fiscal 1991 include fixed charges of approximately
$2.7 million and $2.9 million, respectively.

(5) Adjusted to reflect the application of the proceeds
from the Debenture Offering, which was consummated
on September 29, 1995 (including the over-allotment
option which was exercised on November 3, 1995).
The ratio also assumes additional interest income
was earned on the proceeds remaining after the
redemption of the Company's 1998 Debentures. See
"Use of Proceeds."

(6) Adjusted to give effect to the use of the net
proceeds from the Debenture Offering to redeem
$4,963,000 of the 1998 Debentures and for the
payment of $176,000 of accrued interest thereon as
of December 31, 1995. See "Use of Proceeds."

</TABLE>

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

The following is a discussion of the consolidated financial
condition and results of operations of the Company for the nine
months ended December 31, 1995 and 1994, and for each of the
years in the three year period ended March 31, 1995. This
section should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto and
other financial information included elsewhere in this
Prospectus.

OVERVIEW

During the last three fiscal years, the Company, in
connection with its strategic plan, acquired several businesses
with complementary military and commercial products and
technologies. The businesses of Technology Applications &
Service Company ("TAS"), CMC Technology ("CMC") and Laurel
Technologies ("Laurel"), which joined the Company in the latter
part of fiscal 1994, became an integral part of the fiscal 1995
business base and significantly contributed to the Company's
fiscal 1995 financial performance. In November 1994, the Company
acquired Ahead Technology Corporation ("Ahead"), located in Los
Gatos, California.

RECENT DEVELOPMENTS

Shortly after the close of fiscal 1995, the Company signed a
non-binding letter of intent contemplating the merger of the
Company with NAI Technologies, Inc. ("NAI"), which the Company
terminated on July 13, 1995. Currently, the Company does not
intend to continue discussions with NAI regarding any proposed
merger.

In August 1995, Mr. Leonard Newman was elected Chairman
Emeritus of the Company and retired as the Chairman of the Board
and Secretary of the Company. The Company is currently
negotiating an employment, non-competition and retirement
agreement between the Company and Mr. Leonard Newman. See "--
Financial Condition and Liquidity - Contingencies."

RESULTS OF OPERATIONS

The following table sets forth items in the consolidated
statements of operations as a percentage of revenues and the
percentage increase or decrease of those items as compared with
the prior period.

Percentage of Revenues Percentage Change
Nine
Months
Ended
Decem
ber
31,
1995
Nine vs.
Months Nine
Ended Months
Year Ended March 31, December 31, Ended
Fiscal Fiscal Decem
1995 1994 ber
vs. vs. 31,
1995 1994 1993 1995 1994 1994 1993 1994

Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 20.9% 21.0% 38.4%
Costs and Expenses 92.7 94.0 95.2 91.9 93.1 19.2 19.6 36.6
Operating Income 7.3 6.0 4.8 8.1 6.9 47.7 49.2 63.7
Interest and Related
Expenses (2.0) (2.7) (3.6) (2.5) (2.2) (12.8) (9.3) 64.2
Other Income, Net .8 1.4 2.6 0.6 1.3 (36.0) (31.9) (30.7)
Earnings before
Income Taxes 6.1 4.7 3.8 6.2 6.0 57.2 50.4 43.3
Income Taxes 2.4 1.9 1.5 2.4 2.4 51.1 52.9 39.6
Net Earnings 3.7% 2.8% 2.3% 3.8% 3.6% 61.2% 48.8% 45.7%

COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1995 WITH NINE
MONTHS ENDED DECEMBER 31, 1994

Revenues for the nine-month period ended December 31, 1995
increased 38.4% to $65.6 million from $47.4 million for the same
nine-month period in fiscal 1995. The revenue growth was due
primarily to increased shipments of display workstations and data
storage systems, as well as from higher commercial product sales.
In addition, revenue growth was partly due to higher sales of
electro-optical systems following the acquisition of
substantially all of the assets of Opto Mechanik, Inc. on July 5,
1995 (the "OMI Asset Acquisition").

Operating income for the nine-month period ended December
31, 1995 increased 63.7% to $5.3 million from $3.3 million for
the same nine-month period in fiscal 1995. Operating income as a
percentage of revenues was 8.1% for the nine-month period ended
December 31, 1995 as compared with 6.9% for the comparable prior
year period. Higher operating income was due primarily to the
overall increase in revenues, together with higher margins on the
company's commercial products.

Interest and related expenses were $1.7 million for the nine
months ended December 31, 1995 as compared to $1.0 million for
the comparable prior year period. The increase for the period
was primarily due to the increase in debt associated with the
Debenture Offering, offset in part by a reduction in interest
resulting from repurchases of the Company's 1998 Debentures, in
satisfaction of the August 1, 1995 sinking fund requirement for
this debt.

Other income, net, was $0.4 million for the nine-month
period ended December 31, 1995, representing a decrease from $0.6
million in the comparable prior year period. This decrease was
due to a gain on the sale of fixed assets of approximately $0.2
million in the third quarter of fiscal 1995, offset in part by
interest earned on higher average cash balances this fiscal year,
primarily resulting from the net proceeds generated from the
Debentures.

The Company's effective tax rate for the nine-month period
ended December 31, 1995 was 39%, as compared to 40% in the
comparable prior year period. The Company records income tax
expense based on an estimated effective income tax rate for the
full fiscal year. The effective income tax rate and the
components of income tax expense for the nine months ended
December 31, 1995 did not significantly change from those of the
fiscal year ended March 31, 1995. The provision for income taxes
includes all estimated income taxes payable to federal and state
governments as applicable.

COMPARISON OF FISCAL 1995 WITH FISCAL 1994

Revenues for fiscal 1995 increased 21% to $69.9 million from
$57.8 million in fiscal 1994. The increase during fiscal 1995
was primarily attributable to revenues from the display,
manufacturing and video broadcast product lines of TAS, CMC and
Laurel, which were included in the Company's results for the full
year. In addition, commercial revenues increased $4.3 million to
approximately $6.4 million in fiscal 1995 primarily as a result
of the Company's November 1994 acquisition of Ahead, which
contributed approximately $2.7 million in revenues for the fiscal
1995 period. Revenues from the Company's core signal processing,
display, data storage and optical product lines experienced a
slight decrease during fiscal 1995, as development efforts on
several major programs were substantially completed, and the
receipt of certain new awards was delayed into the latter part of
the year.

Operating income for fiscal 1995 increased 48% to $5.1
million from $3.4 million in fiscal 1994. Operating income as a
percentage of revenues was 7% for fiscal 1995 as compared to 6%
in fiscal 1994. Such increases are attributable to higher fiscal
1995 revenues and the contribution of higher margin commercial
products to the Company's business base and the positive impact
of management's continuing cost reduction efforts.

Interest and related expenses for fiscal 1995 decreased 13%
to $1.4 million from $1.6 million in fiscal 1994. The decrease
was a result of the reduction in the Company's long-term debt.
The Company repurchased approximately $2.7 million of its 1998
Debentures during fiscal 1995, which were used principally to
satisfy the August 1, 1994 mandatory sinking fund requirement for
the debt.

Other income, net, for fiscal 1995 decreased 36% to $.5
million from $.8 million in fiscal 1994. This decrease was
primarily attributable to lower gains from the repurchases of
1998 Debentures of $.2 million. Substantially all 1998
Debentures repurchased during fiscal 1995 were at prices
approximating par value.

The Company's effective income tax rate in fiscal 1995 and
1994 was 39% and 40%, respectively.

COMPARISON OF FISCAL 1994 WITH FISCAL 1993

Revenues for fiscal 1994 increased 21% to $57.8 million from
$47.8 million in fiscal 1993. The revenue increase reflects the
contribution of the recently acquired product lines of TAS, CMC
and Laurel. Revenues from core signal processing, display,
recording and optical product lines shifted to those from
contracts awarded primarily within the 1994 and 1993 fiscal
years. Revenues from older contracts for such products were not
as significant as in fiscal 1993, as a result of the completion
or near-completion of these contracts during the year.

Operating income for fiscal 1994 increased 49% to $3.4
million from $2.3 million in fiscal 1993. Operating income as a
percentage of revenues was 6% in fiscal 1994 as compared to 5% in
fiscal 1993. Such increases are attributable to higher fiscal
1994 revenues, lower costs as a result of improved efficiencies
and the substantial completion during fiscal 1993 of two fixed-
price development contracts on which the Company incurred write-
offs for cost overruns.

Interest and related expenses decreased 9% to $1.6 million
in fiscal 1994 from $1.7 million in fiscal 1993. This decrease
reflects the Company's retirement of $2.5 million of principal on
its 1998 Debentures during the first half of fiscal 1994,
pursuant to the mandatory sinking fund requirement for the debt.
The Company also repurchased an additional $.1 million in
principal amount of the 1998 Debentures during the latter half of
fiscal 1994.

Other income, net, for fiscal 1994 decreased 32% to $.8
million from $1.2 million in fiscal 1993. Fiscal 1994 results
included gains on the repurchases of 1998 Debentures, described
previously, of approximately $.3 million, while fiscal 1993 gains
for similar transactions amounted to $.5 million.

The Company's effective income tax rate in both fiscal 1994
and 1993 was 40%.

FINANCIAL CONDITION AND LIQUIDITY

Cash and Cash Flow. Cash and cash equivalents at December
31, 1995 and March 31, 1995 represented approximately 25% and
17%, respectively, of total assets. During the nine-month period
ended December 31, 1995, cash increased $11.9 million. This
increase was primarily the result of the private placement of
$20,000,000 in aggregate principal amount of the Debentures on
September 29, 1995, and the additional placement of $5,000,000 in
aggregate principal amount of the Debentures, pursuant to an
over-allotment option, completed on November 3, 1995. In
addition, approximately $2.4 million was generated from sales of
certain fixed assets. These contributions to cash were offset by
uses of: (i) approximately $4.1 million in the OMI Asset
Acquisition; (ii) approximately $2.2 million for repurchases of
outstanding 1998 Debentures in satisfaction of the August 1, 1995
sinking fund requirement for such debt; and (iii) approximately
$3.7 million for capital expenditures. Additionally,
approximately $3.5 million was used in support of operations,
primarily for material procurement.

Cash and cash equivalents at March 31, 1995 of $11.2 million
was down $4.3 million from the balance at March 31, 1994. Cash
represented 17% of total assets at the end of fiscal 1995, as
compared with 26% in fiscal 1994. During fiscal 1995, cash
generated by operations amounted to $2.5 million. In comparison,
cash generated by operations during fiscal 1994 was $10.2
million. The reduction in the amount of cash generated by
operations during fiscal 1995 was primarily attributable to the
build-up in inventory which occurred during fiscal 1995 in
preparation for the fiscal 1996 production and shipment of
products under several significant development contracts. Cash
used in investing and financing activities during fiscal 1995
totalled $3.8 million and $3.0 million, respectively, primarily
attributable to purchases of capital equipment for $2.5 million,
the acquisition of Ahead for $1.5 million and the repurchase of
1998 Debentures for $2.7 million.

Capital expenditures during fiscal 1996, excluding assets
acquired as a result of the OMI Asset Acquisition, are expected
to approximate $4.4 million. The majority of these expenditures
will be for facilities improvements, as well as for computer and
laboratory-related equipment, which will be required to support
the Company's growth.

Working capital as of December 31, 1995 was $40.6 million,
as compared to $20.3 million at March 31, 1995. The increase was
primarily due to higher cash balances resulting from the
Debenture Offering. Net proceeds from the Debenture Offering
were used on February 16, 1996 to repurchase approximately $5.0
million in principal amount of outstanding 1998 Debentures, for
working capital requirements and for future acquisition-related
transactions. During the first quarter of fiscal 1996, the
Company obtained a $5.0 million unsecured line of credit from
NatWest Bank, in order to supplement its working capital needs.
This line of credit expired on December 31, 1995 and has not been
renewed. As of August 1995, the Company satisfied its $2.5
million sinking fund obligation under the 1998 Debentures.
Although the Company continues to seek acquisition opportunities
consistent with its business strategy and is engaged in
discussions regarding potential acquisitions, the Company does
not currently have any agreement or understanding regarding any
potential acquisition. The Company believes that its current
working capital position is sufficient to support operational
needs as well as its near-term business objectives.

Accounts Receivable and Inventories. Accounts receivable
increased approximately $3.2 million in the nine-month period
ended December 31, 1995, primarily resulting from increased
billings associated with certain contracts and, to a lesser
extent, from the OMI Asset Acquisition. Accounts receivable were
approximately $17.4 million at March 31, 1995, an increase of
$1.9 million from the balance at March 31, 1994. This increase
was primarily attributable to significant shipments on several
contracts which occurred toward the end of the fiscal year. The
Company receives progress payments on certain contracts from the
U.S. Government of between 80-100% of allowable costs incurred.
The remainder, including profits and incentive fees, is billed to
its customers based upon delivery and final acceptance of all
products. In addition, the Company may bill its customers based
upon units delivered. Generally, there are no contract
provisions for retainage, and all accounts receivable are
expected to be collected within one year.

Inventories increased by approximately $4.8 million during
the first nine months of fiscal 1996, primarily due to increased
material procurement related to higher production activity on
certain display workstation programs. The increase in
inventories was also due, in part, to the OMI Asset Acquisition.
The net inventory balance at March 31, 1995 was $11.7 million, an
increase of $6.7 million from the balance at March 31, 1994. As
mentioned previously, the Company experienced a build-up in
inventory during fiscal 1995 in preparation for production and
shipment on several major development contracts. In addition,
the terms of certain production contracts in process during
fiscal 1995, specifically those with foreign governments, did not
provide for progress billings. In such cases, the Company is
required to fund the cost of inventory until such time as
shipments are made.

Long-Term Debt. Long-term debt outstanding increased by
approximately $23.6 million during the nine-month period ended
December 31, 1995 to $35.3 million, primarily due to the
Debenture Offering. Long-term debt outstanding decreased by
approximately $2.8 million during fiscal 1995. The reduction in
outstanding debt during fiscal 1995 was primarily attributable to
the $2.5 million mandatory sinking fund obligation on the 1998
Debentures, as well as the mandatory redemption of $.2 million in
principal amount on the Company's industrial revenue bonds (the
"Revenue Bonds") on January 1, 1995. The Company is subject to
annual redemptions on the Revenue Bonds through 1998. At
December 31, 1995 and March 31, 1995, the Company had
approximately $1.9 million in principal amount of Revenue Bonds
outstanding, subject to annual redemptions through 1998. The
principal amount of the Revenue Bonds to be redeemed varies each
year in accordance with the redemption schedule provided in the
indenture. Under the terms of the Revenue Bonds, the Company is
a guarantor under a letter of credit arrangement and has agreed
to certain financial covenants (see Note 6 of Notes to
Consolidated Financial Statements). The Company must realize a
certain level of profits during each quarter of fiscal 1996 to be
in compliance with these covenants.

Stockholders' Equity. Net stockholders' equity increased by
$2.4 million during the nine-month period ended December 31, 1995
to $24.9 million and increased by $2.8 million during fiscal 1995
to $22.5 million, primarily as a result of net earnings of $1.6
million and $2.6 million generated for the respective periods.

In July 1994, pursuant to a stock purchase agreement between
the Company and David E. Gross, its former President and Chief
Technical Officer, the Company purchased 659,220 shares of its
Class A Common Stock and 45,179 shares of its Class B Common
Stock owned by Mr. Gross, at a price of $4.125 and $4.00 per
share, respectively, totalling approximately $2.9 million in cash
(the "Buy-back"). On October 18, 1994, the Company filed a
registration statement on form S-2 and on November 10, 1994, the
Company filed Amendment No. 1 to such registration statement with
the SEC for the purpose of selling shares of its common stock
purchased in the Buy-back. The Company sold 650,000 shares of
its Class A Common Stock and 45,000 shares of its Class B Common
Stock, at prices of $4.125 and $4.00 per share, respectively,
totalling approximately $2.9 million pursuant to the offering.

Backlog. At December 31, 1995, the Company's backlog of
orders was approximately $147 million as compared to $126 million
at March 31, 1995. The increase in backlog for the first nine
months of the fiscal year was due to the net effect of bookings,
partially offset by revenues, and the addition of approximately
$16 million of backlog from the OMI Asset Acquisition. New
contract awards of approximately $71 million were booked during
the nine-month period ended December 28, 1995. As of January 28,
1996, backlog totalled approximately $147 million, including
approximately $16 million of backlog from the OMI Asset
Acquisition.

The Company closed fiscal 1995 with a funded backlog of
$126.0 million representing an $8.5 million decrease from backlog
at March 31, 1994. Included in the fiscal 1995 year-end backlog
is approximately $2.2 million of commercial orders. New business
awards during fiscal 1995 totalled approximately $61.4 million
and included approximately $5.8 million of new commercial orders.
Significant awards received during the year included $5.9 million
in contracts from the Naval Air Systems Command to produce
additional quantities of A/U36M-1(V) Weapons Boresight Equipment
for the Marine Corps' AH-1W Cobra helicopters, approximately $9.4
million from the Government Systems Group of Unisys Corporation
to provide portions of the AN/UYQ-70 Advanced Display System and
a $4.9 million contract with the U.S. Navy to provide Readiness
Trainer Systems for the Mobile In-shore Undersea Warfare System
Upgrade program. Contract awards for the Company's 8mm video
recorder products totalled approximately $5.4 million and
included a $3.1 million award from the Naval Air Systems Command
to equip the U.S. Navy's F/A-18 Hornet carrier-based aircraft
with WRR-818 8mm video recorders. The Company also received
funding under a $12.5 million not-to-exceed contract from
Lockheed Aeronautical Systems Company to provide engineering
services and modified AN/USH-42 Mission Recording Systems for
deployment on the U.S. Navy's S-3B Viking carrier-based jet
aircraft, as well as additional funding under a multi-year
contract with the U.S. Navy, initially received in fiscal 1994,
to provide combat-system display consoles for land-based
applications.

Approximately 84%, 94% and 83% of revenues in fiscal 1995,
1994 and 1993, respectively, were derived directly or indirectly
from contracts or subcontracts with the U.S. Government,
principally the U.S. Navy. Included in revenues for fiscal 1995,
1994 and 1993 were $18.8 million, $27.5 million and $19.2
million, respectively, of customer-sponsored research and
development, which were the result of contract agreements
directly or indirectly with the U.S. Government.

The Debenture Offering. On September 29, 1995 (the
"Debenture Closing Date"), the Company issued $20,000,000 in
aggregate principal amount of the Debentures pursuant to the
Debenture Offering. Net proceeds from the private placement of
these Debentures were approximately $19,000,000. On November 3,
1995, the Company issued an additional $5,000,000 in aggregate
principal amount of the Debentures, upon exercise of the over-
allotment option pursuant to the Purchase Agreement between the
Company and the Initial Purchaser, dated September 22, 1995. Net
proceeds from the exercise of the over-allotment option were
approximately $4,750,000. Pursuant to the related Registration
Rights Agreement dated September 22, 1995 between the Company and
the Initial Purchaser, acting on behalf of holders of the
Debentures (the "Registration Rights Agreement"), the Company has
agreed to file, within ninety (90) days after the Debenture
Closing Date, a shelf registration statement relating to the
Debentures and the shares of Class A Common Stock which are
issuable from time to time upon conversion of the Debentures, and
to cause the shelf registration statement to become effective
within one hundred fifty (150) days after the Debenture Closing
Date. In addition, the Company has agreed to use its reasonable
best efforts to keep the shelf registration statement effective
until at least the third anniversary of the issuance of the
Debentures. The Company has filed a registration statement on
Form S-1 of which this Prospectus is a part in compliance with
its obligation under the Registration Rights Agreement to file a
shelf registration statement. In connection with these
transactions, the Company expects to incur approximately $500,000
of professional fees and other costs. These costs, together with
the Initial Purchaser's commissions in connection with the
Debenture Offering, will be amortized ratably through the
maturity date of the Debentures. See "Description of the
Debentures."

Letter of Credit. The Company's Revenue Bonds are supported
by an irrevocable, direct-pay letter of credit in an amount equal
to the principal balance plus interest thereon for 45 days. At
December 31, 1995, the contingent liability of the Company as
guarantor under the letter of credit was approximately
$1,930,000. The Company has collateralized the letter of credit
with accounts receivable and has also agreed to certain financial
covenants, including the maintenance of: (i) a certain minimum
ratio of consolidated tangible net worth to total debt (the "Debt
Ratio"), (ii) a certain minimum quarterly ratio of earnings
before interest and taxes to interest (the "Interest Ratio"), and
(iii) a certain minimum balance of billed and unbilled accounts
receivable ("Eligible Receivables"). At December 31, 1995, the
covenants required: (i) a Debt Ratio of 0.6:1, (ii) an Interest
Ratio of 1.5:1 and (iii) Eligible Receivables of $2,500,000. As
a result of the issuance of $25,000,000 aggregate principal
amount of the Debentures, the Debt Ratio at December 31, 1995 was
0.4:1. The Company has obtained a waiver, renewable quarterly,
from the bank of the required debt ratio and is in compliance
with all covenants under the letter of credit.

Contingencies. The books and records of the Company are
subject to audit and post-award review by the Defense Contract
Audit Agency. The Company is not a party to any legal
proceedings with the U.S. Government.

Certain Agreements. Effective July 20, 1994, the Company
entered into an Employment, Non-Competition and Termination
Agreement (the "Gross Agreement") and a Stock Purchase Agreement
(the "Gross Stock Purchase Agreement") with David E. Gross, its
former President and Chief Technical Officer. Under the terms of
the Gross Agreement, Mr. Gross will receive a total of $600,000
over a five-year period as compensation for his services pursuant
to a five-year consulting arrangement with the Company and a
total of $750,000 over a five-year period as consideration for a
five-year non-compete arrangement. The payments will be charged
to expense over the term of the Gross Agreement as services are
performed and obligations are fulfilled by Mr. Gross. Mr. Gross
will also receive at the conclusion of such initial five-year
period, an aggregate of approximately $1.3 million payable over a
nine-year period as deferred compensation. The net present value
of the payments to be made to Mr. Gross pursuant to the deferred
compensation portion of the Gross Agreement approximated the
amount of the Company's previous deferred compensation
arrangement with Mr. Gross. In addition to the Buy-back, the
Gross Stock Purchase Agreement also provides that (i) the Company
has a right of first refusal with respect to the sale by Mr.
Gross of any of the remaining shares of common stock of the
Company held by Mr. Gross in excess of 20,000 shares, (ii) any
shares of common stock of the Company held by Mr. Gross must be
voted pro rata in accordance with the vote of the Company's other
stockholders and (iii) in the event of a change in control of the
Company within three years from the date of the Gross Stock
Purchase Agreement, Mr. Gross will receive a percentage of the
difference between the price per share paid to Mr. Gross pursuant
to the Buy-back and the price per share received by the
stockholders of the Company pursuant to the change of control
transaction, less an interest factor, as defined in the Gross
Stock Purchase Agreement, on the aggregate amount paid to Mr.
Gross pursuant to the Buy-back.

The Company is currently negotiating an employment, non-
competition and retirement agreement (the "Newman Agreement")
between the Company and Leonard Newman, its former Chairman of
the Board and Secretary of the Company. Pursuant to the Newman
Agreement, it is expected that Mr. Newman will receive certain
compensation from the Company over a five-year period for
consulting services and a non-compete arrangement. In addition,
Mr. Newman will receive certain retirement benefits payable over
a ten-year period at the conclusion of such initial five-year
period. Results of operations for fiscal 1995 reflect a charge
of $1.5 million representing the estimated net present value of
the Company's obligation under the Newman Agreement. The
corresponding amount was included in Other Liabilities in the
Consolidated Balance Sheet at March 31, 1995 as an addition to
the accrual which had been established to cover the Company's
liability to Mr. Newman under a previous deferred compensation
arrangement.

Inflation. The Company has experienced the effects of
inflation through increased costs of labor, services and raw
materials. Although a majority of the Company's revenues are
derived from long-term contracts, the selling prices of such
contracts generally reflect estimated costs to be incurred in the
applicable future periods.

ACCOUNTING STANDARDS

Income Taxes. In February 1992, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. 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. Under SFAS
109, 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.

Effective April 1, 1993, the Company adopted SFAS 109.
Until March 31, 1993, the Company used the asset and liability
method of accounting for income taxes, as set forth in Statement
of Financial Accounting Standards No. 96, "Accounting for Income
Taxes" ("SFAS 96"). Under SFAS 96, deferred income taxes are
recognized by applying statutory tax rates to the difference
between the financial statement carrying amounts and tax bases of
assets and liabilities. The statutory tax rates applied are
those applicable to the years in which the differences are
expected to reverse. The cumulative effect of adopting SFAS 109
was not material to the Company's consolidated results of
operations or financial position.

Postretirement Benefits Other Than Pensions. In December
1990, the FASB issued Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106"). The Company adopted SFAS 106 during
the first quarter of fiscal 1994, and its adoption did not have a
material impact on the Company's consolidated results of
operations or financial position.

Postemployment Benefits. In November 1992, the FASB issued
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("SFAS 112"). The
Company adopted SFAS 112 during the first quarter of fiscal 1995,
and its adoption did not have a material impact on the Company's
consolidated results of operations or financial position.

ACQUISITIONS AND RELATED ACTIVITIES

On October 1, 1993, the Company acquired, through TAS
Acquisition Corp., a wholly-owned subsidiary of the Company, a
95.7% equity interest in TAS, a Maryland corporation, pursuant to
a stock purchase agreement (the "TAS Agreement") dated as of
August 6, 1993. TAS, headquartered in Gaithersburg, Maryland,
was a privately-held company incorporated in early 1991. Under
the terms of the TAS Agreement, the Company paid $15.10 in cash
for a total of 97,317 issued and outstanding shares of common
stock, par value $.01 per share, of TAS. The price paid by the
Company for the shares of TAS common stock was obtained from the
Company's working capital. On September 30, 1993, the Company,
in anticipation of the acquisition, advanced $1.8 million to TAS
pursuant to a demand promissory note. Such advance was converted
to an intercompany liability on the date of the acquisition and
was eliminated in consolidation. On November 1, 1993, Articles
of Merger were filed in order to merge TAS into TAS Acquisition
Corp. The name TAS Acquisition Corp. was changed to Technology
Applications & Service Company.

The acquisition has been accounted for using the purchase
method of accounting. The excess of cost over the estimated fair
value of net assets acquired was approximately $.4 million and
will be amortized on a straight-line basis over 30 years, or
$14,000 annually.

On December 13, 1993, the Company, through its wholly-owned
subsidiary, DRSSMC, entered into a partnership with Laurel
Technologies, Inc. of Johnstown, Pennsylvania. Pursuant to a
Joint Venture Agreement dated November 3, 1993 and a Partnership
Agreement dated December 13, 1993, between DRSSMC and Laurel
Technologies, Inc., Laurel was formed for the purposes of
electronic cable and harness manufacturing, military-quality
circuit card assembly and other related activities. The
Company's contribution to Laurel consisted of cash, notes and
equipment valued at approximately $.6 million, representing an
80% controlling interest in Laurel. As a result, the financial
position and results of operations of Laurel since December 13,
1993 have been consolidated with those of the Company's. The
related minority interest in Laurel has been included in "Other
Liabilities" and "Other Income, Net," respectively, in the
Company's consolidated financial statements for the period ended
March 31, 1995 and 1994.

Also during December 1993, the Company acquired certain
assets of CMC, located in Santa Clara, California, for
approximately $.4 million. CMC primarily refurbishes magnetic
video recording rotary-head scanner assemblies for post-
production facilities and television broadcast stations
worldwide. This acquisition provides the Company with a key
customer base in the commercial video recording systems industry.

On November 17, 1994, the Company acquired, through a
wholly-owned subsidiary of Precision Echo ("Precision
Acquisition"), the net assets of Ahead, pursuant to an asset
purchase agreement (the "Ahead Asset Purchase Agreement"), dated
October 28, 1994. Under the terms of the Ahead Asset Purchase
Agreement, Precision Acquisition paid, on the date of
acquisition, approximately $1.1 million for the net assets of
Ahead. In addition, Precision Acquisition entered into a
Covenant and Agreement Not to Compete (the "Covenant"), dated
October 28, 1994, with the chairman of the board of Ahead. Under
the terms of the Covenant Agreement, the total cash consideration
to be paid by Precision Acquisition consisted of approximately
$.4 million payable at the acquisition date, and an additional
$.5 million, payable in equal monthly installments over a period
of five years from the acquisition date.

The acquisition has been accounted for using the purchase
method of accounting and, therefore, Ahead's financial statements
are included in the consolidated financial statements of the
Company from the date of acquisition. The excess of cost over
the estimated fair value of net assets acquired was approximately
$.9 million and will be amortized on a straight-line basis over 5
years, or approximately $.2 million annually. The acquisition
had no significant effect on the Company's consolidated financial
position or results of operations.

On July 5, 1995 (the "OMI Closing Date"), Photronics Corp.,
a New York corporation and a wholly-owned subsidiary of the
Company ("Photronics Corp."), acquired (through OMI, a Delaware
corporation and a wholly-owned subsidiary of Photronics Corp.),
substantially all of the assets of Opto Mechanik, Inc. ("Opto"),
a Delaware corporation, pursuant to an Agreement for Acquisition
of Assets dated May 24, 1995, as amended July 5, 1995, between
Photronics Corp. and Opto (the "OMI Agreement"), and approved by
the United States Bankruptcy Court for the Middle District of
Florida on June 23, 1995. OMI, now located in Palm Bay, Florida,
designs and manufactures electro-optical sighting and targeting
systems used primarily in military fire control devices and in
various weapons systems.

Pursuant to the OMI Agreement, the Company paid a total of
$5,450,000 consisting of (i) $1,150,000 in cash to PNC Bank,
Kentucky, Inc. ("PNC"), (ii) a note to PNC in the principal
amount of $1,450,000 payable in forty eight (48) equal monthly
installments of principal and interest commencing with the first
day of the month subsequent to the OMI Closing Date (the "PNC
Note"), (iii) $2,550,000 in cash to MetLife Capital Corporation
and (iv) a note in the principal amount of $300,000 to Opto
payable in six (6) equal monthly installments of principal and
interest commencing on August 5, 1995 (the "Opto Note"). The PNC
Note bears interest at a floating rate equal to the lesser of (i)
PNC's stated prime interest rate plus 0.5% or (ii) the prime rate
as reported by the Wall Street Journal plus 0.5%. The Opto Note
bears interest at a rate of 9.5% per annum. Professional fees
and other costs associated with the acquisition were capitalized
as part of the total purchase price. Total cash consideration
paid in the acquisition was obtained from the Company's working
capital.

The acquisition of the assets of Opto has been accounted for
under the purchase method. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the
assets acquired and the liabilities assumed. The fair value of
the assets acquired represented slightly less than 10% of the
total assets of the Company as of March 31, 1995.

Prior to the asset acquisition, on October 11, 1994, Opto
filed a petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. For the twelve months ended March 31, 1995,
Opto had revenues of approximately $13.9 million and an operating
loss of approximately $6.6 million, primarily attributable to
excessive labor and overhead costs, which the Company believes
caused significant cost overruns on substantially all of Opto's
contracts.

The operating results of OMI, the acquiring corporation,
have been included in the Company's reported operating results
since the date of acquisition. For the period from the date of
acquisition to December 31, 1995, revenues generated in respect
of the assets acquired constituted approximately 10% of the
consolidated revenues of the Company for that period. These
assets were operated at a modest profit, which was less than 10%
of the consolidated operating income of the Company for such
period. Interest expense for such period incurred in connection
with the acquired assets was immaterial to the Company's
consolidated results of operations. At the present time, there
is no single contract being performed or to be performed with the
acquired assets which is expected to significantly affect the
Company's operating results in the foreseeable future. The
business currently being conducted with such assets is subject to
risks and uncertainties similar to those of the Company as a
whole. See "Risk Factors" and "Business -- Industry
Consolidation."

Since the asset acquisition, the Company has relocated a
portion of the Electro-Optical Systems Group's manufacturing
operations from Hauppauge, New York to OMI's new location in Palm
Bay, Florida. The Company expects to realize certain cost
benefits and other efficiencies as a result of this
consolidation. See "The Company -- Company Organization" and
Business -- Strategy."

On February 6, 1996, pursuant to a Joint Venture Agreement,
dated February 6, 1996, by and among DRS/MS, Inc. ("DRS/MS"), a
wholly-owned subsidiary of the Company, Universal Sonics
Corporation ("Universal Sonics"), a New Jersey corporation, Ron
Hadani, Howard Fidel and Thomas S. Soulos, and a Partnership
Agreement, dated February 6, 1996, by and between DRS/MS and
Universal Sonics, the Company entered into a partnership with
Universal Sonics (the "Partnership") for the purpose of
developing, manufacturing and marketing medical ultrasound
imaging equipment. The Company's contribution to the Partnership
consisted of $400,000 in cash and certain managerial expertise
and manufacturing capabilities, representing a 90% interest in
the Partnership.

On February 9, 1996, Precision Echo acquired (through Ahead
Technology Acquisition Corporation ("Ahead Acquisition"), a
Delaware corporation and a wholly-owned subsidiary of Precision
Echo), certain assets and assumed certain liabilities
(principally, obligations under property leases) of Mag-Head
Engineering Company, Inc. ("Mag-Head"), a Minnesota corporation,
pursuant to an Asset Purchase Agreement, dated as of February 9,
1996, by and among Mag-Head and Ahead Acquisition for
approximately $400,000 in cash. Mag-Head produces audio and
flight recorder heads.

BUSINESS

GENERAL

STRATEGY

* expanding and diversifying the Company's
technology and product base into complementary
military and commercial markets primarily through
acquisitions and the forging of strategic
relationships;

* increasing revenue opportunities through the
design and adaptation of products for use by all
branches of the military; and

* enhancing financial performance through specific
cost reduction measures and increased
manufacturing efficiencies.

The implementation of these strategies has resulted in
increasing revenues and profits over the last three fiscal years.
Although the Company experienced operating losses in fiscal 1990
through 1992, primarily due to cost overruns on a single fixed-
price development contract, a shift over the last several years
in the nature of military development contracting from fixed-
price to cost-type contracts has reduced the Company's exposure
in this area. For the fiscal year ended March 31, 1995, the
Company had revenues of $69.9 million, net income of $2.6 million
and earnings per share of $.50, representing increases of 20.9%,
61.2% and 66.7%, respectively, compared with the year ended March
31, 1994. For the nine months ended December 31, 1995, the
Company had revenues of $65.6 million, net income of $2.5 million
and fully diluted earnings per share of $.44, representing
increases of 38.4%, 45.7% and 29.4%, respectively, compared with
the same nine-month period ended December 31, 1994.

Acquisitions. In October 1993 the Company acquired TAS, a
designer and supplier of advanced command and control software
and hardware. TAS' business, which focuses primarily on radar
displays, augments the Company's core expertise in sonar signal
processing, allowing the Company to offer complete command and
control system solutions to its naval customers. In December
1993, the Company purchased its 80% interest in Laurel, then
primarily an assembler of wire harness products for aerospace
customers. The addition of Laurel has provided the Company with
the opportunity to consolidate manufacturing operations at ESG
and enables the Company to solicit and bid effectively for long-
term system development and manufacturing contracts.

The Company acquired CMC in December 1993 and Ahead in
November 1994. These acquisitions provide the Company with an
established computer and recorder products commercial base,
provide advanced manufacturing capabilities in the area of
magnetic recorder heads and allow the Company to apply its
expertise in high technology recorder products to select
commercial markets. In July 1995, the Company acquired
substantially all of the assets that now constitute OMI. This
acquisition enables EOSG to expand its electro-optical targeting
products and manufacturing activities in a lower cost
manufacturing facility, adds backlog in complementary product
areas and allows for expansion of the MPBE program.

Strategic Relationships. The Company has established
relationships with other defense suppliers such as Loral
Corporation and Westinghouse Electric Corporation, among others.
The Company acts as a subcontractor to these major contractors
and may also engage in other development work with such
contractors. This enables the Company to diversify its program
base and increase its opportunities to participate in larger
military procurement programs.

Adaptable Product Designs. The Company's recent focus has
been on the design and development of products that can be used
by all branches of the military. This enables the Company to
increase revenues, reduce product costs and decrease reliance on
U.S. Navy procurement programs. The Company's systems,
originally designed under a U.S. Navy development contract, are
open architecture information processing workstations that can be
applied for use in other branches of the military. Similarly,
the Company's boresight products, originally designed for use
with the U.S. Army's Apache attack helicopter, were specifically
designed to be adaptable to other air, sea or land-based weapons
platforms. The boresight system has been successfully applied to
the U.S. Marine Corps' Cobra helicopter and proposals have been
submitted for its use on F-15 and C-130 fixed-wing platforms.

Cost Reduction Programs. During the last three fiscal
years, the Company has streamlined personnel levels, decreased
rent expenses through facility consolidation and acquired low-
cost manufacturing operations. The Company is also utilizing more
efficient manufacturing methods on several projects that are set
to enter full-scale production in fiscal 1996.

COMMERCIAL-OFF-THE-SHELF (COTS) PRODUCT DESIGNS

The concept of designing and manufacturing military products
and systems through the integration and adaptation of existing
commercial and military products was developed in response to
both decreasing military budgets and the increasing pace of
technology. Management believes that the adaptation of
available commercial components and existing military systems to
new military applications offers two primary advantages over
traditional military systems development and procurement cycles:
(i) it has the potential to save significant amounts of time and
expenditures in the area of research and development and (ii) as
commercial product development and production cycles become
shorter than their military equivalents, the adaptation of
commercial technology to battlefield systems has the potential to
shorten military product cycles. As a result of some of these
advantages, the use of COTS computer hardware and software that
can be integrated in common (open architecture) applications and
systems was mandated by the Joint Chiefs of Staff in 1992.

COTS entails the purchasing, refitting, upgrading and
"ruggedization" (repackaging, remounting and stress- testing to
withstand harsh military operating environments) of available
commercial components. Application of the COTS concept to
electronic systems includes open architecture designs and the
customization of software for increased flexibility, performance
and compatibility with existing and future systems. The Company
strives to apply a COTS design to most new product designs at
ESG, EOSG and MTG. For example, the combination of COTS
components integrated in an open architecture design allows ESG
to provide products compatible with existing systems and which
provide improved performance and the ability to upgrade systems
at significant cost savings versus the previous generation
military systems they are intended to replace.

MARKET OVERVIEW

According to a recent Electronics Industry Association
survey (reportedly based on extensive audits, surveys and
interviews of Department of Defense and Congressional records and
personnel), U.S. military expenditures for electronics and
related equipment were $37 billion in 1994 and are projected to
grow slowly over the next decade. The Company believes that the
market for military electronics and related equipment will grow
slowly in coming years due to two primary factors:

First, the nature of modern warfare dictates increasing
reliance on timely and accurate battlefield information to ensure
that increasingly costly assets are efficiently deployed and to
minimize destruction of nonmilitary targets. In general,
military engagements have evolved from large-scale undertakings,
where numerical superiority was the key to dominance, to
"surgical strikes" where the ability to observe and strike
accurately and at will from afar has become a major means of both
deterrence and loss minimization. Advanced technology has been a
major factor enabling the increasing precision strike capability
of the U.S. military and has increased the "per shot" cost of
arms. These factors combine to produce a military, economic and
political environment requiring increased weapons efficiency and
accuracy. In addition, real time data is needed for in-theatre
evaluation, damage assessment and training, as well as to reduce
and minimize incidents of U.S. casualties due to friendly fire.

Second, it is often more cost-effective to refit and upgrade
existing weapons platforms than to replace them. With the
development and unit costs of new platforms increasing rapidly
amid a political and economic environment demanding decreasing
overall military expenditures, Congress and the military have
delayed or canceled the implementation of many proposed weapons
systems, opting instead to improve the performance, and extend
the life, of existing weapons through improved battlefield
intelligence and equipment enhancements. This increasing focus
on cost efficiencies has manifested itself in the military's COTS
program.

INDUSTRY CONSOLIDATION

As the size of the overall defense industry has decreased in
recent years, there has been an increase in the number of
consolidations and mergers of defense suppliers and this trend is
expected to continue. As the industry consolidates, the large
(first-tier) defense contractors are narrowing their supplier
base and awarding increasing portions of projects to strategic second-
and third-tier suppliers, and in the process becoming oriented
more toward system integration and assembly.

As an example of the changing nature of supplier
relationships, Photronics Corp. has been awarded increasing
content in the infrared detector assemblies of several missile
systems by its prime contractors. In 1988, Photronics Corp.
supplied only the primary mirror for these systems. Photronics
Corp. now supplies the primary, secondary, tertiary and fold
mirrors, as well as the housing and nose domes for the missiles,
and is working directly with these prime contractors on the
electro-optical assemblies for the next generation missiles.

COMPANY ORGANIZATION AND PRODUCTS

ELECTRONIC SYSTEMS GROUP ("ESG")

ESG consists of DRS Military Systems ("Military Systems"),
located in Oakland, New Jersey, TAS, located in Gaithersburg,
Maryland, and Laurel, located in Johnstown, Pennsylvania. Also,
under the direction of TAS is Technical Services Division
("TSD"), located in Norfolk, Virginia and San Diego, California.

Military Systems designs, manufactures and markets signal
processors and display workstations which are installed on naval
ships for antisubmarine warfare (ASW) purposes and in land-based
surveillance systems used for underwater surveillance of harbors
and coastal locations. These workstations receive signals from
a variety of sonar-type sensors, processing the information and
arranging it in a display format enabling operators to quickly
interpret the data and inform command personnel of potential
threats. Major product lines and contracts include:

* AN/UYQ-65: The AN/UYQ-65 is the first COTS-based
tactical workstation to be qualified by the U.S. Navy
and was designed to comply with the stringent
requirements of the Aegis (DDG-51) shipbuilding
program. Replacing the sensor displays in the SQQ-89
ASW Combat Suite, it employs dual processors enabling
simultaneous I/O and graphics processing. This new
approach allows for required high bandwidth processing
while maintaining response times for operator/machine
interfaces. The system architecture can be adapted to
meet various interface, cooling, memory, storage and
processing requirements. See "Risk Factors -- Limited
Term of Contracts."

* AN/SQR-17A(V)3: These Mobile In-Shore Undersea Warfare
(MIUW) systems are deployed in land-based vans,
utilizing sonobuoys and anchored passive detectors for
harbor defense, coastal defense and amphibious
operations surveillance, as well as to enhance drug
interdiction efforts. This system is currently being
procured for utilization in 22 field installations.
Military Systems is under contract to provide various
upgrades to these field installations.

* AN/SQQ-TIA: These are portable training systems used
onboard MIUW vans to simulate actual sonar signal
processing sets currently used by the U.S. Navy and are
employed primarily for Navy Reserve training.

TAS produces tactical (e.g., combat/attack) information
systems and training systems. Major product lines and contracts
include:

* AN/UYQ-70: The AN/UYQ-70 is an advanced, open
architecture display system designed for widespread
application through software modification, and is to be
deployed on Aegis and other surface ships, submarines
and airborne platforms. This system was developed for
the U.S. Navy under subcontract with the Government
Systems Group of Loral (Unisys) Corporation. The
AN/UYQ-70 is a self-contained, microprocessor-based
unit complete with mainframe interface software
offering advanced computing and graphic capabilities.
These units replace previous generation units that are
dependent upon a shipboard mainframe computer at
approximately 25% of the cost of the older units. This
project is currently in the pre-production phase.
Based upon the size of the naval surface fleet and the
average number of workstations to be deployed on each
ship, the Company believes that the potential market
for this workstation product may be in excess of 5,000
units over the next decade.

* Military Display Emulators: These are workstations
that are functionally identical to existing U.S. Navy
Mil-spec shipboard display consoles, but are built with
low cost COTS components suitable for landbased
laboratory environments. These Military Display
Emulators are used in U.S. Navy development, test and
training sites as plug compatible replacements for the
more expensive shipboard qualified units. The Company
is currently delivering these Military Display
Emulators for use in the Aegis and other U.S. Navy
programs.

Laurel, which is 80% owned by DRS through a partnership with
Laurel Technologies, Inc., and was purchased in December 1993,
functions as a low-cost manufacturing facility and focuses on two
areas. First, Laurel provides manufacturing and product
integration services for Military Systems and TAS. ESG's
workstation and simulator systems, among other products, are
manufactured in this facility. Second, Laurel manufactures
complex cable and wire harness assemblies for large industrial
customers that are involved in the military and commercial
aerospace industry. These products are then installed by the
customers in a wide variety of rotary blade and fixed-wing aerial
platforms.

TSD performs field service and depot level repairs for ESG
products, as well as other manufacturers' systems. Principal
locations are in close proximity to U.S. Naval yards in Norfolk,
Virginia and San Diego, California. Services including equipment
and field change installation, configuration audit, repair,
testing and maintenance, are performed for the U.S. Navy and, to
a lesser extent, commercial customers. TSD has also performed
work for foreign navies including those of Australia, the
Republic of China, Egypt, Turkey and Greece.

MEDIA TECHNOLOGY GROUP ("MTG")

MTG consists of Precision Echo, Inc. ("PE") located in Santa
Clara, California, Ahead located in Los Gatos, California and CMC
located in Santa Clara, California. PE manufactures a variety of
digital and analog recording systems utilized for military
applications including reconnaissance, ASW and other information
warfare data storage requirements, and is a predominant U.S.
manufacturer of 8 millimeter military recorders supplied to the
U.S. armed forces. PE's products include:

* AN/USH-42: This system was originally developed for
deployment in the U.S. Navy's A-6E attack aircraft. PE
is currently under contract to modify the USH-42 for
use on the Navy's S-3B ASW aircraft to record radar,
infrared, bus, navigation and voice data.

* WRR-818: This ruggedized video recorder, uses certain
components from commercial video recording equipment,
has been selected for use in U.S. F/A-18 aircraft and
several foreign military aircraft. It has also been
selected by the U.S. Army for use in its Kiowa warrior
reconnaissance helicopters. A similar recorder, the
WRR-812, has been adapted for use in the Canadian
Army's light armored reconnaissance vehicles.

* AN/AQH-9 and AN/AQH-12: These products are high-
quality helicopter mission recording systems utilized
to record sonar and mine hunting information and other
intelligence data.

Ahead manufactures burnish, glide and test heads used in the
production of computer disk drives. These consumable products
are used by many U.S. disk drive manufacturers to hone the
surface and ensure the quality of magnetic disks used in computer
hard drives. Customers include Seagate, Conner, Quantum, Komag,
Store Media, Akashic and Western Digital.

CMC manufactures and refurbishes commercial video recording
products for broadcasters operating world-wide. CMC can
refurbish pre-1993 head assemblies located on these machines at a
significant cost savings compared to replacement. CMC is
developing, in conjunction with Ahead, the ability to refurbish
post-1993 recorders used by its customer base. Ahead also has
the capability to manufacture recording heads for CMC. In order
to foster operational synergies and to allow space for growth,
Ahead and CMC will be moving into a new joint facility in late
calendar 1995.

ELECTRO-OPTICAL SYSTEMS GROUP ("EOSG")

EOSG consists of Photronics Corp. located in Hauppauge, New
York and OMI located in Melbourne, Florida.

Photronics Corp. produces boresighting equipment (used to
align and harmonize rotary-wing aircrafts', and armored vehicles'
navigation, targeting, and weapon systems, as well as pilots'
helmet sighting system) and electro-optical components used in
Sidewinder, Stinger and new generation air-to-air and surface-to-
air missiles. Photronics Corp. has specialized coating and
manufacturing processes for primary mirrors used in missiles,
giving the company a competitive advantage. Photronics Corp.'s
primary lines include:

* Multiple Platform Boresight Equipment (MPBE): These
products can be used on both rotary and fixed-wing
aircraft, as well as armored vehicles. MPBE is
currently used on the Army's Apache helicopters and
Apache Longbow helicopters and the Marine Corps' Cobra
helicopters. Proposals have been submitted to employ
the system on the C-130 transport and the F-15 fighter.
This technology is proprietary to the Company.

* Missile Components: The components produced by
Photronics Corp. originally consisted of primary
mirrors used in the nose-mounted infrared seeker of
Sidewinder and Stinger missiles. Photronics Corp.'s
development efforts have resulted in its ability to
provide increased content to include the secondary,
tertiary and fold mirrors, housing and nose dome.
Photronics Corp. is currently under contract to produce
infrared components and subassemblies on many of the
next generation infrared missile systems.

Photronics Corp. has produced all major electro-optical
components such as MPBE and missile products in Hauppauge since
1986. In July 1995, DRS acquired substantially all of the assets
of Opto previously located in Melbourne, Florida through OMI.
In order to reduce its production costs, Photronics Corp.
consolidated a portion of its manufacturing operations to OMI's
new facility in Palm Bay, Florida. In addition, the move will
create space for the expansion of Photronics Corp.'s MPBE
programs in Hauppauge. Primary product programs at OMI include:

* Gunners Auxiliary Sight: This is an electro-optical
device used as a primary or backup sight on M1 Abrams
battle tanks and contains a very sophisticated electro-
optical train and a laser protective filter. OMI has
produced over 2,000 of these instruments and continues
to operate as a repair and retrofit facility for the
M1A2 upgrade program, which will continue through 1997,
with options through 1999.

* TOW Optical Sight: OMI is currently the only U.S.
qualified producer of this device. This complex
electro-optical system is the main component of the
U.S.'s premier anti-tank weapon system.

* TOW Traversing Unit: This unit provides target
tracking accuracy for the TOW anti-tank weapon, acting
as the mount for the TOW Optical Sight and the missile
launch tube. OMI is currently the only qualified
manufacturer of this tightly toleranced assembly, and
is currently working on modification and retrofit
programs. OMI has also been contracted to modify a
version for use by an overseas customer.

* Day/Night Tank Sighting System: This system was
developed in concert with a major primary contractor.
OMI is a major subcontractor, currently supplying three
of the major assemblies.

* Eyesafe Laser Rangefinder: OMI competed against the
U.S. Army's historical primary laser supplier for this
contract and was awarded an initial contract for
preproduction units.

* Improved TOW Acquisition System: Working with the same
primary contractor as referred to above, this antitank
system was developed for the U.S. Army's humvee
vehicle.

CUSTOMERS

A significant portion of the Company's products are sold to
agencies of the U.S. Government, primarily the Department of
Defense, to foreign government agencies or to prime contractors
or subcontractors thereof. Approximately 84%, 94% and 83% of
total consolidated revenues for fiscal 1995, 1994 and 1993,
respectively, were derived directly or indirectly from defense
contracts for end use by the U.S. Government and its agencies.
See "Export Sales" below for information concerning sales to
foreign governments.

BACKLOG

The following table sets forth the Company's backlog by
major product group (including enhancements, modifications and
related logistics support) at the dates indicated:

March 31, March 31, March 31,
1995 1994 1993

Government Products:

U.S. Government $115,200,000 $123,700,000 $123,900,000

Foreign Government 8,600,000 5,800,000 1,000,000

123,800,000 129,500,000 124,900,000

Commercial Products 2,200,000 5,100,000 1,200,000

$126,000,000 $134,600,000 $126,100,000

Approximately 54% of the backlog at March 31, 1995 is
expected to result in revenues during the fiscal year ending
March 31, 1996.

At December 31, 1995, the Company's backlog of orders was
approximately $147 million compared to $126 million at March 31,
1995. The increase in backlog for the first nine months of the
fiscal year was due to the net effect of bookings, partially
offset by revenues, and the addition of approximately $16 million
of backlog from the OMI Asset Acquisition. New contract awards
of approximately $71 million were booked during the nine-month
period ended December 31, 1995. As of January 28, 1996, backlog
totalled approximately $147 million, which includes approximately
$16 million of backlog from the OMI Asset Acquisition.

"Backlog" refers to the aggregate revenues remaining to be
earned at the specified date under contracts held by the Company,
including, for U.S. Government contracts, the extent of the
funded amounts thereunder which have been appropriated by
Congress and allotted to the contract by the procuring Government
agency. Fluctuations in backlog amounts relate principally to
the timing and amount of Government contract awards.

RESEARCH AND DEVELOPMENT

The military electronics industry is subject to rapid
technological changes and the Company's future success will
depend in large part upon its ability to improve existing product
lines and to develop new products and technologies in the same or
related fields. Thus, the Company's technological expertise has
been an important factor in its growth. A portion of its
research and development activities has taken place in connection
with customer-sponsored research and development contracts. All
such customer-sponsored activities are the result of contracts
directly or indirectly with the U.S. Government. The Company
also invests in Company-sponsored research and development. Such
expenditures were $800,000, $500,000 and $500,000 for fiscal
1995, 1994 and 1993, respectively. Revenues recorded by the
Company for customer-sponsored research and development were
$18,800,000, $27,500,000 and $19,200,000 for fiscal 1995, 1994
and 1993, respectively.

CONTRACTS

The Company's 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. Because of their inherent
uncertainties and consequent cost overruns, development contracts
historically have been less profitable than production contracts.

Fixed-price contracts may provide for a firm-fixed price or
they may be fixed-price-incentive contracts. Under the firm-
fixed-price contracts, the Company agrees to perform for an
agreed-upon price and, accordingly, derives benefits from cost
savings, but bears the entire 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 the Company. However, if actual costs under such a contract
exceed estimated costs, excess costs are apportioned between the
customer and the Company up to a ceiling. The Company bears 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 the Company is committed to deliver without
regard to performance cost, cost-type contracts normally obligate
the Company to use its 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 the
Company's 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 the
Company is 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 formula are agreed upon when the contract is
negotiated. In the case of performance-based incentives, the
Company is 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, the Company is reimbursed for costs and receives a
fixed fee, which is negotiated and specified in the contract.
Such fees have statutory limits.

The percentages of revenues during fiscal 1995, 1994 and
1993 attributable to the Company's contracts by contract type
were as follows:

Year Ended March 31,

1995 1994 1993

Firm-fixed-price 74% 65% 88%

Fixed-price-incentive - 1% -

Cost-plus-incentive-fee 6% 17% 10%

Cost-plus-fixed-fee 20% 17% 2%

The increased percentage of cost-type contracts between
fiscal 1993 and fiscal 1995 reflects the U.S. Government's
increased use of cost-type development contracts, and the
continued predominance of fixed-price contracts reflects the fact
that production contracts comprise a significant portion of the
Company's U.S. Government contract portfolio.

The Company negotiates for and, generally, receives progress
payments from its customers of between 80-100% of allowable costs
incurred on the previously described contracts. Included in its
reported revenues are certain amounts which the Company has not
billed to customers. These amounts, approximately $7.9 million,
$5.9 million and $8.1 million as of March 31, 1995, 1994 and
1993, respectively, consist of costs and related profits, if any,
in excess of progress payments for contracts on which sales are
recognized on a percentage-of-completion basis.

Under generally accepted accounting principles, all U.S.
Government 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 ("FAR"),
incorporated by reference in U.S. Government contracts, provide
that Company-sponsored 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 FAR, have been excluded from
costs accumulated on U.S. Government contracts. Work-in-process
inventory included general and administrative costs (which
include Company-sponsored research and development costs) of $6.6
million and $3.8 million at March 31, 1995 and 1994,
respectively.

All domestic defense contracts and subcontracts to which the
Company is a party 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 contract performance for any subsequent year become
unavailable. In addition, if certain technical or other program
requirements are not met in the developmental phases of the
contract, then the follow-on production phase may not be
realized. Upon termination other than for a contractor's
default, the contractor normally is entitled to reimbursement for
allowable costs, but not necessarily all costs, and to an
allowance for the proportionate share of fees or earnings for the
work completed. Foreign defense contracts generally contain
comparable provisions relating to termination at the convenience
of the foreign government.

MARKETING

The Company's marketing activities are conducted by its
staff of marketing personnel and engineers. The Company's
domestic marketing approach begins with the development of
information concerning the present and future requirements of its
current and potential customers for defense electronics, as well
as those in the security and commercial communities serviced by
the Company's products. Such information is gathered in the
course of contract performance, research into the enhancement of
existing systems and inquiries into advances being made in
hardware and software development, and is then evaluated and
exchanged among marketing, research and engineering groups within
the Company to devise proposals responsive to the needs of
customers. The Company markets its products abroad through
independent marketing representatives.

COMPETITION

The military electronics defense industry is characterized
by rapid technological change. The Company's products are sold
in markets containing a number of competitors which are
substantially larger than the Company, devote substantially
greater resources to research and development and generally have
greater financial resources. Certain of such competitors are
also suppliers to the Company. 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. The
Company believes that it competes on the basis of the performance
of its products, its reputation for prompt and responsive
contract performance, and its accumulated technical knowledge and
expertise. The Company's future success will depend in large
part upon its ability to improve existing product lines and to
develop new products and technologies in the same or related
fields.

In the military sector, the Company competes with many
first- and second-tier defense contractors on the basis of
product performance, cost, overall value, delivery and
reputation.

PATENTS

The Company has patents on many of its recording products
and certain commercial products. The Company does not believe
patent protection to be significant to its current operations;
however, future programs may generate the need for patent
protection.

MANUFACTURING AND SUPPLIERS

The Company's manufacturing process for its products,
excluding optical products, consists primarily of the assembly of
purchased components and testing of the product at various stages
in the assembly process. Purchased components include integrated
circuits, circuit boards, sheet metal fabricated into cabinets,
resistors, capacitors, semiconductors and insulated wire and
cables. In addition, many of the Company's products use machined
castings and housings, motors and recording and reproducing
heads. Many of the purchased components have been fabricated to
Company designs and specifications. The manufacturing process
for the Company's optics products includes the grinding,
polishing and coating of various optical materials and machining
of metal components.

Although materials and purchased components generally are
available from a number of different suppliers, several suppliers
are the Company's 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. The Company has not
experienced significant production delays attributable to supply
shortages, but occasionally experiences procurement problems with
respect to certain components, such as semiconductors and
connectors. In addition, with respect to the Company's optical
products, certain exotic materials, such as germanium, zinc
sulfide and cobalt, may not always be readily available.

EXPORT SALES

The Company currently sells several of its products and
services in the international marketplace to countries such as
Canada, Germany, Australia and the Republic of China. Foreign
sales accounted for approximately 7%, 3% and 17% of the Company's
revenues in fiscal 1995, 1994 and 1993, respectively. Foreign
sales are derived under export licenses granted on a case-by-case
basis by the United States Department of State. The Company's
foreign contracts are generally payable in United States'
dollars.

EMPLOYEES

As of January 28, 1996, the Company employed 799 employees.
None of the Company's employees are represented by a labor union,
and the Company has experienced no work stoppages.

There is a continuing demand for qualified technical
personnel, and the Company believes that its future growth and
success will depend upon its ability to attract, train and retain
such personnel.

PROPERTIES

The Company leases approximately 6,000 square feet of office
space for its corporate headquarters in an office building at 5
Sylvan Way, Parsippany, New Jersey under a lease that expires in
fiscal 2001. The Company leases approximately 25,000 square feet
of space for administrative and engineering facilities at 138
Bauer Drive, Oakland, New Jersey. The Company leases the Oakland
building from LDR Realty Co., a partnership wholly-owned by
Leonard Newman and David E. Gross, under a lease which expires in
fiscal 1999. The Company believes that this lease was
consummated on terms no less favorable than those that could have
been obtained by the Company from an unrelated third party in a
transaction negotiated on an arms-length basis.

Precision Echo's engineering and principal operations are
located in a 55,000 square foot building at 3105 Patrick Henry
Drive, Santa Clara, California, under a lease which expires in
fiscal 2001. The operations of CMC and Ahead are conducted from
leased facilities in Santa Clara, California and Los Gatos,
California, respectively. These leased facilities, containing
71,000 square feet and 12,000 square feet, respectively, are
covered by leases, which, with respect to the CMC facility, is on
a month-to-month basis, and for the Ahead facility expires in
fiscal 1998. The operations of CMC and Ahead are currently in
the process of moving out of the facilities in Santa Clara and
Los Gatos and into a new facility in San Jose, California,
comprising 32,000 square feet pursuant to a five year lease
expiring in fiscal 2001.

Photronics Corp.'s principal and manufacturing facilities
are located in a 45,000 square foot building at 270 Motor
Parkway, Hauppauge, New York. The building, which is owned by
the Company, was built in 1983. See Note 10 to Consolidated
Financial Statements.

TAS leases 40,000 square feet in a building at 200
Professional Drive, Gaithersburg, Maryland that houses its
executive offices and principal engineering and manufacturing
facilities under a lease which expires in fiscal 2000. It also
conducts field service operations from locations in Virginia
Beach and Chesapeake, Virginia and National City, California.
These leased facilities, comprising 15,000 square feet, 20,000
square feet and 6,000 square feet, respectively, are covered by
leases, which, with respect to the Virginia locations, expire in
fiscal 1997, and for the California location, expires in fiscal
1999.

Laurel's manufacturing facilities and administrative offices
are located in a 29,000 square-foot building at 423 Walters
Avenue in Johnstown, Pennsylvania. The lease for this facility
expires in fiscal 1999. The Company also leases approximately
2,000 square feet of office space in Arlington, Virginia under a
lease which expires in fiscal 1998.

OMI leases 53,910 square feet in a building in Woodlake
Commerce Park, Palm Bay, Florida, for its operations and
administration offices. The related leases expire in fiscal
2006.

Total rent expense aggregated $2.5 million, $1.7 million,
$1.5 million and $1.9 million in fiscal 1995, 1994, 1993, and the
nine-month period ended December 31, 1995 (unaudited),
respectively.

ENVIRONMENTAL PROTECTION

The Company believes that its manufacturing operations and
properties are in material 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 the Company's earnings or competitive
position.

LEGAL PROCEEDINGS

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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names of the directors and executive officers of the
Company, their positions and offices with the Company, and their
ages are set forth below:

NAME POSITIONS WITH THE COMPANY AGE

Mark S. Newman . . Chairman of the Board, President, 46
Chief Executive Officer and
Director

Nancy R. Pitek . . Controller, Treasurer and 39
Secretary

Paul G. Casner, Jr. Vice President; President of DRS 58
Electronic Systems Group;
President of TAS

Stuart F. Platt . . Vice President and Director; 62
President of Precision Echo

Richard Ross . . . Vice President; President of 41
Photronics Corp.
Leonard Newman . . Director and Chairman Emeritus 71

Jack Rachleff . . . Director 82

Theodore Cohn . . . Director 72

Mark N. Kaplan . . Director 65

Donald C. Fraser . Director 54

Mark S. Newman has been employed by the Company since 1973,
was named Vice President, Finance, Chief Financial Officer and
Treasurer in 1980 and Executive Vice President in 1987. Mr.
Newman became a Director of the Company in 1988. In May 1994,
Mr. Newman became the President and Chief Executive Officer of
the Company and in August 1995 became Chairman of the Board.
Mark Newman is the son of Leonard Newman.

Nancy R. Pitek joined the Company in 1984 as Manager of
Accounting. She became Assistant Controller in 1985 and Director
of Internal Audit in 1988. Ms. Pitek became Director of
Corporate Finance in 1990 and has been the Controller since 1993.
In May 1994, she was also appointed to the position of Treasurer
and in August 1995 became Secretary.

Paul G. Casner, Jr. joined the Company in 1993 as President
of TAS. In 1994 he also became President of DRS Electronic
Systems Group and a Vice President of the Company. Mr. Casner
has over 30 years of experience in the defense electronics
industry and has held positions in engineering, marketing and
general management. He was the president of TAS prior to its
acquisition by the Company.

Stuart F. Platt has been a Director of the Company since
1991 and became the President of Precision Echo in July 1992. He
was named Vice President of the Company in May 1994. Rear
Admiral Platt is a co-founder and director of FPBSM Industries,
Inc., a holding company and management consulting firm for
defense, aerospace and other technology-based companies, and the
Chairman of Stuart Platt & Partners, a management consulting firm
handling principally defense-related issues. He also serves as
director for Harding Associates, Inc. None of these companies is
a parent, subsidiary or affiliate of the Company. Rear Admiral
Platt held various positions as a military officer in the
Department of the Navy, retiring as Competition Advocate General
of the Navy in 1986.

Richard Ross was employed by the Company as Assistant Vice
President and Director, Sales in 1986 and Assistant Vice
President, Corporate Development in 1987. In 1988, he became
Vice President of the Company, and in 1990, he became President
of Photronics Corp.

Leonard Newman has been a Director of the Company since 1968
and was Chairman of the Board and Secretary of the Company from
1971 until August 1995. In August 1995, Mr. Newman was appointed
Chairman Emeritus. From 1971 until May 1994, Mr. Newman also
served as the Company's Chief Executive Officer. Leonard Newman
is the father of Mark S. Newman.

Jack Rachleff has been a Director of the Company since 1968.
Mr. Rachleff has been employed since 1952 by Fablok Mills, Inc.,
a textile manufacturer, and has been its President since February
1982.

Theodore Cohn has been a Director of the Company since 1980.
He has been an independent management consultant since 1974. Mr.
Cohn also serves as a director of Dynatech Corporation.

Mark N. Kaplan has been a Director of the Company since
1986. Mr. Kaplan has been a member of the law firm of Skadden,
Arps, Slate, Meagher & Flom since 1979. Mr. Kaplan also serves
as director of American Biltrite Inc., Grey Advertising Inc.,
Harvey Electronics Inc., REFAC Technology Inc., Congoleum
Corporation, MovieFone, Inc. and Volt Information Sciences, Inc.

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

EXECUTIVE COMPENSATION

Summary of Cash and Certain other Compensation. There is
shown below information concerning the annual and long-term
compensation for services in all capacities to the Company for
the fiscal years ended March 31, 1995, 1994 and 1993, of those
persons who were, at March 31, 1995 (i) the chief executive
officer and (ii) the other four most highly compensated executive
officers of the Company (the "Named Officers"):

SUMMARY COMPENSATION TABLE

Long-Term
Compensation

Annual Compensation (i) Awards

Stock All Other
Name and Principal Fiscal Salary Bonus Options Compensation
Position Year ($) ($) (#) ($)

Leonard Newman . 1995 321,910 0 0 57,000(a)(b)(c)(d)
Chairman of the 1994 331,140 100,000 0 52,538(a)(b)(c)(d)
Board 1993 332,294 20,000 0 43,974(a)(b)(c)(d)
& Secretary

Mark S. Newman . 1995 281,344 120,000 150,000(f) 19,440(b)(c)(d)
President & 1994 230,767 52,993 0 86,728(b)(c)(d)(e)
Chief 1993 226,083 15,000 0 13,910(b)(c)(d)
Executive
Officer

Paul G. Casner, Jr. 1995 198,000 40,000 0 32,201(b)(d)(h)
Vice President &
President--
Electronics
Systems Group

Stuart F. Platt . 1995 256,970 50,000 0 4,414(c)(d)
Vice President & 1994 262,854 21,597 5,000(g) 3,664(c)(d)
President-- 1993 187,889 0 0 2,426(c)(d)
Precision Echo

Richard Ross . . 1995 198,618 36,000 0 9,070(b)(c)(d)
Vice President & 1994 155,596 27,237 5,000(g) 7,010(b)(c)(d)
President-- 1993 159,166 10,000 0 5,851(b)(c)(d)
Photronics

___________________

(a) Includes deferred compensation of $25,000 pursuant to a
Deferred Compensation Agreement (as defined herein) between
the Company and Mr. L. Newman. See "-Deferred Compensation
Agreement."

(b) Includes the amounts of employer contributions which vested
pursuant to the Company's Retirement/Savings Plan (as
defined herein) (See"-Retirement/Savings Plan") in the
fiscal years ended March 31, 1995 and 1994, respectively, in
the accounts of the Named Officers, as follows: Mr. L.
Newman, $4,292 and $1,626; Mr. M. Newman, $4,838 and $3,530;
Mr. P. Casner, Jr., $3,000; and Mr. R. Ross, $3,486 and
$2,234. There were no employer contributions under the
Retirement/Savings Plan during fiscal 1993.

(c) Includes the fixed annual amounts, computed on a fiscal year
basis, provided by the Company for the benefit of the Named
Officers, to reimburse such officers for the amounts of
medical and hospital expenses actually incurred by them,
which are not covered or paid to them under the Company's
group medical and hospitalization plans during the fiscal
years ended March 31, 1995, 1994 and 1993, respectively, as
follows: Mr. L. Newman, $4,000, $3,250 and $3,750; Mr. M.
Newman, $4,500, $3,250 and $5,250; Mr. S. Platt, $4,000,
$3,250 and $2,150; and Mr. R. Ross, $4,000, $3,250 and
$4,500.

(d) The Company pays the cost of policies of life insurance and
long-term disability insurance, in excess of the amounts
furnished under the group coverage provided to all
employees, for the benefit of the Named Officers. Under
certain of the life insurance policies, the Company is a
beneficiary to the extent of the premiums paid. The total
amounts of the premiums paid by the Company or the economic
benefit to the Named Officers for such insurance policies
during the fiscal years ended March 31, 1995, 1994 and 1993,
respectively, were as follows: Mr. L. Newman, $23,708,
$22,662 and $15,224; Mr. M. Newman, $10,102, $9,948, and
$8,660; Mr. P. Casner, Jr., $124; Mr. S. Platt, $414, $414
and $276; and Mr. R. Ross, $1,584, $1,526 and $1,350.

(e) Includes $70,000 earned by Mark S. Newman as a consequence
of his involvement in the Company's October 1993 acquisition
of TAS.

(f) Represents non-qualified stock options to purchase 50,000
shares of Class B Common Stock and incentive stock options
to purchase 100,000 shares of Class B Common Stock issued to
Mr. M. Newman under the Company's 1991 Stock Option Plan
(the "1991 Stock Option Plan"). Such options, granted on
June 9, 1994, became exercisable six months from the date of
grant with respect to 20% of such options and are further
exercisable cumulatively at 20% per year on each of the
first four anniversaries of the date of grant.

(g) Represents incentive stock options to purchase shares of
Class B Common Stock issued to the Named Officers under the
Company's 1991 Stock Option Plan. Such options, granted on
August 5, 1993, became exercisable six months from the date
of grant with respect to 20% of such options and are further
exercisable cumulatively at 20% per year on each of the
first four anniversaries of the date of grant.

(h) Includes forgiveness of principal and interest owed pursuant
to the Grid Note (as defined herein) in an amount equal to
$29,077.

(i) The dollar value of perquisites and other personal benefits
provided for the benefit of the Named Officers during the
fiscal years ended March 31, 1995, 1994 and 1993,
respectively, did not exceed the lesser of either $50,000 or
10% of the total annual salary and bonus reported for the
Named Officers in those period. There were no other amounts
of compensation required to be reported as "Other Annual
Compensation", by Item 402 of Regulation S-K, earned by the
Named Officers.

Stock Options. The following table contains information
concerning the grant of stock options under the Company's 1991
Stock Option Plan to the Named Officer during the Company's
fiscal year ended March 31, 1995.

OPTION GRANTS IN LAST FISCAL YEAR

Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term

Number % of
of Total
Securi- Options
ties Granted
Under- to
lying Employ Exer-
Options ees in cise Expira-
Granted Fiscal Price tion
Name (#) 1995 ($/Sh) Date 0% ($) 5%($)(c) 10%($)(c)

Mark S. Newman 50,000(a) 33.0% $0.01 06/08/99 $224,500 $286,500 $362,000

______________ 100,000(b) 67.0% $4.95 06/08/99 --- $79,000 $230,000

______________

(a) The options granted were for shares of Class B Common Stock
at an exercise price equal to the par value of the Company's
Class B Common Stock on the date of grant. The options
become exercisable over a five year period in increments of
20% beginning six months from the date of grant and
continuing at an additional 20% per year on the anniversary
of the date of grant. The grant date of the options was
June 9, 1994.

(b) The options granted were for shares of Class B Common Stock
at an exercise price equal to 110% of the fair market value
of the Company's Class B Common Stock on the date of grant.
The options become exercisable over a five year period in
increments of 20% beginning six months from the date of
grant and continuing at an additional 20% per year on the
anniversary of the date of grant. The grant date of the
options is June 9, 1994.

(c) The amounts shown under these columns are the result of
calculations at the 5% and 10% rates required by the SEC and
are not intended to forecast future appreciation of the
Company's stock price.

Option Exercises and Fiscal Year-End Values. Shown below is
information with respect to the options exercised during fiscal
1995 by the Named Officers and the unexercised options to
purchase the Company's Class A and Class B Common Stock granted
through March 31, 1995 under the Company's 1981 Incentive Stock
Option Plan, 1981 Non-Qualified Stock Option Plan and 1991 Stock
Option Plan to the Named Officers and held by them at that date.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-
END OPTION VALUE
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options in-the-Money Options
at March 31, 1995 at March 31, 1995(a)
______________________________________ _____________________________________

Class A Class B Class A Class B
Common Common Common Common
Stock Stock Stock Stock
Shares __________________ __________________ __________________ __________________
Acquired Value Un- Un- Un- Un-
on Real- Exer- exer- Exer- exer- Exer exer- Exer- exer
Exercise ized cisa cisa cisa cisa cisa cisa cisa cisa
Name (#) ($) ble ble ble ble ble ble ble ble
________ ________ ________ ________ ________ ________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Leonard Newman -- -- -- -- 25,000 -- -- -- $85,925 --

Mark S. Newman -- -- 40,000 -- 30,000 120,000 $105,500 -- $65,900 $263,600

Paul G. Casner, Jr. -- -- -- -- 20,000 30,000 -- -- $109,800 $164,700

Stuart F. Platt -- -- -- -- 2,000 3,000 -- -- $3,750 $5,625

Richard Ross 10,600 $32,719 -- -- 2,000 3,000 -- -- $3,750 $5,625
<FN>
___________________

(a) Based on the difference between the exercise price of each
grant and the closing price on the AMEX-Composite
Transactions of the Company's Class A and Class B Common
Stock on that date, $5.25 and $5.50, respectively.
</TABLE>

DEFERRED COMPENSATION AGREEMENT

In June 1993, pursuant to approval by the Board of
Directors, the Company and Mr. Leonard Newman entered into a
deferred compensation agreement (the "Deferred Compensation
Agreement") providing for certain deferred benefits which would
become payable upon the termination of his employment for any
reason including death, and providing for certain changes to
certain insurance policies maintained by the Company. Under the
terms of the Deferred Compensation Agreement, in the event of
termination of employment compensation (the "Deferred Benefit")
equal to $25,000 multiplied by the number of complete years of
employment from July 1, 1969 through the date of termination of
employment, payable in twenty quarterly installments commencing
on the first day of the month following the date of termination,
is to be provided to Mr. L. Newman or, in the case of death, to
his designated beneficiary. The terms used for computing the
Deferred Benefit are similar in all material respects to those
that had been used in the computation of deferred compensation
provided pursuant to an employment agreement that expired on June
30, 1990, between the Company and Mr. L. Newman. In the event of
permanent disability, as defined in the Deferred Compensation
Agreement, the Company is required to pay the employee an amount
equal to five times the employee's annual base compensation in
effect immediately prior to his permanent disability. Such
payments are to be made on the Company's regular payroll dates
during the five-year period following the permanent disability.
In the event of the death of the employee during the five-year
pay-out period, the Company will pay to the employee's designated
beneficiary the Deferred Benefit described above reduced by the
total of the disability payments previously paid in equal
quarter-annual installments over the remainder of the five-year
period. In addition, pursuant to the terms of the Deferred
Compensation Agreement, a keyman term insurance policy owned by
the Company for Mr. L. Newman was transferred to him. The
Company is required to provide Mr. L. Newman, on an annual basis,
the sum sufficient to pay the schedule premium on such policy.

TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS

In April 1994, the company entered into agreement with Mr.
Richard Ross which provided for a severance benefit in the event
of (i) termination of his employment other than for cause, (ii)
diminution in compensation and/or responsibilities and (iii) the
change in ownership of the Company or Photronics. The severance
benefit is equal to 30 months of Mr. Ross' then current salary
plus reimbursement of outplacement expenses up to a maximum of
$15,000.

Effective July 20, 1994, the Company entered into the Gross
Agreement and the Gross Stock Purchase Agreement with David E.
Gross. Under the terms of the Gross Agreement, Mr. Gross will
receive a total of $600,000 over a five-year period as
compensation for his services pursuant to a five-year consulting
arrangement with the Company and a total of $750,000 over a five-
year period as consideration for a five-year non-compete
arrangement. The payments will be charged to expense over the
terms of the Gross Agreement as services are performed and
obligations are fulfilled by Mr. Gross. Mr. Gross will also
receive at the conclusion of such initial five-year period, an
aggregate of approximately $1.3 million payable over a nine-year
period as deferred compensation. The net present value of the
payments to be made to Mr. Gross pursuant to the deferred
compensation portion of the Gross Agreement approximated the
amount of the Company's previous deferred compensation
arrangement with Mr. Gross. In addition to the Buy-Back, the
Gross Stock Purchase Agreement also provides that (i) the Company
has a right of first refusal with respect to the sale by Mr.
Gross of any of the remaining shares of common stock of the
Company held by Mr. Gross in excess of 20,000 shares, (ii) any
shares of common stock of the Company held by Mr. Gross must be
voted pro rata in accordance with the vote of the Company's other
stockholders and (iii) in the event of a change in control of the
Company within three years from the date of the Gross Stock
Purchase Agreement, Mr. Gross will receive a percentage of the
difference between the price per share paid to Mr. Gross pursuant
to the Buy-back and the price per share received by the
stockholders of the Company pursuant to the change of control
transaction, less an interest factor, as defined in the Gross
Stock Purchase Agreement, on the aggregate amount paid to Mr.
Gross pursuant to the Buy-back.

The Company is currently negotiating the Newman Agreement
between the Company and Leonard Newman, its former Chairman of
the Board and Secretary of the Company. Pursuant to the Newman
Agreement, it is expected that Mr. Newman will receive certain
compensation from the Company over a five-year period for
consulting services and non-compete arrangement. In addition,
Mr. Newman will receive certain retirement benefits payable over
a ten-year period at the conclusion of such initial five-year
period. Results of operations for fiscal 1995 reflect a charge
of $1.5 million representing the estimated net present value of
the Company's obligation under the Newman Agreement. The
corresponding amount was included in Other Liabilities in the
Consolidated Balance Sheet at March 31, 1995 as an addition to
the accrual which had been established to cover the Company's
liability to Mr. Newman under a previous deferred compensation
arrangement described above.

RETIREMENT/SAVINGS PLAN

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

MEDICAL REIMBURSEMENT PLAN

At the beginning of each calendar year, the Company accrues
fixed annual amounts for the benefit of certain officers to be
paid as needed to reimburse such officers for the amounts of
medical and hospital expenses actually incurred by such officers
which are not covered, and until January 1, 1993, the excess of
the amounts of medical and hospital expenses actually incurred
by such officers over the amount paid to them, under the
Company's group medical and hospitalization plans. The amount
accrued for the benefit of each such officer is included in such
officer's compensation for tax purposes regardless of whether
such accrued amount is actually paid to him. The excess of the
amount accrued over the amounts paid is used to offset the
administrative expenses payable by the Company to the medical
insurance carrier.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Leonard Newman, who was appointed to the Board of
Director's Executive Compensation Committee on May 26, 1994,
served as the Chairman of the Board and Secretary of the Company
during fiscal 1995. Mr. Newman does not participate in
compensation decisions relating to himself or Mark S. Newman.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

During fiscal 1995, the Executive Compensation Committee
(the "Committee") established the compensation of the Chief
Executive Officer and the President of the Company. The bonus
awards of the Named Officers in respect of the 1995 fiscal year
were determined at a meeting of the Committee as constituted on
May 23, 1995. In determining the individual elements of
compensation, the Committee strives to enable the Company to
attract and retain key executives critical to the long-term
success of the Company and each of its subsidiaries, provide
compensation opportunities which are comparable to those offered
by similar companies, reward long-term strategic management and
the enhancement of shareholder value and create a performance-
oriented environment.

In order to meet the foregoing objectives, the Committee has
attempted to design and choose components of compensation. The
Committee consulted with Compensation Resources, Inc. to assist
in this process and provide competitive information, advice,
documentation and recommendations relating to compensation
issues. Compensation packages consist of cash, certain benefits
and equity-based compensation. The Company's compensation
provides for competitive base salaries which reflect individual
performance, level of responsibility and are based on
compensation paid by companies of relatively similar size in the
same industry as that of the Company. Annual bonuses, when
given, are linked to the financial performance of the Company and
its subsidiaries as a whole, job performance and the meeting of
specified goals. Also included are plans which reward the
enhancement of long-term values to the Company's stockholders.
The other components of the Company's compensation focus on both
short-term and long-term performance, rewarding profitability and
growth in stockholder value and delivering competitive levels of
compensation.

The compensation of the Chief Executive Officer was based on
the policies described above. The Chief Executive Officer's
compensation for the fiscal year ending March 31, 1995 was based
on a comparison of compensation provided to chief executive
officers and other members of senior management of companies of
relatively similar size within the same industry as that of the
Company. The bonus award for fiscal 1995 was computed on the
basis of a formula that applied a weighted performance factor to
a target award established for the Chief Executive Officer's
salary level. The weighted performance factor was derived as a
result of the Chief Executive Officer's achievement of certain
Company and individual performance targets including, but not
limited to, the achievement of a certain level of consolidated
earnings before income taxes for fiscal 1995.

For fiscal 1995, the Chief Executive Officer recommended the
compensation, excluding the bonus awards, for the other Named
Officers, based on substantially the same criteria as described
above. Bonus awards for the other Named Officers were computed
by the Committee on a similar basis as that used for the Chief
Executive Officer using specific target awards that had been
established for each individual's salary level.

The Committee has not formally addressed the restrictions
under Section 162(m) of the Internal Revenue Code because the
Committee does not anticipate paying compensation to its
executive officers in an amount to which Section 162(m) would
apply.

Mark N. Kaplan, Chairman
Donald C. Fraser
Jack Rachleff
Leonard Newman until 8/8/95
Theodore Cohn since 8/8/95

PERFORMANCE GRAPH

Set forth below is a chart comparing the yearly percentage
change in the cumulative total stockholder return on the
Company's Class A and Class B Common Stock against the total
return of the AMEX Market Index and a peer group index consisting
of companies comprising the Standard Industrial Classification
(SIC) Codes 3812, Search and Navigation Equipment and 3827,
Optical Instruments and Lenses. A listing of the companies
included in these SIC Codes is available through publications,
such as the Standard Industrial Classification Manual, and
computer data bases, such as Dialog Information Systems. SIC
Code 3812 includes both the Company's Class A and Class B Common
Stock.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG DIAGNOSTIC/ RETRIEVAL SYSTEMS, INC.
CLASS A AND CLASS B COMMON STOCK,
AMEX MARKET INDEX AND PEER GROUP INDEX

Class A Class B AMEX Peer
Common Stock Common Stock Market Index Group Index

1990 100 100 100 100

1991 100 124.10 101.91 111.11
1992 58.06 136.34 109.25 59.26

1993 95.16 170.70 117.52 100
1994 96.77 194.42 121.11 114.81

1995 135.48 211.66 127.73 162.96

* Assumes that the value of the investment in the Company's Class A and
Class B Common Stock and each index was $100 on April 1, 1990 and that
all dividends were reinvested.

SECURITY OWNERSHIP

The following table shows, as of January 15, 1996, the
number of shares of Class A Common Stock and Class B Common Stock
held by each director and executive officer, and by all directors
and executive officers of the Company as a group and the
percentage of each class beneficially owned (within the meaning
of Rule 13d-3 of the Exchange Act).

Class A Class B
Common Stock (a) Common Stock (a)(b)
_________________________ _________________________
Name of Percent Percent
Beneficial Owner Shares of Class Shares of Class
___________ ___________ ___________ ___________
Leonard Newman 617,600 18.7% 200,824 29.6%
Mark S. Newman 71,618(c)(f) 2.2 92,531(d)(e)(g) 7.2
Theodore Cohn 1,600 (h) 4,300 0.3
Donald C. Fraser ____ ___ ___ ___
Mark N. Kaplan 1,000 (h) ___ ___
Stuart F. Platt ____ ___ 3,000(e) 0.1
Jack Rachleff 1,000 (h) ___ ___
Paul G. Casner, Jr 1,000 (h) 30,000 1.4
Nancy R. Pitek 5,724(c) 0.2 8,583(d)(e) 0.7
Richard Ross ____ ___ 3,000(e) 0.1
All directors and
executive
officers as a
group
(10 persons) 699,542(c)(f) 21.2% 342,238(d)(e)(g) 35.3%

__________________
(a) As of January 15, 1996, the Company had outstanding 3,307,324 shares
of Class A Common Stock (excluding 432,639 shares of Class A Common
Stock held in treasury) and 2,151,458 shares of Class B Common Stock
(excluding 65,795 shares of Class B Common Stock held in treasury).
Unless otherwise noted, each director and executive officer had sole
voting power and investment power over the shares of Class A Common
Stock and Class B Common Stock indicated opposite such director's and
executive officer's name.

(b) Each share of Class A Common Stock is convertible at any time into one
share of Class B Common Stock and, accordingly, each person who owns
Class A Common Stock may be deemed to be the beneficial owner of the
number of shares of Class B Common Stock equal to the number of shares
of Class A Common Stock owned. The number of shares of Class B Common
Stock shown does not include the number of shares of Class B Common
Stock into which the number of shares of Class A Common Stock shown
may be converted. However, the computation of the percentage of class
shown includes the number of shares of Class B Common Stock into which
the number of shares of Class A Common Stock shown may be converted.

(c) Includes 5,724 shares of Class A Common Stock held by the trustee of
the Company's Retirement/Savings Plan. Mr. M. Newman and Ms. N. Pitek
share the power to direct the voting of such shares as members of the
administrative committee of such plan. Mr. M. Newman and Ms. N. Pitek
disclaim beneficial ownership as to and of such shares.

(d) Includes 7,383 shares of Class B Common Stock held by the trustee of
the Company's Retirement/Savings Plan. Mr. M. Newman and Ms. N. Pitek
share the power to direct the voting of such shares as members of the
administrative committee of such plan. Mr. M. Newman and Ms. N. Pitek
disclaim beneficial ownership as to and of such shares.

(e) Includes shares of Class B Common Stock which might be purchased upon
exercise of options which were exercisable on January 15, 1996 or
within 60 days thereafter, as follows: Mr. P. Casner, Jr., 30,000
shares; Mr. Newman, 60,000 shares; Ms. N. Pitek, 1,200 shares; Mr. S.
Platt, 3,000 shares; Mr. R. Ross, 3,000 shares; and all directors and
executive officers as a group, 97,200 shares.

(f) Includes 3,200 shares of Class A Common Stock held by Mr. M. Newman as
custodian for his daughter over which Mr. M. Newman has sole voting
and investment power.

(h) Less than 0.1%.

The following table sets forth certain information, as of
January 15, 1996 with respect to each person, other than
executive officers and directors of the Company, which has
advised the Company that it may be deemed to be the beneficial
owner (within the meaning of Rule 13d-3 of the Exchange Act) of
more than five percent of a class of voting securities of the
Company. Such information has been derived from statements on
Schedule 13D or 13G filed with the SEC by the person(s) listed
below.

Class A Class B
Common Stock Common Stock
_________________________ _________________________
Amount and Amount and
Nature of Nature of
Name and Address Beneficial Percent of Beneficial Percent
of Beneficial Ownership Class Ownership of Class
Owner
_________________________ _________________________

First Pacific
Advisors, Inc.
10301 West Pico Blvd.
Los Angeles, CA
90064 . . . . . . 965,678(a) 25.7% 1,717,955(d) 51.7%
Michael N. Taglich
Taglich Brothers,
D'Amadeo, Wagner &
Company, Incorporated
100 Wall Street
New York, NY
10005 . . . . . . 286,550(b) 8.7 529,850(f) 21.7
David E. Gross
27 Cameron Road
Saddle River,
NJ 07458 . . . . 65,880(c) 2.0 335,701(e) 15.1

__________________
(a) Includes 451,978 shares of Class A Common Stock from the assumed
conversion of $4,000,000 principal amount of the Debentures and
310,000 shares of Class A Common Stock beneficially owned by First
Pacific Advisors, Inc. ("First Pacific") through control of FPA
Capital Fund, Inc. ("FPA") to which First Pacific serves as investment
advisor. The Company has been advised that FPA has sole voting power
and shared dispositive power with respect to 310,000 shares. First
Pacific has advised the Company that it has shared voting power with
respect to 100,000 shares and shared dispositive power with respect to
965,678 shares.

(b) Consists of 186,300 shares of Class A Common Stock held by Lander
Partners, Inc. ("Lancer Partners"), 7,500 shares of Class A Common
Stock held by Antrade, N.V. ("Antrade"), 10,200 shares of Class A
Common Stock held by Album N.V. ("Album"), 7,600 shares of Class A
Common Stock held by Ralco Investments Group ("Ralco"), 71,100 shares
of Class A Common Stock held by Lancer Offshore, Inc. ("Lancer
Offshore") and 3,850 shares of Class A Common Stock held by Michael
Lauer. Michael N. Taglich and Michael Lauer serve as general partners
of Lancer Partners and managing partners of Lancer Offshore. The
Company has been advised that Messrs. Taglich and Lauer also share
voting and dispositive authority over the shares held by Album,
Antrade and Ralco resulting in shared voting and shared dispositive
power with respect to a total of 282,700 shares.

(c) Includes 25,000 shares of Class A Common Stock held by Mr. Gross for
which he has voting and dispositive power. Also included are 20,000
shares of Class A Common Stock held by David E. Gross' wife
personally, and 20,880 shares of Class A Common Stock held by her as
custodian for her two children, as to which Mr. Gross disclaims any
beneficial interest and over which he has neither voting power nor
investment power.

(d) Consists of 543,000 shares of Class B Common Stock, the beneficial
ownership of 513,700 shares of Class B Common Stock from the assumed
conversion of Class A Common Stock, beneficial ownership of 451,978
shares of Class B Common Stock from the assumed conversion of
$4,000,000 principal amount of the Debentures and an additional
208,877 shares of Class B Common Stock from the assumed conversion of
$3,133,000 principal amount of the Company's 1998 Debentures
beneficially owned by First Pacific through its control of FPA, Source
Capital, Inc. ("Source Capital") and FPA New Income, Inc. ("New
Income") to which First Pacific serves as investment advisor. The
Company has been advised that FPA has sole voting power and shared
dispositive power with respect to 510,000 shares, Source Capital has
sole voting power and shared dispositive power with respect to 262,363
shares and New Income has sole voting power and shared dispositive
power with respect to 339,328 shares. First Pacific has advised the
Company that it has shared dispositive power with respect to 1,717,955
shares.

(e) Includes 257,381 shares of Class B Common Stock held by Mr. Gross for
which he has sole voting and dispositive power and the beneficial
ownership of an additional 25,000 shares of Class B Common Stock
through the assumed conversion of Class A Common Stock owned, as
described in note (c) above. Also included are 6,000 shares of Class
B Common Stock held by Mrs. Gross' wife personally, 6,440 shares of
Class B Common Stock held by her as custodian for her two children and
the beneficial ownership of an additional 40,880 shares of Class B
Common Stock through the assumed conversion of the shares of Class A
Common Stock owned by Mr. Gross' wife and held by her as custodian for
her two children, as described in note (c) above. Mr. Gross has
neither voting power nor investment power over the shares of Class A
Common Stock and Class B Common Stock held by his wife, either
personally or as custodian for her children, and disclaims any
beneficial interest in such shares.

(f) Consists of 126,150 shares of Class B Common Stock held by Lancer
Partners, 4,000 shares of Class B Common Stock held by Antrade, 5,000
shares of Class B Common Stock held by Album, 4,000 shares of Class B
Common Stock held by Ralco, 85,750 shares of Class B Common Stock held
by Lancer Offshore, 18,400 shares of Class B Common Stock held by
Michael Lauer and the assumed conversion of the shares of Class A
Common Stock owned by each of such entities, respectively, as
described in note (b) above. The Company has been advised that
Messrs. Taglich and Lauer share voting and dispositive authority over
the shares held by Album, Antrade and Ralco resulting in shared voting
and shared dispositive power with respect to a total of 224,700 shares
of the Class B Common Stock and assuming the conversion of the Class A
Common Stock, with respect to an additional 282,700 shares.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was a party to a loan agreement, as amended
March 30, 1993, entered into with Leonard Newman as the Chairman
of the Board, Chief Executive Officer and Secretary of the
Company (the "Newman Loan"). At March 31, 1995, the outstanding
principal amount due to the Company was $160,257. The original
Newman Loan in the principal amount of $267,000 was made in March
1984 to provide financing for the purchase of a new house, closer
to the offices of the Company, during the time required to sell
his old house. The loan was restructured in October 1986 with
the Board of Directors authorizing a new loan to Mr. Newman in
the principal amount of $111,430, which was used to pay all
amounts then due and outstanding under the original Newman Loan.
With the concurrence of the Board of Directors and Mr. Newman, an
advance of $77,500 made to Mr. Newman by the Company in October
1989 against an anticipated bonus was converted subsequently into
a loan in that amount from the Company. In March 1990, the Board
of Directors authorized a consolidation of the then outstanding
principal amount and accrued interest on each of the two
outstanding Newman Loans. The consolidated loan in the principal
amount of $160,257 was evidenced by a promissory note bearing
interest at the rate of 1% over the prime commercial rate of
interest as announced from time to time by Morgan Guaranty Trust
Company of New York and was secured by a pledge of 109 shares
owned by Mr. Newman in, and an assignment of his interest in a
proprietary lease from, an apartment corporation in New York
City. Pursuant to approval by the Board of Directors effective
March 1993, the maturity date of the consolidated loan was
extended from March 30, 1993 to March 30, 1996. Principal and
interest on the consolidated loan was due in one installment at
maturity and could be paid in cash or in shares of Class A Common
Stock or Class B Common Stock of the Company, or in any
combination of cash or such shares. At March 31, 1995, the
largest aggregate amount of indebtedness under the consolidated
Newman Loans since April 1, 1994 was $244,355. The loan was
repaid as of June 1995.

The Company is currently occupying and leasing a building at
138 Bauer Drive (the "LDR Building") owned by LDR Realty Co.
("LDR"), a partnership wholly owned, in equal amounts, by Leonard
Newman and David E. Gross, the former President and Chief
Technical Officer of the Company. The current renegotiated lease
agreement is for a ten-year term beginning June 1, 1988 at a
monthly rental of $19,439. The Company is required to pay all
real estate taxes and is responsible for all repairs and
maintenance, structural and otherwise, subject to no cumulative
limits. The terms of the LDR lease were determined by the
Company and LDR, based on the formal appraisal of an appraisal
firm and informal appraisals from real estate brokers in the
area. Such appraisals indicated that the rental provided for in
the LDR lease is not in excess of the range of fair market
rentals in the relevant area. The Company believes that the LDR
lease was consummated on terms no less favorable than those that
could have been obtained by the Company from an unrelated third
party in a transaction negotiated on an arms-length basis.

Skadden, Arps, Slate, Meagher & Flom, a law firm of which
Mark N. Kaplan, a director, is a member, provided legal services
to the Company during its 1995 fiscal year.

In July 1993, the Company and Donald C. Fraser, a director,
entered into a consulting agreement pursuant to which Dr. Fraser
will provide consultation to the Company concerning defense
technologies. Under the terms of the consulting agreement, as
amended, consulting services are to be provided to the Company
through July 5, 1995 on an as-requested basis, for a fee of
$1,500 per day plus approved travel and miscellaneous expenses.
During fiscal 1995, total remuneration paid to Dr. Fraser under
this agreement approximated $9,000.

In October 1993, the Company issued a Demand Grid Note (the
"Grid Note") in the principal amount of $100,000 to Paul G.
Casner, Jr. The loan bears interest at the applicable federal
rate necessary under the Internal Revenue Code of 1986, as
amended, to avoid an imputed rate of interest.

In May 1995, the Company became a party to a loan with Mark
S. Newman, the President and Chief Executive Officer of the
Company, to provide an amount equal to the exercise price of
incentive stock options which had been granted to him under the
Company's 1981 Incentive Stock Option Plan. The loan is
evidenced by a promissory note in the principal amount of
$104,500 and bears interest at an annual rate of 8%. The loan
is payable on the earlier of (i) the sale or disposition of the
shares of stock obtained pursuant to the exercise of the stock
options, (ii) cessation of Mr. M. Newman's employment by the
Company or (iii) May 25, 2005. Interest is payable on May 25 of
each calendar year or at such earlier time as the loan is repaid.

DESCRIPTION OF THE DEBENTURES

The Debentures were issued under an indenture (the
"Indenture") dated as of September 22, 1995, between the Company
and The Trust Company of New Jersey, as trustee (the "Trustee"),
a copy of which is available upon request from the Company. The
statements under this caption address the material terms of the
Debentures but are summaries and do not purport to be complete.
The summaries make use of terms defined in the Indenture and are
qualified in their entirety by reference to the Indenture,
including the definitions therein of certain terms. Whenever
reference is made to defined terms of the Indenture and not
otherwise defined herein, such defined terms are incorporated
herein by reference.

GENERAL

The Debentures are general unsecured senior subordinated
obligations of the Company, are limited to $25,000,000 aggregate
principal amount and will mature on October 1, 2003. As of
February 20, 1996, $25 million aggregate principal amount of the
Debentures were outstanding. The Debentures bear interest at the
rate per annum shown on the cover page hereof from the date of
original issue, or from the most recent Interest Payment Date (as
defined below) to which interest has been paid or duly provided
for, and accrued but unpaid interest will be payable semi-
annually on April 1 and October 1 of each year commencing April
1, 1996 (each, an "Interest Payment Date"). Interest will be
paid to Debentureholders of record ("Holders") at the close of
business on the March 15 or September 15, respectively,
immediately preceding the relevant Interest Payment Date (each, a
"Regular Record Date"). Interest will be computed on the basis
of a 360-day year of twelve 30-day months.

Principal of and premium, if any, and interest on the
Debentures will be payable, the transfer of the Debentures will
be registrable and the Debentures will be exchangeable at the
office or agency of the Company maintained for that purpose in
Jersey City, New Jersey (which initially will be the corporate
trust office of the Trustee), except that, at the option of the
Company, payment of interest may be made by check mailed to the
address of the Holder entitled thereto as it appears in the
Debenture Register on the related record date.

The Debentures were issued in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple
thereof. No service charge will be made for any transfer or
exchange of Debentures, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith.

All monies paid by the Company to the Trustee or any Paying
Agent for the payment of principal of and premium, if any, and
interest on any Debenture which remain unclaimed for two years
after such principal, premium or interest became due and payable
may be repaid to the Company. Thereafter the Holder of such
Debenture may, as an unsecured general creditor, look only to the
Company for payment thereof.

Initially, the Trustee will act as paying agent and
registrar of the Debentures. The Company may change any paying
agent and registrar without notice.

CONVERSION RIGHTS

Holders are entitled, at any time and from time to time
prior to maturity (subject to earlier redemption or repurchase,
as described below), to convert their Debentures (or any portion
thereof that is an integral multiple of $1,000), at 100% of the
principal amount thereof, into Class A Common Stock of the
Company at the conversion price set forth on the cover page
hereof, subject to adjustment under certain circumstances as
described below. After a call for redemption of Debentures,
through optional redemption or otherwise, the Debentures or
portion thereof called for redemption will be convertible if duly
surrendered on or before, but not after, the business day
preceding the date fixed for redemption in respect thereof.

The conversion price is subject to adjustment upon certain
events, including: (i) the issuance of Common Stock (including a
distribution of Common Stock held in the Company's treasury) as a
dividend or distribution on any class of Capital Stock of the
Company or any Subsidiary which is not wholly owned by the
Company; (ii) a subdivision, combination or reclassification of
outstanding shares of Common Stock; (iii) the issuance or
distribution of Capital Stock of the Company or of rights or
warrants to acquire Capital Stock of the Company at less than the
Current Market Price (as defined below) on the date of issuance
or distribution (provided that the issuance of Capital Stock upon
the exercise of warrants or options will not cause an adjustment
in the conversion price if no such adjustment would have been
required at the time such warrant or option was issued); and (iv)
the distribution to the holders of any class of Capital Stock of
the Company generally and to holders of Capital Stock of any
Subsidiary which is not wholly owned by the Company of evidences
of indebtedness or assets (including cash and securities, but
excluding dividends or distributions payable in shares of Common
Stock and warrants and options for which adjustment is made as
described above and further excluding cash dividends paid out of
cumulative retained earnings of the Company arising after the
date of the Indenture).

Notwithstanding the foregoing, (a) if the rights or warrants
described in clause (iii) of the preceding paragraph are
exercisable only upon the occurrence of certain triggering
events, then the conversion price will not be adjusted until such
triggering events occur and (b) if rights or warrants expire
unexercised, the conversion price shall be readjusted to take
into account only the actual number of such rights or warrants
which were exercised. In addition, the provisions of the
preceding paragraph will not apply to the issuance of Common
Stock upon the exercise of the Company's outstanding stock
options under the 1981 Incentive Stock Option Plan, 1981 Non-
Qualified Stock Option Plan and 1991 Stock Option Plan, unless
the exercise price thereof is changed after the date of the
Indenture (other than solely by operation of the anti-dilution
provisions thereof), or the issuance of Common Stock upon the
conversion of currently outstanding 1998 Debentures, unless the
conversion price thereof is changed after the date of the
Indenture (other than solely by operation of the anti-dilution
provisions thereof).

No adjustment will be made to the conversion price until
cumulative adjustments to the conversion price amount to at least
1% of the conversion price, as last adjusted. Except as stated
above, the conversion price will not be adjusted for the issuance
of Common Stock, or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase
any of the foregoing, or the payment of dividends on the Common
Stock.

Fractional shares of Class A Common Stock will not be issued
upon conversion. A person otherwise entitled to a fractional
share of Class A Common Stock upon conversion shall receive cash
equal to the equivalent fraction of the Current Market Price of a
share of Class A Common Stock on the business day prior to
conversion. The Company from time to time may, to the extent
permitted by law, reduce the conversion price by any amount for
any period of at least 20 days, in which case the Company shall
give at least 15 days' notice of such reduction to each Holder,
if the Board of Directors of the Company has made a determination
that such reduction would be in the best interests of the
Company, which determination shall be conclusive. The Company is
entitled to make such reductions in the conversion price as it
may in its discretion determine to be advisable in order that any
stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities, or distribution of securities
convertible into or exchangeable for stock shall not be taxable
to its stockholders. If at any time the Company makes a
distribution of property to its stockholders which would be
taxable to such stockholders as a dividend for federal income tax
purposes (e.g., distribution of evidence of indebtedness or
assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-
dilution provisions of the Indenture, the conversion price of the
Debentures is reduced or the conversion price of the Debentures
is reduced other than in connection with certain anti-dilution
adjustments, such a reduction may be considered as resulting in
the distribution of a dividend to Holders for federal income tax
purposes.

A Holder who surrenders a Debenture (or portion thereof) for
conversion between the close of business on a Regular Record Date
and the next Interest Payment Date will receive interest on such
Interest Payment Date with respect to such Debenture (or portion
thereof) so converted through such Interest Payment Date.
Subject to such payments in the event of conversion after the
close of business on a Regular Record Date, no payment or
adjustment shall be made upon any conversion on account of any
interest accrued but unpaid on the Debentures surrendered for
conversion.

Subject to any applicable right of the Holders to cause the
Company to purchase Debentures upon a Change of Control (as
described below), in case of any consolidation or merger to which
the Company is a party, other than a transaction in which the
Company is the continuing corporation, or in case of any sale or
conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, or in the case of
any statutory exchange of securities with another corporation or
other entity, there will be no adjustment of the conversion
price, but each Holder will have the right thereafter to convert
such Holder's Debentures into the kind and amount of securities,
cash or other property which the Holder would have owned or have
been entitled to receive immediately after such consolidation,
merger, statutory exchange, sale or conveyance had such Debenture
been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance.
In the case of a cash merger of the Company with another
corporation or other entity or any other cash transaction of the
type mentioned above, the effect of these provisions would be
that the conversion features of the Debentures would thereafter
be limited to converting the Debentures at the conversion price
then in effect into the same amount of cash that such Holder
would have received had such Holder converted the Debentures into
Class A Common Stock immediately prior to the effective date of
such cash merger or transaction. Depending upon the terms of
such cash merger or transaction, the aggregate amount of cash so
received on conversion could be more or less than the principal
amount of the Debentures.

The Company has covenanted under the Indenture to reserve
and keep available at all times out of its authorized but
unissued Class A Common Stock, for the purpose of effecting
conversions of Debentures, the full number of shares of Class A
Common Stock deliverable upon the conversion of all outstanding
Debentures.

REDEMPTION

Optional Redemption by the Company. The Debentures are not
redeemable at the option of the Company prior to October 1, 1998.
Thereafter, the Debentures will be redeemable at any time prior
to maturity, at the option of the Company, in whole or from time
to time in part, upon not less than 30 days' nor more than 60
days' prior notice of the redemption date, mailed by first class
mail to each Holder's last address as it appears in the Debenture
Register, at the Redemption Prices established for the
Debentures, together with accrued but unpaid interest, if any, to
the date fixed for redemption. The Redemption Prices for the
Debentures (expressed as a percentage of the principal amount)
shall be as follows:

AFTER OCTOBER 1, PERCENTAGE

1998 105 %
1999 103.75
2000 102.50
2001 101.25

Selection of Debentures Redeemed. If less than all the
Debentures are to be redeemed, selection of the Debentures for
redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if
any, on which the Debentures are listed, or, if the Debentures
are not listed, on a pro rata basis by lot or by such method that
complies with applicable legal requirements and that the Trustee
considers fair and appropriate. The Trustee may select for
redemption portions of the principal of Debentures that have a
denomination larger than $1,000. Debentures and portions thereof
will be redeemed in the amount of $1,000 or integral amounts of
$1,000. The Trustee will make the selection from Debentures
outstanding and not previously called for redemption.

CHANGE OF CONTROL

If a Change of Control occurs, the Company shall offer to
repurchase each Holder's Debentures pursuant to an offer as
described below (the "Change of Control Offer") at a purchase
price equal to 100% of the principal amount of such Holder's
Debentures, plus accrued but unpaid interest, if any, to the date
of purchase. The Change of Control purchase feature of the
Debentures may in certain circumstances make more difficult or
discourage a takeover of the Company.

Under the Indenture, a "Change of Control" means the
occurrence of any of the following events: (i) any person (as the
term "person" is used in Section 13(d) or Section 14(d) of the
Exchange Act) is or becomes the direct or indirect beneficial
owner of shares of the Company's Capital Stock representing
greater than 50% of the total voting power of all shares of
Capital Stock of the Company entitled to vote in the election of
directors under ordinary circumstances; (ii) the Company sells,
transfers or otherwise disposes of all or substantially all of
the assets of the Company; or (iii) during any period of two
consecutive years (or, in the case this event occurs within the
first two years after the date of issue of the Debentures, such
shorter period as shall have commenced on the date of original
issue), Continuing Directors cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.

Within 30 days after any Change of Control, unless the
Company has previously mailed a notice of optional redemption by
the Company of all of the Debentures, the Company shall mail a
notice of the Change of Control Offer to each Holder by first
class mail at such Holder's last address as it appears on the
Debenture Register stating: (i) that a Change of Control has
occurred and that the Company is offering to repurchase all of
such Holder's Debentures; (ii) the circumstances and relevant
facts regarding such Change of Control (including, but not
limited to, information with respect to pro forma income, cash
flow and capitalization of the Company after giving effect to
such Change of Control); (iii) the repurchase price; (iv) the
expiration date of the Change of Control Offer, which shall be no
earlier than 30 days nor later than 60 days from the date such
notice is mailed; (v) the date such purchase shall be effected,
which shall be no later than 30 days after expiration date of the
Change of Control Offer; (vi) that any Debentures not accepted
for payment pursuant to the Change of Control Offer shall
continue to accrue interest; (vii) that, unless the Company
defaults in the payment of the Change of Control Payment, all
Debentures accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control
Payment Date; (viii) the name and address of the paying agent;
(ix) that Debentures must be surrendered to the paying agent to
collect the repurchase price; (x) any other information required
by applicable law to be included therein; and (xi) the procedures
determined by the Company, consistent with the Indenture, that a
Holder must follow in order to have such Debentures repurchased.

In the event that the Company is required to make a Change
of Control Offer, the Company will comply with any applicable
securities laws and regulations, including, to the extent
applicable, Section 14(e), Rule 14e-1 and any other tender offer
rules under the Exchange Act which may then be applicable in
connection with any offer by the Company to purchase Debentures
at the option of the Holders thereof.

The Company, could, in the future, enter into certain
transactions, including certain recapitalizations of the Company,
that would not constitute a Change in Control under the
Debentures, but that would increase the amount of Senior
Indebtedness (or any other indebtedness) outstanding at such
time. The Company's ability to create any additional Senior
Indebtedness or additional Subordinated Indebtedness is limited
as described in the Debentures and the Indenture although, under
certain circumstances, the incurrence of significant amounts of
additional indebtedness could have an adverse effect on the
Company's ability to service its indebtedness, including the
Debentures. If a Change in Control were to occur, there can be
no assurance that the Company would have sufficient funds at the
time of such event to pay the Change in Control purchase price
for all Debentures tendered by the Holders. A default by the
Company on its obligation to pay the Change in Control purchase
price could, pursuant to cross-default provisions, result in
acceleration of the payment of other indebtedness of the Company
outstanding at that time.

Certain of the Company's existing and future agreements
relating to its indebtedness could prohibit the purchase by the
Company of the Debentures pursuant to the exercise by a Holder of
the foregoing option, depending on the financial circumstances of
the Company at the time any such purchase may occur, because such
purchase could cause a breach of certain covenants contained in
such agreements. Such a breach may constitute an event of
default under such indebtedness and thereby restrict the
Company's ability to purchase the Debentures. See "--Ranking."

MAINTENANCE OF CONSOLIDATED NET WORTH

The Company is required to maintain a Consolidated Net Worth
of at least $18 million. The Indenture provides that if the
Company's Consolidated Net Worth is less than $18 million at the
end of any fiscal quarter, the Company is required to furnish to
the Trustee an Officer's Certificate within 45 days after the end
of such fiscal quarter (90 days after the end of any fiscal year)
notifying the Trustee that the Company's Consolidated Net Worth
has declined below $18 million. If, at any time or from time to
time, the Company's Consolidated Net Worth at the end of each of
any such two consecutive fiscal quarters (the last day of the
second fiscal quarter being referred to as a "Deficiency Date")
is less than $18 million, then the Company shall, in each such
event, no later than 50 days after each Deficiency Date (100 days
if a Deficiency Date is also the end of the Company's fiscal
year), mail to the Trustee and each Holder at such Holder's last
address as it appears on the Debenture Register a notice (the
"Deficiency Notice") of the occurrence of such deficiency, which
shall include an offer by the Company (the"Deficiency Offer") to
repurchase Debentures as described below. The Deficiency Notice
shall state: (i) that a deficiency has occurred; (ii) that the
Company is offering to repurchase 10% of the aggregate principal
amount of Debentures originally issued (or such lesser amount as
may be outstanding at the time of the Deficiency Notice) (the
"Deficiency Repurchase Amount"); (iii) that the repurchase price
shall be 100% of the principal amount of the Debentures
repurchased plus accrued but unpaid interest, if any, to the date
of purchase; (iv) the expiration date of the Deficiency Offer,
which shall be no earlier than 30 days nor later than 45 days
after the date such notice is mailed; (v) the date such purchase
shall be effected, which shall be no later than 20 days after
expiration date of the Deficiency Offer; (vi) that Debentures not
accepted for payment pursuant to the Deficiency Offer shall
continue to accrue interest; (vii) that, unless the Company
defaults in payment of the Deficiency Repurchase Amount, all
Debentures accepted for payment pursuant to the Deficiency Offer
shall cease to accrue interest after the Deficiency Payment Date;
(viii) that if any Debenture is repurchased in part, a new
Debenture or Debentures in principal amount equal to the
unrepurchased portion will be issued; (ix) the name and address
of the paying agent; (x) that Debentures to be repurchased must
be surrendered to the paying agent to collect the repurchase
price; (xi) any other information required by applicable law to
be included therein; and (xii) the procedures determined by the
Company, consistent with the Indenture, that a Holder must follow
in order to have such Debentures repurchased.

The Company shall purchase the Deficiency Repurchase Amount
of Debentures or, if less than the Deficiency Repurchase Amount
has been delivered for repurchase, all Debentures delivered for
repurchase in response to the Deficiency Offer. If the aggregate
principal amount of Debentures delivered for repurchase exceeds
the Deficiency Repurchase Amount, the Company will purchase the
Debentures delivered to it pro rata (in $1,000 increments only)
among the Debentures delivered based on principal amount. The
Company will comply with all applicable securities laws and
regulations in connection with each Deficiency Offer. In no
event shall the failure to meet the minimum Consolidated Net
Worth requirement set forth above at the end of any fiscal
quarter be counted toward the making of more than one Deficiency
Offer.

The Company may credit against the principal amount of
Debentures to be repurchased in any Deficiency Offer 100% of the
principal amount (excluding premium) of Debentures acquired by
the Company subsequent to the Deficiency Date through purchase
(otherwise than pursuant to this provision or a Change of Control
Offer), optional redemption, conversion or exchange and
surrendered for cancellation.

If a Consolidated Net Worth deficiency were to occur, there
can be no assurance that the Company would have sufficient funds
at the time of such event to purchase the Deficiency Repurchase
Amount of Debentures. A default by the Company to so purchase
the Deficiency Repurchase Amount of Debentures could, pursuant to
cross-default provisions, result in acceleration of the payment
of other indebtedness of the Company outstanding at that time.

RANKING

The payment of principal of and premium, if any, and
interest on the Debentures will, to the extent set forth in the
Indenture, be subordinated in right of payment to the prior
payment in full of all Senior Indebtedness (as defined below).
Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment
for the benefit of creditors or marshalling of assets, whether
voluntary, involuntary or in receivership, bankruptcy, insolvency
or similar proceedings, the holders of all Senior Indebtedness
will be first entitled to receive payment in full of all amounts
due or to become due thereon before any payment is made on
account of principal of and premium, if any, and interest on the
Debentures or on account of any other monetary claims under or in
respect of the Debentures, and before any distribution is made to
acquire any of the Debentures for any cash, property or
securities. No payments on account of principal of and premium,
if any, and interest on the Debentures shall be made if at the
time thereof: (i) there is a default in the payment of all or
any portion of the obligations under any Senior Indebtedness or
(ii) there shall exist a default in any covenant with respect to
the Senior Indebtedness (other than as specified in clause (i) of
this sentence), and, in such event, such default shall not have
been cured or waived or shall not have ceased to exist, the
Trustee and the Company shall have received written notice from
any holder of such Senior Indebtedness stating that no payment
shall be made with respect to the Debentures and such default
would permit the maturity of such Senior Indebtedness to be
accelerated, provided that no such default will prevent any
payment on, or in respect of, the Debentures for more than 120
days unless the maturity of such Senior Indebtedness has been
accelerated.

The Holders will be subrogated to the rights of the holders
of the Senior Indebtedness to the extent of payments made on
Senior Indebtedness upon any distribution of assets in any such
proceedings out of the distributive share of the Debentures.

"Senior Indebtedness" is defined to mean the principal of
and premium, if any, and interest on (a) the Debt of the Company
or any of its Subsidiaries which is outstanding on the date of
the Indenture and has been provided by a bank that is not an
Affiliate of the Company or by any State or local government or
agency thereof, (b) any Debt incurred after the date of the
Indenture by the Company or any of its Subsidiaries which
expressly states that it is senior in right of payment to the
Debentures and is provided by a bank that is not an Affiliate of
the Company, (c) any Debt, whether outstanding on the date of the
Indenture or thereafter incurred, which evidences the Company's
obligation to refund any progress payments or deposits to the
United States or any foreign government or any instrumentality
thereof or any prime contractor for any such government or
instrumentality and (d) amendments, renewals, extensions,
modifications and refundings of any such Debt, whether any such
Debt described in (a), (b) or (c) is outstanding on the date of
the Indenture or thereafter created, incurred or assumed, unless
in any case, the instrument creating or evidencing any such Debt
pursuant to which the same is outstanding provides that such Debt
is not superior in right of payment to the Debentures. The
Company's ability to incur Senior Indebtedness after the date of
the Indenture is limited. See "-- Certain Covenants of the
Company - Limitation of Debt and Senior Indebtedness." Only
indebtedness of the Company that is Senior Indebtedness will rank
senior to the Debentures in accordance with the provisions of the
Indenture. The Company has agreed that it will not issue or
incur any Debt (other than Senior Indebtedness or Capitalized
Lease Obligations) unless such Debt (other than Senior
Indebtedness or Capitalized Lease Obligations) will be
subordinate in right of payment to the Debentures at least to the
same extent that the Debentures are subordinate to Senior
Indebtedness. The Company has also agreed that it will not
permit any of its Subsidiaries to issue or incur any Debt (other
than Senior Indebtedness or Capitalized Lease Obligations) unless
such Debt (other than Senior Indebtedness or Capitalized Lease
Obligations) shall provide that such Debt (other than Senior
Indebtedness or Capitalized Lease Obligations) will be
subordinate in right of payment to distributions and dividends
from such Subsidiary to the Company in an amount sufficient to
satisfy the Company s obligations under the Debentures at least
to the same extent the Debentures are subordinate to Senior
Indebtedness. The Debentures are senior in right of payment to
the Company's 1998 Debentures.

The Debentures are unsecured obligations of the Company,
and, accordingly, will rank pari passu with all trade debt and
obligations of the Company and its Subsidiaries that arise by
operation of law or are imposed by any judicial or governmental
authority, except that any such trade debt or other obligation
may be senior in right of payment to the Debentures to the extent
the same is entitled to any security interest arising by
operation of law.

The Debentures are obligations exclusively of the Company,
and the Debentures, as a practical matter, will be effectively
subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of
the Subsidiaries. The right of the Company, and, therefore, the
right of creditors of the Company (including Holders) to receive
assets of any such Subsidiary upon the liquidation or
reorganization of such Subsidiary or otherwise, as a practical
matter, will be effectively subordinated to the claims of such
Subsidiary's creditors, except to the extent the Company is
itself recognized as a creditor of such Subsidiary or such other
creditors have agreed to subordinate their claims to the payment
of the Debentures, in which case the claims of the Company would
still be subordinate to any secured claim on the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Company.

At December 31, 1995, Senior Indebtedness (excluding
current installments) was approximately $2.8 million and the
indebtedness (excluding liability for income taxes) of the
Company's subsidiaries was approximately $16.6 million. The
Company expects that it will from time to time incur additional
indebtedness constituting Senior Indebtedness.

CERTAIN COVENANTS OF THE COMPANY

The Indenture contains, among others, the covenants
summarized below, which are applicable (unless waived or amended)
so long as any of the Debentures are outstanding.

Limitation on Debt and Senior Indebtedness. The Company
will not, and will not permit any of its Subsidiaries to, create,
incur, assume or directly or indirectly guarantee or in any other
manner become directly or indirectly liable for ("incur") any
Debt (including Acquired Debt) or Senior Indebtedness other than
Permitted Debt (as defined); provided, however, that the Company
and, subject to the other limitations set forth herein, its
Subsidiaries may incur Debt or Senior Indebtedness if the Debt to
Operating Cash Flow Ratio of the Company and its Subsidiaries at
the time of incurrence of such Debt, after giving pro forma
effect thereto, is 6.5:1 or less; provided that any such Debt
incurred by the Company that is not Senior Indebtedness shall
have a Weighted Average Life to Maturity longer than the Weighted
Average Life to Maturity of the Debentures. Notwithstanding the
foregoing, at any time the Debt to Operating Cash Flow Ratio of
the Company exceeds 6.5:1, the Company will be permitted to incur
additional Senior Indebtedness pursuant to lines of credit for
working capital of up to $5 million.

For purposes of the foregoing limitations "Permitted Debt"
means (i) Debt evidenced by the Debentures in an aggregate
principal amount not to exceed $25.0 million, (ii) Debt owed by
the Company to any wholly owned Subsidiary of the Company, (iii)
Debt owed by any wholly owned Subsidiary of the Company to the
Company or any other wholly owned Subsidiary of the Company, (iv)
Debt owed to Leonard Newman pursuant to the Newman Agreement, (v)
Capitalized Lease Obligations not in excess of an aggregate of $2
million at any one time outstanding, plus any Capitalized Lease
Obligations from an acquisition outstanding on the date of such
acquisition, (vi) performance bonds or letters of credit incurred
in the ordinary course of business or in connection with
government contracts, (vii) deferred income taxes as defined in
accordance with GAAP, (viii) Debt constituting inter-company
payables or receivables between or among the Company and its
Subsidiaries incurred in the ordinary course of business or (ix)
Refinancing Debt.

A calculation of the Debt to Operating Cash Flow Ratio as
required by this covenant shall be made, in each case, for the
period of four full consecutive fiscal quarters next preceding
the date on which Debt is proposed to be incurred ("Reference
Period"). In addition, for purposes of the pro forma
calculations required to be made above, (i) (x) the amount of
Debt to be incurred (plus all other Debt previously incurred
during such Reference Period), and the amount (valued at its
liquidation value and including any accrued but unpaid dividends)
of Disqualified Stock to be issued (plus all other Disqualified
Stock previously issued during such Reference Period) will be
presumed to have been incurred or issued on the first day of such
Reference Period and (y) the amount of any Debt redeemed,
refinanced or repurchased with the proceeds of the Debt referred
to in clause (x) will be presumed to have been redeemed,
refinanced or repurchased on the first day of such Reference
Period, (ii) if any Asset Disposition occurred during such
Reference Period, the calculations included in the computation of
the Debt to Operating Cash Flow Ratio shall be adjusted to give
effect to such Asset Disposition on a pro forma basis as if such
Asset Disposition had occurred on the first day of such Reference
Period, (iii) if an acquisition of a business or entity occurred
during such Reference Period, the calculations included in the
computation of the Debt to Operating Cash Flow Ratio will be
adjusted to give effect to such acquisition on a pro forma basis
as if such acquisition had occurred on the first day of such
Reference Period and (iv) if such new Debt is being incurred in
connection with an acquisition, no pro forma effect will be given
to negative operating cash flow or losses attributable to the
assets or business so acquired.

Limitation on Additional Debt After Default. The Company
will not, and will not permit any of its Subsidiaries to, incur
any additional Debt (other than Permitted Debt) or Senior
Indebtedness following the occurrence of an Event of Default (as
defined below) unless such Event of Default (and all other Events
of Default then pending) is cured or waived.

Limitation on Preferred Stock. The Company will not, and
will not permit any of its Subsidiaries to, issue any shares of
Disqualified Stock.

Limitation on Dividend Restrictions Affecting Subsidiaries.
The Company may not, and may not permit any of its Subsidiaries
to, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction of any kind on the
ability of any Subsidiary of the Company to (a) pay to the
Company dividends or make to the Company any other distribution
on its Capital Stock, (b) pay any Debt owed to the Company or any
of its Subsidiaries, (c) make loans or advances to the Company or
any of the Company's Subsidiaries or (d) transfer any of its
property or assets to the Company or any of its Subsidiaries,
other than such encumbrances or restrictions existing or created
under or by reason of (i) applicable law, (ii) the Indenture,
(iii) covenants or restrictions contained in any instrument
governing Debt of the Company or any of its Subsidiaries existing
on the date of the Indenture, (iv) customary provisions
restricting subletting, assignment and transfer of any lease
governing a leasehold interest of the Company or any of its
Subsidiaries or in any license or other agreement entered into in
the ordinary course of business, (v) any agreement governing Debt
of a person acquired by the Company or any of its Subsidiaries in
existence at the time of such acquisition (but not created in
contemplation thereof), which encumbrances or restrictions are
not applicable to any person, or the property or assets of any
person, other than the person, or the property or assets of the
person so acquired, (vi) any restriction with respect to a
Subsidiary imposed pursuant to an agreement entered into in
accordance with the terms of the Indenture for the sale or
disposition of Capital Stock or property or assets of such
Subsidiary, pending the closing of such sale or disposition,
(vii) with respect to any Subsidiary, the terms of any contract
with the United States or any foreign government or any
instrumentality thereof or any prime contractor for any such
contract pertaining to retention of funds by such Subsidiary
equivalent to any progress payments or deposits made pursuant to
such contract or (viii) any Refinancing Debt; provided, however,
that the encumbrances or restrictions contained in the agreements
governing any such Refinancing Debt shall be no more restrictive
than the encumbrances or restrictions set forth in the agreements
governing the Debt being refinanced as in effect on the date of
the Indenture.

Limitation on Liens. The Company will not, and will not
permit any of its Subsidiaries, directly or indirectly, to
create, incur, assume or permit to exist any Lien (other than
Permitted Liens) upon or with respect to any of the Property of
the Company or any such Subsidiary, whether owned on the date of
the Indenture or thereafter acquired, or on any income or profits
therefrom, to secure any Debt which is pari passu with or
subordinate in right of payment to the Debentures.

Limitation on Restricted Payments and Investments. The
Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, (i) declare or pay any distribution or
dividend on or in respect of any class of its Capital Stock
(except dividends or distributions payable by wholly owned
Subsidiaries of the Company and dividends or distributions
payable in Qualified Stock of the Company or in options, warrants
or other rights to purchase Qualified Stock of the Company); (ii)
purchase, repurchase, prepay, redeem, defease or otherwise
acquire or retire for value (other than in Qualified Stock of the
Company or in options, warrants or other rights to purchase
Qualified Stock of the Company) any Capital Stock in the Company
or any of its Subsidiaries (other than a wholly owned Subsidiary
of the Company); (iii) make or permit any Subsidiary to make an
Investment (other than Permitted Investments) in any of its or
their Affiliates or any Related Person, or any payment on a
guaranty of any obligation of any of its or their Affiliates or
any Related Person (other than (a) of any wholly owned Subsidiary
or (b) of any other Subsidiary in an amount equal to the amount
of the obligation with respect to which such guaranty relates
multiplied by the fraction whose numerator is the ownership
percentage of such Subsidiary by the Company and its wholly owned
Subsidiaries and whose denominator is 100%); or (iv) repay,
prepay, redeem, defease, retire or refinance, prior to scheduled
maturity or scheduled sinking fund payment, any other Debt which
is pari passu with, or subordinate to, the Debentures (other than
(x) by the payment of Qualified Stock of the Company or of
options, warrants or other rights to purchase Qualified Stock of
the Company or (y) up to $10.0 million aggregate principal amount
of the 1998 Debentures) except, in the case of this clause (iv),
if the proceeds used for such repayment, prepayment, redemption,
defeasance, retirement or refinancing are generated from the
issuance of Refinancing Debt (any such declaration, payment,
distribution, purchase, repurchase, prepayment, redemption,
defeasance or other acquisition or retirement or Investment
referred to in clauses (i) through (iv) above being hereinafter
referred to as a "Restricted Payment"); unless at the time of and
after giving effect to a proposed Restricted Payment (the value
of any such payment, if other than cash, as determined by the
Board of Directors, including the affirmative vote of the
Independent Directors, whose determination shall be conclusive
and evidenced by a board resolution) (a) no Event of Default (and
no event that, after notice or lapse of time, or both, would
become an Event of Default) shall have occurred and be continuing
and, (b) the Company could incur an additional $1.00 of Debt
pursuant to the first sentence under "Limitation on Debt and
Senior Indebtedness" above.

Limitation on Stock Splits, Consolidations and
Reclassifications. The Company will not effect a stock split,
consolidation or reclassification of any class of its Capital
Stock unless (a) an equivalent stock split, consolidation or
reclassification is simultaneously made with respect to each
other class of Capital Stock of the Company and all securities
exchangeable or exercisable for or convertible into any Capital
Stock of the Company, and (b) after such stock split,
consolidation or reclassification all of the relative voting,
dividend and other rights and preferences of each class of
Capital Stock of the Company are identical to those in effect
immediately preceding such stock split, consolidation or
reclassification. Notwithstanding the foregoing, the Company may
combine its Class A Common Stock and Class B Common Stock into a
single class of Common Stock, such that the holder of each share
of Class A Common Stock or Class B Common Stock outstanding
immediately prior to such combination shall, from and after such
combination, be entitled to the same voting, dividend,
liquidation and other rights and preferences with respect to such
share as every other holder of Class A Common Stock or Class B
Common Stock.

Limitation on Sales of Assets and Subsidiary Stock. The
Company will not, and will not permit any of its Subsidiaries to,
make any Asset Disposition having a fair market value or
resulting in gross proceeds to the Company or any such Subsidiary
in excess of $1.0 million in any single transaction or series of
related transactions or $5.0 million in the aggregate over the
life of the Debentures, unless the Company or any such Subsidiary
receives consideration at the time of such Asset Disposition at
least equal to the fair market value (as determined by the Board
of Directors of the Company and evidenced by a board resolution)
of the interests and assets subject to such Asset Disposition.

Transactions with Related Persons. The Company will not,
and will not permit any of its Subsidiaries to, directly or
indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with (a) any
beneficial owner of 20% or more of the outstanding voting
securities of the Company (as determined in accordance with
Section 13(d) of the Exchange Act) at the time of such
transaction, (b) any officer, director or employee of the
Company, of any of its Subsidiaries or of any such beneficial
owner of 20% or more of the outstanding voting securities of the
Company as described in clause (a) above or (c) any Related
Person unless such transaction or series of transactions (i)
involves an amount of $250,000 or less or (ii)(A) is on terms
that are no less favorable to the Company or any such Subsidiary,
as the case may be, than would be available in a comparable
transaction with an unrelated third party and (B)(x) if such
transaction or series of related transactions involve aggregate
payments in excess of $400,000, the Company delivers an officers'
certificate to the Trustee certifying that such transaction
complies with clause (ii)(A) above and such transaction or series
of transactions is approved by a majority of the Board of
Directors of the Company including the approval of each of the
Independent Directors or (y) if such transaction or series of
related transactions involve aggregate payments in excess of $1.5
million, the Company obtains an opinion as to the fairness to the
Company or such Subsidiary from a financial point of view issued
by an investment banking firm, appraisal firm or accounting firm,
in each case of national standing. Notwithstanding the
foregoing, this provision will not apply to (i) any transaction
entered into between the Company and Subsidiaries of the Company
(but excluding transactions with any Subsidiary of which more
than 20% of the outstanding voting securities (as determined in
accordance with Section 13(d) under the Exchange Act) are
beneficially owned by Persons who are (a) officers, directors or
employees of the Company, of any of its Subsidiaries or of any
beneficial owner of 20% or more of the outstanding voting
securities of the Company (as determined in accordance with
Section 13(d) under the Exchange Act) at the time of such
transaction, (b) a beneficial owner of 20% or more of the
outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) or (c)
Related Persons), (ii) the payment of compensation and provision
of benefits to officers and employees of the Company and loans
and advances to such officers and employees in the ordinary
course of business, or any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise
(including the grant of stock options or similar rights to
officers, employees and directors of the Company or any
Subsidiary) pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans or other
benefit plans approved by the Independent Directors, (iii) the
Newman Agreement and the Gross Agreement and (iv) transactions
with any Person who is a director of the Company or of any of its
Subsidiaries and, who is not (a) the beneficial owner of 20% or
more of the outstanding voting securities of the Company (as
determined in accordance with Section 13(d) under the Exchange
Act) or (b) an officer or employee of the Company, of any of its
Subsidiaries or of any such beneficial owner of 20% or more of
the outstanding voting securities of the Company at the time of
such transaction.

Limitation of Payments to Affiliates after Default. The
Company shall not enter into any transaction with any Person who
is an officer or director of the Company, or of any of its
Subsidiaries, or of any beneficial owner of 20% or more of the
outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) at the time
of such transaction (but excluding the Persons identified below)
unless it is provided that the Company's monetary obligations
with respect thereto are subordinate in right of payment to the
Debentures at least to the same extent as the Debentures are
subordinate to Senior Indebtedness. The Company shall not permit
any of its Subsidiaries to enter into any transaction with any
Person who is an officer or director of the Company, or of any of
its Subsidiaries or of any beneficial owner of 20% or more of the
outstanding voting securities of the Company (as determined in
accordance with Section 13(d) under the Exchange Act) at the time
of such transaction (but excluding the Persons identified below)
unless it is provided that such Subsidiary's monetary obligations
with respect thereto are subordinate in right of payment to
distributions and dividends from such Subsidiary to the Company
in an amount sufficient to satisfy the Company's obligations
under the Debentures at least to the same extent that the
Debentures are subordinate to Senior Indebtedness.
Notwithstanding the foregoing, such limitation shall not apply to
(i) the regular compensation payable to any person who is an
employee of the Company, (ii) payments made pursuant to any
pension or other plan made available to employees (including
officers) of the Company and either existing on the date of the
Indenture or thereafter approved by the Independent Directors,
(iii) payments pursuant to the Newman Agreement or the Gross
Agreement or (iv) any payment made to a director of the Company
or of any of its Subsidiaries who is not (a) the beneficial owner
of 20% or more of the outstanding voting securities of the
Company (as determined in accordance with section 13(d) under the
Exchange Act) or (b) an officer or employee of the Company, of
any of its Subsidiaries or of any such beneficial owner of 20% or
more of the outstanding voting securities of the Company at the
time of such transaction.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company, without the consent of the Holders of any of
the Debentures, may consolidate with or merge into any other
entity or convey, transfer, sell or lease its assets
substantially as an entirety to any person or entity, provided
that: (i) either (a) the Company is the continuing corporation or
(b) the corporation or other entity formed by such consolidation
or into which the Company is merged or the person or entity to
which such assets are conveyed, transferred, sold or leased is
organized under the laws of the United States or any state
thereof or the District of Columbia and expressly assumes all
obligations of the Company under the Debentures and the
Indenture, (ii) immediately after and giving effect to such
merger, consolidation, conveyance, transfer, sale or lease no
Event of Default, and no event which, after notice or lapse of
time, would become an Event of Default, under the Indenture shall
have occurred and be continuing, (iii) upon consummation of such
consolidation, merger, conveyance, transfer, sale or lease, the
Debentures and the Indenture will be a valid and enforceable
obligation of the Company or such successor and (iv) the Company
has delivered to the Trustee an officer's certificate and an
opinion of counsel, each stating that such consolidation, merger,
conveyance, transfer, sale or lease complies with the provisions
of the Indenture.

EVENTS OF DEFAULT

The following will be Events of Default under the Indenture:
(a) failure to pay principal of or premium, if any, on any
Debenture when due and payable at maturity, upon redemption, upon
a Change of Control Offer, Deficiency Offer or otherwise, whether
or not such payment is prohibited by the subordination provisions
of the Indenture; (b) failure to pay any interest on any
Debenture when due and payable, which failure continues for 30
days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (c) failure to perform
the other covenants of the Company in the Indenture, which
failure continues for 60 days after written notice as provided in
the Indenture; (d) a default occurs (after giving effect to any
applicable grace periods or any extension of any maturity date)
in the payment when due of principal of and or acceleration of,
any indebtedness for money borrowed by the Company or any of its
Subsidiaries in excess of $1.0 million, individually or in the
aggregate, if such indebtedness is not discharged, or such
acceleration is not annulled, within 10 days after written notice
as provided in the Indenture; and (e) certain events of
bankruptcy, insolvency or reorganization of the Company or any
Subsidiary. Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default shall
occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at
the request or direction of any of the Holders, unless such
Holders shall have offered to the Trustee reasonable indemnity.
Subject to such provisions for the indemnification of the
Trustee, the Holders of a majority in aggregate principal amount
of the outstanding Debentures will have the right to direct the
time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power
conferred on the Trustee.

If an Event of Default shall occur and be continuing, either
the Trustee or the Holders of at least 25% in aggregate principal
amount of the then outstanding Debentures may accelerate the
maturity of all Debentures; provided, however, that after such
acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal
amount of the then outstanding Debentures may, under certain
circumstances, rescind and annul such acceleration if all Events
of Default, other than the non-payment of accelerated principal,
have been cured or waived as provided in the Indenture. For
information as to waiver of defaults, see "Modification and
Waivers."

No Holder of any Debenture will have any right to institute
any proceeding with respect to the Indenture or for the
appointment of a receiver or trustee or for any other remedy
thereunder unless (i) such Holder shall have previously given to
the Trustee written notice of a continuing Event of Default, (ii)
the Holders of at least 25% in aggregate principal amount of the
then outstanding Debentures shall have made written request, and
offered indemnity satisfactory to the Trustee to institute such
proceeding as trustee, (iii) the Trustee shall have failed to
institute such proceeding within 60 days after the receipt of
such notice and (iv) no direction inconsistent with such request
shall have been given to the Trustee during such 60-day period by
the Holders of a majority in aggregate principal amount of the
then outstanding Debentures.

The Company will be required to furnish annually to the
Trustee a statement as to the performance by the Company of
certain of its obligations under the Indenture and as to any
default in such performance.

MODIFICATIONS AND WAIVERS

Modifications and amendments of the Indenture may be made by
the Company and the Trustee with the consent of the Holders of
not less than a majority in aggregate principal amount of the
then outstanding Debentures held by persons other than Affiliates
of the Company; provided, however, that no such modification or
amendment may, without the consent of the Holder of each
outstanding Debenture affected thereby, (i) change the stated
maturity of, or any installment of interest on, any Debenture,
(ii) reduce the principal amount of any Debenture or reduce the
rate or extend the time of payment of interest on any Debenture,
(iii) increase the conversion price (other than in connection
with a reverse stock split as provided in the Indenture), (iv)
change the place or currency of payment of principal of, or
premium or repurchase price, if any, or interest on, any
Debenture, (v) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debenture,
(vi) adversely affect the right to exchange or convert
Debentures, (vii) reduce the percentage of the aggregate
principal amount of outstanding Debentures, the consent of the
Holders of which is necessary to modify or amend the Indenture,
(viii) reduce the percentage of the aggregate principal amount of
outstanding Debentures, the consent of the Holders of which is
necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults, (ix) modify the
provisions of the Indenture with respect to the subordination of
the Debentures in a manner adverse to the Holders, (x) modify the
provisions of the Indenture with respect to the right to require
the Company to repurchase Debentures in a manner adverse to the
Holders or (xi) modify the provisions of the Indenture with
respect to the vote necessary to amend this provision.

The Holders of a majority in aggregate principal amount of
the outstanding Debentures held by persons other than Affiliates
of the Company may, on behalf of all Holders, waive any past
default under the Indenture or Event of Default, except a default
in the payment of principal, premium, if any, or interest on any
of the Debentures or in respect of a provision which under the
Indenture cannot be modified without the consent of the Holder of
each outstanding Debenture.

DISCHARGE OF INDENTURE

The Indenture provides that the Company may defease and be
discharged from its obligations in respect of the Debentures
while the Debentures remain outstanding (except for certain
obligations to convert the Debentures into Common Stock, register
the transfer, substitution or exchange of Debentures, to replace
stolen, lost or mutilated Debentures and to maintain an office or
agency and the rights, obligations and immunities of the
Trustee), if all outstanding Debentures will become due and
payable at their scheduled maturity within one year and the
Company has irrevocably deposited, or caused to be deposited,
with the Trustee (or another trustee satisfying the requirements
of the Indenture), in trust for such purpose, (a) money in an
amount, (b) U.S. Government Obligations (as defined below) which
through the payment of principal, premium, if any, and interest
in accordance with their terms will provide money in an amount,
or (c) a combination thereof, sufficient in the opinion of a
nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the
Trustee, to pay the principal of, premium, if any, and interest
on the outstanding Debentures at maturity or upon redemption,
together with all other amounts payable by the Company under the
Indenture. Such defeasance will become effective 91 days after
such deposit only if, among other things, (x) no Default or Event
of Default with respect to the Debentures has occurred and is
continuing on the date of such deposit or occurs as a result of
such deposit or at any time during the period ending on the 91st
day after the date of such deposit, (y) such defeasance does not
result in a breach or violation of, or constitute a default
under, any other agreement or instrument to which the Company is
a party or by which it is bound, and (z) the Company has
delivered to the Trustee (A) either a private Internal Revenue
Service ruling or an opinion of counsel that Holders will not
recognize income, gain or loss for federal income tax purposes as
a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount, in the same
manner, and at the same times, as would have been the case if
such deposit, defeasance and discharge had not occurred, (B) an
opinion of counsel to the effect that the deposit shall not
result in the Company, the Trustee or the trust being deemed to
be an "investment company" under the Investment Company Act of
1940, as amended, and (C) an officers' certificate and an opinion
of counsel, each stating that all conditions precedent relating
to a defeasance have been complied with. Notwithstanding the
foregoing, the Company's obligations to pay principal, premium,
if any, and interest on the Debentures shall continue until the
Internal Revenue Service ruling or opinion of counsel referred to
in clause (z) (B) above is provided.

REPORTS TO HOLDERS

So long as the Company is subject to the periodic reporting
requirements of the Exchange Act it will continue to furnish the
information required thereby to the Commission. The Indenture
provides that even if the Company is entitled under the Exchange
Act not to furnish such information to the Commission or to the
Holders, it will nonetheless continue to furnish information
under Section 13 of the Exchange Act to the Commission and the
Trustee as if it were subject to such periodic reporting
requirements.

GOVERNING LAW

The Indenture and the Debentures are governed by, and
construed in accordance with, the laws of the State of New York,
without giving effect to such State's conflicts of law
principles.

INFORMATION CONCERNING THE TRUSTEE

The Company and its Subsidiaries may maintain deposit
accounts and conduct other banking transactions with the Trustee
or its affiliates in the ordinary course of business, and the
Trustee and its affiliates may from time to time in the future
provide the Company and its Subsidiaries with banking and
financial services in the ordinary course of their businesses.

CERTAIN DEFINITIONS

Set forth below is a summary of certain defined terms used
in the Indenture. Reference is made to the Indenture for the
full definition of all such terms and for the definitions of
other defined terms used in the Prospectus and not defined below.

"Acquired Debt" of any specified person means Debt of any
other person existing at the time such other person merged with
or into or became a Subsidiary of such specified person,
including Debt incurred in connection with, or in contemplation
of, such other person becoming a Subsidiary of such specified
person.

"Affiliate" of any specified Person means (i) any other
Person who, directly or indirectly, is in control of, is
controlled by or is under common control with such specified
Person or (ii) any Person who is a director or officer (a) of
such specified Person, (b) of any Subsidiary of such specified
Person or (c) of any Person described in clause (i) above. For
purpose of this definition, control of a person means the power,
directly or indirectly, to direct or cause the direction of the
management and policies of such person whether by contract or
otherwise; and the terms "controlling" or "controlled" have
meanings correlative to the foregoing.

"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or
dispositions) of Capital Stock of a Subsidiary, property or other
asset (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Subsidiaries other
than (i) any disposition by any Subsidiary of the Company to the
Company or by the Company or any Subsidiary of the Company to a
wholly owned Subsidiary of the Company, (ii) a disposition of
property or assets in the ordinary course of business and (iii)
any issuance or sale by the Company of its Capital Stock,
including any disposition by means of a merger, consolidation or
similar transaction.

"Capital Stock" of any person means any and all shares,
interests, rights to purchase, warrants, options, participations
or other equivalents of or interests in the common or preferred
equity (however designated) of such person, including, without
limitation, partnership interests.

"Capitalized Lease Obligation" means, with respect to any
person for any period, an obligation of such person to pay rent
or other amounts under a lease that is required to be capitalized
for financial reporting purposes in accordance with GAAP; and the
amount of such obligation shall be the capitalized amount shown
on the balance sheet of such person as determined in accordance
with GAAP.

"Common Stock" as applied to the Capital Stock of any
corporation, means the common equity (however designated) of such
Person.

"Consolidated Net Income" means, for any fiscal period, the
Net Income or loss of the Company and its Subsidiaries as the
same would appear on a consolidated statement of earnings of the
Company for such fiscal period prepared in accordance with GAAP,
provided that (i) any extraordinary gain (but not loss) and any
gain (but not loss) on sales of assets outside the ordinary
course of business, in each case together with any related
provisions for taxes, realized during such period shall be
excluded, (ii) the results of operations of any person acquired
in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, (iii) Net Income
attributable to any person other than a Subsidiary that is at
least 50% owned by the Company shall be included only to the
extent of the amount of cash dividends or distributions actually
paid to the Company or a Subsidiary of the Company during such
period, (iv) any extraordinary charge resulting from the
repurchase of the Debentures shall be excluded and (v) the
cumulative effect of a change in accounting principles based upon
the implementation of a change required by the Financial
Accounting Standards Board shall be excluded.

"Consolidated Net Worth" means, for any fiscal period, the
net stockholders' equity of the Company and its Subsidiaries as
the same would appear on the consolidated balance sheet of the
Company as at the end of such fiscal period prepared in
accordance with GAAP.

"Continuing Directors" means any member of the Board of
Directors of the Company who (i) is a member of that Board of
Directors on the date of the Indenture or (ii) was nominated for
election or elected to the Board of Directors with the
affirmative vote of a majority of the Continuing Directors who
were members of the Board at the time of such nomination or
election.

"Current Market Price" means, when used with respect to any
security as of any date, the last sale price, regular way, or, in
case no such sale takes place on such date, the average of the
closing bid and asked prices, regular way, in either case as
reported for consolidated transactions on the New York Stock
Exchange or, if the security is not listed or admitted to trading
on the New York Stock Exchange, as reported for consolidated
transactions with respect to securities listed on the principal
national securities exchange on which such security is listed or
admitted to trading or, if the security is not listed or admitted
to trading on any national securities exchange, the last quoted
price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated
Quotations System or such other system then in use or, if the
security is not quoted by any such organization, the average of
the closing bid and asked prices furnished by a New York Stock
Exchange member firm selected by the Company. "Current Market
Price" means, when used with respect to any Property other than a
security as of any date, the market value of such Property on
such date as determined by the Board of Directors of the Company
in good faith, which shall be entitled to rely for such purposes
on the advice of any firm of investment bankers or appraisers
having familiarity with such Property.

"Debt" of any person as of any date means and includes,
without duplication, (i) the principal of and premium, if any, in
respect of indebtedness of such person, contingent or otherwise,
for borrowed money, including, without limitation, all interest,
fees and expenses owed with respect thereto (whether or not the
recourse of the lender is to the whole of the assets of such
person or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments, or representing the
deferred and unpaid balance of the purchase price of any property
or interest therein or services, if and to the extent such
indebtedness would appear as a liability (other than a liability
for accounts payable and accrued expenses incurred in the
ordinary course of business) upon a balance sheet of such person
prepared on a consolidated basis in accordance with GAAP, (ii)
all obligations issued or contracted for as payment in
consideration of the purchase by such person of the Capital Stock
or substantially all of the assets of another person or as a
result of a merger or a consolidation (other than any earn-outs
or installment payments), (iii) all Capitalized Lease Obligations
of such person, (iv) all obligations of such person in respect of
letters of credit or similar instruments or reimbursement of
letters of credit or similar instruments (whether or not such
items would appear on the balance sheet of such person), (v) all
net obligations of such person in respect of interest rate
protection and foreign currency hedging arrangements, (vi) all
guarantees by such person of items that would constitute Debt
under this definition (whether or not such items would appear on
such balance sheet), and (vii) the amount of all obligations of
such person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock, but only to the extent such
obligations arise on or prior to January 1, 2004; provided,
however, that Debt issued at a discount from par shall be treated
as if issued at par. The amount of Debt of any person at any
date shall be the outstanding balance on such date of all
unconditional obligations as described above and the maximum
determinable liability, upon the occurrence of the liability
giving rise to the obligation, of any contingent obligations
referred to in clauses (i), (iv), (vi) and (vii) above at such
date.

"Debt to Operating Cash Flow Ratio" means, as of any date of
determination, the ratio of (i) (a) the aggregate principal
amount of all outstanding Debt of the Company and its
Subsidiaries as of such date on a consolidated basis plus (b) the
aggregate par or stated value of all outstanding Preferred Stock
of the Company and its Subsidiaries as reflected on the Company's
most recent consolidated balance sheet prepared in accordance
with GAAP (excluding any such Preferred Stock held by the Company
or a wholly owned Subsidiary of the Company) or, if greater with
respect to any class of Capital Stock which is Disqualified
Stock, the aggregate redemption amount thereof as reflected on
the Company's most recent consolidated balance sheet (excluding
any such Disqualified Stock held by the Company or a wholly owned
Subsidiary of the Company) to (ii) Operating Cash Flow of the
Company and its Subsidiaries on a consolidated basis for the four
most recent full fiscal quarters ending immediately prior to such
date, determined on a pro forma basis as set forth in the
covenant "Limitation on Debt and Senior Indebtedness."

"Disqualified Stock" means any Capital Stock which, by its
terms or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the
holder thereof or mandatorily (except to the extent that such
exchange or conversion right cannot be exercised or such
mandatory conversion cannot occur prior to January 1, 2004), is,
or upon the happening of an event or the passage of time would
be, (a) required to be redeemed or repurchased by the Company or
any of its Subsidiaries, including at the option of the holder,
in whole or in part, or has, or upon the happening of an event or
passage of time would have, a redemption or similar payment due
prior to January 1, 2004 or (b) exchangeable or convertible into
debt securities of the Company or any of its Subsidiaries at the
option of the holder thereof or mandatorily, except to the extent
that such exchange or conversion right cannot be exercised or
such mandatory conversion cannot occur on or prior to January 1,
2004.

"GAAP" means, as of any date, generally accepted accounting
principles in the United States and does not include any
interpretations or regulations that have been proposed but that
have not become effective.

"Independent Directors" means directors that (i) are not 20%
or greater stockholders of the Company or the designee of any
such stockholder, (ii) are not officers or employees of the
Company, any of its Subsidiaries or of a stockholder referred to
above in clause (i), (iii) are not Related Persons and (iv) do
not have relationships that, in the opinion of the Board of
Directors, would interfere with their exercise of independent
judgment in carrying out the responsibilities of the directors.

"Investment" means any loan or advance to any person, any
acquisition of any interest in any other person (including (i)
with respect to a corporation, any and all shares, interests,
rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate
stock, including any Preferred Stock and any securities
convertible or exchangeable for any of the foregoing, bonds,
notes, debentures, loans or other securities or Debt of such
other person and (ii) with respect to a partnership or similar
person, any and all units, interests, rights to purchase,
warrants, options, participations or other equivalents of or
other partnership interests in (however designated) such person
and any securities convertible or exchangeable for any of the
foregoing), any capital contribution to any other person, or any
other investment in any other person, other than (a) advances to
officers and employees in the ordinary course of business, (b)
creation of receivables in the ordinary course of business and
(c) negotiable instruments endorsed for collection in the
ordinary course of business.

"Lien" means any mortgage, lien, pledge, charge, security
interest or other encumbrance of any nature whatsoever (including
any conditional sale or other title retention agreement, any
lease in the nature thereof and any agreement to give any
security interest).

"Net Income" of any person means the net income (or loss) of
such person, determined in accordance with GAAP, excluding,
however, from the determination of Net Income any extraordinary
gain (but not loss) and any gain (but not loss) realized upon the
sale or other disposition (including, without limitation,
dispositions pursuant to sale-leaseback transactions) of any real
property or equipment of such person, which is not sold or
otherwise disposed of in the ordinary course of business, or of
any Capital Stock of a Subsidiary of such person.

"Operating Cash Flow" means, with respect to the Company and
its Subsidiaries for any period, the Consolidated Net Income of
the Company and its Subsidiaries for such period, plus (i)
extraordinary net losses and net losses on sales of assets other
than in the ordinary course of business during such period, to
the extent such losses were deducted in computing Consolidated
Net Income, plus (ii) provision for taxes based on income or
profits, to the extent such provision for taxes was included in
computing such Consolidated Net Income, and any provision for
taxes utilized in computing the net losses under clause (i)
hereof, plus (iii) to the extent deducted in calculating
Consolidated Net Income, Total Interest Expense of the Company
and its Subsidiaries for such period, plus (iv) depreciation,
amortization and all other non-cash charges, to the extent such
depreciation, amortization and other non-cash charges (excluding
any such non-cash charges to the extent that they require an
accrual of or reserve for cash charges for any future periods)
were deducted in calculating such Consolidated Net Income
(including amortization of goodwill and other intangibles).

"Permitted Investments" means (i) Investments in the Company
or in a Subsidiary of the Company; (ii) Investments by the
Company or any Subsidiary of the Company in a person, if as a
result of such Investment (a) such person becomes or is a wholly
owned Subsidiary of the Company or the Subsidiary making such
Investment or (b) such person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company, the
Subsidiary making such Investment or a wholly owned Subsidiary of
either the Company or such Subsidiary making such Investment
(provided that any subsequent issuance or transfer of any
interests or other transaction which results in any such wholly
owned Subsidiary ceasing to be a wholly owned Subsidiary of the
Company, the Subsidiary making such Investment or another wholly
owned Subsidiary of either the Company or such Subsidiary making
such Investment, or any subsequent transfer of such Permitted
Investment (other than to the Company, the Subsidiary making such
Investment or another wholly owned Subsidiary of either the
Company or such Subsidiary making such Investment) shall be
deemed for the purposes hereof to constitute the making of a new
Investment by the maker thereof and therefore subject to a new
determination of whether such Investment qualifies as a Permitted
Investment); (iii) U.S. Government Obligations maturing within
one year of the date of acquisition thereof; (iv) certificates of
deposit maturing within one year of the date of acquisition
thereof issued by a bank or trust company that is organized under
the laws of the United States or any state thereof having
capital, surplus and undivided profits aggregating in excess of
$100,000,000; (v) repurchase agreements with respect to U.S.
Government Obligations; and (vi) Investments in commercial paper
rated at least A1 or the equivalent thereof by Standard & Poor's
Corporation or P1 or the equivalent thereof by Moody's Investor
Services, Inc. and maturing not more than 90 days from the date
of the acquisition thereof.

"Permitted Liens" means (i) Liens for taxes, assessments or
governmental charges or claims that either (a) are not yet
delinquent or (b) are being contested in good faith by
appropriate proceedings and as to which appropriate reserves have
been established or other provisions have been made in accordance
with GAAP; (ii) statutory Liens of landlords and carriers',
warehousemen's, mechanics', suppliers', materialmen's,
repairmen's or other Liens imposed by law and arising in the
ordinary course of business and with respect to amounts that, to
the extent applicable, either (a) are not yet delinquent by more
than 30 days or (b) are being contested in good faith by
appropriate proceedings and as to which appropriate reserves have
been established or other provisions have been made in accordance
with GAAP; (iii) Liens (other than any Lien imposed by the
Employee Retirement Income Security Act of 1974, as amended)
incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security; (iv) judgment or other similar
Liens arising in connection with court proceedings, provided that
(a) the execution or enforcement of each such Lien is effectively
stayed within 30 days after entry of such judgment (or such
judgment has been discharged within such 30 day period), the
claims secured thereby are being contested in good faith by
appropriate proceedings timely commenced and diligently
prosecuted and the aggregate amount of the claims secured thereby
does not exceed $1,000,000 at any time or (b) the payment of
which is covered in full by insurance and the insurance company
has not denied or contested coverage thereof; (v) Liens existing
on property or assets of any entity at the time it becomes a
Subsidiary or existing on property or assets at the time of the
acquisition thereof by the Company or any of its Subsidiaries,
which Liens were not created or assumed in contemplation of, or
in connection with, such entity becoming a Subsidiary or such
acquisition, as the case may be, and which attach only to such
property or assets, provided that the Debt secured by such Liens
is not thereafter increased; (vi) Liens incurred in connection
with Capitalized Lease Obligations otherwise permitted under the
Indenture; (vii) Liens securing Refinancing Debt, provided that
such Liens only extend to the property or assets securing the
Debt being refinanced, such Refinanced Debt was previously
secured by similar Liens on such property or assets and the Debt
or other obligations secured by such Liens is not increased;
(viii) Liens securing the advance of progress payments or
deposits made by the United States or any foreign government or
any instrumentality thereof or any prime contractor for any such
government or instrumentality and received by the Company in the
ordinary course of its business; (ix) the Lien created by the
Master Security Agreement between General Electric Capital
Corporation and OMI Acquisition Corporation dated as of August
28, 1995; and (x) any other Liens existing on the date of the
Indenture.

"Preferred Stock" means, with respect to any person, Capital
Stock of such person of any class or classes (however designated)
which is preferred as to the payments of dividends or
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
person, over any other class of the Capital Stock of such person.

"Property" of any person means all types of real, personal,
tangible, intangible or mixed property owned by such person
whether or not included on the most recent consolidated balance
sheet of such person in accordance with GAAP.

"Qualified Stock" means Capital Stock of the Company that is
not Disqualified Stock.

"Refinancing Debt" means Debt that refunds, refinances or
extends any Debentures, or other Debt existing on the date of the
Indenture or thereafter incurred by the Company or its
Subsidiaries pursuant to the terms of the Indenture, but only to
the extent that (i) the Refinancing Debt is subordinated to the
Debentures to the same extent as the Debt being refunded,
refinanced or extended, if at all, (ii) the Refinancing Debt is
scheduled to mature either (a) no earlier than the Debt being
refunded, refinanced or extended, or (b) after the maturity date
of the Debentures, (iii) the portion, if any, of the Refinancing
Debt that is scheduled to mature on or prior to the maturity date
of the Debentures has a Weighted Average Life to Maturity at the
time such Refinancing Debt is incurred that is equal to or
greater than the Weighted Average Life to Maturity of the portion
of the Debt being refunded, refinanced or extended that is
scheduled to mature on or prior to the maturity date of the
Debentures, (iv) such Refinancing Debt is in an aggregate
principal amount that is equal to or less than the aggregate
principal amount then outstanding under the Debt being refunded,
refinanced or extended, plus customary fees and expenses
associated with refinancing and (v) such Refinancing Debt is
incurred by the same person that initially incurred the Debt
being refunded, refinanced or extended, except that (a) the
Company may incur Refinancing Debt to refund, refinance or extend
Debt of any Subsidiary of the Company, and (b) any Subsidiary of
the Company may incur Refinancing Debt to refund, refinance or
extend Debt of any other wholly owned Subsidiary of the Company.

"Related Person" means an individual related to an officer,
director or employee of the Company or any of its Affiliates
which relation is by blood, marriage or adoption and not more
remote than first cousin.

"Subsidiary" of any person means a corporation or other
entity a majority of whose Capital Stock with voting power, under
ordinary circumstances, entitling holders of such Capital Stock
to elect the board of directors or other governing body, is at
the time, directly or indirectly, owned by such person and/or a
Subsidiary or Subsidiaries of such person.

"Total Interest Expense" means, for any period, the interest
expense of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP,
whether paid or accrued (including amortization of original issue
discount, non-cash interest payments and the interest component
of capital leases, but excluding amortization of debt and
Preferred Stock issuance costs).

"U.S. Government Obligations" means non-callable (i) direct
obligations (or certificates representing an ownership interest
in such obligations) of the United States for which its full
faith and credit are pledged and (ii) obligations of a person
controlled or supervised by, and acting as an agency or
instrumentality of, the United States, the payment of which is
unconditionally guaranteed as a full faith and credit obligation
of the United States.

"Weighted Average Life to Maturity" means, when applied to
any Debt or Preferred Stock or portions thereof (if applicable)
at any date, the number of years obtained by dividing (i) the
then outstanding principal amount or liquidation amount of such
Debt or Preferred Stock or portions thereof (if applicable) into
(ii) the sum of the products obtained by multiplying (a) the
amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by (b) the number
of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment.

BOOK-ENTRY; DELIVERY AND FORM

Except as set forth below, the Debentures were initially
issued in the form of registered debentures in global form
without coupons (each, a "Global Debenture"). The Global
Debentures were deposited on the date of the closing of the sale
of the Debentures (the "Closing Date") with, or on behalf of, the
Depository Trust Company (the "Depository") and registered in the
name of Cede & Co., as nominee of the Depository. Interests in
the Global Debentures were available for purchase pursuant to the
Debenture Offering only by "qualified institutional buyers," as
defined in Rule 144A under the Securities Act ("QIBs"). The
Debentures to be resold as set forth herein will be initially
issued in global form (the "New Global Debentures").

Debentures that were (i) originally issued to or transferred
to institutional "accredited investors," as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act (an
"Institutional Accredited Investor"), who are not QIBs or to any
other persons who are not QIBs or (ii) issued as described below
under "-- Certificated Debentures," were issued in registered
form without coupons (the "Certificated Debentures").

The Depository has advised the Company that it is (i) a
limited purpose trust company organized under the laws of the
State of New York, (ii) a member of the Federal Reserve System,
(iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The
Depository was created to hold securities for its participants
(collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants
through electronic book-entry changes to the accounts of its
Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants
include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and
certain other organizations. Access to the Depository's system
is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly.

The Company expects that pursuant to procedures established
by the Depository (i) upon deposit of the Global Debentures or
New Global Debentures, the Depository will credit the accounts of
Participants with an interest in the Global Debenture or New
Global Debentures, as applicable, and (ii) ownership of the
Debentures will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the
Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in
definitive form of securities that they own and that security
interest in negotiable instruments can only be perfected by
delivery of certificates representing the instruments.
Consequently, the ability to transfer Debentures or to pledge the
Debentures as collateral will be limited to such extent.

So long as the Depository or its nominee is the registered
owner of the Global Debentures or the New Global Debentures, as
the case may be, the Depository or such nominee, as the case may
be, will be considered the sole owner or Holder of the Debentures
represented by the Global Debentures or the New Global
Debentures, as the case may be, for all purposes under the
Indenture. Except as provided below, owners of beneficial
interests in the Global Debentures or the New Global Debentures,
as the case may be, will not be entitled to have Debentures
represented by such Global Debentures or New Global Debentures,
registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Debentures, and will
not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to giving of
any directions, instruction or approval to the Trustee
thereunder. As a result, the ability of a person having a
beneficial interest in Debentures represented by a Global
Debenture or a New Global Debenture, as the case may be, to
pledge such interest to persons or entities that do not
participate in the Depository's system or to otherwise take
action with respect to such interest, may be affected by the lack
of a physical certificate evidencing such interest.

Accordingly, each holder owning a beneficial interest in a
Global Debenture or a New Global Debenture, as the case may be,
must rely on the procedures of the Depository and, if such holder
is not a Participant or an Indirect Participant, on the
procedures of the Participant through which such holder owns its
interest, to exercise any rights of a Holder under the Indenture
or such Global Debenture or New Global Debenture. The Company
understands that under existing industry practice, in the event
the Company requests any action of Holders that is an owner of a
beneficial interest in a Global Debenture or a New Global
Debenture, as the case may be, desires to take any action that
the Depository, as the Holder of such Global Debenture or New
Global Debenture, is entitled to take, the Depository would
authorize the Participants to take such action and the
Participant would authorize holders owning through such
Participants to take such action or would otherwise act upon the
instruction of such holders. Neither the Company nor the Trustee
will have any responsibility or liability for any aspect of the
records relating to or payments made on account of Debentures by
the Depository, or for maintaining, supervising or reviewing any
records of the Depository relating to such Debentures.

Payments with respect to the principal of, premium, if any,
and interest on any Debentures represented by a Global Debenture
or a New Global Debenture, as the case may be, registered in the
name of the Depository or its nominee on the applicable record
date will be payable by the Trustee to or at the direction of the
Depository or its nominee in its capacity as the registered
Holder of the Global Debenture or a New Global Debenture, as the
case may be, representing such Debentures under the Indenture.
Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Debentures, including the
Global Debentures or the New Global Debentures, as the case may
be, are registered as the owners thereof for the purpose of
receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment
of such amounts to beneficial owners of Debentures (including
principal, premium, if any, and interest), or to immediately
credit the accounts of the relevant Participants with such
payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Debentures
or the New Global Debentures, as the case may be, as shown on the
records of the Depository. Payments by the Participants and the
Indirect Participants to the beneficial owners of Debentures will
be governed by standing instructions and customary practice and
will be the responsibility of the Participants or the Indirect
Participants.

CERTIFICATED DEBENTURES

If (i) the Company notifies the Trustee in writing that the
Depository is no longer willing or able to act as a depository
and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee
in writing that it elects to cause the issuance of Debentures in
definitive form under the Indenture, then, upon surrender by the
Depository of its Global Debentures or the New Global Debentures,
as the case may be, Certificated Debentures will be issued to
each person that the Depository identifies as the beneficial
owner of the Debentures represented by the Global Debentures or
the New Global Debentures, as the case may be. In addition,
subject to certain conditions, any person having a beneficial
interest in a Global Debenture or a New Global Debenture, as the
case may be, may, upon request to the Trustee, exchange such
beneficial interest for Certificated Debentures. Upon any such
issuance, the Trustee is required to register such Certificated
Debentures in the name of such person or persons (or the nominee
of any thereof), and cause the same to be delivered thereto.

Neither the Company nor the Trustee shall be liable for any
delay by the Depository or any Participant or Indirect
Participant in identifying the beneficial owners of the related
Debentures and each such person may conclusively rely on, and
shall be protected in relying on, instructions from the
Depository for all purposes (including with respect to the
registration and delivery, and the respective principal amounts,
of the Debentures to be issued).

REGISTRATION RIGHTS; LIQUIDATED DAMAGES

The Company and the Initial Purchaser entered into the
Registration Rights Agreement dated as of September 22, 1995.
Pursuant to the Registration Rights Agreement, the Company has
agreed to file with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act
(the "Shelf Registration Statement") to cover public resales of
the Debentures by Holders and of the Class A Common Stock
issuable upon conversion of the Debentures by holders thereof, in
each case who satisfy certain conditions relating to the
providing of information in connection with the Shelf
Registration Statement. The Company has agreed to use its
reasonable best efforts to (a) cause the Shelf Registration
Statement to be filed with the Commission within 90 days after
September 29, 1995 (the "Closing Date"); (b) cause the Shelf
Registration Statement to be declared effective by the Commission
within 150 days after the Closing Date; and (c) keep the Shelf
Registration Statement effective until at least the third
anniversary of the Closing Date or such shorter period that will
terminate when all the shares of the Class A Common Stock and the
Debentures covered by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration Statement. The Company
has filed a Registration Statement of which this Prospectus is a
part in compliance with its obligation under the Registration
Rights Agreement to file a Shelf Registration Statement.
Notwithstanding the foregoing, the Company will be permitted to
suspend the use of the Shelf Registration Statement during
certain periods under certain conditions.
</R >

The Registration Rights Agreement provides that, if (i) the
Shelf Registration Statement is not filed with the Commission or
is not declared effective by the Commission within the time
periods set forth above or (ii) at any time during which the
Shelf Registration Statement is required to kept effective, it
shall cease to be effective (other than as a result of the
effectiveness of a successor registration statement) and such
effectiveness is not restored within 45 days thereafter (each
such event referred to in clause (i) or (ii), a "Registration
Default"), the Company will pay liquidated damages (the
"Liquidated Damages") to each Holder of Debentures or holder of
Class A Common Stock which are "restricted" securities under the
Securities Act intended to be eligible for resale under the Shelf
Registration Statement and who has complied with its obligations
under the Registration Rights Agreement. During the first 90-day
period immediately following the occurrence of a Registration
Default, such Liquidated Damages shall be in an amount equal to
$.05 per week per $1,000 principal amount of Debentures and $.01
per week per share (subject to adjustment in the event of stock
splits or consolidations, stock dividends and the like) of Class
A Common Stock constituting restricted securities held by such
person. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount and $.01 per
week per share (subject to adjustment as set forth above) of
Class A Common Stock constituting restricted securities for each
subsequent 90-day period until the applicable Registration
Default is cured, up to a maximum amount of liquidated damages of
$.20 per week per $1,000 principal amount of Debentures and $.04
per week per share (subject to adjustment as set forth above) of
Class A Common Stock constituting restricted securities. All
accrued Liquidated Damages shall be paid by wire transfer of
immediately available funds or by federal funds check by the
Company on each Damages Payment Date (as defined in the
Registration Rights Agreement). Following the cure of all
Registration Defaults, the payment of Liquidated Damages will
cease.

In addition, for so long as the Debentures are outstanding
and during any period in which the Company is not subject to the
Exchange Act, the Company will provide to holders of Debentures
and to prospective purchasers of the Debentures the information
required by Rule 144A(d)(4) under the Securities Act. The
Company will provide a copy of the Registration Rights Agreement
to prospective investors upon request.

DESCRIPTION OF 1998 DEBENTURES

The following summary describes certain provisions of the
indenture governing the 1998 Debentures (the "1998 Indenture")
and the 1998 Debentures. The following summary does not purport
to be complete and is subject to and is qualified in its entirety
by reference to the 1998 Indenture and the form of the 1998
Debentures.

The Company's 1998 Debentures were issued on August 1, 1983
in an aggregate principal amount of $25,000,000. The 1998
Debentures are unsecured obligations of the Company which are
subordinated in right of payment to all existing and future
Senior Indebtedness (as defined below) of the Company. The 1998
Indenture does not contain any restrictions upon the incurrence
of Senior Indebtedness or any other indebtedness by the Company
or by any of its subsidiaries.

The 1998 Debentures bear interest at a rate of 8-1/2% per
annum payable semiannually on February 1 and August 1 of each
year and mature on August 1, 1998. Mandatory sinking fund
payments sufficient to retire $2.5 million principal amount of
the 1998 Debentures annually, which commenced on August 1, 1990,
are calculated to retire 80% of the issue prior to maturity. See
"Capitalization."

The 1998 Debentures are redeemable on not less than 30 days'
notice at the option of the Company, in whole or in part, at a
redemption price of 100% of the principal amount, plus accrued
interest to the date of redemption. The 1998 Debentures are
convertible at any time prior to maturity, unless previously
redeemed, into shares of Class B Common Stock of the Company at a
conversion price of $15.00 per share, subject to adjustment under
certain conditions.

The 1998 Indenture contains certain limitations on the
Company's right to distribute dividends or purchase, redeem or
otherwise acquire or retire any of its capital stock and to merge
or consolidate unless it meets the criteria set forth therein.

Senior Indebtedness is defined in the 1998 Indenture to
include the principal of (and premium, if any) and interest on
(a) all indebtedness of the Company, whether outstanding on the
date of the 1998 Indenture or thereafter created, incurred,
assumed or guaranteed, for borrowed money (other than the 1998
Debentures), whether short-term or long-term and whether secured
or unsecured (including all indebtedness evidenced by notes,
bonds, debentures or other securities sold by the Company for
money), (b) indebtedness incurred by the Company in the
acquisition (whether by way of purchase, merger, consolidation or
otherwise and whether by the Company or another person) of any
business, real property or other assets (except assets acquired
in the ordinary course of the conduct of the acquirer's usual
business), (c) guarantees by the Company of indebtedness for
borrowed money, whether short-term or long-term and whether
secured or unsecured, of any corporation in which the Company
owns, directly or indirectly, 50% or more of the stock having
general voting power and (d) renewals, extensions, refundings,
deferrals, restructurings, amendments and modifications of any
such indebtedness, obligation or guarantee, unless in each case
by the terms of the instrument creating or evidencing such
indebtedness, obligation or guarantee or such renewal, extension,
refunding, deferral, restructuring, amendment or modification it
is provided that such indebtedness, obligation or guarantee is
not superior in right of payment of the 1998 Debentures.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company currently
consists of 2,000,000 shares of Preferred Stock, 10,000,000
shares of Class A Common Stock and 20,000,000 shares of Class B
Common Stock. As of February 20, 1996, there were 3,307,324
shares of Class A Common Stock and 2,154,808 shares of Class B
Common Stock issued and outstanding (exclusive of 432,639 shares
of Class A Common Stock and 65,795 shares of Class B Common Stock
held in treasury). No shares of Preferred Stock have been
issued. All outstanding shares of Class A Common Stock and Class
B Common Stock are fully paid and nonassessable. The Class A
Common Stock together with the Class B Common Stock is referred
to herein as the "Common Stock". The Board of Directors of the
Company has authorized and is currently soliciting proxies from
the stockholders of the Company with respect to a proposal to
amend the Company's Certificate of Incorporation to convert the
Class A Common Stock and Class B Common Stock into a single class
of common stock, as well as to include certain other charter
amendments.

PREFERRED STOCK

The terms of the Preferred Stock have not been determined
and are not designated in the Restated Certificate of
Incorporation of the Company, as amended. Instead, the Board of
Directors is authorized to issue the Preferred Stock in series,
each of which may vary as to the designation and number of shares
in such series, the voting power of the holders thereof, and the
dividend rate, the redemption terms and prices, the voluntary and
involuntary liquidation preferences, the conversion rights and
the sinking fund requirements, if any, of such series. The Board
of Directors, however, may not create any series of Preferred
Stock with more than one vote per share or with voting rights
which would limit, reduce or otherwise abridge the right of the
holders of Class B Common Stock to elect a number of Class B
Directors equal to one-fourth of the number of directors
constituting the whole Board of Directors. The foregoing
restriction may be changed only by the affirmative vote of
holders of 60% of the outstanding shares of Class A Common Stock
and Class B Common Stock, voting as separate classes.

CLASS A COMMON STOCK AND CLASS B COMMON STOCK

Voting Rights. The Board of Directors of the Company is
divided into two classes of directors, Class A Directors and
Class B Directors. So long as the number of shares of Class B
Common Stock outstanding is not less than 10% of the total number
of outstanding shares of Class A Common Stock and Class B Common
Stock, the holders of Class B Common Stock, voting as a class,
will be entitled to one vote for each such share held to elect a
number of Class B Directors equal to one-fourth of the number of
directors constituting the whole Board of Directors (rounded up
to the nearest whole number). The holders of Class A Common
Stock, voting as a class, are entitled to one vote for each such
share held to elect the remaining directors, who will be
designated Class A Directors. Neither the Class A Common Stock
nor the Class B Common Stock has cumulative voting rights, and
thus holders of 50% or more of the outstanding shares of each
class are able to elect all of the directors to be elected by
that class. On all matters other than the election or removal of
directors, and matters as to which class voting is required by
Delaware law, holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled
to one-tenth vote per share, voting together as a single class.

However, if the number of shares of Class B Common Stock
outstanding should be less than 10% of the total number of shares
of Class A Common Stock and Class B Common Stock outstanding at
some future record date for a meeting of stockholders of the
Company at which directors are to be elected, then the holders of
Class B Common Stock would not be entitled to elect any Class B
Directors and the holders of Class A Common Stock and Class B
Common Stock would vote together as a single class on all matters
coming before such meeting, including the election of the Class A
Directors to be elected at such meeting, with the holders of
Class A Common Stock entitled to one vote per share and the
holders of Class B Common Stock entitled to one-tenth vote per
share. Alternatively, if at any record date for such a meeting
the number of outstanding shares of Class A Common Stock should
be less than 875,000, then the holders of Class B Common Stock
would continue to elect a number of Class B Directors equal to
one-fourth of the total number of directors constituting the
whole Board and, in addition, would vote together with the
holders of Class A Common Stock to elect the Class A Directors to
be elected at such meeting, with the holders of Class A Common
Stock entitled to cast one vote per share and the holders of
Class B Common Stock entitled to cast one-tenth vote per share.

The Class A Directors are divided into three subclasses,
with each subclass consisting of as nearly an equal number of
directors as possible. The members of one such subclass are
elected each year to hold office for a three-year term and until
their successors have been elected and qualified. The term of
office of each Class B Director is one year. The classification
and subclassification of the Board of Directors may be changed
only by the affirmative vote of holders of 60% of the outstanding
shares of both the Class A Common Stock and the Class B Common
Stock, voting as separate classes. Stockholders of a particular
class may effect the removal of a director of that class during
his term by a like vote, but only for cause.

Dividends and Distributions. Holders of Class A Common
Stock and Class B Common Stock each are entitled to dividends
only if, as and when declared payable by the Board of Directors
out of funds legally available for such payment. For so long as
any shares of the Class B Common Stock are outstanding, the Board
of Directors may not (i) declare any dividends in cash or
property with respect to the Class A Common Stock unless an equal
dividend per share, payable in the same consideration, shall have
been declared with respect to the outstanding Class B Common
Stock and set aside for payment, or (ii) declare any dividend
payable in securities of the Company with respect to the Class A
Common Stock, or distribute any rights or warrants to purchase
securities of the Company with respect to the Class A Common
Stock, unless at the same time it declares an equivalent dividend
or makes an equivalent distribution with respect to the Class B
Common Stock so as to maintain, as nearly as may be practicable,
the relative voting and other rights of the holders of each class
immediately before such action. In addition, the Company may not
combine, subdivide or reclassify the Class A Common Stock or
Class B Common Stock unless at the same time it takes such action
as may be necessary with respect to the other class so as to
maintain, as nearly as may be practicable, the relative voting
and other rights of the holders of each class immediately before
such action. The foregoing provisions may be changed only by the
affirmative vote of holders of 60% of the outstanding shares of
both the Class A Common Stock and Class B Common Stock, voting as
separate classes. The Board of Directors is permitted to declare
a dividend in cash, property or securities with respect to the
Class B Common Stock without declaring a dividend with respect to
the Class A Common Stock, although at this time it does not
foresee any circumstances under which it would consider taking
such action.

Conversion Rights. Holders of Class A Common Stock have the
right at any time, and from time to time, to convert each share
of Class A Common Stock into one share of Class B Common Stock.
Holders of Class B Common Stock do not have the right to convert
their shares into Class A Common Stock nor do they have any other
conversion rights.

In General. Holders of Class A Common Stock and Class B
Common Stock have no redemption or preemptive rights and are not
liable for further calls or assessments. Upon liquidation of the
Company, neither the holders of Class A Common Stock nor the
holders of Class B Common Stock will have any preferences over
each other. Holders of both classes of stock will be entitled,
after satisfaction of the Company's liabilities and payment of
the liquidation preferences, if any, of any outstanding shares of
Preferred Stock, to share the remaining assets of the Company, if
any, equally in proportion to the number of shares of each class
held.

Transfer Agent and Registrar. The Trust Company of New
Jersey, 35 Journal Square, Jersey City, New Jersey, 07306, is the
transfer agent and the registrar of both the Class A Common Stock
and the Class B Common Stock.

PLAN OF DISTRIBUTION

The Company will not receive any of the proceeds from this
offering. The Selling Security Holders may sell all or a portion
of the Debentures and shares of Class A Common Stock offered
hereby from time to time on terms to be determined at the times
of such sales. The Debentures and shares of Class A Common Stock
may be sold from time to time to purchasers directly by any of
the Selling Security Holders. Alternatively, any of the Selling
Security Holders may from time to time offer the Debentures or
shares of Class A Common Stock through underwriters, including
the Initial Purchaser, dealers or agents, who may receive
compensation in the form of underwriting discounts, commissions
or concessions from the Selling Security Holders and the
purchasers of the Debentures or shares of Class A Common Stock
for whom they may act as agent. To the extent required, the
aggregate principal amount of Debentures and number of shares of
Class A Common Stock to be sold, the names of the Selling
Security Holders, the purchase price, the name of any such agent,
dealer or underwriter and any applicable commissions with respect
to a particular offer will be set forth in an accompanying
Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus
is a part. There is no assurance that the Selling Security
Holders will sell any or all of the Debentures or shares of Class
A Common Stock offered hereby. The Selling Security Holders and
any broker-dealers, agents or underwriters that participate with
the Selling Security Holders in the distribution of the
Debentures or shares of Class A Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act, in which
event any discounts, commissions or concessions received by such
broker-dealers, agents or underwriter and any profit on the
resale of the Debentures or shares of Class A Common Stock
purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.

The Debentures and the shares of Class A Common Stock issued
upon conversion of the Debentures may be sold from time to time
in one or more transactions at fixed offering prices, which may
be changed, or at varying prices determined at the time of sale
or at negotiated prices. Such prices will be determined by the
holders of such securities or by agreement between such holders
and underwriters or dealers who may receive fees or commissions
in connection therewith.

To comply with the securities laws of certain states, if
applicable , the Debentures and shares of Class A Common Stock
will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition in certain states the
Debentures and shares of Class A Common Stock may not be offered
or sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.

The Debentures were originally sold to the Initial Purchaser
on September 29, 1995 in a private placement (including the over-
allotment option for $5,000,000 aggregate principal amount of the
Debentures which was exercised on November 3, 1995) at a purchase
price of 95% of their principal amount. The Company agreed to
indemnify the Initial Purchaser against certain liabilities in
connection with the offer and sale of the Debentures, including
liabilities under the Securities Act, and to contribute to
payments that the Initial Purchaser may be required to make in
respect thereof.

The Company will pay substantially all expenses incident to
the offering and sale of the Debentures and Class A Common Stock
to the public other than underwriting discounts and selling
commissions and fees. The Company and the Selling Security
Holders have agreed to indemnify each other against certain
liabilities arising under the Securities Act. In addition, any
underwriter utilized by the Selling Security Holders may be
indemnified against certain liabilities, including liabilities
under the Securities Act. See "Selling Security Holders."

Prior to this offering there has not been any public market
for the Debentures and there can be no assurance regarding the
future development of a market for the Debentures. The Company
has applied for listing of the Debentures and the shares of Class
A Common Stock which are issuable upon conversion of the
Debentures on the AMEX. The Debentures are eligible for trading
in the PORTAL Market; however, no assurance can be given as to
the liquidity of, or trading market for, the Debentures. The
Company has been advised by the Initial Purchaser that it intends
to make a market in the Debentures. However, it is not obligated
to do so and any market-making activities with respect to the
Debentures may be discontinued at any time without notice. See
"Description of the Debentures -- Registration Rights; Liquidated
Damages." Accordingly, no assurance can be given as to the
liquidity of or the trading market for the Debentures. See "Risk
Factors -- Lack of Public Market for the Debentures; Restrictions
on Resale."

SELLING SECURITY HOLDERS

The following table sets forth information concerning the
principal amount of Debentures beneficially owned by each Selling
Security Holder which may be offered from time to time pursuant
to this Prospectus. Other than as a result of the ownership or
placement of Debentures or Class A Common Stock, none of the
Selling Security Holders has had any material relationship with
the Company within the past three years, except as noted herein.
The table has been prepared based upon information furnished to
the Company by or on behalf of the Selling Security Holders.

Principal
Amount Principal
of Amount of Percent
Debentures Debentures of
Beneficially Being Outstanding
Name Owned Registered Debentures
___________ ____________ ___________

BT Holdings . . . . . . . . . . . $1,650,000 $1,650,000 6.6%
Castle Convertible Fund Inc. . . 500,000 500,000 2.0
Catholic Mutual Relief Society of
America . . . . . . . . . . . . . 250,000 250,000 1.0
Cincinnati Financial Corp. . . . 2,000,000 2,000,000 8.0
CNA Income Shares, Inc. . . . . . 1,000,000 1,000,000 4.0
Convertible Holdings, Inc . . . . 1,000,000 1,000,000 4.0
First Pacific Advisers, Inc.1 . . 4,500,000 4,500,000 18.0
Forest Fulcrum Ltd. . . . . . . . 570,000 570,000 2.3
Forest Fulcrum Fund . . . . . . . 980,000 980,000 3.9
Franklin Investors Securities
Trust Convertible Securities
Fund . . . . . . . . . . . 750,000 750,000 3.0
ICI American Holdings . . . . . . 250,000 250,000 1.0
IDS Bond Fund, Inc.2 . . . . . . 3,000,000 3,000,000 12.0
Laterman Strategies 90's L.P. . . 300,000 300,000 1.2
Laterman & Co. . . . . . . . . . 200,000 200,000 *
Nalco Chemical Retirement . . . . 100,000 100,000 *
Nesbitt Burns . . . . . . . . . . 400,000 400,000 1.6
Offshore Strategies Ltd. . . . . 500,000 500,000 2.0
Oregon Equity Fund . . . . . . . 1,000,000 1,000,000 4.0
The Putnam Advisory Company, Inc.
on behalf of Boston College
Endowment . . . . . . . . . . . 200,000 200,000 *
The Putnam Advisory Company, Inc.
on behalf of New Hampshire
Retirement System . . . . . . . 525,000 525,000 2.1
The Putnam Advisory Company, Inc.
on behalf of The Museum of
Fine Art, Boston . . . . . . . 90,000 90,000 *
Putnam Convertible Income-Growth
Trust . . . . . . . . . . . . . 1,850,000 1,850,000 7.4
Putnam Convertible Opportunities
and Income Trust . . . . . . . . 485,000 485,000 1.9
Putnam High Income Convertible
and Bond Fund . . . . . . . . . 600,000 600,000 2.4
State of Delaware . . . . . . . . 400,000 400,000 1.6
United National Insurance Company 150,000 150,000 *
Winchester Convertible Plus
Limited . . . . . . . . . . . . . 1,000,000 1,000,000 4.0
Zazove Convertible Fund, L.P. . . 500,000 500,000 2.0
Zeneca Holdings . . . . . . . . . 250,000 250,000 1.0

Total . . . . . . . . . . . $25,000,000 $25,000,000 100%

_____________________________
* Less than 1%.

1 First Pacific Advisers, Inc. may be deemed to be the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of more than
ten percent of each of the Class A Common Stock and Class B Common
Stock of the Company. Such information has been derived from
statements on Schedule 13D and 13G filed with the SEC by First Pacific
Advisers, Inc.

2 IDS Bond Fund, Inc. is an investment company registered under the
Investment Company Act of 1940, as amended, and is a fund in the IDS
Mutual Fund Group ("IDS Funds"). American Express Financial
Corporation (formerly known as IDS Financial Corporation) ("AEFC"), an
investment adviser registered under the Investment Advisers Act of
1940, as amended, provides investment advisory services to each of the
IDS Funds and to certain other registered investment companies. AEFC
is a wholly owned subsidiary of American Express Company. The
information set forth in the table with respect to IDS Bond Fund, Inc.
and the information set forth in this footnote was provided by AEFC.

Because the Selling Security Holders may sell all or some of
the Debentures which they hold and shares of Class A Common Stock
issued upon conversion thereof pursuant to the offering
contemplated by this Prospectus, no estimate can be given as to
the aggregate amount of Debentures or shares of Class A Common
Stock that are to be offered hereby or that will be owned by the
Selling Security Holders upon completion of this offering to
which this Prospectus relates. Accordingly, the aggregate
principal amount of Debentures offered hereby may increase or
decrease. As of the date of this Prospectus, the aggregate
principal amount of Debentures outstanding is $25,000,000. See
"Plan of Distribution."

LEGAL MATTERS

Certain legal matters in connection with this offering will
be passed upon for the Company by Skadden, Arps, Slate, Meagher &
Flom, 919 Third Avenue, New York, New York 10022. Mark N.
Kaplan, a director and owner of 1,000 shares of the Class A
Common Stock of the Company, is a partner in the firm of Skadden,
Arps, Slate, Meagher & Flom.

EXPERTS

The consolidated financial statements and consolidated
financial statement schedule of the Company as of March 31, 1995
and 1994, and for each of the years in the three-year period
ended March 31, 1995, included herein and in the Registration
Statement, have been included herein and in the Registration
Statement, in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere
herein and in the Registration Statement, and upon the authority
of said firm as experts in accounting and auditing.

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements of Diagnostic/Retrieval
Systems, Inc. and Subsidiaries

Page

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

Consolidated Financial Statements:

Consolidated Balance Sheets as of March 31, 1995 and 1994
and December 31, 1995 (unaudited) . . . . . . . F-3

Consolidated Statements of Earnings for the fiscal years
ended March 31, 1995, 1994 and 1993 and for the nine months
ended December 31, 1995 and 1994 (unaudited) . . F-4

Consolidated Statements of Stockholders'
Equity for the fiscal years ended March 31, 1995, 1994
and 1993 and for the nine months ended December 31,
1995 (unaudited) . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows for the fiscal
years ended March 31, 1995, 1994 and 1993 and for the
nine months ended December 31, 1995 and 1994 (unaudited) F-6

Notes to Consolidated Financial Statements . F-7

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders,
Diagnostic/Retrieval Systems, Inc.:

We have audited the accompanying consolidated
balance sheets of Diagnostic/Retrieval Systems, Inc. and
subsidiaries as of March 31, 1995 and 1994, and the
related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1995.
These consolidated financial statements are the responsi-
bility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with
generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial state-
ments are free of material misstatement. An audit in-
cludes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting princi-
ples 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 Diagnos-
tic/Retrieval Systems, Inc. and subsidiaries as of March
31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-
year period ended March 31, 1995 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Short Hills, New Jersey
May 18, 1995

CONSOLIDATED BALANCE SHEETS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES

December 31,
March 31, 1995
1995 1994 (unaudited)
___________ __________ __________

Assets
Current Assets:
Cash and Cash Equivalents . . . . . . . . $11,197,000 $15,465,000 $23,069,000
Accounts Receivable (Notes 2 and 6) . . . 17,432,000 15,538,000 20,594,000
Inventories, Net of Progress Payments
(Note 3) . . . . . . . . . . . . . . . . 11,724,000 5,042,000 16,558,000
Other Current Assets . . . . . . . . . . 2,445,000 2,563,000 2,477,000
___________ __________ __________
Total Current Assets . . . . . . . . . . 42,798,000 38,608,000 62,698,000
___________ __________ __________

Property, Plant and Equipment, at Cost
(Notes 4 and 6) . . . . . . . . . . . . . 33,661,000 32,182,000 39,958,000
Less Accumulated Depreciation and Amorti-
zation . . . . . . . . . . . . . . . . . 23,812,000 23,289,000 25,230,000
___________ __________ __________
Net Property, Plant and Equipment . . . . 9,849,000 8,893,000 14,728,000
___________ __________ __________

Intangible Assets, Less Accumulated Amor-
tization of $3,457,000, $3,008,000 and
$3,883,000 at March 31, 1995 and 1994 and
December 31, 1995, respectively . . . . . 8,920,000 8,414,000 8,494,000
Other Assets . . . . . . . . . . . . . . 3,023,000 2,921,000 4,850,000
___________ __________ __________
Total Assets . . . . . . . . . . . . . . $64,590,000 $58,836,000 $90,770,000
___________ __________ __________
___________ __________ __________

Liabilities and Stockholders' Equity
Current Liabilities:

Current Installments of Long-Term Debt
(Note 6) . . . . . . . . . . . . . . . . $ 2,492,000 $ 2,664,000 $ 3,436,000
Accounts Payable and Accrued Expenses
(Note 5) . . . . . . . . . . . . . . . . 19,989,000 16,141,000 18,677,000
___________ __________ __________
Total Current Liabilities . . . . . . . . 22,481,000 18,805,000 22,113,000
Long-Term Debt, Excluding Current In-
stallments (Note 6) . . . . . . . . . . . 11,732,000 14,515,000 35,319,000
Deferred Income Taxes (Note 8) . . . . . 4,605,000 4,624,000 4,605,000
Other Liabilities (Notes 10 and 11) . . . 3,263,000 1,133,000 3,826,000
___________ __________ __________

Total Liabilities . . . . . . . . . . . . 42,081,000 39,077,000 65,863,000
___________ __________ __________

Stockholders' Equity (Notes 6 and 9):
Class A Common Stock, $.01 par Value per
Share. Authorized 10,000,000 Shares;
Issued 3,699,963 Shares, 3,674,963 Shares
and 3,739,963 Shares at March 31, 1995
and 1994 and December 31, 1995, respec-
tively . . . . . . . . . . . . . . . . . 37,000 37,000 37,000
Class B Common Stock, $.01 par Value per
Share. Authorized 20,000,000 Shares;
Issued 2,163,253, 2,105,528 and 2,216,353
Shares at March 31, 1995 and 1994, and
December 31, 1995, respectively . . . . 22,000 21,000 22,000
Additional Paid-in Capital . . . . . . . 13,435,000 12,970,000 13,579,000
Retained Earnings . . . . . . . . . . . . 10,919,000 8,315,000 13,414,000
24,413,000 21,343,000 27,052,000

Treasury Stock, at Cost: 432,639 Shares
of Class A Common Stock and 21,619 Shares
of Class B Common Stock at March 31,
1995, 423,419 Shares of Class A Common
Stock and 21,440 Shares of Class B Common
Stock at March 31, 1994, and 432,639
Shares of Class A Common Stock and 65,795
Shares of Class B Common Stock at
December 31, 1995 (Note 10) . . . . . . (1,617,000) (1,579,000) (1,918,000)
Unamortized Restricted Stock Compensation (287,000) (5,000) (227,000)
___________ __________ __________
Net Stockholders' Equity . . . . . . . . 22,509,000 19,759,000 24,907,000
___________ __________ __________
Commitments and Contingencies (Note 10)
Total Liabilities and Stockholders' Equi-
ty . . . . . . . . . . . . . . . . . . . $64,590,000 $58,836,000 $90,770,000

__________________
See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF EARNINGS

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Nine Months Ended
Years Ended March 31, December 31
------------------------------------------- --------------------------
1995 1994 1993 1995 1994
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues ...................... $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 65,628,000 $ 47,404,000

Costs and Expenses (Note 3) ... 64,836,000 54,372,000 45,461,000 60,289,000 44,143,000

Operating Income .............. 5,094,000 3,448,000 2,311,000 5,339,000 3,261,000

Interest and Related Expenses . (1,372,000) (1,574,000) (1,735,000) (1,675,000) (1,020,000)

Other Income, Net (Notes 7
and 11) ....................... 534,000 834,000 1,224,000 425,000 613,000

Earnings before Income Taxes .. 4,256,000 2,708,000 1,800,000 4,089,000 2,854,000

Income Taxes (Note 8) ......... 1,652,000 1,093,000 715,000 1,594,000 1,142,000
------------ ------------ ------------ ------------ ------------
Net Earnings .................. $ 2,604,000 $ 1,615,000 $ 1,085,000 $ 2,495,000 $ 1,712,000
============ ============ ============ ============ ============

Earnings per Share of Class A and Class B Common Stock:

Primary .............. $ .50 $ .30 $ .20 $ .44 $ .34

Fully diluted ........ $ .50 $ .30 $ .20 $ .44 $ .34

Weighted Average Number of
Shares of Class A and Class
B Common Stock Outstanding:

Primary ............... 5,231,000 5,334,000 5,324,000 5,647,000 5,026,000

Fully diluted ......... 5,231,000 5,334,000 5,324,000 6,552,000 5,026,000
<FN>

- -----------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

Years Ended March
31, 1995, 1994 and
1993, and Nine
Months Ended
December 31, 1995
(unaudited)
Common Stock
---------------------------------------
Additional Unamortized
Class A Class B Paid Restricted Net
------------------ ------------------ In Retained Treasury Stock Stockholders'
Shares Amount Shares Amount Capital Earnings Stock Compensation Equity
- ----------------- --------- ------- --------- ------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March
31, 1992 ........ 3,674,963 $ 37,000 2,089,528 $ 21,000 $ 12,984,000 $ 5,615,000 $ (1,579,000) $ (31,000) $ 17,047,000

Net Earnings .... -- -- -- -- -- 1,085,000 -- -- 1,085,000

Stock Options
Exercised ....... -- -- 5,000 -- -- -- -- -- --

Compensation
Relating to Stock -- -- -- -- (39,000) -- -- 22,000 (17,000)
Options, Net .... _________ _______ _________ ________ ___________ ___________ ___________ _________ ___________

Balances at March
31, 1993 ........ 3,674,963 37,000 2,094,528 21,000 12,945,000 6,700,000 (1,579,000) (9,000) 18,115,000

Net Earnings .... -- -- -- -- -- 1,615,000 -- -- 1,615,000

Stock Options
Exercised ....... -- -- 11,000 -- 2,000 -- -- -- 2,000

Compensation
Relating to Stock
Options, Net .... -- -- -- -- 23,000 -- -- 4,000 27,000
_________ _______ _________ _______ ___________ ___________ ___________ _________ ___________
Balances at March
31, 1994 ........ 3,674,963 37,000 2,105,528 21,000 12,970,000 8,315,000 (1,579,000) (5,000) 19,759,000

Net Earnings .... -- -- -- -- ... 2,604,000 ... ... 2,604,000

Stock Options
Exercised ....... 25,000 -- 57,725 1,000 188,000 -- -- -- 189,000

Compensation
Relating to Stock
Options, Net .... -- -- -- -- 388,000 -- -- (282,000) 106,000

Purchase of
Treasury Stock .. -- -- -- -- -- -- (2,900,000) -- (2,900,000)

Sale of Treasury
Stock ........... -- -- -- -- (111,000) -- 2,862,000 -- 2,751,000
_________ _______ _________ _______ ___________ ___________ ___________ _________ ___________
Balances at March
31, 1995 ........ 3,699,963 37,000 2,163,253 22,000 13,435,000 10,919,000 (1,617,000) (287,000) 22,509,000

Net Earnings
(unaudited) ..... -- -- -- -- -- 2,495,000 -- -- 2,495,000

Stock Options
Exercised
(unaudited) ..... 40,000 -- 53,100 -- 220,000 -- -- -- 220,000

Expenses relating
to the Sale of
Treasury Stock
(unaudited) ..... -- -- -- -- (76,000) -- -- -- (76,000)

Receipt of Stock
Into Treasury
(unaudited) ... -- -- -- -- -- -- (301,000) -- (301,000)

Compensation
Relating to Stock
Options Net ..... -- -- -- -- -- -- -- 60,000 60,000
(unaudited) ..... _________ _______ _________ _______ ___________ ___________ ___________ _________ ___________

Balances at
December 31, 1995
(unaudited) ..... 3,739,963 $ 37,000 2,216,353 $ 22,000 $ 13,579,000 $ 13,414,000 $(1,918,000) $(227,000) $ 24,907,000
_________ _______ _________ _______ ___________ ___________ ___________ _________ ___________

<FN>
- --------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

Nine Months Ended
Years Ended March 31, December 31,
--------------------------------------- ------------------------
1995 1994 1993 1995 1994
------------- ----------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Earnings..................... $2,604,000 $1,615,000 $1,085,000 $2,495,000 $1,712,000
Adjustments to Reconcile Net
Earnings to Cash Flows from
Operating Activities:
Depreciation and Amortization. 2,480,000 2,558,000 3,202,000 2,226,000 1,967,000
Deferred Income Taxes......... 26,000 (15,000) (31,000) -- --
Other, Net.................... (77,000) (233,000) (446,000) 305,000 (235,000)
Changes in Assets and
Liabilities, Net of Effects
from Business Combinations:

(Increase) Decrease in Accounts
Receivable.................. (1,415,000) 1,443,000 (880,000) (2,859,000) 2,265,000
(Increase) Decrease in
Inventories....................... (6,408,000) 2,069,000 2,186,000 (4,141,000) (5,543,000)

(Increase) Decrease in Other
Current Assets.................... (7,000) (133,000) 1,400,000 667,000 (130,000)
Increase (Decrease) in Accounts
Payable and Accrued Expenses . 3,640,000 2,928,000 (400,000) (2,381,000) (182,000)
Other, Net..................... 1,643,000 (62,000) (357,000) 194,000 160,000
---------- --------- --------- ---------- --------

Net Cash Provided by (Used in)
Operating 2,486,000 10,170,000 5,759,000 (3,494,000) 14,000
Activities:...................... ---------- --------- --------- ---------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital Expenditures............. (2,543,000) (988,000) (922,000) (3,712,000) (1,014,000)
Sales of Fixed Assets............ -- -- -- 2,380,000 --
Payments Pursuant to Business
Combinations, Net of Cash
Acquired......................... (1,514,000) (696,000) -- (4,140,000) (1,514,000)
Cash Advanced to Company
Acquired for Repayment of Debt
Prior to Acquisition............. -- (1,800,000) -- -- --
Other, Net....................... 263,000 11,000 2,000 -- 236,000
---------- --------- --------- ---------- --------

Net Cash Used in Investing (3,794,000) (3,473,000) (920,000) (5,472,000) (2,292,000)
Activities....................... ---------- --------- --------- ---------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments on Long-Term Debt....... (275,000) (168,000) (262,000) (374,000) (56,000)
Repurchases of Convertible
Subordinated
Debentures....................... (2,667,000) (2,354,000) (1,880,000) (2,242,000) (2,639,000)
Net Proceeds From Issuance of
Senior Subordinated -- -- -- 23,360,000 --
Convertible Debentures...........

Other Borrowings................. 20,000 325,000 -- 55,000 75,000
Purchase of Treasury Stock....... (2,900,000) -- -- -- (2,900,000)
Sale of Treasury Stock........... 2,862,000 -- -- -- 2,625,000
Other, Net....................... -- -- -- 39,000 --
---------- --------- --------- ---------- --------

Net Cash Used in Financing (2,960,000) (2,197,000) (2,142,000) 20,838,000 (2,895,000)
Activities....................... ---------- --------- --------- ---------- --------

Net Increase (Decrease) in
Cash and
Cash Equivalents................. (4,268,000) 4,500,000 2,697,000 11,872,000 (5,173,000)
Cash and Cash Equivalents,
Beginning of Period.............. 15,465,000 10,965,000 8,268,000 11,197,000 15,465,000
---------- --------- --------- ---------- --------
Cash and Cash Equivalents, End
of Period........................ $11,197,000 $15,465,000 $10,965,000 $23,069,000 $10,292,000
---------- --------- --------- ---------- --------

<FN>
- --------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC. AND SUBSIDIARIES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The Consolidated Financial Statements include the accounts of
Diagnostic/Retrieval Systems, Inc., its subsidiaries, all of which are wholly
owned, and a joint venture consisting of an 80% controlling partnership interest
(the "Company"). All significant intercompany transactions and balances have
been eliminated in consolidation.

The Consolidated Financial Statements include information as
of December 31, 1995 and for the nine months ended December 31, 1995 and 1994,
which is unaudited. In the opinion of Management, the accompanying unaudited
consolidated financial statements of the Company contain all adjustments
(consisting of only normal and recurring adjustments) necessary for the fair
presentation of the Company's consolidated financial position as of December 31,
1995, the statements of earnings for the nine months ended December 31, 1995 and
1994, cash flows for the nine months ended December 31, 1995 and 1994 and the
statement of stockholders' equity for nine months ended December 31, 1995. The
results of operations for the nine months ended December 31, 1995 are not
necessarily indicative of the results to be expected for the full year.

B. CASH AND CASH EQUIVALENTS

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

C. 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. The estimated profits applicable to such
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.

Revenues related to incentive-type contracts also are
determined on a percentage-of- completion basis measured by the cost-to-cost
method. Revenues from cost-reimbursement contracts are recorded, together with
the fees earned, as costs are incurred.

Revenues recognized under the cost-to-cost
percentage-of-completion basis during fiscal 1995, 1994 and 1993 approximated
16%, 26% and 37% of total revenues, respectively, with remaining revenues
recognized as delivery of finished units is made, or as costs are incurred under
cost-reimbursement contracts. Included in revenues for fiscal 1995, 1994 and
1993 are $18,771,000, $27,496,000 and $19,155,000 respectively, of
customer-sponsored research and development.

Revisions in profit estimates are reflected in the year in
which the facts, which require the revisions, become known, and any estimated
losses and other future costs are accrued in full.

Approximately 84%, 94% and 83% of the Company's revenues in
fiscal 1995, 1994 and 1993, respectively, were derived directly or indirectly
from defense-industry contracts with the United States Government (principally
the U.S. Navy). In addition, approximately 7%, 3% and 17% of the Company's
revenues in fiscal 1995, 1994 and 1993, respectively, were derived directly or
indirectly from sales to foreign governments. Sales to commercial customers
comprised 9% and 3% of revenues in fiscal 1995 and 1994, respectively.

D. INVENTORIES

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.

In accordance with industry practice, inventories include
amounts relating to contracts having production cycles longer than one year, and
a portion thereof will not be realized within one year.

E. DEPRECIATION AND AMORTIZATION OF PROPERTY,
PLANT AND EQUIPMENT

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

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

F. EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED

Intangibles resulting from acquisitions represent the excess
of cost of the investments over the fair-market values of the underlying net
assets at the dates of investment. All intangibles are being amortized on the
straight-line method, over five to thirty years. The carrying value of
intangible assets periodically is reviewed by the Company, and impairments are
recognized when the expected undiscounted future operating cash flows derived
from such intangible assets are less than their carrying value.

G. INCOME TAXES

In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized 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. 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. Under SFAS 109, 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. SFAS 109 supersedes Statement of Financial
Accounting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96").

Effective April 1, 1993, the Company adopted SFAS 109. The
cumulative effect of adopting SFAS 109 was not material to the Company's
consolidated results of operations or financial position.

Prior-year financial statements have not been restated to
apply the provisions of SFAS 109. Until March 31, 1993, the Company used the
asset and liability method of accounting for income taxes, as set forth in SFAS
96. Under SFAS 96, deferred income taxes are recognized by applying statutory
tax rates to the difference between the financial statement carrying amounts and
tax bases of assets and liabilities. The statutory tax rates applied are those
applicable to the years in which the differences are expected to reverse.
Deferred tax expense represents the change in the liability for deferred taxes
from year to year.

H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

In December 1990, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). The
Company adopted SFAS 106 during the first quarter of fiscal 1994, and its
adoption did not have a material impact on the Company's consolidated results of
operations or financial position.

I. POSTEMPLOYMENT BENEFITS

In November 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("SFAS 112"). The Company adopted SFAS
112 during the first quarter of fiscal 1995, and its adoption did not have a
material impact on the Company's consolidated results of operations or financial
position.

J. EARNINGS PER SHARE (UNAUDITED WITH RESPECT TO THE NINE
MONTHS ENDED DECEMBER 31, 1995)

Earnings per share of common stock is computed by dividing net
earnings by the weighted average number of shares of Class A and Class B
Common Stock outstanding during each period. In fiscal 1995, the
computation of earnings per share included approximately 123,000 shares
from the assumed exercise of dilutive stock options computed using the
treasury stock method. Options outstanding to purchase shares of common
stock are not included in the computation of earnings per share for fiscal
1994 and 1993, because their effect was not material. Furthermore,
additional shares assumed to be outstanding applicable to the Company's 8
1/2% Convertible Subordinated Debentures also are not included for any of
the periods presented, because their effet on earnings per share was
antidilutive.

For the nine month period ended December 31, 1995, the computation
of primary earnings per share included approximately 174,000 shares from the
assumed exercise of dilutive stock options computed using the treasury stock
method. Options outstanding to purchase shares of common stock were excluded
from the computation of earnings per share for the nine month period ended
December 31, 1994, because their effect was not material. The computation
of fully diluted earnings per share for the nine month period ended
December 31, 1995 included approximately 185,000 shares, also from the assumed
exercise of dilutive stock options and, in addition, included approximately
894,000 shares from the assumed conversion of the Company's 9% Senior
Subordinated Convertible Debentures (the "Debentures"). Additional shares
assumed to be outstanding applicable to the Company's 8 1/2% Convertible
Subordinated Debentures were excluded from the computations for the interim
periods presented, as their effect on earnings per share was antidilutive.

NOTE 2. ACCOUNTS RECEIVABLE

The component elements of accounts receivable are as follows:

==============================================================================
March 31,
----------------------------------
1995 1994
-------- -------
U.S. Government:

Amounts Billed................. $ 5,885,000 $ 5,746,000

Recoverable Costs and
Accrued Profit
on Progress Completed, Not 7,264,000 5,374,000
Billed......................... --------------- --------------

13,149,000 11,120,000
--------------- --------------
Other U.S. Defense Contracts:
Amounts Billed................. 1,418,000 2,981,000

Recoverable Costs and
Accrued Profit
on Progress Completed, Not 639,000 537,000
Billed......................... --------------- --------------
2,057,000 3,518,000
---------------- --------------

Other Amounts Billed........... 2,226,000 900,000
--------------- --------------

Total.......................... $ 17,432,000 $ 15,538,000
--------------- ---------------

=============================================================================

Generally, no accounts receivable arise from retainage
provisions in contracts. The Company receives progress payments on certain
contracts from the U.S. Government of between 80- 100% 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 may
bill based upon units delivered.

NOTE 3. INVENTORIES

Inventories are summarized as follows:

==============================================================================

March 31, December 31,
------------------------------ ----------------
1995 1994 1995
------------- ------------- ----------------
(unaudited)

Work-in-Process....... 23,017,000 14,639,000 $38,356,000

Raw Material.......... 2,573,000 2,917,000 836,000
------------- ------------- -------------

25,590,000 17,556,000 39,192,000

Less Progress Payments 13,866,000 12,514,000 22,634,000
------------- ------------- -------------

Total................. $ 11,724,000 $ 5,042,000 $ 16,558,000
------------- ------------- -------------

==============================================================================

General and administrative costs included in work-in-process
were $6,584,000 and $3,753,000 at March 31, 1995 and 1994 and $9,111,000 at
December 31, 1995 (unaudited), respectively. General and administrative costs
included in costs and expenses amounted to $17,681,000, $16,896,000, $14,028,000
and $14,622,000 in fiscal 1995, 1994, 1993, and for the nine months ended
December 31, 1995 (unaudited), respectively. Included in those amounts are
expenditures for Company-sponsored independent research and development,
amounting to approximately $795,000, $537,000, $470,000 and $218,000 in
fiscal 1995, 1994, 1993, and for the nine months ended December 31, 1995
(unaudited), respectively.

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at March 31, 1995 and 1994 are
summarized as follows:

===============================================================================

March 31,

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

1995 1994
--------------- ---------------

Land......................... $ 1,350,000 $ 1,350,000

Building and Building 2,384,000 2,289,000
Improvements.................

Office Furnishings and 3,621,000 3,754,000
Equipment....................

Laboratory and Production 15,639,000 14,457,000
Equipment....................

Motor Vehicles............... 235,000 389,000

Computer Equipment........... 7,246,000 7,323,000

Leasehold Improvements....... 3,186,000 2,620,000
--------------- ---------------

TOTAL........................ $ 33,661,000 $ 32,182,000
--------------- ---------------

===============================================================================

Depreciation and amortization of plant and equipment amounted
to $1,833,000, $2,061,000 and $2,748,000 in fiscal 1995, 1994 and 1993,
respectively.

NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The component elements of accounts payable and accrued expenses are as follows:
==============================================================================

March 31,

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

1995 1994
--------------- ---------------

Payrolls, Including $ 648,000 $ 1,753,000
Payroll Taxes..............

Holiday and Vacation Pay... 1,102,000 849,000

Income Taxes Payable....... 1,821,000 1,917,000

Losses and Future Costs

Accrued on 4,555,000 3,214,000
Uncompleted Contracts......

Other...................... 3,897,000 4,101,000
--------------- ---------------

12,023,000 11,834,000

Accounts Payable........... 7,966,000 4,307,000
--------------- ---------------

TOTAL...................... $ 19,989,000 $ 16,141,000
--------------- ---------------

==============================================================================

NOTE 6. LONG-TERM DEBT

A summary of long-term debt is as follows:

March 31, December 31,
1995 1994 1995
__________ __________ __________
(unaudited)
Convertible Subordinated
Debentures, Due 1998 . . $12,209,000 $14,889,000 $ 9,963,000

Industrial Revenue Bonds,
Due 1998 . . . . . . . . 1,895,000 2,095,000 1,895,000

Senior Subordinated
Convertible Debentures,
Due 2003 . . . . . . . . -- -- 25,000,000

Other Obligations . . . . 120,000 195,000 1,897,000
__________ __________ __________
14,224,000 17,179,000 38,755,000

Less Current Installments
of Long-Term Debt . . . . 2,492,000 2,664,000 3,436,000

Total . . . . . . . . . . $11,732,000 $14,515,000 $35,319,000

The 1998 Debentures bear interest at a rate of
81/2% per annum and are convertible at their face amount
any time prior to maturity into shares of Class B Common
Stock, unless previously redeemed, at a conversion price
of $15.00 per share, subject to adjustment under certain
conditions. The 1998 Debentures are redeemable at the
option of the Company, in whole or in part, at face
value, together with interest accrued to the redemption
date. As of August 1, 1990 and on August 1 of each year
thereafter, to and including August 1, 1997, the Company
is required to provide for the retirement of the 1998
Debentures by mandatory redemption (the "sinking fund")
in the aggregate annual principal amount of $2,500,000.
As of March 31, 1995, the Company had repurchased
$12,791,000 of the 1998 Debentures and has satisfied all
sinking fund requirements to date. The Consolidated
Statements of Earnings for fiscal years 1995, 1994 and
1993 reflect gains resulting from these repurchases of
$13,000, $257,000 and $500,000, respectively.

The 1998 Debentures are subordinate to the
prior payment in full of the principal and interest on
all senior indebtedness of the Company, which amounted to
$2,015,000 at March 31, 1995. The indenture pursuant to
which the 1998 Debentures were issued contains certain
dividend and other restrictions. Under such provisions,
the Company may not distribute dividends or purchase,
redeem or otherwise acquire or retire any of its capital
stock in excess of an aggregate amount which, at March
31, 1995, was approximately $4,400,000.

On December 19, 1991, the Suffolk County
Industrial Development Agency (the "Agency") issued
variable rate demand industrial development revenue
refunding bonds (the "Bonds") in the amount of $2,395,000
to refinance a prior bond issue which provided funds for
the construction of the manufacturing facilities of
Photronics Corp. ("Photronics"), a wholly-owned
subsidiary of the Company. All property, plant and
equipment acquired or constructed from the proceeds of
the original bonds collateralizes the obligation, and
payment of the principal and interest and premium (if
any) on the Bonds is further secured by the unconditional
guaranty of the Company. The Bonds are supported by an
irrevocable, direct-pay letter of credit in an amount
equal to the principal balance plus interest thereon for
45 days. At March 31, 1995, the contingent liability of
the Company as guarantor under the letter of credit was
approximately $1,930,000. The Company has collateralized
the letter of credit with accounts receivable and also
has agreed to certain financial covenants, including the
maintenance of: (i) a certain minimum ratio of
consolidated tangible net worth to total debt (the "Debt
Ratio"), (ii) a certain minimum quarterly ratio of
earnings before interest and taxes to interest (the
"Interest Ratio"), and (iii) a certain minimum balance of
billed and unbilled accounts receivable (the "Eligible
Receivables"), all as defined in the related agreements.
At March 31, 1995, the covenants, all of which the
Company was in compliance with, required (i) a Debt Ratio
of 0.6:1, (ii) an Interest Ratio of 1.5:1, and (iii)
Eligible Receivables of $2,500,000. The financial
covenants also require that the Company realize a certain
level of profits during each quarter of fiscal 1996 in
order to be in compliance. A default under the Bonds
constitutes a default on the Debentures.

Commencing February 1, 1992 and on the first
business day of each month thereafter, interest on the
Bonds is payable at that daily rate determined to be
necessary under prevailing market conditions to enable
the Bonds to be sold at a price equal to 100% of the
principal amount thereof plus accrued interest. Such
rate was 4.5% at March 31, 1995. At the option of the
Company, the interest rate payable on the Bonds may be
changed to a weekly or fixed rate.

Commencing February 1, 1992 and until such time
as the Bonds may be converted to fixed-rate obligations,
the Bonds are subject to redemption, in whole or in part,
at the option of the Company at a price equal to their
principal amount plus accrued interest. On or after the
second anniversary of a conversion, Bonds bearing
interest at a fixed rate are subject to the redemption,
in whole on any date or in part on any interest payment
date, at the option of the Company at an annual
redemption rate of 102% at the second anniversary of such
conversion and diminishing by one percent each year to
100% on or after the fourth anniversary of such
conversion. Commencing January 1, 1993 and on each
January 1 thereafter, to and including January 1, 1998,
the Bonds are subject to a schedule of mandatory sinking
fund redemptions at a price equal to 100% of the
principal amount of the Bonds redeemed plus accrued
interest. The principal amount of the Bonds redeemed at
January 1, 1995 was $200,000.

Cash payments for interest during fiscal 1995,
1994 and 1993 were $1,237,000, $1,448,000 and $1,687,000,
respectively.

The aggregate maturities of long-term debt for
the five years ending March 31, 2000 are as follows:
1996, $2,492,000; 1997, $2,637,000; 1998, $4,095,000;
1999, $5,000,000; and 2000, $0.

NOTE 7. OTHER INCOME, NET

Other income, net includes:

Years Ended March 31,
1995 1994 1993
________ ________ ________
Interest Income $439,000 $370,000 $585,000

Royalty Income 63,000 157,000 221,000

Gain on Repurchase
of Subordinated
Debentures . . 13,000 257,000 500,000

Other . . . . . 19,000 50,000 (82,000)
________ ________ ________

Total . . . . . $534,000 $834,000 $1,224,000

NOTE 8. INCOME TAXES

Income tax expense consists of:

Years Ended March 31,
1995 1994 1993
__________ __________ __________

Current:
Federal $1,498,000 $ 884,000 $ 688,000

State . . 128,000 224,000 58,000
__________ __________ __________
1,626,000 1,108,000 746,000

Deferred:

Federal 172,000 33,000 (103,000)

State . . (146,000) (48,000) 72,000
__________ __________ __________
26,000 (15,000) (31,000)
__________ __________ __________

Total . $1,652,000 $1,093,000 $ 715,000

Deferred income taxes at March 31, 1995 and
1994 reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The
tax effects of temporary differences that gave rise to
significant portions of the deferred tax assets and
deferred tax liabilities at March 31, 1995 and 1994 are
as follows:

March 31,
DEFERRED TAX ASSETS: 1995 1994

State Net Operating Loss
Carryforwards . . . . . . . . . . $ 3,977,000 $ 5,849,000

Inventory Capitalization . . . . 1,687,000 1,888,000

Costs Accrued on Uncompleted
Contracts . . . . . . . . . . . . 2,627,000 2,163,000

Other . . . . . . . . . . . . . . 2,287,000 1,846,000

Total Gross Deferred Tax Assets . 10,578,000 11,746,000

Less Valuation Allowance . . . . (2,279,000) (3,575,000)

Net Deferred Tax Assets . . . . . 8,299,000 8,171,000

DEFERRED TAX LIABILITIES:

Depreciation and Amortization . . (5,048,000) (5,540,000)

General and Administrative Costs (4,325,000) (2,740,000)

Federal Impact of the State
Benefits . . . . . . . . . . . . (1,136,000) (1,986,000)

Other . . . . . . . . . . . . . (828,000) (917,000)

Total Gross Deferred Tax
Liabilities . . . . . . . . . . . (11,337,000) (11,183,000)

Net Deferred Tax Liabilities . . $(3,038,000) $(3,012,000)

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 the deferred tax
asset attributable to state net operating loss
carryforwards, due to the uncertainty of future Company
earnings attributable to various states and the status of
applicable statutory regulations that could limit or
preclude utilization of these benefits in future periods.
A deferred tax asset of $1,567,000 and $1,612,000 is
included in Other Current Assets in the Consolidated
Balance Sheets at March 31, 1995 and 1994, respectively.
Approximately $47,647,000 of state net operating loss
carryforwards were available in various tax jurisdictions
at March 31, 1995. Of that amount, $29,655,000 will
expire between fiscal years 1997 and 2002; the remaining
$17,992,000 will expire between fiscal years 2005 and
2010.

A reconciliation of the statutory federal income tax
rate to the effective tax rate follows:

Years Ended March 31,
1995 1994 1993

Statutory Tax Rate 34% 34% 34%

State Income Tax,
Net of Federal
Income Tax Benefit 3 4 5
Amortization of
Intangible Assets . 1 2 3

Other . . . . . . . 1 -- (2)

Total . . . . . . . 39% 40% 40%

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

Cash payments for income taxes during fiscal 1995,
1994 and 1993 amounted to $1,723,000, $311,000 and
$303,000, respectively.

NOTE 9. COMMON STOCK, STOCK OPTION PLANS AND EMPLOYEE
BENEFIT PLANS

The Company has three authorized classes of stock:
A class consisting of 10,000,000 shares of Class A Common
Stock, a class consisting of 20,000,000 shares of Class B
Common Stock, and a class consisting of 2,000,000 shares
of Preferred Stock (none of which has been issued). The
holders of Class A and Class B Common Stock are entitled
to one vote per share and one-tenth vote per share,
respectively.

On February 7, 1991, the Board of Directors (the
"Board") adopted the 1991 Stock Option Plan (the "Stock
Option Plan"), which authorizes the issuance of up to
600,000 shares of Class B Common Stock. The Stock Option
Plan was approved by the Company's stockholders on August
8, 1991. The Stock Option Plan is the successor to the
Company's 1981 Non-Qualified Stock Option Plan (the "Non-
Qualified Plan") that expired on May 12, 1991 and to the
1981 Incentive Stock Option Plan (the "Incentive Plan")
that expired on October 31, 1991. Under the terms of the
Stock Option Plan, options to purchase shares of Class B
Common Stock may be granted to key employees, directors
and consultants of the Company. Options granted under
the Stock Option Plan are at the discretion of the Stock
Option Committee of the Board (the "Stock Option
Committee") and may be incentive stock options or non-
qualified stock options, except that incentive stock
options may be granted only to employees. The option
price is determined by the Stock Option Committee and
must be a price per share which is not less than the par
value per share of the Class B Common Stock, and in the
case of an incentive stock option, may not be less than
the fair-market value of the Class B Common Stock on the
date of the grant. Options may be exercised during the
exercise period, as determined by the Stock Option
Committee, except that no option may be exercised within
six months of its grant date, and in the case of an
incentive stock option, generally, the exercise period
may not exceed ten years from the date of the grant. At
March 31, 1995, 286,250 shares of Class B Common Stock
were reserved for future grants under the Stock Option
Plan.

The Non-Qualified Plan, as amended, provided for the
grant of options to purchase a total of 100,000 shares of
Class A Common Stock and 50,000 shares of Class B Common
Stock through May 12, 1991. Under the Non-Qualified
Plan, the Stock Option Committee had discretion to grant
options to employees, consultants and directors of the
Company. The exercise price of an option granted under
the Non-Qualified Plan was the price, as determined by
the Stock Option Committee, but was not less than the
aggregate par value of the shares subject to the option.
Options granted under the Non-Qualified Plan are
exercisable in accordance with the terms of the grant
during a specified period, which did not exceed five
years. Upon the expiration of the Non-Qualified Plan, a
total of 87,600 shares of Class A Common Stock and a
total of 10,300 shares of Class B Common Stock remained
ungranted.

The Incentive Plan, as amended, provided for the
grant of options to purchase a total of 150,000 shares of
Class A Common Stock and 475,000 shares of Class B Common
Stock through October 31, 1991. Under the Incentive
Plan, options were granted at the discretion of the Stock
Option Committee only to employees of the Company.
Options are exercisable in accordance with the terms of
the grant within a specified period, which may not exceed
ten years. Each option granted provided for the purchase
of a specified number of shares of Class A Common Stock
or Class B Common Stock, or both, at an exercise price
not less than the fair-market value of the shares subject
to the option on the date of grant. Upon the expiration
of the Incentive Plan, options representing a total of
23,665 shares of Class A Common Stock and a total of
269,832 shares of Class B Common Stock remained
ungranted.

Under the Stock Option 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 expense as the options become
exercisable, in accordance with the terms of the grant.
Under the Non-Qualified Plan, pursuant to the restriction
periods on the exercise of options as stated in the stock
option agreements, the excess of the fair-market value of
shares under option at the date of grant over the option
price was charged to unamortized restricted stock
compensation and credited to additional paid-in capital.
The unamortized restricted stock compensation is charged
to expense as services are performed during the periods
of restriction. As restricted options expire, the amount
of unamortized restricted stock compensation relating to
the options is credited and eliminated through a charge
to additional paid-in capital. In addition, the total
amount of compensation previously charged to expense is
credited. The amount of compensation charged (credited)
to earnings for all plans in fiscal 1995, 1994 and 1993
was $106,000, $27,000 and ($17,000), respectively.

When stock is issued on exercise of options, the par
value of each share ($.01) is credited to common stock
and the remainder of the option price is credited to
paid-in capital. No charge is made to operations.

A summary of all transactions under the Stock
Option, Incentive and Non-Qualified Plans follows:

Number of
Shares of Option Number of
Class A Price Shares of Option
Common per Class B Price per
Stock Share Common Stock Share
___________ _________ __________ _______________

OUTSTANDING
AT MARCH 31,
1992
(of Which
16,250
Shares and
77,238
Shares of
Class A and
Class B,
Respectively
, Were
Exercisable) 65,000 $2.61 205,450 $ .01-4.75

Granted . . -- -- 10,000 $ .01
Exercised . -- -- (5,000) $ .01
Expired . . -- -- (35,600) $ .01-4.75
___________ _________ __________ _______________

OUTSTANDING
AT MARCH 31,
1993 (of Which
32,500 Shares and
111,925 Shares of
Class A and Class
B, Respectively,
Were
Exercisable) 65,000 $2.61 174,850 $ .01-4.75

Granted . . -- -- 142,750 $ .01-3.63
Exercised . -- -- (11,000) $ .01-2.25
Expired . . -- -- (32,250) $ 2.13-2.25
___________ _________ __________ _______________

OUTSTANDING
AT MARCH 31,
1994
(of Which
48,750
Shares and
111,163
Shares of
Class A and
Class B,
Respectively
, Were
Exercisable) 65,000 $2.61 274,350 $ .01-4.75

Granted . . -- -- 150,000 $ .01-4.95
Exercised . (25,000) $2.61 (57,725) $ .01-3.63
Expired . . -- -- (17,000) $ .01-3.63
___________ _________ __________ _______________

OUTSTANDING
AT MARCH 31,
1995 (of Which
40,000
Shares and
145,425
Shares of
Class A and
Class B,
Respectively
, Were
Exercisable) 40,000 $2.61 349,625 $ .01-4.95

The Company also maintains defined contribution
plans covering substantially all full-time eligible
employees. The Company's contributions to these plans,
which are discretionary, for fiscal 1995 and 1994
amounted to $365,000 and $203,000, respectively. The
Company did not make any contributions to these plans
during fiscal 1993.

NOTE 10. COMMITMENTS, CONTINGENCIES AND RELATED PARTY
TRANSACTIONS

At March 31, 1995, the Company was party to
various noncancellable operating leases (principally for
administration, engineering and production facilities)
with minimum rental payments as follows:

1996 $1,909,000
1997 1,555,000
1998 1,133,000
1999 811,000
2000 695,000
Thereafter 72,000
__________
Total $6,175,000

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 $2,490,000,
$1,703,000 and $1,492,000 in fiscal 1995, 1994 and 1993,
respectively.

In April 1984, the Board of Directors approved
a lease agreement with LDR Realty Co. (wholly owned by
the Chairman of the Board of Directors and former
President) for additional office and manufacturing space
for the Company. The LDR lease, which expired on May 31,
1988, was renegotiated for a ten-year term commencing
June 1, 1988 at a net annual rental of $233,000. The
Company is required to pay all real-estate taxes,
maintenance and repairs to the facility.

Effective July 20, 1994, the Company entered
into an Employment, Non-Competition and Termination
Agreement (the "Gross Agreement") and a Stock Purchase
Agreement (the "Stock Purchase Agreement") with David E.
Gross, who retired as President and Chief Technical
Officer of the Company on May 12, 1994. Under the terms
of the Gross Agreement, Mr. Gross will receive a total of
$600,000 as compensation for his services under a five-
year consulting agreement with the Company and a total of
$750,000 as consideration for a five-year non-compete
arrangement. The payments will be charged to expense
over the term of the Gross Agreement as services are
performed and obligations are fulfilled by Mr. Gross. He
will also receive, at the conclusion of such initial
five-year period, an aggregate of approximately $1.3
million payable over a nine-year period as deferred
compensation. The net present value of the payments to
be made to Mr. Gross, pursuant to the deferred
compensation portion of the Gross Agreement, approximated
the amount of the Company's previous deferred
compensation arrangement with Mr. Gross. On July 28,
1994, pursuant to the Stock Purchase Agreement, the
Company purchased 659,220 shares of Class A Common Stock
and 45,179 shares of Class B Common Stock owned by Mr.
Gross for $4.125 and $4.00 per share, respectively,
totaling approximately $2.9 million in cash (the "Buy-
back"). The Stock Purchase Agreement also includes
certain provisions regarding the sale and voting of Mr.
Gross' remaining shares of stock in the Company, as well
as the adjustment which would have been made in the
purchase price paid to Mr. Gross pursuant to the Buy-back
should a change in control of the Company occur within
three years from the date of the Stock Purchase
Agreement.

On October 18, 1994, the Company filed a
Registration Statement on Form S-2, and on November 10,
1994, the Company filed Amendment No. 1 to such
Registration Statement (the "Registration Statement")
with the Securities and Exchange Commission for the
purpose of selling shares of its common stock purchased
by the Company in the Buy-back. Pursuant to the
Registration Statement, the Company offered to sell
650,000 shares of its Class A Common Stock at a purchase
price of between $3.92 per share and $4.33 per share and
45,000 shares of its Class B Common Stock at a purchase
price of between $3.80 per share and $4.20 per share. As
of March 31, 1995, all shares of Class A and Class B
Common Stock offered for sale under the Registration
Statement had been sold at a price of $4.125 per share
and $4.00 per share, respectively, totaling approximately
$2.9 million.

As of March 31, 1995, the Company was in the
process of finalizing an Employment, Non-Competition and
Termination Agreement (the "Newman Agreement") between
the Company and Leonard Newman, the Chairman of the Board
and Secretary of the Company. Pursuant to the Newman
Agreement, it is expected that Mr. Newman will receive
certain compensation from the Company over a five-year
period for consulting services and a non-compete
arrangement. In addition, Mr. Newman will receive
certain retirement benefits payable over a ten-year
period at the conclusion of such initial five-year
period. Results of operations for fiscal 1995 reflect a
charge of $1.5 million representing the estimated net
present value of the Company's obligation under the
Newman Agreement. The corresponding amount was included
in Other Liabilities in the Consolidated Balance Sheet at
March 31, 1995 as an addition to the accrual which had
been established to cover the Company's liability to Mr.
Newman under a previous deferred compensation
arrangement.

The Company is a party to various legal actions
and claims arising in the ordinary course of its
business. In management'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 substantially all of the Company's
revenues are derived from contracts or subcontracts with
the U.S. Government, 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.

NOTE 11. BUSINESS COMBINATIONS

On October 1, 1993, the Company acquired
(through TAS Acquisition Corp., a wholly-owned
subsidiary) a 95.7% equity interest in Technology
Applications and Service Company ("TAS"), a Maryland
corporation, pursuant to a Stock Purchase Agreement (the
"Agreement") dated as of August 6, 1993. Under the terms
of the Agreement, the Company paid $15.10 in cash for a
total of 97,317 issued and outstanding shares of common
stock, par value $.01 per share, of TAS. TAS,
headquartered in Gaithersburg, Maryland, was a privately
held company incorporated in 1991. It applies state-of-
the-art technology to produce emulators that can replace
display consoles and computer peripherals used by the
military. TAS also produces simulators, stimulators and
training products used primarily for testing and training
at military land-based sites, as well as provides
technical services to both Department of Defense and
commercial customers. On September 30, 1993, the
Company, in anticipation of the acquisition, advanced
$1,800,000 to TAS pursuant to a demand promissory note.
Such advance was converted to an intercompany liability
on the date of the acquisition and is eliminated in
consolidation. On November 1, 1993, Articles of Merger
were filed in order to merge TAS into TAS Acquisition
Corp. The name TAS Acquisition Corp. was changed to
Technology Applications & Service Company ("TAS").

The acquisition has been accounted for using
the purchase method of accounting. The excess of cost
over the estimated fair value of net assets acquired was
approximately $405,000 and is being amortized on a
straight-line basis over 30 years, or $14,000 annually.
The Consolidated Statements of Earnings include the
operations of TAS from October 1, 1993.

The following unaudited pro forma financial
information shows the results of operations for the years
ended March 31, 1994 and 1993 as though the acquisition
of TAS had occurred at the beginning of each period
presented. In addition to combining the historical
results of operations of the two companies, the pro forma
calculations include: the amortization of the excess of
cost over the estimated fair value of net assets
acquired; the effect of a reduction in interest expense
arising from the assumed repayment by TAS prior to the
acquisition date of its outstanding borrowings under a
bank line of credit; the effect of a reduction in
interest income from the assumed decrease in cash
associated with the $1,800,000 advanced to TAS prior to
the acquisition and the funding of the TAS operating loss
for the periods presented; and the adjustment to income
taxes (benefit) to reflect the effective income tax
(benefit) rate assumed for the Company and TAS on a
combined basis for each pro forma period presented:

Years Ended March 31,
1994 1993

Revenues . . . . . . . . . . . $ 65,944,000 $ 56,652,000

Net Earnings (Loss) before
Extraordinary Item . . . . . . $ 1,291,000 $ (2,364,000)

Net Earnings (Loss) per Share
before Extraordinary
Item . . . . . . . . . . . . . $ .24 $ (.44)

The unaudited pro forma financial information
is not necessarily indicative either of the results of
operations that would have occurred had the acquisition
been made at the beginning of the period, or of the
future results of operations of the combined companies.

On December 13, 1993, pursuant to a Joint
Venture Agreement dated November 3, 1993 and a
Partnership Agreement dated December 13, 1993, by and
between DRS Systems Management Corporation, a wholly-
owned subsidiary of the Company, and Laurel Technologies,
Inc. ("Laurel") of Johnstown, Pennsylvania, the Company
entered into a partnership with Laurel (the
"Partnership") for the purposes of electronic cable and
harness manufacturing, military-quality circuit card
assembly and other related activities. The Company's
contribution to the Partnership consisted of cash, notes
and equipment valued at approximately $600,000,
representing an 80% controlling interest in the
Partnership. As a result, the financial position of the
Partnership has been consolidated with that of the
Company's, and the Consolidated Statements of Earnings
include the operations of Laurel from December 13, 1993.
The related minority interest in the Partnership has been
included in Other Liabilities and Other Income, Net,
respectively, in the Company's consolidated financial
statements for the periods ended March 31, 1995 and 1994.

The Company also made one other asset
acquisition in December 1993 which was not significant to
the Company's consolidated financial statements.

On November 17, 1994, Precision Echo, Inc., a
wholly-owned subsidiary of the Company, acquired, through
its wholly-owned subsidiary ("Precision Echo"), the net
assets of Ahead Technology Corporation ("Ahead"),
pursuant to an Asset Purchase Agreement dated October 28,
1994. Under the terms of the Asset Purchase Agreement,
Precision Echo paid, on the date of acquisition,
approximately $1,100,000 for the net assets of Ahead. In
addition, Precision Echo entered into a Covenant and
Agreement Not to Compete ("Covenant"), dated October 28,
1994, with the chairman of the board of Ahead. Under the
terms of the Covenant, the total cash consideration to be
paid by Precision Echo consisted of approximately
$400,000 payable at the acquisition date, and an
additional $540,000 payable in equal monthly installments
over a period of five years from the acquisition date.
Ahead, located in Los Gatos, California, designs and
manufactures a variety of consumable magnetic head
products used in the production of computer disk drives.
It products include burnish heads, glide heads and
specialty test heads.

The acquisition has been accounted for using
the purchase method of accounting and, therefore, Ahead's
financial statements are included in the consolidated
financial statements of the Company from the date of
acquisition. The excess of cost over the estimated fair
value of net assets acquired was approximately $940,000
and will be amortized on a straight-line basis over five
years, or approximately $188,000 annually. The financial
position and results of operations of Ahead were not
significant to those of the Company's at the date of
acquisition.

NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following tables set forth unaudited
quarterly financial information for the fourth quarter of
fiscal 1994, each quarter of fiscal 1995 and the first,
second and third quarters of fiscal 1996:

First Quarter Second Quarter
1996 1995 1996 1995
___________ ___________ ___________ __________
Revenues . $ 17,279,000 $ 16,012,000 $ 22,786,000 $ 15,650,000

Operating
Income . . $ 1,314,000 $ 1,076,000 $ 1,844,000 $ 1,180,000

Income
Taxes . . . $ 420,000 $ 382,000 $ 584,000 $ 335,000

Net Earnings $ 656,000 $ 508,000 $ 915,000 $ 570,000

Net Earnings
per Share . $ .12 $ .10 $ .16 $ .12

______________________________________________________________________

Third Quarter Fourth Quarter
1996 1995 1995 1994
___________ ___________ ___________ __________

Revenues . . $ 25,563,000 $ 15,742,000 $ 22,526,000 $ 22,451,000

Operating
Income . . . $ 2,181,000 $ 1,005,000 $ 1,833,000 $ 1,275,000

Income
Taxes . . . . $ 590,000 $ 425,000 $ 510,000 $ 413,000

Net Earnings $ 924,000 $ 634,000 $ 892,000 $ 617,000

Net Earnings
per Share . . $ .16 $ .13 $ .16 $ .12

Primary and fully diluted net earnings per
share amounts are the same for each of the periods presented above.

NOTE 13. SUBSEQUENT EVENTS AND OTHER MATTERS (UNAUDITED)

On July 5, 1995 (the "OMI Closing Date"), Photronics
Corp., a New York corporation and a wholly-owned subsidiary
of the Company ("Photronics Corp."), acquired (through OMI
Acquisition Corp. ("OMI"), a Delaware corporation and a
wholly-owned subsidiary of Photronics Corp.), substantially all of
the assets of Opto Mechanik, Inc. ("Opto"), a Delaware
corporation, pursuant to an Agreement for Acquisition of
Assets dated May 24, 1995, as amended July 5, 1995, between
Photronics Corp. and Opto (the "OMI Agreement"), and approved by
the United States Bankruptcy Court for the Middle District
of Florida on June 23, 1995. OMI, now located in Palm Bay,
Florida, designs and manufactures electro-optical sighting
and targeting systems used primarily in military fire
control devices and in various weapons systems.

Pursuant to the OMI Agreement, the Company paid a
total of $5,450,000 consisting of i) $1,150,000 in cash to
PNC Bank, Kentucky, Inc. ("PNC"), ii) a note to PNC in the
principal amount of $1,450,000 payable in forty eight (48)
equal monthly installments of principal and interest
commencing with the first day of the month subsequent to the
OMI Closing Date (the "PNC Note"), iii) $2,550,000 in cash to
MetLife Capital Corporation and iv) a note in the principal
amount of $300,000 to Opto payable in six (6) equal monthly
installments of principal and interest commencing on August
5, 1995 (the "Opto Note"). The PNC Note bears interest at a
floating rate equal to the of i) PNC's stated prime interest
rate plus 0.5% or ii) the prime rate as reported by the Wall
Street Journal plus 0.5%. The Opto Note bears interest at a
rate of 9.5% per annum. Professional fees and other costs
associated with the acquisition were capitalized as part of
the total purchase price. Total cash consideration paid in
the acquisition was obtained from the Company's working
capital.

The acquisition of the assets of Opto has been
accounted for under the purchase method. The operating
results of OMI, the acquisition corporation, have been
included in the Company's reported operating results since the
date of acquisition. The cost of the acquisition has been allocated
on the basis of the estimated fair market value of the
assets acquired and the liabilities assumed.

On September 29, 1995 (the "Debenture Closing
Date"), the Company issued $20,000,000 in aggregate
principal amount of the Company's 9% Senior Subordinated
Convertible Debentures due 2003 (the "Senior Subordinated
Convertible Debentures") pursuant to a private placement.
Net proceeds from the private placement of these Senior
Subordinated Convertible Debentures were approximately
$19,000,000. On November 3, 1995, the Company issued an
additional $5,000,000 in aggregate principal amount of
the Senior Subordinated Convertible Debentures, upon
exercise of the over-allotment option pursuant to the
Purchase Agreement between the Company and Forum Capital
Markets L.P. ("Forum") , dated September 22, 1995. Net
proceeds from the exercise of the over-allotment option
were approximately $4,750,000. Pursuant to the related
Registration Rights Agreement dated September 22, 1995
between the Company and Forum, acting on behalf of
holders of the Senior Subordinated Convertible Debentures
(the "Registration Rights Agreement"), the Company has
agreed to file, within ninety (90) days after the
Debenture Closing Date, a shelf registration statement
relating to the Senior Subordinated Convertible
Debentures and the shares of Class A Common Stock which
are issuable from time to time upon conversion of the
Senior Subordinated Convertible Debentures, and to cause
the shelf registration statement to become effective
within one hundred fifty (150) days after the Debenture
Closing Date. In addition, the Company has agreed to use
its reasonable best efforts to keep the shelf
registration statement effective until at least the third
anniversary of the issuance of the Senior Subordinated
Convertible Debentures. In connection with these
transactions, the Company expects to incur approximately
$500,000 of professional fees and other costs. These
costs, together with Forum's commissions in connection
with the private placement of the Senior Subordinated
Convertible Debentures, will be amortized ratably through
the maturity date of the Senior Subordinated Convertible
Debentures.

The Company's Bonds are supported by an
irrevocable, direct-pay letter of credit in an amount
equal to the principal balance plus interest thereon for
45 days. At December 31, 1995, the contingent liability
of the Company as guarantor under the letter of credit
was approximately $1,930,000. The Company has
collateralized the letter of credit with accounts
receivable and has also agreed to certain financial
covenants, including the maintenance of: (i) a certain
minimum ratio of consolidated tangible net worth to total
debt (the "Debt Ratio"), (ii) a certain minimum quarterly
ratio of earnings before interest and taxes to interest
(the "Interest Ratio"), and (iii) a certain minimum
balance of billed and unbilled accounts receivable
("Eligible Receivables"). At December 31, 1995, the
covenants required: (i) a Debt Ratio of 0.6:1, (ii) an
Interest Ratio of 1.5:1 and (iii) Eligible Receivables of
$2,500,000. As a result of the issuance of $25,000,000
aggregate principal amount of the Senior Subordinated
Convertible Debentures on September 29, 1995, the Debt
Ratio at December 31, 1995 was 0.4:1. The Company has
obtained a waiver, renewable quarterly, from the bank of
the required debt ratio and is in compliance with all
covenants under the letter of credit.

On February 6, 1996, pursuant to a Joint
Venture Agreement, dated February 6, 1996, by and among
DRS/MS, Inc. ("DRS/MS"), a wholly-owned subsidiary of
the Company, Universal Sonics Corporation ("Universal
Sonics"), a New Jersey corporation, Ron Hadani, Howard
Fidel and Thomas S. Soulos, and a Partnership Agreement,
dated February 6, 1996, by and between DRS/MS and
Universal Sonics, the Company entered into a partnership
with Universal Sonics (the "Partnership") for the
purpose of developing, manufacturing and marketing
medical ultrasound imaging equipment. The Company's
contribution to the Partnership consisted of $400,000 in
cash and certain managerial expertise and manufacturing
capabilities, representing a 90% interest in the
Partnership.

On February 9, 1996, Precision Echo acquired
(through Ahead Technology Acquisition Corporation
("Ahead Acquisition"), a Delaware corporation and a
wholly-owned subsidiary of Precision Echo), certain
assets and assumed certain liabilities (principally,
obligations under property leases) of Mag-Head
Engineering Company, Inc. ("Mag-Head"), a Minnesota
corporation, pursuant to an Asset Purchase Agreement,
dated as of February 9, 1996, by and among Mag-Head and
Ahead Acquisition for approximately $400,000 in cash.
Mag-Head produces audio and flight recorder heads.

NO PERSON IS AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT
CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS,
AND ANY INFORMATION OR $25,000,000
REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE
HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY DIAGNOSTIC/RETRIEVAL
THE COMPANY OR ANY UNDERWRITER. SYSTEMS, INC.
THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY
SECURITY OTHER THAN THE
REGISTERED SECURITIES TO WHICH 9% SENIOR SUBORDINATED
IT RELATES OR AN OFFER TO ANY CONVERTIBLE
PERSON IN ANY JURISDICTION DEBENTURES DUE 2003
WHERE SUCH OFFER WOULD BE
UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY _______________
IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE PROSPECTUS
COMPANY SINCE THE DATE HEREOF. ______________
_____________

TABLE OF CONTENTS

Page

Available Information . . . 2
Prospectus Summary . . . . 3
Risk Factors . . . . . . . 7
The Company . . . . . . . . 11
Use of Proceeds . . . . . . 13
Capitalization . . . . . . 13 FEBRUARY 23, 1996
Market Prices of Capital Stock
14
Dividend Policy . . . . . . 14
Selected Consolidated Financial
Data . . . . . . . . . . . 15
Management's Discussion and
Analysis of Financial
Condition
and Results of Operations 17
Business . . . . . . . . . 26
Management . . . . . . . . 38
Security Ownership . . . . 47
Certain Relationships and
Related Transactions . . . 50
Description of the Debentures
51
Description of 1998 Debentures
72
Description of Capital Stock
73
Plan of Distribution . . . 75
Selling Security Holders . 77
Legal Matters . . . . . . . 79
Experts . . . . . . . . . . 79
Index to Financial Statements
F-1