DIAGNOSTIC RETRIEVAL SYSTEMS INC, 424B3, 1996-05-15

DIAGNOSTIC RETRIEVAL SYSTEMS INC
424B3, 1996-05-15
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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PROSPECTUS 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 Common Stock (as defined herein) of the Company which are
issuable from time to time upon conversion of the Debentures. The
Debentures or 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"). The Company will not receive any proceeds from this offering.
On March 26, 1996, the stockholders of the Company approved the
reclassification (the "Reclassification") of each share of the Company's
Class A Common Stock, par value $.01 per share (the "Class A Common
Stock"), and each share of the Company's Class B Common Stock, par value
$.01 per share (the "Class B Common Stock"), into one share of the
Company's new single class of common stock, par value $.01 per share (the
"Common Stock"). The Reclassification became effective on April 1, 1996.

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 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 Debentures and the shares of Common Stock which are issuable upon
conversion of the Debentures are listed 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 Common Stock is listed on the AMEX
under the symbol "DRS." On April 25, 1996, the last reported sale price of
the Common Stock on the AMEX was $7-5/16 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 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
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 Common Stock offered by the Selling
Security Holders hereby will be the purchase price of such Debentures or
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 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 Common Stock purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act.

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

The date of this Prospectus is May 14, 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, the
exchange on which the 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 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 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:

o 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;

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

o 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 Lockheed-Martin Tactical Defense
Systems (formerly, 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
Nine Months
Year Ended March 31, 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)(2)..... $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34

OTHER OPERATIONS DATA:

EBITDA(3)............... $ 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(4)(5)....... 2.9x 2.3x 1.8x -- -- 2.8x 2.7x
Ratio of Earnings to Fixed
Charges, as adjusted(4)(6)... 1.8x 2.2x

December 31, 1995
__________________________________
Actual As Adjusted(7)

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

<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) Does not give effect to the Reclassification. On April 1, 1996, the
Reclassification became effective pursuant to which each share of
the Class A Common Stock and each share of the Class B Common Stock
was reclassified into one share of the Common Stock. See
"Description of Capital Stock."

(3) 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.

(4) 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.

(5) 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.

(6) 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."

(7) 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>

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 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 sub-
ordinated 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 suffi-
cient 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 (ex-
cluding current install-
ments) 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
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 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
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 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 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
Common Stock in the public market could adversely affect the prevailing
market price of the Debentures and the 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 Common Stock, at a
conversion price of $8.85 per share, subject to adjustment under certain
circumstances. As of April 25, 1996, there was an aggregate of 5,467,632
shares of Common Stock outstanding (excluding 498,434 shares held in
treasury). Of such shares, 1,062,248 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 332,800 shares of Common Stock at $15 per share.

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 Debentures and the shares of Common
Stock which are issuable upon conversion of the Debentures are listed 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 Common Stock of the Company is listed on the AMEX. The
market for the Common Stock has historically been characterized by limited
trading volume and a limited number of holders. There can be no assurance
that a more active trading market for the 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

o 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;

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

o 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.

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 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 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."
The Company continues to seek acquisition opportunities consistent with its
business strategy and is engaged in preliminary discussions regarding
several potential acquisitions. However, there can be no assurance that
definitive agreements will be reached or that any acquisition will be
consummated.

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.

<TABLE>

<CAPTION>
December 31, 1995
-----------------------------
Actual As Adjusted
----------- -------------

Long-term debt, excluding current installments(1):

<S> <C> <C>
Senior Indebtedness(2) .................................... $ 2,819,000 $ 2,819,000
8 1/2% 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(3) ................ 37,000 37,000

Class B Common Stock, $.01 par value, 20,000,000 shares
authorized; 2,216,353 shares issued(3) ................. 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(3) ............................................. (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
============ ============
</TABLE>

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

(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.

(3) Does not give effect to the Reclassification. On April 1, 1996, the
Reclassification became effective pursuant to which each share of the
Class A Common Stock and each share of the Class B Common Stock was
reclassified into one share of the Common Stock. See "Description of
Capital Stock."

MARKET PRICES OF CAPITAL STOCK

Prior to the Reclassification, the Company's Class A Common
Stock and Class B Common Stock traded on the AMEX (Symbols: DRSA and DRSB,
respectively). On April 1, 1996, upon the effectiveness of the
Reclassification, trading of the newly classified Common Stock commenced.
The following table sets forth for each period indicated the high and low
closing sales prices of the Company's Class A Common Stock , Class B Common
Stock and Common Stock, as reported by the American Stock Exchange Monthly
Market Statistics:

<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock Common Stock*
High Low High Low High Low

Year Ended March 31, 1994:

<S> <C> <C> <C> <C> <C> <C>
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........................ 8-11/16 7-7/16 8-3/4 7-3/8 - -

Year Ended March 31, 1997:
First Quarter
(through April 25, 1996).............. - - - - 7-15/16 7-5/16

</TABLE>
[FN]
- ----------------

* As of April 25, 1996, the Common Stock was held by 2,113 stockholders
(of which 346 were registered holders and 1,767 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
Common Stock. The Company's 1998 Debentures limit the Company's ability to
pay dividends or make other distributions on its Common Stock. See Note 6
of Notes to Consolidated Financial Statements for information concerning
restrictions on the declaration or payment of dividends. 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)(2)....... $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34

OTHER OPERATIONS DATA:

EBITDA(3).................... $ 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(4)(5)............. 2.9x 2.3x 1.8x - - 2.8x 2.7x

Ratio of Earnings to Fixed
Charges, as adjusted(4)(6). 1.8x 2.2x

March 31, December 31, l995
1995 1994 1993 1992 1991 Actual As Adjusted(7)
------------ ------------ ------------- ------------ ------------- -------- -------------
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

</TABLE>
[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) Does not give effect to the Reclassification. On April 1, 1996, the
Reclassification became effective pursuant to which each share of the
Class A Common Stock and each share of the Class B Common Stock was
reclassified into one share of the Common Stock. See "Description of
Capital Stock."

(3) 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.

(4) 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.

(5) 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.

(6) 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."

(7) 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."

MANAGEMENT'S DISCUSSION AND ANALYSIS

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. In March 1996, the Company entered into an employment,
non-competition and termination agreement with Mr. Leonard Newman.
Pursuant to such agreement, Mr. Newman resigned as Chairman Emeritus
of the Company. See "-- Financial Condition and Liquidity - Certain
Agreements."

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.
<TABLE>
<CAPTION>
Percentage of Revenues Percentage Change
-------------------------------------------------------------- -----------------------------------

NINE MONTHS
ENDED
DECEMBER 31,
1995
VS.
FISCAL FISCAL NINE MONTHS
1995 1994 ENDED
Nine Months VS. VS. DECEMBER 31,
Year Ended March 31, Ended December 31, 1994 1993 1994
------------------------------------- ---------------------- -------- -------- --------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1995 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
---------- -------- --------- --------- ---------
3.7% 2.8% 2.3% 3.8% 3.6%
Net Earnings................... ========== ======= ======== ========= ========= 61.2% 48.8% 45.7%

</TABLE>

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. The Company continues to seek acquisition opportunities
consistent with its business strategy and is engaged in preliminary
discussions regarding several potential acquisitions . However, there can
be no assurance that definitive agreements will be reached or that any
acquisition will be consummated.

On February 5, 1996, the Company received a written commitment
from Mellon Bank, N.A. ("Mellon Bank") for a $15 million unsecured
revolving line of credit. The line of credit will be used for working
capital, stand-by letters of credit, and to refinance certain existing debt
obligations of the Company at more favorable interest rates. Interest on
borrowings under the line of credit will be accrued at the prime rate or
London Interbank Offered Rate plus 175 basis points. The Company has agreed
to maintain certain financial covenants, including the maintenance of: (i)
a certain minimum quarterly ratio of liquid assets to current liabilities,
(ii) a certain minimum interest coverage ratio, calculated on a rolling
four quarter basis and (iii) a certain maximum quarterly ratio of total
liabilities to tangible net worth. This commitment is subject to the
execution of a related loan agreement by and between the Company and Mellon
Bank. The Company expects this agreement to be completed in May 1996.

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 31, 1995. As of February 25,
1996, backlog totalled approximately $148 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 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 $625,000 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.

On March 28, 1996, the Company entered into an employment,
non-competition and termination agreement (the "Newman Agreement") with
Leonard Newman. Pursuant to the Newman Agreement, Mr. Newman received a
lump sum payment of approximately $2.0 million. Under the terms of the
Newman Agreement, Mr. Newman has agreed to provide consulting services,
as required from time to time, to the Company for a five year period
and has also agreed not to compete with the Company during this same
period. This agreement supersedes a previous deferred compensation
agreement with the Company.

In March 1996, Mr. Leonard Newman and certain members of his
immediate family sold an aggregate of 885,924 shares of Common Stock to a
buyer, acting as an investment adviser to several accounts. In connection
with such sale, the Company entered into a registration rights agreement
with such buyer to assist in facilitating such sale. The Company has agreed
to file and cause to become effective a registration statement with the SEC
upon demand, at its expense, relating to such shares for future sale by
such buyer.

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

o 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;

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

o 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 Lockheed-Martin Tactical
Defense Systems (formerly, 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:

o 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."

o 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.

o 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:

o 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 (presently, Lockheed-Martin Tactical
Defense Systems). 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 ship-
board 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.

o 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:

o 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.

o 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.

o 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
moved into a new joint facility .

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:

o 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.

o 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:

o 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.

o 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.

o 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.

o 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.

o 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.

o 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 February 25, 1996, backlog
totalled approximately $148 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 perfor mance 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 February 25, 1996, the Company employed 795 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 have recently been consolidated and relocated
to 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 approximately 54,000 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, Chief 46
Executive Officer and Director

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

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

Stuart F. Platt......... Vice President and Director; President 62
of DRS Media Technology Group

Richard Ross............ Vice President; President of DRS 41
Electro-Optical Systems Group

Leonard Newman.......... Director 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 also serves as
President of DRS Media Technology Group. He 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. Mr. Ross also
serves as President of the DRS Electro-Optical Systems Group.

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. From August 1995 until March 1996, Mr. Newman held the position
of 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"):

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

Long-Term
Compensation
-----------------
Annual Compensation (i) Awards
--------------------------------------- -----------------
All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Stock Options(#) Compensation($)
- --------------------------------------- ----------- ----------- ---------- ----------------- ---------------

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

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

Paul G. Casner, Jr................. 1995 198,000 40,000 0 32,201(b)(d)(h)
Vice President &
President-- DRS Electronic
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)(j) 3,664(c)(d)
President-- DRS Media Technology Group 1993 187,889 0 0 2,426(c)(d)

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

</TABLE>
- ------------------

(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 Common Stock and incentive stock options to purchase 100,000
shares of 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 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.

(j) In connection with the Reclassification, each option issued or
issuable pursuant to the 1991 Stock Option Plan will be
exercisable for an equal number of shares of the Company's
Common Stock.

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. The following table does not give effect to the Reclassification.

OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------------- --------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED (#) FISCAL 1995 ($/SH) DATE 0% ($) 5%($)(C) 10%($)(C)
- ----------- -------------- -------------- -------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <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

(Footnotes on next page)

</TABLE>
- --------------

(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. The following table does not give effect to the
Reclassification.

<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE

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 STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------------- ----------------- ---------------- ------------
SHARES
ACQUIRED ON VALUE EXER- UNEXER- EXER- UNEXER- EXER- UNEXER- EXER- UNEXER-
NAME EXERCISE (#) REALIZED ($) CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE CISABLE
- ------------------ ------------ ------------ ------- -------- -------- -------- ------- -------- ------- -------

<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

</TABLE>
[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.

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. Upon
entering into the Newman Agreement in March 1996, this Deferred
Compensation Agreement was superseded. 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,
was 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
were 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 was 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 were 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 was to 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. Under the Newman Agreement, the Company will continue
to be 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 an 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.

On March 28, 1996, the Company entered into the Newman
Agreement with Leonard Newman. Under the terms of the Newman Agreement, Mr.
Newman has agreed to provide consulting services, as required from time to
time, to the Company for a five year period and has also agreed not to
compete with the Company during this same period. This agreement supersedes
a previous deferred compensation agreement with the Company. In
consideration for the above, Mr. Newman received a lump sum payment of
approximately $2.0 million.

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 (the "Committee") on May 26, 1994, served
as the Chairman of the Board and Secretary of the Company during fiscal
1995 and until his resignation from such offices in August 1995. During the
period in which he served on the Committee, Mr. Newman did not participate
in compensation decisions relating to himself or Mark S. Newman.

SECURITY OWNERSHIP

The following table gives effect to the Reclassification and
shows, as of April 25, 1996, the number of shares of 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 beneficially owned
(within the meaning of Rule 13d-3 of the Exchange Act).

COMMON STOCK (a)
-------------------------------
PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS

Mark S. Newman........................ 194,149(b)(c)(d) 3.5

Theodore Cohn......................... 5,900 0.1

Donald C. Fraser....................... - -

Mark N. Kaplan......................... 1,000 -(e)

Stuart F. Platt....................... 3,000(c) 0.1

Jack Rachleff.......................... 1,000 -(e)

Paul G. Casner, Jr..................... 31,000(c) 0.6

Nancy R. Pitek......................... 14,307(b)(c) 0.3

Richard Ross........................... 3,000(c) 0.1

Leonard Newman......................... 2,700 -(e)

All directors and executive
officers as a group
(10 persons)....................... 388,356(b)(c)(d) 6.9%

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

(a) As of April 25, 1996, the Company had outstanding
5,467,632 shares of Common Stock (excluding 498,434
shares of Common Stock held in treasury). Unless
otherwise noted, each director and executive officer
had sole voting power and investment power over the
shares of Common Stock indicated opposite such
director's and executive officer's name.

(b) Includes 13,107 shares of 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.

(c) Includes shares of Common Stock which might be
purchased upon exercise of options which were
exercisable on April 25, 1996 or within 60 days
thereafter, as follows: Mr. P. Casner, Jr., 30,000
shares; Mr. Newman, 90,000 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, 181,200 shares.

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

(e) Less than 0.1%.

The following table gives effect to the Reclassification and
sets forth certain information, as of April 25, 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.

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

COMMON STOCK

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

AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP OF CLASS
OF BENEFICIAL OWNER ---------------------- -----------------

First Pacific Advisors, Inc.
10301 West Pico Blvd.
Los Angeles, CA 90064....... 1,774,452(a) 28.7%

Palisade Capital Management
L.L.C.
One Bridge Plaza
Suite 695
Fort Lee, New Jersey
07024 . ...................... 885,924(b) 16.2

Michael N. Taglich
Taglich Brothers,
D'Amadeo, Wagner &
Company, Incorporated
100 Wall Street
New York, NY 10005 . .......... 529,850(c) 9.7

David E. Gross
27 Cameron Road
Saddle River, NJ 07458 ......... 335,701(d) 6.1

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(a) Includes 508,475 shares of Common Stock from
the assumed conversion of $4,500,000 principal amount of
the Debentures , 208,877 shares of Common Stock from the assumed
conversion of $3,133,000 principal amount of the Company's 1998
Debentures and 1,057,100 shares of Common Stock beneficially owned by
First Pacific Advisors, Inc. ("First Pacific") through control of FPA
Capital Fund, Inc. ("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 First Pacific
has shared voting power with respect to 300,000 shares and
shared dispositive power with respect to 1,774,452 shares, 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 321,527 shares and New Income has sole voting power
and shared dispositive power with respect to 339,328 shares.

(b) Represents shares of Common Stock held by Palisade Capital Management
L.L.C., acting as investment adviser to (i) Crysler Corp. Emp. #1 Pension
Plan Dtd. 4-1-89, (ii) IBM Corp. Retirement Plan Trust Dtd. 12-18-45,
(iii) G.E. Pension Trust, and (iv) Nynex Master Pension Trust Dtd. 1-1-84.

(c) Consists of 312,450 shares of Common Stock held by Lancer Partners, Inc.
("Lancer Partners"), 11,500 shares of Common Stock held by Antrade, N.V.
("Antrade"), 15,200 shares of Common Stock held by Album N.V. ("Album"),
11,600 shares of Common Stock held by Ralco Investments Group ("Ralco"),
156,850 shares of Common Stock held by Lancer Offshore, Inc. ("Lancer
Offshore") and 22,250 shares of Common Stock held by Michael Lauer. The
Company has been advised that Michael Lauer has sole voting power and sole
dispositive power with respect to 22,250 shares. 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 507,600 shares.

(d) Includes 282,381 shares of Common Stock held by Mr. Gross for which he
has sole voting and dispositive power. Also included are 26,000 shares of
Common Stock held by Mr. Gross' wife personally and 27,320 shares of Common
Stock held by her as custodian for her two children. Mr. Gross has neither
voting power nor investment power over the shares of Common Stock held by
his wife, either personally or as custodian for her children, and disclaims
any beneficial interest in such 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, and as supplemented as of April 1, 1996,
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 April 25, 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 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 Common Stock will not be issued upon
conversion. A person otherwise entitled to a fractional share of Common
Stock upon conversion shall receive cash equal to the equivalent fraction
of the Current Market Price of a share of 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 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 Common
Stock, for the purpose of effecting conversions of Debentures, the full
number of shares of 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; and with respect to the Company, means the Common Stock,
par value $.01 per share, or any successor class of common equity
into which such common stock may thereafter be converted.

"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 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
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.

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
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
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
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 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

On February 7, 1996, the Board of Directors of the Company
approved and recommended for submission to the stockholders of
the Company by a 6 to 1 vote, with Leonard Newman voting against
such submission, the consideration and approval of an Amended and
Restated Certificate of Incorporation (the "Restated
Certificate"), which amended and restated the Company's
certificate of incorporation (i) to effect a reclassification of
each share of Class A Common Stock and each share of Class B
Common Stock into one share of Common Stock, (ii) to provide
that action by the stockholders may be taken only at a duly
called annual or special meeting, and not by written consent and
(iii) to provide that the stockholders of the Company would have
the right to make, adopt, alter, amend, change or repeal the By-
Laws of the Company only upon the affirmative vote of not less
than 66 2/3% of the outstanding capital stock of the Company
entitled to vote thereon.

On March 26, 1996, the stockholders approved the Restated
Certificate. The Restated Certificate was filed with the
Secretary of State of the State of Delaware and became effective
April 1, 1996. The authorized capital stock of the Company
currently consists of 2,000,000 shares of Preferred Stock and
20,000,000 shares of Common Stock. As of April 25, 1996, there
were 5,467,632 shares of Common Stock issued and outstanding
(exclusive of 498,434 shares held in treasury). No shares of
Preferred Stock have been issued. All outstanding shares of
Common Stock are fully paid and nonassessable.

PREFERRED STOCK

The Restated Certificate authorizes 2,000,000 shares of
Preferred Stock each having a par value of $10 per share.
Subject to applicable law, the Board may issue, in its sole
discretion, shares of Preferred Stock without further stockholder
action by resolution at the time of issuance. The Preferred
Stock may be issued in one or more series and may vary as to the
designation and number of shares in such series, the voting power
of the holders thereof, the dividend rate, the redemptive
terms and prices, the voluntary and involuntary liquidation
preferences, the conversion rights and the sinking fund
requirements, if any, of such series. The Board, however, may
not create any series of Preferred Stock with more than one vote
per share.

COMMON STOCK

Voting Rights. As a result of the Reclassification, all
holders of Common Stock have the same preferences, rights, powers
and qualifications, including one vote for each share of Common
Stock held.

The Board was previously divided into two classes; Class A
Directors and Class B Directors. The Class A Directors were
divided into three classes serving staggered terms, the Class A-I
Directors, the Class A-II Directors and the Class A-III
Directors. As a result of the Reclassification, the Board is no
longer divided into Class A Directors and Class B Directors. The
directors who, as of the effective date of the Reclassification,
were designated as Class A-I Directors, Class A-II Directors and
Class A-III Directors are now designated as Class I Directors,
Class II Directors and Class III Directors, respectively, and
will continue to serve out their respective terms. Each of the
former Class B Directors was appointed to serve as either a Class
I Director, Class II Director or Class III Director. Each class
of directors will consist of as nearly an equal number of
directors as possible. At each annual meeting beginning with the
1996 Annual Meeting, one class of directors will be elected to
succeed those whose terms expire by all record holders of the
Common Stock as of the date of determination, with each new
director to serve a three-year term.

In General. Holders of Common Stock have no redemption or
preemptive rights and are not liable for further calls or
assessments. Holders of Common Stock will be entitled, after
satisfaction of the Company's liabilities and payment of the
liquidation preferences, if any, of any outstanding shares of Pre
ferred Stock, to share the remaining assets of the Company, if
any, equally in proportion to the number of shares held.

Subject to the rights of holders of Preferred Stock, if any,
and subject to other provisions of the Restated Certificate,
holders of Common Stock are entitled to receive such dividends
and other distributions in cash, property or shares of stock of
the Company as may be declared from time to time by the Board in
its discretion from any assets of the Company legally available
therefor.

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 Common Stock and
the Debentures.

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 Common Stock offered hereby
from time to time on terms to be determined at the times of such
sales. The Debentures and shares of 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
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 Common Stock for whom they may act as agent. To
the extent required, the aggregate principal amount of Debentures
and number of shares of 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 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 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 Common Stock purchased by
them may be deemed to be underwriting commissions or discounts
under the Securities Act.

The Debentures and the shares of 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 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 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 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
Debentures and the shares of Common Stock which are issuable
upon conversion of the Debentures are listed 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 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
of Deben- Principal Percent
tures Amount of of
Benef- Debentures Outstand-
icially Being ing
Name Owned Registerd 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. . . . . . 500,000 500,000 2.0
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 . . . . . . . . . . . .$24,500,000 $24,500,000 98%

______________________

* 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 the 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 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 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 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 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 1994 1995
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
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 Amortization................. 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 Installments (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, 9 and 13):
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, respectively..................... 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' Equity................... $64,590,000 $58,836,000 $90,770,000
=========== =========== ===========

- ------------------
See accompanying Notes to Consolidated Financial Statements.

</TABLE>

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

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 (Note 13):

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 (Note 13):

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>

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

Years Ended March
31, 1995, 1994 and
1993, and Nine
Months Ended
December 31, 1995 Common Stock
(unaudited) --------------------------------
Class A Class B Unamortized Net
----------- ---------- Additional Restricted Stock-
Paid In Retained Treasury Stock holders'
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 Options, Net..... -- -- -- -- (39,000) -- -- 22,000 (17,000)
--------- -------- ---------- ------- ----------- ----------- ---------- -------- -----------

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 Re-
lating 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 Trea-
sury 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 Re-
lating to Stock
Options Net (unaudited)... -- -- -- -- -- -- -- 60,000 60,000
--------- ------- ---------- -------- -------- --------- -------- --------- ---------

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

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 Liabil-
ities, 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
Activities: .................................. 2,486,000 10,170,000 5,759,000 (3,494,000) 14,000
--------- ---------- --------- ----------- ---------
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 Ac-
quired 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 activities....... (3,794,000) (3,473,000) (920,000) (5,472,000) (2,292,000)
----------- ----------- --------- ------------ ------------

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 Convertible
Debentures ................................ -- -- -- 23,360,000 --

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 Activities...... (2,960,000) (2,197,000) (2,142,000) 20,838,000 (2,895,000)
------------ ----------- ----------- ----------- -----------

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 consol-
idation.

The Consolidated Financial Statements include
information as of December 31, 1995 and for the nine
months ended December 31, 1995 and 1994, which is unau-
dited. In the opinion of Management, the accompanying
unaudited consolidated financial statements of the Compa-
ny contain all adjustments (consisting of only normal and
recurring adjustments) necessary for the fair presenta-
tion 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 necessar-
ily indicative of the results to be expected for the full
year.

B. CASH AND CASH EQUIVALENTS

The Company considers all highly liquid invest-
ments 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 ship-
ments 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 engi-
neering as well as production requirements are recorded
using the percentage-of-completion method measured by the
costs incurred on each contract to estimated total con-
tract costs at completion (cost-to-cost) with consider-
ation 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 expens-
es, which include research and development costs, where
such costs are recoverable under customer contracts.

In accordance with industry practice, invento-
ries include amounts relating to contracts having produc-
tion 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 provid-
ed on the straight-line method. The ranges of estimated
useful lives are: office furnishings, motor vehicles and
equipment, 3-10 years; building and building improve-
ments, 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 opera-
tions as incurred; renewals and betterments are capital-
ized. 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 repre-
sent 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 recog-
nized in income in the period that includes the enactment
date. SFAS 109 supersedes Statement of Financial Ac-
counting 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 recog-
nized 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 ex-
pense 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 out-
standing 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 mate-
rial. 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 effect 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 Con-
vertible 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 Ac-
crued Profit on Progress
Completed, Not Billed . . . 7,264,000 5,374,000
------------ ------------
13,149,000 11,120,000
------------ ------------

Other U.S. Defense Contracts:

Amounts Billed . . . . . 1,418,000 2,981,000

Recoverable Costs and Ac-
crued Profit on Progress
Completed, Not Billed . . . 639,000 537,000
----------- -----------
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 in-
curred; the remainder, including profits and incentive
fees, if any, is billed upon delivery and final accep-
tance 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 Improvements....... 2,384,000 2,289,000

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

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

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

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

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

Losses and Future Costs
Accrued on Uncompleted Contracts.. 4,555,000 3,214,000

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 8 1/2% 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 Number of
Shares of Shares of Option
Class A Option Price Class B Price per
Common Stock per 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.

The acquisition of the assets of Opto has been accounted for
under the purchase method. The operating results of OMI, the acquiring
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 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. The Company
filed a Registration Statement on Form S-1 (No. 33-64641) with the
Securities and Exchange Commission (the "Commission"), pursuant to the
terms of the Registration Rights Agreement. In connection with these
transactions, the Company expects to incur approximately $625,000 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 7, 1996, the Board of Directors of the Company
approved and recommended for submission to the stockholders of the Company
by a majority vote the consideration and approval of an Amended and
Restated Certificate of Incorporation (the "Restated Certificate"), which
amended and restated the Company's certificate (i) to effect a
reclassification (the"Reclassification") of each share of Class A Common
Stock and each share of Class B Common Stock into one share of common
stock, par value $.01 per share (the "Common Stock"), of the Company, (ii)
to provide that action by the stockholders may be taken only at a duly
called annual or special meeting, and not by written consent and (iii) to
provide that the stockholders of the Company would have the right to make,
adopt, alter, amend, change or repeal the By-Laws of the Company only upon
the affirmative vote of not less than 662/3% of the outstanding capital
stock of the Company entitled to vote thereon. On March 26, 1996, the
stockholders approved the Restated Certificate. The Restated Certificate
was filed with the Secretary of State of the State of Delaware and became
effective April 1, 1996. As a result of the Reclassification, the Senior
Subordinated Convertible Debentures and the 1998 Debentures are convertible
into shares of Common Stock and each option issued or issuable pursuant to
the Company's stock option plans (See Note 9) are exercisable for an equal
number of shares of the Common Stock.

On March 28, 1996, the Company entered into an Employment,
Non-Competition and Termination Agreement (the "Newman Agreement") with
Leonard Newman. Pursuant to the Newman Agreement, Mr. Newman received a
lump sum payment of approximately $2.0 million. Under the terms of the
Newman Agreement, Mr. Newman has agreed to provide consulting services,
as required from time to time, to the Company for a five year period and
has also agreed not to compete with the Company during this same period.
This agreement supersedes a previous deferred compensation agreement
with Mr. Newman.

In March 1996, Mr. Leonard Newman and certain members of his
immediate family sold an aggregate of 885,924 shares of Common Stock to a
buyer, acting as an investment adviser to several accounts. In connection
with such sale, the Company entered into a registration rights agreement
with such buyer to assist in facilitating such sale. The Company has agreed
to file and cause to become effective a registration statement with the
Securities and Exchange Commission upon demand, at its expense, relating to
such shares for future sale by such buyer.

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 CONVERTIBLE
IT RELATES OR AN OFFER TO ANY DEBENTURES DUE 2003
PERSON IN ANY JURISDICTION
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
Market Prices of Capital
Stock . . . . . . . . . 15
Dividend Policy . . . . . 15
Selected Consolidated
Financial Data . . . . 16
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations . . . . . . 18
Business . . . . . . . . 27
Management . . . . . . . 39
Security Ownership . . . 46
Certain Relationships and
Related Transactions . . 48
Description of the
Debentures . . . . . . . 49
Description of 1998
Debentures . . . . . . . 70
Description of Capital
Stock . . . . . . . . . 71
Plan of Distribution . . 73
Selling Security Holders 75
Legal Matters . . . . . . 77
Experts . . . . . . . . . 77
Index to Financial May 14, 1996
Statements . . . . . . . F-1