DIAGNOSTIC RETRIEVAL SYSTEMS INC, S-3/A, 1997-02-07

DIAGNOSTIC RETRIEVAL SYSTEMS INC
S-3/A, 1997-02-07
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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Registration No. 333-04929

As filed with the Securities and Exchange Commission on February 7, 1997

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
ON FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 13-2632319
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

--------------
5 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(201) 898-1500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

MARK S. NEWMAN
5 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(201) 898-1500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

MARK N. KAPLAN, ESQ.
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000

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

Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Post-Effective
Amendment No. 1 to this Registration Statement.

If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check
the following box. |_|

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, please check the following
box. |X|

If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS POST-EFFECTIVE AMENDMENT NO.1 TO THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS POST-EFFECTIVE AMENDMENT NO.1 TO THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.

Cross Reference Sheet Pursuant to
Rule 501(b) of Regulation S-K, Showing
Location in Prospectus of Information
Required by Part I of Form S-3

Item
No. Caption Location in Prospectus
- ---- ------- ----------------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages
of Prospectus................................ Inside Front Cover Page;
Outside Back Cover Page

3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........... Prospectus Summary; Risk
Factors; Business

4. Use of Proceeds.............................. Use of Proceeds

5. Determination of Offering Price.............. Plan of Distribution

6. Dilution..................................... Not Applicable

7. Selling Stockholders......................... Selling Stockholders

8. Plan of Distribution......................... Outside Front Cover
Page; Plan of
Distribution

9. Description of Securities to be
Registered................................... Description of Capital
Stock

10. Interests of Named Experts and Counsel....... Legal Matters

11. Material Changes............................. Not Applicable

12. Incorporation of Certain Information
by Reference................................. Incorporation of Certain
Documents by Reference

13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not Applicable

[FLAG]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS
DATED FEBRUARY 7, 1997

PROSPECTUS

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.

885,924 Shares of Common Stock
----------------------

This Prospectus relates to 885,924 shares of Common Stock, $.01 par
value (the "Common Stock") of Diagnostic/Retrieval Systems, Inc. (the
"Company"). The Common Stock may be offered from time to time for the
account of holders named herein (the "Selling Stockholders"). The Company
will not receive any proceeds from this offering. The Company's Common
Stock is listed on the American Stock Exchange (the "AMEX") under the
symbol "DRS." On February 4, 1997, the last reported sale price of the
Common Stock on the AMEX was $11 1/4 per share.

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 Stockholders that the
Selling Stockholders, each acting as a principal for its 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
Common Stock offered hereby from time to time, depending on market
conditions and other factors, in one or more transactions on the AMEX or
otherwise, at market prices prevailing at the time of sale, at negotiated
prices or at fixed prices. To the extent required, the number of shares of
Common Stock to be sold, the names of the Selling Stockholders, the
offering 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 Stockholders
from the sale of Common Stock offered by the Selling Stockholders hereby
will be the offering price of such Common Stock less any commissions. For
information concerning indemnification arrangements between the Company and
the Selling Stockholders see "Plan of Distribution."

The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the
distribution of the 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
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 ____ , 1997

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 has filed with the SEC a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect
to the 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 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 ob tained, upon payment of the pre-
scribed fees, at the offices of the SEC as set forth above.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The documents listed below have been filed by the Company under the
Exchange Act with the SEC and are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996.

2. The Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.

3. The Company's Quarterly Report on Form 10-Q for the quarter
ended September 30 1996.

4. The description of the Common Stock of the Company set forth as
Item 1 under caption "Description of Registrant's Securities to be
Registered" in the Company's Registration Statement on Form 8-A, filed
pursuant to Section 12(b) of the Exchange Act.

All documents filed by the Company subsequent to the date of this
Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act and prior to termination of the Registration Statement of which this
Prospectus is a part shall be deemed to be incorporated by reference in
this Prospectus and shall be part hereof from the date of filing of such
document.

Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus, or in any other subsequently filed
document that is also incorporated or deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon
their written or oral request, a copy of any or all of the documents
incorporated herein by reference (other than exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Written requests for such copies should be addressed to
Patricia Williamson, Corporate Communication, Diagnostic/Retrieval Systems,
Inc., 5 Sylvan Way, Parsippany, New Jersey, 07054, telephone number
201-898-1500.

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 the nature of modern warfare has
changed, dictating increasing reliance on real-time, accurate battlefield
information derived from increasingly sophisticated defense systems and
electronics. Additionally, the nature of military procurement programs has
changed, requiring suppliers to become more efficient and adaptable to
current and future market needs.

In recent 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 designing new products and adapting existing products for
use by all branches of the military;

o transferring technologies developed in the defense sector to
commercial and industrial markets; and

o acquiring businesses that will further strengthen and
complement the technology, product and market reach in the
electronic systems, data storage systems and electro-optical
systems segments of the marketplaces targeted by the
Company.

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 Northrop-Grumman (formerly,
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, 1996, the Company had
revenues of $101.5 million, net earnings of $4.1 million and fully diluted
earnings per share of $.69, representing increases of 45.2%, 57.6% and 38.0%,
respectively, compared with the year ended March 31, 1995. For the six
months ended September 30, 1996, the Company had revenues of $60.9 million,
net earnings of $2.5 million and fully diluted earnings per share of $.38,
representing increases of 51.9%, 60.2% and 35.7%, respectively, compared
with the same six-month period ended September 30, 1995.

THE OFFERING

Common Stock Offered........................ 885,924 shares

Common Stock to be outstanding after the
offering. 5,584,093 shares (1)

Reclassification............................ 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 "Restat-
ed Certificate"), which
amended and restated the
Company's certificate to (i)
effect a reclassification
(the "Reclassification") of
each share of Class A Common
Stock, $.01 par value per
share (the "Class A Common
Stock"), and each share of
Class B Common Stock, $.01
par value per share (the
"Class B Common Stock"),
into one share of Common
Stock of the Company, (ii)
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) 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 out
standing 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 on April 1, 1996.
As a result of the
Reclassification, the
Company's 9% Senior
Subordinated Convertible
Debentures due October 1,
2003 (the "Debentures") and
the 8 1/2% Convertible
Subordinated Debentures due
August 1, 1998 (the "1998
Debentures") are convertible
into shares of Common Stock.
In addition, each option
issued or issuable pursuant
to the Company's stock
option plan is now
exercisable for an equal
number of shares of the
Common Stock.

The purpose of the
Reclassification was to
simplify the Company's
capital structure,
streamline the Company's
voting procedures and
enhance the marketability
and liquidity of and
maximize investor interest
in the Company's capital
stock. In addition, the
Company believes that, as a
result of the Reclas-
sification, the Company is
in a more flexible position
to raise capital and effect
mergers and acquisitions
using its common stock.
However, there can be no
assurance that the
Reclassification will have
such effects.

Voting Rights............................... Holders of Common Stock are
entitled to one vote per
share on all matters
submitted for approval of
stockholders. See
"Description of Capital
Stock."

AMEX symbol for Common Stock................ "DRS"

Registration Rights......................... Pursuant to a registration
rights agreement (the
"Registration Rights
Agreement") between the Com
pany and Palisade Capital
Management L.L.C.
("Palisade"), acting as
investment adviser to the
Selling Stockholders, the
Company has agreed to file a
shelf registration statement
(the "Shelf Registration
Statement") relating to the
shares of Common Stock
offered hereby. The Company
has agreed to use its
reasonable best efforts to
maintain the effectiveness
of the Shelf Registration
Statement until the earlier
of the disposition of the
shares offered hereby or the
third anniversary of the
effective date of the Shelf
Registration Statement,
except that it will be
permit ted to suspend the
use of the Shelf
Registration Statement
during certain periods under
certain circumstances.

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

(1) Based upon 5,584,093 shares of Common Stock outstanding as of February
4, 1997 (exclusive of 420,893 shares held in treasury).

RISK FACTORS

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

SUBSTANTIAL INDEBTEDNESS

The Company has indebtedness that is substantial in relation to its
stockholders' equity. The indenture (the "Indenture") relating to the
Debentures 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, 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 Common Stock and could impair the Company's ability to
raise additional capital through the sale of its securities. As of February
4, 1997, there was an aggregate of 5,584,093 shares of Common Stock outstanding
(excluding 420,893 shares held in treasury). Of such shares, 1,038,403 are
"restricted" under the Securities Act and are resalable pursuant to the
limitations of Rule 144 under the Securities Act. The Debentures 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. In addition,
the 1998 Debentures are convertible into an additional 332,800 shares of
Common Stock at $15 per share, subject to adjustment under certain
circumstances.

LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE

At present, the Company's Common Stock is owned by a small number
of institutional investors. The Common Stock, the Debentures, the 1998
Debentures and the shares of Common Stock which are issuable upon
conversion of the Debentures and the 1998 Debentures (hereinafter, the
Company's "Listed Securities") are listed on the AMEX. The markets for the
Listed Securities have 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.

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of shares
of Common Stock offered pursuant to this Prospectus. The Selling
Stockholders will receive all of the net proceeds from any sale of the
shares of Common Stock offered hereby.

BUSINESS

GENERAL

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

The Company is organized into three operating groups: Electronic
Systems Group ("ESG," 47.2% of fiscal 1996 revenues), Electro-Optical
Systems Group ("EOSG," 21.8% of fiscal 1996 revenues) and Media Technology
Group ("MTG," 31.0% of fiscal 1996 revenues). See "Business -- Company
Organization and Products."

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 the
nature of modern warfare has changed, dictating increasing reliance on
real-time, accurate battlefield information derived from increasingly
sophisticated defense systems and electronics. Additionally, the nature of
military procurement programs has changed, requiring suppliers to become
more efficient and adaptable to current and future market needs.

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 designing new products and adapting existing products for
use by all branches of the military;

o transferring technologies developed in the defense sector to
commercial and industrial markets; and

Acquisitions. In October 1993 the Company acquired Technology
Applications & Service Company ("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 Technologies ("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 Technology ("CMC") in December 1993 and
Ahead Technology Corporation ("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 of Opto
Mechanik, Inc., which now constitute OMI Corp. ("OMI"). This acquisition
enables EOSG to expand its electro-optical targeting products and
manufacturing activities in a lower cost manufacturing facility while
adding backlog in complementary product areas.

In February 1996, the Company acquired substantially all of the
assets of Mag-Head Engineering Company, Inc. ("MEC"), a manufacturer of
audio and flight recorder heads. This acquisition provides the Company with
an established manufacturing capability in the area of magnetic recorder
heads and, when coupled with CMC and Ahead, allows the Company to apply its
expertise in high-technology recorder head products in select commercial
markets.

In June 1996, the Company acquired substantially all of the assets
of Vikron, Inc. ("Vikron") through a subsidiary of the Company. Located
in St. Croix Falls, Wisconsin, Vikron is a leading manufacturer of magnetic
data and recording heads that write and retrieve data from various magnetic
media, such as magnetic cards, tapes and ink. It also produces audio heads
for cassette tape duplication, heads for airline ticketing card readers,
automated teller machines and security access monitors, broadcast heads for
radio stations, digital data tape heads for computer hard disk back-up and
other archival applications. Vikron complements the Company's existing
capabilities in the defense and commercial magnetic recording systems
market.

In October 1996, the Company acquired certain assets of Nortronics
Company, Inc. ("Nortronics") through a subsidiary of DRS. Located near
Minneapolis, Minnesota, Nortronics is a manufacturer of magnetic data
recording heads that write and retrieve data from various data storage
media, such as cards with magnetic strips and magnetic tapes and ink. Its
products include specialty heads for magnetic strip card readers used in
airline ticketing, automated teller machines, security access systems, fare
and toll collection, credit cards, airplane phones, vending machines and
currency validation devices. Nortronics also produces tape heads utilized in
cockpit flight data recorders, broadcast audio heads, cassette duplication
equipment, medical monitors used in cardiology and in computer hard disk
back-up applications. Nortronics is a strategic component in the growth
the Company seeks in the specialty magnetic tape head business area and is
expected to favorably impact future operating results.

Pacific Technologies, Inc. ("PTI") was also acquired in October
1996, through a merger with and into a subsidiary of the Company. Located
in San Diego, California, PTI provides software, engineering and systems
support to the U.S. Navy for the testing of shipboard combat systems. For
over 10 years, PTI has developed a wide range of simulation software for the
acceptance and validation testing of planned upgrades for combat systems
on board the Navy's surface ships.

In furtherance of its strategic plan, in February 1996, the Company
acquired a 90% interest in DRS Medical Systems, a partnership formed to
develop, manufacture and market medical ultrasound and sonographic imaging
equipment. The DRS Medical Systems partnership provides a means for the Company
to apply its expertise in sonar and image processing technology to related
commercial applications.

Strategic Relationships. The Company has established relationships
with other defense suppliers such as Lockheed-Martin Tactical Defense
Systems (formerly, Loral Corporation) and Northrop-Grumman (formerly,
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 display 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 to the U.S. Air Force's AC-130 Spectre gunship
platforms; recently, proposals have been submitted for its use on F-15
fixed-wing platforms.

Cost Reduction Programs. The Company continues to focus on
streamlining its operations and, during fiscal 1996, the Company
consolidated several of its manufacturing facilities.

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. The use of COTS designs
entails the purchasing, refitting, upgrading and "ruggedization"
(repackaging, remounting and stress testing to withstand harsh military
environments) of available commercial components. The Company strives to
apply COTS designs to most of its new products. Management believes that
the adaptation of available commercial components to existing as well as to
new military systems and 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.

MARKET OVERVIEW

The Company believes that the market for military electronics and
related equipment will be influenced by 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 non-
military 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, Laurel,
located in Johnstown, Pennsylvania, DRS Medical Systems, located in Mahwah,
New Jersey, and PTI, located in San Diego, California. 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.

o Airborne Separation Video Systems ("ASVS"): In fiscal 1996,
Military Systems was selected as the prime contractor on the
tri-service (Army, Navy and Air Force) program to develop
ASVS for the test and evaluation of weapons separation
events on board various fixed-and rotary-wing military
aircraft. The systems include an electronically-shuttered,
fast-frame, high-resolution, digital imaging camera and a
high-density, digital data storage device. Military Systems
is also incorporating a color readiness capability and is
miniaturizing the system's high-speed, electronic camera to
assure compatibility with air platforms, such as the Air
Force's F-16.

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 (currently, 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 shipboard mainframe computer at
approximately 25% of the cost of the older units. This
project is currently in the 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 shipboard
display consoles built to military specifications, but are
manufactured using low cost COTS components suitable for
land-based 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 cost
efficient manufacturing facility and focuses on two areas. First, Laurel
provides manufacturing and product integration services for Military
Systems , TAS and Photronics Corp., a New York corporation and wholly owned
subsidiary of DRS ("Photronics Corp."). ESG's workstation and simulator
systems, among other products, are manufactured in this facility. In
addition, in fiscal 1996, Laurel was awarded a subcontract to manufacture
AN/UYQ-70 workstations for Lockheed-Martin Tactical Defense Systems.
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.

DRS Medical Systems is 90% owned by the Company through a
partnership with Universal Sonics Corporation and was formed to develop,
manufacture and market high-quality, low-cost medical ultrasound equipment.
DRS Medical Systems currently manufactures ultrasound and sonographic
systems principally for original equipment manufacturers.

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.

PTI provides software, engineering and systems support to the U.S.
Navy for the testing of shipboard combat systems. PTI has also developed a
wide range of simulation software used in acceptance and validation testing
of planned upgrades for combat systems on board the Navy's surface ships.

MEDIA TECHNOLOGY GROUP ("MTG")

MTG consists of Precision Echo, Inc. ("PE") located in Santa Clara,
California, Ahead and CMC located in San Jose, California, MEC, located in
Golden Valley, Minnesota, Vikron, located in St. Croix Falls, Wisconsin,
and Nortronics, located in Dassel, Minnesota. 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. These recorders provide a
high-resolution video record of mission data, operators'
displays and external imagery.

o WRR-818: This ruggedized video recorder 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
most major computer disk drive manufacturers.

CMC manufactures and refurbishes commercial video recording
products for broadcasters operating worldwide. 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 in fiscal 1996.

MEC designs, manufactures and refurbishes magnetic broadcast audio
heads, magnetic flight recorder heads and magnetic strip card readers for
the U.S. Government, defense and commercial markets.

Vikron manufacturers magnetic data and recording heads that write
and retrieve data from various magnetic media, such as magnetic cards,
tapes and ink. It also produces audio heads for cassette duplication, heads
for airline ticketing card readers, automated teller machines and security
access monitors, broadcast heads for radio stations, digital tape heads for
computer hard disk back-up and other archival applications. Products are
sold in the defense and commercial magnetic recording systems market.

Nortronics is a manufacturer of magnetic data recording heads that
write and retrieve data from various data storage media, such as cards with
magnetic strips and magnetic tapes and ink. Its products include specialty
heads for magnetic strip card readers used in airline ticketing, automated
teller machines, security access systems, fare and toll collection, credit
cards, airplane phones, vending machines and currency validation devices.
Nortronics also produces tape heads utilized in cockpit flight data
recorders, broadcast audio heads, cassette tape duplication equipment,
medical monitors used in cardiology and in computer hard disk back-up
applications.

ELECTRO-OPTICAL SYSTEMS GROUP ("EOSG")

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

Photronics Corp. produces boresighting equipment used to align and
harmonize the navigation, targeting and weapons systems on rotary- and
fixed-wing aircraft and armored vehicles. Multiple Platform Boresighting
Equipment ("MPBE") is Photronics Corp.'s main product line. These products
can be used on both rotary- and fixed-wing aircraft, as well as on armored
vehicles. MPBE currently is used on the Army's Apache helicopters and
Apache Longbow helicopters , the Marine Corps' Cobra helicopters and on the
Air Force's AC-130 Spectre gunship, the Company's first award for this
equipment involving fixed-wing aircraft. Proposals have been submitted to
employ the system on the F-15 fighter. This technology is proprietary to
the Company.

Until the latter part of fiscal 1996, Photronics Corp. also
produced electro-optical components used in Sidewinder, Stinger and new
generation air-to-air and surface-to-air missiles in its Hauppauge
facility. In order to reduce its production costs, Photronics Corp.
consolidated its missile component manufacturing operations to OMI's new
facility in Palm Bay, Florida. In addition, the move created space for the
expansion of Photronics Corp.'s MPBE programs in Hauppauge.

OMI designs and manufactures electro-optical targeting and sighting
systems and missile components. Major product programs at OMI include:

o Night Vision Binoculars: OMI is currently under contract to
develop and manufacture 1,182 units for the Israeli
military. The Night Vision Binocular is a hand-held viewing
binocular that incorporates an image intensifier tube, laser
rangefinder and digital compass in a compact lightweight
system suited for infantry units, special forces and night
operations involving forward observers and reconnaissance
patrols. The Night Vision Binocular displays range and
asimuth data in soldier's eyepieces, allowing identification
of targets and providing essential fire support data for
nighttime engagement. These units have a range of 20 to
2,000 meters.

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 antitank weapon
system.

o TOW Traversing Unit: This unit provides target tracking
accuracy for the TOW antitank 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 Improved TOW Acquisition System: Working with the primary
contractor for the TOW sighting system, this antitank system
was developed for the U.S. Army's HMVE vehicle.

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

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 78%, 84% and 94% of total consolidated revenues for
fiscal 1996, 1995 and 1994 , 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,
1996 1995 1994
------------ ------------ ------------
Government Products:

U.S. Government......... $120,000,000 $115,200,000 $123,700,000

Foreign Government...... 21,200,000 8,600,000 5,800,000
------------ ------------ ------------
141,200,000 123,800,000 129,500,000

Commercial Products....... 4,400,000 2,200,000 5,100,000
------------ ------------ ------------
$145,600,000 $126,000,000 $134,600,000

Approximately 60% of the backlog at March 31, 1996 is expected to
result in revenues during the fiscal year ending March 31, 1997.

At March 31, 1996, the Company's backlog of orders was
approximately $145.6 million compared to $126.0 million at March 31, 1995.
The increase in backlog for the fiscal year was due to the net effect of
bookings, partially offset by revenues, and the addition of approximately
$17 million of backlog from the OMI asset acquisition. New contract awards
of approximately $104.3 million were booked during the fiscal year ended
March 31, 1996.

"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
$600,000, $800,000 and $500,000 for fiscal 1996, 1995 and 1994 ,
respectively. Revenues recorded by the Company for customer-sponsored
research and development were $12,100,000, $18,800,000 and $27,500,000 for
fiscal 1996, 1995 and 1994 , 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 1996, 1995 and 1994
attributable to the Company's contracts by contract type were as follows:

Year Ended March 31,
1996 1995 1994
---- ---- ----

Firm-fixed-price.......... 87% 74% 65%

Fixed-price-incentive..... - - 1%

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

Cost-plus-fixed-fee....... 13% 20% 17%

The increased percentage and 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 $8.7 million, $7.9 million and $5.9 million as of
March 31, 1996, 1995 and 1994 , 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 $9.9 million and $6.6
million at March 31, 1996 and 1995 , 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. 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 are becoming oriented more toward
system integration and assembly.

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. Similarly, the Company and its
subsidiaries have certain registered trademarks, none of which are
considered significant to current operations.

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 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 December 31, 1996, the Company employed 1,153 employees.
None of the Company's employees are represented by labor unions, 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, co-founders and former
executive officers of the Company, 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. MEC operates from a 7,000 square
foot leased facility in Golden Valley, Minnesota.

Vikron's principal offices and manufacturing facilities are located
in a 18,500 square foot leased facility in St. Croix Falls, Wisconsin.
Nortronics operates principally from a 20,000 square foot leased facility
in Dassel, Minnesota. Vikron's and Nortronics' leases expire in fiscal
2000 and 2002, respectively.

Photronics Corp.'s principal 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. OMI leases
approximately 54,000 square feet in a building at 2330 Commerce Park Drive,
Palm Bay, Florida, for its operations and administration offices. These
leases expire in fiscal 2006.

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. TAS's Technical Services Division, together with
PTI, conducts field service operations from locations in Virginia Beach,
Virginia and San Diego, California. These leased facilities, comprising
15,000 square feet and 5000 square feet, respectively, are covered by
leases, which, with respect to the Virginia location, expires in fiscal
1997, and for the California location, expires in fiscal 2001.

Laurel's primary manufacturing facilities and administrative offices
are located in a 38,000 square-foot building at 423 Walters Avenue in
Johnstown, Pennsylvania. The lease for this facility expires in fiscal
1999. DRS Medical Systems operates from an 8,400 square foot facility in
Mahwah, New Jersey, under a month-to-month lease expiring in April 1997.
The Company also leases approximately 2,000 square feet of office space in
Arlington, Virginia under a lease which expires in fiscal 1998.

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.

DESCRIPTION OF THE DEBENTURES

The Debentures were issued under 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").
The following summary does not purport to be complete and is subject to and
is qualified in its entirety by reference to the Indenture and the form of
the Debentures.

The Debentures were issued on September 29, 1995 in an aggregate
principal amount of $20,000,000. On November 3, 1995, pursuant to the
exercise of an overallotment option by Forum, an additional $5,000,000
aggregate principal amount was issued. The Debentures are general unsecured
senior subordinated obligations of the Company, are limited to $25,000,000
aggregate principal amount and will mature on October 1, 2003. As of
February 4, 1997, $25 million aggregate principal amount of the Debentures
were outstanding. The Debentures bear interest at 9% per annum, and accrued
but unpaid interest is payable semi-annually on April 1 and October 1 of
each year commencing April 1, 1996 (each, an "Interest Payment Date").
Interest is 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 is computed on the basis of a 360-day year of twelve
30-day months.

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 of $8.85, subject to
adjustment under certain circumstances.

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, at the redemption prices established
for the Debentures, together with accrued but unpaid interest, if any, to
the date fixed for redemption. If a Change of Control occurs (as defined in
the Indenture), the Company shall offer to repurchase each Holder's
Debentures 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.

In addition, in the event the Company's Consolidated Net Worth (as
defined in the Indenture) at the end of any two consecutive fiscal quarters
is below $18.0 million, 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.

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
qualifications, as set forth therein.

Senior Indebtedness is defined in the Indenture to mean the
principal of and premium, if any, and interest on (a) the Debt (as defined
in the Indenture) of the Company or any of its Subsidiaries (as defined in
the Indenture) which is outstanding on the date of the Indenture and has
been provided by a bank that is not an Affiliate (as defined in the
Indenture) 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.

DESCRIPTION OF 1998 DEBENTURES

The following summary describes certain provisions of the indenture
governing the 1998 Debentures, as supplemented as of April 1, 1996 (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. As of February 4, 1997, $4,992,000
aggregate principal amount of the 1998 Debentures were outstanding. 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 re-
demption. 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 to (i) 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) 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) 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 February 4,
1997, there were 5,584,093 shares of Common Stock issued and outstanding
(exclusive of 420,893 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 Preferred 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. Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004, is the transfer agent and
the registrar of the Common Stock.

PLAN OF DISTRIBUTION

The Company will not receive any of the proceeds from this
offering. The Selling Stockholders may sell all or a portion of the shares
of Common Stock offered hereby from time to time on terms to be determined
at the times of such sales. The shares of Common Stock may be sold from
time to time to purchasers directly by any of the Selling Stockholders.
Alternatively, any of the Selling Stockholders may from time to time offer
the shares of Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the Selling Stockholders and the purchasers of the shares
of Common Stock for whom they may act as agent. To the extent required, the
number of shares of Common Stock to be sold, the names of the Selling
Stockholders, the offering 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
Stockholders will sell any or all of the shares of Common Stock offered
hereby. The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the
distribution of the 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 shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.

The shares of Common Stock may be sold from time to time in one or
more transactions, depending on market conditions and other factors, in one
or more transactions on the AMEX or otherwise, at market prices prevailing
at the time of sale, at negotiated prices or at fixed prices. Such prices
may 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. In addition, the Selling Stockholders
may from time to time sell the shares of Common Stock in transactions under
Rule 144 promulgated under the Securities Act.

To comply with the securities laws of certain states, if
applicable, the shares of Common Stock will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition in
certain states the 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.

Pursuant to the Registration Rights Agreement, the Company agreed
to indemnify the Selling Stockholders against certain liabilities in
connection with the offer and sale of the Common Stock, including
liabilities under the Securities Act, and to contribute to payments that
the Selling Stockholders may be required to make in respect thereof.

The Company will pay substantially all expenses incident to the
offering and sale of the Common Stock to the public to the extent provided
for in the Registration Rights Agreement other than underwriting discounts
and selling commissions and expenses, and the fees and disbursements of the
Selling Stockholders' counsel, accountants and experts. The Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities arising under the Securities Act. In addition, any underwriter
utilized by the Selling Stockholders may be indemnified against certain
liabilities, including liabilities under the Securities Act. See "Selling
Stockholders."

The Common Stock is listed on the AMEX and has historically been
characterized by limited trading volume and a limited number of holders. No
assurance can be given as to the liquidity of or the trading market for the
Common Stock. See "Risk Factors -- Lack of Public Market; Restrictions on
Resale."

SELLING STOCKHOLDERS

The following table sets forth information concerning the number of
shares of Common Stock beneficially owned by each Selling Stockholder which
may be offered from time to time pursuant to this Prospectus. Other than as
a result of the ownership of Common Stock, none of the Selling Stockholders
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
Stockholders.
<TABLE>
<CAPTION>

NUMBER OF NUMBER OF PERCENT OF
SHARES BENEFI- SHARES BEING OUTSTANDING
NAME CIALLY OWNED REGISTERED SHARES
- ------------------------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
Chrysler Corp. Emp. # 1 Pension Plan Dtd. 4-1-89... 292,300 292,300 33%
IBM Corp. Retirement Plan Trust Dtd. 12-18-45...... 319,024 319,024 36%
G.E. Pension Trust................................. 212,600 212,600 24%
NYNEX Master Pension Trust Dtd. 1-1-84............. 62,000 62,000 7%
-------------- ------------- ------------
Total....................................... 885,924 885,924 100%
</TABLE>

Because the Selling Stockholders may sell all or some of the Common
Stock which they hold pursuant to the offering contemplated by this
Prospectus, no estimate can be given as to the aggregate amount of shares
of Common Stock that are to be offered hereby or that will be owned by the
Selling Stockholders upon completion of this offering to which this
Prospectus relates. Accordingly, the aggregate principal amount of Common
Stock offered hereby may decrease. In addition, the Selling Stockholders
identified above may have sold, transferred or otherwise disposed of all or
a portion of their Common Stock since the date on which they provided the
information regarding their Common Stock, in transactions exempt from the
registration requirements of the Securities Act. As of February 4, 1997,
5,571,093 shares of Common Stock, including the shares being
offered hereby, were issued and outstanding (exclusive of 420,893
shares held in treasury). 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 LLP,
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 LLP.

EXPERTS

The consolidated financial statements and consolidated financial
statement schedule of the Company as of March 31, 1996 and 1995 , and for
each of the years in the three-year period ended March 31, 1996, have been
incorporated by reference in the Registration Statement in reliance upon
the reports of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.

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

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
REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE HEREIN 885,924 SHARES
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR
ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITY OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR DIAGNOSTIC/RETRIEVAL
AN OFFER TO ANY PERSON IN ANY SYSTEMS, INC.
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
COMPANY SINCE THE DATE HEREOF.

------------- COMMON STOCK

TABLE OF CONTENTS
Page

Available Information........... 2
Incorporation of Certain
Documents by Reference........ 2 ---------------
Prospectus Summary.............. 3
Use of Proceeds................. 11 PROSPECTUS
Business........................ 12
Description of the ---------------
Debentures.................... 26
Description of 1998
Debentures.................... 28
Description of Capital Stock.... 29
Plan of Distribution............ 31
Selling Stockholders............ 32
Legal Matters................... 33

Experts......................... 33 , 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. Other Expenses of Issuance and Distribution.

The following table sets forth all expenses (other than
underwriting discounts and commissions) payable by the Company in
connection with the sale of the Common Stock being registered. All amounts
(other than the registration fee) are estimated.

Item Amount
---- ------
Securities and Exchange Commission registration fee...... 2,596.67
Blue Sky fees and expenses............................... 2,500.00
Accountants' fees and expenses........................... 10,000.00
Legal fees and expenses.................................. 45,000.00
Transfer agent and registrar fees and expenses........... 1,000.00
Miscellaneous............................................ 3,903.33
--------
Total............................................... 65,000.00
=========
- -------------------------------------

ITEM 15. Indemnification of Directors and Officers.

Set forth below is a description of certain provisions of the
Company's Restated Certificate of Incorporation, as amended (the "Restated
Certificate of Incorporation"), the Amended and Restated Bylaws (the
"Bylaws") of the Company and the General Corporation Law of the State of
Delaware, as such provisions relate to the indemnification of the directors
and officers of the Company. This description is intended only as a summary
and is qualified in its entirety by reference to the Restated Certificate
of Incorporation, Bylaws, and the General Corporation Law of the State of
Delaware.

The Company's Restated Certificate of Incorporation provides that
the Company shall, to the full extent permitted by Sections 102 and 145 of
the General Corporation Law of the State of Delaware, as amended from time
to time, indemnify all persons whom it may indemnify pursuant thereto and
eliminates the personal liability of its directors to the full extent
permitted by Section 102(b)(7) of the General Corporation Law of the State
of Delaware, as amended from time to time.

Section 145 of the General Corporation Law of the State of Delaware
permits a corporation to indemnify its directors and officers against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties, if such directors or
officers acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. In a derivative action, i.e., one by or
in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors and officers in
connection with the defense or settlement of an action or suit, and only
with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be
made if such person shall have been adjudged liable for negligence or
misconduct in the performance of his respective duties to the corporation,
although the court in which the action or suit was brought may determine
upon application that the defendant officers or directors are reasonably
entitled to indemnity for such expenses despite such adjudication of
liability.

Section 102(b)(7) of the General Corporation Law of the State of
Delaware provides that a corporation may eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
174 of the General Corporation Law of the State of Delaware, or (iv) for
any transaction from which the director derived an improper personal
benefit. No such provision shall eliminate or limit the ability of a
director for any act or omission occurring prior to the date when such
provision becomes effective.

ITEM 16. Exhibits.

Certain of the following exhibits, designated with an asterisk (*),
will be filed upon amendment and certain of the following exhibits,
designated with two asterisks (**), are filed herewith. The exhibits not so
designated have been previously filed with the Commission and are
incorporated herein by reference to the documents indicated in brackets
following the descriptions of such exhibits.

Exhibit No. Description
- ----------- -----------
1.1 - Purchase Agreement, dated September 22, 1995 between
the Company and Forum Capital Markets L.P.
[Registration Statement, File No. 33-64641]

3.1 - Restated Certificate of Incorporation of the Company
[Registration Statement No. 2-70062-NY, Amendment
No. 1, Exhibit 2(a)]

3.2 - Certificate of Amendment of the Restated Certificate
of Incorporation of the Co mpany, as filed July 7,
1983 [Registration Statement on Form 8-A of the
Company, dated July 13, 1983, Exhibit 2.2]

3.3 - Composite copy of the Restated Certificate of
Incorporation of the Company, as amended
[Registration Statement No. 2-85238, Exhibit 3.3]

3.4 - Amended and Restated Certificate of Incorporation of
the Company, as filed April 1, 1996 [Registration
Statement, File No. 33-64641]

3.5 - By-laws of the Company, as amended to November 7,
1994 [Form 10-K, fiscal year ended March 31, 1995,
File No. 1-8533, Exhibit 3.4]

3.6 - Certificate of Amendment of the Certificate of
Incorporation of Precision Echo Acquisition Corp.,
as filed March 10, 1995 [Form 10-K, fiscal year
ended March 31, 1995, File No. 1-8533, Exhibit 3.5]

3.7 - Form of Advance Notice By-Laws of the Company [Form
10-Q, quarter ended December 31, 1995, File No.
1-8533, Exhibit 3]

3.8 - Amended and Restated By-Laws of the Company, as of
April 1, 1996 [Registration Statement, File No.
33-64641]

4.1 - Indenture, dated as of September 22, 1995, between
the Company and The Trust Company of New Jersey, as
Trustee, in respect of the Company's 9% Senior
Subordinated Convertible Debentures Due 2003
[Registration Statement, File No. 33-64641]

4.2 - Form of 9% Senior Subordinated Convertible Debenture
Due 2003 (included as part of Exhibit 4.1)
[Registration Statement, File No. 33-64641]

4.3 - Registration Rights Agreement, dated as of September
22, 1995 between the Company and Forum Capital
Markets L.P. [Registration Statement, File No.
33-64641]

4.4 - Indenture, dated as of August 1, 1983, between the
Company and Bankers Trust Company, as Trustee [Form
10-Q, quarter ended September 30, 1983, File No.
1-8533, Exhibit 4.2]

4.5 - Indenture of Trust, dated December 1, 1991, among
Suffolk County Industrial Development Agency,
Manufacturers and Traders Trust Company, as Trustee
and certain bondholders [Form 10-K, fiscal year
ended March 31, 1992, File No. 1-8533, Exhibit 4.2]

4.6 - Reimbursement Agreement, dated December 1, 1991,
among Photronics Corp., the Company and Morgan
Guaranty Trust Company of New York [Form 10-K,
fiscal year ended March 31, 1992, File No. 1-8533,
Exhibit 4.3]

4.7 - Registration Rights Agreement, dated as of March 27,
1996, by and between the Company and Palisade
Capital Management L.L.C., acting as investment
adviser to the accounts named therein [Registration
Statement, File No. 33-64641]

4.8 - First Supplemental Indenture, dated as of April 1,
1996, to Indenture, dated as of September 22, 1995,
between the Company and The Trust Company of New
Jersey, as Trustee [Registration Statement, File No.
33-64641]

*4.9 - First Supplemental Indenture, dated as of April 1,
1996, to Indenture, dated as of August 1, 1983,
between Company and Bankers Trust Company, as
Trustee

*5.1 - Opinion of Skadden, Arps, Slate, Meagher & Flom LLP

**23.1 - Consent of KPMG Peat Marwick LLP

*23.2 - Consent of Skadden, Arps, Slate, Meagher & Flom LLP,
contained in their opinion filed as Exhibit 5.1

*24.1 - Power of Attorney (included in signature page to
Registration Statement)

25.1 - Form T-1 Statement of Eligibility and Qualification
of the Trustee under the Trust Indenture Act of 1939
[Registration Statement, File No. 33-64641]

- ------------------------
* To be filed upon amendment.
** Filed herewith.

ITEM 17. Undertakings

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement;

(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.

(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold as of
the termination of the offering.

The undersigned Registrant hereby undertakes that:

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to
be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim information.

SIGNATURES AND POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in The City of New York, State of New York on,
February 7, 1997.

DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.

By: /s/ Mark S. Newman
______________________________
Mark S. Newman
Chairman of the Board, President,
and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICAT-
ED.

Signature Title Date
- ------------------------ ----------------------------- -----------------

/s/ Mark S. Newman President, Chief Executive February 7, 1997
- ------------------------- Officer, Chairman of the
Mark S. Newman Board and Director (Principal
Executive Officer)

/s/ Nancy R. Pitek Vice President-Financial, February 7, 1997
- ------------------------- Treasurer and Secretary
Nancy R. Pitek (Principal Financial Officer
and Principal Accounting
Officer)

* Vice President, President of February 7, 1997
- ------------------------- Precision Echo and
Stuart F. Platt Director

* Director February 7, 1997
- -------------------------
Leonard Newman

* Director February 7, 1997
- -------------------------
Donald C. Fraser

* Director February 7, 1997
- -------------------------
Mark N. Kaplan

* Director February 7, 1997
- -------------------------
Jack Rachleff

*By /s/ Mark S. Newman
- -------------------------
Mark S. Newman
Attorney-in-Fact

EXHIBIT INDEX

Certain of the following exhibits, designated with an asterisk (*),
have been previously filed and certain of the following exhibits,
designated with two asterisks (**), are filed herewith. The exhibits not so
designated have been previously filed with the Commission and are
incorporated herein by reference to the documents indicated in brackets
following the descriptions of such exhibits.

Page No. in
Exhibit No. Description This Filing
- ----------- ----------- -----------
1.1 - Purchase Agreement, dated September 22, 1995
between the Company and Forum Capital Markets L.P.
[Registration Statement, File No. 33-64641]

3.1 - Restated Certificate of Incorporation of the
Company [Registration Statement No. 2-70062-NY,
Amendment No. 1, Exhibit 2(a)]

3.2 - Certificate of Amendment of the Restated
Certificate of Incorporation of the Company, as
filed July 7, 1983 [Registration Statement on
Form 8-A of the Company, dated July 13, 1983,
Exhibit 2.2]

3.3 - Composite copy of the Restated Certificate of
Incorporation of the Company, as amended
[Registration Statement No. 2-85238, Exhibit 3.3]

3.4 - Amended and Restated Certificate of Incorporation
of the Company, as filed April 1, 1996
[Registration Statement, File No. 33-64641]

3.5 - By-laws of the Company, as amended to November 7,
1994 [Form 10-K, fiscal year ended March 31, 1995,
File No. 1-8533, Exhibit 3.4]

3.7 - Form of Advance Notice By-Laws of the Company
[Form 10-Q, quarter ended December 31, 1995, File
No. 1-8533, Exhibit 3]

3.8 - Amended and Restated By-Laws of the Company, as of
April 1, 1996 [Registration Statement, File No.
33-64641]

4.1 - Indenture, dated as of September 22, 1995, between
the Company and The Trust Company of New Jersey,
as Trustee, in respect of the Company's 9% Senior
Subordinated Convertible Debentures Due 2003
[Registration Statement, File No. 33-64641]

4.2 - Form of 9% Senior Subordinated Convertible
Debenture Due 2003 (included as part of Exhibit
4.1) [Registration Statement, File No. 33-64641]

4.3 - Registration Rights Agreement, dated as of
September 22, 1995 between the Company and Forum
Capital Markets L.P. [Registration Statement, File
No. 33-64641]

4.4 - Indenture, dated as of August 1, 1983, between the
Company and Bankers Trust Company, as Trustee
[Form 10-Q, quarter ended September 30, 1983, File
No. 1-8533, Exhibit 4.2]

4.5 - Indenture of Trust, dated December 1, 1991, among
Suffolk County Industrial Development Agency,
Manufacturers and Traders Trust Company, as
Trustee and certain bondholders [Form 10-K, fiscal
year ended March 31, 1992, File No. 1-8533,
Exhibit 4.2]

4.7 - Registration Rights Agreement, dated as of March
27, 1996, by and between the Company and Palisade
Capital Management L.L.C., acting as investment
adviser to the accounts named therein
[Registration Statement, File No. 33-64641]

4.8 - First Supplemental Indenture, dated as of April 1,
1996, to Indenture, dated as of September 22,
1995, between the Company and The Trust Company of
New Jersey, as Trustee [Registration Statement,
File No. 33-64641]

*4.9 - First Supplemental Indenture, dated as of April 1,
1996, to Indenture, dated as of August 1, 1983,
between Company and Bankers Trust Company, as
Trustee

*5.1 - Opinion of Skadden, Arps, Slate, Meagher & Flom LLP

**23.1 - Consent of KPMG Peat Marwick LLP

* 23.2 - Consent of Skadden, Arps, Slate, Meagher & Flom LLP,
contained in their opinion filed as Exhibit 5.1

* 24.1 - Power of Attorney (included in signature page to
Registration Statement)

25.1 - Form T-1 Statement of Eligibility and
Qualification of the Trustee under the Trust
Indenture Act of 1939 [Registration Statement,
File No. 33-64641]

- -------------------
* To be filed.
** Filed herewith.

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Diagnostic/Retrieval Systems, Inc.:

We consent to the use of our reports dated May 17, 1996, on the consolidated
financial statements and related schedule of Diagnostic/Retrieval
Systems, Inc. and subsidiaries as of March 31, 1996 and 1995, and for each
of the years in the three-year period ended March 31, 1996, which reports
appear or are incorporated by reference in the March 31, 1996 Annual Report
on form 10-K of Diagnostic/Retrieval Systems, Inc., incorporated herein by
reference and to the reference to our firm under the heading "Experts" in the
prospectus.

KPMG Peat Marwick LLP

Short Hills, New Jersey
February 7, 1997