<SUBMISSION>
<ACCESSION-NUMBER>0001047469-08-003537
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>8
<PERIOD>20071231
<FILING-DATE>20080327
<DATE-OF-FILING-DATE-CHANGE>20080327
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
<CIK>0001069258
<ASSIGNED-SIC>4899
<IRS-NUMBER>133818604
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>000-27231
<FILM-NUMBER>08715317
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>4810 EASTGATE MALL
<STREET2>.
<CITY>SAN DIEGO
<STATE>CA
<ZIP>92121
<PHONE>858-812-7300
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>4810 EASTGATE MALL
<STREET2>.
<CITY>SAN DIEGO
<STATE>CA
<ZIP>92121
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>WIRELESS FACILITIES INC
<DATE-CHANGED>19990817
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2184011z10-k.htm
<DESCRIPTION>10-K
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_1">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>

<P style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><I> <hr noshade width=100% align=left size=4>
<hr noshade width=100% align=left size=1>  </I></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=5><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>  </B></FONT><FONT SIZE=2><B>Washington, D.C. 20549  </B></FONT></P>

<HR NOSHADE ALIGN="CENTER" WIDTH="120">
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=5><B>FORM 10-K  </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TD WIDTH="11%" ALIGN="CENTER" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2><B>(Mark One)</B></FONT></TD>
<TD WIDTH="89%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="11%" ALIGN="CENTER" style="font-family:times;"><BR><FONT SIZE=3><FONT FACE="WINGDINGS">&#253;</FONT></FONT></TD>
<TD WIDTH="89%" style="font-family:times;"><BR><FONT SIZE=2><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR&nbsp;15(d)&nbsp;OF&nbsp;THE SECURITIES&nbsp;EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER&nbsp;31, 2007</B></FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="11%" ALIGN="CENTER" style="font-family:times;"><BR><FONT SIZE=3><FONT FACE="WINGDINGS">&#111;</FONT></FONT></TD>
<TD WIDTH="89%" style="font-family:times;"><BR><FONT SIZE=2><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR&nbsp;15(d)&nbsp;OF&nbsp;THE SECURITIES&nbsp;EXCHANGE ACT OF 1934</B></FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Commission file number 0-27231  </B></FONT></P>

<HR NOSHADE ALIGN="CENTER" WIDTH="120">
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=5><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.<BR>  </B></FONT><FONT SIZE=2>(Exact name of Registrant as specified in its charter) </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="49%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>Delaware</B></FONT><FONT SIZE=2><BR>
(State or other jurisdiction of<BR>
incorporation or organization)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="49%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>13-3818604</B></FONT><FONT SIZE=2><BR>
(I.R.S. Employer<BR>
Identification No.)</FONT></TD>
</TR>
<TR VALIGN="BOTTOM">
<TD COLSPAN=3 ALIGN="CENTER" VALIGN="TOP" style="font-family:times;"><BR><FONT SIZE=2><B>4810 Eastgate Mall<BR>
San Diego, CA 92121<BR>
(858)&nbsp;812-7300<BR> </B></FONT><FONT SIZE=2>(Address, including zip code, and telephone number, including area code,<BR>
of Registrant's principal executive offices)</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="74%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="49%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Title of Each Class</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="49%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Name of each exchange on which registered</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>Common Stock, par value $0.001</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>The NASDAQ Global Select Market</FONT></TD>
</TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>Right to Purchase Shares of Series C Preferred Stock</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>None
</FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule&nbsp;405 of the Securities
Act.&nbsp;Yes&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT FACE="WINGDINGS">&#253;</FONT> </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if the registrant is not required to file reports pursuant to Section&nbsp;13 or Section&nbsp;15(d) of the
Act.&nbsp;Yes&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT FACE="WINGDINGS">&#253;</FONT> </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant: (1)&nbsp;has filed all reports required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12&nbsp;months (or for such shorter period that the registrant was required to file such reports), and (2)&nbsp;has been subject to such filing requirements for the
past 90&nbsp;days. Yes&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT FACE="WINGDINGS">&#253;</FONT> </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if disclosure of delinquent filers pursuant to Item&nbsp;405 of Regulation&nbsp;S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part&nbsp;III of this Form&nbsp;10-K or any amendment to
this Form&nbsp;10-K.&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT> </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in
Rule&nbsp;12b-2 of the Exchange Act); </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Large accelerated filer&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT><BR>
Non-accelerated filer&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT>&nbsp;</FONT><FONT SIZE=1>(Do not check if a smaller reporting company)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="25%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>Accelerated filer&nbsp;<FONT FACE="WINGDINGS">&#253;</FONT><BR>
Smaller reporting company&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT></FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate
by check mark whether the registrant is a shell company (as defined in Rule&nbsp;12b-2 of the Exchange
Act).&nbsp;Yes&nbsp;<FONT FACE="WINGDINGS">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT FACE="WINGDINGS">&#253;</FONT> </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate market value of the voting and non-voting stock (Common Stock) held by non-affiliates as of the last business day of most
recently completed second fiscal quarter (June&nbsp;29, 2007) was approximately $113.1&nbsp;million, based on the closing sale price on the NASDAQ Global Select Market on that date.* </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
number of shares outstanding of the Registrant's Common Stock was 78,998,922 as of March&nbsp;3, 2008. </FONT></P>

<HR NOSHADE ALIGN="LEFT" WIDTH="120">
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>*</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Excludes
the common stock held by executive officers, directors and stockholders whose individual ownership exceeds 10% of the Common Stock outstanding on June&nbsp;30, 2007. </FONT></DD></DL>
<BR>

<P style="font-family:times;"><FONT SIZE=2><hr
noshade width=100% align=left size=1>
<hr noshade width=100% align=left size=4> </FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=236674,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]BA49901A.;7',USER='KSEAMON',CD='23-MAR-2008;13:09' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_bc49901_1_2"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="bc49901_documents_incorporated_by_reference"> </A>
<A NAME="toc_bc49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>Documents Incorporated by Reference    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Portions of the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation&nbsp;14A in connection with the Registrant's 2008
Annual Meeting of Stockholders (the "Proxy Statement") or portions of the Registrant's Form&nbsp;10-K/A, to be filed subsequent to the date here of, are incorporated by reference into
Part&nbsp;III of this Report. Such Proxy Statement or Form-10K/A will be filed with the Commission not later than 120&nbsp;days after the conclusion of the Registrant's fiscal year
ended December&nbsp;31, 2007. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>2</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=2,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=441914,FOLIO='2',FILE='DISK133:[08ZAH1.08ZAH49901]BC49901A.;5',USER='ABEAULI',CD='27-MAR-2008;14:56' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_bg49901_1_3"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="bg49901_kratos_defense___security_solu__kra03833"> </A>
<A NAME="toc_bg49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.    <BR>    <BR>    FORM 10-K    <BR>    <BR>    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007    <BR>    <BR>    TABLE OF CONTENTS    <BR>    </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="78%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="12%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TH>
<TH WIDTH="76%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="7%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Page No.</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>PART I</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;1.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Business</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;1A.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Risk Factors</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;1B.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Unresolved Staff Comments</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>27</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;2.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Properties</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>27</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;3.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Legal Proceedings</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>28</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;4.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Submission of Matters to a Vote of Security Holders</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>32</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>PART II</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;5.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>33</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;6.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Selected Financial Data</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>35</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;7.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Management's Discussion and Analysis of Financial Condition and Results of Operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;7A.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Quantitative and Qualitative Disclosures About Market Risk</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;8.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Financial Statements and Supplementary Data</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;9.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;9A.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Controls and Procedures</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;9B.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Other Information</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>60</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>PART III</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;10.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Directors, Executive Officers and Corporate Governance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;11.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Executive Compensation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;12.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;13.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Certain Relationships and Related Transactions, and Director Independence</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;14.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Principal Accountant Fees and Services</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>PART IV</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>Item&nbsp;15.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="76%" style="font-family:times;"><FONT SIZE=2>Exhibits, Financial Statement Schedules</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>3</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=3,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=238962,FOLIO='3',FILE='DISK133:[08ZAH1.08ZAH49901]BG49901A.;11',USER='TOSBORNA',CD='27-MAR-2008;14:46' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_da49901_1_4"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All references to us, we, our, the Company and Kratos refer to Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc., a Delaware Corporation, and its subsidiaries. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="da49901_part_i"> </A>
<A NAME="toc_da49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>PART I    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="da49901_item_1._business"> </A>
<A NAME="toc_da49901_2"> </A>
Item&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Business</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
Annual Report (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding
our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in
this Annual Report. Additionally, statements concerning future matters are forward-looking statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although
forward-looking statements in our Annual Report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in
Item&nbsp;1A&#151;"Risk Factors" below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of our Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, results of operations and prospects. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
were incorporated in the state of New York on December&nbsp;19, 1994 and began operations in March 1995. We reincorporated in the state of Delaware in 1998. On September&nbsp;12,
2007, we changed our name from Wireless Facilities,&nbsp;Inc. to Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Overview  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are an innovative provider of mission critical engineering, IT services and warfighter solutions. We work primarily for the U.S. government and government
agencies, but we also perform work for state and local agencies and commercial customers. Our principle services are related to, but are not limited to, Command, Control, Communications, Computing,
Combat Systems Intelligence, Surveillance and Reconnaissance (C5ISR), weapons systems lifecycle support and extension, military weapon range operations and technical services, missile and rocket and
weapons system test and evaluation, mission launch services, public safety, security and surveillance systems, advanced network engineering and information technology services, advanced IT services,
security and surveillance systems, and critical infrastructure design and integration services. We offer our customers solutions and expertise to support their mission-critical needs by leveraging our
skills across our core service areas. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
derive a substantial portion of our revenue from contracts performed for federal government agencies, with the majority of our revenue currently generated from the delivery of
mission-critical warfighter solutions, advanced engineering services, system integration and system sustainment services to defense and other non-DoD (Department of Defense) and civilian
government agencies. We believe our diversified and stable client base, strong client relationships, broad array of contracts, considerable employee base possessing government security clearances,
extensive list of past performance qualifications, and significant management and operational capabilities position us for continued growth. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>4</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=4,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=467081,FOLIO='4',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<A NAME="page_da49901_1_5"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prior
to 2007 we were an independent provider of outsourced engineering and network deployment services, security systems engineering and integration services and other technical
services for the wireless communications industry, the U.S. government and enterprise customers. In 2006 and 2007, we undertook a transformation strategy whereby we divested our commercial
wireless-related businesses and chose to pursue business with the federal government, primarily the U.S. Department of Defense, through strategic acquisitions. On September&nbsp;12, 2007, we changed
our name from Wireless Facilities,&nbsp;Inc. (WFI) to Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. (Kratos). Our new name reflects our revised focus as a defense contractor and security
systems integrator for the federal government, for state and local agencies, and certain commercial customers. In connection with our name change, we changed our NASDAQ Global Market trading symbol to
"KTOS". </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Current Reporting Segments  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prior to the divestiture of our wireless-related business, we had three operating segments: our Wireless Network Services (WNS) segment, our Enterprise Network
Services (ENS) segment, and our Government Network Services (GNS) segment. Following the divestiture of the WNS segment and corporate name change, we reorganized into two operating segments, Kratos
Government Solutions (KGS) (formerly GNS) and Public Safety and Security (PSS) (formerly ENS). The financial statements in this Annual Report are presented in a manner consistent with our new
operating structure. For additional information regarding our operating segments, see Note&nbsp;14 of Notes to Consolidated Financial Statements. From a customer and solutions perspective, we view
our business as an integrated whole, leveraging skills and assets where ever possible. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><I> Kratos Government Solutions (KGS) Segment  </I></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Kratos Government Solutions segment provides engineering, information technology and technical services to federal, state, and local government agencies, but
primarily the U.S. Department of Defense (DoD). Our work includes weapon systems lifecycle support and extension; command, control, communications, computing, combat systems, intelligence,
surveillance and reconnaissance (C5ISR); military range operations and technical services; missile, rocket, and weapons systems test and evaluation; mission launch services; public safety and security
services; and advanced network engineering and information technology services; public safety, security and surveillance systems integration. Our KGS segment also focuses on the homeland security
market with products and services aimed at supporting first responders. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><I> Public Safety and Security (PSS) Segment  </I></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Kratos Public Safety and Security segment provides system design, deployment, integration, monitoring and support services for public safety, security and
surveillance networks for state and local governments and commercial customers. Public safety and security networks have been traditionally segregated into systems such as voice, data, access control,
video surveillance, temperature control and fire and life safety. We provide services that combine such systems and offer integrated solutions on an Ethernet-based platform. We also offer solutions
that combine voice, data, electronic security and building automation systems with fixed or wireless connectivity solutions. Our target markets are retail, healthcare, education, sports and
entertainment, municipal government, correctional facilities and other public facilities. Our commitments to these markets and our ability to provide feature-rich,
cost-effective solutions have allowed us to become one of the larger independent integrators for these types of systems. We maintain regional office locations,
comprised of Kratos Mid Atlantic, Kratos Southeast, and Kratos Southwest, where we are focused on security, surveillance and other building automation and integration services. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>5</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=5,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=531188,FOLIO='5',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<A NAME="page_da49901_1_6"> </A>
<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Sale and Discontinuance of Significant Subsidiaries  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December 2005, our Board made the decision to exit our Mexican operations and certain of our other deployment businesses in South America. On
February&nbsp;17, 2006, we entered into an Equity Purchase Agreement for the sale of all of the stock of our wholly owned subsidiaries (i)&nbsp;WFI de Mexico, S. de R.L. de C.V., (ii)&nbsp;WFI
de Mexico, Servicios de Adminstracion, S. de R.L. de C.V., (iii)&nbsp;WFI de Mexico, Servicios de Ingenieria, S. de R.L. de C.V., (iv)&nbsp;WFI Services de Mexico&nbsp;S.A. de C.V.,
(v)&nbsp;WFI Asesoria en Adminstracion, S.C; and (vi)&nbsp;WFI Asesoria en Telecomunicaciones, S.C. (the "Mexico Operations") to Sakoki&nbsp;LLC. The transaction closed on March&nbsp;10, 2006
for total consideration of approximately $18.9&nbsp;million, with $1.5&nbsp;million in cash and the balance by a secured promissory note. As of December&nbsp;31, 2006, we had received all
installment payments due under the promissory note. The impact of the divestiture is reflected in our consolidated balance sheets as of December&nbsp;31, 2006. There was no gain or loss realized on
the sale because the business was sold at its net carrying value. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
March&nbsp;9, 2007, we completed the sale of our Europe, Middle East and Africa (EMEA) operations to LCC Wireless Engineering Services Limited, a wholly-owned subsidiary of LCC
International,&nbsp;Inc. ("LCC") in a cash for stock transaction valued at $4&nbsp;million. The sale of EMEA generated a gain of $3.3&nbsp;million which was recorded in the first quarter of
2007. In the fourth quarter of 2007, we recorded a reserve of $0.7&nbsp;million related to the remaining holdback amount due to our assessment of LCC's available liquidity. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
April&nbsp;20, 2007, we completed the sale of all of the issued and outstanding equity interests of our wholly owned subsidiary WFI de Brazil Techlogia en
Telecomunicaciones&nbsp;LTDA, to Strategic Project Services,&nbsp;LLC ("SPS"). The consideration included the assumption of substantially all outstanding liabilities of WFI Brazil, nominal cash
consideration, and additional earn-out consideration based on 25% of net receivables collected subsequent to the closing date. We recorded an impairment charge in the fourth quarter of
2006 of approximately $5.2&nbsp;million to reduce the current carrying value of the South American operations to their estimated fair value. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
June&nbsp;4, 2007, we completed the sale to LCC International,&nbsp;Inc. ("LCC") of the assets used in the operation of our wireless engineering services portion of the Wireless
Network Services segment that provided engineering services to the non-government wireless communications industry in the United States. The aggregate consideration paid by LCC in
connection with the acquisition was
$46&nbsp;million. Pursuant to the terms of the Acquisition Agreement, LCC delivered a subordinated promissory note for the principal amount of $21.6&nbsp;million, paid $17&nbsp;million at the
closing and paid final working capital adjustments of $2.4&nbsp;million through an addition to the subordinated promissory note, and we retained an estimated $5&nbsp;million in net working
capital. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;5, 2007, we sold the $21.6&nbsp;million subordinated promissory note taken in the sale of assets to LCC in exchange for approximately $19.6&nbsp;million in net cash
proceeds, reflecting a discount from par value of less than five percent and aggregate transaction fees of approximately $1&nbsp;million. The note was acquired by a fund affiliated with Silver Point
Capital,&nbsp;L.P. On January&nbsp;30, 2008, we received net proceeds of approximately $2.3&nbsp;million on the working capital adjustment from Silverpoint. We did not provide any guaranty for
LCC's payment obligations for the note. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;24, 2007, we completed the sale to an affiliate of Platinum Equity of our wireless deployment services portion of the Wireless Network Services segment and the Wireless
Facilities trade and corporate names. The total consideration for the acquisition was $24&nbsp;million including $18&nbsp;million in cash at closing, subject to typical post-closing
working capital adjustments, and an aggregate $6&nbsp;million in a three-year earn-out arrangement. We provided certain transition services to Platinum Equity for a period of
nine months pursuant to a Transition Services Agreement. Under an employee leasing arrangement with Platinum Equity, we serviced the payroll for the deployment business employees until
October&nbsp;1, 2007. On September&nbsp;25, 2007, in accordance with the acquisition agreement, we provided our working capital calculation to Platinum Equity. However, we have not </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>6</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=6,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=103776,FOLIO='6',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<A NAME="page_da49901_1_7"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>been
able to come to an agreement with Platinum Equity on the amount of the working capital adjustment. Pursuant to the terms of the agreement, both parties are in the process of choosing a firm to
resolve this issue. As of December&nbsp;31, 2007, the balance of our calculation has been reflected in other current liabilities. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a result of the above divestitures, the Wireless Network Services segment has been classified as a discontinued operation. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Acquisitions  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On October&nbsp;2, 2006 we acquired Huntsville, Alabama based Madison Research Corporation ("MRC") for $69&nbsp;million in cash. MRC offers a broad range of
technical, engineering and IT solutions, and has developed core competencies in weapons system lifecycle support, integrated logistics, test and evaluation,
commercial-off-the-shelf software and hardware selection and implementation, software development and systems lifecycle maintenance. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;31, 2007 we acquired Haverstick Consulting,&nbsp;Inc. ("Haverstick") for approximately $90.2&nbsp;million in aggregate total merger consideration including Kratos
transaction costs of $0.5&nbsp;million, of which $66.7&nbsp;million was paid in cash at closing and approximately $19.4&nbsp;million was paid with unregistered shares of Kratos stock. Of the
consideration, $2.4&nbsp;million was cash paid shortly thereafter, approximately $1.2&nbsp;million in cash and $7.4&nbsp;million of the Kratos stock is being retained as an indemnity holdback.
In addition to the indemnity holdback, the Agreement also calls for a post closing working capital adjustment. Haverstick provides rocket and missile test and evaluation, weapons systems support, and
professional services to the U.S. Army, U.S. Air Force, U.S. Navy, NASA, and other federal, state and local agencies. Through the Haverstick acquisition, we expanded our customer footprint within the
DoD, and enhanced our presence with the U.S. Air Force, a key growth area for Haverstick. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;29, 2008 we provided the working capital calculation to Haverstick, which indicated a working capital adjustment was due to us primarily because the working capital,
as calculated per the Agreement, was below the target amount. Haverstick has reviewed our working capital calculation and is in disagreement. Their response proposes that there is actually excess
working capital of approximately $1.5&nbsp;million. In accordance with the Agreement, we have fifteen days from the date of Haverstick's objection to resolve the disagreement. If resolution has not
been achieved within the fifteen day period, we and Haverstick have five days to agree on a nationally recognized independent accounting firm to resolve the disagreement. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
February 2008 we entered into a definitive merger agreement with San Diego-based C5ISR and net-centric warfare solutions provider SYS Technologies in a
stock-for-stock transaction. Under the terms of the agreement, SYS will merge with and into a wholly-owned subsidiary of Kratos and all of SYS's outstanding common shares will
be converted into Kratos common shares. Upon closing, we will issue approximately 25&nbsp;million shares of our common stock. The transaction is subject to customary closing conditions, including
approval of the transaction by SYS's shareholders and the approval of Kratos stockholders for Kratos' issuance of shares. The transaction is expected to close in the second quarter of 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Industry Background  </B></FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> U.S. Department of Defense Drives Strategic Priorities for the Company  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The delivery and execution of our mission-critical engineering and support services are driven by the priorities of the U.S. Federal government. The strategic
priorities of the DoD are based in large part on the Quadrennial Defense Review, the first conducted in an era of global terrorism, which continues the shift in emphasis by identifying key strategic
priorities. These priorities are currently </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>7</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=7,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=622305,FOLIO='7',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<A NAME="page_da49901_1_8"> </A>

<P style="font-family:times;"><FONT SIZE=2>focused
on mission critical capabilities of the U.S. armed forces and providing the support infrastructure necessary to sustain these forces in a time of heightened warfare readiness and deployment. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
2008 Fiscal Year DoD Budget request is $481.4&nbsp;billion, an increase of $42.1&nbsp;billion over Fiscal Year 2007. The total budgetary increase of approximately 9.6% represents
a significant opportunity to key federal government contractors in support of the DoD's war fighter, information technology, and other operational priorities. The fiscal DoD budget request for 2008
includes a request for supplemental funding of $141.7&nbsp;billion to fight the Global War on Terror. We believe there will be significant market opportunities for providers of system sustainment,
IT and engineering services and solutions to federal government agencies over the next several years, particularly those in the defense and homeland security communities. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Focus on Federal Government Transformation  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The federal government, and the DoD in particular, is in the midst of a significant transformation that is driven by the federal government's need to address the
changing nature of global threats. A significant aspect of this transformation is the use of Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance
(C5ISR), and information technology to increase the federal government's effectiveness and efficiency. The result is increased federal government spending on information technology to upgrade networks
and transform the federal government from separate, isolated organizations into larger, enterprise level, network-centric organizations capable of sharing information broadly and quickly. While the
transformation initiative is driven by the need to prepare for new world threats, adopting these IT transformation initiatives will also improve efficiency and reduce infrastructure costs across all
federal government agencies. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An
additional aspect of the military transformation includes significantly enhancing military readiness in areas such as missile defense, weapons system sustainment and extension, and
the overall strengthening of intelligence and security. For example, the objective of the DoD as it relates to missile defense is to
continue to develop, test, and field missile defense systems to protect America, its allies and deployed forces. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Competitive Strengths  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe we are well positioned to meet the rapidly evolving needs of federal government agencies for high-end engineering services,IT solutions and
other technical operations because we possess the following key business strengths and performance qualifications: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Significant and Highly Specialized Experience  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through the existing customer engagements and with the government focused acquisitions we have completed over the past several years, we have amassed significant
and highly specialized experience in areas directly related to weapon system life cycle extension and sustainment; missile, rocket and weapons test and evaluation; C5ISR; military range operations and
technical services and other highly differentiated services and solutions. This collective experience, or 'past performance qualifications,' is a requirement on the majority of contract vehicles and
customer engagements we are involved in. We believe, this presents a significant barrier to entry and positions us for long-term success. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> In-Depth Understanding of Client Missions  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have a history of providing mission-critical services and solutions to our clients, enabling us to develop an in-depth understanding of their
missions and technical needs. In addition, a significant number of our employees are located at client sites, giving us valuable strategic insights into clients' ongoing and future program
requirements. Our in-depth understanding of our client missions, in </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>8</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=8,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=647567,FOLIO='8',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<A NAME="page_da49901_1_9"> </A>

<P style="font-family:times;"><FONT SIZE=2>conjunction
with the strategic location of our employees, enables us to offer technical solutions tailored to our clients' specific requirements and consistent with their evolving mission objectives. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Diverse Base of Key Contract Vehicles  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of our business development focus on securing key contracts, we are a preferred contractor on numerous multi-year
government-wide acquisition contracts and multiple award contracts that provide us with the opportunity to bid on hundreds of millions of dollars of business against a discrete number of
other pre-qualified companies each year. These contracts include Seaport-e, GSA, Passive RFID EPC-1, PES, IT, LOG World, Mobis Millennia Lite, AMCOM Express,
Consolidated Acquisition of Professional Services (CAPS), Support Services for Aviation, Air Defense and Missile Systems, Systems Engineering and Technical Assistance Contract, and Specialized
Engineering, Development and Test Articles/Models. While the federal government is not obligated to make any awards under these vehicles, we believe that holding preferred positions on these contract
vehicles provides us an advantage as we seek to expand the level of services we provide to our clients. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Strategic Geographic Locations and BRAC  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The federal government's Base Realignment and Closure (BRAC) Act of 2005 is the congressionally authorized process the Department of Defense has implemented to
reorganize its base structure to more efficiently and effectively support U.S. armed forces, increase operational readiness and facilitate new ways of doing business. As a result of the DoD's BRAC
transformation, we have concentrated our business strategy on building a significant presence in key BRAC receiving locations where the federal government is relocating its personnel as well as
related technical and professional services. As we continue to entrench in these key locations, we expect this to be a significant competitive advantage. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Highly Skilled Employees and an Experienced Management Team  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We deliver our services through a highly skilled workforce of approximately 1,500 full-time, part-time and on-call employees
in our on-going business. Our senior managers have over 125&nbsp;years of collective experience with federal government agencies, the U.S. military, and federal government contractors.
Members of our management team have experience growing businesses organically, as well as through acquisitions. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
cumulative experience and differentiated expertise of our personnel in our core focus areas of C5ISR, weapons systems lifecycle extension and maintenance, missile and rocket test and
evaluation, along with our sizable employee base with government security clearances, allow us to qualify for and bid on larger projects in the prime contracting role. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Services and Solutions  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide a range of integrated engineering, war fighter, security and information technology services and solutions by leveraging our core service offerings:
weapons systems lifecycle support and extension; C5ISR; military range operations and technical services; missile and rocket test and evaluation; security systems integration; and advanced network
engineering; and IT services. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Weapon Systems Lifecycle Support and Extension  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide weapons systems life cycle support and extension services for the DoD and foreign governments. These services focus on maintaining, testing and
repairing certain weapons systems for the war fighter. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>C5ISR (Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance)  </I></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the area of C5ISR, Kratos is involved in a wide range of services, including installation, upgrade and maintenance of command, control, combat and surveillance
systems for customers such as Joint Inter Agency Task Force-south and the Naval Undersea Warfare Center (NUWC). </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>9</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=9,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=971230,FOLIO='9',FILE='DISK133:[08ZAH1.08ZAH49901]DA49901A.;15',USER='RKING',CD='27-MAR-2008;13:04' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_dc49901_1_10"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2><I>Missile Range Operations and Technical Services  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A key area of differentiation for us is within the range and technical service areas we offer. We have resources stationed at many major range locations
throughout the United States, including NAWC Pt. Mugu, Hawaii Pacific Missile Range, Fort Bliss, Texas, and White Sands Missile Range, New Mexico. Our services include aerial targets operations and
maintenance, surface targets operations and maintenance, missile systems operations and maintenance, range operations planning and support, hazardous materials management, supply and logistics
support, and manufacturing. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Missile and Rocket Test and Evaluation  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through the acquisition of Haverstick Consulting,&nbsp;Inc., we acquired expertise in the area of missile and rocket test and evaluation services. This includes
exclusive rights to the design and manufacture of the motor on the Oriole Rocket System and ancillary hardware for sounding rockets, suborbital research and target services. Additionally, this area of
our business develops and produces low-cost ballistic missile defense targets. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Security Systems Integration  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have broad experience integrating security services and solutions across a number of network and communications platforms. In particular, our
non-federal business has long-standing experience and has developed significant customer relationships by providing best-in-class systems integration
services on a variety of platforms including digital (IP) surveillance and security, building automation systems and controls, fire and life safety systems, access control and perimeter protection,
and service and maintenance of the aforementioned systems. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have comprehensive experience providing engineering services at any phase of a project lifecycle including program management, engineering design, system engineering, C5I System INCO,
operations and maintenance, integrated telecommunications, and warfare systems training. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
also offer a range of IT services and solutions from conceptual network planning to system service and maintenance. We have extensive experience building complex and secure networks
for the federal government, and we possess in-depth experience with network operations centers. Our services include network operations centers, help desks, system maintenance, system
upgrades, configuration management, data warehousing, COTS selection and integration, and high performance computing. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Our Strategy  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our strategy is to aggressively grow our business as a leading provider of highly-differentiated services in our core areas of focus as noted above by delivering
comprehensive, high-end engineering services, technical solutions and information technology solutions to federal government agencies while improving our profitability. To achieve our
objective, we intend to: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Accelerate Internal Growth  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are focused on accelerating our internal growth rate by capitalizing on our current contract base, expanding services provided to our existing clients,
expanding our client base and offering new, complementary services. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capitalize on Current Contract Base.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We are aggressively pursuing task orders under existing contract vehicles to maximize
our revenue and strengthen our client relationships, though there is no assurance that the federal government will make awards up to the ceiling amounts or that we will be awarded any task orders
under these vehicles. We have developed several internal tools that facilitate our ability to track, prioritize and win task orders under these vehicles. Combining these tools with our </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>10</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=10,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=16327,FOLIO='10',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<A NAME="page_dc49901_1_11"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>technical
expertise, our strong past performance record and our knowledge of our clients' needs, should position us to win additional task orders. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Expand Services Provided to Existing Clients.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We are focused on expanding the services we provide to our current clients by
leveraging our strong relationships, technical capabilities and past performance record, and by offering a wider range of solutions as we continue to acquire companies with new areas of
specialization. We believe our understanding of client missions, processes and needs, in conjunction with our full lifecycle IT offerings, positions us to capture new work from existing clients as the
federal government continues to increase the volume of IT services contracted to professional services providers. Moreover, we believe our strong past performance record positions us to expand the
level of services we provide to our clients as the federal government places greater emphasis on past performance as a criterion for awarding contracts. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Expand Client Base.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We are also focused on expanding our client base into areas with significant growth opportunities by
leveraging our industry reputation, long-term client relationships and diverse contract base. We anticipate that this expansion will enable us both to pursue additional higher value work
and to further diversify our revenue base across the federal government. Our long-term relationships with federal government agencies, together with our Government Wide Acquisition
Contract vehicles, give us opportunities to win contracts with new clients within these agencies. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Improve Operating Margins.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We believe that we have significant opportunities to increase our operating margins and improve
profitability by capitalizing on our corporate infrastructure investments and internally developed tools, and concentrating on high value-added prime contracts. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capitalize on Corporate Infrastructure Investments.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In recent periods, we have made significant investments in our senior
management and corporate infrastructure in anticipation of future revenue growth. These investments included hiring senior executives with significant experience with federal IT services companies,
strengthening our internal controls over financial reporting and accounting staff in support of public company reporting requirements and expanding our Sensitive Compartmented Information Facilities
and other corporate facilities. We believe our management experience and corporate infrastructure are more typical of a company with a much larger revenue base than ours. We therefore anticipate that,
to the extent our revenue grows, we will be able to leverage this infrastructure base and increase our operating margins. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Concentrate on High Value-Added Prime Contracts.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We expect to improve our operating margins as we strive to increase the
percentage of revenue we derive from our work as a prime contractor and from engagements where contracts are awarded on a best value, rather than on a low cost, basis. The federal government's move
toward performance-based contract awards to realize greater return on its investment has resulted in a shift to greater utilization of best value awards. We believe this shift will enable us to expand
our operating margins as we are awarded more contracts of this nature. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B><I> Pursue Strategic Acquisitions  </I></B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We intend to supplement our organic growth by identifying, acquiring and integrating businesses that meet our primary objective of providing us with enhanced
capabilities in order to pursue a broader cross section of the DoD, DHS and other government markets, complement and broaden our existing client base and expand our primary service offerings. Our
senior management team brings significant acquisition experience. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
previously described in "Acquisitions" above, on December&nbsp;31, 2007 we completed the acquisition of Haverstick Consulting,&nbsp;Inc., an Indianapolis, Indiana based
privately-held provider of rocket and missile test and evaluation, weapons systems support, and professional services to the U.S. Army, U.S. Air Force, U.S. Navy, NASA, and other federal,
state and local agencies. In addition, on February&nbsp;20, 2008 we entered into a definitive merger agreement with San Diego-based C5ISR and </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>11</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=11,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=430669,FOLIO='11',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<A NAME="page_dc49901_1_12"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>net-centric
warfare solutions provider SYS Technologies (AMEX:SYS) in a stock-for-stock transaction. We are currently evaluating other potential acquisition
targets. We anticipate that we will need to obtain additional financing through the sale of equity or debt securities to fund any such acquisitions. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Customers  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A representative list of our customers in our KGS segment during 2007 included the U.S. Air Force, U.S. Army, U.S. Navy, Missile Defense Agency, the Department of
Homeland Security, NASA, FMS and the U.S. Southern Command. In our PSS segment, our customers in 2007 included General Electric, Atlanta's Hartsfield-Jackson Airport, Lockheed Martin, the City of
Houston, Texas, and the Toyota Center. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table presents our customers from whom we receive more than 10% of our revenue: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="70%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Key Customer<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Revenue</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="10%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>% of Total Revenue</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2005</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>33.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2006</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>34.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2007</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>U.S. Army</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>46.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>24</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>38.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Employees  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2007, including the employees from the Haverstick Consulting acquisition, we employed approximately 1,500 full-time,
part-time and on-call employees. We have one collective bargaining unit of approximately 22 employees which is represented by the International Association of
Machinists&nbsp;&amp; Aerospace Workers, AFL-CIO, White Sands Local Lodge 2515, Alamogordo, New Mexico. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Competition  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our market is competitive, and includes the full range of federal and non-federal engineering and IT service providers. Many of the companies that we
compete against have significantly greater financial, technical and marketing resources, and generate greater revenues than we do. Competition in the federal business segment includes tier one, large
federal government contractors, such as Northrop Grumman, SAIC, ITT Industries,&nbsp;Inc., Computer Sciences Corporation, ARINC,
Raytheon Corporation, BAE, and CACI. While we view government contractors as competitors, we often team with these companies in joint proposals or in the delivery of our services for customers. Tier
two competitors include smaller and mid-tier government contractors such as NCI,&nbsp;Inc., Stanley,&nbsp;Inc., and Dynamics Research Corp. Competition in the PSS segment includes
Siemens Building Technology, Johnson Controls, Ingersoll Rand and Convergent. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
believe that the principal competitive factors in our ability to win new business include past performance, qualifications, domain and technology expertise, the ability to replace
contract vehicles, the ability to deliver results within budget (time and cost), reputation, accountability, staffing flexibility including the large number of personnel with government security
clearances, and project management expertise. We believe our ability to compete also depends on a number of additional factors including the ability of our customers to perform the services
themselves, and competitive pricing for similar services. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>12</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=12,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=117599,FOLIO='12',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<A NAME="page_dc49901_1_13"> </A>

<P style="font-family:times;"><FONT SIZE=2><B>Available Information  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We file reports with the SEC. We make available on our website under "Investor Relations/SEC Filings," free of charge, our annual reports on
Form&nbsp;10-K, quarterly reports on Form&nbsp;10-Q, current reports on Form&nbsp;8-K and amendments to those reports as soon as reasonably practicable after
we electronically file such materials with or furnish them to the SEC. Our website address is </FONT><FONT SIZE=2><I>www.kratosdefense.com</I></FONT><FONT SIZE=2>. You can also read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 100&nbsp;F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (</FONT><FONT SIZE=2><I>www.sec.gov</I></FONT><FONT SIZE=2>) that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dc49901_item_1a._risk_factors"> </A>
<A NAME="toc_dc49901_1"> </A>
Item&nbsp;1A.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Risk Factors</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;You
should carefully consider the following risk factors and all other information contained herein as well as the information included in this Annual Report, and other reports and
filings made with the SEC in evaluating our business and prospects. Risks and uncertainties, in addition to those we describe below, that are not presently known to us or that we currently believe are
immaterial may also impair our business operations. If any of the following risks occur, our business and financial results could be
harmed and the price of our common stock could decline. You should also refer to the other information contained in this report, including our consolidated financial statements and related notes. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our business could be adversely affected by changes in the contracting or fiscal policies of the federal government and governmental
entities.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
derive a significant portion of our revenue from contracts with the U.S. federal government and government agencies and subcontracts under federal government prime contracts, and the
success of our business and growth of our business will continue to depend on our successful procurement of government contracts either directly or through prime contractors. Accordingly, changes in
government contracting policies or government budgetary constraints could directly affect our financial performance. Among the factors that could adversely affect our business are: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in fiscal policies or decreases in available government funding, including budgetary constraints affecting federal government spending generally, or specific
departments or agencies in particular;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>the
adoption of new laws or regulations or changes to existing laws or regulations;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in political or social attitudes with respect to security and defense issues;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in federal government programs or requirements, including the increased use of small business providers;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in or delays related to government restrictions on the export of defense articles and services;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>potential
delays or changes in the government appropriations process; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>delays
in the payment of our invoices by government payment offices. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These
and other factors could cause governments and government agencies, or prime contractors that use us as a subcontractor, to reduce their purchases under existing contracts, to
exercise their rights to terminate contracts at-will or to abstain from exercising options to renew contracts, any of which could have an adverse effect on our business, financial
condition and results of operations. Many of our government customers are subject to stringent budgetary constraints. The award of additional </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>13</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=13,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=343177,FOLIO='13',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<A NAME="page_dc49901_1_14"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>contracts
from government agencies could be adversely affected by spending reductions or budget cutbacks at these agencies. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We derive a substantial amount of our revenues from the sale of our solutions either directly or indirectly to U.S. government entities pursuant to government
contracts, which differ materially from standard commercial contracts, involve competitive bidding and may be subject to cancellation or delay without penalty, any of which may produce volatility in
our revenues and earnings.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Government
contracts frequently include provisions that are not standard in private commercial transactions, and are subject to laws and regulations that give the federal government
rights and remedies not typically found in commercial contracts, including provisions permitting the federal government to: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>terminate
our existing contracts;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>reduce
potential future income from our existing contracts;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>modify
some of the terms and conditions in our existing contracts;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>suspend
or permanently prohibit us from doing business with the federal government or with any specific government agency;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>impose
fines and penalties;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>subject
us to criminal prosecution;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>suspend
work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>decline
to exercise an option to extend an existing multiple year contract; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>claim
rights in technologies and systems invented, developed or produced by us. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, government contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted and typically impose
provisions that permit cancellation in the event that necessary funds are unavailable to the public agency. Competitive procurements impose substantial costs and managerial time and effort in order to
prepare bids and proposals for contracts that may not be awarded to us. In many cases, unsuccessful bidders for government agency contracts are provided the opportunity to formally protest certain
contract awards through various agency, administrative and judicial channels. The protest process may substantially delay a successful bidder's contract performance, result in cancellation of the
contract award entirely and distract management. We may not be awarded contracts for which we bid, and substantial delays or cancellation of purchases may follow our successful bids as a result of
such protests. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain
of our government contracts also contain "organizational conflict of interest" clauses that could limit our ability to compete for certain related follow-on
contracts. For example, when we work on the design of a particular solution, we may be precluded from competing for the contract to install that solution. While we actively monitor our contracts to
avoid these conflicts, we cannot guarantee that we will be able to avoid all organizational conflict of interest issues. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability or loss of
market share.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
operate in highly competitive markets and generally encounter intense competition to win contracts from many other firms, including mid-tier federal contractors with
specialized capabilities and large defense and IT services providers. Competition in our markets may increase as a result of a number of factors, such as the entrance of new or larger competitors,
including those formed through alliances or consolidation. These competitors may have greater financial, technical, marketing and </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>14</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=14,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=109611,FOLIO='14',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<A NAME="page_dc49901_1_15"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>public
relations resources, larger client bases and greater brand or name recognition than we do. These competitors could, among other things: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>divert
sales from us by winning very large-scale government contracts, a risk that is enhanced by the recent trend in government procurement practices to bundle services
into larger contracts;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>force
us to charge lower prices; or
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>adversely
affect our relationships with current clients, including our ability to continue to win competitively awarded engagements in which we are the incumbent. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
we lose business to our competitors or are forced to lower our prices, our revenue and our operating profits could decline. In addition, we may face competition from our
subcontractors who, from time-to-time, seek to obtain prime contractor status on contracts for which they currently serve as a subcontractor to us. If one or more of our
current subcontractors are awarded prime contractor status on such contracts in the future, it could divert sales from us or could force us to charge lower prices, which could cause our margins to
suffer. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Recent acquisitions and potential future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our
resource.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have completed several acquisitions of complementary businesses in recent years, including our October 2006 acquisition of Madison Research Technology Corporation and December 2007
acquisition of Haverstick Consulting,&nbsp;Inc. In addition, on February&nbsp;20, 2008, we entered into an agreement to acquire SYS in a stock for stock transaction. We currently expect the
transaction to close by the end of the second quarter of 2008, upon receipt of the required stockholder approvals. However, the transaction may not close as expected, and the anticipated synergies
from the acquisition may not be
fully realized or may take longer to realize than expected. The success of the acquisition will depend in part on the success in integrating the operations, technologies and personnel of SYS. The
failure to successfully integrate the operations of the two companies or otherwise to realize any of the anticipated benefits of the acquisition could seriously harm our results of operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
continually evaluate opportunities to acquire new businesses as part of our ongoing strategy and we may in the future acquire additional companies that we believe could complement or
expand our business or increase our customer base. Acquisitions involve numerous risks, including: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>difficulties
in integrating operations, technologies, accounting and personnel;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>difficulties
in supporting and transitioning customers of acquired companies;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>difficulties
or delays in transitioning federal government contracts pursuant to federal acquisition regulations;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>diversion
of financial and management resources from existing operations;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>potential
loss of key employees;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>federal
acquisition regulations may require us to enter into government novation agreements, a potentially time-consuming process; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>inability
to generate sufficient revenue to offset acquisition costs. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquired
companies may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. In particular, to the extent that prior
owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or
failed to fulfill their contractual obligations to the federal government or other clients, we, as the successor owner, may be financially responsible for these violations and failures and may suffer
reputational harm or otherwise be adversely affected. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the
future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the
market price of our stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in
excess of what we anticipate. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>15</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=15,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=30412,FOLIO='15',FILE='DISK133:[08ZAH1.08ZAH49901]DC49901A.;10',USER='RKING',CD='27-MAR-2008;13:05' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_de49901_1_16"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT SIZE=2><B><I>We agreed to indemnify acquirers of our divested operations against specified losses in connection with the sale of these operations, and any demands for
indemnification may result in expenses we do not anticipate and distract the attention of our management from our continuing businesses.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
agreed to indemnify acquirers of our divested operations against specified losses in connection with their sale and generally retain responsibility for various legal liabilities that
accrued prior to closing. We also made representations and warranties to these acquirers about the condition of the divested businesses. If any acquirer makes an indemnification claim because it has
suffered a loss or a third party has commenced an action against the divested business, we may incur substantial expenses resolving such claims or defending against the third party action, which would
harm our operating results. In addition, our ability to defend ourselves may be impaired because our former employees are now employees of the acquirer or other companies, and our management may have
to devote a substantial amount of time to resolving the claim. In addition, these indemnity claims may divert management attention from responsibilities related to the daily ongoing concerns of the
business. In addition, we may be required to expend substantial resources trying to determine which party has responsibility for the claim, even if we are ultimately found to be not responsible. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our financial results may vary significantly from quarter to quarter.</I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
expect our revenue and operating results to vary from quarter to quarter. Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a
relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the start-up and early stages of large contracts and may
not be able to recognize corresponding revenue in that same quarter. We may also incur additional expenses when contracts expire, are terminated or are not renewed. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, payments due to us from federal government agencies may be delayed due to billing cycles or as a result of failures of government budgets to gain congressional and
administration approval in a timely manner. The federal government's fiscal year ends September&nbsp;30. If a federal budget for the next federal fiscal year has not been approved by that date in
each year, our clients may have to suspend engagements that we are working on until a budget has been approved. Any such suspensions may reduce our revenue in the fourth quarter of that year or the
first quarter of the subsequent year. The federal government's fiscal year end can also trigger increased purchase requests from clients for equipment and materials. Any increased purchase requests we
receive as a result of the federal government's fiscal year end would serve to increase our third or fourth quarter revenue, but will
generally decrease profit margins for that quarter, as these activities generally are not as profitable as our typical offerings. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additional
factors that may cause our financial results to fluctuate from quarter to quarter include those addressed elsewhere in these Risk Factors and the following, among others: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>the
terms of customer contracts that affect the timing of revenue recognition;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>variability
in demand for our services and solutions;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>commencement,
completion or termination of contracts during any particular quarter;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>timing
of award or performance incentive fee notices;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>timing
of significant bid and proposal costs;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>variable
purchasing patterns under the GSA Schedule&nbsp;70 Contracts, government wide acquisition contracts (GWACs), blanket purchase agreements and other indefinite
delivery/indefinite quantity contracts;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>restrictions
on and delays related to the export of defense articles and services; </FONT></DD></DL>
</UL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>16</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=16,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=692435,FOLIO='16',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_17"> </A>
<UL>
<UL>
</UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>costs
related to ongoing government inquiries;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>strategic
decisions by us or our competitors, such as acquisitions, divestitures, spin-offs and joint ventures;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>strategic
investments or changes in business strategy;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in the extent to which we use subcontractors;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>seasonal
fluctuations in our staff utilization rates;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in our effective tax rate including changes in our judgment as to the necessity of the valuation allowance recorded against our deferred tax assets; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>the
length of sales cycles. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Significant
fluctuations in our operating results for a particular quarter could cause us to fall out of compliance with the financial covenants contained in our credit facility, which
if not waived by the lender, could restrict our access to capital and cause us to take extreme measures to pay down our debt under the credit facility. In addition, fluctuations in our financial
results could cause our stock price to decline. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If we fail to establish and maintain important relationships with government entities and agencies and other government contractors, our ability to bid
successfully for new business may be adversely affected.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To
develop new business opportunities, we primarily rely on establishing and maintaining relationships with various government entities and agencies. We may be unable to successfully
maintain our relationships with government entities and agencies, and any failure to do so could materially adversely affect our ability to compete successfully for new business. In addition, we often
act as a subcontractor
or in "teaming" arrangements in which we and other contractors bid together on particular contracts or programs for the federal government or government agencies. As a subcontractor or team member, we
often lack control over fulfillment of a contract, and poor performance on the contract could tarnish our reputation, even when we perform as required. We expect to continue to depend on relationships
with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could be materially adversely affected if any prime contractor or teammate
chooses to offer a client services of the type that we provide or if any prime contractor or teammate teams with other companies to independently provide those services. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We derive a significant portion of our revenues from a limited number of customers.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. To the extent that any significant customer uses
less of our services or terminates its relationship with us, our revenues could decline significantly. As a result, the loss of any significant client could seriously harm our business. For the fiscal
year ended December&nbsp;31, 2007, two customers comprised approximately 60% and 44% of our federal business revenues and total revenues, respectively, and our five largest customers accounted for
approximately 84% and 62% of our total federal business revenues and total revenues, respectively. None of our customers are obligated to purchase additional services from us. As a result, the volume
of work that we perform for a specific customer is likely to vary from period to period, and a significant client in one period may not use our services in a subsequent period. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our margins and operating results may suffer if we experience unfavorable changes in the proportion of cost-plus-fee or fixed-price
contracts in our total contract mix.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although
fixed-price contracts entail a greater risk of a reduced profit or financial loss on a contract compared to other types of contracts we enter into, fixed-price contracts
typically provide </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>17</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=17,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=438692,FOLIO='17',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_18"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>higher
profit opportunities because we may be able to benefit from cost savings. In contrast, cost-plus-fee contracts are subject to statutory limits on profit margins, and
generally are the least profitable of our contract types. Our federal government customers typically determine what type of contract we enter into. Cost-plus-fee and fixed-
price contracts in our federal business accounted for approximately 51.1% and 23.3%, respectively, of our federal business revenues for the fiscal year ended December&nbsp;31, 2007. To the extent
that we enter into more cost-plus-fee or less fixed-price contracts in proportion to our total contract mix in the future, our margins and operating results may suffer. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our cash flow and profitability could be reduced if expenditures are incurred prior to the final receipt of a contract.</I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
provide various professional services and sometimes procure equipment and materials on behalf of our federal government customers under various contractual arrangements. From time to
time, in order to ensure that we satisfy our customers' delivery requirements and schedules, we may elect to initiate procurement in advance of receiving final authorization from the government
customer or a prime contractor. If our government or prime contractor customers' requirements should change or if the government or the prime contractor should direct the anticipated procurement to a
contractor other than us or if the equipment or materials become obsolete or require modification before we are under contract for the procurement, our investment in the equipment or materials might
be at risk if we cannot efficiently resell them. This could reduce anticipated earnings or result in a loss, negatively affecting our cash flow and profitability. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Loss of our GSA contracts or GWACs would impair our ability to attract new business.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
are a prime contractor under several GSA contracts and GWAC schedule contracts. We believe that our ability to provide services under these contracts will continue to be important to
our business because of the multiple opportunities for new engagements each contract provides. If we were to lose our position as prime contractor on one or more of these contracts, we could lose
substantial revenues and our operating results could suffer. GSA contracts and other GWACs typically have a one or two-year initial term with multiple options exercisable at the government
client's discretion to extend the contract for one or more years. We cannot be assured that our government clients will continue to exercise the options remaining on our current contracts, nor can we
be assured that our future clients will exercise options on any contracts we may receive in the future. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Failure to properly manage projects may result in additional costs or claims.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
engagements often involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with
our customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors, and our own personnel, in a timely manner. Any defects or errors or failure to
meet clients' expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, error, mistakes or
omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, in
certain instances, we guarantee customers that we will complete a project by a scheduled date. If the project experiences a performance problem, we may not be able to recover the additional costs we
will incur, which could exceed revenues realized from a project. Finally, if we underestimate the resources or time we need to complete a project with capped or fixed fees, our operating results could
be seriously harmed. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>The loss of any member of our senior management could impair our relationships with federal government clients and disrupt the management of our
business.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
believe that the success of our business and our ability to operate profitably depends on the continued contributions of the members of our senior management. We rely on our senior
management to generate business and execute programs successfully. In addition, the relationships and reputation </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>18</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=18,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=468142,FOLIO='18',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_19"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>that
many members of our senior management team have established and maintain with federal government personnel contribute to our ability to maintain strong client relationships and to identify new
business opportunities. We do not have any employment agreements providing for a specific term of employment with any member of our senior management. The loss of any member of our senior management
could impair our ability to identify and secure new contracts, to maintain good client relations and to otherwise manage our business. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If we fail to attract and retain skilled employees or employees with the necessary security clearances, we might not be able to perform under our contracts or win
new business.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
growth of our business and revenue depends in large part upon our ability to attract and retain sufficient numbers of highly qualified individuals who have advanced information
technology and/or engineering skills. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. Certain federal government contracts require us, and
some of our employees, to maintain security clearances. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain
employees who already hold security clearances. In addition, some of our contracts contain provisions requiring us to staff an engagement with personnel that the client considers key to our successful
performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the client may terminate the contract and we may lose revenue. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
we are unable to recruit and retain a sufficient number of qualified employees, our ability to maintain and grow our business could be limited. In a tight labor market, our direct
labor costs could increase or we may be required to engage large numbers of subcontractor personnel, which could cause our profit margins to suffer. Conversely, if we maintain or increase our staffing
levels in anticipation of one or more projects and the projects are delayed, reduced or terminated, we may underutilize the additional personnel, which would increase our general and administrative
expenses, reduce our earnings and possibly harm our results of operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If our subcontractors fail to perform their contractual obligations, our performance and reputation as a prime contractor and our ability to obtain future
business could suffer.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a prime contractor, we often rely upon other companies to perform work we are obligated to perform for our clients as subcontractors. As we secure more work under our GWAC vehicles,
we expect to require an increasing level of support from subcontractors that provide complementary and supplementary services to our offerings. Depending on labor market conditions, we may not be able
to identify, hire and retain sufficient numbers of qualified employees to perform the task orders we expect
to win. In such cases, we will need to rely on subcontracts with unrelated companies. Moreover, even in favorable labor market conditions, we anticipate entering into more subcontracts in the future
as we expand our work under our GWACs. We are responsible for the work performed by our subcontractors, even though in some cases we have limited involvement in that work. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
one or more of our subcontractors fail to satisfactorily perform the agreed-upon services on a timely basis or violate federal government contracting policies, laws or
regulations, our ability to perform our obligations as a prime contractor or meet our clients' expectations may be compromised. In extreme cases, performance or other deficiencies on the part of our
subcontractors could result in a client terminating our contract for default. A termination for default could expose us to liability, including liability for the agency's costs of reprocurement, could
damage our reputation and could hurt our ability to compete for future contracts. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of
penalties.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
must comply with laws and regulations relating to the formation, administration and performance of federal government contracts, which affect how we do business with our clients and </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>19</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=19,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=685968,FOLIO='19',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_20"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>may
impose added costs on us. In addition, the federal government, including the Defense Contract Audit Agency (DCAA), audits and reviews our performance on contracts, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. The DCAA reviews a contractor's internal control systems and policies, including the contractor's purchasing, property,
estimating, compensation and management information systems, and the contractor's compliance with such policies. Any costs found to be improperly allocated to a specific contract will not be
reimbursed, while such costs already reimbursed must be refunded. Adverse findings in a DCAA audit could materially affect our competitive position and result in a substantial adjustment to our
revenue and profit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>The commercial business arena in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make
profitability even more difficult to sustain.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
than the technical skills required in our commercial business, the barriers to entry in area are relatively low. We do not have any intellectual property rights in this segment of
our business to protect our methods and business start-up costs do not pose a significant barrier to entry. The success of our commercial business is dependent on our employees, customer
relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market
share and brand recognition. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If our commercial customers do not invest in security systems and other new in-building technologies such as wireless local area networks and/or
IP-based networks, our business will suffer.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
intend to devote significant resources to developing our enterprise-based wireless local area networks (WLAN), but we cannot predict that we will achieve widespread market acceptance
amongst the enterprises we identify as potential customers. It is possible that some enterprises will determine that capital constraints and other factors outweigh their need for WLAN systems. As a
result, we may be affected by a significant delay in the adoption of WLAN by enterprises, which would harm our business. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If we experience systems or service failure, our reputation could be harmed and our clients could assert claims against us for damages or
refunds.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
create, implement and maintain IT solutions that are often critical to our clients' operations. We have experienced, and may in the future experience, some systems and service
failures, schedule or delivery delays and other problems in connection with our work. If we experience these problems, we may: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>lose
revenue due to adverse client reaction;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>be
required to provide additional services to a client at no charge;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>receive
negative publicity, which could damage our reputation and adversely affect our ability to attract or retain clients; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>suffer
claims for substantial damages. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition to any costs resulting from product or service warranties, contract performance or required corrective action, these failures may result in increased costs or loss of revenue
if clients postpone subsequently scheduled work or cancel, or fail to renew, contracts. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While
many of our contracts limit our liability for consequential damages that may arise from negligence in rendering services to our clients, we cannot assure you that these contractual
provisions will be legally sufficient to protect us if we are sued. In addition, our errors and omissions and product liability insurance coverage may not be adequate, may not continue to be available
on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>20</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=20,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=879907,FOLIO='20',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_21"> </A>

<P style="font-family:times;"><FONT SIZE=2>some
types of future claims. The successful assertion of any large claim against us could seriously harm our business. Even if not successful, these claims could result in significant legal and other
costs, may be a distraction to our management and may harm our reputation. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Security breaches in sensitive federal government systems could result in the loss of clients and negative publicity.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many
of the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified federal
government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or
classified systems for federal government clients. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance.
Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our
revenue. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our employees may engage in misconduct or other improper activities, which could cause us to lose contracts.</I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include intentional failures to comply with federal government procurement
regulations, engaging in unauthorized activities or falsifying time records. Employee misconduct could also involve the improper use of our clients' sensitive or classified information, which could
result in regulatory sanctions against us and serious harm to our reputation and could result in a loss of contracts and a reduction in revenues. It is not always possible to deter employee
misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could cause us to lose contracts or cause a
reduction in revenues. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our business is dependent upon our ability to keep pace with the latest technological changes.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
market for our services is characterized by rapid change and technological improvements. Failure to respond in a timely and cost effective way to these technological developments
would result in
serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from providing innovative engineering services and
technical solutions that are based upon today's leading technologies and that are capable of adapting to future technologies. As a result, our success will depend, in part, on our ability to develop
and market service offerings that respond in a timely manner to the technological advances of our customers, evolving industry standards and changing client preferences. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If we are unable to manage our growth, our business could be adversely affected.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sustaining
our growth has placed significant demands on our management, as well as on our administrative, operational and financial resources. For us to continue to manage our growth, we
must continue to improve our operational, financial and management information systems and expand, motivate and manage our workforce. If we are unable to manage our growth while maintaining our
quality of service and profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, prospects, financial condition or
operating results could be adversely affected. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We may be harmed by intellectual property infringement claims and our failure to protect our intellectual property could enable competitors to market products and
services with similar features.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
may become subject to claims from our employees or third parties who assert that software and other forms of intellectual property that we use in delivering services and solutions to
our clients infringe upon intellectual property rights of such employees or third parties. Our employees develop some of the software and other forms of intellectual property that we use to provide
our services and </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>21</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=21,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=875165,FOLIO='21',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_22"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>solutions
to our clients, but we also license technology from other vendors. If our employees, vendors, or other third parties assert claims that we or our clients are infringing on their intellectual
property rights, we could incur substantial costs to defend those claims. If any of these infringement claims are ultimately successful, we could be required to cease selling or using products or
services that incorporate the challenged software or technology, obtain a license or additional licenses from our employees, vendors, or other third parties, or redesign our products and services that
rely on the challenged software or technology. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
attempt to protect our trade secrets by entering into confidentiality and intellectual property assignment agreements with third parties, our employees and consultants. However, these
agreements can be breached and, if they are, there may not be an adequate remedy available to us. In addition, others may independently discover our trade secrets and proprietary information and in
such cases we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secret is difficult, expensive and time consuming,
and the outcome is unpredictable. If we are unable to protect our intellectual property, our competitors could market
services or products similar to our services and products, which could reduce demand for our offerings. Any litigation to enforce our intellectual property rights, protect our trade secrets or
determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources, with no assurance of success. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>The matters relating to our internal review of our stock option granting practices and the restatement of our financial statements have exposed us to civil
litigation claims, regulatory proceedings and government proceedings which could have a material adverse effect on us.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
the summer of 2006, our current executive management team, which has been in place since 2004, initiated an investigation of our past stock option granting practices (the "Equity
Award Review") in reaction to media reports regarding stock option granting practices of public companies. The Equity Award Review was conducted with oversight from the Board and assistance from our
outside counsel. In February 2007, the Board appointed a Special Committee of the Board to review the adequacy of the Equity Award Review and the recommendations of management regarding historical
option granting practices, and to make recommendations and findings regarding those practices and individual conduct. The Special Committee was not charged with making, and did not make, any
evaluation of the accounting determinations or tax adjustments. The Special Committee was comprised of a non-employee director who had not served on our Compensation Committee before 2005. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Equity Award Review encompassed all grants of options to purchase shares of our common stock and other equity awards made since two months prior to our IPO in November 1999 through
December 2006. We also reviewed all option grants that were entered into our stock option database (Equity Edge) after our IPO with a grant date before November 1999, as well as other substantial
grants issued prior to our IPO, consisting of more than 14,000 grants. We further reviewed all option grants with a grant date that preceded an employee's date of hire. As part of the review,
interviews of 18 current and former officers, directors, employees and attorneys were conducted, and more than 40&nbsp;million pages of electronic and hard copy documents were searched for relevant
information. The Special Committee also conducted its own separate review of the option granting practices during the tenure of current executive management team through additional interviews and
document collection and review with the assistance of its own separate counsel and FTI Consulting. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Equity Award Review established the absence of contemporaneous evidence supporting a substantial number of the previously-recorded option grants, substantially all of which were made
in the period from 1998 through late 2003. During this period of time, in some instances, documents, data and interviews suggest that option grants were prepared or finalized days or, in some cases,
weeks or months after the option grant date recorded in our books. The affected grants include options issued to certain newly-hired employees but dated prior to their employment start dates and
options issued to </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>22</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=22,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=327970,FOLIO='22',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_23"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>non-employees,
including advisors to the Board erroneously designated as employees. The Special Committee also concluded that certain former employees and former officers participated in
making improper option grants, including the selection of grant dates with the benefit of hindsight and in the deferral of the recording of otherwise approved option grants. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
light of the Equity Award Review, the Audit Committee of our Board concluded that our prior financial statements for periods from 1998 through our filing of interim financial
statements for the period ended September&nbsp;30, 2006, could no longer be relied upon and must be restated. Our management determined that, from fiscal year 1998 through fiscal year 2005, we had
unrecorded non-cash equity-based compensation charges associated with our equity incentive plans. These charges are material to our financial statements for the years ended
December&nbsp;31, 1998 through 2005, the periods to which such charges would have related. Previously filed annual reports on Form&nbsp;10-K and quarterly reports on
Form&nbsp;10-Q affected by the restatements have not been and will not be amended and should not be relied upon. Our Annual Report on Form&nbsp;10-K filed on
September&nbsp;11, 2007 superseded and replaced in their entirety all of our previously issued financial statements and related reports filed with the Securities and Exchange Commission. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
past stock option granting practices and the restatement of our prior financial statements have exposed and may continue to expose us to greater risks associated with litigation,
regulatory proceedings and government inquiries and enforcement actions. As described in Part&nbsp;I, Item&nbsp;3, "Legal Proceedings," several derivative complaints have been filed in state and
federal courts against our current directors, some of our former directors and some of our current and former executive officers pertaining to allegations relating to stock option grants. The SEC has
initiated an informal inquiry into our historical stock option granting practices and we received a subpoena from the United States Attorney's Office for the Southern District of California for the
production of documents relating to our historical stock option granting practices, which could result in civil and/or criminal actions seeking, among other things, injunctions against us and the
payment of significant fines and penalties by us. We are cooperating with the SEC and the United States Attorney's Office for the Southern District of California, and expect to continue to do so. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
period of time necessary to resolve these inquiries is uncertain, and we cannot predict the outcome of these inquiries or whether we will face additional government inquiries,
investigations or other actions related to our historical stock option grant practices. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and
employees in connection with the investigation of our historical stock option practices, these DOJ and SEC inquiries and any future government inquiries, investigations or actions. These inquiries
could require us to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal
actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, which could have a material adverse effect on our financial condition, business,
results of operations and cash flow. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
a federal government investigation uncovers improper or illegal activities, including any potential improper or illegal activities related to the Company's stock option review or
related matters we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension
or debarment from doing business with federal government agencies. In addition, we could suffer serious harm to our reputation and competitive position if allegations of impropriety were made against
us, whether or not true. If our reputation or relationship with federal government agencies were impaired, or if the federal government otherwise ceased doing business with us or significantly
decreased the amount of business it does with us, our revenue and operating profit would decline. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>23</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=23,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=621496,FOLIO='23',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_24"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent
fraud.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective
internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be misstated, our
reputation may be harmed and the trading price of our stock could be negatively affected. Our management has concluded that there are no material weaknesses in our internal controls over financial
reporting as of December&nbsp;31, 2007. However, there can be no assurance that our controls over financial processes and reporting will be effective in the future or that additional material
weaknesses or significant deficiencies in our internal controls will not be discovered in the future. Any failure to remediate any future material weaknesses or implement required new or improved
controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial
statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the
trading price of our stock. In addition, from time to time we acquire businesses which could have limited infrastructure and systems of internal controls. Performing assessments of internal controls,
implementing necessary changes, and maintaining an effective internal controls process is costly and requires considerable management attention, particularly in the case of newly acquired entities. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We may need additional capital in the future to fund the growth of our business, and financing may not be available.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
currently anticipate that our available capital resources, including our credit facility and operating cash flows, will be sufficient to meet our expected working capital and capital
expenditure requirements for at least the next 12&nbsp;months. However, such resources may not be sufficient to fund the long-term growth of our business or the expenses associated with
the ongoing litigation, litigation settlements and government inquiries. In particular, we may experience a negative operating cash flow due to billing milestones and project timelines in certain of
our contracts. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
may raise additional funds through public or private debt or equity financings if such financings become available on favorable terms or we may expand our credit facility to fund
future acquisitions and for general corporate purposes. However, due to the current challenges in the lending markets, we can provide no assurance that the lender would agree to extend additional or
continuing credit under that facility. We could fall out of compliance with financial and other covenants contained in our credit facility which, if not waived, would restrict our access to capital
and could require us to pay down our existing debt under the credit facility. Any new financing or offerings would likely dilute our stockholders' equity ownership. In addition, additional financing
may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated
opportunities, develop new products or otherwise respond to competitive pressures. In any such case, our business, operating results or financial condition could be materially adversely affected. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our ability to make payments on our debt will be contingent on our future operating performance, which will depend on a number of factors that are outside of our
control.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
debt service obligations are estimated to be approximately $11&nbsp;million to $13&nbsp;million in 2008, including approximately $2.6&nbsp;million of principal repayments. This
debt service may have an adverse impact on our earnings and cash flow, which could in turn negatively impact our stock price. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
ability to make principal and interest payments on our debt is contingent on our future operating performance, which will depend on a number of factors, many of which are outside of
our </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>24</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=24,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=843380,FOLIO='24',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_25"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>control.
The degree to which we are leveraged could have other important negative consequences, including the following: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>we
must dedicate a substantial portion of our cash flows from operations to the payment of our indebtedness, reducing the funds available for future working capital
requirements, capital expenditures, acquisitions or other general corporate requirements;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>a
significant portion of our borrowings are, and will continue to be, at variable rates of interest, which may result in higher interest expense in the event of increases in
interest rates;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>we
may be more vulnerable to a downturn in the industries in which we operate or a downturn in the economy in general;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>we
may be limited in our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>we
may be placed at a competitive disadvantage compared to our competitors that have less debt;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>we
may determine it to be necessary to dispose of certain assets or one or more of our businesses to reduce our debt; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>our
ability to borrow additional funds in excess of our current financing may be limited. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
may not generate sufficient cash flow from operations and future borrowings may not be available in amounts sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs. Moreover, we may need to refinance all or a portion of our indebtedness on or before maturity. In such a case, we cannot make assurances that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. If we are unable to make scheduled debt payments or comply with the other provisions of our debt instruments, our various lenders may be
permitted under certain circumstances to accelerate the maturity of the indebtedness owed to them and exercise other remedies provided for in those instruments and under applicable law. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We are subject to restrictive debt covenants pursuant to our indebtedness. These covenants may restrict our ability to finance our business and, if we do not
comply with the covenants or otherwise default under them, we may not have the funds necessary to pay all amounts that could become due and the lenders could foreclose on substantially all of our
assets.</I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
indebtedness contains covenants that, among other things, significantly restricts and, in some cases, effectively eliminates our ability and the ability of our subsidiaries to: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>incur
additional debt;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>create
or incur liens;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>secure
performance bonds by letters of credit, thereby limiting the amount of work we may bid on or perform;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>pay
dividends or make other equity distributions to our stockholders;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>make
investments;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>sell
assets;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>issue
or become liable on a guarantee;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>create
or acquire new subsidiaries;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>effect
a merger or consolidation of, or sell all or substantially all of our assets; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>raise
capital via equity securities. </FONT></DD></DL>
</UL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>25</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=10,SEQ=25,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=683788,FOLIO='25',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_26"> </A>
<UL>
<UL>
</UL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, we must comply with certain financial covenants. In the event we failed to meet any of such covenants and were unable to cure such breach or otherwise renegotiate such
covenants, our lenders would have significant rights to deny future access to liquidity and/or seize control of substantially all of our assets. The material financial covenants with which we must
comply include a maximum first lien leverage ratio, a maximum total leverage ratio, a minimum liquidity ratio, a minimum fixed charge coverage ratio, and a minimum consolidated EBITDA. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
covenants contained in our indebtedness and any credit agreement governing future debt may significantly restrict our future operations. Furthermore, upon the occurrence of any event
of default, our lenders could elect to declare all amounts outstanding under such agreements, together with accrued interest, to be immediately due and payable. If those lenders were to accelerate the
payment of those amounts, our assets may not be sufficient to repay those amounts in full. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
are also subject to interest rate risk due to our indebtedness at variable interest rates, based on a base rate or LIBOR plus an applicable margin. Shifts in interest rates could have
a material adverse effect on us. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We may be required to prepay our indebtedness prior to its stated maturity, which may limit our ability to pursue business opportunities.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to the terms of certain of our indebtedness, in certain instances we are required to prepay outstanding indebtedness prior to its stated maturity date. Specifically, certain
non-recurring cash inflows such as proceeds from asset sales, insurance recoveries, and equity offerings may have to be used to pay down indebtedness and may not be reborrowed. These
prepayment provisions may limit our ability to utilize this cash flow to pursue business opportunities. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our stock price may be volatile, which may result in lawsuits against us and our officers and directors.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
stock market in general and the stock prices of government services companies in particular, have experienced volatility that has often been unrelated to or disproportionate to the
operating performance of those companies. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. Factors which could have a significant impact on the
market price of our common stock include, but are not limited to, the following: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>quarterly
variations in operating results;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>announcements
of new services by us or our competitors;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>the
gain or loss of significant customers;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>changes
in analysts' earnings estimates;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>rumors
or dissemination of false information;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>pricing
pressures;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>short
selling of our common stock;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>impact
of litigation and ongoing government inquiries;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>general
conditions in the market;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>political
and/or military events associated with current worldwide conflicts; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>events
affecting other companies that investors deem comparable to us. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Companies
that have experienced volatility in the market price of their stock have frequently been the object of securities class action litigation. We and certain of our current and
former officers and directors have been named defendants in class action and derivative lawsuits. These matters and any other securities class action litigation and derivative lawsuits in which we may
be involved could result </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>26</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=11,SEQ=26,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=933347,FOLIO='26',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<A NAME="page_de49901_1_27"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>in
substantial costs to us and a diversion of our management's attention and resources, which could materially harm our financial condition and results of operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>Our charter documents and Delaware law may deter potential acquirers and may depress our stock price.</I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain
provisions of our charter documents and Delaware law, as well as certain agreements we have with our executives, could make it substantially more difficult for a third party to
acquire control of us. These provisions include: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>authorizing
the board of directors to issue preferred stock;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>prohibiting
cumulative voting in the election of directors;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>prohibiting
stockholder action by written consent;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>establishing
advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at meetings of
our stockholders;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Section&nbsp;203
of the Delaware General Corporation Law, which prohibits us from engaging in a business combination with an interested stockholder unless specific
conditions are met; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>a
number of our executives have agreements with us that entitle them to payments in certain circumstances following a change in control. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have a stockholder rights plan which may discourage certain types of transactions involving an actual or potential change in control and may limit our stockholders' ability to approve
transactions that they deem to be in their best interests. As a result, these provisions may depress our stock price. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><B><I>We may incur goodwill impairment charges in our reporting entities which could harm our profitability.</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
significant portion of our net assets come from goodwill and other intangible assets. In accordance with Statement of Financial Accounting Standards, or SFAS, No.&nbsp;142, "Goodwill
and Other Intangible Assets," we periodically review the carrying values of our goodwill to determine whether such carrying values exceed the fair market value. Our acquired companies are subject to
annual review for goodwill impairment. If impairment testing indicates that the carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired.
Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could reduce our profitability. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="de49901_item_1b._unresolved_staff_comments"> </A>
<A NAME="toc_de49901_1"> </A>
Item&nbsp;1B.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Unresolved Staff Comments    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="de49901_item_2._properties"> </A>
<A NAME="toc_de49901_2"> </A>
Item&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Properties    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal executive offices for all business segments are located in approximately 93,000 square feet of office space in San Diego, California. The lease for
such space expires in April 2010. Other corporate resource offices are located in the following locations: Washington, D.C.; Marietta, Georgia; Newport, Delaware; Houston, Texas; Huntsville, Alabama;
Alexandria, Virginia; and Indianapolis, Indiana. We also lease office space to provide local support services to our customers in various regions throughout the United States. The leases on these
spaces expire at various times through August&nbsp;2016. We continually evaluate our current and future space capacity in relation to current and projected future staffing levels. We believe that
our existing facilities are suitable and adequate to meet our current business requirements. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>27</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=12,SEQ=27,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=385080,FOLIO='27',FILE='DISK133:[08ZAH1.08ZAH49901]DE49901A.;21',USER='RKING',CD='27-MAR-2008;12:14' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_dg49901_1_28"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dg49901_item_3._legal_proceedings"> </A>
<A NAME="toc_dg49901_1"> </A>
Item&nbsp;3.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Legal Proceedings</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Contingencies  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>IPO Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Beginning in June 2001, the Company and certain of its officers and directors were named as defendants in several parallel class action shareholder complaints
filed in the United States District Court for the Southern District of New York, now consolidated under the caption, </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Initial Public
Offering Securities Litigation</I></FONT><FONT SIZE=2>, Case No.&nbsp;01-CV-4779. In the amended complaint, the plaintiffs allege that the Company, certain of its officers
and directors, and the underwriters of the Company's initial public offering ("IPO") violated section&nbsp;11 of the Securities Act of 1933 and section&nbsp;10(b) of the Securities Exchange Act of
1934 based on allegations that the Company's registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices
of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court against hundreds of other public companies ("Issuers") that
conducted IPOs of their common stock in the late 1990s and 2000 (the "IPO Cases"). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
June 2004, the Issuers (including the Company) executed a settlement agreement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all claims
against the Issuers and their officers and directors and the assignment of certain potential Issuer claims to the plaintiffs. On February&nbsp;15, 2005, the court issued a decision certifying a
class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August&nbsp;31, 2005, the
court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive Order. On February&nbsp;24, 2006, the
court dismissed litigation filed against certain underwriters in connection with certain claims to be assigned under the settlement. On April&nbsp;24, 2006, the court held a Final Fairness Hearing
to determine whether to grant final approval of the settlement. On December&nbsp;5, 2006, the Second Circuit Court of Appeals vacated the lower court's earlier decision certifying as class actions
the six IPO Cases designated as "focus cases." Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs' petition to the Second
Circuit for rehearing en banc and resolution of the class certification issue. On April&nbsp;6, 2007, the Second Circuit denied plaintiffs' rehearing petition, but clarified that the plaintiffs may
seek to certify a more limited class in the District Court. Accordingly, the stay remains in place and the plaintiffs and Issuers have stated that they are prepared to discuss how the settlement might
be amended or renegotiated to comply with the Second Circuit's decision. Plaintiffs filed amended complaints in the six focus cases on or about August&nbsp;14, 2007. On September&nbsp;27, 2007,
Plaintiffs filed a motion for class certification in the six focus cases. On November&nbsp;13, 2007, the Issuer Defendants filed a motion to dismiss the amended complaints in the six focus cases. On
November&nbsp;14, 2007, the Underwriter Defendants filed a motion to dismiss the amended complaints in the six focus cases. The court has not yet set a deadline for the plaintiffs to file amended
complaints in the other IPO lawsuits. Due to the inherent uncertainties of litigation, and because the settlement may not receive final approval from the Court, the ultimate outcome of this matter
cannot be predicted. In accordance with FASB No.&nbsp;5, </FONT><FONT SIZE=2><I>"Accounting for Contingencies"</I></FONT><FONT SIZE=2> The Company believes any contingent liability related to this
claim is not probable or estimable and therefore no amounts have been accrued in regards to this matter. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>2004 Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August 2004, following the Company's announcement on August&nbsp;4, 2004 that it intended to restate its financial statements for the fiscal years ended
December&nbsp;31, 2000, 2001, 2002 and 2003, the Company and certain of its current and former officers and directors were named as defendants ("Defendants") in several securities class action
lawsuits filed in the United States District Court for </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>28</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=28,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=944731,FOLIO='28',FILE='DISK133:[08ZAH1.08ZAH49901]DG49901A.;13',USER='DCONRAD',CD='26-MAR-2008;23:47' -->
<A NAME="page_dg49901_1_29"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>the
Southern District of California. These actions were filed on behalf of those who purchased, or otherwise acquired, the Company's common stock between April&nbsp;26, 2000 and August&nbsp;4,
2004. The lawsuits generally allege that, during that time period, Defendants made false and misleading statements to the investing public about the Company's business and financial results, causing
its stock to trade at artificially inflated levels. Based on these allegations, the lawsuits allege that Defendants violated the Securities Exchange Act of 1934, and the plaintiffs seek unspecified
damages. These actions have been consolidated into a single action&#151;</FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Securities Litigation,</I></FONT><FONT SIZE=2> Master File
No.&nbsp;04CV1589-JAH. Plaintiffs filed a First Amended Consolidated Class Action Complaint on April&nbsp;1, 2005. Defendants filed their motion to dismiss this first amended complaint
on April&nbsp;14, 2005. The plaintiffs then requested leave to amend their first amended complaint. The plaintiffs filed their Second Amended Complaint on June&nbsp;9, 2005, this time on behalf of
those who purchased, or otherwise acquired, the Company's common stock between May&nbsp;5, 2003 and August&nbsp;4, 2004. Defendants filed their motion to dismiss this Second Amended Complaint on
July&nbsp;14, 2005. The motion to dismiss was taken under submission on October&nbsp;20, 2005 and on March&nbsp;8, 2006, the Court granted the Defendants' motion. However, plaintiffs were
granted the right to amend their complaint within 45&nbsp;days and subsequently filed their Third Amended Consolidated Class Action Complaint on April&nbsp;24, 2006. Defendants filed a motion to
dismiss this complaint on June&nbsp;8, 2006. On May&nbsp;7, 2007, the Court denied the Defendants' motion to dismiss. Defendants' filed their answer to the plaintiffs' complaint on July&nbsp;13,
2007. In February 2008, following a voluntary mediation of the matter, the parties reached a tentative agreement to settle the class action. Under the tentative settlement, plaintiffs and the class
will dismiss all claims, with prejudice, in exchange for a cash payment in the total amount of $12&nbsp;million. The Company's directors' and officers' liability insurers will pay the settlement
amount in accordance with the Company's insurance policies, less any applicable retention or co-insurance obligations that are expected to be paid directly by the Company. The Company
estimates that the amount of its payment toward the settlement will be approximately $2.4&nbsp;million. The Company has accrued approximately $2.4&nbsp;million as of December&nbsp;31, 2007
related to this matter. The parties currently are in the process of documenting their agreement and then will seek a determination by the Court that the proposed settlement is fair, reasonable and
adequate. The Company makes no assurances at this time that the Court will approve the proposed settlement terms or that the matter ultimately will be settled. Despite the tentative settlement reached
in this action, the Company believes that the allegations lack merit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2004, two derivative lawsuits were filed in the United States District Court for the Southern District of California against certain of the Company's current and former officers and
directors: </FONT><FONT SIZE=2><I>Pedicini v. Wireless Facilities,&nbsp;Inc.,</I></FONT><FONT SIZE=2> Case No.&nbsp;04CV1663; and </FONT><FONT SIZE=2><I>Roth v. Wireless
Facilities,&nbsp;Inc.,</I></FONT><FONT SIZE=2> Case No.&nbsp;04CV1810. These actions were consolidated into a single action in </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc.
Derivative Litigation</I></FONT><FONT SIZE=2>, Lead Case No 04CV1663-JAH. These lawsuits contain factual allegations that are substantially similar those made in the class action lawsuits,
but the plaintiffs in these lawsuits assert claims for breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets, violation of Sarbanes Oxley Act section&nbsp;304,
unjust enrichment and insider trading. The plaintiffs in these lawsuits seek unspecified damages and equitable and/or injunctive relief. The lead plaintiff filed a consolidated complaint on
March&nbsp;21, 2005. On May&nbsp;3, 2005, the defendants filed motions to dismiss this action, to stay this action pending the resolution of the consolidated non-derivative securities
case pending in the Southern District of California, and to dismiss the complaint against certain non-California resident defendants. Pursuant to a request by the Court, Defendants'
motions were withdrawn without prejudice pending a decision on defendants' motion to dismiss the complaint against the non-California resident defendants. On March&nbsp;20, 2007, the
Court ruled that it lacked personal jurisdiction over five of the six non-California defendants and dismissed them from the federal derivative complaint. On March&nbsp;27, 2007,
plaintiffs filed an amended derivative complaint setting forth all of the same allegations from the original complaint and adding allegations regarding the Company's stock option granting practices.
Basically, plaintiffs allege that the Company "backdated" or </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>29</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=29,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=396806,FOLIO='29',FILE='DISK133:[08ZAH1.08ZAH49901]DG49901A.;13',USER='DCONRAD',CD='26-MAR-2008;23:47' -->
<A NAME="page_dg49901_1_30"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>"springloaded"
employee stock option grants so that the options were granted at less than fair market value. The amended complaint names all of the original defendants (including those dismissed for
lack of jurisdiction) as well as nine new defendants. On July&nbsp;2, 2007, the non-California resident defendants moved to dismiss the complaint for lack of personal jurisdiction. On
October&nbsp;17, 2007, the Court took the motion under submission without oral argument. On February&nbsp;26, 2008, the Court again ruled that it lacked personal jurisdiction over five of the six
non-California defendants and dismissed them from the amended federal derivative complaint. The parties have conferred and discussed the Court's order and have stipulated to a briefing
schedule for any remaining motions to dismiss that the Company, along with the individual defendants subject to the court's jurisdiction, may bring in an effort to dismiss the complaint as to them.
Pursuant to the parties' stipulation, such motions must be brought on or before June&nbsp;5, 2008. The Company believes that the allegations lack merit and intends to vigorously defend all claims
asserted. It is impossible at this time to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
April 2007, another derivative complaint was filed in the United States District Court for the Southern District of California, </FONT><FONT SIZE=2><I>Hameed v.
Tayebi</I></FONT><FONT SIZE=2>, Case No.&nbsp;07-CV-0680 BTM(RBB) (the "</FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action"), against several of the Company's
current and former officers and directors. The allegations in this new derivative complaint mirror the amended allegations in the 2004 federal derivative action. Pursuant to the Court's order and
agreement of the parties, the defendants' responses to the complaint in the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action were stayed until the Court ruled on the motion to dismiss for
lack of personal jurisdiction in the 2004 derivative litigation. As noted above, on February&nbsp;26, 2008, the Court ruled that it lacked personal jurisdiction over five of the
non-California defendants named in the 2004 derivative action, including three that were also named in the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action. The parties have
conferred and discussed the Court's order and are in the process of stipulating to a briefing schedule for any remaining motions to dismiss that the Company, along with the individual defendants
subject to the court's jurisdiction, may bring in an effort to dismiss the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action as to them. At this time, the parties have not set a date by
which such
motions must be brought. The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. Currently, we are unable to form&nbsp;a professional judgment that
an unfavorable outcome is either probable or remote. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
August and September 2004, two virtually identical derivative lawsuits were filed in California Superior Court for San Diego County against certain of the Company's current and former
officers and directors. These actions contain factual allegations similar to those of the federal lawsuits, but the plaintiffs in these cases assert claims for violations of California's insider
trading laws, breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiffs in these actions seek unspecified damages, equitable
and/or injunctive relief and disgorgement of all profits, benefits and other compensation obtained by defendants. These lawsuits have been consolidated into one
action&#151;</FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Derivative Litigation,</I></FONT><FONT SIZE=2> California Superior Court, San Diego County, Lead Case No. GIC 834253.
The plaintiffs filed a Consolidated Shareholder Derivative Complaint on October&nbsp;14, 2004. This action has been stayed pending a decision in federal court on a motion to dismiss the federal
derivative lawsuits. In October 2007, the parties notified the Court of the status of the federal action and requested the court continue its stay of this action. The Company anticipates that the
court will continue to stay this matter and that the court will request the parties file an updated status report in April 2008. The Company believes that the allegations lack merit and intends to
vigorously defend all claims asserted. It is impossible at this time to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company has recorded an accrual for a contingent liability associated with the legal proceedings related to the derivative actions of $0.8&nbsp;million based on the Company's
estimate of the potential amount it would have to pay, net of estimated amounts to be paid by the Company's insurance carriers, in relation to these lawsuits. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>30</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=30,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=246544,FOLIO='30',FILE='DISK133:[08ZAH1.08ZAH49901]DG49901A.;13',USER='DCONRAD',CD='26-MAR-2008;23:47' -->
<A NAME="page_dg49901_1_31"> </A>

<P style="font-family:times;"><FONT SIZE=2><B><I>2007 Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In March and April 2007, there were three federal class actions filed in the United States District Court for the Southern District of California against the
Company and several of its current and former officers and directors. These class action lawsuits followed the Company's March&nbsp;12, 2007 public announcement that it was conducting a voluntary
internal review of its stock option granting processes. These actions have been consolidated into a single action, </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Securities Litigation
II</I></FONT><FONT SIZE=2>, Master File No.&nbsp;07-CV-0482-BTM-NLS. The consolidated class action complaint was filed on November&nbsp;19, 2007. In
March 2008, following a voluntary mediation of the matter, the parties reached a tentative agreement to settle the class action. Under the settlement proposal, plaintiffs and the class will dismiss
all claims, with prejudice, in
exchange for a cash payment in the amount of $4.5&nbsp;million. The Company's directors' and officers' liability insurers will pay the settlement amount, less any applicable retention or
co-insurance obligations and contributions that are expected to be paid directly by the Company. The Company estimates that the total amount of its payment toward the settlement will be
approximately $1.7&nbsp;million. The Company has accrued approximately $1.7&nbsp;million as of December&nbsp;31, 2007 related to this matter. The parties currently are in the process of
documenting their agreement, and then will seek a determination by the Court that the proposed settlement is fair, reasonable and adequate. The Company makes no assurances at this time that the Court
will approve the proposed settlement terms or that the matter ultimately will be settled. Despite the tentative settlement reached in this action, the Company believes that the allegations lack merit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Other Litigation and Government Investigations  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January 2005, a former independent contractor of the Company filed a lawsuit in Brazil against the Company's subsidiary, WFI de Brazil, to which he had been
assigned for a period of time. He sought to be designated an employee of WFI de Brazil and entitled to severance and related compensation pursuant to Brazilian labor law. The individual sought back
wages, vacation pay, stock option compensation and related benefits in excess of $0.5&nbsp;million. In July 2006, the labor court awarded the individual back wages, vacation pay and certain other
benefits. The Company filed an appeal in the matter on July&nbsp;20, 2006. On August&nbsp;22, 2007, the appeals court partially upheld the Company's appeal, although it upheld the individual's
designation as an employee. The labor court has awarded the individual the Brazilian currency equivalent of approximately $0.6&nbsp;million (based on the current currency exchange rate). The
Company's counsel has filed motions for clarification of the judgment due to omissions in the decision. The Company has accrued approximately $0.6&nbsp;million as of December&nbsp;31, 2007 related
to this matter. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
March&nbsp;28, 2007, three plaintiffs, on behalf of a purported class of similarly situated employees and contractors, filed a lawsuit against the Company in the Superior Court of
the State of California, Alameda County. The suit alleges various violations of the California Labor Code and seeks payments for allegedly unpaid straight time and overtime, meal period pay and
associated penalties. The Company and the plaintiffs have agreed to venue for the suit in San Diego County. Although the Company believes that the allegations lack merit, it has agreed in principle
with the plaintiffs to settle their claims for an aggregate amount in the range of $0.3&nbsp;million to $0.5&nbsp;million, to include individual and incentive awards, attorneys' fees and
administrative costs, subject to court approval. The actual amount paid by the Company will depend upon the number of responses received from members of the purported class of plaintiffs. The Company
has recorded an accrual for a contingent liability associated with this legal proceeding in the amount of $0.3&nbsp;million. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
May&nbsp;3, 2007, the Company announced that it had a filed a lawsuit against a former employee who previously served as its stock option administrator and left the Company in
mid-2004, and his spouse. The lawsuit sought to recover damages resulting from the theft by a former employee of Company stock options and common stock valued in excess of
$6.3&nbsp;million. The thefts, which appear to have taken place during 2002 and 2003, were discovered through the Company's review of its past </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>31</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=31,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=537903,FOLIO='31',FILE='DISK133:[08ZAH1.08ZAH49901]DG49901A.;13',USER='DCONRAD',CD='26-MAR-2008;23:47' -->
<A NAME="page_dg49901_1_32"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>practices
related to the granting and pricing of employee stock options with the assistance of its outside counsel and forensic computer consultants. The complaint also alleged that the former
employee attempted to cover up the scheme by, among other things, deleting entries from the Company's records. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
promptly reported to the SEC the discovery of the theft. The SEC initiated an informal inquiry, and commenced an enforcement action against the former employee. The U.S. Attorney's
Office also forwarded a grand jury subpoena to us seeking records related to our former employee and our historical option granting practices. The SEC filed a federal lawsuit and obtained a temporary
restraining order and asset freeze against the former employee and his spouse. The U.S. Attorney's Office indicted him for the theft and he pled guilty to federal criminal charges and has been
sentenced to 46&nbsp;months in prison and currently is incarcerated. We have cooperated with, and intend to continue to cooperate with both the SEC and the U.S. Attorney's Office on this matter and
otherwise. He and his wife entered into a settlement agreement with us on October&nbsp;5, 2007 turning over substantially all of their assets to us in settlement of the damages incurred in the
theft. On February&nbsp;15, 2008, the SEC approved the settlement. On February&nbsp;19, 2008, the court entered a final judgment approving the settlement. We have obtained the assets, which
aggregate approximately $3.4&nbsp;million, and are in the process of liquidating them. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition to the foregoing matters, from time to time, the Company may become involved in various claims, lawsuits and legal proceedings that arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company's business. The Company is currently not
aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dg49901_item_4._submission_of___dg402390"> </A>
<A NAME="toc_dg49901_2"> </A>
Item&nbsp;4.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Submission of Matters to a Vote of Security Holders</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
November&nbsp;14, 2007, we held our annual stockholders' meeting at which our stockholders (i)&nbsp;elected five (5)&nbsp;directors to hold office until the 2008 election of
directors and (ii)&nbsp;ratified the appointment of Grant Thornton&nbsp;LLP as our independent registered accounting firm for the year ending December&nbsp;31, 2007. The vote on such matter was
as follows: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>1.</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Election
of Directors: </FONT></DD></DL>
</UL>
<BR>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="56%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="54%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Director<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="20%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>For</B></FONT><HR NOSHADE></TH>
<TH WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="20%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Withheld</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Scott I. Anderson</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>65,049,380</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>535,981</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Bandel L. Carano</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>58,607,583</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,977,778</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Eric M. DeMarco</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>54,444,218</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11,414,143</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>William A. Hoglund</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>65,048,885</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>536,476</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Scot B. Jarvis</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>65,044,280</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>541,081</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>2.</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Ratification
of the selection of Grant Thornton&nbsp;LLP as the Company's independent registered public accounting firm for the fiscal year ending December&nbsp;31, 2007: </FONT></DD></DL>
</UL>
<BR>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="49%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>For<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Against</B></FONT><HR NOSHADE></TH>
<TH WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Abstain</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>65,427,108</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>91,957</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="31%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>66,296</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>32</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=32,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=396301,FOLIO='32',FILE='DISK133:[08ZAH1.08ZAH49901]DG49901A.;13',USER='DCONRAD',CD='26-MAR-2008;23:47' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_di49901_1_33"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="di49901_part_ii"> </A>
<A NAME="toc_di49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>PART II    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="di49901_item_5._market_for_registrant___ite04666"> </A>
<A NAME="toc_di49901_2"> </A>
Item&nbsp;5.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Market Information  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Common Stock is listed on the NASDAQ Global Select Market and has traded under the symbol "KTOS" since September&nbsp;17, 2007. Our common stock traded
under the symbol "WFII" from November&nbsp;5, 1999 through September&nbsp;14, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table sets forth the high and low sales prices for our Common Stock for the periods indicated, as reported by NASDAQ. Such quotation represents inter-dealer prices without
retail markup, markdown or commission and may not necessarily represent actual transactions. </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>High</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Low</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Year Ended December&nbsp;31, 2007:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Fourth Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.04</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.91</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Third Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.75</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.73</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Second Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.74</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.07</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>First Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.85</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.24</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Year Ended December&nbsp;31, 2006:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Fourth Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.88</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.00</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Third Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.93</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.91</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Second Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.53</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.75</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>First Quarter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.52</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.88</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;3, 2008 the last sale price of our Common Stock as reported by NASDAQ was $1.71 per share. On March&nbsp;3, 2008, there were 216
shareholders of record of our Common Stock. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have not declared any cash dividends since becoming a public company. We currently intend to retain any future earnings to finance the growth and development of the business and,
therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit facility restricts our ability to pay dividends. Any future determination to pay cash
dividends will be at the discretion of our Board and will be dependent upon the future financial condition, results of operations, capital requirements, general business conditions and other relevant
factors as determined by our Board. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Securities Authorized for Issuance Under Equity Compensation Plans  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information about our equity compensation plans as of December&nbsp;31, 2007 is as follows (shares in thousands): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Plan Category<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Exercise Price of Outstanding Options, Warrants and Rights</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="10%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Securities Remaining Available for Future Issuance</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Equity Compensation Plans Approved by Shareholders(1)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7,019</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.62</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7,321</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>(3)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Equity Compensation Plans Not Approved by Shareholders(2)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1,318</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.86</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2,110</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="53%" style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8,337</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9,431</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE ALIGN="LEFT" WIDTH="120">
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(1)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Includes
1997 Stock Option Plan, 1999 and 2005 Equity Incentive Plan and 1999 Employee Stock Purchase Plan </FONT></DD></DL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>33</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=33,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=1046706,FOLIO='33',FILE='DISK133:[08ZAH1.08ZAH49901]DI49901A.;14',USER='ALOEW',CD='21-MAR-2008;23:42' -->
<A NAME="page_di49901_1_34"> </A>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(2)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Includes
2000 Non-Statutory Stock Option Plan
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(3)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Includes
351,811 shares reserved for issuance under the Employee Stock Purchase Plan which was suspended in 2006. </FONT></DD></DL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For more detailed information regarding our equity compensation plans, see Note&nbsp;10 to our consolidated financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Performance Graph  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following performance graph is a comparison of the five year cumulative stockholder return on our common stock against the cumulative total return of the
NASDAQ Composite Index, the NASDAQ Telecommunications Index and a peer group composed of the Russell 2000 Stock Index and SYS Technologies, NCI,&nbsp;Inc., Stanley,&nbsp;Inc., SI
International,&nbsp;Inc., MTC Technologies,&nbsp;Inc., and Dynamic Research Corporation for the period commencing December&nbsp;31, 2002 and ending December&nbsp;31, 2007. The performance
graph assumes an initial investment of $100 in our common stock and in each of the indices and peer group. The comparison also assumes that all dividends are reinvested and all returns are
market-cap weighted. The historical information set forth below is not necessarily indicative of future performance. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="di49901_comparison_of_5_year_cumulativ__com06893"> </A>
<A NAME="toc_di49901_3"> </A>
<BR></FONT><FONT SIZE=2><B>COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*<BR>  </B></FONT><FONT SIZE=2>Among Kratos Defense &amp; Security Solutions, Inc. The NASDAQ Composite Index,<BR>  The NASDAQ Telecommunications Index And A Peer Group
<BR></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>
<IMG SRC="g808772.jpg" ALT="GRAPHIC" WIDTH="616" HEIGHT="409">
  </B></FONT></P>

<UL>
<UL>

<P style="font-family:times;"><FONT SIZE=2>*$100
invested on 12/31/02 in stock or index-including reinvestment of dividends.<BR>
Fiscal year ending December&nbsp;31. </FONT></P>

</UL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
performance graph above and related text are being furnished solely to accompany this annual report on Form&nbsp;10-K pursuant to Item&nbsp;201(e) of
Regulation&nbsp;S-K, and are not being filed for purposes of Section&nbsp;18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any
filing of ours, whether made before or after the date hereof, regardless of any general incorporation language in such filing. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>34</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=34,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=813990,FOLIO='34',FILE='DISK133:[08ZAH1.08ZAH49901]DI49901A.;14',USER='ALOEW',CD='21-MAR-2008;23:42' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_dk49901_1_35"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dk49901_item_6._selected_financial_data"> </A>
<A NAME="toc_dk49901_1"> </A>
Item&nbsp;6.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Selected Financial Data</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a result of the Engineering and Deployment Services divestitures in June and July 2007, respectively, the Wireless Network Services segment has been classified as a discontinued
operation in this Report and all prior year results presented herein have been reclassified to reflect these businesses as discontinued operations in accordance with SFAS No.&nbsp;144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
December 2005, our Board made the decision to exit our Mexican and South American deployment businesses. In December 2006, our Board made the decision to exit our EMEA and Brazilian
businesses. Accordingly, all results of operations for these businesses have been reflected as discontinued operations for all years presented. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
selected consolidated financial data has been restated as a result of the discontinued businesses. The following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are incorporated in
Item&nbsp;7 or elsewhere in this Report on Form&nbsp;10-K. Our historical results are not necessarily indicative of operating results to be expected in the future. </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="93%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=14 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Year Ended December&nbsp;31,</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2003</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2004</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=14 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>(All amounts except per share data in millions)<BR> </B></FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Consolidated Statements of Operations Data:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>43.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>116.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>152.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>193.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Gross profit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>21.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>29.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>28.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>31.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Operating income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(13.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(31.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(24.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Provision (benefit) for income taxes from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(46.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(28.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Income (loss) from discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>23.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(57.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(40.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations per common&nbsp;share</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.12</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.63</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.38</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.12</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.63</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.38</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income (loss) from discontinued operations per common&nbsp;share</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.04</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.34</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.17</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.04</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.34</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.17</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Net income (loss) per common share</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.55</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.55</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Weighted average shares:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>68.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>73.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>68.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>73.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>35</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=35,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=362046,FOLIO='35',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_36"> </A>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="100%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="92%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=14 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>As of December&nbsp;31,</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2003</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2004</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=14 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>(All amounts in millions)<BR> </B></FONT><BR></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Consolidated Balance Sheet Data:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Cash and cash equivalents</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>50.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Short-term investments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>35.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Working capital</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>132.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>98.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>23.4</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Total assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>279.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>330.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>342.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>337.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>335.3</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Short-term debt</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>51.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Long-term debt</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="45%" style="font-family:times;"><FONT SIZE=2>Total stockholders' equity</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>191.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>219.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>229.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>187.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>167.2</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain
amounts in the selected consolidated financial data above have been reclassified to conform to the 2007 presentation. See Note&nbsp;1 of Notes to Consolidated Financial
Statements, included in Part&nbsp;IV, Item&nbsp;15 of this Report. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;You
should read this selected consolidated financial data together with the Consolidated Financial Statements and related Notes contained in this Report, as well as the section of this
Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dk49901_item_7._management_s_discussio__ite03850"> </A>
<A NAME="toc_dk49901_2"> </A>
Item&nbsp;7.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&amp;A")</I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or
other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Factors that may cause our results to differ include, but are not limited to:
changes in the scope or timing of our projects; changes or cutbacks in spending by the U.S. Department of Defense which could cause delays or cancellations of key government contracts; the timing,
rescheduling or cancellation of significant customer contracts and agreements, or consolidation by or the loss of key customers; failure to successfully consummate acquisitions or integrate acquired
operations; the rate of growth of adoption of WLAN and wireless security systems by enterprises; and competition in the marketplace which could reduce revenues and profit
margins.</I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither we, nor
any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing
of our Annual Report on Form&nbsp;10-K to conform such statements to actual results or to changes in our expectations.</I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>Certain of the information set forth herein, including costs and expenses that exclude the impact of stock compensation expense, amortization expense of purchased
intangibles for 2006 and 2007, and the stock option investigation and related costs in 2007, may be considered non-GAAP financial measures. We believe this information is useful to
investors because it provides a basis for measuring the operating performance of our business and our cash flow, excluding the effect of stock compensation expense that would normally be included in
the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles. Our management uses these non-GAAP financial measures along with
the most directly comparable GAAP financial measures in evaluating our operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in
isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-financial measures we report may not be comparable to similarly titled amounts
reported by other companies.</I></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>36</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=36,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=996766,FOLIO='36',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_37"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information
appearing elsewhere in this Report and other reports and filings made with the Securities and Exchange Commission. Readers are also urged to carefully review and consider the various disclosures made
by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption Item&nbsp;1A&#151;Risk
Factors.</I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Overview  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide mission critical engineering, IT services and warfighter solutions to the U.S. Government and government agencies, as well as to state and local
agencies and commercial customers. We are an innovative provider of mission critical engineering, IT services and warfighter solutions. Our principal services are related to, but are not limited to,
Command, Control, Communications, Computing, Combat Systems Intelligence, Surveillance and Reconnaissance (C5ISR), weapons systems lifecycle support and extension, military weapon range operations and
technical services, missile, rocket and weapon test and evaluation, mission launch services, public safety, security and surveillance, advanced network engineering services and IT services, and
critical infrastructure design and integration services. We offer our customers solutions and expertise to support their mission-critical needs by leveraging our skills across these core service
areas. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Historically,
the majority of our business was concentrated in the area of wireless network services, and our business operated in three reportable segments: wireless network services,
government network services, and enterprise network services. In 2006, we were an independent provider of outsourced engineering and network deployment services, security systems engineering and
integration services and other technical services for the wireless communications industry, the U.S. government, and enterprise customers. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2006 and 2007, we undertook a transformation strategy whereby we divested our wireless-related businesses and chose to aggressively pursue business with the federal government,
primarily the U.S. Department of Defense, through strategic acquisitions and organic growth. We divested assets in our wireless network services segment and renamed our enterprise network services
segment "Public Safety and Security". Today, under the new corporate name of Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc., we are organized into two primary operating segments: Kratos
Government Solutions (KGS) and Public Safety&nbsp;&amp; Security (PSS). </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><I> Divestiture of Wireless Network Business  </I></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December 2005, our Board made the decision to exit our Mexican operations and certain of our other deployment businesses in South America. Prior to this
decision, these operations had been reported in our Wireless Network Services segment. We determined that these operations met the criteria to be classified as held for sale. Accordingly, we reflected
these operations as discontinued in accordance with SFAS No.&nbsp;144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Our South American deployment operations were
substantially shut down as of the end of 2005. Accordingly, all results for these operations for all periods presented have been reflected as discontinued. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;17, 2006, we entered into a definitive agreement to divest all of our operations in Mexico for total approximate cash consideration of $18.0&nbsp;million, which
approximated the net book value of the operations, including $13.2&nbsp;million of liabilities associated with a loss contingency. The transaction closed on March&nbsp;10, 2006. The transaction
was structured as a sale of our subsidiaries in Mexico, and the purchase price consisted of $1.5&nbsp;million in cash paid on February&nbsp;17, 2006, plus a secured promissory note payable in
installments through December&nbsp;31, 2006. The note was secured by pledges of assets and a personal guaranty. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>37</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=37,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=609146,FOLIO='37',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_38"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
final closing balance sheet as of February&nbsp;17, 2006 resulted in net asset adjustments aggregating to a total approximate $18.9&nbsp;million consideration,
$1.5&nbsp;million of which was paid on February&nbsp;17, 2006, with the remaining $17.4&nbsp;million payable by means of the promissory note in installments through December&nbsp;31, 2006 with
an interest rate of 7.5% per annum. The remaining note receivable balance was paid in December 2006. No amounts remain outstanding on the note receivable. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
purchaser, Sakoki&nbsp;LLC, was a newly-formed entity controlled by Massih Tayebi. Although Massih Tayebi has no current role with us, he was one of our co-founders and
served as our Chief Executive Officer from inception in 1994 through September 2000, and as a director from inception through April 2002. In addition, as of July&nbsp;31, 2007, Massih Tayebi owned
or controlled approximately 8.2% of the total voting power of our capital stock. He is also the brother of Masood Tayebi, who was the Chairman of our Board at the time of this transaction. Masood
Tayebi is no longer on our Board and had no personal financial interest in the transaction and no role with the entity that purchased the Mexico operations. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
October&nbsp;2, 2006, we consummated the acquisition of Madison Research Corporation ("MRC") for $69.0&nbsp;million in cash, subject to an adjustment paid in April 2007 which
increased the total purchase price to approximately $73.8&nbsp;million, including transaction costs of $0.2&nbsp;million. Ten percent of the purchase price before adjustment, or
$6.9&nbsp;million, was withheld as security for satisfaction of certain indemnification obligations and payable over eighteen months following the closing date of the merger pursuant to the terms of
the merger agreement. In April 2007, approximately $1.5&nbsp;million of the holdback was released and paid to the former shareholders of MRC. In October 2007, a second scheduled holdback payment of
$2.8&nbsp;million was made. The remaining holdback payment of approximately $2.3&nbsp;million is expected to be settled in April 2008 subject to the resolution of certain indemnification matters.
The acquisition was funded by cash on hand and cash from our previous $85&nbsp;million Credit Facility with Key Bank National Association. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
MRC acquisition has been accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No.&nbsp;141, "Business Combinations"
("SFAS&nbsp;141"), whereby the total cost of the acquisition has been allocated to tangible and intangible assets acquired and liabilities assumed based upon a determination of fair values at the
effective date of the acquisition. A valuation was performed by an independent appraiser to finalize the purchase price allocation based upon the fair value of the assets and liabilities acquired and
the details of this valuation are included in Note&nbsp;6 of our Consolidated Financial Statements. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;28, 2006, our Board approved a plan to divest portions of our business where critical mass had not been achieved. This plan involved the divestiture of our EMEA
operations and our remaining South American operations. The EMEA operations were sold to LCC International,&nbsp;Inc. ("LCC") on March&nbsp;9, 2007 for $4.0&nbsp;million in cash,
$3.3&nbsp;million of which was received on that date. We also received approximately $1.8&nbsp;million from our EMEA operations prior and subsequent to the closing date as payment on outstanding
intercompany debt. The balance of the $0.7&nbsp;million sales price is being withheld as security for the satisfaction of certain indemnification obligations and is payable on a date that is the
earlier of March&nbsp;31, 2008 or the date that the buyer files its 10-K for the fiscal year ended December&nbsp;31, 2007. Based upon our review of the most recently available
financial statements of the buyer, as of December&nbsp;31, 2007, we have concern about their ability to pay this holdback, due to their available liquidity. We have recorded a reserve of
$0.7&nbsp;million for this receivable. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
recorded an impairment charge of $5.2&nbsp;million in the fourth quarter of 2006 to reduce the current carrying value of our South American operations to their estimated fair value
based upon current indications of interest. On April&nbsp;20, 2007, we entered into an Equity Purchase Agreement to sell all of the issued and outstanding equity of its interests of our wholly-owned
subsidiary WFI de Brazil Techlogia en Telecomunicaciones&nbsp;LTDA to Strategic Project Services,&nbsp;LLC (SPS). The consideration included the assumption of substantially all outstanding
liabilities of WFI Brazil, nominal </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>38</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=38,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=556083,FOLIO='38',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_39"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>cash
consideration, and additional earn-out consideration based on 25&nbsp;percent of net receivables collected subsequent to the closing date. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
May&nbsp;29, 2007, we entered into an Asset Purchase Agreement with LCC International,&nbsp;Inc. for the sale of all of the assets used in the conduct of the operation of our
engineering services business of our Wireless Network Services segment that provided engineering services to the non-government wireless communications industry in the United States, for
aggregate consideration in of $46&nbsp;million. LCC delivered a subordinated promissory note for the principal amount of $21.6&nbsp;million (the "</FONT><FONT SIZE=2><I>Subordinated Promissory
Note</I></FONT><FONT SIZE=2>"), paid $17&nbsp;million at closing and paid final working capital adjustments of $2.4&nbsp;million through an amendment to the Subordinated Promissory Note. We
retained an estimated $5.0&nbsp;million in net working capital. The transaction was completed on June&nbsp;4, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;5, 2007, we sold the $21.6&nbsp;million Subordinated Promissory Note to Silver Point Capital,&nbsp;L.P. ("Silver Point") in a transaction arranged by KeyBanc Capital
Markets ("KeyBanc"). We received approximately $19.6&nbsp;million in net cash proceeds, reflecting a discount from par value of less than five percent and aggregate transaction fees of approximately
$1&nbsp;million, which includes a $0.75&nbsp;million fee to KeyBanc, an affiliate of our lender. On January&nbsp;30, 2008, we received net proceeds of approximately $2.3&nbsp;million on the
working capital adjustment from Silver Point, net of a $0.1&nbsp;million discount from par value. We did not provide any guaranty for LCC's payment obligations for the note. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;9, 2007, we entered into a definitive agreement with an affiliate of Platinum Equity to sell our deployment services business of our wireless network services segment for
total consideration payable of $24&nbsp;million, including $18&nbsp;million in cash at closing (subject to typical post closing working capital adjustments) and an aggregate $6&nbsp;million in a
three-year earn-out arrangement. We also agreed to provide certain transition services for a period of six months. The assets sold to Platinum Equity included all of our
wireless deployment business and the Wireless Facilities name. The transaction closed on July&nbsp;24, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
September&nbsp;25, 2007, we provided the working capital calculation to Platinum Equity, which indicated a working capital adjustment was due to Platinum primarily due to cash
collected on accounts receivables by us prior to the close of the transaction that exceeded our previous estimate of working capital to be delivered to Platinum. Platinum has reviewed our working
capital calculation, and we have not been able to come to an agreement on the working capital adjustment. In accordance with the
terms of the acquisition agreement, we and Platinum are currently in the process of choosing a firm to resolve this item. As of December&nbsp;31, 2007 the balance of our calculation has been
reflected in other current liabilities. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a result of the engineering and deployment services divestitures in 2007, the Wireless Network Services segment has been classified as a discontinued operation in this Annual Report
and all prior year results presented herein have been reclassified to reflect these businesses as discontinued operations in accordance with SFAS No.&nbsp;144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><I> Recent Acquisitions  </I></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;31, 2007 we completed our acquisition of Indianapolis, Indiana headquartered Haverstick Consulting,&nbsp;Inc. ("Haverstick") as part of our
Government Solutions Segment. Haverstick provides rocket and missile test and evaluation, weapons systems support, and professional services to the U.S. Army, U.S. Air Force, U.S. Navy, NASA, and
other federal, state and local agencies. Through the Haverstick acquisition, we expanded our customer relationship within the DoD and enhanced our presence with the U.S. Air Force, a key growth area
for Haverstick. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
total purchase price was $90.2&nbsp;million including transaction costs incurred by Kratos of $0.5&nbsp;million. The purchase price paid to Haverstick of $89.7&nbsp;million was
paid in a combination of $70.3&nbsp;million of cash and common stock valued at $19.4&nbsp;million. We paid $66.7&nbsp;million in cash at </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>39</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=39,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=422869,FOLIO='39',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_40"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>closing,
$2.4&nbsp;million in cash shortly thereafter and $12.0&nbsp;million of common stock. In addition, $1.2&nbsp;million in cash and $7.4&nbsp;million in stock was held back to secure any
negative working capital adjustments required by the merger agreement and our indemnity rights. The holdback consideration will be released on the 12<SUP>th</SUP>&nbsp;month and
21<SUP>st</SUP>&nbsp;month of the anniversary date of the acquisition. In addition to the indemnity holdback, the Agreement also calls for a post closing working capital adjustment. To fund the
acquisition, we secured a new credit facility of $85.0&nbsp;million arranged by KeyBanc Capital Markets. The credit facility, which includes a $25.0&nbsp;million line of credit and
$60.0&nbsp;million in term notes, replaced our previous credit facility, which had an outstanding principal balance of $6.0&nbsp;million on December&nbsp;31, 2007. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;29, 2008 we provided the working capital calculation to Haverstick, which indicated a working capital adjustment was due to us primarily because the working capital,
as calculated per the Agreement, was below the target amount. Haverstick has reviewed our working capital calculation and is in disagreement. Their response proposes that there is actually excess
working capital of approximately $1.5&nbsp;million. In accordance with the Agreement, we have fifteen days from the date of Haverstick's objection to resolve the disagreement. If resolution has not
been achieved within the
fifteen day period, we and Haverstick have five days to agree on a nationally recognized independent accounting firm to resolve the disagreement. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to the terms of the Merger Agreement, the Company has agreed to use its reasonable best efforts to file a resale registration statement covering the shares issued in connection
with the Merger promptly following the closing date. In the event that the common stock issued are not salable under rules promulgated under the Securities Acts, holders of the stock may elect to
exchange such shares for a cash amount equal to $2.74 per share in accordance with the terms of the Merger Agreement. Until the date on which the shares of stock are salable interest shall accrue on
the value of the Closing Stock at a floating rate of one-month LIBOR plus four percent (4%) per annum. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
February 2008 we entered into a definitive merger agreement with San Diego-based C5ISR and net-centric warfare solutions provider SYS Technologies (AMEX:SYS) in a
stock-for-stock transaction. Under the terms of the agreement, SYS will merge into a wholly owned subsidiary of Kratos and all of SYS's outstanding common shares will be
converted into Kratos common shares. Upon closing, we will issue approximately 25&nbsp;million shares of common stock. The transaction is subject to customary closing conditions, including approval
of the transaction by SYS's shareholders and the approval of our stockholders of the issuance of shares. The transaction is expected to close in the second quarter of 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
September&nbsp;12, 2007 we changed our name from Wireless Facilities,&nbsp;Inc. to Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. to reflect our new strategic focus. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, we consider the following factors to be important in understanding our financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Kratos
Government Solutions' business with the U.S. government and prime contractors is generally performed under cost reimbursable, fixed-price or time and materials contracts. Cost
reimbursable contracts for the government provide for reimbursement of costs plus the payment of a fee. Some cost reimbursable contracts include incentive fees that are awarded based on performance on
the contract. Under fixed-price contracts, we agree to perform certain work for a fixed price. Under time and materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates
and reimbursed for travel and other direct expenses at actual costs plus applied general and administrative expenses. Our Pubic Security and Safety contracts are primarily fixed-price contracts
whereby revenue is recognized using the percentage-of-completion method of accounting under the provisions of Statement of Position (SOP) 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts." For contracts offered on a time and material basis, we recognize revenues as services are performed. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>40</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=40,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=903047,FOLIO='40',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_41"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost
of revenues includes direct compensation, living, travel and benefit expenses for project-related personnel, payments to third-party subcontractors, cost of materials
project-related incentive compensation based upon the successful achievement of certain project performance goals, allocation of overhead costs and other direct project-related expenses. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling,
general and administrative expenses include compensation and benefits for corporate service employees and similar costs for billable employees whose time and expenses cannot be
assigned to a project (underutilization costs), expendable computer software and equipment, facilities expenses and other operating expenses not directly related and/or allocated to projects. General
and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Additionally, our sales
personnel and senior corporate executives have, as part of their compensation packages, periodic and annual bonus/commission incentives based on the attainment of specified performance goals. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
consider the following factors when determining if collection of a receivable is reasonably assured: comprehensive collection history; results of our communications with customers;
the current financial position of the customer; and the relevant economic conditions in the customer's country. If we have had no prior experience with the customer, we review reports from various
credit organizations to ensure that the customer has a history of paying its creditors in a reliable and effective manner. If the financial condition of our customers were to deteriorate, and
adversely affect their financial ability to make payments, additional allowances would be required. Additionally, on certain contracts whereby we perform services for a prime/general contractor, a
specified percentage of the invoiced trade accounts receivable may be retained by the customer until we complete the project. We periodically review all retainages for collectibility and record
allowances for doubtful accounts when deemed appropriate, based on our assessment of the associated risks. Total retainages included in accounts receivable and current assets of discontinued
operations were approximately $1.7&nbsp;million and $0.0&nbsp;million at December&nbsp;31, 2007, respectively. In addition, $0.6&nbsp;million of retainages that are expected to be paid after
2007 are included in other assets (long term). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
PSS segment previously built, installed and operated a wireless LAN system at a number of shopping malls in the United States. This network was developed to offer internet
connectivity for a fee to customers and tenants at the malls. The market for these services had changed in 2006 with the emergence of free WiFi and WiMAX and this resulted in significantly reduced
expectations for future revenue and profits related to the realizability of this asset. Based upon an analysis of the expected future cash flows from this asset in accordance with SFAS No.&nbsp;144,
we determined that the full value of this asset, approximately $1.8&nbsp;million, was impaired at the end of 2006. In January 2008, we sold the LAN system network to the owner of the shopping malls
for $0.3&nbsp;million. This transaction will be recorded in our first quarter of 2008 at the time of the transfer of the network. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due
to a loss of management in early 2006 as a result of the completion of earn-outs on some of our PSS acquisitions at the end of 2005, our PSS operations experienced an
underperformance relative to historic operating results in 2006 and this impacted our projected future performance. We determined at the end of 2006 that the total amount of goodwill for our PSS
segment, approximately $18.3&nbsp;million, was impaired. The fair value of the goodwill was estimated using these projections and a
combination of a discounted cash flow model and a market approach model that takes into consideration comparable business and market transactions. We also concluded based on this analysis the
intangible assets for PSS were not impaired. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, our annual effective tax rate was a negative 5% for the year ending December&nbsp;31, 2007 which resulted in tax expense of $1.3&nbsp;million on a
loss before income taxes of $26.9&nbsp;million. The rate differs from the federal and state statutory rates primarily due to the increase in the valuation allowance against deferred tax assets
created during the year for which recognition is not considered to be "more likely than not". </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>41</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=41,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=465509,FOLIO='41',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<A NAME="page_dk49901_1_42"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Management
currently considers the following events, trends and uncertainties to be important to understanding its financial condition and operating performance: </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
believe that our Kratos Government Solutions segment will build and expand our customer relationships within the U.S. Departments of Defense, Department of Homeland Security and other
non-DoD state and local agencies by taking advantage of the significant opportunities for companies with substantial expertise in advanced engineering and information technology. We
believe we will experience continued growth in revenues and operating income from this operating segment. The acquisition of Haverstick on December&nbsp;31, 2007 resulted in the addition of nearly
500 highly skilled technical professionals and engineers with expertise in the areas of military weapons and target range support as well as targets and missile operations and maintenance. The
acquisition of MRC on October&nbsp;2, 2006 provides us with expanded presence in Huntsville Alabama, which is a key strategic military location for this segment. MRC offers a broad range of
technical, engineering and IT solutions, and has developed core competencies in weapons system lifecycle support, integrated logistics, test and evaluation, commercial
off-the-shelf software and hardware selection and implementation, software development and systems lifecycle maintenance. The results of operations of Haverstick have not been
included in our consolidated statement of operations as that transaction closed on December&nbsp;31, 2007. The results of operations of MRC have been included in our consolidated results beginning
from the closing date of October&nbsp;2, 2006. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
restructuring assessments which occurred in the fourth quarter of 2006 included a critical review of our Public Safety&nbsp;&amp; Security segment to take into consideration the
overall enterprise related industry and market opportunities, as well as the management and performance setbacks that occurred in this segment during 2006. As a result of this analysis we made the
decision to focus primarily on areas where we have significant existing expertise, qualifications and relationships. For example, we believe our expertise and overall qualifications provide a clear
competitive differentiator on projects related to physical and other types of security system integrations at Department of Defense military bases, production facilities, and other state, local and
municipal government locations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Results of Operations  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Comparison of Results for the Year Ended December&nbsp;31, 2006 to the Year Ended December&nbsp;31, 2007  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Revenues by operating segment for the years ended December&nbsp;31, 2006 and 2007 are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="87%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>$ change</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>% change</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Public Safety&nbsp;&amp; Security Segment</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>55.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>51.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)%</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Kratos Government Solutions Segment</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>97.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>142.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>45.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>46.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="53%" style="font-family:times;"><FONT SIZE=2>Total revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>193.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>40.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>26.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues
increased $40.5&nbsp;million from $153.1&nbsp;million in 2006 to $193.6&nbsp;million in 2007, reflecting an increase of $45.0&nbsp;million in our Kratos Government
Solutions segment, primarily due to the acquisition of MRC in October 2006, which contributed $70.5&nbsp;million in revenues in 2007 and $17.2&nbsp;million in 2006. This increase of
$53.3&nbsp;million was partially offset by decreases due to the reduction of one program with annualized revenues of nearly $5.7&nbsp;million that was consolidated by one of our Federal Government
customers as well as, to a lesser degree, other program delays and losses resulting in reduced revenues of $2.6&nbsp;million in other businesses within our Government Solutions segment. Reductions
in our Public Safety&nbsp;&amp; Security segment of $4.5&nbsp;million were primarily related to our exit of the municipal wireless business in the first quarter of 2007. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>42</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=42,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=548447,FOLIO='42',FILE='DISK133:[08ZAH1.08ZAH49901]DK49901A.;20',USER='RKING',CD='27-MAR-2008;13:18' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_dm49901_1_43"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As described in the section "Critical Accounting Principles and Estimates" and in the footnotes to our audited consolidated financial statements, a portion of our revenue is derived from
fixed-price contracts whereby revenue is calculated using the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total
costs to complete the contract. These estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that
adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects,
which determine the project's percent complete, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of
our revenue for any period if management makes different judgments or utilizes different estimates. During the reporting periods contained herein, we did experience revenue and margin adjustments of
certain projects based on the aforementioned factors, but the effect of such adjustments, both positive and negative, when evaluated in total were determined to be immaterial to the consolidated
financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of Revenues.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Cost of revenues increased $37.8&nbsp;million or 30.4% from $124.2&nbsp;million for the year ended
December&nbsp;31, 2006 to $162.0&nbsp;million for the year ended December&nbsp;31, 2007 primarily due to the increase in total revenues. The increase was primarily attributable to cost of
revenues of approximately $14.6&nbsp;million related to the MRC acquisition, offset by decreases in cost of revenues as a result of the reduced revenues in our PSS segment discussed above. Gross
margin during the year ended December&nbsp;31, 2007 of 16.3% decreased from a 2006 gross margin of 18.9%. The decrease in gross margin primarily resulted from a change in the mix of Government
Services revenue versus Public Safety&nbsp;&amp; Security revenue. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling, General and Administrative Expenses.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses increased 2.6% from
$38.5&nbsp;million to $39.5&nbsp;million for the years ended December&nbsp;31, 2006 and 2007, respectively. The increase of $1.0&nbsp;million is primarily due to an increase in costs
reflecting the acquisition of MRC and an increase in external consulting and professional fees, such as legal and accounting, partially offset by a reduction in stock compensation expense of
$4.9&nbsp;million from 2006, which decreased from $5.9&nbsp;million in 2006 to $1.0&nbsp;million in 2007. Included in the selling, general and adminstrative expenses (SG&amp;A) for 2006 and 2007 is
amortization of purchased intangibles of $2.0&nbsp;million and $2.8&nbsp;million, respectively. The increase in amortization year over year is also a result of the MRC acquisition. As a percentage
of revenues, selling, general and administrative expenses decreased from 25.1% in 2006 to 20.4% in 2007. Excluding the impact of the amortization of purchased intangibles and stock compensation
expense, SG&amp;A decreased from 20.0% to 19.0% of revenues for 2006 and 2007, respectively. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock Option Investigation, Related Fees and Recoveries.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In the summer of 2006, our current executive management team, which
has been in place since 2004, initiated an investigation of our past stock
option granting practices (the "Equity Award Review") in reaction to media reports regarding stock option granting practices of public companies. Our 2007 costs of $10.6&nbsp;million included
$14.0&nbsp;million in legal, accounting and other professional fees related to our Equity Award Review which was completed in September 2007 and the ongoing government inquiries by the Department of
Justice and the SEC. This amount was partially offset by $3.4&nbsp;million related to the recovery of assets from our settlement with our former stock option administrator related to damages for the
theft of our stock options and common stock which occurred in 2002 and 2003 and was discovered during our internal review of our option granting practices. See Item&nbsp;3. Legal Proceedings for a
further discussion of these items. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimated Cost for Settlement of Securities Litigation.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In March&nbsp;2008, following a voluntary mediation of 2004 and
2007 securities litigation, the parties reached a tentative agreement to settle the class action. See Item&nbsp;3. Legal Proceedings for a further discussion of these items. We have accrued an
estimated $4.9&nbsp;million related to its costs for the settlement of these litigations. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>43</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=43,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=168564,FOLIO='43',FILE='DISK133:[08ZAH1.08ZAH49901]DM49901A.;20',USER='RKING',CD='27-MAR-2008;13:32' -->
<A NAME="page_dm49901_1_44"> </A>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contingent Acquisition Consideration and Restatement Fees.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In September 2004, we amended the purchase agreements related to
two of the companies acquired in our ENS segment in 2003 to more accurately reflect the intent of the transactions, resulting in a rescission of the continuous employment clauses from the
earn-out arrangements, for which we recorded a $12.4&nbsp;million accrual at that time. We had $0.1&nbsp;million in expense associated with contingent acquisition consideration based
upon the final payments on these agreements in 2006. There were no charges incurred in 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Impairment and Restructuring Charges.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Impairment and restructuring charges decreased $20.6&nbsp;million from
$21.8&nbsp;million in 2006 to $1.2&nbsp;million in 2007. During 2006, we recorded $21.8&nbsp;million in impairment and restructuring charges as a result of a change in strategic focus of our PSS
segment and a consolidation of our headquarter facilities, which included $18.3&nbsp;million for goodwill impairment related to acquisitions made in the PSS segment. This was due in part to changes
in the industry and the strategic focus, the impact of recent and future expected operating performance, as well as operational challenges from significant employee turnover that we encountered after
the completion of the earn-out periods in early 2006. The balance of the charge was related to an asset impairment of approximately $1.8&nbsp;million, an unused facility charge of
approximately $1.4&nbsp;million related to facilities consolidation and severance costs associated with restructuring activities of approximately $0.3&nbsp;million. The costs in 2007 of
$1.2&nbsp;million included $0.8&nbsp;million for an excess facility accrual for obligations under facility leases with unused office space as a result of the recent divestitures of our wireless
network services businesses, $0.2&nbsp;million related to the impairment of leasehold improvements for these facilities and $0.2&nbsp;million related to an impairment of fixed assets. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other Expense, Net.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;For the year ended December&nbsp;31, 2006, net other expense was $0.9&nbsp;million compared to net
other expense of $2.3&nbsp;million for the year ended December&nbsp;31, 2007. The other expense in 2006 was due to interest income on the note receivable relating to the sale of our Mexican
subsidiary and interest expense for the borrowings on the line of credit used to fund the acquisition of MRC in
October 2006. In 2007, in accordance with EITF&nbsp;87-24, </FONT><FONT SIZE=2><I>Allocation of Interest to Discontinued Operations</I></FONT><FONT SIZE=2>, interest expense on the debt
of $2.2&nbsp;million that was required to be repaid as a result of the sales of our wireless network services business was allocated to discontinued operations for the periods presented. See
Note&nbsp;4 of Notes to Consolidated Financial Statements, included in Part&nbsp;IV, Item&nbsp;15 of this report. Consequently, in 2007 the interest cost for the Line of Credit borrowings used
to fund the MRC acquisition was primarily allocated to discontinued operations. The net other expense of $2.3&nbsp;million in 2007 was primarily attributable to approximately $1.8&nbsp;million of
an impairment charge, recorded in the fourth quarter of 2007, related to the carrying value of investments to fair value as well as $1.2&nbsp;million of interest expense incurred on our credit
facility. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision (benefit) for Income Taxes.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Our effective income tax rate for the year ended December&nbsp;31, 2006 represented a
negative 43% income tax provision compared to a negative 5% income tax provision for the year ended December&nbsp;31, 2007. The tax provision of $13.8&nbsp;million for the year ended
December&nbsp;31, 2006 included an increase to the valuation allowance of $15.9&nbsp;million against the deferred tax assets. The tax provision for the year ended December&nbsp;31, 2007 included
an increase to the valuation allowance of $9.8&nbsp;million against the deferred tax assets. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income (Loss) from Discontinued Operations.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Loss from discontinued operations increased from a loss of $11.7&nbsp;million
in 2006 to a loss of $12.6&nbsp;million during 2007. The increase was primarily due to the impairment of assets related to the wireless deployment business of $13.4&nbsp;million, an impairment of
goodwill of $7.2&nbsp;million related to this business, a $1.9&nbsp;million loss from the disposal of our deployment business and a $1.1&nbsp;million excess facility accrual. These charges were
all partially offset by a gain of $14.8&nbsp;million on the sale of the wireless engineering services business operations and a gain of $2.6&nbsp;million on the sale of the EMEA business. Revenues
and net loss before taxes generated by these businesses in 2006 were approximately $201.7&nbsp;million and $9.8&nbsp;million, respectively, compared to $85.7&nbsp;million and
$12.7&nbsp;million, respectively, in 2007. The decrease year over year was impacted by the </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>44</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=44,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=198558,FOLIO='44',FILE='DISK133:[08ZAH1.08ZAH49901]DM49901A.;20',USER='RKING',CD='27-MAR-2008;13:32' -->
<A NAME="page_dm49901_1_45"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>divestitures
of the wireless network services businesses in 2007. See Note&nbsp;4 to the Notes to the Consolidated Financial Statements for further discussion of these transactions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Comparison of Results for the Year Ended December&nbsp;31, 2005 to the Year Ended December&nbsp;31, 2006  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Revenues by operating segment for the years ended December&nbsp;31, 2005 and 2006 are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="87%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>$ change</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>% change</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Public Safety&nbsp;&amp; Security Segment</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>55.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(17.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)%</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Government Solutions Segment</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>85.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>97.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="53%" style="font-family:times;"><FONT SIZE=2>Total revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>152.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues
increased $0.8 or 0.1% from $152.3&nbsp;million in 2005 to $153.1&nbsp;million in 2006. The increase in revenues included an increase of $12.5&nbsp;million in our
Government Solutions segment, substantially offset by reduced revenue in our Public Safety&nbsp;&amp; Security segment. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
decreased revenues in the PSS segment of $11.7&nbsp;million from 2005 to 2006 was primarily a result of significant employee turnover, particularly management sales and business
development personnel, that occurred in our Atlanta and Houston offices following the completion of the three year acquisition earn-out periods at the beginning of 2006. The increased
revenue in the Government Network Services segment is a result of the acquisition of MRC in the fourth quarter of 2006, which contributed $17.6&nbsp;million in revenues in 2006, offset partially by
decreases due to program delays and program reductions from two of our DOD Customers. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of Revenues.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Cost of revenues increased $8.5&nbsp;million or 7.3% from $115.7&nbsp;million for the year ended
December&nbsp;31, 2005 to $124.2&nbsp;million for the year ended December&nbsp;31, 2006. Gross margin during the year ended December&nbsp;31, 2005 of 24.0% decreased to a gross margin of 18.9%
for the year ended December&nbsp;31, 2006. The increase in cost of revenues was partially attributable to cost of revenues of approximately $14.6&nbsp;million related to the MRC acquisition. The
decrease in gross margins resulted from an increased mix of government network services business, which generally reports the classification of cost elements based upon definitions in accordance with
government contracting regulations. As a result, cost of revenues in the 2006 periods includes certain cost elements that would otherwise be classified as SG&amp;A expense under a commercial contract
arrangement. In addition, the
overall decrease in gross margin percentage was partially attributable to a stock-based compensation expense of $0.9&nbsp;million in 2006 related to our adoption of SFAS No.&nbsp;123(R) in January
2006, compared to $0.0&nbsp;million in 2005 and the impact of cost overruns in the PSS sector as a result of employee and management turnover that occurred following the completion of the
earn-out periods in early 2006. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling, General and Administrative Expenses.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses increased 8.5% from
$35.5&nbsp;million to $38.5&nbsp;million for the years ended December&nbsp;31, 2005 and 2006, respectively. As a percentage of revenues, selling, general and administrative increased from 23.3%
in 2005 to 25.1% in 2006. The increase of $3.0&nbsp;million is primarily due to the cost of stock-based compensation which was $5.9&nbsp;million in 2006 or 3.9% of revenues versus
$0.2&nbsp;million, net of related tax adjustments, in 2005 or 0.1% of revenues partially offset by a reduction in consulting fees. Excluding the stock-based compensation expense, SG&amp;A decreased from
$35.3&nbsp;million, or 23.2% of revenues, in 2005 to $32.6&nbsp;million, or 21.3% of revenues, in 2006. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contingent Acquisition Consideration and Restatement Fees.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In September 2004, we amended the purchase agreements related to
two of the companies acquired in our ENS segment in 2003 to more accurately reflect the intent of the transactions, resulting in a rescission of the continuous employment clauses from the
earn-out arrangements, for which we recorded a $12.4&nbsp;million accrual at that time. In September 2005, we reduced $2.5&nbsp;million of our contingent acquisition
earn-out accruals that was determined to be excess based on the projected performance of the division compared to the minimum performance targets as defined in the earn-out
arrangements. In December 2005, we increased our </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>45</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=45,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=696505,FOLIO='45',FILE='DISK133:[08ZAH1.08ZAH49901]DM49901A.;20',USER='RKING',CD='27-MAR-2008;13:32' -->
<A NAME="page_dm49901_1_46"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>contingent
acquisition earn-out accruals by $0.4&nbsp;million, to reflect the financial performance of one of the acquired entities that exceeded its previously projected performance. We
had $0.1&nbsp;million in expense associated with contingent acquisition consideration based upon the final payments on these agreements in 2006. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Impairment and Restructuring Charges.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During 2006, we recorded $21.8&nbsp;million in impairment and restructuring charges
as a result of a change in strategic focus of our ENS segment and a consolidation of our headquarter facilities, which included $18.3&nbsp;million for goodwill impairment related to acquisitions
made in the ENS segment. This was due in part to changes in the industry and our strategic focus, the impact of recent and future expected operating performance, as well as operational challenges from
significant employee turnover that we encountered after the completion of the earn-out periods in early 2006. The balance of the charge was related to an asset impairment of approximately
$1.8&nbsp;million, an unused facility charge of approximately $1.4&nbsp;million related to facilities consolidation and severance costs associated with restructuring activities of approximately
$0.3&nbsp;million. No impairment or restructuring charges were incurred in 2005. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other Income (Expense), Net.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;For the year ended December&nbsp;31, 2005, net other income was $0.3&nbsp;million compared
to net other expense of $0.9&nbsp;million for the year ended December&nbsp;31, 2006. The increase in net other expense of $1.2&nbsp;million was primarily due to the interest that was incurred on
the Key Bank
credit facility as a result of the MRC acquisition, partially offset by the interest income earned on the note receivable for the sale of Mexico. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision (benefit) for Income Taxes.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Our effective income tax rate for the year ended December&nbsp;31, 2005 represented a
3% income tax benefit compared to a negative 43% income tax provision for the year ended December&nbsp;31, 2006. The tax benefit of $0.1&nbsp;million for the year ended December&nbsp;31, 2005
included a decrease to the valuation allowance on deferred tax assets based upon the Company's projections of taxable income for 2006, including the reversal of temporary differences. The reduction in
the valuation allowance was primarily a result of our projected forecasts of 2006 taxable income, the estimated timing of reversal of temporary differences and the expected utilization of net
operating loss carryforwards. In 2006, the income tax expense of $13.8&nbsp;million is a result of an increase of $15.9&nbsp;million in our valuation allowance for deferred tax assets. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Loss from Discontinued Operations.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Loss from discontinued operations increased from a loss of $2.0&nbsp;million in 2005 to
a loss of $11.7&nbsp;million during 2006. Included in the loss from discontinued operations of $2.0&nbsp;million for the year ended December&nbsp;31, 2005 is an approximate $5.0&nbsp;million
charge related to a write off of unrecoverable contract costs incurred on sites we were building for our customers in Mexico and South America which were cancelled prior to the completion of the
sites. Although we were under contractual arrangement with these customers to build these sites, these costs were contractually unrecoverable from our customers due to the termination clauses in the
contracts, which did not provide for reimbursement for in process cancelled sites, unless agreed upon by the customer. Also included in our loss from discontinued operation in 2005 is an impairment
charge of $0.9&nbsp;million related to accumulated foreign currency translation losses as well as a $4.4&nbsp;million valuation allowance established against the deferred tax assets of our
discontinued operations. Included in the loss from discontinued operations of $11.7&nbsp;million for the year ended December&nbsp;31, 2006 is an impairment charge of approximately
$5.2&nbsp;million to reduce the current carrying value of the South American operations to their estimated fair value based upon current indications of interest. Also included in our loss from
discontinued operations in 2006 is an impairment charge of $1.7&nbsp;million related to accumulated foreign currency translation losses. Revenues and net income (loss) before taxes generated by
these businesses in 2005 were approximately $265.1&nbsp;million and net income of $7.1&nbsp;million, respectively, compared to $201.7&nbsp;million and a net loss of $9.8&nbsp;million,
respectively, in 2006. The reduction in revenues in 2006 from 2005 reflects the sale of our Latin American operations in February 2006. See Note&nbsp;4 to the Notes to the Consolidated Financial
Statements for further discussion of these transactions. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>46</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=46,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=833465,FOLIO='46',FILE='DISK133:[08ZAH1.08ZAH49901]DM49901A.;20',USER='RKING',CD='27-MAR-2008;13:32' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_do49901_1_47"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>Liquidity and Capital Resources  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2007, we had consolidated cash and cash equivalents of $8.6&nbsp;million, consolidated long-term and
short-term debt of $76.7&nbsp;million, and consolidated stockholders equity of $167.2&nbsp;million. Our principal sources of liquidity are cash flows from operations and borrowings
under our credit facility. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Net Cash from Operations  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating cash flow is used to finance trade accounts receivable, fund capital expenditures, fund our ongoing litigation and government inquiries, and make
selective acquisitions. Financing trade accounts receivable is necessary because, on average, our customers do not pay us as quickly as we pay our vendors and employees for their goods and services.
Cash from continuing operations is primarily derived from our customer contracts in progress and associated changes in working capital components. A summary of our net cash provided by operating
activities from continuing operations from our consolidated statement of cash flows is as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="87%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="69%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=8 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Years Ended December&nbsp;31,</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH WIDTH="69%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="69%" style="font-family:times;"><FONT SIZE=2>Net cash used in operating activities of continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash
used in operating activities of continuing operations for 2007 decreased by $2.7&nbsp;million from 2006 primarily due to a decrease in days sales outstanding from 109&nbsp;days
to 101&nbsp;days, after adjustment for the MRC transaction in 2006 and the Haverstick transaction in 2007, partially offset by payment related to our internal stock option investigation, as well as
the timing of payments of our expenses. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash
used in investing activities from continuing operations are summarized as follows (in&nbsp;millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="86%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Investing activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Sale/maturity of short-term investments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Cash paid for contingent acquisition consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(17.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Cash paid for acquisitions, net of cash acquired</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(33.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(59.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(63.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Proceeds from the disposition of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Cash transferred from (to) restricted cash</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Capital expenditures</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="62%" style="font-family:times;"><FONT SIZE=2>Net cash used in investing activities from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(47.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(50.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(15.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash
paid for acquisitions and contingent acquisition consideration accounted for the most significant outlays for investing activities in each of the three years from 2005 to 2007 as a
result of the implementation of our strategies to diversify our business while focusing on our core competencies. These acquisitions included Haverstick in 2007, MRC in 2006, and TLA in 2005. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investing
activities in 2006 and 2007 also included proceeds of $18.9&nbsp;million and $57.3&nbsp;million respectively, directly attributable to our sale of our wireless discontinued
operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capital
expenditures consist primarily of investment in computer hardware and software and improvement of our physical properties in order to maintain suitable conditions to conduct our
business. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>47</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=47,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=149800,FOLIO='47',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_48"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>Cash provided by financing activities from continuing operations</I></FONT><FONT SIZE=2> are summarized as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="86%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Financing activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Proceeds from issuance of common stock</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Proceeds from issuance of common stock under employee stock purchase plan</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Borrowings under credit facility and line of credit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>85.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>88.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Repayment under line of credit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(34.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(64.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Repayment of capital lease obligations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Debt issuance costs</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="63%" style="font-family:times;"><FONT SIZE=2>Net cash provided by financing activities from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>21.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2005, we entered into a $15&nbsp;million credit facility with KeyBank National Association ("KeyBank") for general working capital requirements and to fund future acquisitions. We
did not draw on this facility until 2006 and in October 2006 we replaced this facility with an $85&nbsp;million facility from KeyBank to fund the acquisition of MRC. During 2007, we entered into two
amendments to our credit facility, one in March and the other in June, which reduced the total facility to $35&nbsp;million as a result of the divestitures of our wireless network services
businesses. In December 2007, we successfully negotiated a new $85.0&nbsp;million credit facility with Key Bank, which was used primarily to fund the Haverstick acquisition. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proceeds
from the issuance of common stock in 2005 through 2006 are related to the exercise of employee stock options. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT
SIZE=2><I>Cash provided by (used in) discontinued operations are summarized</I></FONT><FONT SIZE=2> as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="87%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Operating cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Investing cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(6.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Financing cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Effect of exchange rates on cash and cash equivalents</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="64%" style="font-family:times;"><FONT SIZE=2>Net cash flows of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investing
cash flow consists of capital expenditures incurred by our wireless network services segment. Financing cash flows is the result of proceeds received on the exercise of stock
options by the wireless network services employees. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Off Balance Sheet Arrangements  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have no material off-balance sheet arrangements as defined in Regulation&nbsp;S-K 303(a)(4)(ii). </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>Contractual Obligations and Commitments  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with our business acquisitions, we have agreed to make additional future payments to sellers based on final purchase price adjustments and the
expiration of certain indemnification obligations. Pursuant to the provisions of SFAS No.&nbsp;141, such amounts are accrued, and therefore, recorded by the Company when the contingency is resolved
beyond a reasonable doubt and, hence, the additional consideration becomes payable. In 2007, we paid $4.6&nbsp;million of working capital adjustments and approximately $4.3&nbsp;million of the
holdback amounts to the former MRC shareholders in accordance with the Purchase Agreement. As of December&nbsp;31, 2007, we have approximately </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>48</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=48,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=259738,FOLIO='48',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_49"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>$3.5&nbsp;million
of cash holdback amounts that will be released subject to indemnity rights due for the MRC and Haverstick acquisitions. The MRC payment of approximately $2.3&nbsp;million is due
in April 2008 and the remaining amounts for Haverstick of $1.2&nbsp;million are due in December 2008 and September 2009. The holdback arrangements accrue interest in accordance to terms in the
purchase agreements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition to the indemnity holdback, the Haverstick Agreement also calls for a post closing working capital adjustment. On February&nbsp;29, 2008 we provided the working capital
calculation to Haverstick, which indicated a working capital adjustment was due to us primarily because the working capital, as calculated per the Agreement, was below the target amount. Haverstick
has reviewed our working capital calculation and is not in agreement. Their response proposes that there is actually excess working capital of approximately $1.5&nbsp;million. In accordance with the
Agreement, we have fifteen days from the date of Haverstick's objection to resolve the disagreement. If resolution has not been achieved within the fifteen day period, we and Haverstick have five days
to agree on a nationally recognized independent accounting firm to resolve the disagreement. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any
amounts earned by shareholders of acquired companies for which there were no continuous employment clauses will result in additional goodwill recorded for those acquisitions when the
earn-out consideration is earned. There were no earn-out considerations in connection with the MRC or Haverstick acquisitions, but in connection with future acquisitions, we
may agree to make additional payments to sellers contingent upon achievement of performance milestones by the acquired entities. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;31, 2007, we entered into a new credit facility of $85.0&nbsp;million with KeyBanc Capital Markets which replaced the October&nbsp;2, 2006 credit agreement with
Key Bank. This credit facility provides for two term loans consisting of a first lien term note of $50.0&nbsp;million and a second lien term note of $10.0&nbsp;million, as well as, a first lien
$25&nbsp;million revolving line of credit. The $10.0&nbsp;million term loan has a five and one half year term with principal payments required quarterly beginning on March&nbsp;31, 2008 of
$25,000 through March&nbsp;31, 2013 with the final balance of $9.5&nbsp;million due on June&nbsp;30, 2013. The $50.0&nbsp;million term loan has a five year term with principal payments
required quarterly beginning on March&nbsp;31, 2008 of $0.6&nbsp;million in 2008, $1.3&nbsp;million in 2009, $2.5&nbsp;million in 2110, and $4.1&nbsp;million in 2011 and 2012. The term loans
have a provision which states that once the full amount of the note has been borrowed, the notes cannot be paid down and reborrowed again. The revolving
line of credit has a four year term which expires on December&nbsp;31, 2011 and contains provisions typical in such arrangements. All loans under the new credit facility have an interest rate equal
to a base rate defined as a fluctuating rate per annum equal to the higher of (a)&nbsp;the Federal Funds Rate plus <SUP>1</SUP>/<SMALL>2</SMALL> of 1% and (b)&nbsp;the rate of interest in effect for such day
as publicly announced from time to time by KeyBank as its "prime rate" plus a margin for the term loans of 6.5% to 7.5% and a margin of 1.0% to 3.25% on the revolving line of credit. The applicable
margin at date of borrowing is determined by the ratio of our aggregate debt to our EBITDA for the previous four fiscal quarters. We used the credit facility to fund the Acquisition of Haverstick
Consulting&nbsp;Inc. (Haverstick) and to retire outstanding debt under our October 2006 credit facility with Key Bank. The terms of the new credit agreement require us to provide certain customary
covenants for a credit agreement, including certain financial covenants which vary by quarter. See schedules&nbsp;7.12(a) through (e)&nbsp;to both the First Lien Credit Agreement and the Second
Lien Credit Agreement which are filed as Exhibits&nbsp;10.1 and 10.2 respectively, to our Current Report on Form&nbsp;8-K filed with the SEC on January&nbsp;7, 2008, and which are
incorporated herein by reference. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, our outstanding balance on the facility was $75.5&nbsp;million and the weighted average interest rate on the debt borrowed during 2007 was 8.3%. This
includes $3.5&nbsp;million of interest expense and financing costs related to the October 2006 credit facility and the new facility dated December&nbsp;31, 2007. The replacement of the October
2006 facility resulted in a write-off of $1.0&nbsp;million in deferred financing costs. We have $3.3&nbsp;million in deferred financing costs outstanding as </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>49</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=49,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=888131,FOLIO='49',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_50"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>of
December&nbsp;31, 2007 which are related to the new facility and are being amortized over the four, five and five and one half year life of the respective underlying notes. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;11, 2008, we entered into three interest swap agreements with Key Bank, to fix the our LIBOR rate to an average of 3.16% for the term of the swap agreements. The
effective date of the swaps were February&nbsp;14, 2008. The notional amounts and expiration dates of the swap agreements are $15&nbsp;million and March&nbsp;31, 2010; $22.5&nbsp;million and
March&nbsp;31, 2011; and $32.5&nbsp;million and March&nbsp;31, 2011. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
March 2008 we entered into a tentative agreement to settle the 2004 and 2007 securities class action litigation actions (described in Item&nbsp;3 Legal Proceedings), and as a
result, we recorded a $4.9&nbsp;million charge in the quarter ended December&nbsp;31, 2007 to accrue our share of the settlement amounts, and an estimate for a contingent liability associated with
legal proceedings related to the derivative actions, net of the amounts to be covered by our insurance carriers. As a consequence of recording this legal settlement, we did not meet certain of the
financial covenants in accordance with the Credit Agreement. Accordingly, on March&nbsp;27, 2008, we obtained an amendment and waiver from our lenders to waive the impact of the legal settlement
amounts on our financial covenants as of December&nbsp;31, 2007 and the affected future periods. The amendment also amended the Credit Agreement to provide for an increase in the LIBOR floor rate to
4.25% and to require that we set aside in a restricted account approximately 50% of the proceeds of the recovery from the theft of stock options by our former stock option administrator, or
approximately $1.7&nbsp;million, to fund these settlement amounts. The lenders have also reserved the right to require us to utilize the entire amount of the $3.4&nbsp;million in proceeds received
from the theft of stock options to permanently pay down indebtedness. This right can be exercised no
earlier than 60&nbsp;days from March&nbsp;27, 2008 and expires upon our compliance with financial covenants under the Credit Agreement for the four consecutive quarters commencing after
January&nbsp;1, 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
net benefit of the swap agreements entered into by us on February&nbsp;11, 2008 has been reduced by the LIBOR floor included in the amendment and waiver discussed above. The cost
related to this amendment will be recorded as deferred financing costs for the credit facility in the first quarter of 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table summarizes our currently existing contractual obligations and other commitments at December&nbsp;31, 2007, and the effect such obligations could have on our
liquidity and cash flow in future periods (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="94%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=14 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Payments due/forecast by Period</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2008</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2009-2010</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2011-2012</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2013 and After</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Long-term debt, net of interest(1)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>24.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>43.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.0</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Capital leases(5)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Estimated interest on debt(2)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>21.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other liabilities(3)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Purchase orders(4)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>43.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>40.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Operating leases(5)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>16.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Interpretation 48 obligations, including interest and penalties(6)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="41%" style="font-family:times;"><FONT SIZE=2>Total commitments and recorded liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>165.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>60.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>46.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>50.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.3</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE ALIGN="LEFT" WIDTH="120">
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(1)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
Key Bank Credit Facility. The payments shown are our present forecast which contemplates that we will pay off the Key Bank Credit Facility by the due date of June 2013. The annual
payment requirements for long-term debt obligations are $2.6&nbsp;million in 2008, $15.2&nbsp;million in 2009 </FONT></DD></DL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>50</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>

<!-- ZEQ.=4,SEQ=50,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=888152,FOLIO='50',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_51"> </A>
<UL>

<P style="font-family:times;"><FONT SIZE=2>to
2010, $32.7&nbsp;million in 2011 to 2012, and $9.5&nbsp;million in 2013. See "Notes to Consolidated Financial Statements" Note&nbsp;8(a) for further details. </FONT></P>

</UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(2)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Includes
interest payments based on current interest rates for variable rate debt and fixed rate debt based upon our swap arrangements. See "Notes to Consolidated Financial
Statements" Note&nbsp;8(a) for further details.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(3)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Primarily
the obligations under the working capital adjustment clause and holdback payments related to the acquisition of MRC and Haverstick. See "Notes to Consolidated Financial
Statements" Note&nbsp;6 for further details.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(4)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Purchase
orders include commitments in which a written purchase order has been issued to a vendor, but the goods have not been received or services have not been performed.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(5)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>See
"Notes to Consolidated Financial Statements" Note&nbsp;10 for further details.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(6)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
FIN&nbsp;48 obligations shown in the above table represent certain uncertain tax positions. The years for which the uncertain tax positions will reverse have been estimated in
scheduling the obligations in the table above. </FONT></DD></DL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007 we have $2.4&nbsp;million of standby letters of credit outstanding. Our letters of credit are related to our workers compensation program, as support for
our performance bond program and for our work overseas. Additional information regarding our financial commitments at December&nbsp;31, 2007 is provided in the notes to our consolidated financial
statements. See "Notes to Consolidated Financial Statements, Note&nbsp;16&#151;Commitments and Contingencies." </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B><I>Other Liquidity Matters  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We intend to fund our cash requirements with cash flows from operating activities, and borrowings under our current Credit Facilities and future Credit
Facilities. We believe these sources should be sufficient to meet our cash needs for at least the next 12&nbsp;months. However, we expect to pay for the settlement of our shareholder litigation in
the second half of 2008 as discussed in Note&nbsp;17&#151;Legal Matters to our audited consolidated financial statements included in Item&nbsp;15 of Part&nbsp;IV of this Annual Report and
we may need to raise additional funds to pay for this settlement. In addition, if we become subject to significant judgments, settlements or fines related to the matters discussed in
Note&nbsp;17&#151;Legal Matters to our audited consolidated financial statements included in Item&nbsp;15 of Part&nbsp;IV of this Annual Report, or any other matters, or incur legal fees
in excess of our current expectations, we could be required to make significant payments that could materially and adversely affect our financial condition, potentially impacting our ability to access
the capital markets and our compliance with our debt covenants. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed in Part&nbsp;II, Item&nbsp;1A, "Risk Factors" section of this Annual Report on Form&nbsp;10-K, our quarterly and annual operating results have fluctuated
in the past and may vary in the future due to a variety of factors, many of which are external to our control. If the conditions in our industry deteriorate or our customers cancel or postpone
projects or if we are unable to sufficiently increase our revenues or further reduce our expenses, we may experience, in the future, a significant long-term negative impact to our
financial results and cash flows from operations. In such a situation we could fall out of compliance with our financial and other covenants which, if not waived, could limit our liquidity and capital
resources. </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B> Critical Accounting Principles and Estimates  </B></FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated
financial statements. The preparation of our financial statements in conformity with accounting principles generally accepted in </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>51</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=51,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=366203,FOLIO='51',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_52"> </A>

<P style="font-family:times;"><FONT SIZE=2>the
United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, stockholders' equity, revenues and expenses, and related
disclosures of contingent assets and liabilities. On a periodic basis, as deemed necessary, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts,
valuation of long-lived assets including identifiable intangibles and goodwill, accounting for income taxes including the related valuation allowance, accruals for partial
self-insurance, contingencies and litigation and contingent acquisition consideration. We explain these accounting policies in the notes to the audited consolidated financial statements
and at relevant sections in this discussion and analysis. These estimates are based on the information that is currently available and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue recognition.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We derive a significant percentage of our revenue from long-term contracts and account for
these contracts under the provisions of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". Revenue
on time and materials contracts is recognized as services are rendered at contracted labor rates plus material and other direct costs incurred. The portion of our revenue derived from fixed-price
contracts accounted for approximately 51.1% of our revenues for 2007. Revenue on fixed-price contracts is recognized using the percentage-of-completion method based on the
ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable general and
administrative expenses for our government contracts. These cost estimates are reviewed and, if necessary, revised monthly on a contract-by-contract basis. If, as a result of
this review, we determine that a loss on a contract is probable, then the full amount of estimated loss is charged to operations in the period it is determined that it is probable a loss will be
realized from the full performance of the contract. In certain instances in which it is impractical to estimate the final outcome of the project margin, but it is certain that we will not incur a loss
on the project, we may record revenue equal to
cost incurred, at zero margin. In the event that our cost incurred to date may be in excess of our funded contract value, we may defer those costs until the associated contract value has been funded
by the customer. Once the final estimate of the outcome of the project margin is determined, we will record revenue using the percentage-of-completion method of accounting
based on the ratio of total costs incurred to date compared to the estimated total costs to complete the project. Significant management judgments and estimates, including but not limited to the
estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period. The revenue we recognize in a given reporting period depends on:
(1)&nbsp;the costs we have incurred for individual projects; (2)&nbsp;our then current estimate of the total remaining costs to complete individual projects; and (3)&nbsp;the current estimated
contract value associated with the projects. If, in any period, we increase or decrease our estimate of the total costs to complete a project, and/or reduce or increase the associated contract value,
revenue for that period would be impacted. As a result, our gross margin in such period and in future periods may be affected. To the extent that our estimates fluctuate over time or differ from
actual results, gross margins in subsequent periods may vary significantly from our estimates. Material differences may result in the amount and timing of our revenue for any period if management made
different judgments or utilized different estimates. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
cancellation, schedule delay, or modification of a fixed-price contract which is accounted for using the percentage-of-completion method may adversely affect
our gross margins for the period in which the contract is modified or cancelled. Under certain circumstances, a cancellation or negative modification could result in us having to reverse revenue that
we recognized in a prior period, thus significantly reducing the amount of revenues we recognize for the period in which the adjustment is made. Correspondingly, a positive modification may positively
affect our gross margins. In addition, a schedule delay or modifications can result in an increase in estimated cost to complete the project, which would also result in an impact to our gross margin. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>52</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=52,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=557425,FOLIO='52',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_53"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, many of our contracts include milestone billings. If a contract is terminated or if the scope of a contract changes prior to a milestone billing, the amount of revenue we
recognize may change, based upon the specific termination clauses of the contract, which would affect our revenue and gross margin in the period in which the contract is terminated or the scope is
changed. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During
the reporting periods contained herein, we did experience revenue and margin adjustments of certain projects based on the aforementioned factors. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Allowance for doubtful accounts.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We maintain an allowance for doubtful accounts for estimated losses resulting from the
potential inability of certain customers to make required future payments on amounts due to us. Management determines the adequacy of this allowance by periodically evaluating the aging and past due
nature of individual customer accounts receivable balances and considering the customer's current financial situation as well as the existing industry economic conditions and other relevant factors
that would be useful towards assessing the risk of collectibility. If the future financial
condition of our customers were to deteriorate, resulting in their inability to make specific required payments, additions to the allowance for doubtful accounts may be required. In addition, if the
financial condition of our customers improves and collections of amounts outstanding commence or are reasonably assured, then we may reverse previously established allowances for doubtful accounts.
Changes to estimates of contract value are recorded as adjustments to revenue and not as a component of the allowance for doubtful accounts. We write off accounts receivable when they become
uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-lived and Intangible Assets.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We account for long-lived assets in accordance with the provisions
of SFAS No.&nbsp;144, </FONT><FONT SIZE=2><I>Accounting for the Impairment or Disposal of Long-Lived Assets</I></FONT><FONT SIZE=2> ("SFAS&nbsp;144"). SFAS&nbsp;144 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected future
net cash flows generated by the asset. If it is determined that the asset may not be recoverable and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is
recognized to the extent of the difference. SFAS&nbsp;144 requires companies to separately report discontinued operations, including components of an entity that either have been disposed of (by
sale, abandonment or in a distribution to owners) or classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
accordance with SFAS&nbsp;144, we assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could individually or in combination trigger an impairment review include the following: </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>significant
underperformance relative to expected historical or projected future operating results;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>significant
changes in the manner of our use of the acquired assets or the strategy for our overall business;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>significant
negative industry or economic trends;
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>significant
decline in our stock price for a sustained period; and
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>our
market capitalization relative to net book value. </FONT></DD></DL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
we determined that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of
impairment, we would record an impairment equal to the excess of the carrying amount of the asset over its estimated fair value. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>53</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=53,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=807472,FOLIO='53',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_54"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be
recoverable. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Goodwill and Purchased Intangible Assets.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We evaluate our goodwill and intangible assets for impairment pursuant to SFAS
No.&nbsp;142, </FONT><FONT SIZE=2><I>Goodwill and Other Intangible Assets</I></FONT><FONT SIZE=2> ("SFAS&nbsp;142"), which provides that goodwill and other intangible assets with indefinite lives
are not amortized but tested for impairment annually or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;&nbsp;&nbsp;A
reporting unit's fair value is compared to its carrying value. The carrying values of each reporting unit are determined by specifically identifying and allocating the
assets and liabilities of the Company to each reporting unit based on headcount, relative revenues or costs, or other methods as deemed appropriate by management. If the fair value is less than its
carrying value, impairment is indicated; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;&nbsp;&nbsp;if
impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill and intangible assets to their carrying value at the
reporting unit level. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounting for income taxes and tax contingencies.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In July 2006, the FASB issued FASB Interpretation No.&nbsp;48,
"Accounting for Uncertainty in Income Taxes" ("Interpretation No.&nbsp;48"). Interpretation No.&nbsp;48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No.&nbsp;109, "Accounting for Income Taxes." Interpretation No.&nbsp;48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation No.&nbsp;48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of Interpretation No.&nbsp;48 effective January&nbsp;1, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
part of the process of preparing our consolidated financial statements we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct
business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain
items for tax and accounting purposes. These temporary differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our
consolidated balance sheet. We then assess on a periodic basis the probability that our net deferred tax assets will be recovered and, therefore realized from future taxable income and to the extent
we believe that recovery is not more likely than not, a valuation allowance is established to address such risk resulting in an additional related provision for income taxes during the period. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Significant
management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any
required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided to us by
our tax advisors, our legal advisors and similar tax cases. If at a later time our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase
or decrease. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have a valuation allowance at December&nbsp;31, 2007, due to management's overall assessment of risks and uncertainties related to our future ability to realize and, hence, utilize
certain deferred tax assets, primarily consisting of net operating losses, carry forward temporary differences and future tax deductions resulting from certain types of stock option exercises, before
they expire. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
2007 effective tax rate at December&nbsp;31, 2007 for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized at
December&nbsp;31, 2007 are settled at an amount which differs from our estimate. Finally, during 2008, if we are impacted by a change in the valuation allowance as of December&nbsp;31, 2007
resulting from a change in judgment regarding the </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>54</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=54,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=903404,FOLIO='54',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_55"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>realizability
of deferred tax assets beyond December&nbsp;31, 2007, such effect will be recognized in the interim period in which the change occurs. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrual for partial self-insurance.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We maintain an accrual for our health and workers compensation partial
self-insurance, which is a component of total accrued expenses in the consolidated balance sheets. Management determines the adequacy of these accruals based on a monthly evaluation of our
historical experience and trends related to both medical and workers compensation claims and payments, information provided to us by our insurance broker, industry experience and average lag period in
which claims are paid. If such information indicates that our accruals require adjustment, we will, correspondingly, revise the assumptions utilized in our methodologies and reduce or provide for
additional accruals as deemed appropriate. We also carry stop-loss insurance that provides coverage limiting our total exposure related to each
medical and workers compensation claim incurred, as defined in the applicable insurance policies. The medical and workers compensation limits per claim are $100,000 and $250,000, respectively. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contingencies and litigation.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We are currently involved in certain legal proceedings. We estimate a range of liability
related to pending litigation where the amount and range of loss can be estimated. We record our estimate of a loss when the loss is considered probable and estimable. Where a liability is probable
and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with
SFAS No.&nbsp;5, "Accounting for Contingencies." As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. Revisions
in our estimates of potential liability could materially impact our results of operations. See Part&nbsp;II, Item&nbsp;1 "Legal Proceedings" for additional information. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Share-Based Payments.</I></FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Beginning in fiscal year 2006, we account for share-based compensation arrangements in accordance with
the provisions of Statement of Financial Accounting Standards No.&nbsp;123R ("SFAS&nbsp;123R") "Share-Based Payments," which requires the measurement and recognition of compensation expense for
all share-based payment awards to employees and directors based on estimated fair values. Prior to adoption of SFAS&nbsp;123R, we accounted for share-based compensation using the intrinsic
value-based method in accordance with Accounting Principles Board (APB) Opinion No.&nbsp;25, "Accounting for Stock Issued to Employees." We adopted SFAS&nbsp;123R using the modified prospective
transition method. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
valuation provisions of SFAS&nbsp;123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Under the modified
prospective application, which we used, prior periods are not revised for comparative purposes. We use the Black-Scholes option valuation model to estimate the fair value of our stock options at the
grant date. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Our employee
stock options are generally subject to vesting restrictions and are generally not transferable. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Option
pricing models require the input of highly subjective assumptions including the expected stock price volatility over the term of the award, the expected life of an option and the
number of awards ultimately expected to vest. Changes in these assumptions can materially affect the fair value estimates of an option. Furthermore, the estimated fair value of an option does not
necessarily represent the value that will ultimately be realized by an employee. We used historical data to estimate the expected forfeiture rate, intrinsic and historical data to estimate the
expected price volatility, and a weighted-average expected life formula to estimate the expected option life. The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of grant for the estimated life of the option. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimates
of share-based compensation expenses are significant to our consolidated financial statements, but these expenses are based on option valuation models and will never result in
the </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>55</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=55,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=318450,FOLIO='55',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<A NAME="page_do49901_1_56"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>payment
of cash by us. For this reason, and because we do not view share-based compensation as related to our operational performance, we exclude estimated share-based compensation expense when
evaluating the business performance of our operating segments. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Recently Issued Accounting Pronouncements  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2006, FASB issued Interpretation No.&nbsp;48, Accounting for Uncertainty in Income Taxes&#151;an interpretation of FASB Statement No.&nbsp;109
(FIN&nbsp;48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize the impact of a tax position in our financial statements, if that
position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN&nbsp;48 are effective for fiscal years beginning after
December&nbsp;15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The application of this Statement reduced our
retained earnings on January&nbsp;1, 2007 by $0.1&nbsp;million to increase reserves for uncertain tax positions. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
SEC issued Staff Accounting Bulletin No.&nbsp;108 ("SAB&nbsp;108") in September 2006. SAB&nbsp;108 expresses the views of the SEC staff regarding the process of quantifying the
materiality of financial misstatements. SAB&nbsp;108 requires both the balance sheet and income statement approaches be used when quantifying the materiality of misstatement amounts. In addition,
SAB&nbsp;108 contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. SAB&nbsp;108 was effective in the
Company's fourth quarter of 2006. The adoption of SAB&nbsp;108 did not have a material impact on the Company's consolidated financial statements. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
September 2006, the FASB issued SFAS No.&nbsp;157, "Fair Value Measurements" ("SFAS&nbsp;157"). This new standard provides guidance for using fair value to measure assets and
liabilities and information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on
earnings. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS&nbsp;157 also expands financial statement disclosure requirements about a company's use of fair value measurements, including the effect of such measures on
earnings. The provisions of SFAS&nbsp;157 are effective for financial statements issued for fiscal years beginning after November&nbsp;15, 2007. The Company is in the process of determining the
impact of this statement on its consolidated financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
February 2007, the FASB issued FASB Statement No.&nbsp;159, </FONT><FONT SIZE=2><I>The Fair Value Option for Financial Assets and Financial Liabilities&#151;Including an
Amendment of FASB Statement No.&nbsp;115.</I></FONT><FONT SIZE=2> This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option
is available to all entities, including not-for-profit organizations. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement
No.&nbsp;115, </FONT><FONT SIZE=2><I>Accounting for Certain Investments in Debt and Equity Securities</I></FONT><FONT SIZE=2> applies to all entities with available-for-sale
and trading securities. Some requirements apply differently to entities that do not report net income. The FASB's stated objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions." </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent
reporting date. A not-for-profit organization will report unrealized gains and losses in its statement of activities or similar statement. The fair value option: (a)&nbsp;may
be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b)&nbsp;is irrevocable (unless a new election date occurs); and
(c)&nbsp;is applied only to entire instruments and not to portions of instruments. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>56</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=10,SEQ=56,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=656125,FOLIO='56',FILE='DISK133:[08ZAH1.08ZAH49901]DO49901A.;23',USER='RKING',CD='27-MAR-2008;13:44' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_dq49901_1_57"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->

<P style="font-family:times;"><FONT SIZE=2>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Statement 159 is effective as of the beginning of an entity's first fiscal year that begins after November&nbsp;15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first 120&nbsp;days of that fiscal year and also elects to apply the provisions of FASB Statement No.&nbsp;157, </FONT> <FONT SIZE=2><I>Fair Value Measurements.</I></FONT><FONT
SIZE=2> The Company is in the process of determining the impact of this statement on its consolidated financials statements. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
December 2007, the FASB issued SFAS No.&nbsp;141 (revised 2007) ("SFAS&nbsp;141R"), "Business Combinations" and SFAS No.&nbsp;160 ("SFAS&nbsp;160") "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No.&nbsp;51". SFAS&nbsp;141R will change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS&nbsp;160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. The provisions of SFAS&nbsp;141R and SFAS&nbsp;160 are effective for financial statements issued for fiscal years beginning after
December&nbsp;15, 2008. Early adoption is not permitted. The Company is in the process of determining the impact of these statements on its consolidated financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Related Party Transactions  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For detailed information regarding related party transactions, see Note&nbsp;15 of our consolidated financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_7a._quantitative_and_qual__ite02669"> </A>
<A NAME="toc_dq49901_1"> </A>
Item&nbsp;7A.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Quantitative and Qualitative Disclosures About Market Risk    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are exposed to market risk in connection with changes in interest rates, primarily in connection with outstanding balances under our credit facility with
KeyBank National Association. Based on our average outstanding balances during the year ended December&nbsp;31, 2007 a 1% change in the LIBOR rate would impact our financial position and results of
operations by approximately $0.4&nbsp;million over the next year. We did not utilize any derivative financial instruments to hedge interest rate risks in 2007 or in prior years. Cash and cash
equivalents as of December&nbsp;31, 2007 were $8.6&nbsp;million and are primarily
invested in money market interest bearing accounts. A hypothetical 10% adverse change in the average interest rate on our money market cash investments and short-term investments would
have had no material effect on net income for the year ended December&nbsp;31, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_8._financial_statements_and_supplementary_data"> </A>
<A NAME="toc_dq49901_2"> </A>
Item&nbsp;8.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Financial Statements and Supplementary Data    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this Item is included in Part&nbsp;IV Item&nbsp;15(a)(1) and (2)&nbsp;of this Annual Report on Form&nbsp;10-K. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_9._changes_in_and_disagre__ite03576"> </A>
<A NAME="toc_dq49901_3"> </A>
Item&nbsp;9.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_9a._controls_and_procedures"> </A>
<A NAME="toc_dq49901_4"> </A>
Item&nbsp;9A.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Controls and Procedures    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We maintain disclosure controls and procedures, as defined in Rules&nbsp;13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended ("Exchange Act"), designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer
and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>57</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=57,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=278474,FOLIO='57',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_58"> </A>
<BR>

<P style="font-family:times;"><FONT SIZE=2>control
objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
required by Rule&nbsp;13a-15(e) promulgated under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based on the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable
assurance level as of December&nbsp;31, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Management's Report on Internal Control Over Financial Reporting  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules&nbsp;13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in </FONT><FONT SIZE=2><I>Internal Control&#151;Integrated
Framework</I></FONT><FONT SIZE=2> issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework). Based on this evaluation, our management concluded that our internal
control over financial reporting is effective as of December&nbsp;31, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Grant
Thornton LLP, the independent registered public accounting firm who audited the Company's consolidated financial statements included in this Form&nbsp;10-K, has
issued a report on the Company's internal control over financial reporting, which is included herein. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Changes in Internal Control over Financial Reporting  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During 2007, we completed the integration of Madison Research Corporation's historical internal controls into our own internal control over financial reporting.
Integration changes are included in our assessment of internal controls over financial reporting at December&nbsp;31, 2007. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
May&nbsp;10, 2007, we completed a significant upgrade to the Oracle financial accounting system software used primarily by the U.S. divisions of our Wireless Network Services
segment. Subsequently, as discussed further in Note&nbsp;4 to the consolidated financial statements covered by this report, we completed the sale of our U.S. engineering services business and
wireless deployment business. The
financial accounting system software was included in the sale of the wireless deployment business. As a result, the internal control over financial reporting that formerly operated at these businesses
were excluded from our assessment of internal control over financial reporting at December&nbsp;31, 2007. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;31, 2007, we completed the acquisition of Haverstick Consulting,&nbsp;Inc. (Haverstick) and, as permitted by SEC guidance, we excluded from our assessment of the
effectiveness of our internal control over financial reporting as of December&nbsp;31, 2007, the internal control over financial reporting of this entity. Total assets related to Haverstick of
$111.1&nbsp;million and no revenue for the date of acquisition of December&nbsp;31, 2007 are included in our consolidated financial statements as of and for the year ended December&nbsp;31,
2007. We plan to integrate Haverstick's historical internal control over financial reporting into our own internal control over financial reporting in 2008. Accordingly, certain changes will be made
to our internal control over financial reporting until such time as this integration is complete. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>58</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=58,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=247606,FOLIO='58',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_59"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except
as described above, there were no changes in our internal control over financial accounting and reporting (as defined in Rules&nbsp;13a-15(f) and
15d-15(f) of the Exchange Act) during the fiscal year ended December&nbsp;31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="dq49901_report_of_independent___dq402299"> </A>
<A NAME="toc_dq49901_5"> </A>
<BR></FONT><FONT SIZE=2><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Board
of Directors and Stockholders<BR>
Kratos Defense and Security Solutions,&nbsp;Inc. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have audited Kratos Defense and Security Solutions,&nbsp;Inc. (a Delaware Corporation) and subsidiaries' (the "Company") internal control over financial reporting as of
December&nbsp;31, 2007, based on criteria established in </FONT><FONT SIZE=2><I>Internal Control&#151;Integrated Framework</I></FONT><FONT SIZE=2> issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
indicated in Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of its wholly-owned subsidiary, Haverstick Consulting&nbsp;Inc. which was acquired on December&nbsp;31, 2007 and constituted approximately 33% of
total consolidated assets as of December&nbsp;31, 2007 and none of the total consolidated revenues for the year then ended. Our audit of internal control over financial reporting of Kratos
Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. also did not include an evaluation of the internal control over financial reporting of this acquired company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1)&nbsp;pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)&nbsp;provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)&nbsp;provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>59</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=59,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=470636,FOLIO='59',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_60"> </A>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
our opinion, Kratos Defense and Security Solutions,&nbsp;Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December&nbsp;31, 2007, based on the criteria established in </FONT><FONT SIZE=2><I>Internal Control&#151;Integrated Framework</I></FONT><FONT SIZE=2> issued by COSO. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of
December&nbsp;31, 2006 and 2007, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December&nbsp;31, 2007
and our report dated March&nbsp;27, 2008 expressed an unqualified opinion thereon. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>/s/
GRANT THORNTON&nbsp;LLP </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Irvine,
California<BR>
March&nbsp;27, 2008 </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_9b._other_information"> </A>
<A NAME="toc_dq49901_6"> </A>
Item&nbsp;9B.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Other Information    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>60</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=60,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=876161,FOLIO='60',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_61"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="dq49901_part_iii"> </A>
<A NAME="toc_dq49901_7"> </A>
<BR></FONT><FONT SIZE=2><B>PART III    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_10._directors_and__dq402284"> </A>
<A NAME="toc_dq49901_8"> </A>
Item&nbsp;10.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Directors and Executive Officers of the Registrant    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is incorporated by reference of the Registrant's Proxy Statement or Form&nbsp;10-K/A, which we will file with
the SEC within 120&nbsp;days after the end of fiscal 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_11._executive_compensation"> </A>
<A NAME="toc_dq49901_9"> </A>
Item&nbsp;11.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Executive Compensation    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is incorporated by reference to the Registrant's Proxy Statement or Form&nbsp;10-K/A, which we will file with
the SEC within 120&nbsp;days after the end of fiscal 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_12._security_ownership_of__ite04004"> </A>
<A NAME="toc_dq49901_10"> </A>
Item&nbsp;12.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is incorporated by reference to the Registrant's Proxy Statement or Form&nbsp;10-K/A, which we will file with
the SEC within 120&nbsp;days after the end of fiscal 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_13._certain_relat__dq402127"> </A>
<A NAME="toc_dq49901_11"> </A>
Item&nbsp;13.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Certain Relationships and Related Transactions    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is incorporated by reference to the Registrant's Proxy Statement or Form&nbsp;10-K/A, which we will file with
the SEC within 120&nbsp;days after the end of fiscal 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_14._principal_accountant_fees_and_services"> </A>
<A NAME="toc_dq49901_12"> </A>
Item&nbsp;14.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Principal Accountant Fees and Services    <BR>    </I></B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is incorporated by reference to the Registrant's Proxy Statement or Form&nbsp;10-K/A, which we will file with
the SEC within 120&nbsp;days after the end of fiscal 2007. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="dq49901_part_iv"> </A>
<A NAME="toc_dq49901_13"> </A>
<BR></FONT><FONT SIZE=2><B>PART IV    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B> <A NAME="dq49901_item_15._exhibits,_financial_statement_schedules"> </A>
<A NAME="toc_dq49901_14"> </A>
Item&nbsp;15.&nbsp;&nbsp;&nbsp;&nbsp;</B></FONT><FONT SIZE=2><B><I>Exhibits, Financial Statement Schedules    <BR>    </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>(a)&nbsp;&nbsp;&nbsp;Financial Statements and Financial Statement Schedules  </I></B></FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(1)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Report
of Independent Registered Public Accounting Firm </FONT></DD></DL>
<UL>

<P style="font-family:times;"><FONT SIZE=2>Consolidated
Balance Sheets as of December&nbsp;31, 2006 and 2007 </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Consolidated
Statements of Operations for the Years Ended December&nbsp;31, 2005, 2006 and 2007 </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Consolidated
Statements of Stockholders' Equity for the Years Ended December&nbsp;31, 2005, 2006 and 2007 </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Consolidated
Statements of Cash Flows for the Years Ended December&nbsp;31, 2005, 2006 and 2007 </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>Notes
to Consolidated Financial Statements </FONT></P>

</UL>
</UL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>61</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=61,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=179997,FOLIO='61',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_62"> </A>
<UL>
<UL>
</UL>
</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All
other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have
been omitted. </FONT></P>

<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(2)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Exhibits
</FONT></DD></DL>
</UL>
<BR>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="89%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="9%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TH>
<TH WIDTH="51%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=3 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Incorporated by Reference</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH WIDTH="9%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Exhibit Number<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="51%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Exhibit Description<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="7%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Form</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="10%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Filing Date/Period End Date</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Filed-Furnished Herewith</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Stock Purchase Agreement by and among the Company, JMA Associates,&nbsp;Inc. d/b/a TLA Associates, and the Stockholders of JMA Associates,&nbsp;Inc., dated as of January&nbsp;27, 2005.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>02/02/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Equity Purchase Agreement, dated February&nbsp;17, 2006, by and between Sakoki&nbsp;LLC and the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>02/23/06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Addendum and Waiver Related to the Equity Purchase Agreement, dated June&nbsp;26, 2006, by and between Sakoki&nbsp;LLC and the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-Q</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>06/30/06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Merger Agreement, dated August&nbsp;8, 2006, by and among the Company, WFI Government Services,&nbsp;Inc., MRC Merger Company,&nbsp;Inc. and Madison Research Corporation.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/14/06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Agreement dated as of March&nbsp;9, 2007 by and between LCC Wireless Engineering Services Limited and the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/31/06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Equity Purchase Agreement, dated April&nbsp;20, 2007, by and between the Company and Strategic Project Services,&nbsp;LLC.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/31/06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Asset Purchase Agreement, dated May&nbsp;29, 2007, by and between the Company and LCC International,&nbsp;Inc.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>05/30/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Asset Purchase Agreement, dated July&nbsp;7, 2007, by and between the Company and Burgundy Acquisition Corporation.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>07/12/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>2.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Agreement and Plan of Merger, dated November&nbsp;2, 2007, by and among the Company, Kratos Government Solutions,&nbsp;Inc., Haverstick Acquisition Corporation and Haverstick Consulting,&nbsp;Inc.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11/07/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Amended and Restated Certificate of Incorporation.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-Q</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/30/01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certificate of Ownership and Merger of Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. into Wireless Facilities,&nbsp;Inc.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9/12/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Amended and Restated Bylaws of the Company, as amended December&nbsp;31, 2007.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>01/07/08</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certificate of Designations, Preferences and Rights of Series&nbsp;A Preferred Stock.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-Q</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/30/01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certificate of Designations, Preferences and Rights of Series&nbsp;B Preferred Stock.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K/A</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>06/05/02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certificate of Designation of Series&nbsp;C Preferred Stock.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/17/04</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>4.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Reference is made to Exhibits&nbsp;3.1 and 3.2.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>4.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Specimen Stock Certificate.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/18/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- insert table folio -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>62</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=62,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=181166,FOLIO='62',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_63"> </A>
<!-- end of table folio -->
<TABLE WIDTH="89%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>4.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Rights Agreement, dated as of December&nbsp;16, 2004, between the Company and Wells Fargo, N.A.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/17/04</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.1#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>1997 Stock Option Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/18/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.2#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Stock Option Agreement pursuant to the 1997 Stock Option Plan and related terms and conditions.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1/A</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/10/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.3#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>1999 Equity Incentive Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/18/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.4#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Stock Option Agreement pursuant to the 1999 Equity Incentive Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1/A</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/10/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.5#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>1999 Employee Stock Purchase Plan and related offering documents.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/18/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.6#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Indemnity Agreement by and between the Company and certain officers and directors of the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/18/99</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.7#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>2000 Nonstatutory Stock Option Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-Q</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/30/00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.8#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Stock Option Agreement and Grant Notice used in connection with the 2000 Nonstatutory Stock Option Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-Q</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/30/00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.9#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Executive Employment Agreement by and between the Company and Eric DeMarco effective November&nbsp;14, 2003.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/26/03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.10#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Amended and Restated Severance and Change of Control Agreement dated March&nbsp;28, 2006 between the Company and Deanna Lund.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/31/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.11#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Amended and Restated Severance and Change of Control Agreement dated March&nbsp;28, 2006 between the Company and James Edwards.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/31/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.12#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Nonqualified Deferred Compensation Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12/31/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.13#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>2005 Equity Incentive Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/01/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.14#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Stock Option Agreement pursuant to the 2005 Equity Incentive Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>S-8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>08/01/05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.15#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Restricted Stock Unit Agreement and Form of Notice of Grant under the Company's 2005 Equity Incentive Plan.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>01/17/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.16#</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Severance and Change of Control Agreement dated as of July&nbsp;12, 2007 between the Company and Laura L. Siegal.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>09/11/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.17</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Subordinated Promissory Note issued by LCC International,&nbsp;Inc. to the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5/30/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.18</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Subordination Agreement executed by LCC International,&nbsp;Inc., the Company and Bank of America, N.A.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5/30/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.19</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Note Sale Agreement, dated July&nbsp;3, 2007, by and between SPCP Group,&nbsp;LLC International,&nbsp;Inc. and the Company.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7/10/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.20</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Assignment Agreement, dated July&nbsp;3, 2007, by and among the Company, SPCP Group&nbsp;LLC, LCC International,&nbsp;Inc. and Bank of America, N.A.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7/10/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.21</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Form of Earnout Agreement executed by the Company and Burgundy Acquisition Corporation.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7/12/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- insert table folio -->
<BR>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>63</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=63,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=831127,FOLIO='63',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<A NAME="page_dq49901_1_64"> </A>
<!-- end of table folio -->
<TABLE WIDTH="89%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Facility Letter, dated October&nbsp;24, 2007, by and between the Company and KeyBank Capital Markets.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11/07/07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.23</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>First Lien Credit Agreement among Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc., KeyBank National Association, as Administrative Agent and Lender and the other financial institutions parties thereto and Keybanc
Capital Markets as lead arranger and book runner, dated as of December&nbsp;31, 2007.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>01/07/08</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>10.24</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Second Lien Credit Agreement among Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc., KeyBank National Association, as Administrative Agent and Lender, the other financial institutions parties thereto and Keybanc
Capital Markets as lead arranger and book runner, dated as of December&nbsp;31, 2007.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8-K</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>01/07/08</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>21.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>List of Subsidiaries.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>23.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Consent of Independent Registered Public Accounting Firm.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>31.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certification of Chief Executive Officer pursuant to Section&nbsp;302 of the Sarbanes Oxley Act of 2002.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>31.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certification of Chief Financial Officer pursuant to Section&nbsp;302 of the Sarbanes Oxley Act of 2002.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>32.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certification pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002 for Eric M. DeMarco.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>32.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Certification pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002 for Deanna Lund.</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>*</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE ALIGN="LEFT" WIDTH="120">
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>#</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Indicates
a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form. </FONT></DD></DL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>64</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=64,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=847817,FOLIO='64',FILE='DISK133:[08ZAH1.08ZAH49901]DQ49901A.;19',USER='TOSBORNA',CD='27-MAR-2008;14:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_ds49901_1_65"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="ds49901_signatures"> </A>
<A NAME="toc_ds49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>SIGNATURES    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Date:
March&nbsp;27, 2008 </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2><BR>
&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=2><BR>
By:</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="53%" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>ERIC M. DEMARCO</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Eric M. DeMarco<BR></FONT> <FONT SIZE=2><I>President and Chief Executive Officer</I></FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="37%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Signature<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="38%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Title<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="19%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Date<BR> </B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><BR><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
&nbsp;</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>ERIC M. DEMARCO</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Eric M. DeMarco</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>President and Chief Executive Officer</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>March&nbsp;27, 2008</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>DEANNA H. LUND</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Deanna H. Lund</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
Senior Vice President, Chief Financial Officer</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
March&nbsp;27, 2008</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>LAURA L. SIEGAL</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Laura L. Siegal</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
VP, Corporate Controller and Principal Accounting Officer</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
March&nbsp;27, 2008</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>SCOTT ANDERSON</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Scott Anderson</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
Director</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
March&nbsp;27, 2008</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>BANDEL CARANO</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Bandel Carano</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
Director</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
March&nbsp;27, 2008</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="37%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>SCOT JARVIS</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Scot Jarvis</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="38%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
Director</FONT></TD>
<TD WIDTH="2%" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="CENTER" VALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><BR>
March&nbsp;27, 2008</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>65</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=65,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=183917,FOLIO='65',FILE='DISK133:[08ZAH1.08ZAH49901]DS49901A.;13',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_du49901_1_66"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="du49901_report_of_independent___du402303"> </A>
<A NAME="toc_du49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Board
of Directors and Stockholders<BR>
Kratos Defense and Security Solutions,&nbsp;Inc. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have audited the accompanying consolidated balance sheets of Kratos Defense and Security Solutions,&nbsp;Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of
December&nbsp;31, 2006 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December&nbsp;31, 2007.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kratos Defense and Security
Solutions,&nbsp;Inc. and subsidiaries as of December&nbsp;31, 2006 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended
December&nbsp;31, 2007 in conformity with accounting principles generally accepted in the United States of America. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed in Note&nbsp;1 of the notes to consolidated financial statements, on January&nbsp;1, 2006, the Company has adopted Financial Accounting Standards Board Statement
No.&nbsp;123(R), </FONT><FONT SIZE=2><I>"Share-Based Payments</I></FONT><FONT SIZE=2>". </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed in Note&nbsp;10 of the notes to consolidated financial statements, on January&nbsp;1, 2007, the Company has adopted Financial Accounting Standards Board issued
Interpretation No.&nbsp;48, "</FONT><FONT SIZE=2><I>Accounting for Uncertainty in Income Taxes&#151;An Interpretation of FASB Statement No.&nbsp;109</I></FONT><FONT SIZE=2>". </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Kratos Defense and Security Solutions,&nbsp;Inc.'s internal
control over financial reporting as of December&nbsp;31, 2007 based on criteria established in </FONT><FONT SIZE=2><I>Internal Control&#151;Integrated Framework</I></FONT><FONT SIZE=2>
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March&nbsp;27, 2008 expressed an unqualified opinion thereon. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>/s/
</FONT><FONT SIZE=2>GRANT THORNTON&nbsp;LLP</FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Irvine,
California<BR>
March 27, 2008 </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>66</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=66,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=568879,FOLIO='66',FILE='DISK133:[08ZAH1.08ZAH49901]DU49901A.;11',USER='TOSBORNA',CD='27-MAR-2008;14:47' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_dw49901_1_67"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="dw49901_kratos_defense___security_solu__kra05039"> </A>
<A NAME="toc_dw49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.    <BR>    <BR>    Consolidated Balance Sheets    <BR>    <BR>    December&nbsp;31, 2006 and 2007    <BR>    <BR>    (in millions, except par value and number of
shares)    <BR>    </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1><B>Assets</B></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Current assets:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Cash and cash equivalents</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>5.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>8.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Restricted cash</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accounts receivable, net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>59.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>77.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Income taxes receivable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Prepaid expenses</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>7.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Notes receivable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Other current assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>3.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>8.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Current assets of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>67.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total current assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>140.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>106.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1><BR>
Property and equipment, net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1><BR>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1><BR>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1><BR>
6.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1><BR>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1><BR>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1><BR>
6.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1><BR>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Goodwill</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>129.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>194.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Other intangibles, net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>13.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>19.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Deferred tax assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>6.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Investments in unconsolidated affiliates</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Other assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>6.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Non current assets of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>37.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>337.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>335.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1><B>Liabilities and Stockholders' Equity</B></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Current liabilities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accounts payable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>16.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>22.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accrued expenses</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>5.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>14.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accrued compensation</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>6.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>9.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Line of credit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>51.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Billings in excess of costs and earnings on uncompleted contracts</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>4.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>10.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Deferred tax liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accrual for contingent acquisition consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>9.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Income taxes payable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accrual for unused office space</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Other current liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>13.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Current portion of long-term debt</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Current portion of capital lease</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Current liabilities of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>49.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>5.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total current liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>144.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>83.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Long-term debt, net of current portion</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>72.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Accrual for unused office space, net of current portion</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Capital lease</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Deferred tax liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Other liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>4.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Non current liabilities of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>150.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>168.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Commitments and contingencies (Notes&nbsp;1, 2, 6, 8, 9, 10, 16 and 17)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Stockholders' equity:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Preferred stock, 5,000,000 shares authorized Series&nbsp;B Convertible Preferred Stock, $.001 par value, 10,000 shares outstanding at December&nbsp;31, 2006 and 2007 (liquidation preference $5.0&nbsp;million at
December&nbsp;31, 2006 and 2007)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Common stock, $.001 par value, 195,000,000 shares authorized; 73,883,950 and 78,998,922 shares issued and outstanding at December&nbsp;31, 2006 and 2007, respectively</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Additional paid-in capital</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>391.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>412.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Accumulated deficit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(204.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(245.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total stockholders' equity</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>187.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>167.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="72%" style="font-family:times;"><FONT SIZE=1>Total liabilities and stockholders' equity</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>337.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>335.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>See accompanying notes to consolidated financial statements. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>67</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=67,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=237912,FOLIO='67',FILE='DISK133:[08ZAH1.08ZAH49901]DW49901A.;11',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_dy49901_1_68"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="dy49901_kratos_defense___securities_so__kra05525"> </A>
<A NAME="toc_dy49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITIES SOLUTIONS,&nbsp;INC.    <BR>    <BR>    Consolidated Statements of Operations    <BR>    <BR>    Years ended December&nbsp;31, 2005, 2006 and 2007    <BR>    <BR>    (in millions, except
per share amounts)    <BR>    </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>152.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>193.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Cost of revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>115.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>124.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>162.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Gross profit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>28.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>31.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Selling, general and administrative expenses</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>35.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>38.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>39.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Stock option investigation and related fees</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Estimated cost for settlement of securities litigation</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Recovery of unauthorized issuance of stock options</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Contingent acquisition consideration and restatement fees</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Impairment and restructuring charges</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>21.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Operating income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(31.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(24.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Other income (expense):</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Interest income (expense), net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Foreign currency gain</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Impairment of investments in unconsolidated affiliates</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other income and (expenses), net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Total other income (expense), net</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations before income taxes</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(32.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(26.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Provision (benefit) for income taxes from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(46.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(28.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Loss from discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(57.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(40.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Basic earnings (loss) per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.63</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.38</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Loss from discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.17</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Net income (loss) per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.55</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Diluted earnings (loss) per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.05</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.63</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.38</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Loss from discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.17</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Net income (loss) per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.55</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Weighted average common shares outstanding:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>73.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>73.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>See
accompanying notes to consolidated financial statements. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>68</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=68,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=45223,FOLIO='68',FILE='DISK133:[08ZAH1.08ZAH49901]DY49901A.;10',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->

<P style="font-family:times;"><FONT SIZE=2><A
NAME="page_ea49901_1_69"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2>

<!-- COMMAND=ROTATED_TABLE WIDTH="150%" -->

 </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.<BR>
Consolidated Statements of Stockholders' Equity<BR>
Years ended December&nbsp;31, 2005, 2006 and 2007<BR>
(in millions)  </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=4 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" ROWSPAN=3 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=3 ROWSPAN=3 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Convertible<BR>
Preferred Stock</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="4%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=4 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=4 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Common Stock</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=4 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Additional Paid-In Capital</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Deferred Compensation</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Retained Earnings (Accumulated Deficit)</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accumulated Other Comprehensive Loss</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" ROWSPAN=2 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ROWSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total Stockholders' Equity</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=4 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="4%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="5%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Amount</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="4%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Amount</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1><B>Balance, December 31, 2004</B></FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>71.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>374.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(3.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(148.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(3.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>219.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Issuance of common stock for exercise of stock options</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Issuance of common stock under employee stock purchase plan</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Stock based compensation</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(0.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>3.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Components of comprehensive income:</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Net income</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Foreign currency translation gain, net of income taxes of $0.2&nbsp;million</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="23%" style="font-family:times;"><FONT SIZE=1>Total comprehensive income</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1><B>Balance, December 31, 2005</B></FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>72.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>379.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(146.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(2.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>229.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Conversion of Series B convertible preferred stock</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Issuance of common stock for exercise of stock options</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Stock based compensation</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>11.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>11.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Components of comprehensive income:</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Net loss</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(57.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(57.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Foreign currency translation gain, net of income taxes of $0.3&nbsp;million</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=1>Reclassification adjustment&#151;foreign currency translation gain, included in net loss</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="23%" style="font-family:times;"><FONT SIZE=1>Total comprehensive loss</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(55.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1><B>Balance, December 31, 2006</B></FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>73.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>391.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(204.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>187.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Issuance of common stock for exercise of stock options</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Common stock issued for acquisitions</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>4.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>12.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>12.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Paid in capital for contingent consideration</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>7.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>7.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Cumulative effect adjustment upon adoption of FIN No.&nbsp;48</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Stock based compensation</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=1>Net loss and total comprehensive loss</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(40.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(40.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1><B>Balance, December 31, 2007</B></FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>79.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>412.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>(245.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>)</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>167.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="4%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>See accompanying notes to consolidated financial statements. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>69</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=69,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=710762,FOLIO='69',FILE='DISK133:[08ZAH1.08ZAH49901]EA49901A.;12',USER='ABEAULI',CD='27-MAR-2008;14:56' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_ec49901_1_70"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="ec49901_kratos_defense___security_solu__kra04412"> </A>
<A NAME="toc_ec49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.    <BR>    <BR>    Consolidated Statements of Cash Flows    <BR>    <BR>    Years ended December&nbsp;31, 2005, 2006 and 2007    <BR>    <BR>    (in millions)    <BR>
  </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=5 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Operating activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(57.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(40.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Less: Loss from discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Income (loss) from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(46.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(28.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Adjustments to reconcile income (loss) from continuing operations to net cash used in operating activities from continuing operations:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Depreciation and amortization</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Deferred income taxes</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Accrual for settlement of securities litigation</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Asset impairment charges</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Disposal of property and equipment</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Provision for doubtful accounts</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Stock based compensation</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Changes in assets and liabilities, net of acquisitions:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accounts receivable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Prepaid expenses</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accounts payable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accrued expenses</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(6.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accrued compensation</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accrual for contingent acquisition consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accrual for unused office space</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Billings in excess of costs and earnings on uncompleted contracts</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income tax receivable or payable</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other liabilities</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="56%" style="font-family:times;"><FONT SIZE=2>Net cash provided by (used in) operating activities from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Investing activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Sale/maturity of short-term investments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Cash paid for contingent acquisition consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(17.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Cash paid for acquisitions, net of cash acquired</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(33.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(59.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(63.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Proceeds from the disposition of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Cash transferred (to) from restricted cash</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Capital expenditures</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="56%" style="font-family:times;"><FONT SIZE=2>Net cash used in investing activities from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(47.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(50.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(15.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- insert table folio -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>70</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=70,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=553760,FOLIO='70',FILE='DISK133:[08ZAH1.08ZAH49901]EC49901A.;13',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ec49901_1_71"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Consolidated Statements of Cash Flows (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> (in millions) </B></FONT></P>

<!-- end of table folio -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Financing activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Proceeds from issuance of common stock</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Proceeds from issuance of common stock under employee stock purchase plan</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Borrowings under credit facility and line of credit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>85.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>88.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Repayment under line of credit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(34.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(64.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Repayment of capital lease obligations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Debt issuance costs</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="56%" style="font-family:times;"><FONT SIZE=2>Net cash provided by financing activities from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>21.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Net cash flows of continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(43.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Cash flows of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Operating cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Investing cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(6.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Financing cash flows</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Effect of exchange rates on cash and cash equivalents</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="56%" style="font-family:times;"><FONT SIZE=2>Net cash flows of discontinued operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Net increase (decrease) in cash and cash equivalents</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(42.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Cash and cash equivalents at beginning of year</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>50.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Cash and cash equivalents at end of year</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Supplemental disclosure of cash flow information:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Cash paid during the year for interest</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Net cash received during the year for income taxes</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Noncash investing and financing activities:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Common stock issued for acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Paid in capital for contingent consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Liability for contingent cash consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=5 style="font-family:times;"><FONT SIZE=2>Supplemental disclosures of non-cash investing and financing transactions:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Fair value of assets acquired in acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>40.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>80.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>111.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Fixed assets financed</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=4 style="font-family:times;"><FONT SIZE=2>Liabilities assumed in acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>See
accompanying notes to consolidated financial statements. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>71</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=71,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=559439,FOLIO='71',FILE='DISK133:[08ZAH1.08ZAH49901]EC49901A.;13',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_eg49901_1_72"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="eg49901_kratos_defense___security_solu__kra04170"> </A>
<A NAME="toc_eg49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.    <BR>    <BR>    Notes to Consolidated Financial Statements    <BR>    <BR>    Years ended December&nbsp;31, 2005, 2006 and 2007    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(a)&nbsp;&nbsp;&nbsp;Description of Business  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. ("Kratos" or "the Company") was initially incorporated in the state of New York on December&nbsp;19,
1994, commenced operations in March 1995 and was reincorporated in Delaware in 1998. Kratos historically conducted business in three segments: Wireless Network Services, Government Network Services
and Enterprise Network Services. The Company was an independent, global provider of outsourced communications and security systems engineering and integration services for the wireless communications
industry through its Wireless Network Services division ("WNS"), the U.S. government through its Government Network Services division ("GNS"), now referred to as the Kratos Government Solutions
("KGS") segment, and enterprise customers through its Enterprise Network Services division ("ENS"), now referred to as the Public Safety&nbsp;&amp; Security ("PSS") segment. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2006 and 2007, the Company undertook a transformation strategy that culminated in the divestiture in 2007 of its wireless-related businesses and has aggressively pursued business with
the federal government, primarily the U.S. Department of Defense, through strategic acquisition. See Note&nbsp;5, Acquisitions. The Company's divestiture of its European wireless engineering
services business which was discontinued and held for sale in December 2006 was completed in March 2007. In addition, the Company's divestiture of its domestic wireless engineering services business
was completed in June 2007 and the divestiture of its wireless deployment services business was completed in July 2007. Accordingly, the accompanying financial statements reflect the divestiture of
the domestic wireless engineering services and wireless network deployment business and the results of operations through the date of divestiture are reflected as discontinued operations in the
accompanying statements of operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a result of the divestment of the Company's wireless related assets and businesses in 2007, the Company changed its name from Wireless Facilities, Inc to Kratos Defense&nbsp;&amp;
Security Solutions,&nbsp;Inc. on September&nbsp;12, 2007. The name was changed to reflect the Company's revised focus as a defense contractor and security systems integrator for the federal
government and for state and local agencies and reflects the Company's business going forward. All previous financial statements prior to September&nbsp;12, 2007 were issued under the Company's
previous name, Wireless Facilities,&nbsp;Inc. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(b)&nbsp;&nbsp;&nbsp;Principles of Consolidation  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements include the accounts of Kratos and its wholly-owned subsidiaries for which all inter-company transactions have been
eliminated in consolidation. Kratos and its subsidiaries are collectively referred to herein as the "Company." </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investments
in unconsolidated affiliates are accounted for using the cost method as the Company owns less than 20% and has no significant influence over the affiliates. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(c)&nbsp;&nbsp;&nbsp;Calendar Year  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company's calendar year end is on the last day of the year, December&nbsp;31st. The interim fiscal periods are on the last day of the calendar month of each
quarter. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>72</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=72,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=662549,FOLIO='72',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_73"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(d)&nbsp;&nbsp;&nbsp;Use of Estimates  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US&nbsp;GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such estimates include revenue recognition, allowance for doubtful accounts, valuation of long-lived assets
including identifiable intangibles and goodwill, accounting for income taxes including the related valuation allowance on the deferred tax asset, accruals for partial self-insurance,
contingencies and litigation and contingent acquisition consideration. In the future, the Company may realize actual results that differ from the current reported estimates and if the estimates that
we have used change in the future, such changes could have a material impact on the Company's consolidated financial position, results of operations and cash flows. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(e)&nbsp;&nbsp;&nbsp;Reclassifications  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying consolidated statements of cash flows separately reflect the operating, investing and financing portions of the cash flows attributable to the
Company's discontinued operations for each of the periods presented. These amounts were reported on a combined basis as a single amount in prior consolidated statements of cash flows. In addition, the
consolidated balance sheets and statements of operations have been reclassified to present the discontinued operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(f)&nbsp;&nbsp;&nbsp;&nbsp;Revenue Recognition  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company provides services to customers under three primary types of contracts: fixed-price; time and materials; and cost reimbursable plus fixed fee. The
Company realizes a portion of its revenue from long-term contracts and accounts for these contracts under the provisions of Statement of Position (SOP) 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." Revenue on fixed-price contracts is recognized using the
percentage-of-completion method of accounting based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs
to complete include materials, direct labor, overhead, and allowable general and administrative expenses (for government contracts). While the Company generally does not incur a material amount of
set-up fees for its projects, such costs, if any, are excluded from the estimated total costs to complete the contract. Cost estimates are reviewed monthly on an individual contract basis,
and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. The full amount of an
estimated loss associated with a contract is accrued and charged to operations in the period it is determined that it is probable a loss will be realized from the performance of the contract. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Significant
management judgments and estimates, including the estimated costs to complete projects, which determine the project's percentage of completion and profit margin must be made
and used in connection with the revenue recognized in any accounting period. In the future, the Company may realize actual results that differ from current estimates and the differences could be
material. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accordingly,
the revenue the Company recognizes in a given financial reporting period depends on (1)&nbsp;the costs the Company has incurred for individual projects, (2)&nbsp;the
Company's then current estimate of the total remaining costs to complete the individual projects and (3)&nbsp;current estimated </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>73</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=73,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=488783,FOLIO='73',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_74"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>contract
value associated with the projects. If, in any period, we significantly increase or decrease our estimate of the total costs to complete a project, and/or reduce or increase the associated
contract value, revenue for that period would be impacted. To the extent that the Company's estimates fluctuate over time or differ from actual results, gross margins in subsequent periods may vary
significantly from previous estimates. Material differences may result in the amount and timing of the Company's revenue for any period if management made different judgments or utilized different
estimates. In the event the Company is unable to provide reliable cost estimates on a given project, the Company records revenue using the completed contract method. There are no contracts for which
the Company utilized the completed contract method for the years ended December&nbsp;31, 2005, 2006 and 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
the terms of substantially all of the Company's fixed price contracts, if a contract is terminated without proper cause by the customer, if the customer creates
unplanned/unreasonable time delays, or if the customer modifies the contract tasks/scope, the Company has contractual rights to reimbursement in accordance with the terms and conditions regarding
payment for work performed, but not yet billed (i.e.,&nbsp;unbilled trade accounts receivable) at a gross profit margin that is consistent with the overall project margin. Furthermore, certain
additional provisions compensate the Company for additional or excess costs incurred, whereby any scope reductions or other modifications are subject to reimbursement of costs incurred to date with a
reasonable profit margin based on the contract value and completed work at that time. The inherent aforementioned risks are reflected in the Company's ongoing periodic assessment of the "total
contract value" and the associated revenue recognized. Total net unbilled accounts receivable at December&nbsp;31, 2006 and December&nbsp;31, 2007 were $23.4&nbsp;million and
$34.2&nbsp;million, respectively. Approximately, $0.5&nbsp;million and $0.6&nbsp;million of the unbilled receivables as of December&nbsp;31, 2006 and December&nbsp;31, 2007, respectively,
are expected to be collected after one year as they are related to future milestone payments and retainages. Retainages receivable which are included in net unbilled accounts receivable are
$1.2&nbsp;million and $1.5&nbsp;million as of December&nbsp;31, 2006 and December&nbsp;31, 2007, respectively. The Company periodically performs work under authorizations to proceed or work
orders from its customers for which a formal purchase order may not be received until after the work has commenced. As of December&nbsp;31, 2006 and 2007, approximately $0.6&nbsp;million and
$0.4&nbsp;million, respectively, of the Company's unbilled accounts receivable balance were under an authorization to proceed or work order from its customers where a formal purchase order had not
yet been received. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue
from certain time and materials and fixed-price contracts are recognized when realized or realizable and earned, in accordance with Staff Accounting Bulletin (SAB) 101, as
revised by SAB&nbsp;104 (recognized when services are rendered at contracted labor rates, when materials are delivered and when other direct costs are incurred). Additionally, based on management's
periodic assessment of the collectibility of its accounts receivable, credit worthiness and financial condition of customers, the Company determines if collection is reasonably assured prior to the
recognition of revenue. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost
reimbursable contracts for the government provide for reimbursement of costs plus the payment of a fee. The Company records the fee as costs are incurred. Under time and materials
contracts, the Company is reimbursed for labor hours at negotiated hourly billing rates and is reimbursed for travel and other direct expenses at actual costs plus applied general and administrative
expenses. Under certain of the Company's contractual arrangements, the Company may also recognize revenue for out-of-pocket expenses in accordance with
EITF&nbsp;01-14 "Income Statement Characterization </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>74</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=74,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=946256,FOLIO='74',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_75"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>of
Reimbursements Received for Out-of-Pocket Expenses Incurred." Depending on the contractual arrangement, these expenses may be reimbursed with or without a fee. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
certain of its contracts, the Company provides supplier procurement services and materials for its customers. The Company records revenue on these arrangements on a gross or net
basis in accordance with EITF&nbsp;99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," depending on the specific circumstances of the arrangement. The Company
considers the following criteria, among others, for recording revenue on a gross or net basis: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;&nbsp;&nbsp;Whether
the Company acts as a principal in the transaction; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;&nbsp;&nbsp;Whether
the Company takes title to the products; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;&nbsp;&nbsp;Whether
the Company assumes risks and rewards of ownership, such as risk of loss for collection, delivery or returns; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4)&nbsp;&nbsp;&nbsp;Whether
the Company serves as an agent or broker, with compensation on a commission or fee basis; and </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5)&nbsp;&nbsp;&nbsp;Whether
the Company assumes the credit risk for the amount billed to the customer subsequent to delivery. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2><B>(g)&nbsp;&nbsp;&nbsp;Derivative Instruments  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In managing interest rate risk exposure, the Company enters into interest rate swap agreements. An interest rate swap is a contractual exchange of interest
payments between two parties. A standard
interest rate swap involves the payment of a fixed rate time a notational amount by one party in exchange for a floating rate times the same notational amount from another party. As interest rates
change, the difference to be paid or received is accrued and recognized as interest expense or income over the life of the agreement. These instruments are not entered into for trading purposes.
Counterparties to the Company's interest rate swap agreements are major financial institutions. In accordance with SFAS&nbsp;133, Accounting for Derivative Instruments and Certain Hedging
Activities, as amended by SFAS&nbsp;137 and 138, the Company recognizes interest rate swap agreements on the consolidated balance sheet at fair value. The interest rate swap agreements are marked to
market with changes in fair value recognized in either other comprehensive income (loss) or in the carrying value of the hedged portions of fixed rate debt, as applicable (Hedge accounting). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Hedge
accounting is discontinued when it is determined that a derivative instrument is not highly effective as a hedge. Hedge accounting is also discontinued when: (1)&nbsp;the
derivative instrument expires; is sold, terminated or exercised; or is no longer designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; (2)&nbsp;a hedged
firm commitment no longer meets the definition of a firm commitment; or (3)&nbsp;management determines that designation of the derivative as a hedging instrument is no longer appropriate. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;When
hedge accounting is discontinued, the derivative instrument will be either terminated, continue to be carried on the balance sheet at fair value, or redesignated as the hedging
instrument in either a cash flow or fair value hedge, if the relationship meets all applicable hedging criteria. Any asset or liability that was previously recorded as a result of recognizing the
value of a firm commitment will be removed from the balance sheet and recognized as a gain or loss in current period earnings. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>75</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=75,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=445487,FOLIO='75',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_76"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>Any
gains or losses that were accumulated in other comprehensive income from hedging a forecasted transaction will be recognized immediately in current period earnings, if it is probable that the
forecasted transaction will not occur. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(h)&nbsp;&nbsp;&nbsp;Allowance for Doubtful Accounts  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which
results in bad debt expense. Management periodically determines the adequacy of this allowance by evaluating the comprehensive risk profiles of all individual customer receivable balances including,
but not limited to, the customer's financial condition, credit agency reports, financial statements and overall current economic conditions. Additionally, on certain contracts whereby the Company
performs services for a prime/general contractor, a specified percentage of the invoiced trade accounts receivable may be retained by the customer until the project is completed. The Company
periodically reviews all retainages for collectibility and records allowances for doubtful accounts when deemed appropriate, based on its assessment of the associated credit risks. Total retainages
included in billed accounts receivable were $0.2&nbsp;million and $0.2&nbsp;million at December&nbsp;31, 2006 and 2007, respectively. Changes to estimates of contract value are recorded as
adjustments to revenue and not as a component of the allowance of
doubtful accounts. Allowances for doubtful accounts on receivable as of December&nbsp;31, 2006 and December&nbsp;31, 2007 were $0.3&nbsp;million and $0.5&nbsp;million, respectively. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table outlines the balance of the Company's Allowance for Doubtful Account for 2005, 2006 and 2007. It identifies the additional provisions each year as well as the
write-offs that utilized the allowance (in millions). </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="80%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="40%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Allowance for Doubtful Accounts<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Balance at Beginning of Year</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Provisions</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Write-offs/ Recoveries</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Balance at End of Year</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="40%" style="font-family:times;"><FONT SIZE=2>Year ended December&nbsp;31, 2005</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="40%" style="font-family:times;"><FONT SIZE=2>Year ended December&nbsp;31, 2006</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="40%" style="font-family:times;"><FONT SIZE=2>Year ended December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>(j)&nbsp;&nbsp;&nbsp;&nbsp;Cash Equivalents and Short-Term Investments  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company's cash equivalents consist of its highly liquid investments with an original maturity of three months or less when purchased by the Company. The
Company has evaluated its investments in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No.&nbsp;115, "Accounting for Certain Investments in Debt and Equity
Securities." Based on such evaluation, the Company's management has determined that all of its investment securities are properly classified as available-for-sale. Based on the
Company's intent and board-approved investment policy and its ability to liquidate debt securities maturing after one year, the Company classifies such short-term investment securities
within current assets. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of Stockholders' Equity within
the caption "Accumulated Other Comprehensive Income (Loss)." The amortized cost basis of debt securities is periodically adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included as a component of interest income (expense), net. The amortized cost basis of securities sold is based on the specific identification method and all such realized gains
and losses are </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>76</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=76,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=101606,FOLIO='76',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_77"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>recorded
as a component within other income (expense). Interest and dividends on securities classified as available-for-sale are included in interest income. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a result of the Company's acquisition of Madison Research Corporation on December&nbsp;31, 2006, the Company had approximately $1.0&nbsp;million in restricted cash related to
collateral required for two foreign letters of credit issued outside of the Company's credit facility. On June&nbsp;5, 2007 the cash collateral became unrestricted upon cancellation of the two
letters of credit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(i)&nbsp;&nbsp;&nbsp;&nbsp;Inventory  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories which are comprised primarily of supplies including parts and materials are stated at the lower of cost or market. The Company regularly reviews
inventory quantities on hand, future purchase commitments with its suppliers, and the estimated utility of its inventory. If the Company review indicates a reduction in utility below carrying value,
it reduces its inventory to a new cost basis. As of December&nbsp;31, 2006 and December&nbsp;31, 2007, the Company had $2.7&nbsp;million and $2.1&nbsp;million, respectively, of inventories
which were reflected in other current assets of continuing operations on the consolidated balance sheets. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(k)&nbsp;&nbsp;&nbsp;Property and Equipment, Net  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment consists primarily of computer equipment, software, leasehold improvements and office-related equipment and is recorded at cost. Equipment
acquired under capital leases is recorded at the present value of the future minimum lease payments. Depreciation is calculated using
the straight-line method over the estimated useful life of each asset, which is one to three years for computer equipment, five years for furniture and office equipment, and five to ten
years for software for the Company's enterprise systems. Equipment and facilities acquired under capital leases is amortized over the shorter of the lease term or the estimated useful life of the
asset. Improvements, which significantly improve and extend the useful life of an asset, are capitalized over the shorter of the lease period or the estimated useful life. Expenditures for maintenance
and repairs are charged to operations as incurred. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP&nbsp;98-1"), the
Company expenses all internal-use software costs incurred in the preliminary project stage and capitalizes certain direct costs associated with the development and purchase of
internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(l)&nbsp;&nbsp;&nbsp;&nbsp;Goodwill and Other Intangible Assets, Net  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with SFAS No.&nbsp;142, "Goodwill and Other Intangible Assets," we classify intangible assets into three categories: (1)&nbsp;intangible assets
with definite lives subject to amortization, (2)&nbsp;intangible assets with indefinite lives not subject to amortization, and (3)&nbsp;goodwill. We test intangible assets with definite lives for
impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future
operations. We record an impairment charge when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>77</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=77,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=392355,FOLIO='77',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_78"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intangible
assets with indefinite lives and goodwill are not amortized. We test these intangible assets and goodwill for impairment at least annually, typically in the fourth quarter, or
more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. All goodwill is assigned to our operating segments. We perform our impairment tests of
goodwill at our reporting unit level. Such impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill. We use a variety
of methodologies in conducting these impairment tests, including discounted cash flow analyses. When appropriate, we consider the assumptions that we believe hypothetical marketplace participants
would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on the Company's cost of capital rate. When the fair value is less than the
carrying value of the intangible assets or the operating segment, we record an impairment charge to reduce the carrying value of the assets to fair value. These impairment charges are generally
recorded in other operating charges. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when
determining useful lives include the contractual term of any agreement, the history of the asset, the Company's long-term strategy for the use of the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives
are amortized, generally on a straight-line basis, over their useful lives, ranging from 1 to 10&nbsp;years. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(m)&nbsp;&nbsp;Income Taxes  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these tax assets in future
tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets will be
recoverable, and scheduled reversals of deferred tax liabilities. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
January&nbsp;1, 2007, the Company adopted FASB Interpretation No.&nbsp;48, "Accounting for Uncertainty in Income Taxes" ("Interpretation No.&nbsp;48") to account for uncertainty
in income taxes recognized in the Company's financial statements in accordance with SFAS No.&nbsp;109, "Accounting for Income Taxes." Refer to Note&nbsp;10. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(n)&nbsp;&nbsp;&nbsp;Stock-Based Compensation  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January&nbsp;1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No.&nbsp;123R ("SFAS&nbsp;123R"),
"Share-Based Payments," which requires the measurement and recognition of compensation expense for all share-based payment awards to </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>78</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=78,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=221368,FOLIO='78',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_79"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>employees
and directors based on estimated fair values. SFAS&nbsp;123R supersedes the Company's previous accounting methodology using the intrinsic value method under Accounting Principles Board
Opinion APB No.&nbsp;25, "Accounting for Stock Issued to Employees." Under the intrinsic value method, no share-based compensation expense related to stock option awards granted to employees at
market price on date of grant had been recognized in the Company's Consolidated Statements of Operations prior to January&nbsp;1, 2006. The Company has no awards with market or performance
conditions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
November&nbsp;10, 2005, the FASB issued FASB Staff Position No. FAS&nbsp;123(R)-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards." The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to
FAS&nbsp;123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax
effects of employee share-based compensation, which is available to absorb tax deficiencies which could be recognized subsequent to the adoption of FAS&nbsp;123R. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company adopted SFAS&nbsp;123R using the modified prospective transition method. Under this transition method, compensation expense recognized during the years ended
December&nbsp;31, 2006 and 2007 included: (a)&nbsp;compensation expense for all share-based awards granted prior to, but not yet vested, as of December&nbsp;31, 2005, based on the grant date
fair value estimated in accordance with the original provisions of SFAS&nbsp;123, and (b)&nbsp;compensation expense for all share-based awards granted subsequent to December&nbsp;31, 2005, based
on the grant date fair value estimated in accordance with the provisions of SFAS&nbsp;123R. In accordance with the modified prospective transition method, the Company's consolidated financial
statements for prior periods have not been restated to reflect the impact of SFAS&nbsp;123R. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For
the twelve months ended December&nbsp;31, 2006 and December&nbsp;31, 2007, there was no incremental tax benefit from stock options exercised in the period due to expected tax
losses for the year. The Company recorded cash received from the exercise of stock options of $567&nbsp;thousand in 2006 </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>79</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=79,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=501764,FOLIO='79',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eg49901_1_80"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>and
$27&nbsp;thousand in 2007. The following table shows the amounts recognized in the consolidated financial statements for 2006 and 2007 for share-based compensation related to employees (in
millions). </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="75%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Year ended December&nbsp;31, 2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Year ended December&nbsp;31, 2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Cost of revenues</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Selling, general and administrative expenses</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="64%" style="font-family:times;"><FONT SIZE=2>Total cost of employee share-based compensation included in operating loss from continuing operations, before income tax</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Amount of related income tax benefit recognized in earnings</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Amount charged to loss from continuing operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Amount charged to loss from discontinued operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="64%" style="font-family:times;"><FONT SIZE=2>Total charged against operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Impact on net loss per common share:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="64%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="64%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
proforma effect of recognizing estimated compensation expense under the fair value method on net income and earnings per common share for the year ended December&nbsp;31, 2005 were
as follows (in millions, except per share data): </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="eg49901_reconciliation_of_stock-based___rec03418"> </A>
<A NAME="toc_eg49901_2"> </A>
<BR></FONT><FONT SIZE=2><B>RECONCILIATION OF STOCK-BASED COMPENSATION EXPENSE FOR 2005<BR>  (In millions, except per share data)    <BR>    </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="71%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="80%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Year Ended December&nbsp;31, 2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net income</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Add: Stock-based compensation expense included in net income</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Deduct: Stock-based compensation expense determined under the fair value method</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(47.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net loss&#151;pro forma</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(43.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net income per share (basic)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net loss per share (basic)&#151;pro forma</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.59</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net income per share (diluted)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Net loss per share (diluted)&#151;pro forma</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.59</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Weighted average shares:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Basic&#151;as reported</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Basic&#151;pro forma</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Diluted&#151;as reported</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="80%" style="font-family:times;"><FONT SIZE=2>Diluted&#151;pro forma</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>74.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>80</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=80,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=876361,FOLIO='80',FILE='DISK133:[08ZAH1.08ZAH49901]EG49901A.;12',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_ei49901_1_81"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(o)&nbsp;&nbsp;&nbsp;Net Income (Loss) per Common Share  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company calculates net income (loss) per share in accordance with SFAS No.&nbsp;128, "Earnings Per Share". Under SFAS No.&nbsp;128, basic net income
(loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share
reflects the effects of potentially dilutive securities (in millions). </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="75%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="74%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="74%" style="font-family:times;"><FONT SIZE=2>Anti-dilutive weighted shares from stock options excluded from<BR>
calculation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.8</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="74%" style="font-family:times;"><FONT SIZE=2>Anti-dilutive weighted shares from preferred stock excluded from calculation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>(p)&nbsp;&nbsp;&nbsp;Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with SFAS No.&nbsp;144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell. The Company concluded that $1.8&nbsp;million of equipment related to a wireless LAN system that the Company had
installed and operated in the Public Safety&nbsp;&amp; Security ("PSS") segment was impaired in the fourth quarter of 2006 based upon recent trends regarding free WiFi and WiMAX services and the
resulting impact to the realizability of this network. In addition, the Company concluded that its' investments in Tactical Survey Group and Commverge Solutions,&nbsp;Inc. were impaired as of
December&nbsp;31, 2007 (see Note&nbsp;5). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company completed its annual impairment test as required under the provisions of SFAS No.142 during the fourth quarter of 2006 and 2007. In 2006, the Company determined that there
was an impairment of goodwill for the Public Safety&nbsp;&amp; Security segment. The Company's annual impairment test resulted in a non-cash impairment charge of $18.3&nbsp;million related
to the write-down of goodwill for the acquisitions made in the PSS segment (See Note&nbsp;3). The fair value of goodwill was estimated by taking into consideration recent performance,
expected future performance and industry trends, using a combination of a discounted cash flow model and a market approach model which takes into consideration comparable businesses and market
transactions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2007, the Company's annual test did not indicate any impairment was necessary. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(q)&nbsp;&nbsp;&nbsp;Fair Value of Financial Instruments  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SFAS No.&nbsp;107, "Disclosures about Fair Value of Financial Instruments," requires that fair values be disclosed for the Company's financial instruments. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, billings in excess of costs and </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>81</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=81,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=672495,FOLIO='81',FILE='DISK133:[08ZAH1.08ZAH49901]EI49901A.;23',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ei49901_1_82"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>earnings
on uncompleted contracts, and our credit facility approximate fair value due to the short-term nature of these instruments. The fair value of the Company's long-term
debt and capital lease obligations is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining
maturities. The fair value of the Company's long-term debt and capital lease obligations as of December&nbsp;31, 2007 is $75.5&nbsp;million and $1.2&nbsp;million, respectively. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(r)&nbsp;&nbsp;&nbsp;Comprehensive Income (Loss)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SFAS No.&nbsp;130, "Reporting Comprehensive Income," establishes rules for the reporting of comprehensive income (loss) and its components. Comprehensive income
(loss) consists of net income and other gains and losses affecting shareholders' investment that, under accounting principles generally accepted in the United States of America are excluded from net
income (loss). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(s)&nbsp;&nbsp;&nbsp;Foreign Currency Translation  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with SFAS No.&nbsp;52 "Foreign Currency Translation," the financial statements of the Company's foreign subsidiaries where the functional currency
has been determined to be the local currency are translated into United States dollars using year-end rates of exchange for assets and liabilities and rates of exchange that approximate
the rates in effect at the transaction date for revenues, expenses, gains and losses. In 2007, all foreign subsidiaries are accounted for as discontinued operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(t)&nbsp;&nbsp;&nbsp;&nbsp;Concentration of Credit Risk  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company maintains cash balances at various financial institutions and such balances commonly exceed the $100,000 insured amount by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to such cash and
cash equivalents. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Financial
instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company's billed and unbilled accounts receivable. The Company's
accounts receivable result from sales to customers within the federal government, state and local agencies and with commercial customers in various industries. The Company performs ongoing credit
evaluations of its commercial customers. See Note&nbsp;13 for a discussion of our significant customers. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(u)&nbsp;&nbsp;&nbsp;Liquidity  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2007 the Company had substantially completed its reorganization of the primary business segments from one focused on wireless related
activities to one focused on federal, state, and local government businesses. The change in focus was very costly due to the necessity to sell and discontinue operations of previous significant
subsidiaries. In addition, the Company completed its internal stock option investigation in 2007 which resulted in approximately $14.0&nbsp;million of one time expenses. See Note&nbsp;2. As a
result, the Company reported a net loss of $57.9&nbsp;million and $40.8&nbsp;million for the years ended December&nbsp;31, 2006 and December&nbsp;31, 2007, respectively. There has been a net
use of cash from operating activities for each of the last three years ended December&nbsp;31, 2007 due to working capital requirements and infrastructure costs associated with the Company's legacy
wireless business in 2005 and 2006 and costs of the stock option investigation and related fees in 2007. In </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>82</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=82,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=405071,FOLIO='82',FILE='DISK133:[08ZAH1.08ZAH49901]EI49901A.;23',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ei49901_1_83"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>addition,
corporate overhead has not been allocated to discontinued operations and as such the continuing operating segments have had to absorb general and administrative expenses intended for a much
larger company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
December of 2007, the Company successfully negotiated an $85.0&nbsp;million credit facility in order to increase the critical mass of its new government focused operations and
provide for any working capital requirements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;31, 2007 the Company completed the acquisition of Haverstick Consulting,&nbsp;Inc. which required the use of $75.5&nbsp;million of the aforementioned
$85.0&nbsp;million credit facility. In addition, the Company had $2.4&nbsp;million in letters of credit outstanding resulting in $7.1&nbsp;million in borrowing capacity. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
the Company currently carries a significant amount of debt, the Company's ability to execute on additional business opportunities may be limited due to its existing borrowing
capacity. In addition, given the relatively highly leveraged liquidity position, any down-turn in its operating earnings could impair its ability to comply with the financial covenants of
its existing credit facility. If the Company anticipated a potential covenant violation, it would seek relief from its lenders. This relief would have some cost to the Company and such relief might
not be on terms as favorable as those in its existing Credit Agreement. If the Company were to actually default due to its failure to meet the financial covenants of its Credit Agreement and inability
to obtain a waiver from the lenders, the Company's Credit Agreement could require the Company to immediately repay all amounts then
outstanding under the Credit Agreement and/or require the Company to pay interest at default rates per the Credit Agreement. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
the event the Company was required to repay the amount outstanding under the existing credit facility, it would need to obtain alternative sources of financing to continue its
operating activities at existing levels. There can be no assurance that alternative financing would be available on acceptable terms or at all. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(v)&nbsp;&nbsp;&nbsp;Debt Issuance Costs  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fees paid to obtain debt financing are treated as debt issuance costs and are capitalized and amortized over the expected term of the related debt. These payments
are shown as a financing activity in the consolidated statement of cash flows. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(w)&nbsp;&nbsp;Recent Accounting Pronouncements  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In September 2006, the FASB issued SFAS No.&nbsp;157, "Fair Value Measurements" ("SFAS&nbsp;157"). This new standard provides guidance for using fair value to
measure assets and liabilities and information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair
value measurements on earnings. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in
some cases require, estimates of fair market value. SFAS&nbsp;157 also expands financial statement disclosure requirements about a company's use of fair value measurements, including the effect of
such measures on earnings. The provisions of SFAS&nbsp;157 are effective for financial statements issued for fiscal years beginning after November&nbsp;15, </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>83</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=83,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=790602,FOLIO='83',FILE='DISK133:[08ZAH1.08ZAH49901]EI49901A.;23',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ei49901_1_84"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;1. Organization and Summary of Significant Accounting Policies (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>2007.
The Company is in the process of determining the impact of this statement on its consolidated financial statements. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
February 2007, the FASB issued FASB Statement No.&nbsp;159, </FONT><FONT SIZE=2><I>The Fair Value Option for Financial Assets and Financial Liabilities&#151;Including an
Amendment of FASB Statement No.&nbsp;115.</I></FONT><FONT SIZE=2> This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option
is available to all entities, including not-for-profit organizations. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement
No.&nbsp;115, </FONT><FONT SIZE=2><I>Accounting for Certain Investments in Debt and Equity Securities,</I></FONT><FONT SIZE=2> applies to all entities with
available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. The FASB's stated objective in issuing this
standard is as follows: "to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions." </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent
reporting date. A not-for-profit organization will report unrealized gains and losses in its statement of activities or similar statement. The fair value option: (a)&nbsp;may
be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b)&nbsp;is irrevocable (unless a new election date occurs); and
(c)&nbsp;is applied only to entire instruments and not to portions of instruments. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Statement
159 is effective as of the beginning of an entity's first fiscal year that begins after November&nbsp;15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first 120&nbsp;days of that fiscal year and also elects to apply the provisions of FASB Statement No.&nbsp;157, </FONT> <FONT SIZE=2><I>Fair Value Measurements.</I></FONT><FONT
SIZE=2> The Company is in the process of determining the impact of this statement on its consolidated financials statements. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
December 2007, the FASB issued SFAS No.&nbsp;141 (revised 2007) ("SFAS&nbsp;141R"), "Business Combinations" and SFAS No.&nbsp;160 ("SFAS&nbsp;160") "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No.&nbsp;51". SFAS&nbsp;141R will change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS&nbsp;160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. The provisions of SFAS&nbsp;141R and SFAS&nbsp;160 are effective for financial statements issued for fiscal years beginning after
December&nbsp;15, 2008. Early adoption is not permitted. The Company is in the process of determining the impact of these statements on its consolidated financial statements. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;2. Stock Option Investigation  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company completed an internal Equity Award Review of its past practices for granting and pricing stock options in August 2007. The voluntary review was
initiated by its current executive management team, with oversight from the Board of Directors and assistance from outside legal counsel. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>84</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=84,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=983913,FOLIO='84',FILE='DISK133:[08ZAH1.08ZAH49901]EI49901A.;23',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_ek49901_1_85"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;2. Stock Option Investigation (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;3, 2007, the Company announced that it had a filed a lawsuit against a former employee who previously served as its stock option administrator and
left the Company in mid-2004, and his spouse. The lawsuit sought to recover damages resulting from the theft of stock options and common stock valued in excess of $6.3&nbsp;million. The
U.S. Attorney's Office indicted the former employee for the theft and he pled guilty to federal criminal charges and has been sentenced to 46&nbsp;months in prison and is currently incarcerated. The
former employee and his wife entered into a settlement agreement with the Company on October&nbsp;5, 2007 turning over substantially all of their assets to the Company in settlement of the damages
incurred in the theft. The settlement has been approved by the SEC and by the federal judge overseeing this case. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During
the investigation, criminal prosecution, and settlement negotiations the Company incurred $14.0&nbsp;million in legal expenses and other fees. As of December&nbsp;31, 2007 the
Company has recorded $3.4&nbsp;million of recoveries which consists of $2.1&nbsp;million of Money Market Accounts and two properties which are in escrow for $1.3&nbsp;million. Subsequent to
December&nbsp;31, 2007, the Company intends to liquidate these assets. As more fully discussed in Note&nbsp;8 to these consolidated financial statements, $1.7&nbsp;million to $3.4&nbsp;million
of the proceeds from liquidation of these assets is subject to restrictions imposed by the Company's amended credit agreement. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
past stock option granting practices have exposed us to greater risks associated with litigation, regulatory proceedings and government inquiries and enforcement actions. The SEC has
initiated an informal inquiry into our historical stock option granting practices and we received a subpoena from the United States Attorney's Office for the Southern District of California for the
production of documents relating to our historical stock option granting practices. We are cooperating with the SEC and the United States Attorney's Office for the Southern District of California. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
period of time necessary to resolve these inquiries is uncertain, and we cannot predict the outcome of these inquiries or whether we will face additional government inquiries,
investigations or other actions related to our historical stock option grant practices. These inquiries could require us to expend significant management time and incur significant legal and other
expenses. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;3. Goodwill and Other Intangible Assets  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following tables set forth information for finite-lived intangible assets subject to amortization (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="92%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=8 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>As of December&nbsp;31, 2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=8 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>As of December&nbsp;31, 2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Gross Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accumulated Amortization</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Net Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Gross Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accumulated Amortization</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Net Value</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Acquired finite-lived intangible assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Customer relationships</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12.4</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Contracts and Backlog</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Non-compete agreements</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Trade names</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="26%" style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>19.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>28.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="5%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>19.8</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>85</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=85,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=759281,FOLIO='85',FILE='DISK133:[08ZAH1.08ZAH49901]EK49901A.;16',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ek49901_1_86"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;3. Goodwill and Other Intangible Assets (Continued) </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
aggregate amortization expense for finite-lived intangible assets was $1.7&nbsp;million, $2.1&nbsp;million and $2.8&nbsp;million for the years ended December&nbsp;31, 2005,
2006, and 2007, respectively. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
increase in finite-lived intangibles in 2006 is related to the acquisition of Madison Research Corporation. Refer to the schedule below and to Note&nbsp;6 of the Consolidated
Financial Statements (in millions, except amortization period). </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="84%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=10 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>As of December&nbsp;31, 2006</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Gross Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accumulated Amortization</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Net Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Amortization<BR>
Period (years)</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Acquired Intangible Assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Customer relationships</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.0</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Contracts and Backlog</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.8</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="42%" style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
increase in finite-lived intangibles in 2007 is related to the acquisition of Haverstick Consulting, Inc (Haverstick). Refer to the schedule below and to Note&nbsp;6 of the
Consolidated Financial Statements (in millions, except amortization period). </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="84%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=10 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>As of December&nbsp;31, 2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Gross Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accumulated Amortization</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Net Value</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Amortization<BR>
Period (years)</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Acquired Intangible Assets</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Customer relationships</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.0</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Contracts and Backlog</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.3</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="42%" style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.5</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
is no amortization in 2007 since Haverstick was acquired on December&nbsp;31, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information
about estimated amortization expense for intangible assets subject to amortization for the five years succeeding December&nbsp;31, 2007, is as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="74%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="81%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Amortization Expense</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="81%" style="font-family:times;"><FONT SIZE=2>2008</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.5</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="81%" style="font-family:times;"><FONT SIZE=2>2009</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.1</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="81%" style="font-family:times;"><FONT SIZE=2>2010</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.6</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="81%" style="font-family:times;"><FONT SIZE=2>2011</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.4</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="81%" style="font-family:times;"><FONT SIZE=2>2012</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.7</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>86</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=86,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=604064,FOLIO='86',FILE='DISK133:[08ZAH1.08ZAH49901]EK49901A.;16',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_ek49901_1_87"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;3. Goodwill and Other Intangible Assets (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
changes in the carrying amounts of goodwill by operating segment for the years ended December&nbsp;31, 2006 and 2007, are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="83%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Public Safety&nbsp;&amp; Security</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Government Solutions</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2004</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>45.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>57.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Acquisitions and purchase accounting adjustments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>28.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>29.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Earn-out consideration</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2005</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>76.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>94.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>53.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>53.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Impairments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(18.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(18.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2006</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>129.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>129.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Acquisitions and purchase accounting adjustments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>64.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>64.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>194.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>194.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company tests goodwill for impairment annually during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach, in accordance with the
provisions of SFAS No.&nbsp;142, </FONT><FONT SIZE=2><I>Goodwill and Other Intangible Assets</I></FONT><FONT SIZE=2>. In 2007, the annual test did not result in any impairment charge. In 2006, the
annual test resulted in a non-cash impairment charge of $18.3&nbsp;million in the PSS segment. This was due in part to changes in the industry and the strategic focus of the Company as
well as operational challenges from significant employee turnover that we encountered after the completion of the earn-out periods. The fair value of goodwill was estimated by taking into
consideration recent performance and expected future performance and using a combination of a discounted cash flow model and a market approach model which takes into consideration comparable
businesses and market transactions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment
between annual tests. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;4. Discontinued Operations  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;17, 2006, the Company entered into a definitive agreement to divest all of its operations in Mexico for total approximate cash consideration of
$18.0&nbsp;million, which approximated the net book value of the operations, including $13.2&nbsp;million of liabilities associated with a loss contingency. The transaction closed on
March&nbsp;10, 2006. The transaction was structured as a sale of our subsidiaries in Mexico, and the purchase price consisted of $1.5&nbsp;million in cash paid on February&nbsp;17, 2006, plus a
secured promissory note payable in installments through December&nbsp;31, 2006. The note was secured by pledges of assets and a personal guaranty. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>87</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=87,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=165173,FOLIO='87',FILE='DISK133:[08ZAH1.08ZAH49901]EK49901A.;16',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_em49901_1_88"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;4. Discontinued Operations (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The final closing balance sheet as of February&nbsp;17, 2006 resulted in net asset adjustments aggregating to a total approximate $18.9&nbsp;million
consideration, $1.5&nbsp;million which was paid on February&nbsp;17, 2006, with the remaining $17.4&nbsp;million payable by means of the promissory note in installments through
December&nbsp;31, 2006 with an interest rate of 7.5% per annum. The remaining note receivable balance was paid in December 2006. No amounts remain outstanding on the note receivable. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;28, 2006, the Board of Directors of the Company approved a plan to divest portions of the Company's business where critical mass had not been achieved. This plan
involved the divestiture of the Company's EMEA (Europe, Middle East and Asia) operations and its remaining South American operations. The Company determined that these operations met the criteria to
be classified as held for sale. Accordingly, these operations were reflected as discontinued in accordance with SFAS No.&nbsp;144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in the accompanying consolidated financial statements commencing as of and for the year ended December&nbsp;31, 2006. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
EMEA operations were sold to LCC International,&nbsp;Inc. (LCC) on March&nbsp;9, 2007 for $4.0&nbsp;million in cash, $3.3&nbsp;million of which was received on that date. We
also received approximately $1.8&nbsp;million from our EMEA operations, prior and subsequent to the closing date as payment on outstanding intercompany debt. The balance of the $0.7&nbsp;million
sales price is being withheld as security for the satisfaction of certain indemnification obligations and is payable on a date that is the earlier of March&nbsp;31, 2008 or the date that the buyer
files its 10-K for the fiscal year ended December&nbsp;31, 2007. The sale of EMEA generated a gain on disposition of $3.3&nbsp;million. In the fourth quarter of 2007, the Company
recorded a reserve of $0.7&nbsp;million on the remaining sales price holdback based on the Company's assessment of LCC's available liquidity and ability to pay following the Company's review of
LCC's most recently file financial statements, thereby reducing the net estimated gain on this transaction to $2.6&nbsp;million. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
April&nbsp;20, 2007, the Company entered into an Equity Purchase Agreement to sell all of the issued and outstanding equity of its interests of its wholly owned subsidiary WFI
Brazil Techlogia en Telecomunicaciones&nbsp;LTDA, to Strategic Project Services,&nbsp;LLC (SPS). The consideration included the assumption of substantially all outstanding liabilities of WFI
Brazil, nominal cash consideration, and additional earn-out consideration based on 25&nbsp;percent of net receivables collected subsequent to the closing date. The Company recorded an
impairment charge of approximately $5.2&nbsp;million as of December&nbsp;31, 2006 to reduce the current carrying value of the Brazil operations to their estimated fair value based upon current
indications of interest. In the second quarter of 2007,
when this business was sold, a gain on disposition of $0.2&nbsp;million was recorded primarily due to lower than expected selling costs. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
May&nbsp;29, 2007, the Company entered into an Asset Purchase Agreement with LCC pursuant to which the Company agreed to sell to LCC all of the assets used in the conduct of the
operation of the Company's Wireless Network Services business segment that provides engineering services to the non-government wireless communications industry in the United States. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
transaction was completed on June&nbsp;4, 2007. The aggregate consideration paid by LCC in connection with the Acquisition was $46&nbsp;million. LCC delivered a subordinated
promissory note for the principal amount of $21.6&nbsp;million (the "</FONT><FONT SIZE=2><I>Subordinated Promissory Note</I></FONT><FONT SIZE=2>"), paid $17&nbsp;million at closing and paid final
working capital adjustments of $2.4&nbsp;million through an amendment to the Subordinated </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>88</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=88,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=628658,FOLIO='88',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_89"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;4. Discontinued Operations (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>Promissory
Note, and the Company has retained an estimated $5.0&nbsp;million in net working capital of the business. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;5, 2007, the Company announced that it had sold the $21.6&nbsp;million Subordinated Promissory Note in a transaction arranged by KeyBanc Capital Markets ("KeyBanc"). The
Company received approximately $19.6&nbsp;million in net cash proceeds, reflecting a discount from par value of less than five percent and aggregate transaction fees of approximately
$1&nbsp;million, which includes a $0.75&nbsp;million fee to KeyBanc, an affiliate of the Company's lender. The note was acquired by a fund affiliated with Silver Point Capital,&nbsp;L.P.
("Silver Point"). The Company did not provide any guaranty for LCC's payment obligations. Certain post closing adjustments that, under the terms of the sale of the U.S. wireless engineering business
were expected to be made to the principal amount of the Note, may instead be made by payments between Kratos and LCC, or between Silver Point and the Company, as applicable. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
August&nbsp;10, 2007, in accordance with the terms of the acquisition agreement, the Company provided the closing balance sheet working capital calculation, which indicated a
$2.6&nbsp;million working capital adjustment was due to the Company as an increase to the balance of the Subordinated Promissory Note. LCC had thirty days to review the calculation and notify the
Company of any dispute. The Company and LCC agreed to a final working capital calculation of $2.4&nbsp;million. The Company collected $2.3&nbsp;million in January 2008, net of a
$0.1&nbsp;million discount from Silver Point in accordance with the terms of the note agreement. The net amount is presented as part of notes receivable in the consolidated balance sheet as of
December&nbsp;31, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July&nbsp;7, 2007, the Company entered into a definitive agreement with an affiliate of Platinum Equity to sell the Company's wireless deployment business. Platinum Equity is a Los
Angeles based private equity firm whose portfolio includes service and distribution businesses in a number of equity sectors. The total consideration for the acquisition was $24&nbsp;million
including $18&nbsp;million in cash at closing, subject to post closing working capital adjustments, and an aggregate $6&nbsp;million in a three-year earn-out arrangement
through 2010. The transaction included
a Transition Services Agreement for the transition of certain services for a period of nine months. The assets sold to an affiliate of Platinum Equity include all of the Company's wireless deployment
business, and the Wireless Facilities name. The transaction closed on July&nbsp;24, 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
September&nbsp;25, 2007, in accordance with the terms of the acquisition agreement, the Company provided the working capital calculation to Platinum Equity (Platinum), which
indicated a working capital adjustment was due to Platinum primarily due to cash collected on accounts receivables by the Company prior to the close of the transaction that exceeded the Company's
previous estimate of working capital to be delivered to Platinum. Platinum has reviewed the Company's working capital calculation, and the Company and Platinum have not been able to come to an
agreement on the working capital adjustment. In accordance with the agreement, the Company and Platinum are in the process of choosing a firm to resolve this item. As of December&nbsp;31, 2007, the
balance of the Company's calculation has been reflected in other current liabilities. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company determined that the U.S. engineering and U.S. deployment operations met the criteria to be classified as held for sale in the first quarter of 2007. Accordingly, the Company
has reflected these operations as discontinued and assessed these assets for impairment in accordance with </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>89</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=89,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=174734,FOLIO='89',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_90"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;4. Discontinued Operations (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>SFAS
No.&nbsp;144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company determined that the assets of the U.S. deployment operations were impaired and recorded
an impairment charge of approximately $13.4&nbsp;million. The fair value of the assets was determined by utilizing the sale price less estimated costs to sell the business. The Company subsequently
recorded a gain in discontinued operations from the sale of the U.S. engineering operations of $14.8&nbsp;million. Upon the divestiture of the deployment business, the Company recorded a loss from
disposal of $1.9&nbsp;million, reflecting the closing working capital adjustment and final closing balance sheet. In addition, the Company recorded a charge for an excess facility accrual of
approximately $1.1&nbsp;million related to certain facility leases of Deployment field offices that were not assumed by Platinum. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
determination that the U.S. engineering business and U.S. deployment operations met the criteria to be classified as held for sale in the first quarter of 2007 was also a triggering
event under SFAS&nbsp;142 Goodwill and Other Intangible Assets ("SFAS&nbsp;142") that resulted in an accelerated review of the Company's goodwill and intangibles assets with indefinite lives. In
accordance with SFAS&nbsp;142, the Company allocated the goodwill for the WNS reporting unit based upon the fair value of the engineering business and the deployment business. The fair values used
were based upon market information obtained as a result of the sale of the businesses. This resulted in an impairment charge of approximately $7.2&nbsp;million related to goodwill for this reporting
unit which was recorded in the first quarter of 2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, in accordance with EITF&nbsp;87-24, </FONT><FONT SIZE=2><I>Allocation of Interest to Discontinued Operations</I></FONT><FONT SIZE=2>
("EITF&nbsp;87-24"), interest expense incurred on the debt that was required to be repaid as a result of the sales of our wireless network services business was allocated to discontinued
operations for the periods presented. During the years ended December&nbsp;31, 2005, 2006 and 2007, interest expense allocated to discontinued operations was approximately $0.0&nbsp;million,
$0.0&nbsp;million and
$2.2&nbsp;million, respectively. The following table presents the results of discontinued operations (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="80%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="63%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="63%" style="font-family:times;"><FONT SIZE=2>Revenue</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>265.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>201.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>85.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="63%" style="font-family:times;"><FONT SIZE=2>Net income (loss) before taxes</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(9.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="63%" style="font-family:times;"><FONT SIZE=2>Provision (benefit) for income taxes</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="63%" style="font-family:times;"><FONT SIZE=2>Net loss after taxes</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>90</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=90,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=130955,FOLIO='90',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_91"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;4. Discontinued Operations (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Following
is a summary of the assets and liabilities of discontinued operations as of December&nbsp;31, 2006 and December&nbsp;31, 2007 (in millions) for each of the operations: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="74%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="67%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>December&nbsp;31, 2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>December&nbsp;31, 2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Cash</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Accounts receivable, net</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>63.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Other current assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Impairment allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Current assets of discontinued operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Property, plant and equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Goodwill</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>25.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Deferred tax assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Impairment allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Other assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Non-current assets of discontinued operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>37.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Accounts payable</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Accrued expenses</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.7</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Billings in excess of cost on uncompleted contracts</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Income tax contingencies</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Deferred tax liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Other current liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Current liabilities of discontinued operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.3</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Non-current income tax contingencies</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.0</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Other non-current liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Non-current liabilities of discontinued operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.7</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;5. Investments in Unconsolidated Affiliates  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Tactical Survey Group,&nbsp;Inc. ("TSG")  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In February 2004, the Company paid $1.0&nbsp;million in cash to bring its total stock ownership position in Tactical Survey Group,&nbsp;Inc. (TSG), a
privately-held company that provides expertise in developing, deploying and integrating tactical survey systems for use in government and commercial applications, to 11%. Pursuant to the
provisions of APB Opinion No.&nbsp;18, "The Equity Method of Accounting for Investments in Common Stock", this investment was accounted for under the equity method of accounting due to the presence
of significant influence deemed to exist based on the significant number of subcontracts that the Company has entered into with TSG and the presence of a Kratos employee on TSG's board of directors. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During
the third quarter of 2006, TSG was no longer considered a significant subcontractor to the Company. This factor, combined with the lack of current representation on TSG's board of
directors </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>91</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=91,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=695618,FOLIO='91',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_92"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;5. Investments in Unconsolidated Affiliates (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>resulted
in the Company concluding effective September&nbsp;29, 2006 that significant influence no longer existed. Accordingly, the investment in TSG no longer met the conditions for the use of the
equity method of accounting and has been accounted for under the cost method effective September&nbsp;29, 2006. There were no equity earnings related to this investment during the period this
investment was accounted for under the equity method of accounting. The balance of the Company's investment in TSG at December&nbsp;31, 2006 totaled $1.2&nbsp;million. The Company evaluates the
realizability of its investment in TSG according to the provisions of APB Opinion No.&nbsp;18 and FAS&nbsp;115-1 and FAS&nbsp;124-1. The Company periodically obtains and
reviews the financial statements of TSG. Based on this review, and recent indicators of fair value, an impairment charge of $0.9&nbsp;million was recorded in 2007 to reduce the carrying value of
this investment as of December&nbsp;31, 2007 to $0.3&nbsp;million. This investment has been classified on the consolidated balance sheet under the caption "Investments in unconsolidated
affiliates." </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>CommVerge Solutions,&nbsp;Inc.  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has an investment in CommVerge Solutions,&nbsp;Inc., a privately-held wireless network planning and deployment company. The balance of
the Company's investment in CommVerge Solutions,&nbsp;Inc. at December&nbsp;31, 2006 totaled $0.9&nbsp;million. Management periodically obtains and reviews the most recent financial performance
and financial forecasts available from CommVerge which may include information regarding project status and current progress of the business. Based on this review, an impairment charge of
$0.9&nbsp;million was recorded to reduce the carrying value of this investment as of December&nbsp;31, 2007 to $0.0&nbsp;million. This investment is accounted for under the cost method and has
been classified on the consolidated balance sheet under the caption "Investments in unconsolidated affiliates." One of the Company's directors is also a director of CommVerge Solutions,&nbsp;Inc. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Government Solutions Segment  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Haverstick Consulting,&nbsp;Inc.  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;31, 2007 the Company acquired Indianapolis, Indiana headquartered Haverstick Consulting,&nbsp;Inc. (Haverstick) as part of the Kratos
Government Solutions Segment. Haverstick provides rocket and missile test and evaluation, weapons systems support, and professional services to the U.S. Army, U.S. Air Force, U.S. Navy, NASA, and
other federal, state and local agencies. Through the Haverstick acquisition, the Company expanded its customer footprint within the DoD, and enhanced its presence with the U.S. Air Force, a key growth
area for Kratos. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
total purchase price was $90.2&nbsp;million including transaction costs incurred by Kratos of $0.5&nbsp;million. The purchase price paid to Haverstick was $89.7&nbsp;million
comprised of $70.3&nbsp;million in cash and the issuance of 7.48&nbsp;million shares of the Company's common stock valued at $2.60 per share or an aggregate stock consideration of
$19.4&nbsp;million. The value of the share issued was determined by averaging the market price of the stock two days before and two days after the announcement of the acquisition, November&nbsp;5,
2007. The Company paid $81.1&nbsp;million, $66.7&nbsp;million of which was cash paid at closing, $2.4&nbsp;million was paid shortly thereafter, and $12.0&nbsp;million in common stock. The
Company held back $8.6&nbsp;million (the Holdback Consideration) to secure any negative working capital adjustments </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>92</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=92,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=41629,FOLIO='92',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_93"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>required
by the Merger Agreement and the Company's indemnity rights. The Holdback Consideration is comprised of both cash and Kratos stock in the amounts of $1.2&nbsp;million and
$7.4&nbsp;million, respectively. The holdback consideration will be released in 50% increments on the 12<SUP>th</SUP>&nbsp;month and 21<SUP>st</SUP>&nbsp;month of the anniversary date of
the acquisition. In addition to the indemnity holdback, the Agreement also calls for a post closing working capital adjustment. To fund the acquisition, the Company secured a new credit facility of
$85.0&nbsp;million arranged by KeyBanc Capital Markets. The credit facility, which includes a $25.0&nbsp;million line of credit and $60.0&nbsp;million in term notes, replaced the Company's
previous credit facility which had an outstanding principal balance of $6.0&nbsp;million on the date of closing. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;29, 2008 the Company provided the working capital calculation to Haverstick, which indicated a working capital adjustment was due to the Company primarily because the
working capital, as calculated per the Agreement, was below the target amount. Haverstick has reviewed the Company's working capital calculation and is not in agreement. Haverstick's response proposes
that there is actually excess working capital of approximately $1.5&nbsp;million. In accordance with the Agreement, the Company and Haverstick have fifteen days from the date of the objection to
resolve the disagreement. If resolution has not been achieved within the fifteen day period, the Company and Haverstick have five days to agree on a nationally recognized independent accounting firm
to resolve the disagreement. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to the terms of the Merger Agreement, the Company has agreed to use its reasonable best efforts to file a resale registration statement covering the shares issued in connection
with the Merger promptly following the closing date. In the event that the common stock issued are not salable under rules promulgated under the Securities Acts, holders of the stock may elect to
exchange such shares for a cash amount equal to $2.74 per share in accordance with the terms of the Merger Agreement. Until the date on which the shares of stock are salable interest shall accrue on
the value of the Closing Stock at a floating rate of one-month LIBOR plus four percent (4%) per annum. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
purchase price paid to Haverstick of $89.7&nbsp;million plus $0.5 in transaction costs was accounted for as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="74%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Current assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>32.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Property, plant, and equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Intangible assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Goodwill</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>64.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Total assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>111.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Current liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(17.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Net assets acquired</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>90.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="83%" style="font-family:times;"><FONT SIZE=2>The goodwill recorded in this transaction is not tax deductible.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pro
Forma Financial Information </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
results of Haverstick's operations are not included in the accompanying Consolidated Statements of Operations for the years ended December&nbsp;31, 2005, 2006 and 2007. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>93</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=93,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=557859,FOLIO='93',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_94"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following summary presents pro forma consolidated results of operations for the years ended December&nbsp;31, 2006 and December&nbsp;31, 2007 as if the Haverstick acquisition
described above had occurred on January&nbsp;1, 2006 and includes adjustments that were directly attributable to the transaction, such as amortization of intangibles, interest related to debt, and
one time expenses associated with the merger, or were not expected to have a continuing impact on the Company. The pro forma results are unaudited and for illustrative purposes only for the applicable
period and do not purport to be indicative of the actual results which would have occurred had the transactions been completed as of the beginning of the period indicated, nor are they indicative of
results of operations which may occur in the future (all unaudited amounts, except per share amounts, are in million): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="82%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="55%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006 As Reported</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Pro forma Adjustments</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006 Pro forma</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Revenue</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>93.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>246.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(57.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(62.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Basic and diluted loss per share</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.85</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="BOTTOM">
<TH WIDTH="55%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007 As Reported</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Pro forma Adjustments</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007 Pro forma</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Revenue</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>193.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>94.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>287.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Net loss</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(40.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(45.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="55%" style="font-family:times;"><FONT SIZE=2>Basic and diluted loss per share</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.55</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.07</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.62</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><I>Madison Research Corporation  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On October&nbsp;2, 2006 the Company acquired Huntsville, Alabama based Madison Research Corporation ("MRC") as part of the Company's Government Solutions
segment. MRC offers a broad range of technical, engineering and IT solutions, and has developed core competencies in weapons system lifecycle support, integrated logistics, test and evaluation,
commercial-off-the-shelf software and hardware selection and implementation, software development and systems lifecycle maintenance. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
purchase price was approximately $73.8&nbsp;million, including a working capital adjustment of $4.6&nbsp;million and transaction costs of $0.2&nbsp;million, and is subject to
certain additional post-closing adjustments. The Company paid $62.1&nbsp;million at closing, the working capital adjustment of $4.6&nbsp;million was paid in April 2007 and the
remaining $6.9&nbsp;million, which has been subsequently adjusted for legal costs and a reduction in contingent cash consideration, was held back to secure the Company's indemnity rights and will be
released, subject to indemnity rights, in installments following 6, 12, and 18&nbsp;months from the date of close. In April 2007, $1.5&nbsp;million of the hold-back was released and
paid to the former shareholders of MRC. In October 2007, a second scheduled holdback payment of $2.8&nbsp;million was made. The remaining hold back balance of approximately $2.3&nbsp;million as of
December&nbsp;31, 2007, subject to the resolution of certain indemnification matters, is expected to be paid in April 2008. The Company entered into a new $85&nbsp;million credit facility with
KeyBank National Association to fund the acquisition, which replaced the Company's previous credit facility of $15&nbsp;million. Refer to Note&nbsp;8 for further discussion. The results of
operations of MRC have been included in the Company's consolidated statement of operations for the period from the acquisition date of October&nbsp;2, 2006 in the Company's fourth quarter of 2006. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>94</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=94,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=396003,FOLIO='94',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_95"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
purchase price, including transaction costs of $0.2&nbsp;million, was accounted for as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="74%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Current assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>17.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Property, plant, and equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Intangible assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Goodwill</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>53.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Total assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>80.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Current liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(6.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Net assets acquired</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>73.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="84%" style="font-family:times;"><FONT SIZE=2>The goodwill recorded in this transaction is not tax deductible.</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><I>Pro Forma Financial Information  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The results of MRC's operations since the acquisition date are included in the Company's consolidated financial statements for 2006 and are a component within the
Kratos Government Solutions segment. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following summary presents pro forma consolidated results of operations for the years ended December&nbsp;31, 2005 and December&nbsp;31, 2006 as if the MRC acquisition described
above had occurred January&nbsp;1, 2005 and includes adjustments that were directly attributable to the transaction or were not expected to have a continuing impact on the Company. The pro forma
results are unaudited and for illustrative purposes only for the applicable period and do not purport to be indicative of the actual results which would have occurred had the transactions been
completed as of the beginning of the period indicated, nor are they indicative of results of operations which may occur in the future (all unaudited amounts, except per share amounts, are in million): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="80%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="54%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005 As Reported</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Pro forma Adjustments</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005 Pro forma</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Revenue</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>152.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>62.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>214.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Basic and diluted earnings (loss) per share</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.02</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.04</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.02</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="BOTTOM">
<TH WIDTH="54%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006 As Reported</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Pro forma Adjustments</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006 Pro forma</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Revenue</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>46.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>199.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Net loss</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(57.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(61.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>Basic and diluted loss per share</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.79</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.84</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Contingent Acquisition Consideration  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with certain business acquisitions, the Company may agree to make additional future payments to sellers contingent upon achievement of specific
performance-based milestones by the acquired entities. Pursuant to the provisions of SFAS No.&nbsp;141, such amounts are accrued, and therefore, recorded by the Company when the contingency is
resolved beyond a reasonable doubt and, </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>95</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=95,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=910022,FOLIO='95',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<A NAME="page_em49901_1_96"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>hence,
the additional consideration becomes payable. A summary of the contingent acquisition consideration as of December&nbsp;31, 2006 and December&nbsp;31, 2007 is summarized in the following
table (in millions). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Summary of Contingent Acquisition Consideration  </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="84%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>PSS</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Other KGS</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Haverstick</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>MRC</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2004</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Post acquisition adjustments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Payments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(13.0</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2005</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.2</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Post acquisition adjustments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Payments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(7.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2006</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Acquisitions</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Post acquisition adjustments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="39%" style="font-family:times;"><FONT SIZE=2>Payments</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Balance as of December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
current liabilities accrual for contingent consideration on the accompanying Consolidated Balance Sheet as of December&nbsp;31, 2007 includes $2.3&nbsp;million for MRC and
$0.6&nbsp;million for Haverstick. Included in long term other liabilities is $0.6&nbsp;million for Haverstick with the contingent stock consideration of $7.4&nbsp;million reflected as paid in
capital for contingent consideration in the accompanying Consolidated Statement of Stockholder's Equity. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Government Solutions Segment  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Haverstick Consulting,&nbsp;Inc.  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the Company's acquisition of Haverstick Consulting,&nbsp;Inc. (Haverstick) on December&nbsp;31, 2007, the purchase price included
$8.6&nbsp;million in holdback consideration to secure, if any, negative adjustments to working capital and the Company's indemnity rights. The hold-back consideration includes both a
cash and Kratos common stock component. As of December&nbsp;31, 2007, the $8.6&nbsp;million contingent acquisition consideration balance was reflected as $1.2&nbsp;million in Accrual for
contingent acquisition consideration for the cash portion and as $7.4&nbsp;million in Paid-in-Capital for Contingent Consideration in the accompanying consolidated balance
sheets. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
accordance with the terms of the Merger Agreement $0.6&nbsp;million and $3.7&nbsp;million of the cash and stock component of the hold back, respectively, will be released at
December&nbsp;31, 2008 with the remaining hold back amounts to be released in August 2009. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>96</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=96,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=251318,FOLIO='96',FILE='DISK133:[08ZAH1.08ZAH49901]EM49901A.;30',USER='ABEAULI',CD='27-MAR-2008;14:51' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_eo49901_1_97"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;6. Acquisitions (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Madison Research Corporation (MRC)  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the Company's acquisition of Madison Research Corporation ("MRC") in October 2006, the purchase price included a working capital adjustment of
$4.6&nbsp;million, which was paid in April 2007 and $6.9&nbsp;million, which has been subsequently adjusted for legal costs and a reduction in contingent cash consideration, was held back to
secure the Company's indemnity rights and will be released, subject to indemnity rights, in installments following 6, 12, and 18&nbsp;months from the date of close. Holdback payments of
$1.5&nbsp;million and $2.8&nbsp;million were released and paid to the former shareholders of MRC in April and October of 2007, respectively. As of December&nbsp;31, 2007, the $2.3&nbsp;million
contingent acquisition consideration balance which includes accrued interest of $0.1&nbsp;million was reflected as $2.3&nbsp;million in the Accrual for contingent acquisition consideration on the
accompanying consolidated balance sheet. The Company expects to pay the remaining holdback, subject to the remaining indemnification obligations, in April 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Public Safety&nbsp;&amp; Security Segment  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the year ended December&nbsp;31, 2006, $7.8&nbsp;million of earn-out consideration was paid to certain shareholders of the companies
acquired in the Public Safety&nbsp;&amp; Security Segment. As of March&nbsp;31, 2006, all earn-out performance periods had ended and there was no additional contingent consideration earned
related to those shareholders. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;7. Balance Sheet Details  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company's cash equivalents consist of overnight cash sweep accounts that are invested on a daily basis. As of December&nbsp;31, 2007, the company had no
other short term investments. The cash and cash equivalents at December&nbsp;31, 2006 and December&nbsp;31, 2007 were as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="79%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=5 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>December&nbsp;31, 2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=5 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>December&nbsp;31, 2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Amortized Cost Basis</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Fair Value Basis</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Amortized Cost Basis</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Fair Value Basis</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2><I>Cash and cash equivalents:</I></FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="43%" style="font-family:times;"><FONT SIZE=2>Cash</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.6</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="43%" style="font-family:times;"><FONT SIZE=2>Money market</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.0</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Cash and cash equivalents</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net
unrealized gains and realized gains recorded during the year ended December&nbsp;31, 2006 and December&nbsp;31, 2007 were immaterial. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>97</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=97,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=974993,FOLIO='97',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_98"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;7. Balance Sheet Details (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
breakdown of certain assets in the consolidated balance sheets consists of the following at December&nbsp;31, 2006 and 2007 (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="77%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Accounts receivable, net:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Billed</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>43.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Unbilled</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>23.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>34.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Total accounts receivable</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>59.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>77.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Allowance for doubtful accounts</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="70%" style="font-family:times;"><FONT SIZE=2>Total accounts receivable, net</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>59.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>77.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Property and equipment, net:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Computer equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Software</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Furniture and office equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Facility under capital lease</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Leasehold improvements</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="70%" style="font-family:times;"><FONT SIZE=2>Property and equipment</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Accumulated depreciation and amortization</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="70%" style="font-family:times;"><FONT SIZE=2>Total property and equipment, net</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Investments in unconsolidated affiliates:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>CommVerge,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Tactical Survey Group,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="70%" style="font-family:times;"><FONT SIZE=2>Total investments in unconsolidated affiliates</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;8. Notes Payable and Other Financing Arrangements  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(a) Credit Agreement  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;16, 2005, the Company entered into a credit agreement with KeyBank National Association ("KeyBank") to provide a $15.0&nbsp;million senior
credit facility. KeyBank was designated as the sole arranger and sole book manager. The facility had a three-year term and could have been expanded to a $60.0&nbsp;million facility. The
Company used the facility for general corporate purposes and to fund acquisitions. On October&nbsp;2, 2006, the Company entered into a credit agreement with Key Bank to provide an $85&nbsp;million
senior credit facility, which replaced the Company's existing $15&nbsp;million senior credit facility. The facility had a 5&nbsp;year term with principal due in 2011 and interest payable on a
monthly basis. At the Company's option, interest was payable at the London Interbank Offer Rate plus
1.75-3.50%, or at the prime rate plus 0.30-0.75%, with either option adjusted quarterly based on the Company's total net debt-to-EBITDA ratio. The
Company used the facility to fund its acquisition of Madison Research Corporation (MRC) and for general corporate purposes. The terms of the credit agreement required the Company to provide certain
customary covenants for a credit agreement, including certain financial covenants, computed as defined by the terms of the agreement. The facility was collateralized by the assets of the Company. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>98</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=98,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=624162,FOLIO='98',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_99"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;8. Notes Payable and Other Financing Arrangements (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
facility contained customary events of default, including payment defaults, breaches of representations and warranties, and covenant defaults. As of March&nbsp;30, 2007, the
Company was in technical default of this agreement as it had not yet filed its Form&nbsp;10-K and 2006 audited financials. On April&nbsp;6, 2007, the Company entered into an amendment
to the credit agreement whereby Key Bank waived this technical default and provided an extension through April&nbsp;30, 2007 for filing our 10-K and 2006 audited financial statements. On
June&nbsp;1, 2007, the Company entered into a second amendment to the credit agreement whereby Key Bank extended the original waiver for filing our 10-K and 2006 audited financial
statements and the quarterly unaudited financial statements for the fiscal quarters ended March&nbsp;31, 2007 and June&nbsp;30, 2007 through September&nbsp;30, 2007 and reduced the total
facility to $50&nbsp;million to reflect the net pay downs of the revolving line of credit related to the divestiture of our EMEA business in March 2007 and the divesture of our domestic engineering
business. In addition, the second amendment provided for the further reduction of the Company's credit facility to $35&nbsp;million effective upon receipt of principal payments under the note
received from the buyer of the domestic engineering business, which occurred on July&nbsp;3, 2007. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;31, 2007, the Company entered into a new credit facility of $85.0&nbsp;million with KeyBanc Capital Markets which replaced the October&nbsp;2, 2006 credit
agreement with Key Bank. This credit facility provides for two term loans consisting of a first lien term note of $50.0&nbsp;million and a second lien term note of $10.0, as well as, a first lien
$25&nbsp;million revolving line of credit. The $10.0&nbsp;million term loan has a five and one half year term with principal payments required quarterly beginning on March&nbsp;31, 2008 of
$25,000 through March&nbsp;31, 2013 with the final balance of $9.5&nbsp;million due on June&nbsp;30, 2013. The $50.0&nbsp;million term loan has a five year term with principal payments
required quarterly beginning on March&nbsp;31, 2008 of $0.6&nbsp;million in 2008, $1.3&nbsp;million in 2009, $2.5&nbsp;million in 2110, and $4.1&nbsp;million in 2011 and 2012. The term loans
have a provision which states that once the full amount of the note has been borrowed, the notes cannot be paid down and reborrowed again. The revolving line of credit has a four year term which
expires on December&nbsp;31, 2011 and contains provisions typical in such arrangements. All loans under the new credit facility have an interest rate equal to a base rate defined as a fluctuating
rate per annum equal to the higher of (a)&nbsp;the Federal Funds Rate plus 0.5% and (b)&nbsp;the rate of interest in effect for such day as publicly announced from time to time by KeyBank as its
"prime rate" plus a margin for the term loans of 6.5% to 7.5% and a margin of 1.0% to 3.25% on the revolving line of credit. The applicable margin at date of borrowing is determined by the ratio of
the Company's aggregate debt to it's EBITDA for the previous four fiscal quarters. The Company used the credit facility to fund the acquisition of Haverstick Consulting&nbsp;Inc. (Haverstick) and to
retire the outstanding debt from the October 2006 agreement. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Credit Facilities contain covenants which impose certain restrictions on the Company's ability to, among other things, incur additional debt, pay dividends, make investments or sell
assets. Additionally, certain non-recurring cash inflows such as proceeds from asset sales, insurance recoveries, and equity offerings may have to be used to pay down indebtedness and may
not be reborrowed. In addition, the Credit Facilities contain certain financial covenants which include certain financial covenants as defined by the terms of the agreements. These financial covenants
include a maximum first lien leverage ratio, a maximum total leverage ratio, a minimum liquidity ratio, a minimum fixed </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>99</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=99,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=523138,FOLIO='99',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_100"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;8. Notes Payable and Other Financing Arrangements (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>charge
coverage ratio, and a minimum consolidated EBITDA at various dates for the $50.0&nbsp;million term loan and the $25.0&nbsp;million revolver as outlined in the following table. </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="21%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Date<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Maximum First Lien Leverage Ratio</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Maximum Total Leverage Ratio</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Minimum Liquidity Ratio</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="14%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Minimum Fixed Charge Coverage Ratio</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Minimum Consolidated EBITDA<BR>
(in millions)</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="21%" style="font-family:times;"><FONT SIZE=1>December&nbsp;31, 2007&#151;2008</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>3.22 to 4.76:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>3.76 to 5.68:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.56 to 1.33:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.05 to 0.50:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>$16.1 to $19.4</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="21%" style="font-family:times;"><FONT SIZE=1>2009</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.97 to 2.33:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.78 to 3.50:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.60 to 1.58:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.11 to 1.02:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>$19,8 to $21.5</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="21%" style="font-family:times;"><FONT SIZE=1>2010</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.75 to 2.00:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.25 to 2.50:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.54 to 1.49:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.10 to 1.06:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>$21.5 to 23.4</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="21%" style="font-family:times;"><FONT SIZE=1>2011</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.75:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.25:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.55 to 1.53:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.10:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>$24.4 to $26.5</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="21%" style="font-family:times;"><FONT SIZE=1>2012</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.75:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>2.25:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.42 to 1.54:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="14%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>1.10:1.00</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=1>$26.7 to $27.6</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The $10.0&nbsp;million term loan also provides for similar financial covenants. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Future
maturities of long-term debt are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="59%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>2008</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.6</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>2009</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.1</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>2010</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.1</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>2011</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>31.9</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>2012</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>16.4</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Thereafter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.4</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.5</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, the Company's outstanding balance on the facility was $75.5&nbsp;million and the weighted average interest rate on the debt borrowed during 2007 was
8.3%. This includes $3.5&nbsp;million of interest expense and financing costs related to the October 2006 agreement and the new facility dated December&nbsp;31, 2007. The replacement of the
October 2006 facility resulted in a write-off of $1.0&nbsp;million in deferred financing costs. The Company had $3.3&nbsp;million in deferred financing costs outstanding as of
December&nbsp;31, 2007 which are related to the new facility and are being amortized over the four, five and five and one half year life of the respective underlying notes. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007 the unused line of credit under the revolving line of credit was $9.5&nbsp;million. The only restriction on the use of these funds is that the Company
must be in compliance with covenants of the credit facility. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;11, 2008 the Company entered into a three derivative financial instruments with Key Bank to reduce the Company's exposure to its variable interest rates on its
outstanding debt. These instruments initially hedged $70&nbsp;million of its LIBOR-based floating rate debt with the amounts hedged decreasing over time. The derivatives mature on March&nbsp;31,
2010 and March&nbsp;31, 2011 and result in an average fixed rate of 3.16% for the term of the agreements. The Company designated these instruments as cash flow hedges. In March&nbsp;2008 as a
result of the amendment to the Company's Credit Facility, the Company determined that these instruments were no longer highly effective as a hedge. Future gains and losses on these derivative
instruments as well as the offsetting gain or loss on the hedged item attributable to the hedged risk will be recognized in earnings. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>100</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=100,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=964290,FOLIO='100',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_101"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;8. Notes Payable and Other Financing Arrangements (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
March 2008 The Company entered into a tentative agreement to settle the 2004 and 2007 securities class action litigation actions, and as a result, the Company recorded a
$4.9&nbsp;million charge in the quarter ended December&nbsp;31, 2007 to accrue its share of the settlement amounts and an estimate for a contingent liability associated with legal proceedings
related to the derivative actions, net of the amounts to be covered by the Company's insurance carriers. As a consequence of recording this legal settlement, the Company did not meet certain of the
financial covenants in accordance with the Credit Agreement. Accordingly, on March&nbsp;27, 2008, the Company obtained an amendment and waiver from its lenders to waive the impact of the legal
settlement amounts on its financial covenants as of December&nbsp;31, 2007 and the affected future periods. The amendment also amended the Credit Agreement to provide for an increase in the LIBOR
floor rate to 4.25% and to require that the Company set aside in a restricted account, approximately 50% of the proceeds of the recovery from the theft of stock options by its former stock option
administrator, or approximately $1.7&nbsp;million, to fund these settlement amounts. The lenders have also reserved the right to require the Company to utilize the entire amount of the
$3.4&nbsp;million in proceeds received from the theft of stock options to permanently pay down indebtedness. This right can be exercised no earlier than 60&nbsp;days from March&nbsp;27, 2008 and
expires upon the Company's compliance with financial covenants under the Credit Agreement for the four consecutive quarters commencing after January&nbsp;1, 2008. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
net benefit of the swap agreements entered into by us on February&nbsp;11, 2008 has been reduced by the LIBOR floor included in the amendment and waiver discussed above. The cost
related to this amendment will be recorded as deferred financing costs for the credit facility in the first quarter of 2008. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;9. Lease Commitments  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company leases certain facilities and equipment under operating leases having terms expiring at various dates through 2016. Future minimum lease payments
under capital and operating leases as of December&nbsp;31, 2007 are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="71%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Capital Leases</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Net Operating Leases</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Year ending December&nbsp;31,</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2008</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.6</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2009</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.2</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2010</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.8</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2011</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.0</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2012</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Thereafter</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.9</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Total future minimum lease payments</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>16.3</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Less amount representing interest</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Present value of capital lease obligations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Less current portion</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Long-term capital lease obligations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="11%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>101</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=101,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=672166,FOLIO='101',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_102"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;9. Lease Commitments (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant
to the terms of sublease agreements as of December&nbsp;31, 2007, approximately $0.8&nbsp;million of sublease income will offset future minimum lease
payments. Gross rent expense under operating leases for the years ended December&nbsp;31, 2005, 2006 and 2007 were $4.6&nbsp;million, $4.0&nbsp;million and $4.3&nbsp;million, respectively.
Total sublease income for the years ended December&nbsp;31, 2005, 2006 and 2007 totaling $0.3&nbsp;million, $0.2&nbsp;million and $0.2&nbsp;million, respectively, has been netted against rent
expense. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based
on management's assessment of assumptions based upon existing market conditions, sublease rental rates and recoverability of operating lease expenses for the Company's vacant
properties and due to the Company's actions to consolidate facilities, during the fourth quarter of 2006, the Company reevaluated its accrual for unused office space and determined that a portion of
its corporate facility would no longer be utilized to the extent previously expected. As a result, the Company calculated the estimated loss on unused office space to increase by approximately
$1.4&nbsp;million in 2006. In 2007, the Company recorded an additional $0.8&nbsp;million for an excess facility accrual for obligations under facility leases that were unfavorably impacted by its
recent divestitures of our wireless network services businesses which resulted in unused office space. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
accrual for loss on unused office space was $2.6&nbsp;million and $2.4&nbsp;million as of December&nbsp;31, 2006 and December&nbsp;31, 2007, respectively. The Company
estimates that the remaining accrual will be paid through 2010. These amounts are included in asset impairment and other charges on the Company's statement of operations. The lease on certain office
facilities includes scheduled base rent increases over the term of the lease. The total amount of the base rent payments is being charged to expense on the straight-line method over the
term of the lease. In addition to the base rent payment, the Company pays a monthly allocation of the building's operating expenses. The Company has recorded deferred rent, included in accrued
expenses and other liabilities in the consolidated balance sheets, of $1.0&nbsp;million and $0.8&nbsp;million at December&nbsp;31, 2006 and 2007, respectively, to reflect the excess of rent
expense over cash payments since inception of the respective lease. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;10. Income Taxes  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July 2006, the FASB issued Interpretation No.&nbsp;48, Accounting for Uncertainty in Income Taxes&#151;An Interpretation of FASB Statement
No.&nbsp;109 ("FIN&nbsp;48"). FIN&nbsp;48 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement
No.&nbsp;109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN&nbsp;48, the impact of an uncertain income tax position must be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN&nbsp;48
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company adopted the provisions of FIN&nbsp;48 on January&nbsp;1, 2007. The total liability for unrecognized tax benefits as of the date of adoption was $4.7&nbsp;million.
Additionally, the Company has a tax refund claim of $2.4&nbsp;million for which it has not recorded any benefit under FIN&nbsp;48 or prior standards. As a result of the implementation of
FIN&nbsp;48, the Company recognized a $0.7&nbsp;million increase in the liability for unrecognized tax benefits, with $0.2&nbsp;million net decrease in valuation allowance, $0.1&nbsp;million
charged to retained earnings, and $0.4&nbsp;million recorded to goodwill. In addition, </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>102</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=102,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=263310,FOLIO='102',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_103"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;10. Income Taxes (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>the
Company reduced its gross deferred tax assets by $10.8&nbsp;million for unrecognized tax benefits, which was offset by a reduction in its valuation allowance by the same amount. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table summarizes the activity related to the Company's unrecognized tax benefits (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="67%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="85%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Balance at January&nbsp;1, 2007</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Increases related to prior periods</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Decreases related to current year tax positions</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(7.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Expiration of applicable statutes of limitations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Foreign currency translation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>Balance at December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="85%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Included
in the balance of unrecognized tax benefits at December&nbsp;31, 2007, are $12.8&nbsp;million of tax benefits that, if recognized, would affect the effective tax rate.
Included in this amount is $8.8&nbsp;million that would become a deferred tax asset it the tax benefit were recognized. As such, this benefit may be impacted by a corresponding valuation allowance
depending upon the Company's financial condition at the time the benefits are recognized. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the year ended December&nbsp;31, 2007, the Company recorded
$0.2&nbsp;million in interest and penalties. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company believes that it is reasonably possible that as much as $3.8&nbsp;million of the FIN&nbsp;48 tax liabilities will expire within 12&nbsp;months of December&nbsp;31,
2007 due to the expiration of various applicable statutes of limitations and possible settlement of a pending income tax refund claim. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company is subject to taxation in the U.S. and various state tax jurisdictions. The Company's tax years for 2000 and forward are subject to examination by the U.S. and state tax
authorities due to the existence of net operating loss carryforwards. Generally, the Company's tax years for 2002 and forwards are subject to examination by various foreign tax authorities. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
assessing the realizability of deferred tax assets, management considers on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As such, management has determined that it is appropriate to maintain a full valuation allowance against
its deferred tax assets, with the exception of an amount equal to its deferred tax liabilities which can be expected to reverse. Management will continue to evaluate the necessity to maintain a
valuation allowance against its deferred tax asset. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, the Company had a net deferred tax liability of $2.0&nbsp;million. The deferred tax assets and liabilities are allocated based upon the underlying asset
or liability that produced the deferred taxes. As of December&nbsp;31, 2007, there were no deferred tax assets or liabilities allocated to discontinued operations. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>103</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=103,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=68513,FOLIO='103',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_104"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;10. Income Taxes (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income
(loss) from continuing operations before provision (benefit) for income taxes for the years ended December&nbsp;31, 2005, 2006 and 2007 is comprised of the following (in
millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="73%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="62%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="62%" style="font-family:times;"><FONT SIZE=2>Domestic</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(32.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(26.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
provision (benefit) for income taxes from continuing operations for the years ended December&nbsp;31, 2005, 2006 and 2007 is comprised of the following (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="72%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Current:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Federal</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.0</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>State</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="59%" style="font-family:times;"><FONT SIZE=2>Total current</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(5.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Deferred:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Federal</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>12.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>State</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="59%" style="font-family:times;"><FONT SIZE=2>Total deferred</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
reconciliation of total income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate of 35% to income (loss) from continuing operations
before income tax provision (benefit) for the years ended December&nbsp;31, 2005, 2006 and 2007 is as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="73%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Income tax expense (benefit) at federal statutory rate</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(9.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>State taxes, net of federal tax benefit and valuation allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Increase (decrease) in federal valuation allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Increase (decrease) in reserves for uncertain tax positions</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Contingent acquisition consideration</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Tax basis difference on subsidiaries</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Nondeductible expense</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Revision of prior year estimates</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Goodwill write-off</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="60%" style="font-family:times;"><FONT SIZE=2>Total</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>104</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=104,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=498604,FOLIO='104',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<A NAME="page_eo49901_1_105"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;10. Income Taxes (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December&nbsp;31, 2006 and 2007 are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="70%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Deferred tax assets:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Allowance for doubtful accounts</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Sundry accruals</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Vacation accrual</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Stock-based compensation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Property and equipment, principally due to differences in depreciation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Investments</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Goodwill and other intangibles</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Net operating loss carryforwards</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>52.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>62.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Capital loss carryforward</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Tax credit carryforwards</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Deferred revenue</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Reserves and other</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>75.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>84.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Valuation allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(54.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(75.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Total deferred tax assets, net of allowance</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Deferred tax liabilities:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Unearned revenue</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(12.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other intangibles</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(9.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Property and equipment, principally due to differences in depreciation</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Other liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Total deferred tax liabilities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(22.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Net deferred tax liability</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(2.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At
December&nbsp;31, 2007, the Company had federal tax loss carryforwards of $174.2&nbsp;million (including stock option net operating loss carryforwards) which expire beginning in
2020 and various state tax loss carryforwards of $152.7&nbsp;million which expire beginning in 2012. Federal and state tax laws impose restrictions on the utilization of net operating loss and tax
credit carryforwards in the event of an "ownership change" for tax purposes as defined by Section&nbsp;382 of the Internal Revenue Code. The Company may have incurred one or more "ownership changes"
under Section&nbsp;382. If an "ownership change" did occur, utilization of the net operating loss or credit carryforward amounts may be limited. As discussed elsewhere, deferred tax assets relating
to the net operating loss and credit carryforwards
are offset by a full valuation allowance. In addition, utilization of state tax loss carryforwards is dependent upon sufficient taxable income apportioned to the states. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>105</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=105,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=476569,FOLIO='105',FILE='DISK133:[08ZAH1.08ZAH49901]EO49901A.;31',USER='GKIBBE',CD='27-MAR-2008;15:00' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_eq49901_1_106"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;10. Income Taxes (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. During fiscal 2007, the Company recorded an increase in its valuation allowance of $20.7&nbsp;million. Of this amount, $9.9&nbsp;million is a result
of current year operations, causing the current year tax expense to increase over the expected expense or benefit. The remaining increase in the valuation allowance is attributed to deferred tax
assets acquired in the acquisition of Haverstick Consulting,&nbsp;Inc. and the true-up of beginning deferred tax assets based on actual tax return filings. The increase was required
based on the Company's overall assessment of the risks and uncertainties related to its future ability to realize and utilize the Company's deferred tax assets. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(a)&nbsp;&nbsp;&nbsp;Preferred Stock  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;30, 2002, the Company issued an aggregate of 90,000 shares of Series&nbsp;B Convertible Preferred Stock, at an aggregate purchase price of
$45.0&nbsp;million, in a private placement to entities affiliated with one of the directors of the Company (40,000 shares), to a brother of the Chairman and Chief Executive Officer of the Company
(10,000 shares) and to an unrelated third-party investor (40,000 shares). The Company received $44.9&nbsp;million of net proceeds. Each share of Series&nbsp;B Convertible Preferred Stock is
initially convertible into 100 shares of Common Stock for a conversion price of $5.00 per share, which was the fair market value of the common stock at the closing, at the option of the holder at any
time, subject to certain provisions in the Series&nbsp;B Preferred Stock Purchase Agreement. Prior to December&nbsp;31,
2004, 64,517 shares of Series&nbsp;B Convertible Preferred Stock were converted into 6,451,700 shares of the Company's Common Stock. On April&nbsp;5, 2006, 15,483 shares of Series&nbsp;B
Convertible Preferred Stock were converted into 1,548,300 shares of the Company's Common Stock. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through
December&nbsp;31, 2007, the Company has received notices from the holders to convert an aggregate number of 80,000 shares of Series&nbsp;B Convertible Preferred Stock into an
aggregate 8,000,000 shares of the Company's Common Stock. On December&nbsp;31, 2007, the total liquidation preference equaled $5.0&nbsp;million. In accordance with EITF
No.&nbsp;03-06 "Participating Securities and the Two-Class Method under FASB Statement No.&nbsp;128", the Company's Series&nbsp;A and B Preferred Stock was considered a
participating security for purposes of computing basic earnings per share as further discussed in Note&nbsp;1(o). </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>(b)&nbsp;&nbsp;&nbsp;Stock Option Plans and Restricted Stock Unit Plans  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the years ended 1997, 1999 and 2000, the Board of Directors approved the 1997 Stock Option Plan (the "1997 Plan"), the 1999 Equity Incentive Plan (the
"1999 Plan") and the 2000 Non-statutory Stock Option Plan (the "2000 Plan"), respectively. Further, in February 2005, the Board of Directors approved the 2005 Equity Incentive Plan (the
"2005 Plan"). The 2005 Plan was subsequently approved by a majority of the Company's stockholders on May&nbsp;18, 2005. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock
options granted under the 1997 Plan and 1999 Plan may be incentive stock options or non-statutory stock options and are exercisable for up to ten years following the
date of grant. The Company ceased making grants under, and subsequently terminated the 1997 Plan upon completion of its initial public offering. The 2000 Plan permits the grant of
non-statutory stock options, which are </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>106</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=106,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=894521,FOLIO='106',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_107"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>exercisable
for a period following the date of grant as determined by the Board of Directors (generally ten years). Additionally, in July 2004, the Board of Directors resolved that all future stock
option grants under all of the Company's stock option plans would be non-statutory stock options, until such further determination by the Board of Directors. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock
option exercise prices for the 1997 Plan, 1999 Plan, 2000 Plan and 2005 Plan must be equal to or greater than the fair market value of the common stock on the date of grant. A
cumulative total of 7.5&nbsp;million, 15.9&nbsp;million, 6.5&nbsp;million and 3.5&nbsp;million shares of common stock have been authorized for issuance under the 1997 Plan, 1999 Plan, 2000
Plan and 2005 Plan, respectively. There remain approximately 2.3&nbsp;million shares of common stock authorized for the 1997 Plan which are no longer issuable due to the termination of the plan. In
accordance with the provisions of SFAS No.&nbsp;123, "Accounting for Stock-Based Compensation," the Company applies APB Opinion No.&nbsp;25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its 1997 Plan, 1999 Plan and 2000 Plan. On May&nbsp;18, 2005, the Compensation Committee of the Company's Board of Directors
approved the acceleration of vesting of all unvested options to purchase shares of the Company's common stock that were held by current employees, including executive officers, and which have an
exercise price per share equal to or greater than $10.00. Options to purchase 2,044,487 shares of common stock were subject to this acceleration. The options subject to acceleration had a weighted
average exercise price of $12.02. The exercise prices and number of shares subject to the accelerated options were unchanged. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
September&nbsp;19, 2005, the Compensation Committee of the Company's Board of Directors approved the acceleration of vesting of all unvested options to purchase shares of the
Company's common stock that were held by current employees, including executive officers, and excluding Directors and which have an exercise price per share equal to or greater than $8.00. Options to
purchase 1,026,197 shares of common stock were subject to this acceleration. The options subject to acceleration had a weighted average exercise price $9.06. The exercise prices and number of shares
subject to the accelerated options were unchanged. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;21, 2005, the Company's Board of Directors approved, subject to certain limited conditions, the acceleration of vesting of all unvested options to purchase shares of
common stock of the Company that were held by employees, and which have an exercise price per share equal to or greater than $6.50. The acceleration was effective as of December&nbsp;30, 2005,
provided that holders of incentive stock options within the meaning of Section&nbsp;422 of the Internal Revenue Code of 1986, as amended, were given the election to decline the acceleration of an
option if such acceleration would have the effect of changing the status of such option for federal income tax purposes from an incentive stock option to a non-qualified stock option.
Options to purchase approximately 316,239 shares of common stock were subject to this acceleration. The options subject to acceleration had a weighted average exercise price of $6.82. The number of
shares subject to the accelerated options remained unchanged. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
acceleration of these options was undertaken to avoid recognition of future compensation expense that the Company would otherwise recognize in its consolidated statement of
operations with respect to these options once the Financial Accounting Standards ("FASB") No.&nbsp;123 (revised 2004) "Share-Based Payment", issued by the Financial Accounting Standards Board,
became effective. As originally issued by the FASB, SFAS No.&nbsp;123 was to be implemented as of the beginning of the first </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>107</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=107,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=411478,FOLIO='107',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_108"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>interim
or annual period beginning after June&nbsp;15, 2005. In April, 2005, the SEC announced it would permit companies to implement SFAS No.&nbsp;123R at the beginning of the next fiscal year.
The future expense that was eliminated as a result of the acceleration of the accelerated vesting of these options was approximately $18.4&nbsp;million, net of tax (of which approximately
$7.8&nbsp;million was attributable to options held by executive officers and $0.4&nbsp;million is attributable to options held by directors). </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, on December&nbsp;21, 2005, the Board of Directors of the Company approved, subject to certain limited conditions, the amendment of all outstanding stock option grants
under the Company's 1999 Equity Incentive Plan and 2000 Nonstatutory Stock Option Plan (collectively, the "</FONT><FONT SIZE=2><I>Option Plans</I></FONT><FONT SIZE=2>"), with an exercise price per
share greater than 120% of the closing market price of the Company's common
stock on December&nbsp;29, 2005 to provide that, as of December&nbsp;30, 2005, the exercise price of each outstanding stock option under the Option Plans shall be reduced to 120% of the closing
price of the Company's common stock as reported on the NASDAQ National Market on December&nbsp;29, 2005; </FONT><FONT SIZE=2><I>provided, however</I></FONT><FONT SIZE=2>, that the holder of such
outstanding stock option is an employee of the Company on December&nbsp;30, 2005, but excluding (i)&nbsp;employees of the Company that are categorized as project staff associates and
(ii)&nbsp;employees who have, prior to December&nbsp;30, 2005, given notice to, or received notice from, the Company terminating their employment on a date or time period after December&nbsp;30,
2005. There was no financial impact related to this amendment. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
acceleration of these options was undertaken to eliminate the future compensation expense that the Company would otherwise have recognized in its consolidated statement of operations
with respect to these options once the Statement of Financial Accounting Standards No.&nbsp;123 (revised 2004) "Share-Based Payment", issued by the Financial Accounting Standards Board
("</FONT><FONT SIZE=2><I>FAS&nbsp;123</I></FONT><FONT SIZE=2>"), became effective for reporting periods beginning in January 2006. The future expense that was eliminated as a result of the
acceleration of the vesting of these options was approximately $0.8&nbsp;million (none of which is attributable to options held by executive officers). In addition, because the repricing occurred in
lieu of additional option grants in 2006 of approximately 2.5&nbsp;million shares for certain of the Company's employees (the "2006 </FONT><FONT SIZE=2><I>Option Grants</I></FONT><FONT SIZE=2>"),
the repricing enabled the Company to significantly offset the dilutive impact of the 2006 Option Grants by reducing both the FAS&nbsp;123 compensation expense for future option grants as well as the
dilution to the Company's outstanding share amount. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective
January&nbsp;1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No.&nbsp;123R ("SFAS&nbsp;123R"), "Share-Based Payments," which
requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS&nbsp;123R supersedes the Company's
previous accounting methodology using the intrinsic value method under Accounting Principles Board Opinion APB No.&nbsp;25, "Accounting for Stock Issued to Employees." Under the intrinsic value
method, no share-based compensation expense related to stock option awards granted to employees had been recognized in the Company's Consolidated Statements of Operations, as all stock option awards
granted under the plans had an exercise price equal to or greater than the market value of the common stock on the date of grant. The Company has no awards with market or performance conditions. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company adopted SFAS&nbsp;123R using the modified prospective transition method. Under this transition method, compensation expense recognized during the years ended
December&nbsp;31, 2006 and 2007 included: (a)&nbsp;compensation expense for all share-based awards granted prior to, but not yet vested, as of December&nbsp;31, 2005, based on the grant date
fair value estimated in accordance with the </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>108</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=108,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=314040,FOLIO='108',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_109"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>original
provisions of SFAS&nbsp;123, and (b)&nbsp;compensation expense for all share-based awards granted subsequent to December&nbsp;31, 2005, based on the grant date fair value estimated in
accordance with the provisions of SFAS&nbsp;123R. In accordance with the modified prospective transition method, the Company's consolidated financial statements for prior periods have not been
restated to reflect the impact of SFAS&nbsp;123R. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;28, 2006, the Board of Directors of the Company approved the acceleration of vesting of all unvested options issued prior to June&nbsp;30, 2006 to purchase shares of
common stock of the Company that were held by employees and directors. The acceleration was effective as of December&nbsp;29, 2006, provided that holders of incentive stock options within the
meaning of Section&nbsp;422 of the Internal Revenue Code of 1986, as amended, were given the election to decline the acceleration of an option if such acceleration would have the effect of changing
the status of such option for federal income tax purposes from an incentive stock option to a non-qualified stock option. Options to purchase approximately 2.1&nbsp;million shares of
common stock were subject to this acceleration. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
acceleration of these options was undertaken to eliminate the future compensation expense that the Company would have otherwise recognized in its consolidated statement of operations
with respect to these options under the Statement of Financial Accounting Standards No.&nbsp;123R "Share-Based Payment", issued by the Financial Accounting Standards Board
("</FONT><FONT SIZE=2><I>FAS&nbsp;123R</I></FONT><FONT SIZE=2>"). The expense that was incurred in 2006 related to the vesting of these options was $5.4&nbsp;million in continuing operations and
$4.1&nbsp;million in discontinued operations. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
January&nbsp;10, 2007, the Compensation Committee of the Board approved a form of Restricted Stock Unit Agreement (the "RSU Agreement") to govern the issuance of restricted stock
units ("RSU") to executive officers under the Company's 2005 Plan. Each RSU represents the right to receive a share of common stock (a "Share") on the vesting date. Unless and until the RSUs vest, the
Employee will have no right to receive Shares under such RSUs. Prior to actual distribution of Shares pursuant to any vested RSUs, such RSUs will represent an unsecured obligation of the Company,
payable (if at all) only from the general assets of the Company. The RSUs that may be awarded to executive officers under the RSU Agreement will vest according to vesting schedules specified in the
notice of grant accompanying each grant. We recognize compensation expense on a straight-line basis over the vesting periods based on the market price of our stock on the grant date. Of
the awards granted in 2007, the vesting periods ranged from 11&nbsp;months to 10&nbsp;years with accelerated vesting occurring upon a change in control or termination. Upon exercise of the RSU,
the Company issues new shares of common stock. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><I>Information under FAS123R for Fiscal 2006 and 2007  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes
option-pricing model and the weighted average assumptions (annualized percentages) included in the following table. Awards with </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>109</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=109,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=1029072,FOLIO='109',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_110"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>graded
vesting are recognized using the straight-line method. Fair value under SFAS No.&nbsp;123R is determined using the Black-Scholes option-pricing model with the following
assumptions: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="77%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="13%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Expected life:(1)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>Stock options</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.8&nbsp;years</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.0&nbsp;years</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="66%" style="font-family:times;"><FONT SIZE=2>Purchase plan</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Risk-free interest rate(2)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Volatility(3)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>61.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>56.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Forfeiture rate(4)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>23.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>23.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Dividend yield(5)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="13%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE ALIGN="LEFT" WIDTH="120">
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(1)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
expected life of stock options granted under the Plans is based upon historical exercise patterns which the Company believes are representative of future behavior or the life of
the option when the options are 100% vested at grant. All options granted in 2007 were 100% vested at grant date and had a life of 10&nbsp;years. The expected life of shares under the Purchase Plan
represents the amount of time remaining in the offering period.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(2)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term of the options.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(3)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
Company estimated the implied volatility of its common stock at the date of grant based on an equally weighted average of trailing volatility and market based implied volatility
for the computation in 2006 and in 2007 we estimated implied volatility based upon trailing volatility.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(4)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>Forfeitures
are estimated at the time of grant based upon historical information. Forfeitures will be revised, if necessary, in subsequent periods if actual forfeitures differ from
estimates. Previously, under APB25, the Company recognized forfeitures as they were incurred.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>(5)</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>The
Company has no history or expectation of paying dividends on its common stock. </FONT></DD></DL>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>110</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=110,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=331088,FOLIO='110',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_111"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Upon
option exercise, the Company issues new shares of common stock. A summary of the status of the Company's stock option plan as of December&nbsp;31, 2007 and of changes in options
outstanding under the plan for the year ended December&nbsp;31, 2007 is as follows: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="88%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="8%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted-Average Exercise Price per Share</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="17%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted-Average Remaining Contractual Term (in years)</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Aggregate Intrinsic Value</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="8%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>(000's)<BR> </B></FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="17%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>(000's)<BR> </B></FONT><BR></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Options outstanding at December&nbsp;31, 2006</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11,144</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.12</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="34%" style="font-family:times;"><FONT SIZE=2>Options granted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.18</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="34%" style="font-family:times;"><FONT SIZE=2>Options exercised</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(15</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.68</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="34%" style="font-family:times;"><FONT SIZE=2>Options forfeited or expired</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4,963</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.93</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Options outstanding at December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,181</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.28</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.5</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Options exercisable at December&nbsp;31, 2007</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,145</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.31</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.8</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, there was $26&nbsp;thousand of total unrecognized stock compensation expense related to nonvested shares which is expected to be recognized over a
remaining weighted-average vesting period of 1.4&nbsp;years. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During
the years ended December&nbsp;31, 2006 and 2007, the following activity occurred under our option plans: </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="69%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="75%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>(In thousands except weighted average grant date fair value)<BR> </B></FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Weighted average grant date fair value of options granted</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.33</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.54</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="75%" style="font-family:times;"><FONT SIZE=2>Total intrinsic value of options exercised</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>179</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additional
information about stock options outstanding at December&nbsp;31, 2007 with exercise prices less than $2.35 per share, the exercise price at December&nbsp;31, 2007 the last
trading day of the period, follows (number of shares in thousands): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="86%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="29%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=4 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Exercisable</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=4 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Unexercisable</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=4 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Total</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH WIDTH="29%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Stock Options<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="8%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Exercise Price</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="8%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Exercise Price</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="8%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Shares</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average Exercise Price</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="29%" style="font-family:times;"><FONT SIZE=2>Less than $2.35</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>109</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>35</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.03</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>144</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.04</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="29%" style="font-family:times;"><FONT SIZE=2>Above $2.35</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,036</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.39</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.39</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,037</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.39</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="29%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="29%" style="font-family:times;"><FONT SIZE=2>Total outstanding</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,145</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.31</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.15</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6,181</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.28</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="29%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>111</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=111,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=221430,FOLIO='111',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_eq49901_1_112"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2><B> The following table summarizes the Company's Restricted Stock Unit activity:  </B></FONT></P>
</UL>
<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="87%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="67%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>(Shares in Thousands)<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="9%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Restricted Stock Units (000's)</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted-Average Grant-Date Fair Value</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2><B>Nonvested balance at December&nbsp;31, 2006</B></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Grants</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2,751</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.29</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Vested</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(550</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.36</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>Forfeitures</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(40</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.33</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2><B>Nonvested balance at December&nbsp;31, 2007</B></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2,156</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>2.28</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="67%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007, there was $4.6&nbsp;million of total unrecognized stock compensation expense related to nonvested restricted stock units which is expected to be
recognized over a remaining weighted-average vesting period of 8.8&nbsp;years. The fair value of RSU awards that vested in 2007 was $1.2&nbsp;million (none in 2005 and 2006). </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><I>Information under FAS&nbsp;123 for Periods Prior to Fiscal 2006  </I></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock option transactions are summarized below (shares in thousands): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="80%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TH>
<TH WIDTH="9%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=6 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Options Outstanding</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="9%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=4 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Exercise Price per Share</B></FONT><HR NOSHADE></TH>
</TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="9%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Shares Available for Grant</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="12%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Number of Shares Outstanding</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="19%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Range</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Weighted Average</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Outstanding at December&nbsp;31, 2004</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7,192</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11,831</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>$1.33&#151;$132.06</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>9.11</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="35%" style="font-family:times;"><FONT SIZE=2>Plan Shares Expired</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(28</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="35%" style="font-family:times;"><FONT SIZE=2>Granted</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(10,196</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10,196</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>$4.95&#151;$9.54</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.22</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="35%" style="font-family:times;"><FONT SIZE=2>Exercised</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&#151;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(593</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>$1.33&#151;$6.43</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.31</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="35%" style="font-family:times;"><FONT SIZE=2>Cancelled</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8,269</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8,269</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>$3.58&#151;$132.00</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.42</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Outstanding at December&nbsp;31, 2005</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5,237</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>13,165</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>$1.33&#151;$52.88</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.27</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="12%" ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="19%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="10%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>(c)&nbsp;&nbsp;&nbsp;Employee Stock Purchase Plan  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 2.9&nbsp;million shares of Common Stock
have been authorized for issuance under the Purchase Plan. The Purchase Plan qualifies as an employee stock purchase plan within the meaning of Section&nbsp;423 of the Internal Revenue Service Code.
The Purchase Plan commenced in November 1999 upon completion of the Company's initial public offering. On November&nbsp;16, 2005, the Compensation Committee of the Board of Directors elected to
suspend all future offerings under the Purchase Plan effective January&nbsp;1, 2006. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unless
otherwise determined by the Compensation Committee of the Board of Directors, all employees were eligible to participate in the Purchase Plan so long as they are employed by the
Company (or a subsidiary designated by the board) for at least 20&nbsp;hours per week and were customarily employed by the Company (or a subsidiary designated by the board) for at least
5&nbsp;months per calendar year. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>112</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=112,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=735294,FOLIO='112',FILE='DISK133:[08ZAH1.08ZAH49901]EQ49901A.;17',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="page_es49901_1_113"> </A>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT> <FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC.  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued)  </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employees who actively participated in the Purchase Plan were eligible to have up to 15% of their earnings for each purchase period withheld pursuant to the
Purchase Plan. The amount that was withheld was used at various purchase dates within the offering period to purchase shares of Common Stock. The price paid for Common Stock at each such purchase date
was then equal the lower of 85% of the fair market value of the Common Stock at the commencement date of that offering period or 85% of the fair market value of the Common Stock on the relevant
purchase date. Employees were also able to end their participation in the offering at any time during the offering period, and participation ended automatically upon termination of employment. From
the Purchase Plan's inception through December&nbsp;31, 2007, the cumulative number of shares of Common Stock that have been issued under the Purchase Plan was 2,005,899. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(d)&nbsp;&nbsp;&nbsp;Shelf Registration  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;19, 2004 the Company filed a universal shelf Registration statement on Form&nbsp;S-3 and an acquisition shelf Registration on
Form&nbsp;S-4 with the Securities and Exchange Commission (SEC). The Company has no immediate plans to raise capital under the shelf Form&nbsp;S-3 or to utilize the shelf
Form&nbsp;S-4 for acquisition transactions and the registration statements are not currently usable due to the late filings made in 2007. The universal shelf registration statement on
Form&nbsp;S-3 will permit the Company to sell, in one or more public offerings, shares of newly issued common stock, shares of newly issued preferred stock, warrants or debt securities,
or any combination of such securities, for proceeds in an aggregate amount of up to $200&nbsp;million. In addition, the universal shelf will permit certain stockholders who purchased the Company's
Series&nbsp;A and Series&nbsp;B Convertible Preferred Stock, to sell up to 5.4&nbsp;million shares of common stock, all of which are currently included in the Company's December&nbsp;31, 2005
weighted average diluted common shares outstanding. The acquisition shelf registration statement on Form&nbsp;S-4 will enable the Company to issue up $200&nbsp;million of its common
stock in one or more acquisition transactions that the Company may make from time to time. These transactions may include the acquisition of assets, businesses or securities, whether by purchase,
merger or any other form of business. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>(e)&nbsp;&nbsp;&nbsp;Stockholder Rights Agreement  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;16, 2004, the Company entered into a Stockholder Right Agreement (the "Rights Agreement"). Under the terms of the Rights Agreement, initially,
the Rights will attach to all certificates representing shares of outstanding Company common stock and no separate Rights Certificates will be distributed. Subject to the provisions of the Rights
Agreement the Rights will separate from the Company common stock and the "Distribution Date" will occur upon the earlier of (i)&nbsp;ten business days following a public announcement (the date of
such announcement being the "Stock Acquisition Date") that person or group of affiliated or associated persons has acquired or obtained the right to acquire beneficial ownership of 15% or more of the
then-outstanding Common Stock (an "Acquiring Person"), or (ii)&nbsp;ten business days (or such later date as may be determined by action of the Board of Directors prior to such time as
any person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. An Acquiring Person does not
include certain persons specified in the Rights Agreement. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>113</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=113,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=320026,FOLIO='113',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_114"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;11. Stockholders' Equity (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December&nbsp;16, 2004, the Company's Board of Directors authorized and declared a dividend of one right (a "Right") to purchase on one-hundredth of a share of the
Company's Series&nbsp;C Preferred Stock ("Series&nbsp;C Preferred") for each outstanding share of Common Stock, par value $0.001 ("Common Stock"), to stockholders of record as of the close of
business December&nbsp;27, 2004 (the "Record Date"). Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one
one-hundredth of a share of Series&nbsp;C Preferred at a purchase price of $54.00, subject to adjustment (the "Purchase Price"). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Rights are not exercisable until the Distribution Date and will expire at the close of business on the tenth anniversary of the Rights Agreement unless earlier redeemed or exchanged
by the Company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;12. Employee Benefit Plan  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 1996, the Company implemented a 401(k) savings plan pursuant to Section&nbsp;401(k) of the Internal Revenue Code (the "Code"), covering substantially all
employees. Participants in the plan may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code.
The Company may make contributions at the discretion of its Board of Directors. The Company made contributions of $2.1&nbsp;million in 2005, $2.5&nbsp;million in 2006 and $2.1&nbsp;million in
2007. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
November&nbsp;18, 2004, the Board of Directors adopted the Wireless Facilities,&nbsp;Inc. Nonqualified Deferred Compensation Plan, effective as of January&nbsp;1, 2005 (the
"Plan"). The Plan provides executive officers and other eligible highly compensated employees with the opportunity to enter into agreements to defer up to eighty percent (80%) of their cash
compensation derived from base salary, bonus awards and/or commissions. In addition, the Company may, in its sole and absolute discretion, award any participant under the Plan an additional employer
contribution. Deferrals are adjusted for gain or loss based on the performance of one or more investment options selected by the participant from among investment funds chosen by the committee
appointed to administer the Plan. Participants may elect that distribution of deferred amounts be paid in the form of either a lump sum or in annual installments if the participant terminates
employment as a result of his or her retirement. However, all other distributions under the Plan will be made in a single lump sum. Distributions occur upon termination of service or upon such other
dates that may be elected by the participant in accordance with the terms of the Plan. The Company, in its sole discretion, may suspend or terminate the Plan or revise of amend it in any respect
whatsoever; provided, however, that no such action may reduce amounts credited to deferral accounts and such accounts will continue to be owed to the participants or beneficiaries and will continue to
be a liability of the Company. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>114</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=2,SEQ=114,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=638379,FOLIO='114',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_115"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;13. Significant Customers  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents our key customers for the years presented and the percentage of net sales made to such customers (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="77%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Key Customer<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Revenue</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="9%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>% of Total Revenue</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2005</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="69%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>33.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2006</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="69%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>34.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2007</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="69%" style="font-family:times;"><FONT SIZE=2>U.S. Army</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>46.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>24</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="69%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>38.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="9%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
top five customers accounted for approximately 38%, 47% and 62% of our total revenue in 2005, 2006 and 2007, respectively. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For
the fiscal year ended December&nbsp;31, 2007, two customers comprised approximately 60% of our federal business revenues and our five largest customers accounted for approximately
84% of federal business revenues. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following table presents net accounts receivable for customers with significant concentrations (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="71%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=2 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Key Customer<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Accounts receivable, net</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="16%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>% of Total accounts receivable, net</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2006</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="16%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>FMS</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="16%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>11</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>2007</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="17%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="16%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>U.S. Army</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>15.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="16%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>20</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="54%" style="font-family:times;"><FONT SIZE=2>U.S. Navy</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="17%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>10.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="16%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>%</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;14. Segment Information  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has historically organized its business along service lines to include three reportable segments: Wireless Network Services (WNS), Enterprise Network
Services (ENS) and Government Network Services (GNS). The Wireless Network Services segment was discontinued in the first quarter of 2007 (see Note&nbsp;4) and we have renamed the ENS segment to the
Public Safety&nbsp;&amp; Security (PSS) segment and the GNS segment to the Government Solutions (KGS) segment to more accurately describe the underlying business operations. Certain income and charges
that are not allocated to segments in the Company's management reports because they are not considered in evaluating the segments' operating performance are categorized as reconciling items in the
table below. Unallocated charges are related to corporate expenses previously allocated to the discontinued wireless network services segment prior to the disposal of those businesses, share based
compensation charges and related tax adjustments, impairment and restructuring charges and expenses related to the stock option investigation conducted in 2007. As a result of the divestiture of the
WNS businesses, the corporate expenses allocated to the PSS and KGS segments has increased in 2007, negatively impacting the </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>115</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=3,SEQ=115,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=1728,FOLIO='115',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_116"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;14. Segment Information (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>operating
income (loss) for these continuing operations. Due to the aforementioned discontinued operations, prior period amounts have been reclassified in order to conform to the current period
presentation and allocation methodology. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues,
operating income (loss) and assets provided by the Company's segments for the years ended December&nbsp;31, 2005, 2006 and 2007 are as follows (in millions): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="79%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2005</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Revenues:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Government Solutions</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>85.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>97.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>142.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Public Safety&nbsp;&amp; Security</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>67.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>55.6</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>51.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="57%" style="font-family:times;"><FONT SIZE=2>Total revenues</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>152.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>153.1</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>193.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Operating income (loss) from continuing operations:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Government Solutions</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Public Safety&nbsp;&amp; Security</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>5.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(23.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(6.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Corporate activities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(10.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(15.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(21.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="57%" style="font-family:times;"><FONT SIZE=2>Total operating income (loss) from continuing operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>3.2</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(31.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(24.6</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="100%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH COLSPAN=3 ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2006</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>2007</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="6%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT><BR></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>Assets:</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Government Solutions</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>188.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>292.4</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Public Safety&nbsp;&amp; Security</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>27.9</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>22.5</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Discontinued Operations</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>104.0</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>1.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD COLSPAN=2 style="font-family:times;"><FONT SIZE=2>Corporate activities</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>17.8</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>18.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=0>&nbsp;</FONT></TD>
<TD WIDTH="61%" style="font-family:times;"><FONT SIZE=2>Total assets</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>337.7</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>335.3</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD COLSPAN=3 style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD COLSPAN=2 ALIGN="RIGHT" style="font-family:times;"><HR NOSHADE SIZE=4></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="6%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
operating income (loss) of the Public Safety&nbsp;&amp; Security segment for 2005, 2006 and 2007 were impacted by the following items: </FONT></P>

<UL>
<UL>
<DL compact>
<DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>a
benefit to operating income in 2005 as a result of a $2.1&nbsp;million credit to reduce an excess contingent acquisition accrual.
<BR><BR></FONT></DD><DT style='font-family:times;margin-bottom:-11pt;'><FONT SIZE=2>&#149;</FONT></DT><DD style="font-family:times;"><FONT SIZE=2>charges
in 2006 of $18.3&nbsp;million related to the impairment of goodwill and a $1.8&nbsp;million impairment of an asset. </FONT></DD></DL>
</UL>
<UL>

<P style="font-family:times;"><FONT SIZE=2>The
reconciling amounts in 2006 were impacted by increased stock-based compensation expense due to the Company's adoption of SFAS No.&nbsp;123R in January 2006. Amounts related to corporate
activities in 2007 were impacted by the costs of the stock option investigation and related costs as well as the recovery from the former stock option administrator. See Note&nbsp;2 to Notes to
Consolidated Financial Statements. </FONT></P>

</UL>
</UL>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;15. Related Party Transactions  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;30, 2002, the Company issued an aggregate of 90,000 shares of Series&nbsp;B Convertible Preferred Stock, at an aggregate purchase price of
$45.0&nbsp;million, in a private placement to entities </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>116</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=4,SEQ=116,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=924399,FOLIO='116',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_117"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;15. Related Party Transactions (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>affiliated
with one of the directors of the Company (40,000 shares), to a brother of the previous Chairman and Chief Executive Officer of the Company (10,000 shares) and to an unrelated third-party
investor (40,000 shares). The Company received $44.9&nbsp;million of net proceeds. Each share of Series&nbsp;B Convertible Preferred Stock is initially convertible into 100 shares of Common Stock
for a conversion price of $5.00 per share, which was the fair market value of the common stock at the closing, at the option of the holder at any time, subject to certain provisions in the
Series&nbsp;B Preferred Stock Purchase Agreement. Prior to December&nbsp;31, 2004, 64,517 shares of Series&nbsp;B Convertible Preferred Stock were converted into 6,451,700 shares of the
Company's Common Stock. On April&nbsp;5, 2006, 15,483 shares of Series&nbsp;B Convertible Preferred Stock were converted into 1,548,300 shares of the Company's Common Stock. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through
December&nbsp;31, 2007, the Company has received notices from the holders to convert an aggregate number of 80,000 shares of Series&nbsp;B Convertible Preferred Stock into an
aggregate 8,000,000 shares of the Company's Common Stock. On December&nbsp;31, 2007, the total liquidation preference equaled $5.0&nbsp;million. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
February&nbsp;17, 2006, the Company entered into a definitive agreement to divest all of its operations in Mexico for total approximate cash consideration of $18.0&nbsp;million
subject to adjustments for the closing net asset calculations, with $1.5&nbsp;million payable in cash on signing of the Equity Purchase Agreement and $16.5&nbsp;million by means of a secured
promissory note payable in installments through December 2006, which approximates the net book value of the operations. The purchaser, Sakoki&nbsp;LLC, is a newly-formed entity controlled by Massih
Tayebi. Although Massih Tayebi has no current role with the Company, he was a co-founder of the Company, having served as Chief Executive Officer from inception in 1994 through September
2000 and as a director from inception through April 2002. In addition, as of July&nbsp;31, 2007, Massih Tayebi owns or controls approximately 8.2% of the total voting power of the Company's capital
stock. He is also the brother of Masood Tayebi, who was the Company's Chairman of the Board of Directors until March&nbsp;6, 2007. Masood Tayebi had no personal financial interest in the transaction
and has no role with the entity that has purchased the Mexico Operations. The transaction was approved by the disinterested members of the Company's Board of Directors after consideration of other
expressions of interest and an independent valuation analysis. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
final closing balance sheet as of February&nbsp;17, 2006 resulted in net asset adjustments aggregating to a total approximate $18.9&nbsp;million consideration,
$1.5&nbsp;million which was paid on February&nbsp;17, 2006, with the remaining $17.4&nbsp;million payable by means of the promissory note in installments through December&nbsp;31, 2006 with an
interest rate of 7.5% per annum. On June&nbsp;26, 2006, the Company entered into an Addendum with the buyer to finalize the closing net asset calculations, pursuant to which the parties agreed that
the resulting total purchase price was $18.9&nbsp;million. The Addendum also provided for a conditional waiver that permits the purchaser to make the payment due on August&nbsp;17, 2006 by
September&nbsp;30, 2006, and for the installments due on November&nbsp;17, 2006 and December&nbsp;31, 2006 to be made on or before December&nbsp;29, 2006. Failure to make the payments on such
later dates would have resulted in a restoration of the original terms of the note. The first scheduled note payment of $3.3&nbsp;million was received from the buyer on May&nbsp;19, 2006, and the
second scheduled note payment of $5.5&nbsp;million was received in installments of $5.2&nbsp;million on September&nbsp;29, 2006 and $0.3&nbsp;million on October&nbsp;10, 2006. The remaining
note receivable balance of $9.5&nbsp;million which included accrued interest through December&nbsp;29, 2006, was paid in full on December&nbsp;29, 2006. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>117</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=5,SEQ=117,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=342324,FOLIO='117',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_118"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;16. Commitments and Contingencies  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company periodically evaluates all pending or threatened contingencies and any commitments, if any, that are reasonably likely to have a material adverse
effect on its operations or financial position. The Company assesses the probability of an adverse outcome and determines if it is remote, reasonably possible or probable as defined in accordance with
the provisions of SFAS No.&nbsp;5, "Accounting for Contingencies." If information available prior to the issuance of the Company's financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date of the Company's financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then such
loss is accrued and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions pursuant to SFAS No.&nbsp;5 are not met, but the probability of an
adverse outcome is at least reasonably possible, the Company will disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such an estimate
cannot be made. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company maintains an accrual for the Company's health and workers compensation partial self-insurance, which is a component of total accrued expenses and current
liabilities of
discontinued operations in the consolidated balance sheets. Management determines the adequacy of these accruals based on a monthly evaluation of the Company's historical experience and trends related
to both medical and workers compensation claims and payments, information provided to the Company by the Company's insurance broker, industry experience and the average lag period in which claims are
paid. If such information indicates that the Company's accruals require adjustment, the Company will, correspondingly, revise the assumptions utilized in the Company's methodologies and reduce or
provide for additional accruals as deemed appropriate. As of December&nbsp;31, 2005, 2006 and 2007, the accrual for the Company's partial self-insurance programs approximated
$2.6&nbsp;million, $1.8&nbsp;million and $1.1&nbsp;million, respectively. In 2005, 2006 and 2007 the accrual for these programs which was related to continuing operations was
$1.1&nbsp;million, $0.2&nbsp;million, and $0.6&nbsp;million, respectively. The Company also carries stop-loss insurance that provides coverage limiting the Company's total exposure
related to each medical and workers compensation claim incurred, as defined in the applicable insurance policies. The medical and workers compensation annual claim limits are $100,000 and $250,000,
respectively. For each year ending 2005 and 2006, the Company had one claim that exceeded the limits for workers compensation and in 2007 no claims exceeded the limits for workers compensation. For
each year ending 2005 and 2006, the Company had no claim that exceeded the limits for medical insurance and in 2007 three claims exceeded the limits for medical insurance. As of December&nbsp;31,
2007, the Company had a $700,000 letter of credit outstanding issued from the Company's insurance carrier to cover a performance bond and liabilities in connection with the Company's workers'
compensation partial self-insurance. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2007 the Company has $2.4&nbsp;million of standby letters of credit. The letters of credit related to our worker compensation program of $0.7&nbsp;million
and $1.7 as support for our performance bond on work overseas. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>118</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=6,SEQ=118,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=492278,FOLIO='118',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_119"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;17. Legal Matters  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Contingencies  </B></FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B><I>IPO Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Beginning in June 2001, the Company and certain of its officers and directors were named as defendants in several parallel class action shareholder complaints
filed in the United States District Court for the Southern District of New York, now consolidated under the caption, </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Initial Public
Offering Securities Litigation</I></FONT><FONT SIZE=2>, Case No.&nbsp;01-CV-4779. In the amended complaint, the plaintiffs allege that the Company, certain of its officers
and directors, and the underwriters of the Company's initial public offering ("IPO") violated section&nbsp;11 of the Securities Act of 1933 and section&nbsp;10(b) of the Securities Exchange Act of
1934 based on allegations that the Company's registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices
of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court against hundreds of other public companies ("Issuers") that
conducted IPOs of their common stock in the late 1990s and 2000 (the "IPO Cases"). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
June 2004, the Issuers (including the Company) executed a settlement agreement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all claims
against the Issuers and their officers and directors and the assignment of certain potential Issuer claims to the plaintiffs. On February&nbsp;15, 2005, the court issued a decision certifying a
class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August&nbsp;31, 2005, the
court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive Order. On February&nbsp;24, 2006, the court dismissed litigation filed against certain
underwriters in connection with certain claims to be assigned under the settlement. On April&nbsp;24, 2006, the court held a Final Fairness Hearing to determine whether to grant final approval of
the settlement. On December&nbsp;5, 2006, the Second Circuit Court of Appeals vacated the lower court's earlier decision certifying as class actions the six IPO Cases designated as "focus cases."
Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs' petition to the Second Circuit for rehearing en banc and resolution of the
class certification issue. On April&nbsp;6, 2007, the Second Circuit denied plaintiffs' rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District
Court. Accordingly, the stay remains in place and the plaintiffs and Issuers have stated that they are prepared to discuss how the settlement might be amended or renegotiated to comply with the Second
Circuit's decision. Plaintiffs filed amended complaints in the six focus cases on or about August&nbsp;14, 2007. On September&nbsp;27, 2007, Plaintiffs filed a motion for class certification in
the six focus cases. On November&nbsp;13, 2007, the Issuer Defendants filed a motion to dismiss the amended complaints in the six focus cases. On November&nbsp;14, 2007, the Underwriter Defendants
filed a motion to dismiss the amended complaints in the six focus cases. The court has not yet set a deadline for the plaintiffs to file amended complaints in the other IPO lawsuits. Due to the
inherent uncertainties of litigation, and because the settlement may not receive final approval from the Court, the ultimate outcome of this matter cannot be predicted. In accordance with FASB
No.&nbsp;5, </FONT><FONT SIZE=2><I>"Accounting for Contingencies"</I></FONT><FONT SIZE=2> The
Company believes any contingent liability related to this claim is not probable or estimable and therefore no amounts have been accrued in regards to this matter. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>119</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=7,SEQ=119,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=831961,FOLIO='119',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_120"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;17. Legal Matters (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>2004 Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August 2004, following the Company's announcement on August&nbsp;4, 2004 that it intended to restate its financial statements for the fiscal years ended
December&nbsp;31, 2000, 2001, 2002 and 2003, the Company and certain of its current and former officers and directors were named as defendants ("Defendants") in several securities class action
lawsuits filed in the United States District Court for the Southern District of California. These actions were filed on behalf of those who purchased, or otherwise acquired, the Company's common stock
between April&nbsp;26, 2000 and August&nbsp;4, 2004. The lawsuits generally allege that, during that time period, Defendants made false and misleading statements to the investing public about the
Company's business and financial results, causing its stock to trade at artificially inflated levels. Based on these allegations, the lawsuits allege that Defendants violated the Securities Exchange
Act of 1934, and the plaintiffs seek unspecified damages. These actions have been consolidated into a single action&#151;</FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc.
Securities Litigation,</I></FONT><FONT SIZE=2> Master File No.&nbsp;04CV1589-JAH. Plaintiffs filed a First Amended Consolidated Class Action Complaint on April&nbsp;1, 2005. Defendants
filed their motion to dismiss this first amended complaint on April&nbsp;14, 2005. The plaintiffs then requested leave to amend their first amended complaint. The plaintiffs filed their Second
Amended Complaint on June&nbsp;9, 2005, this time on behalf of those who purchased, or otherwise acquired, the Company's common stock between May&nbsp;5, 2003 and August&nbsp;4, 2004. Defendants
filed their motion to dismiss this Second Amended Complaint on July&nbsp;14, 2005. The motion to dismiss was taken under submission on October&nbsp;20, 2005 and on March&nbsp;8, 2006, the Court
granted the Defendants' motion. However, plaintiffs were granted the right to amend their complaint within 45&nbsp;days and subsequently filed their Third Amended Consolidated Class Action Complaint
on April&nbsp;24, 2006. Defendants filed a motion to dismiss this complaint on June&nbsp;8, 2006. On May&nbsp;7, 2007, the Court denied the Defendants' motion to dismiss. Defendants' filed their
answer to the plaintiffs' complaint on July&nbsp;13, 2007. In February 2008, following a voluntary mediation of the matter, the parties reached a tentative agreement to settle the class action.
Under the tentative settlement, plaintiffs and the class will dismiss all claims, with prejudice, in exchange for a cash payment in the total amount of $12&nbsp;million. The Company's directors' and
officers' liability insurers will pay the settlement amount in accordance with the Company's insurance policies, less any applicable retention or co-insurance obligations that are expected
to be paid directly by the Company. The Company estimates that the amount of its payment toward the settlement will be approximately $2.4&nbsp;million. The Company has accrued approximately
$2.4&nbsp;million as of December&nbsp;31, 2007 related to this matter. The parties currently are in the process of documenting their agreement and then will seek a determination by the Court that
the proposed settlement is fair, reasonable and adequate. The Company makes no assurances at this time that the Court will approve the proposed settlement terms or that the matter ultimately will be
settled. Despite the tentative settlement reached in this action, the Company believes that the allegations lack merit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
2004, two derivative lawsuits were filed in the United States District Court for the Southern District of California against certain of the Company's current and former officers and
directors: </FONT><FONT SIZE=2><I>Pedicini v. Wireless Facilities,&nbsp;Inc.,</I></FONT><FONT SIZE=2> Case No.&nbsp;04CV1663; and </FONT><FONT SIZE=2><I>Roth v. Wireless
Facilities,&nbsp;Inc.,</I></FONT><FONT SIZE=2> Case No.&nbsp;04CV1810. These actions were consolidated into a single action in </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc.
Derivative Litigation</I></FONT><FONT SIZE=2>, Lead Case No 04CV1663-JAH. These lawsuits contain factual allegations that are substantially similar those made in the class action lawsuits,
but the plaintiffs in these lawsuits assert claims for breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets, </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>120</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=8,SEQ=120,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=439600,FOLIO='120',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_121"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;17. Legal Matters (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>violation
of Sarbanes Oxley Act section&nbsp;304, unjust enrichment and insider trading. The plaintiffs in these lawsuits seek unspecified damages and equitable and/or injunctive relief. The lead
plaintiff filed a consolidated complaint on March&nbsp;21, 2005. On May&nbsp;3, 2005, the defendants filed motions to dismiss this action, to stay this action pending the resolution of the
consolidated non-derivative securities case pending in the Southern District of California, and to dismiss the complaint against certain non-California resident defendants.
Pursuant to a request by the Court, Defendants' motions were withdrawn without prejudice pending a decision on defendants' motion to dismiss the complaint against the non-California
resident defendants. On March&nbsp;20, 2007, the Court ruled that it lacked personal jurisdiction over five of the six non-California defendants and dismissed them from the federal
derivative complaint. On March&nbsp;27, 2007, plaintiffs filed an amended derivative complaint setting forth all of the same allegations from the original complaint and adding allegations regarding
the Company's stock option granting practices. Basically, plaintiffs allege that the Company "backdated" or "springloaded" employee stock option grants so that the options were granted at less than
fair market value. The amended complaint names all of the original defendants (including those dismissed for lack of jurisdiction) as well as nine new defendants. On July&nbsp;2, 2007, the
non-California resident defendants moved to dismiss the complaint for lack of personal jurisdiction. On October&nbsp;17, 2007, the Court took the motion under submission without oral
argument. On February&nbsp;26, 2008, the Court again ruled that it lacked personal jurisdiction over five of the six non-California defendants and dismissed them from the amended federal
derivative complaint. The parties have conferred and discussed the Court's order and have stipulated to a briefing schedule for any remaining motions to dismiss that the Company, along with the
individual defendants subject to the court's jurisdiction, may bring in an effort to dismiss the complaint as to them. Pursuant to the parties' stipulation, such motions must be brought on or before
June&nbsp;5, 2008. The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. It is impossible at this time to assess whether or not the outcome of
these proceedings will or will not have a material adverse effect on the Company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
April 2007, another derivative complaint was filed in the United States District Court for the Southern District of California, </FONT><FONT SIZE=2><I>Hameed v.
Tayebi</I></FONT><FONT SIZE=2>, Case No.&nbsp;07-CV-0680 BTM(RBB) (the "</FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action"), against several of the Company's
current and former officers and directors. The allegations in this new derivative complaint mirror the amended allegations in the 2004 federal derivative action. Pursuant to the Court's order and
agreement of the parties, the defendants' responses to the complaint in the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action were stayed until the Court ruled on the motion to dismiss for
lack of personal jurisdiction in the 2004 derivative litigation. As noted above, on February&nbsp;26, 2008, the Court ruled that it lacked personal jurisdiction over five of the
non-California defendants named in the 2004 derivative action, including three that were also named in the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action. The parties have
conferred and discussed the Court's order and are in the process of stipulating to a briefing schedule for any remaining motions to dismiss that the Company, along with the individual defendants
subject to the court's jurisdiction, may bring in an effort to dismiss the </FONT><FONT SIZE=2><I>Hameed</I></FONT><FONT SIZE=2> Action as to them. At this time, the parties have not set a date by
which such
motions must be brought. The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
August and September 2004, two virtually identical derivative lawsuits were filed in California Superior Court for San Diego County against certain of the Company's current and former
officers and directors. These actions contain factual allegations similar to those of the federal lawsuits, but the plaintiffs in these cases assert claims for violations of California's insider
trading laws, breaches of </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>121</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=9,SEQ=121,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=329738,FOLIO='121',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_122"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;17. Legal Matters (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>fiduciary
duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiffs in these actions seek unspecified damages, equitable and/or injunctive relief and
disgorgement of all profits, benefits and other compensation obtained by defendants. These lawsuits have been consolidated into one action&#151;</FONT><FONT SIZE=2><I>In re Wireless
Facilities,&nbsp;Inc. Derivative Litigation,</I></FONT><FONT SIZE=2> California Superior Court, San Diego County, Lead Case No. GIC 834253. The plaintiffs filed a Consolidated Shareholder Derivative
Complaint on October&nbsp;14, 2004. This action has been stayed pending a decision in federal court on a motion to dismiss the federal derivative lawsuits. In October 2007, the parties notified the
Court of the status of the federal action and requested the court continue its stay of this action. The Company anticipates that the court will continue to stay this matter and that the court will
request the parties file an updated status report in April 2008. The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. It is impossible at this
time to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Company has recorded an accrual for a contingent liability associated with the legal proceedings related to the derivative actions of $0.8&nbsp;million based on the Company's
estimate of the potential amount it would have to pay in relation to these lawsuits. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2><B><I>2007 Securities Litigation  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In March and April 2007, there were three federal class actions filed in the United States District Court for the Southern District of California against the
Company and several of its current and former officers and directors. These class action lawsuits followed the Company's March&nbsp;12, 2007 public announcement that it was conducting a voluntary
internal review of its stock option granting processes. These actions have been consolidated into a single action, </FONT><FONT SIZE=2><I>In re Wireless Facilities,&nbsp;Inc. Securities Litigation
II</I></FONT><FONT SIZE=2>, Master File No.&nbsp;07-CV-0482-BTM-NLS. The consolidated class action complaint was filed on November&nbsp;19, 2007. In
March 2008, following a voluntary mediation of the matter, the parties reached a tentative agreement to settle the class action. Under the settlement proposal, plaintiffs and the class will dismiss
all claims, with prejudice, in exchange for a cash payment in the amount of $4.5&nbsp;million. The Company's directors' and officers' liability insurers will pay the settlement amount, less any
applicable retention or co-insurance obligations and contributions that are expected to be paid directly by the Company. The Company estimates that the total amount of its payment toward
the settlement will be
approximately $1.7&nbsp;million. The Company has accrued approximately $1.7&nbsp;million as of December&nbsp;31, 2007 related to this matter. The parties currently are in the process of
documenting their agreement, and then will seek a determination by the Court that the proposed settlement is fair, reasonable and adequate. The Company makes no assurances at this time that the Court
will approve the proposed settlement terms or that the matter ultimately will be settled. Despite the tentative settlement reached in this action, the Company believes that the allegations lack merit. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B><I>Other Litigation and Government Investigations  </I></B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January 2005, a former independent contractor of the Company filed a lawsuit in Brazil against the Company's subsidiary, WFI de Brazil, to which he had been
assigned for a period of time. He sought to be designated an employee of WFI de Brazil and entitled to severance and related compensation pursuant to Brazilian labor law. The individual sought back
wages, vacation pay, stock </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>122</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=10,SEQ=122,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=654884,FOLIO='122',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_123"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;17. Legal Matters (Continued) </B></FONT></P>

<BR>

<P style="font-family:times;"><FONT SIZE=2>option
compensation and related benefits in excess of $0.5&nbsp;million. This matter was argued before the appropriate labor court in July 2005 and in July, 2006, the labor court awarded the
individual the Brazilian currency equivalent of approximately $0.6&nbsp;million for his back wages, vacation pay and certain other benefits. The Company filed an appeal in the matter on
July&nbsp;20, 2006 and is challenging the basis for the award on several theories. The Company has accrued approximately $0.6&nbsp;million as of December&nbsp;31, 2007 related to this matter. On
August&nbsp;22, 2007, the appeals court partially upheld the Company's appeal, although it upheld the individual's designation as an employee. The court is reviewing possible damage calculations
before publishing a final decision. The Company's counsel is preparing a motion for clarification of the judgment due to omissions in the decision. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
March&nbsp;28, 2007, three plaintiffs, on behalf of a purported class of similarly situated employees and contractors, filed a lawsuit against the Company in the Superior Court of
the State of California, Alameda County. The suit alleges various violations of the California Labor Code and seeks payments for allegedly unpaid straight time and overtime, meal period pay and
associated penalties. The Company and the plaintiffs have agreed to venue for the suit in San Diego County. Although the Company believes that the allegations lack merit, it has agreed in principle
with the plaintiffs to settle their claims for an aggregate amount in the range of $0.3&nbsp;million to $0.5&nbsp;million, to include individual and incentive awards, attorneys' fees and
administrative costs, subject to court approval. The actual amount paid by the Company will depend upon the number of responses received from members of the purported class of plaintiffs. The Company
has recorded an accrual for a contingent liability associated with this legal proceeding in the amount of $0.3&nbsp;million. </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition to the foregoing matters, from time to time, the Company may become involved in various claims, lawsuits and legal proceedings that arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company's business. The Company is currently not
aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>123</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=11,SEQ=123,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=472803,FOLIO='123',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_124"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;18. Quarterly Financial Data (Unaudited)  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following financial information reflects all normal and recurring adjustments that are, in the opinion of management, necessary for a fair statement of the
results of the interim periods. Summarized quarterly data for the years ended December&nbsp;31, 2006 and 2007, is as follows (in millions, except per share data): </FONT></P>

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="51%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>First Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Second Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Third Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Fourth Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2><I>Fiscal year 2006</I></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>33.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>34.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>36.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.1</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Gross profit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>6.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Operating loss from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.7</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(1.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(27.9</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Provision (benefit) for income taxes</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>14.8</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Net loss</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.9</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(55.7</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Net loss per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.76</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.01</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.76</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="100%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<!-- User-specified TAGGED TABLE -->
<DIV ALIGN="CENTER"><TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="51%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT><BR></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>First Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Second Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Third Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="2%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH COLSPAN=2 ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Fourth Quarter</B></FONT><HR NOSHADE></TH>
<TH WIDTH="1%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2><I>Fiscal year 2007</I></FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Revenues</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.0</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>47.8</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>47.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>49.3</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Gross profit</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>7.5</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>8.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Operating loss from continuing operations</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(3.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(8.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(4.6</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Provision for income taxes</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.3</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.4</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Net income (loss)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(20.1</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>4.2</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(13.4</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(11.5</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Net income (loss) per common share:</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="7%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Basic</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.28</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.18</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="TOP">
<TD WIDTH="51%" style="font-family:times;"><FONT SIZE=2>Diluted</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.28</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>0.06</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.18</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
<TD WIDTH="2%" style="font-family:times;"><FONT SIZE=2>$</FONT></TD>
<TD WIDTH="7%" ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>(0.16</FONT></TD>
<TD WIDTH="1%" style="font-family:times;"><FONT SIZE=2>)</FONT></TD>
</TR>
</TABLE></DIV>
<!-- end of user-specified TAGGED TABLE -->


<P style="font-family:times;"><FONT SIZE=2><B>Quarterly Results in 2006  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company's revenues in the fourth quarter were higher than the first three quarters because of the MRC acquisition, which occurred early in the fourth quarter.
The Company's fourth quarter losses were significantly greater than the first three quarters due to the impairment of goodwill of $18.3&nbsp;million in our PSS business, an accelerated vesting of
stock options which resulted in a total charge of $9.5&nbsp;million, a write-off of assets related to discontinued operations of $5.2&nbsp;million and restructuring and other asset
impairment charges of $3.5&nbsp;million. In addition, the Company increased its valuation allowance by approximately $12.4&nbsp;million on its deferred tax assets in the fourth quarter of 2006 to
address the risks and uncertainties related to the Company's future ability to realize and utilize its deferred tax assets. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>124</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=12,SEQ=124,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=1026702,FOLIO='124',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<A NAME="page_es49901_1_125"> </A>
<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS,&nbsp;INC. </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Notes to Consolidated Financial Statements (Continued) </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B> Years ended December&nbsp;31, 2005, 2006 and 2007 </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;18. Quarterly Financial Data (Unaudited) (Continued) </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Quarterly Results in 2007  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company's results by quarter were impacted by the divestitures of our wireless network services segment. In the first quarter of 2007 the loss was primarily
due to impairment of assets related to the Wireless Deployment business of $13.4&nbsp;million and an impairment of goodwill related to this business of $7.2&nbsp;million partially offset by a gain
of $3.3&nbsp;million on the sale of the EMEA business. The second quarter income was impacted by a gain of $14.8&nbsp;million on the sale of the Wireless Engineering Services business operations.
The third quarter was impacted by a $1.9&nbsp;million loss from the disposal of our deployment business and a $2.1&nbsp;million excess facility accrual. The fourth quarter was impacted by a gain
of $3.4&nbsp;million related to the recovery of assets under the settlement with the Company's former stock option administrator as well as an expense of $4.9&nbsp;million related to our estimated
cost of the settlement of our 2004 and 2007 Securities Litigation. See Note&nbsp;16 to Notes to Consolidated Financial Statements. Stock option investigation and related costs of
$1.5&nbsp;million, $5.2&nbsp;million, $6.2&nbsp;million, and $1.1&nbsp;million impacted the results for the first, second, third and fourth quarters of 2007, respectively. </FONT></P>

<P style="font-family:times;"><FONT SIZE=2><B>Note&nbsp;19. Subsequent Events  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In February 2008, the Company entered into a definitive merger agreement with San Diego-based C5ISR and net-centric warfare solutions provider SYS
Technologies (AMEX:SYS) in a stock-for-stock transaction. Under the terms of the agreement, SYS will merge with a wholly-owned subsidiary of Kratos, and all of SYS's
outstanding common shares will be converted into Kratos common shares. Upon closing, Kratos will issue approximately 25&nbsp;million shares of its common stock. Approximately 79&nbsp;million
shares of Kratos common stock are currently outstanding. The transaction is subject to customary closing conditions, including approval of the transaction by SYS's shareholders and the approval of
Kratos stockholders for Kratos' issuance of shares. The transaction is expected to close in the second quarter of 2008. </FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2>125</FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=13,SEQ=125,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1",CHK=263017,FOLIO='125',FILE='DISK133:[08ZAH1.08ZAH49901]ES49901A.;30',USER='RKING',CD='27-MAR-2008;13:49' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_1">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_bc49901_1">Documents Incorporated by Reference</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_bg49901_1">KRATOS DEFENSE &amp; SECURITY SOLUTIONS, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_da49901_1">PART I</A></FONT><BR>
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_da49901_2">Item 1. Business</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dc49901_1">Item 1A. Risk Factors</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_de49901_1">Item 1B. Unresolved Staff Comments</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_de49901_2">Item 2. Properties</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dg49901_1">Item 3. Legal Proceedings</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dg49901_2">Item 4. Submission of Matters to a Vote of Security Holders</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_di49901_1">PART II</A></FONT><BR>
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_di49901_2">Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_di49901_3">COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Kratos Defense &amp; Security Solutions, Inc. The NASDAQ Composite Index, The NASDAQ Telecommunications Index And A Peer Group</A></FONT><BR>
<!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dk49901_1">Item 6. Selected Financial Data</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dk49901_2">Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&amp;A")</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_1">Item 7A. Quantitative and Qualitative Disclosures About Market Risk</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_2">Item 8. Financial Statements and Supplementary Data</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_3">Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_4">Item 9A. Controls and Procedures</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_5">REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</A></FONT><BR>
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_6">Item 9B. Other Information</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_7">PART III</A></FONT><BR>
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_8">Item 10. Directors and Executive Officers of the Registrant</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_9">Item 11. Executive Compensation</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_10">Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_11">Item 13. Certain Relationships and Related Transactions</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_12">Item 14. Principal Accountant Fees and Services</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_13">PART IV</A></FONT><BR>
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dq49901_14">Item 15. Exhibits, Financial Statement Schedules</A></FONT><BR>
</UL>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ds49901_1">SIGNATURES</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_du49901_1">REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</A></FONT><BR>

<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dw49901_1">KRATOS DEFENSE &amp; SECURITY SOLUTIONS, INC. Consolidated Balance Sheets December 31, 2006 and 2007 (in millions, except par value and number of shares)</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_dy49901_1">KRATOS DEFENSE &amp; SECURITIES SOLUTIONS, INC. Consolidated Statements of Operations Years ended December 31, 2005, 2006 and 2007 (in millions, except per share amounts)</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ec49901_1">KRATOS DEFENSE &amp; SECURITY SOLUTIONS, INC. Consolidated Statements of Cash Flows Years ended December 31, 2005, 2006 and 2007 (in millions)</A></FONT><BR>
<!-- TOC_BEGIN -->
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_eg49901_1">KRATOS DEFENSE &amp; SECURITY SOLUTIONS, INC. Notes to Consolidated Financial Statements Years ended December 31, 2005, 2006 and 2007</A></FONT><BR>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_eg49901_2">RECONCILIATION OF STOCK-BASED COMPENSATION EXPENSE FOR 2005 (In millions, except per share data)</A></FONT><BR>
<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="1" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>2
<FILENAME>a2184011zex-21_1.htm
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_2">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="ka49901_exhibit_21.1"> </A>
<A NAME="toc_ka49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 21.1    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="ka49901_list_of_subsidiaries"> </A>
<A NAME="toc_ka49901_2"> </A></FONT> <FONT SIZE=2><B>List of Subsidiaries    <BR>    </B></FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TH WIDTH="54%" ALIGN="LEFT" style="font-family:times;"><FONT SIZE=1><B>Subsidiary Name<BR> </B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="15%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Jurisdiction of<BR>
Organization</B></FONT><HR NOSHADE></TH>
<TH WIDTH="3%" style="font-family:times;"><FONT SIZE=1>&nbsp;</FONT></TH>
<TH WIDTH="26%" ALIGN="CENTER" style="font-family:times;"><FONT SIZE=1><B>Type&nbsp;of&nbsp;Entity</B></FONT><HR NOSHADE></TH>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Bejing Wanfeng United Wireless Technology Consulting Co. (dba WFI China)</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" style="font-family:times;"><FONT SIZE=2>China</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Defense Systems, Incorporated</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Virginia</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>DTI Associates,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Viriginia</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>EyeVelocity,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Washington</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Haverstick Consulting,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Indiana</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Haverstick Government Solutions,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Ohio</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>HGS Holdings,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Indiana</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>JMA Associates, Inc (dba TLA Associates)</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Commercial Solutions,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Government Solutions,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Mid-Atlantic,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Souteast,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Georgia</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Southwest L.P.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Texas</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Limited Partnership</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Kratos Texas,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Texas</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Madison Research Corporation</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Alabama</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Posinet,&nbsp;Inc.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Rocket Support Services, LLC</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Indiana</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Limited Liabilitity Company</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>WFI India Private Limited</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>India</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>WFI NMC Corp.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>WFI Uruguay S.A.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Uruguay</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Wireless Facilities International Hong Kong Limited</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Hong Kong</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Wireless Facilities International Singapore PTE&nbsp;LTD.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Singapore</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Wireless Facilities International, Spain S.L.&nbsp;</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Spain</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
<TR BGCOLOR="White" VALIGN="BOTTOM">
<TD WIDTH="54%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Wireless Facilities, Inc./Entel</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Delaware</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="26%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>Corporation</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="2",CHK=902508,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KA49901A.;5',USER='JBELANG',CD='25-MAR-2008;04:02' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_2">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ka49901_1">EXHIBIT 21.1</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ka49901_2">List of Subsidiaries</A></FONT><BR>

<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="2" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>a2184011zex-23_1.htm
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_3">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="kc49901_exhibit_23.1"> </A>
<A NAME="toc_kc49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 23.1    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><A
NAME="kc49901_consent_of_independent__kc402321"> </A>
<A NAME="toc_kc49901_2"> </A></FONT> <FONT SIZE=2><B>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    <BR>    </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have issued our reports dated March&nbsp;27, 2008, accompanying the consolidated financial statements and management's assessment of the effectiveness of
internal control over financial reporting included in the Annual Report of Kratos Defense and Security Solutions&nbsp;Inc. and subsidiaries on Form&nbsp;10-K for the year ended
December&nbsp;31, 2007. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Kratos Defense and Security Solutions&nbsp;Inc. on
Forms&nbsp;S-3 (No.&nbsp;333-53014, No.&nbsp;333-71618, No.&nbsp;333-74108, and No.&nbsp;333-112956), on
Form&nbsp;S-4 (No.&nbsp;333-112957) and on Forms&nbsp;S-8 (No.&nbsp;33-90455, No.&nbsp;333-54818,
No.&nbsp;333-71702, No.&nbsp;333-91852, No.&nbsp;333-116903, No.&nbsp;333-124957, and No.&nbsp;333-127060). </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>/s/
GRANT THORNTON&nbsp;LLP </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>Irvine,
California<BR>
March&nbsp;27, 2008 </FONT></P>

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="3",CHK=649163,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KC49901A.;5',USER='RKING',CD='27-MAR-2008;12:56' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_3">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_kc49901_1">EXHIBIT 23.1</A></FONT><BR>
</UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_kc49901_2">CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</A></FONT><BR>

<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="3" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>4
<FILENAME>a2184011zex-31_1.htm
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_4">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="ki49901_exhibit_31.1"> </A>
<A NAME="toc_ki49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 31.1    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>CERTIFICATION OF CHIEF EXECUTIVE OFFICER<BR>
PURSUANT TO SECTION&nbsp;302 OF THE SARBANES-OXLEY ACT OF&nbsp;2002  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>I,
Eric M. DeMarco, certify that: </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I
have reviewed this annual report on Form&nbsp;10-K of Kratos Defense&nbsp;&amp; Security Solutions, Inc.; </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report; </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules&nbsp;13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules&nbsp;13a-15(f) and 15d-15(f))
for the registrant and have: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report financial information; and </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>Date:
March&nbsp;27, 2008 </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TD WIDTH="39%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>ERIC M. DEMARCO</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Eric M. De Marco<BR></FONT> <FONT SIZE=2><I>Chief Executive Officer
and President</I></FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="58%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="4",CHK=796858,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KI49901A.;7',USER='MANDERS',CD='26-MAR-2008;21:18' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_4">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ki49901_1">EXHIBIT 31.1</A></FONT><BR>
</UL>
<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="4" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>5
<FILENAME>a2184011zex-31_2.htm
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_5">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="kk49901_exhibit_31.2"> </A>
<A NAME="toc_kk49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 31.2    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>CERTIFICATION OF CHIEF FINANCIAL OFFICER<BR>
PURSUANT TO SECTION&nbsp;302 OF THE SARBANES-OXLEY ACT OF&nbsp;2002  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>I,
Deanna H. Lund, certify that: </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I
have reviewed this annual report on Form&nbsp;10-K of Kratos Defense&nbsp;&amp; Security Solutions, Inc.; </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report; </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules&nbsp;13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules&nbsp;13a-15(f) and 15d-(f))for the
registrant and have: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and </FONT></P>


<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing similar functions): </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report financial information; and </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>Date:
March&nbsp;27, 2008 </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="BOTTOM">
<TD WIDTH="39%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>DEANNA H. LUND</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Deanna H. Lund<BR></FONT> <FONT SIZE=2><I>Chief Financial
Offer</I></FONT></TD>
<TD WIDTH="3%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="58%" VALIGN="TOP" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="5",CHK=401139,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KK49901A.;5',USER='MANDERS',CD='26-MAR-2008;21:18' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_5">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_kk49901_1">EXHIBIT 31.2</A></FONT><BR>
</UL>
<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="5" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>6
<FILENAME>a2184011zex-32_1.htm
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_6">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="km49901_exhibit_32.1"> </A>
<A NAME="toc_km49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 32.1    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>CERTIFICATION OF CHIEF EXECUTIVE OFFICER<BR>
PURSUANT TO SECTION&nbsp;18 U.S.C SECTION&nbsp;1350<BR>
AS ADOPTED PURSUANT TO<BR>
SECTION&nbsp;906 OF THE SARBANES-OXLEY ACT OF&nbsp;2002  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the Annual Report of Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. (the "Company") on Form&nbsp;10-K for the fiscal
year ended December&nbsp;31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric M. DeMarco, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Report fully complies with the requirements of Section&nbsp;13(a) or 15(d), of the Securities Exchange Act of 1934; and </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;That
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>Date:
March&nbsp;27, 2008 </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS, INC.</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2><BR>
&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>ERIC M. DEMARCO</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2><I>Chief Executive Officer</I></FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="6",CHK=427447,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KM49901A.;7',USER='MANDERS',CD='26-MAR-2008;21:18' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_6">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_km49901_1">EXHIBIT 32.1</A></FONT><BR>
</UL>

<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="6" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>7
<FILENAME>a2184011zex-32_2.htm
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<HTML>
<HEAD>
</HEAD>
<BODY BGCOLOR="#FFFFFF" LINK=BLUE  VLINK=PURPLE>
<BR>
<FONT SIZE=3 ><A HREF="#08ZAH49901_7">QuickLinks</A></FONT>
<font size=3> -- Click here to rapidly navigate through this document</font>
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2>


<!-- COMMAND=ADD_BASECOLOR,"Black" -->




<!-- COMMAND=ADD_DEFAULTFONT,"font-family:times;" -->


 </FONT></P>

<!-- TOC_END -->
<P ALIGN="RIGHT" style="font-family:times;"><FONT SIZE=2><A
NAME="ko49901_exhibit_32.2"> </A>
<A NAME="toc_ko49901_1"> </A>
<BR></FONT><FONT SIZE=2><B>EXHIBIT 32.2    <BR>    </B></FONT></P>

<P ALIGN="CENTER" style="font-family:times;"><FONT SIZE=2><B>CERTIFICATION OF CHIEF FINANCIAL OFFICER<BR>
PURSUANT TO SECTION&nbsp;18 U.S.C SECTION&nbsp;1350<BR>
AS ADOPTED PURSUANT TO<BR>
SECTION&nbsp;906 OF THE SARBANES-OXLEY ACT OF&nbsp;2002  </B></FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the Annual Report of Kratos Defense&nbsp;&amp; Security Solutions,&nbsp;Inc. (the "Company") on Form&nbsp;10-K for the fiscal
year ended December&nbsp;31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Deanna&nbsp;H. Lund, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002, that: </FONT></P>

<UL>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Report fully complies with the requirements of Section&nbsp;13(a) or 15(d), of the Securities Exchange Act of 1934; and </FONT></P>

<P style="font-family:times;"><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;That
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. </FONT></P>

</UL>

<P style="font-family:times;"><FONT SIZE=2>Date:
March 27, 2008 </FONT></P>

<!-- User-specified TAGGED TABLE -->
<TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0>
<TR VALIGN="TOP">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2>KRATOS DEFENSE&nbsp;&amp; SECURITY SOLUTIONS, INC.</FONT></TD>
</TR>
<TR VALIGN="TOP">
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2><BR>
&nbsp;</FONT></TD>
<TD WIDTH="3%" style="font-family:times;"><FONT SIZE=2><BR>&nbsp;</FONT></TD>
<TD WIDTH="49%" style="font-family:times;"><FONT SIZE=2><BR>
/s/&nbsp;&nbsp;</FONT><FONT SIZE=2>DEANNA H. LUND</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2><I>Chief Financial Officer</I></FONT></TD>
</TR>
</TABLE>
<!-- end of user-specified TAGGED TABLE -->

<HR NOSHADE>
<P style='font-family:times;page-break-before:always'></p>
<!-- ZEQ.=1,SEQ=1,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="7",CHK=776688,FOLIO='blank',FILE='DISK133:[08ZAH1.08ZAH49901]KO49901A.;8',USER='MANDERS',CD='26-MAR-2008;21:18' -->
<!-- THIS IS THE END OF A COMPOSITION COMPONENT -->
<BR>
<P><br><A NAME="08ZAH49901_7">QuickLinks</A><br></P><!-- TOC_BEGIN -->
<UL>
<FONT SIZE=2 style="font-family:times;"><A HREF="#toc_ko49901_1">EXHIBIT 32.2</A></FONT><BR>
</UL>

<!-- SEQ=,FILE='QUICKLINK',USER=RKING,SEQ=,EFW="2184011",CP="KRATOS DEFENSE & SECURITY",DN="7" -->
<!-- TOCEXISTFLAG -->
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>GRAPHIC
<SEQUENCE>8
<FILENAME>g808772.jpg
<DESCRIPTION>G808772.JPG
<TEXT>
begin 644 g808772.jpg
M_]C_X``02D9)1@`!`0$!KP&O``#__@`[1$E32S$S,SI;,#A:04@Q+C`X6D%(
M-#DY,#$N3U544%5473,R.3E?,5]015)&3U)-7TQ)3D4N15!3_]L`0P`'!08&
M!@4'!@8&"`@'"0L2#`L*"@L7$!$-$AL7'!P:%QH9'2$J)!T?*"`9&B4R)2@L
M+2\P+QTC-#@T+C<J+B\N_\``"P@!F0)H`0$1`/_$`!P``0`"`P$!`0``````
M```````%!@,$!P$""/_$`%<0``$$`@$"!`,$!P,(!0@'"0$``@,$!1$&$B$'
M$S%!%")1%C)A<15"5H&1E.(C-G07)#-28I6ATD1R@K+1)4-58Y*QP=,()C14
M9)/P-3=35W-V@\+A_]H`"`$!```_`+K6Y?R;_*3/A[MNC2:9WQU\7<KOB^)@
M'5TR0V!L/>=-)'IHD>H4?8YOS3#W\[C<A+1O9*#$/NL@KT9&""QUM:V-A)W8
M;I^RYH[:]5]U^><DL0Q8B/(56YRWE8,>6V<2^L^@U['/,CHG2'KVUOR]Q^*O
M?AQGK^=PMP97R79#'9"QCYY86=#)71.UUANSK8([?7:E<OR?C^&M,J97+U:D
M[VA[632=)()T#_$*91$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1
M$1$1%SR'POQ;.0-ORY'(38V*8VH<;)*#''.[KVX'75TCK)`ZO4E>4_"W&UVN
M;)G\[/Y51].@XV@Q]"-S@[^S<T`[[`;=OL->B^SX8X^2"Q+:S65L9F6W#<&6
M>]GGQR1-+8^D!O3TAI(T0=[.U9N)\=J<9Q(QU26:<NEDGGL3D&2>5[NISW$`
M#9/T"TO$K^X>>_PCU:$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1
M$1$1$1$1%5_$O^X>>_PCU:$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1
M$1$1$1$1$1$1%5_$O^X>>_PCU:$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1
M$1$1$1$1$1$1$1$1%5_$O^X>>_PCU:$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1
M$1$1$1$1$1$1$1$1$1<[QWB#<O\`+K^(K8!TV/I3OK330V`ZQ&YO5\[H-;$9
M(T#O?<'7?M&?Y6I*3LD,[Q>QCW5J/QL43;3992#(V-D<K``87N+VZ!WZGZ+9
M=XF78/B,7<XPZ+D[+T%*/&LN-?'(Z9A>Q_G=/9O2UV_E[$*V\*Y&.3X=]Q]-
MU*W7LRU+59SP_P`F:-VG-#AKJ'H0?Q6#Q*_N'GO\(]6A$1$1$1$1$1$1$1$1
M$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$7)'^'G(K7/:N8O96DZO3F-B'(Q5Q'
M=>T]8;`XCY2T=0V2#L`#ZK3M^%?(,XZ])G\UC6V7436CMT*KHY;;Q(Q[);/L
MXM\MO8?Q6[+X><FMV[')[>5QC>4G(5KD+8HY/A`V&-T8C=OYM.#W$GU!UI7+
M@/';/',-8AOV8K&0NW)KUM\+2V/S97;(8#WZ1V'=1GBK@\1;XME\K:Q\$M^O
M3(BG<W;F:.QH_F2KVB(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M%?G?%YMO)[-^U?RW*ZV7C?8?-<J2NBH8/RR_HC>#IKOE8.K8.]ZVNT<#REW-
M\-PF6R,89<MTXY90!H%Q'J![`^NOQ5@1$1$15?Q+_N'GO\(]6A$1$1$1$1$1
M$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$18;-FM5C$EJ>*%A<&!TCPT%Q.@-GW
M)[`*NV&<PM<PA\J6G1XU4:'/.A+-><6_=T?]&UI]_4Z'UT,65\.^&Y;)R92]
M@X9+4C@^4A[VLE</1SXP>EY_%P*R<)H\CQ,-_&YZ['?K03_^3[I.I987=^F1
MH``+3VV/7Z#2M*(B(B*K^)?]P\]_A'JT(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(H_-9C%X*@_(9B_!2J,(!EF?TC9]`/J?P"K.0\2N+PXB+(8N
MV<U)8F^&K5<<TR2S3:WT:_5[=^^NWU6_E.*8OD>4Q6:S,-F1U.,.BQ\TNX&2
M'OUN8.SGCTWLC_@K.B@^8<=J\HP-C$6I98>O3XIXG%KX96G;'C7N"`5]XF[%
M4-/C^1S->YG8ZC99=`1OF:/E,O1LZ!*F41$1%5_$O^X>>_PCU:$1$1$1$1$1
M$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$)`&RN2>+KLQ'<XYRG!UJV1I5!,PRN
MC=8CJ/DZ0VSY<8)>&@.]`=$A?7AS7LY'F4V?B?<LTXL4VG9R=JD:AR=GS.H2
M"(@'3&;;U$;[Z[Z7641%"9GC6+RV5Q.7L,ECOXR4R03POZ':(T6.(]6'W;__
M`-VXYR7&<A-^.B^5L]"PZM9@G9T21.![$M/?1]0?=3:*GM\0N.GD3L$Z2PQP
ME=7%M\#A6=,T$NB$GIU#I=^'8C>PM:EXG\4MQ6YA/<AAKU7W&R3U)(VV(&'3
MI(B1\X!^G=;#_$+`1XR3(2QY2)C9HZ\<4N.FCEL2OWTLC8YH+R='T4[QS.X[
MD6*BRF,D>^![G,(D86/8]ITYKFGN""-:47XE_P!P\]_A'JT(B(B(B(B+PN:#
MHN`/YH'-/8$'\BO41$1$1$1$1$1$1$1$1$1$1$1$1$1$1:.:RM'"8JUELC*8
MJ=5ADE>&EQ`_(;)5<$3?$+B71D*F9PE6S+ORC*(9Y80>W5K9:UX]6^NOXJRX
MK&T<1CJ^-QM6.M3KMZ(HHQH-"W$1$14;GN5AXA`_,8;C[,AR3*R,J11Q,T^P
M6L<X=1'<AK6N.O4]A^49PCG.9R%W"5\]%CI:V>KR38ZY0;)&.N,;DADCD)(<
M!O1!T=+IBXC3PO+Z_B*^U3PDN/:^P^;)&O::^A?KDO[B-[B1*[Y1Z#1V3V.U
M@9@.79J+*V.2<)L27):4E>K6;D8(*M:#J:[R(O+)<'N#=%[AW(UV"QU>)\HK
MS-S5#`7*^-HYJM>J8*S<;+-T-B<R=S7%Y`)<X.`+N_2?3LNB^&&'R6*PF0FR
MM;X6UD\G9R!K%P<8!(_;6$CL3H#T^JP>*N,EL<6R]]N7R$#(J9W5B<P0RZ._
MF!:7=_0Z([*]HB(B(B(B+@_BQ:XQ2\0K-CD>'AS$@PM:.A1D=TF69UB4:!]N
MW<GV`4IX.R\;L\HREWBM*&EC[6'I3.K1'?E2F28/:[\01K^!79$1$1$1$1$1
M$1$1$1$1$1$1$1$1%2O$7DM["C%XW%S4ZMW)RR#XR[_H:L,;"^61PV-D-'8;
M&R56>/\`/YL9+!)GL[#F,#>J36JF6AQ[X)-PO:R1CH0"2WYATN`[_P#%7K'<
MQX]D>/VN15;SCBJO7YT\D$D?1T@%WRN:'=@1Z!8\3S;C6:Q&1RV'R3;M3'L<
MZPZ-CATZ:7:^8#?8+EV.\2N39;"93E&)RF`L_H^`V[&!^'E$D,'<[,Y(V\`=
MP!KV^BZ;P2GFX\4Z_G\W^D[>0Z;'3''T05VEHTR-OKK6NY]3^_=I1$1$15_E
M_'&<CHUHX[LM"_2L-M4KD30YT$K00"6GLYI!(+3Z@J*PO$\M]H:W(>49V/)V
MZ43XJ,-:K\/#7ZP`]^NIQ<]P&M[T![*ZHB(JOXE_W#SW^$>K0B(B(B(B+7OW
M*N/I3WKL[(*L$9DEE>=-8T#9)7,.)X"MSW+VN?<GQ%>:G9B^&P]*U"UX95!)
M\U[2.[GDDCZ`]O59./8^AP7Q/NXF"E7K8SDL7Q%%\<0;Y<\8_M(`1^J0>L#T
M'?2ZFB(B(B(B(B(B(B(B(B(BQV9X:U>6S8D;'#$POD>XZ#6@;))^@"H=?Q.Q
MLGPMR?"9JI@[<C8H,O8KAM=Q<=-<?FZFL<2-.<T`[]ET!$1$1%J97(5<5C;6
M2NO+*M6)TTK@TN(:T;)T.Y5'MXBGXK<08[.X:YB8S8,U!TCF^<&`?)*6D$#J
M!.V.![?N*E^,\.9B<D[,9'+6\OE/(^&CGL,9&R"+>^B..,!K`=#?UT%;"`1H
MK'+!#-#)!+&UT4C2U[".S@1H@KG8\-)_@FX%_+LF_BC=`8HQQ]1C!V(C/KK,
M?MKUUVVNCL:UC&L8T-:T:``T`%ZB(B(B(B(B*K^)?]P\]_A'JT(B(B(B(BY?
MR5[_`!`Y6>'57N''<4]LN;F:="Q*#ME4']VW:^FNQ73HV,CC;'&QK&-`#6M&
M@`/0`*I^)7'[&>XT\XUWEYG'R-O8Z4>K9X^X'Y.&V_O4APGD,'*>,8_-P#H-
MB/\`M8O>*4=GL/Y.!'\%/(B(B(B(B(B(B(B(B(B*+Y-CH<S@<CA)['D-R-:6
MJ'@]QUL(V![D>NOP7#'<%\4,M8?B,K<EAHSZJVYA:C?1--H8&B&#[[9/DWU'
M7K^:[W1R./NR6H*5R">2I)Y,[(Y`XQ/U]UP'H5N(B(BQOFB9(R)TC&R/WT-+
M@"[7KH>^E7.*P<L=;R60Y-:K1QSOZ:F-K`.96C:2`XR:!<YPT3[>GY"SHB(B
M(B(B(B(B(BJ_B7_<//?X1ZM"(B(B(B*E^(W)+F*JU<)@6MFY+F'F"C&?2(?K
MS.^C6#O^>OQ4MPSC=/BN`KXBHYTI;M\\\G=]B5W=\CC[DG_AH>RGD7-<4W[&
M>)5K$?<PO)^JY4_U8KK1_:QCZ=;=.'XC2Z4B(B(B(B(B(B(B(B(B+7R%VICJ
M4]^]897JP,,DLLATUC0-DE5HX"AR+D>(YB_)R7:->J),=5`U"Q[^_G_4N+2`
M-^BMJ@!QC$U^33<JK5I(\I)7,,WDR=#;`[$=;>P<X:T"?_#7QP_E=#E%6PZO
M%/5NTY/)NT;+>F6M)_JN'XZV".Q5B1%X]S6,<]Y`:T;)/L%Q/(^+N9A94RM/
M$XZ?'7)#\)C6S2/R5B`;W/T-!:QNFEVG>WNK]@<#A\EFHN?-L6[UB[58ZB;+
M]MJ0O8#TQM'9O5O9)V>Y[JWHB(B(B(BP2W*L-J"I+8C98L!QBB<X!T@:`7:'
MOK8W^:SHB(M%F7Q;\H_$,R-5V18SK=5$K?-#?KT[VO:V6Q=I]AE7)5)GUM^>
MV.=KC%KUZM'Y?3W7S'F<1+CWY*/*4GT&;Z[+;##$W7KM^]#^*VJUB"U!'8JS
M1S02#J9)&X.:X?4$=B%7/$O^X>>_PCU:$1$1$1%&Y_,T,!AKF8R<WE4ZL9DD
M=KO^``]R3H`?4JH>'6&OW+5KG?(X>C,Y5@;7KN_Z#4]61#Z./WG?C^]=!1%4
M_$CCT_(>,RQT'>7EZ4C;N.E'JRQ'W;W_`![M/_66YPGDE?E/&*6;C;Y3I6$3
MQ.[&&5O9[#^1!_=I9\5RCCF7NRT<7G<==M1;+X:]ECW`#U.@?13*\+@/4CNN
M=<PYQ<I\KAXKAKN#I6_)9++9R\CNDE[BUD4<;2'/>=;/?0&OJIWAG(+^4FRN
M(S=2&OFL1,R*S\.2896O;U,D9ON`X>Q[C2M*(B(2!ZH""-A$1$1$1$1%X2`"
M2=`*ELL<:\2Z%Z@Z"S:Q=&\UCI.[(+3V:)#2#_:,!['?8D?D5=&-:QH8QH:T
M#0`&@`O441R"ME'8B^>.25*N7D:'12SQ=3'.&M!VN_<#6^^M_@L&(S<OV:KY
M;E%:+`S])^(BLV&=$3@2/O[UHZV/S4M1O4LA6;:H6X+5=_W98)`]COR([*'P
MW,..YS+V\3A\G'=LU&=<Q@!=&WOK7F:Z2?P!6OQMO,I[URQR;]$P47M+*]*F
M'2/;W^\^1V@=CV`^BI-7PFN8EN1QN`R^/HXK(.>);'Z.#K\<+OO0LFZM=.M@
M$C8_%=5QM&MC,=4QU-GEUJL+(8F?ZK&@`#^`6RB(B(BQ6IX:M::S8D;'#"PR
M2/=Z-:!LD_N"U,=F<;D</6S56W&['V(A-',X]+>DCWWZ?D?11M'FG%<CF683
M'YZE<R#FN<(:\GF=FC9[MV!KZ;45F.2\N&2L8_C_``:Q:$+^@W;MN.O`[_:;
MZN<._L`N&9GE.5R>9O<JR>>Q]/D&!<Z'$4*E:P^*8M=_:'J(T6R`N;WUO0^Z
M%UO$9KQ2L8JIDX<;QC,5+,398C!8FJR%I&^X>"`?PVK=+G<G1XNS,9/C=TWQ
MKS<9CG-M2M)=KY3\H=VT3^"KKO%OBE9A.6BS&(</U;^,FC_XAI'_`!6]X8<V
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MFFB/R`-<!W(WL_0IP+D/)<3:Y'0J\*S]^*+(-#8I\E'*^K_8L/EETCR3_K=B
M1\RN/VSY;_\`RRS'\Y7_`.95SQ*Y/RZ3@><;-P;(XR,UCU7#D:[O)&Q\VF/Z
MOX=U1>:\*OG$6\[)@[W'L;CHHG-K6,JZY);G=,P!Q^=[6L:"?H=_\/TX$1%J
MY+(4L71GR&1M15:D+>J2:5W2UH_$K\]9W(-EBY-5X?-+8PO+FODIAL;XMW8B
MTV(F;`/]K'O1]SV"U<9+>Y'E.*1XC(8L7Z=Z%_Z,Q.'?",9"T_VGFSOTYOR[
M:6D:<3[^J[DSBLOVG_3\G)LZ]K7E[,=\2&U6@MUHL#>X[D]SZ_DOJUPCB]OD
MK.3V<6)<O&]CV3NF?\KFC32&]72#H#V]E&\IX0_*9^#DF&R,&.R\<(KO?/29
M:CEC!ZF[8X@AP/HX$'V6A@N%\EX_R3],UN4MR(R,@=FH[M8-\T@$-?#T?<T-
M-#22-?7T5PQO(<+D\E?Q5+(PS7Z#^BS7!T^,]O8^H[^H[>RED1>.(:"YQ``[
MDGV7'?&?(21\@XYCKN-GR6&MQS=%)MIM:&W:!;T-FD)`#`TN=KW/L5]>'V9P
M6/\`$O+\2P-ML&,%..047S]<<=L'<C8"2=MZ3MP'NTZ&EV%$1$1%K9"PZK0L
MV8XS*^&)T@8/UB`3K]^E^;OMGE7<9=RZ')<VGRC8_B'VHJH_1#'_`/W<QDCY
M!]PO'???:[99Y]QO&28RGG,@S'9"]6CL,@E8_7S^W4!K>]C6]JSS6ZL,L<,U
MF&.63?0Q[P'.UZZ!]5'\CY%B.-TF7,O;\F.2011-:QSWRO/HUC&@EQ_`!5G%
M<^K\CY5#Q_!XV>>".%\N4FMQ/KFJ#V8WH>W;G./MZ:[[]5=,?1IXVG%1Q]6&
MK5B&HX86!C&#>]`#T]5LHB+C/C/0;:Y+@)LQE7XO#1P2&K=?"):]>^'L+#,P
M_*6N8'-&_P`>Z^?!K'/BYAR3(8[,#)822-C73U:HJTY;1<>KRHV_*>E@:"X>
MI)]5V&I3J4HO)IUH:\747=$3`QNR=DZ'NLZ(B(B(O'.#022`!W)/LH7-\@BQ
MV%&6I4;F98]X9'%C&"9SR3K8T=:!]3OLN1^(-_Q,SM&#&7..3XS!Y%Q9;AQL
M9O760C1/4X:8WJ[#I'?UWV]?C@'!L'D\_E:V:XGG#C(2V?&?I>.2*.,'_21^
M6'=&^LEP[=PX]AI=LQ>(Q6(A\C%8VI2B_P!2M"V,?\`MY$15?G_&[O*L#^AZ
MF4CH,?-').Z2OYPE8T]7EEO4WL2!OOW`U[J+X[Q#D..Y8.0Y'DU2X'U/A)J]
M?&?#"1@)<PDB0C;23HZ]"0KXL8AB$YG$;?-+0POUW+020-_39*R+SI;K6AKZ
M+T#0T%5_$O\`N'GO\(]6A$1$7&^1\3P7*O&:*M)5E,=/'BYDWQV9&>9*?[.!
MORN'26M#G;;HKI/&N,87C$%B##5I(66)?.E\R>29SWZ#=ESW$^@'NIO0^BT\
MOC*.8QMC&9*NV>G89T2Q$D!S?IL$%5$>%/`0YKOL^TZ(<`ZS,1L'8[%ZO2+D
M/BMR5U+E%/"7,AE:>--`V60XEQ9:R5ATO0R!CAW`'WCK7JL7A[9Y?DQRGB>0
MR%W&SUFP2U+,T[+EJDV3J/ER/UTN=IN^_<!WJNCX'CM?%8=^+L7;N69*]TDL
MN3E\]\A.M@[&M=O36@JWXT05QP"U:Z9FVZ4T$V/?7:"^.SYC6Q$`Z[=3@#^!
M*C<%XL07<;2MV^*YV%LMB.G8LMAB\B*PYX86D^9U:#SKN-_@NI(B*-EP>(ES
M4&=?CJYRL$;HH[73J0-/8C?O^_TV?JHGCF2Y5)F,AC.182"*&,F6KD:<O5#-
M&7::PM=\S7@>OL='T[;\K^('#;&7_0\/(J3[O68PT//2YP_5#]=)=^`.UGY3
MGK^+HUI,)@;6<MVW=$#*[VMB;VV'22$Z:S\>ZP9WB\/+L=C8N1/MPLC:'VJ%
M2VYD,[BT;8\C1>T'T]%,VL+B;F,9BKN-JV<>QK6MKSQ"2,!HTWL[?HOC'X#!
MXUM9F/P]&JVJ7&`0UVL\HN&G%NAVV/7ZJ+PK>85>17ZV7?1O8.3KFJ7(QY4T
M.W=H7,[AP`/9^_;OZ]IZA>I9&LVWC[<%JN_8;+!('L.CHZ([>JV415OD_+:'
M'[-6B:E[(Y.T"Z&ACX?-F<P>KR"0&M!/J2%[Q;EV)Y-':;2\^&]3=T6J%J/R
MK%=WT<PGW]B"0?JL?%LSG\V^Y)DN,SX6CH"JZS.TSR>NRZ,;Z/;6R5]<4XG!
MQZ6U;=E<IE+]O0FM7[)D)`)(`:--:!L^@6B[PUX<Z^;CL4XM,_Q!J_$2?#>;
MO?7Y/5T;_=K\%<)(HY`!(QKP#L!PWW4+R+B7&^2^6<[AJMYT;2UCY6?,P'N0
M'#N%3?%OC>0R%KCF7H1Y5]?%/F$T>'F$=N-KV`"2+?9Q;TZ+?4ARS\0K9#*\
MT;R9^*R6-H5<0,:QV4:&6KK^L.+WM!)T.GU/<EQ72$3WTB+Y>QDC2Q[0YI&B
M"-@KUC6L:&L:&M`T`!H!>HB(J7SCQ"X]Q6G99)D*]C,!A%?'1.ZY993]QI:W
M9:"==SI5#@7B-R`8O]$<@XER._GJ0#K+J]:,$QOV8W.:][2"1L>GZO[ET3CG
M()\T^PR;C>9Q(B#2'9&*-@DWOLWI>[TUWWKU42_E^>:]S1X>9]P!(#A+6T?Q
M_P!*N?P\[YA>Y#-R*K2-'CED_H:HW(.ZH66MNZ9G^6X_+YH,9([:+>Y5N;X>
M7LV1+SOD]W,,)V<=5W4IC\"UAZGZ^I*OF+QU#$T(<?C:D-6G"-1PPM#6M&]G
M0_,DK;T$1$1$1$1$57\2_P"X>>_PCU:$1$7S(]K&.>]P:UHV23H`?5<]\(F.
MR57.<SF:?,S^0?+"2.XK1_V<(_@"?WKHB(B*-Y#E/T+A;F4^"M736CZQ7JQE
M\LA]`&@?B?W>J@(L$WF/'<98YM@XJV4C)F9'7G>V2HXGY>F1I#@[73O1UL*:
MXYQS#<:IOIX:DVM%(\R2'J+WRO/JYSW$N<?Q)4NJ?XIX_(9/A5NIBZ<ENWY]
M:5D$9`<\,L1O=HD@>C3[KE7*,'RRWDI;G%>*9S'MO9&&]=H7)*QJS2L>UWF`
MB0NC<2T=6M[73N.>(.-R&0&#S56?`<A'8X^]H>9^,4GW9!]-=S]%=T1%&<EI
MVLAQW*T*$WDW+-26&&7TZ'N80T_N)"_/#^/07.&.X94QG*VYB>6,QXFPUXJ4
M)V@MDE\XCI=%LE_WCL@:]5^C\71@QN.JX^M$R."M$V)C&-Z6M`&NP]EMHB$;
M&BJ1D:&"\.\-R3E&)QQBZH?B):D4A;"][=Z+6?=822-D!<VK^)/+L-/7M<BD
MLNF%MD.0Q3\,8HZT3W`"2*RTD.'S-UU;ZM_D5UJWF>2LY-'C*G$GSXKK8)<H
M^]&QK6D=RV/NYQ'IKMZ)E:O,I\]`_&Y;%U,*SRW2,DJ.EGD(/SMWU!H!'H?5
M4_Q)XGF+?+:')L;'E+=05!3N4\9>;5G+6R%[7`N[/;LD%FQ[%;GA5PY^!NYK
M-2X6+"C(>5'!CF3^>^&-F_FDDV=O<YQ)T3H`!=*1$1$143->*/%,?/+3I6)\
MU?B:7.K8F$V'-`]>IP^1NM=]GLN78SGV:IYR3Q'O0&7#99[:3,3!9CDL1P@'
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M\"^&%3]%6OAAK47Z2L]`[[^[YFO7O^:OT;!&QK`20T``N))_>3ZKZ1$1$1$1
M$1%5_$O^X>>_PCU:$1$5'\7,G8H\,L4:!_\`*.8E9C*@WWZYCTD_N;U']RM6
M#QE?#8>CB:@U7IP,@C_)H`W_`,%O(B+X?+&Q[(W2-:]^^EI.B[7<Z^JKO$JG
M)V2Y+(<FO1.DM3?YO0KZ,-2)NP`':!<YP[DG^"LJ(B:'T41R3CF$Y-CSC\YC
MH;D'JT/'S,/U:X=VG\00J2*'.>#=\5--RSC[/^A67@7Z[?\`U<GI*!_JGOZ`
M+-3\7>-7K#ZE#'Y^W;B8'3UZ^+DDD@/NU[1W!!['V_%67BW+,?R6:_!4K9"K
M8HF,3PWJKH)&]8);\KN_<#:L2)I$6CF\I4PN(NY:\_HJU(732'WT!O0_$^@_
M$K'Q[,4^082CF<>XNK7(6RLWZMWZM/X@[!_$%22ULC2JY*A9Q]Z%LU6S&Z*6
M-WHYKAHC^"IE+P[BCEH0Y#D>9R>*Q\C9*N.MR,,;7-.V=9:T.D#>V@XG6@KX
MB(B*$/)L0.5MXJ;'_E1U0W`SVZ.K6M_7WU].ZW+N8Q./_P#M^4I51_Z^=C/_
M`'E:6>Y5Q_C^*@R^6R<,%"=S6PSM!D;(7`D=/2#O8!*HW(/&+"0XJ9V!I9:_
M=F'DTB,=*R.2=VPQO4X#U(]!W.EH\7SWB?F:S^/05L52R&*#(+^1R+W/D>7-
MZF/;`T#1+2#\QT3OZ:5YXKQG)XFY-D<QRO*9J[/'Y;VS%L=9G?>V0M&FG\=G
MLIR'$8J"G/1@QM2*I8ZO.@9"UK).K?5U-`T=[.]^NU$#@G"0>H<0P0=]1CXM
M_P#=6[G^-8#D5?X?-XFI>C`TWSHP7,_ZKO5O[BM+*87*U./4L7PS(5L6^ETM
MC%J%UACXV@CRR2[J&^WS=SV5(Y)X@\RXKB+#.1<1:+TH,%&]C9Q/6EL.!Z`6
M'3V]]G6CO2V,#XGY/*XV**EP?/9#+P#R+HCC9#7CL-[/9YCW:'?OK78$*T<9
MR'-[^0=)G^/X[$X[RCTQLNFQ8\S8UO30W6M_CO2C\EPO/Y6[;ER'/\TRC)*Y
MT-/&MCJ>6S?9AD`+G:';?;:Y?5\.^85<=?$?%X)<W/;;9@RUC.F22#H>'1MZ
M7,(<`-M/?;NH^GHOT'CO.-"J;-=E>?RF^9"P]38W:&V@^X![+91$1$1$1$1$
M1$V-Z1$57\2_[AY[_"/5H1$1<YRG_P!8/%_$XX?-3XY3=?G'L;$OR1`_B&AS
MA^:Z,B(2`-GT5(M^*?`:KK#9.257O@[.;$'/ZCL#3-#3SL^C=J2/%J]KF$?*
MKUR>V^O"(\?6>-14]C3WM'NYWU/<#M]-65$1$1%P#Q/JX_'\MY'G\SC\[5'P
ME3]&YS&Q'525H>UVW=0!!+F`COO\%.>"&:R.;SW++F;K&IEGQT!/"\=+G%L+
MAY@;[!W8C\UV-$11G(LS5P&'L9:Y'9EA@`VRM"99'DD-`:T>I)('T7YL\;.5
M<ZR=6*A?H08/$3P_&MHR3#XB5C)&@>8?9VR"&-[C7?9"^?!O,<^R.6O5L!F<
M5#&^!^1;C;`,M?9EZ7-^4E\1))=Z]][([[7Z`XIG<_D+-C'\AXM8Q-J!@=Y[
M)FS5IAO7R/'??OTD=@IZAD*.1@^(Q]RO:@V1YD$@>W8]1L%;`>QSW,#FES=;
M`/<;]%](N4>*?B-#Q&Q*VIFZ<L[Z;V?H\-#I893OHF:=:.CH.8XCL-CT(.#C
MOC+Q6:K;RV;Y)6K,D+?A\:R![I*[!O[Q#?G>[U.OE;V`WW)M7"O$#&\RM3-Q
M..R+:4;"YMVQ&UD<K@0.EHZB[?OZ>Q4?E:/B5<?<EGY+BL+CHB]S!CJ1GG?$
M-D;=*0T.('L/5<1GPUN[@9<GE<-F<ER"9T>4ENV,E7$#ZK'%NNIL@<&&(])<
M/<#6@%WC"^''A\RI!:K\0QW3+&V0"S%YS@"-Z/67=^ZNL,$$$$=>"&..&-H:
MR-C0&L`&@`!V`"@>5\2QW*'4'7K60@?1D,L#J=IT+FO(UU;;WV!L`^VS]5@X
MWPG&\>RUC+5K^6M6[$(@E?>NOL=36G;?O?3OKZ;/U5J1$14_F/$;O(<MB<G5
MY%8QDF,ZW0-BKQRCS'#I+R'@@GI[#MVV=+WAO$;?'<CE[]KD%C)R9-[)9A+7
MCB`D:.GK`8``2-`]N^@5;T1$1$1$1$1$1%HY+*4,8:OQ]@0-M3MKQ.<T])D=
MOI:7:TW>M#>MD@>I`6M7Y%AK-JG4KW6R6+?F^3&QKB2(G%KR1KY0'`C9T-Z`
M[D*77!\=DWP>)D5ZUEKMNMD,DZO4OT;I?`=EX;5FKN[-`Z2-M'J.K?=;#I^0
MU(_%:A-R:2>]7%..M=M3LJ-B,D7ZI!#(_O:!&MD#U)40R_DX;S.'7K^4K2R9
MVE5R%AF8EM-?#)$^1C(Y7:=&7$`.`T3VTNE^$5RW9X_DJUFW-;BH9:W3JSS/
M+WR0L?IA+C][6R-_@O?%6]D(>+9>K!A9[%62F?,MMFC:R+9T=M+@XZ'?L#ZJ
M]HB+YE>R*-\DC@UC07.<3V`'J5SWP@8_(4,SS&=I$W(;\EB/J&B*[#Y<+3_V
M6D_O71$15SFL$N8XSGL%BKD3<K-0D:R,2`/;U-(;OW`.B-KB;67.48*A@;&!
MEBY)5MQMQU:OCYJT6"B:YG6]\KM-?MK-^_<]O7M^CPBY?XH<_K5,=9XWQ:V;
M_++G^;PUJ`,LL&_OO/3V:6MV1L@[T?0$K5XKXA\KO8L02<!R=R_0=\)>?%:A
M8!.P#J^5SMC>P?W]MJ]XC,9>]A+=ZUQBW1NP]8BHS3Q%\^F@C3@>D;/;N?95
M^US+EE2K-;M>'%^&O#&Z261V3J:8UHV2?G]@%2\)S#Q"ARL=Z3`1V*_*Y'2X
MNK<N"$5&L9MK=@.^_'IVNQ)#CI72O)XLV+$3I:_$:5;J'F-,EB>3I[;T1TC?
MJIGE.&Y)E;%<X;ETF$KL81-'%2CF=*=]B'/^[VV.P7*N6<7S;>48^KF)>:<I
MP<$8LSB`0^7)8#OD8&;:`T#JZO7U`'U4)A^.^(>&-GE^+;<C?@FNK5<9DZK6
MR6L>.[8RYCCUEHW\IV1TC1[@+K_AQR_+\LH1W;W'VTJLD+98;D%QD\,VSHM`
M&G-<#O8([:4IA^;<3S-E]3&\@HS66/+#!YH9)L'1TUVB>_N`I&+-8R7.6,#'
M:8[)05V69(1ZMC<2`?XC_B/J%2+/)>5\ML24.%8]V,QS7F.;.Y*$M[@Z(@A/
M=YV#W=H=BIRO^BO#SBD]G,YRY8AC>Z:>Y?F,DDLCO4-'XD=F-_\`$KB8Q6<\
M=\_8S8+<)QVBPU:KY(C(ZQ\W5IP#AOOHG1T.P&SLKWB_A5B^.^(C^/<CO3S-
MNTC+A[M8NK.=*T@R!I:[8>T;['8(._P74OLYX@X+OQ[E\.7K-'RU,_#U/U__
M`%X].)_,+G7)(8\-';R=CB>8X1FVL+FY3"RF6A(X=QYHC!`:3]6;[]U1./>)
M/)<?F9\V.3T9K>9DBAMML57R>2QC?E>(V`?,!MNF]B3^\=%AF\<>1SM_1.0F
MH4''_P"TW\?%2V-^T?SR:5Y=X?YW-CKY?SG*66D:^#Q6J5<`^K3K;GC\250.
M4>"-:KR"G-QOCSKV,;5>+$<^5\ISICL-<"YKC\O8_0G7;L=W#PPX-/BI>11Y
M[CE""C>LB>K5,D5ML0.^IG5T`Z!UK?;7L.Y-BR'A=P"^[KEXO1B?[.J@UR/W
MQD*.G\-:5"*2?%<NY3B(XVEW3%DG21-`[[+9`[87&I>/\YQ]V7-8UYRN.9";
MT=?)5'1B2,R[\TP,[#Y_[41^OZQ;U=EV&GXFMQT,#.;8._@W/8W_`#X1_$4I
M21ZME9O6_71';:ON+RF-R]5MS%WZUVL[TEKRB1O\0MU$47R')TL9BK4]O+5\
M8/*=T69RW4;M=G=)(ZM?3W7'Z?C&<CF'8*/(XRO8<R&+X\;DKA_4[S)(Q]Z0
MN:8^F,ZT2[9TWOW0(B(B(B(B(B(B(L,=FO)Y?ESQO\T$LZ7@]8'J1]?5>&W5
M%8VS9B%<#J,O6.C7UZO14K(^*/%XK+J.'?;Y!D!_T;#P&R?WO'R#^*JO,;/B
MER;&1TJ>`IX2I=E$'DV"VY-*UP.S*.DQQ1@;))^;8`&R=+SPAXWG>+WXV9:;
M)3LN^:&S^2TLW&YXZ)>IID8#WD80X-/6=C9^;LZK\/#N-0<D?R6+#U&95XT;
M`C`.SO;O^L=Z)]=+>FP>'F_27G8RK)^D@UMWJC!^(#6](Z_KH=E&P\(XE!A)
ML%%Q^@W&3OZY:XB'2]P]''W)'L=["F,5C:&'Q\..QE2*I3A&HX8F]+6]]GM^
M?=0?B7_<//?X1ZM"(BHOB_D+%;ALN,H/Z<CFIX\75T>_5*=./[F=15NQ&/KX
MG%T\948&5ZD+(8P!Z-:`!_[EN(JOC.4ORW*+N&HX:\ZC1ZH[.2E;Y<0F!']F
MP.[O]]D=AV]0=K-Q?B&&XT^W8I,EFO7'E]F[:D,L\W?8!>>^A[#\/KW4O%D*
M4MVU1CLQNLU6,?/&'=XVOWTD_3?2?X*FY7Q*Q3;C\5QBG9Y-EVG3H,<-QQ'_
M`-9,?D8/WE2F0P=OE?&J53D$MO%V'.;+:@QEPM#O7<1>!MS#L;UKT]5"V/#G
MP_AM0MAA&,L4:I(%.\^L]D))ZGN+7!Q!T07./?6M]E-<4XUQWCM_(?HBQ.^Y
M<9'-9;/>?8>YHV&/(>XGOH@'WUKV5I6EE\91S.-L8S)0>?3L-Z)8^HMZV[WK
M8(/LJQ2\,>#T;E:[5P8CLUI&RPO%F8]#VG8(V]71$T/HF@N6R[\-N7^=W;P_
M/V/[0>C,;<=^M_LQR?P!^GO;N5\7XQF:5BQFN.ULBZ.-SNT`,[M#?2UPT[9U
MH:*X/Q3%7N-W,;R*AQ7F3<^VT?BZ\E1SZQJ.)#H6N)ZB6LZ-./J6?P[YRWE6
M)XIB?TCDY'[D(CKUXVETUB0^C&-]23_P]UQ'(8OD?B9RUF-RTA@D@U);@A=U
M186$^D8/H^T\#N?U!_!OZ!P^,HX;&5<7C:[*].M&(XHV#LT#_P!Y]R?<E0/B
M'QJ3DF!Z*,OP^9I2"WC;([&*=G=O?Z'T/X'\%GX%R:/E7'8,B8_(NQN,%VL?
M6O89V>P_O[C\"%*YRI+>Q-RI`RH^::(L8+D7F1;/IUL_6'X>ZYQ2\)*6,ORY
M.B^G)?$D4C7VJP>R;0_M1(S[H#C\S>@#H(&NVP>K`:1$1$7R]C'L<Q[0YKAH
M@C8*H^4\,>,V;;LCB66<!DS_`-+P\QKD_FT?*X?F.ZI7,[7BCPD4,F,E!R+&
MUI'"5Y8*TCF.T/+D:#TO<21T%HZNH>A!(,?P#D_BAR;HL8W'5A'!695;8R=Q
MWE,<UK2Y\D;/G=*_8<"=`-]/4DWK[&\QRO?D7B%=CB=ZUL+`VHUOX>8=O*V(
M?"OA\$<TK,?\1DGL(;?R#C<D8[79^I=MV#W]-+5R'A#Q.YC)J'DRQ%T,3([#
M->;%*QSW><':V7N,AZM]CH=AH:P_#\ZX+WIOGY?QYGK!*X#(UF_[+O28#Z'Y
MO96WBO+L#RFL^7$71)+'VFK2#HF@/T>P]Q_[OQ5@1$1$1$1$11][,8ZA=K4K
ME@0SVFR.A#FG4G0-N`.M=6N_3ZD`D#L5BHY_$W[3*M.XV:5]5ES3&DAL3_N.
M<=:;U>H!T2`3KL5&9KGW#,)U-R7),?%(WUB;,))/_89MW_!09\279#Y>,\.Y
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MQ%-E+%T:].JS[L4$88T?N'O^*W'.:UI<X@`#9)]E^?/%?E)Y3D9,7P?R;UBA
M4G?<R$<)Z:T/2?-:)@[3VN;\I9TD$Z(.P-9O#WE?(^*SY6IROBUFTX&*2QD<
M=&9YG`M/1)(.K9CZ0`TL`:WI(UO:Z_QOF'&N31]>$S%6V\#;H6NZ96?]9ATX
M?P4^B(L3[-=GF]<\3?*`,FW@=`/H3]%]-EB=(^)LC3(S74T'NW?IL>RT\YBJ
M&<Q-O$9*$34[49CE8?<'W'T(]0?8@*B<'S&5PLMW@>:W:S&-@,N+FE?T#)U@
M/D^8^CV]FN^GKWT2OF]XL8J"26A6QEJQG#'&V#%`:L/L.<\.A<W1Z>CH!+^X
MZ7`C?;=6R%7-09VJ;4\.2\2\M$?AFM&ZV!JG[SP/3MLCJ/=Q^OZW5N&\8Q_$
M\+'C*/5(XDR6+,G>2S*?O2//N2?X#LI]%S'D6^"<XAY5'\G'\X]E7+C]6O/Z
M16/P!^ZX_O73@=C81$1$1$1:%[$T+]ZE=MP>;-2+G5^IQZ6.<-%W3Z=6M@'U
M&SK6RM;&\<P^+M06J%3R)8:C*0+7N^:%FNAKAOYBW78G9&SW[E3"(BJ/*N"8
M;D%EF289L9FXO]#E*+O+G:?H2/OC\';_`'*A9OGO,O#_`"4..Y:S'Y.A)6E,
M&2J1ELI>!\KY8@>PWH'7;OL'MI6#AOBAALZ76KV>PE"L8HV0UYK+8YY)?_./
M+7.^5N^S6]R0.HZV`K_4RF-N@&GD*M@'T,4S7_C[%;9(`)[G\@H"+F''9*;;
MAR4<<!AFG<Z5KF>6V)S6R!X(^1S7/:"TZ.SZ*:IV8[=2"U$V01S1MD:)&%C@
M"-C;3W!_`]PLCGM:-N<`/J>RJ_*>75,`RO<=/1FHL?JZ!9:)HHSZ2,;OY]'U
M;ZZ]-D:,=P?G7VPL1.HUZS*;(W^?*9]N=(':#8VZVYH&BYYT-N`&^^KVB(H/
MDO*L!QBJ+&;R<-4.[1QD]4DI^C&#YG'\@N2<XN\Z\012QF#X]=PV$F\R22UD
M8F];VLT0_HT71N!UT:<'$GZ`D?'`/"ZI)JIR^+.6W35X[8;+9>VI+MK1IS6Z
M+96=F%KB00`1[AO7L+Q/C."`_1&!Q]-P[=<5=H>?S=K9_BIS06.*"&)K&Q0L
M8U@(:&M`#1^'T7L44<,;8H8VQQM]&L``'[@OM$1$1%5_$O\`N'GO\(]6A$7Q
M/+'!#)-,\,BC:7/<XZ#0!LG^"H'A!%)=Q>5Y=986V.17Y+;.H:+:[?DA;_[+
M=_\`:4_S+D-G`TJXQV&MY;)7)?)JUH&Z:7ZWM[_1C0.^S_XZY;XQ_#,SV#L\
M?D?6\0K#?)#:3Q(YD7020\!I/K\K7:'J3Z!2/$,7R?*86/[*92K@^/7'&RZ_
M)NYD;<KM>8Z0NTUK^H%I]P6]NRO?%.%8OCEJ?(QV<AD,K8C$<]^_9=++(W>]
M?ZH&_8!6E>:'_P"BJ]RWE^$XK78_)6'/M3=JU*NWS+%AWL&,'<_GZ?BJDW`<
MHYZYMCF#Y,+Q\]V8*K*?-G;[?$2C_N-_?HA=$QV.H8RE%0QU.&K5B;TLAA8&
MM:/R"VM#>]=U5^2<#XKR.3XC)8F+XT';;E<F&=I]B)&:/\=JF\BXSXC8'"VF
M<5Y7:S$`:/+J7P/BHR'#19.-=1'N'C1&P?54[C?B/S+/YV2B["Y&5['Q69H,
M=8C'FF-K&EK'O<`V%S@7GIZB>H#8!)/2CRSG\I_S7POL=)/RNLY>O'_$#9"]
M&:\49Q_9\*P]0N/;XC,=?2/QZ&=_W+FGB9+SV6:P9*7':^0-)_Q;:$\LD@I]
M_P#3]0#"WJ^YOYM[Z>W4K#P;#\[NT[IAYECL;D38/Z4;^BA+:%CW$A>[7H1T
MD#IZ0WI[*T_87D=H:R?B9R&3Z_!LAJ_]UI_!5;Q#\*\7#Q/)YK]-9RYD\;5D
ML0V,A??-V:.IS-=M!P!!UI<8HW^-XBN[D3>/7'W3TQB&W$V2L;`ZG30EKI#(
MU@8Z(M?W=MIWV)"_4'AYQDX>E-E\G.+O(<KTSW[FO4Z^6-GT8T=@/_T+DB+1
MS6+I9O$W,3D81+4MQ.BE8?<'Z?0CU!^H5,\,<K=K.O<&SLQDR^#TV*9WK;J'
M_12CZG6FN^A`WW*Z"B(B(B(B(B(BKG*N,CDK6U;M^1N-$3PZFQGRRRD::^0[
M^9K?4,[`G1.]!1>&\../8T25Y:-&]CWQLU5M4HWB.4#3WL)&VA^@2SN`=D:V
M5[<\+?#ZWOS>)XYN_P#^"PQ?]PA:9\*.+P-/Z-GS>-[?]#RL[=?Q<?S7+;GA
MIR&WG69NK8Y$:C@^RV"W:'QD@B=&&ETA;TLE</F8UP)_LFAQ!^[TVGX:8JY5
MAGNY[E]ILS&O,=[+2M<`1OI<T:T?J/8K./"'@#G==G#2VW^I=9NSR$GZ]W^J
MPY7PGXG9%6M1P6*IU#+U7'MK!TTC!K3&//W-GL7#OK>M$[$)C?!+$T+T5JM?
ML5)#"YLL]"5]>:.3J):^-P)`!:=.:X$?*"-=]SGZ%\2\&=XCD]'/5AZ5LS!Y
M<H'T$T?J?Q(6.;Q&R6(@D'*^&Y3$2-:=6HQ\73!UV+I(@7-&_P#9)TH"QX\\
M>CQGQ4<+9;)J[%5DA+S9Z^GR]Z^YKYNOW'MOLIR.]XC<O:P4:D7$<2]H)M6F
MB:[(/?HB^['[_>[^A4]QG@''N/VG9)D,M_,/[R9+(2&>PX_@X_=_[("MV@B(
MB(B(B(BJ_B7_`'#SW^$>K0B*A^,-ZQ#P]^(HOZ<AG;$>+KZ^LIT\_D&!RR<@
MR]+CW"+E?C^:PU.7$LCI-DN2[CK.`:.EP;L]8;W#==SKLM>I0S^7X-A:^!YA
M9:+`Z[65MU3\5+$[9/0TZZ#OL-CL-=^W?3H^#^"QUV6_C<[R.E=G8&3V(,AJ
M2;W)<XM)))[GV5MXAQBIQ2A8HTKMZS%-8?8<;DHD<'N^\00!ZGO^9/U4^JKS
M?E/'L'B+K,GR&/'3NA<&>3*PV0==C&P[V[Z#6EQBKXH<QY3?GX_QPO\`B9O)
MC.197T(6,<X23,A/?;MLVW9Z='\UV/B?!L9Q^S+E)Y9LIGIQ_;Y2X>J5WU#?
M9C?]EOM]5;D1%IY?'5<OCI\;=:]U6<!LK&2.87MWLM):0='6B/<$CW4=+Q7!
M23LL-HMBF9/%8C?"]S#&^-@8WIT?E'0T-+1V(V""IU%C\B$ND=Y,?5(`'GI&
MW`>F_JO6Q1MD?*V-HD?KJ<!W=KTV?=?:@><TK.2X7R#'THC+:M8ZQ##&"`7/
M=&X`=_Q*Y)EL+/:PV3?5\+<M'R.[B?@'7G2P:WY89O7F]O36P-D+N5%CHZ5>
M-XTYL;01]"`%G1$7._%:C-CH*G/L66,R>`V^1KG=(M53_I8B?R[M^A].Y4S0
M\0^$7:M:>/E.(C-AC7MBEN1LD'4.S2TG8/?6E:T57S_-\)@LL,3<%^6Z8&V#
M'4HRV-1EQ:">AIUW:0LW&^7X?D5RU2H"ZRS5C9)+':J25W!KB0TZ>!L'I/\`
M!6)$1$1$1$1$1-(B(BPVV/?5F9''%(]S'!K)?N..NP=Z]OJN4_Y(XV7FYJ.7
M&G+BOL]5,?#/FZM]!A^Z(>CY!KYA][?5Z]9A#FQ,#FL:X-&VL]`=>@_!?:(B
M(B(B+D53E7)6>)\F(RN2BH02VC%6Q]JF6PV:_P`W2^&<;ZI#H'1('JW798+G
M/.68JEX@RY.+'_'8>2E#3@@)?#&Z<``EQ#7.^^"=@>A`[+#9Y=S*AF;'!Y<M
M5L95V3IU8LN:;6]$4T+Y''R@>DN;Y9`]CONKUX:YO)9K"W69>2.:_C<C8Q\T
M\;.ALYB=H/Z?;8([?5<A_P#I!<WY'B<[;X_2R,,.+FQ\1D@=`USY'/<\'3B-
M@::/=9O#'QLB\S*#GO(H>C4+J3HZ1&]]76#Y;?4?+Z_N)74G^*7`V85N:/(J
M[J1E$6VL>7AQWK<8'4/0]]:5?Y1XU<0I<7M9+`Y6MD,AT@5ZK@YA<XG6W`@'
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M'02%CJYAZNAS#Z@_.X$_K`D'>RK0B(B(B(B(FA]$1$14CQE__=AR7_"'_O!<
M4YK6XW2PN;BXIS3CLU&W898BQ@KLEL1O=(SJ;'+U;#=CJUKL`1^*[`>.^)DA
M+SXC4HB3]R/!,+1^\OV@XESYW:7Q3M=)^\(\/6;^>C[*C9G%<EP'/9;%KD7+
M[L4V*C8,AC<0R=Q(E>?*=TL+0!][TW\R]XI_E(?RO+Y3%..0;\'7B=)R/&28
MY\S6ND(8SI&BYN^[B._4%=OM_FL7\O*.`YJFT=C8Q_3>A'XDLTX#]RDL?XE\
M(R%>66KR"H9(F.>ZO*[R9OE&R`Q^B3V4:WQ2I/QHRC>)<M-`P_$"P,:.@Q]/
M5U[Z]:UWVKUC+L.2QU3(U^KR+4+)H^H:/2YH<-_CHK:1$1$1$1$1$1$1$1$1
M$1$14&EX8X6GR6/,,MWW589S;@QKIMP16"7$R`:W^L2!O0)*EKW",'?/)/C(
MYI6\@$0N-,F@#&P-86:'RD:!]^X42WPQPQHV(I\EEK&1FMQ7/TM+8:;;)8F]
M,9:X-Z?E:2-=.M$JR\6X]1XSB6XRBZ:1OF/FEFG?URS2/.W/>=#9)_!<U\8_
M#Z#)29#FS,M/7MU,=Y386PL>QP&_=V]$]1]%KU/!BU@GW<EQ_DOG9&=_6^OD
M:<;ZECN26O8!VWOL6_=[Z]5DQS>!7\BS!<WX)BL!GW]F-DKL;!;_`!AF:`'>
MW8G??7=:WB;X/\;9Q:>7BO'[#,EYL0#:DLDAZ"\=>HW/Z2>G9]NX]50^)>'6
M:Q_,N.Y!F/Y'(VMD87ROO8Z*%C(AH$E[9GGL&MT-:7Z>RV5QV%Q\N0RMV&G4
MB&WRS/#6C\/Q/X#N5S\\@Y;SD^5P^N_"8)W9V<O0_P!K,WZP0G_O._X%;N'\
M*>,XQURPYUZYD+AB,]ZW/YDSBQ[7]G$=NIS1OZ^BMV$PU3"16*]`R,JRS.F9
M7+MQP%WJV,?JMWL]/H"3K0[*31$1$1$1$1$1$1$7S(QDC"R1K7-/8APV"L'P
M%+U^$@__`"V_^"V41$TJYS#C&'SV)NMN86E>M&N\0NE@:YX?TGITXC8.]>ZX
MA7XCG:?%&8_$\<YIB\B['^18;!?@DJ6)3'IY=$^0Z:X[]-$;[!7W!7/$SBV$
MQM?(\;I9NA!6B9K'3>5:A:&`=+HW_*\C6OE/=3V)\3N)7[(HV[LN'R/O3R\1
MJR`_3YOE/[B5/9KD_'L&VN_,9FE1;8!,)GF#!(!K>M^OJ/XK'A>6\9SMIU3#
M9VA>L,89'1UYP]P:"!O0]MD?Q4ZB(B(B(B(B(B(B(B(B(B(B*K^)?]P\]_A'
MJT*-SV#Q/(,=)C<S0AN5'^L<K=Z/U!]6G\1HKF.?CYIX98J:]A+\&=XW`6N=
M4RLNK%5G4-MCEV.L:[`'9';0*B&>-=W.7Z^(XAC*MC)6KG3%\>3#'%#T-[//
M5WD+B\?*?0#0.U=L1X??%WXLYSG(?:#+,/5%$]O33J'Z11>A/^T[9.@?5=!`
M`&@$1$1$1$1$1$1$1$1$1$1$1-#Z(M#+8?%9FL:N6QU6[`?_`#=B)L@_XCLN
M&\[XS@>%\OXY+B,])Q>K8@NGS9?\ZKPO`C["*38'5L[`^@]-+2X[XAU:?B)7
MOYVUCK=2OBI:K\GA8GNAT^9C@^5FMQZZ='U&R-=E^A<??I9*G%=Q]J&U5E'4
MR6%X>UP_`A;*(B(B(B(B(B(B(B(B(B(B*K^)?]P\]_A'JT(H_.4K61QLM*ID
M)*$DI:UUB)@=(QFQU=&^P<1L!W?1.]=E5\-X?4<!D_TA@K)HO=9ZY8VQ]3)H
M.EH,3P3MQ!:7"0GJ!<?4$@WA$1$1$1$1$1$1$1$1$1$1$1$1>%K3Z@'\POE\
M4;V.8^-KFN!:X$`@CZ%<_P`CX>.QUN7+<"R9X_?>>J2J&]=&R?\`;A]&G\6Z
MU]%AC\2OT%U4_$+$S8*VQI++,8,U2UH;_LY!LAQU]UW?]ZVY?%3BT53XV:/,
MQU`P2&=^(L-C#3Z.ZBS6N_JKZ""`1Z%>HB(B(B(B(B(B(B(B(B(JOXE_W#SW
M^$>K0B(B(B(B(B(B(B(B(B(B(B(B(B(B(BK?B)2=D."<CJ15?B9Y,=.(8A'U
METGEGIT/<[UK\5P'.5,K5XE/B.)4N7MK7*C(;6'OXBP^`./3U.AD(W&=@G1V
M#O\`)=SXCSG$Y^=V+F9-B\["W^WQ=YOES-[>K?9[?Q;[?16]$1$1$1$1$1$1
M$1$1?,K_`"XW/+7.Z03IHV3^2Y-BO%:]:P6:S\V$INQU2JZQ%\/?#WQN`;J&
M<=.V//5Z@$`@CVV=BKXGW;>*BGJX?&V+MS(18ZE%4RHGC=(X.<XR/#!T!H;O
MT.]]E<.#\C=R;#RVIJ?P=RK:EIVZX?UB.:-VG`.T-CT.]>ZP^);F_83/-ZAO
MX-_;:M*(B(B(B(B(B(B(B(B(B(B(B(B(B(B(BKW*^(X/E5=D>4JGSXCNO;A=
MY<]=WL6/'<?EZ?@JD<MS#@7R<ACFY)QQGIE*T?\`G=9O_KHQ]\#_`%V]^Q)^
MBMM7FG$;5."[%R7%>1.WJC<^VQG4/R<00?P/HI'&YK#91[X\9EJ-U[!M[:UA
MDA:/J>DG2D$1$4#R;EF"XP:C<S:EA=;+Q`V*M),YY:`7=F-)[`A:6$Y]Q?.9
M2+%8^Y9==E8^1D<U&>'J:W7407L`.MA6M$1$1$48<]A`2#F*`([$&RS_`,5O
MP30V(F302LEB>-M>QP<UP_`A9$1%CL1NF@EB;*Z)SV%HD9ZM)'J/Q"Y#1\,.
M0.R.3R&0SN/%]U5U6"Y%CFEUO?EGS+#'ES7_`'-:UZDNWZ+:/AMFYK%GD,^9
MQ[.3/R%:]$8*CFU&F&-T88YG5U$.:X[.]^FE<^"<<EXUAYJ]JVRU>N6YKMN:
M-A8QTLCMNZ6DG0'8?N49XIX;$6N)YC)V<73FOP4W"*S)"UTD>CL=+B-C1)/9
M7A$1$1$1$1$1$1$1$1$1$1$1$1$1$1$1$7Y]\0>-<>J^*'G09'"<=E?B?B@^
M_%$:UJ;SBTM>Q_8[;[M[]MK#Q+D\V*YYD+D/&L=D86XJ&*?['.98B&IGGS.@
M:.SO1;Z@`'T*ZMA?$GAF7F^&BS4-6X#IU6\#6E#OITOUL_EM7$.:6]0<.G6]
M^RUOCZ/_`-\K_P#YK?\`Q69\\+(3.^5C80.HR%P#0/KOT5(R?B?Q>O:-#$R6
M>09$?]%P\)LN_>X?*!^95!YKD?$+(9[CN8=QZW@*]8VFQ35:YREF,/C`+GQ,
M^5NQV`)['>_11^.Y7F\?SG"9#F#,M)@L?'8ACS5W$25"#.&`-F;KI&BS74/K
MW7Z&AEBGB9-#(R2)[0YCV'8<#Z$$>H7VB(B(H/DW*<!Q>H+6<R4-5KO]&PG<
MDI^C&#YG'\@OSMPZU3L\;J%G%.`O,7F&6QG;4++-LF1Y^4:);H$#Y_IV5X\,
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MXIG\S@`V-Y^&@LF:L[L=[BDV/X$+DN$XY+-P:G,(?#ORI,;YIM3P$WF?V9.B
MW?2Y_MU'^"Z+P/PXQ68XCQW(<ER&3S3),?7EBI6K!;5@!C!:UL3=`Z';9WM=
M4QN,QV*K-J8RC6IUV^D5>)L;1^X!;BQ6JU>W7EJVH8YH)6EDD<C0YKVGU!![
M$+F4^*SOAO+)>XU#/EN)DE]C#=75-2'J7UR?O-]RP_N^HOO',]BN28J'*X>X
MRS5E_6;V+3[M</5KA[@J51%7>2<QX_QJS6K9>U-%-98Y\3(JLLY<UI`<=1M=
MK74/7ZJ'/BMP1OF";-.K%D1EU:J30%[00/E#V#K.SZ-V5'/SG.>8$,XMCOL]
MB'^N5RL6YY!]8H/;\"_U4WQO@&"PMS]*S"?*YMW=^3R+_.FW_L[[,'X-`4H[
MB7%7.+W<:PY<3LDT8B2?_94M5K5JE>.M4KQ001CI9'$P-:T?0`=@OJ>"&Q&8
MIXF2QGU:]H<#^XKE/B5X=XJU-A;N&X/5O&*X7WH*3HZCY8C&X??VW]<M/KOL
MOO%4.16.0\+A/#;N(Q6#DG<Z:UD(;!Z70/8T?*\N)VX+JZ(B*K^)?]P\]_A'
MJT(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B\>UKVECVAS2-$'T(5:^P7!_V
M.P/^[XO^56&M!!5KQ5JT+(8(FAD<<;0UK&@:``'H`%E1$7-N9\8LX*:]SCAM
MJ+'9&&)\]^I(#\+D&-!<>MH^Z_0.G#O]?7:HT'C%R9^"LY2S8XE0M01>8<9<
M%F.R_;>I@8TG3NH:((.NXWI7BGXLX>[2KR8S$9W,V7QM+V8W&R.8UY`V.I_2
M-`[&]K/]I_$*^=8OP]%2,_=GRN29'K\XV!SE2.5GQ"J\MP^1S>5K8U_P5F-E
MG!8>:^(@71DL<';[NT-.T-=)[=UL<&P^.N^)M?).&<S#HL5*^6_G:<C"VQYS
M.CRP]H#--+M!OH-KN2(B(B(B(JOXE_W#SW^$>K0B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(H_/T'93!9/&,D$;K=66`/(V&E["W?\`Q7,KG!^;W./C
M"6+'#GL;C_T<RT<=,;#(O+Z-AY?V.N_IK?LNI8JJ:6,ITW.#C!`R(N'H>EH&
M_P#@MM$1$1$1$4?GLO1P.(M9;(R.95K,ZGEK2XGN```/4DD`#ZE52'Q,P9Q4
MMVQ3RE:VRQ'6&.DJGXF6239C:QH[.Z@UQ['V.]*R<9S^/Y+B693'&41%[XWQ
MS,+)(GM.G,>T^C@0H[Q+_N'GO\(]6?8^J]V/J$V/J%J1Y"K)DK&,:\FU!#'-
M(W1T&/+PT[]/5COX+;V/J$V/J%JY._6QF.M9&V\LK58G32N`)(:T;)T/7L%L
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M-&XC1+7`$'1].Q6SL?4)L?4+4DR%6/)U\8YY%J>&2:-NCHL86AQW^;V_Q6WL
M?4)L?4+QSFM:7$]@-K6QE^MD\=5R-1Y?6M1-FB<002UPV#H^G8K:V/J$V/J%
MJ29"K'DZ^,<\BU/#)-&W1T6,+0X[_-[?XK;V/J$V/J%YL?5:F*R-3*XZMD:4
MA?6L,$D;BTM)!_`K<V/J$V/J%ISY&K!D:F.DD(LVF2/B;TD@AG3U=_;[[5N;
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M"7`M:3^J3[]^E>&6%R6'PMZ3+P-K7<GDK.0DK->'^1YK]AA<.Q(`&R%(\EXO
M6Y$'QW,EE(:\D7E25ZUGRXWC9/<:]>__``6M]CS^U')/Y_\`I3['G]J.2?S_
M`/2GV//[4<D_G_Z5A;P6NRW)<;R+D(LRL;&^47_F<UI):#\OH"YW\2LWV//[
M4<D_G_Z4^QY_:CDG\_\`TK#;X-!<JS5+?(N135YF&.6-]_L]I&B#\OH0LHX=
MH`#D_)`!_P#C_P"E>_8\_M1R3^?_`*4^QY_:CDG\_P#TK"W@M=EN2XWD7(19
ME8V-\HO_`#.:TDM!^7T!<[^)6;['G]J.2?S_`/2GV//[4<D_G_Z5BL\(AM5I
MJMGD?(I8)F.CDC=?[/:1H@_+[@K[CX8V-C8X^3<C:QH#6@7_`$`_[*^OL>?V
MHY)_/_TI]CS^U')/Y_\`I6`<%KBXZZ.0\A%IT8B=+\?\Q8"2&_=]`7$_O6?[
M'G]J.2?S_P#2GV//[4<D_G_Z5CGX5'8AD@GY)R.2*1I8]CK_`&<TC1!^7Z)!
MPJ.O#'!!R3D<<4;0QC&W^S6@:`'R_19/L>?VHY)_/_TI]CS^U')/Y_\`I6#[
M"5OC/COM#R'XKR_)\WX[YNC>^G[OIONL_P!CS^U')/Y_^E/L>?VHY)_/_P!*
MQS\*CL0R03\DY')%(TL>QU_LYI&B#\OT2#A4=>&."#DG(XXHVAC&-O\`9K0-
M`#Y?HLGV//[4<D_G_P"E/L>?VHY)_/\`]*P'@M<W&W3R'D)M-C,39?C_`)@P
MD$M^[Z$M!_<L_P!CS^U')/Y_^E/L>?VHY)_/_P!*^9.&-D8Z-_)N1N8X$.!O
M^H/_`&5\5N$0U:T-6MR/D44$+&QQQMO]F-`T`/E]@%E^QY_:CDG\_P#TI]CS
M^U')/Y_^E87<&KOMQW'<BY";,3'1LE-_YFM<6EP'R^A+6_P"S?8\_M1R3^?_
M`*4^QY_:CDG\_P#TKP\/V"#R?DA!_P#Q_P#2L53@T%.K#4J<BY%#7A8(XXV7
M^S&@:`'R^@"S?8\_M1R3^?\`Z4^QY_:CDG\__2L+N#5WVX[CN1<A-F)CHV2F
M_P#,UKBTN`^7T):W^`6;['G]J.2?S_\`2GV//[4<D_G_`.E/L>?VHY)_/_TK
M!3X+7HU8JE/D/(8*\3>F.-E_0:/H/E6?['G]J.2?S_\`2GV//[4<D_G_`.E8
M)."UY+4-N3D/(76(&O;%(;_=@=KJ`^7WZ1_!9_L>?VHY)_/_`-*?8\_M1R3^
M?_I3['G]J.2?S_\`2L%/@E:C695I\AY#!`S?3&R_H#9)/ZOU)6?['G]J.2?S
M_P#2GV//[4<D_G_Z5@EX)6FLP6I>0\A?/7ZO*D-[NSJ&G:^7W"S_`&//[4<D
M_G_Z4^QY_:CDG\__`$I]CS^U')/Y_P#I6"GP2M1K,JT^0\A@@9OIC9?T!LDG
M]7ZDK/\`8\_M1R3^?_I3['G]J.2?S_\`2L$W!:\\]>Q-R'D+YJ[BZ%YO]XR6
MEI(^7W!(_>L_V//[4<D_G_Z4^QY_:CDG\_\`TI]CS^U')/Y_^E36"Q5;"8N'
M&U'2OAB+B'3/ZWN+G%SB3[DEQ*D$1%#R<DPL?(8>.?I")V6EC?+\,P]3F-:`
M27Z^[V<-;UOV4;B^>\8RC[3:E]^J\$EGKD@?&R:%A(?)&YP`D:"-$M)6/%^(
M/&<E=KTH;<T<T\0D:9J[V,!,8E,9>1TAX80XMWL!;G&^8X'DD\M?%V972LB;
M.&35WPF2)Q(;*SK`ZV$@CJ&PO,OS+C^(R\>)O6WLL.\OK<V![XX/,=TQ^8\#
MICZCV'41M:N6Y]QS$VKE6Y/8\VK.('MAK/E+G^5YKND,!)#6$.<=:;L;627G
MG&(\C5H?I$O?9;"YLT<+WPL\[_0]<@'2PO\`U=D;4MG\WC\#1%W(R/;&^5L,
M;(HW222R..FL8QH)<XGV`45)SGCD=+'WGW'MK7A.6/?$YIC$+7.E+P0"SIZ2
M#L>NA[K"SQ!XU)C?CVSVR?B&U15^"E^),KF];6B'IZSMOS#MK7=3N-S.,R>&
MBS=*Y')CI8C*V<GI:&C>R=^FM'>_314)2Y_QF[C\ED(;<S8<?5^,E\ZM)$Y\
M&B1*P/`ZVGI.B.Q7E3Q`XO9N35/CGPR0Q22O=/"]D?\`9M#I6AY'27,#AU-!
M)"D.-<IP_)18_1<TQDKACI(IZ[X7AKQMC^EX!Z7#N#Z%9;?),+4SU'C\V0A_
M2MTN\JJT]3]!I<7.`^Z--.B?5:.-YMQS)9>3$U;KS8;YO0Y\+V13>6=2>7(0
M&OZ3ZZ)TM/%^(W%LG;H5*]N=LMT1^49*[PP.>"Z-CGZZ6O<UI<UI.R-?5;_'
MN9\?Y#>DI8NW)),V,S,ZX'QMGC#N@R1N<`'M#NVV[&TY#S/C_';L=+*6Y(Y7
M1B9_1`^1L,1=TB21S00QG5VZG:&UBR_-\#B;MNE:EL.L5G0L='!7?*Y[Y6N<
MUC&M!+G=+'.(`[#NLEWFG&Z>-Q&2ER3'5<O+'%2=&TN,SG^G8#8'<;)]/=2F
M;R]#!XV7)9*8Q5HRT$M87N<YQ#6M:T`EQ)(``]=J&?SGCT>-J9&2Q-%!8M/J
M:E@=&^&1C7.>)&N`+`UK'$DCMK\5DQ7-N.Y/%7\K!<?'6H,#[(L0OA?$TMZV
MN+'`'3FD$'7?V4K@\Q0SF'JYC'RE]*S'YD;W-+=M^I!]/10V+YWQK*.MBI=D
MZ:U=]HOD@?&V6!I(=+&YP`D8"-=3=C^*^,/S[C>6R%7'5K,[;-EC71B6N]K>
MHQB3RR_73Y@80XLWL!2>)Y)B,OELMB<?:\ZWBG,9;:&$-8YV]`.]#]T@Z]"-
M+V_R3"X_,4,)9R$+<G>?TP56NZI#\KG=1:.X;II[GMOLM.AS3CU_..PE:W(Z
MWURQ,<Z![8I7Q_Z1C)".E[F^X![+1J>(W%K4M")EN=IO!IC<ZN_H:'O<R/K<
M`6LZRT]/41OM]5,Q<DP\O)Y>+Q6NO+0UOBI(0PZ8S8'=WIOYAV]=$%8.2\NP
M?&Y(8LI8E;))&Z7IA@?,61-UU2/#`>E@V-N/9:^8YSQ_$W/@[-B:28PPRL;7
MA=,9?-<YL;6!NRYSNAQ``]`2L;_$#BP91?'=L61=K_%0BI2FG)BZNDN(8PEO
MS=OFUW[*=S66H83%SY7)3^13@:"]_22>Y```'<DD@`#N25$1\UP4E"K=$EAC
M+%X8_P`N6N^*2.;1):]CP"W0!<2?0#:UJOB)Q2SC;>29>G;7JF+KZZDH>YLK
MNF)S&=/4]KSZ%H.U8,1E*F7I_&4Q8$746:L5I('@CU^61H=_P41B>;\<RUN>
MM3NO+HHI)FR20/CCFC8[I>^-[@&R-:>Q+25K8_Q#XQ?NX^E%:F9->9$Z+S*[
MPUKI6E\;'/UTM>YHZ@TG9"W\!RW"<@L/@Q4MJ;I:YWFNI31Q.#7=)Z9'-#7=
M^W8GW6QE^287#WL?C[]^*.[?F9#6K[W)(YQT#TCOT['=WH%I1<UX])R!V`;<
M?\8)C6ZC`_R3.&]1B$NN@O#>_3O:TF^(W%768JYN3-,DSHNOX=Y8S4IB#GO`
M(8USVEK2XC>E)X_EN$R.8FQ%.6U+:AFD@D<*4WE-DC^^WS>GHV/^LG)N5X7C
M7D#*3S!\S7R-9!7?,X1L`+Y"&`D,:"-N/8+7RG-^/XR41SVI']52.VQT$3I1
M(R1X9&&].RYSW'Y6@;.B?98;/B!QBOC:61-NQ+%;;*YC(:DLDC6Q'4KGL:TN
M8&'LXD#2G[N6QU'$2YFU;CCQ\4/GOG/W0S6]_CV4+%S?!2XUU]KK;0VW%2=!
M-5?%,V:0M#&F-X![]0._37?V6"KXB<2LU\C99DRR"C$9Y))(7L#XNLL\R/8_
MM&EP+06[V>WNIK`9VAGJLMBB9V^3*89HK$#X98G@`]+F/`(.B#^]:..YGQ_(
MYIV&JVWNL[D;&]T#VQ3.C.I&QR$=+RW?<`G2T,?XC\5OVJ-6&Y,)+I8V(NKO
M#`7N<V,.?KI:7]!+02"X:^JD<1S#!9?+2XJC8F?.SS.E[J\C8IO+=TR>7(1T
MOZ7=CHE;.;Y)A<'8HU<ED(8;-Z=D%:#>Y)7.<&C31WUL]SZ#W6F[FG'F<@_0
M#KCQ<\X5NKR'^3YY;U"+S=='7T]^G>UH6?$CBM60LL7)F`331.?\.]S6".01
M/D<6@AL?6>GK.@3OZ*2;S#!.Y"<`VQ,;@E\@N%>0PB;HZ_*\W71U]/?IWM9N
M2<FQ/'(Z[LE)-UV7.;##7@?-))TMZG$,8"=-:-D^@"T<CSOC6/BIS2WC)#;J
M&Y#)#&9`^/J8UN@.^W.D:`-;).O98I?$+C$6/AR#[%WX>02$N9CK#_*,;BU[
M9`UA\MS2#L.T??T4[!F<;/@V9YMD,QCJ_P`5Y\K2P"+IZNHAP!`UW[A0<//N
M/3X:[EXY+8AIF(21R5)(Y3YI`B+6/`+@_J&B/5>5_$'B]EUYL%NS(:C2]PCI
MS/,K!)Y9?$`TF5H?\I+-@*3X[R?#\C-QN*FG>ZF]L<[9JLL#F.(V`1(T'>N_
M[Q]5KT^9\?NYYV"KVY'6_,DB8XP/$4DD8W)&R0CI<YH]0#L=_H5H1>(W%9)*
M<?QDS?BG=+'FN\L8/-,37/<`0QKGM(:7$;6W6YQQZQFJ^$9-=9?L2/CBCFQ\
M\0>Y@)=ISF!I``]=Z]/JM_D/),+QR"&;,7XJ_GR-CAC)V^5Q<&Z:WU=W<-Z]
M!W*TKW->/4<\,%9N2-M^9'$]P@>Z**23_1L?(!TM<[V!/=:F1\0^,8Z6S':L
MV&FO9EKR=%9\FC&UKI7_`"@_(SK:'./8'LL]OG?&Z>1BQUBQ;;/-.RO$X4)S
M%)(_72&R!G0[>_4'2M*(JCF\);GYYQ[.5:K'5J=6['9>'-:XN>(PP=^Y^Z?R
M7.G<9YIE(;T>2XT:=J]&,=$^O;@%7&T7RM,K(XVG9)8#MQV2=``!29XER&#D
M#JD6&CFQ<.>FSK+0GC:V5IKEC:_03L.ZCTDD=.N^_93'AOB>009:UD^48-U7
M(OJM@CFCL0FO!"U^VUX8F$EK1ZDGN2%@\0\+R?-9,4Z.'::WGU9Z]^"RUC&E
MCPYXM1./]J!K;``>Y]CW44_B_**46*Y'#A6W<N^;*37J(L1M<UUK09ISCTD,
M$<;3H^F];6&7B'+HZ7'<`S%Q.;C30?'DJ]EK8=Q=)E%B)QW*6EIZ--/J#V*N
M?BCQ^WG\5BOA*DESX#)Q6Y:D4_D23QAKFN:U^QTNT_?J-Z(V-JC0\$Y=EL#D
M:66;Y,L6%FIXX6+(F+7S3F0L<_9)Z&1PQEQ_'6P%)LQ/+C8S6?DXRYARMB!D
ME"*ZQER"*.OY?FQ2M<&->7$_K`]/XE6OA/'[M#PXJ<=S$$+I_A989(0\=(:X
MNTQSFCN0UP!<!W.RN;8[@?++-B"/(U+K:;H:>*E9<MP2F.K'-YLG08P-LTQC
M!U#K/620`%+0\3Y;%F8X8,32,&+N92_7M696NAN&PUPCB+`>H?Z0AVQKY1HE
M6/PZP^;J9SD&7R>.GQT.0;7Z:]FTRQ)YC`[K+7-)Z8AU`-:3VT>PWI2W(\);
MN\OXEEJM>-T./LV'VI-@.#75WL;^)^8A<\R&"YOD)<I+-Q;R)WQ6*F)%>W`R
MMCXYB&ODZ&GJ=(07.<[^`6]:X5G*^?\`T5C<9$,*_+T,E'?,K=0QUXFM\IS-
M]1<3&T#0UIQ[A2?#,+R4<W.<RN'&+C;C75)V-LLF@DD\QI;\,T$NBCTTD@ZV
M2-C8VO?%/"\DSHFQF-PS9ZUF",0W8+38G12AY)%AKC_:0@$.Z0';(/;T*T?L
MWR:M9I<L=B_C<JS.6;UC'MFC8]T+H37B#7$].VL:QVB?<^_90S_#+ET/&\,R
MMDZ3KE=M5KJCZW6*Q%GSI',D,@!&RTD:VX1@`A="\3,!=Y!QB.K4B^)L5[E>
MT8&2^2Z=L;P7,:_?R.(WH[['7<>JH5?@O*<M1N4,E7?5IQT,B,9':M"=U=]@
MAD<3G=3B>B-I[]]>9H$Z6_1X=RO,V\AE+8@X^^62@!3GC;;;,*T;M=88\#I\
MQX<!O]0;'LKAX9X3)X3@6+PN<\HVH83&]C!V8TDZ:2"0XZ/J-;^BYA#P+F,C
M74OA;D%..D[#QLGNPS,BKS6&F1T1:&N+&PM/=_SDN:-::I_['<D'(#CJU2.M
MCF9Z;-Q94/8YK`ZN6,C$6^HN:X^XZ=-]?92WASP[/\7Y+E9+UVI8QLE&K7BD
MBK^6Z9\?7MQ'6X@@N<7$_>+]]M:-@Y5A;60S_%;]2NQ[:&0=-9D)`+8S!(T>
MO<_,X=A]5S_)X;F]O(Y2X>*F.6-EJ'"MK7((X*AF:6&=[0>I\K@XDD^FSH;*
MRY/@F:JW;6$Q6/;/B,B,2WXTS-:*C*9'4'-)ZG%P8-=(/<G>E*\<X7R7#^(<
M&8L92I=H.JV_B)Q4\N22269K^D_VA[]FZ<!H-8&Z]"MSQ3Q?(,Q4FQN,PIN5
M;=)\/GU;;:\\,Q/82%Q`=`1]YHWO7H5!,XKR>"6'DLV,CN9:KF8I75(I(XS-
M5BK&NTLV>EI)<^0-)'9VNQ[*$DX#RFOB*$,.$>[,/I/;%?J94P#'3R6GS$/;
MU`/:WS/5H=L@C7H5TSQ(P-[/\,FQU0>?<9+!.&"3RC-Y<C7N:'?JD@'1]CKT
M5'Q'"N37Y75,G!/1Q4<>1EH16;8L.JNG8(8HW.ZG$]+3*_U('F`;*UXN(<EM
MTS/D^+APIX_&XT46Y%L;[(KR.>^6.1CM-[D=(<1OOO6@NA>'&+RV+X_+7RXE
MC,EN:6M5FL>>^K7<[Y(G/V>H@;]SZZVN7.X%S#^TI5J=J"I6J6<;59-<AEBC
MBLS-:YT)`:_I;%UN/F?-OI:`=*Q9#A^>;R:2C0QL0P\V:HY1E_SFAL$=>)K?
M*+-]75N-H!`(TX]QI;'AQQG.8;D#)78F?#8V*E)#9A=DS:BMSF3J:^-I<2UK
M6]7<AI^;6O4JT\YPEO+R\<EHUXY)*69K6IG$AI;"SJZM$^OJ.P5,S.-YG-R6
M]D&\4,E6E+--AX:UJO'$;!C<T69@3U/D)/;>@T'W*C[OA]GZ563`8ZBRS3RF
M/QE2:Z)FM%1]>0NE>YI.W=6R1T[[^NE,\<XSGJ?/8[\6*FQ=-MJ[/?L#)F:"
M^V79C#(BXEI#CU';6ZT>YVI?Q0QV>RE)]#&X9U^K:J2P/DJ6VUK,4AUT[<X@
M&(_K-[D]NQ589PSE'P9RUJG%/EJ63QLD=6-[&-L5ZD8;IG?I9U.?*\`Z]MZ4
M5D>`\F?7BROZ'FFOVFY)WPM;("!]":Q,)(7EX<`\,U\P!/?6@Y=(YCQ[*YOP
MTM\?^)9-EI*<;'2EW2)96=+B=^W46GO[;51X]Q3DD^9J1W<=9Q_'HKTV0AJV
M[HM/K.$`B8TNZW$]3WR2:!(&AZ$Z4$_P]Y;DL&<=8QL523%82/&P$6F_Y](R
MTR4N8YIVP%L0`+M$.?Z=MKI?AMB\MC,?DFY&M8I5IKSI:-&S:^)DK0]+1TE_
M4[U<'.UU'6_5<[R/"^8QY2P[$4;<->@[(R8^-]V%\'59:6-,0T'@CS'O=U]F
M].F[VI.;@N:H9AV(QF.9)A;5S%6!>\YH^&CJ,8US'-)ZBX^4-:!'SG9&EG\.
M.(<AX]R.!DE:>K1K16F6[#KWF19$OEZH2R+J/E]#2=[#?4COZJX\^PEO,U\-
M\#7CDFJY>G9D+B&EL4<H<\@G\/;W51SN.Y=8Y99O'B?GXNE.;.-@JVH(F2V0
MP@6)P2'/=O0`[`#UV5$9/@/)*.+BQ^+QT=YV0XXS$6I3.UGPTYF=)),[J.W-
M)E>?EV=M';NI'$\,Y#B^?&U5KV(Z[\M)=FR3;NH9:KHM&N8.K[_7H[Z?8'?L
MK=XA5LS:J5X,;AG9&M(R6.S\+:%:W#MHZ712.(`!((=WWH^_<*A5>#<K_1++
M-RE7ER6*&*BJ5XWL8VQ%5=YLC6G[K>ISR!O6S&/0%3$'%.0W,$:%NFVO#F^1
MR9'*5C,TF&H7=7E.(.G%W0P.Z=_>/LKWS+$2YSB&9PM5S(YKE*6"(N[-#BT@
M;_#>ES'CO$>4/R5&M<QEJAQ_X^M;DJV<@++HW01.)=OJ=VDF+#H>T>R!O2V^
M$\8Y7A[-`6<5%%]G\1:I5I//8X9"5\H<QS0#MK=,&^K1V[]ZOG`L+-@N*T*5
MWYLD]OGWI"[J,EEYZI'%WO\`,2-_0!<RRG$.8P9ZU/AJ-ME:C;O7Z,;KL+Z[
MY9HG-9T`@2-<7R%S@\]+0#TD]2RYC@&=JQV<!B:++./R>/QE)UWS6L%/X:3;
MW.:2'.Z@=CIWW]5T#$8>^[G&=Y!DXFB/RXJ>,^<.Z8`.J1VAZ%TA[[[Z8%YX
MDX2UGN+R4L?7CFN?$UI&=1#=-9/&]^B?3Y6G\U6.38SD][F;IG<7=9X]6FAL
MQLJ6H(779V:(DG+CU.#"`&L_V>_L%#6.&\KH8JE8KXQF1R5[#7Z5^,3L88;-
MJ02F0EQTYH<2TZ.]`:VKEB>,Y&'DV#=>#),7@<-'7J.#QI]IWR22=/J-,:`"
M?]<_BKTB(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(B(B(B(B(B\<X-:7.(#0-DGV4)]K>*_M-A_YZ+_F3[6\
M5_:7#_ST7_,H[D7.N/8W`9/(T\YB+5FK5EFB@%V,F5S6DAH`.^Y&NRHM[Q(Y
M13P4V9=/P65D=?XCX:++R.G<.G?2&=/=WMK?JNCU^8<8DKQ2/Y'AVO<P.+?C
MH^Q(]/O+)]K>*_M+A_YZ+_F7TSE7%WO:QG(\0Y[B&M:+L9))]`/F57Y-XDTN
M-\GR&'R-;^SKXV.W`8W%TMF9\A8V%C-=R?K_`/!;GVZJX/"T;G/'5<#=N,DE
MCJ![YBUK0"02&]W@$;`]SH;6X_G_`!&/.,P3\Q&V^^1L(:8W]'F.&VQF3IZ0
M\[^Z3M1>&\4N,9"GG+MF=]"OB;CJTCIV._M.^FN:`-DN(.F?>[=PI1O/N).P
M<N<&8C^!BF%=Y,;Q(V4^D9BZ>OJ/^KK:E>/<@Q'(Z+KV'N-LP-D,3_E<QT;Q
MZM<UP#FG\"`N>,\1^3/QV:SL7%:D^%Q%V>O8='?(L%D3M.>UA9HZ!WKJ^JM%
MSQ'X;2?2CN9J.%]N"*PS<;W!D<@!8Z1S01&#L?>(457\2:DG.>082P:M7$X2
ML))[DSGASG:!.AT](:-Z[G9.NG>^TM6\1N&V,5;RK,W&VG3?&RPZ6*2-T1>=
M,ZF.:'`'?8ZU^*^ZGB%P^W1R=^'-Q"OC`TVW2,?&8P[[ITYH+@[V(!W[+ZK^
M('$9\/=S#<Q&RG2>UECSHWQR1N=]T&-S0_9]NW?V4GQSD>&Y+3DMX:Z+,4<A
MCD!8YCXWC]5S'`.:?S"IV6\2),?X@1\4;B&RQ&S6K.D^(U.YTS2X2,BZ?FC:
M&_,[8TK3S?D<7$^*Y'D$U=]AM2,.$33KK<7!K1OV&R-GV"@>-\LY#/D(X<]B
M<>,;/6=9CRF+MF>M#TC99*X@!IUWWO7_`,)3"\^XCFWVV8[-1/-6$V)?,8^(
M>4/60%X'4P:^\-A8*?B1PNYC[V0@S<?PU&-LL[GPR,+6$AH>&EH+FDD#J`(4
MEDN7<=Q<\\%[)QPRP4?TA(TL<2VOU!O7V'IL@:]?P4'+XCX.2WCW8VY5MXZ<
M7!),'/#^J",/<(V]/S]CW._RVLW#/$7C_*:N+,,KZM[(ME=%4F8[J/E_?`=K
MI.@0>Q]_P*EV<HQ%CC5WDE"<W,?5CFD<^)A^?RM]0;L#?=I'T50XISGDN8EP
M]V?C]&;#94Z$N,N.L2T=C;?/;T@`>Q(/8^OT5DJ\\XG;SGZ"KYF%^0\TPAO0
MX,=(/5C9-=#G#_5!VM#BG/J.8>^O?$=*W)E;6.J0ASG^>8=$NWK0['?=8N0>
M)_&\//2C$LEH39-^-F=#&X_#R,`Z]CI[ZVWL.YWVWHK;BYUBJU;.6\U;J5*^
M-R3J(,;WR.>=`M'3T[ZSL_*W?IZK-_E`X>,/'FG9R!E"2S\)YCV/:6S:)Z'-
M(ZF.T#V<`OB/Q%X=)AY<PW,-^$BL"J\&"02B8^C/*+>LN/<@:]C]%-X#.8KD
M./&1P]QMFL7NC)#2US'CU:YK@"UP^A`*A>0\O9A.68?"V(&"I=JVK,UISSN%
ML+.H_*!W[;7WA.?\1SN19CL7F8Y[,D1FC;Y;V-D8!LEKG-`<1[@'8[[]"LG'
M^<\5Y%D),?A\O'9LL:YP;T/:)&@Z+F%P`>`?=I*LR(B+7O7:>/KNLW[<%6NT
M@&6>0,:"3H=SV47]K>*_M+A_YZ+_`)EO29;%QX]N3DR5-M!P!;9=.T1'9T-/
MWKN?Q6@[EW%&M+CR7$:`V?\`/8S_`/[*!X3XB8SD6,OWK[H<4VM8`;\5((P^
M"39@DV[M\[0?W@A3_P!K>*_M+A_YZ+_F6]/E\37HQ9"QDZ<5*77EV'SM;&_?
MIIQ.CM8J/(,%D+`K4,UCK4Y!<(H+3'N('J=`[5&QWB?%:S7,L--0;#:P;;#Z
MVY#TW&Q`E_?78CY=COV=OV3/^)4^,X#@.1UL.+>2S#&/BQ[92-#RS(\]6O1K
M1]/<+:Y%XALJ87C-S$5ZTMCD1:*KKMCR8(06!Q,C]'6M@:]25I9/G_(L+Q?+
M9'+<9B9>H68(8W1V'&K<;*X`/BD+=D#?<:[=E+8KEV8AY74XSRG"5\?9OPR2
MT9ZELSQ3%G=[#MK2'`=_1:/%/$R#.\LR^%FHBK3K,EEI73)MMN.)_1(X#7;1
M[^_;:CV>(O)[&!FYI4XK7?Q2(N>`^V6W)(&G1F#.GI`[$]).^W[U=LYRO&8C
MAL_+9"Z7'LJMLLZ.QD#@.@#?H27`?O4%@>4<P?E<;6Y'Q%M2GDV.=%8I3.L?
M"N`Z@R?Y1T['ZP[;[?E+8KGG$\OF/T/C\S%-=)<UC>A[6REOWA&\@->1[])*
MT&^*7!'2&-N>87=+W#4$NGEITYK3T_,__9&W'Z+9E\1>&Q8['Y)^;B^&R`D-
M5S8I'.E+-![0T-WU`D#I(WL^BRR<]XE'@:^?.9B./LR>5"YC'N?))_J",#K+
MOJ-;"3<]XE%A:V:.8C?2LRF&$Q1ODD?(/5@C:TOZA[C7;W6M/SO$NEP$^/MU
M+.-RAL;FZWAX\J,N(:P-)+M@@@Z(_/LM#!^*W%LAQ:MR*W/)0CGG=7;7?$^2
M4O'LUK&DO[:.V@@;[]U<\-EL=G,;!E,5;CM4IQN.6,]C['\00>Q![A;R(B(O
M'M:]I8]H<UPT01V(5:^P7!_V.P/^[XO^5/L%P?\`8[`_[OB_Y5'<A\-^)W\!
MDZ..XS@JMVQ5EB@L"C&TQ2.:0UVPW8T2#L=U1;OAAR*U@Y<2./\`AW`Z2OY'
MQD-*5L[3TZZP[I[.]]_5='K\`X4R")DO$<"Z1K`'._1\7<@=S]U9/L%P?]CL
M#_N^+_E7U'P;A<4C)8N(X-DC'!S7-H1`M([@@]*IO+_#3[6<YR.3R#1'3?AV
M5Z=J.34M>TV0N#P!]!_\0O:7'>89/.<#R?):M1T^#-MEV5LS7B;JC:V.5HUZ
MDCN/8C:KV5X+S7(9V:6>N)(H^0QY&.5M]L==T#7@@-KM`'FZ]7/[]NQ.UM3\
M%Y9%-E)8*5*?X?E1Y%2:ZUH6VNV#"X=/R.`T0X[&R?S7M_@O(\O7Y!G;V&J-
MR.3R-6W%C6Y!S'UVP,+`YD[-`3'JWO1;]?PN'A9AN28C&9!O(Y9"^>T9*\5B
MPVQ/''H#^UF:T=;B1Z]^WNJA7XSS^O@>3<4JXC&LJYJ_;E_24M_?E13.T?[(
M,V3T[]_4_@M',>&.<IY;)U<54ER.(R=:K!VRQJ,C$40C(F8&DR-[;'3Z>BD,
MWX:9F]#SNI5?#'#DXL8,>Y\Q/6:S`"U_N-].MG\"H^YX><DRV%S4TV+DK9.V
M:D3!=S)N221QS![NIV@T`:^7U/KZ*P\OX/ELOGN67(J%*U5R&/J0UXK$[HP^
M2*3J(VSYF$`=CZ;UOMM5F3P^YSD<+>-J6RQT.1J7:-*[DVS67>4'![76FL&M
M]7R;WTZ]O?H'AEQR]ASE\GDZ,M.[DI8R]DV1-V5S6-(!>_0'5W([>P"YSR3P
MZYQ;R^8L4(&?I2>W8FBSWZ2Z"^I(PM%4QZ)&AV!&@/7:Z[E<=E;7!G8W&0U*
M^1-1D;(;X%F($`;C>>_4"`1O7OO2Y?%X<9G)9*S)4XY2X=6GQMJI;;5O><VZ
M^1G2S^S:.EK&GYOJOC&>&O(LAC;-+*TY*5B##R8^M:FS#K37/<T-TR,-`9$=
M>A[CV"ELAQ7E_).*93%WN/X3$SC#Q8^M*)1+/,]CVN/]HWLR(]'9A&]G?LM'
M+\/YOR.SF,C>P]/'R6>,_HF"!MX2GS1,U^W$```@$]MZ[>ZM>2XCDI<[P*S5
MB@CJX:G:@L@/#>@R5Q&WI`]1U#V7/,_C,YQ3PUXO4G;2J\JP]]T.+CCG\TWF
MR[8_I&@1_I1V^C0??2[/@\#)A.$5./8Z6..>M1$$<KV=;?-Z>[RWW!<22/=<
MQQ?!,^_D>`NMXIBN.W*%ELM_*XZZ`R[&`>IC(&@:#SK?4.RR8K@O*X:F`XA/
M0ILQ.&S(R7Z9;9!?.QLCGM:(]=37GJT2>W;W7S'PCEN*LT,U3QU6[:H\BOY`
M4_BA'YL,[0UI#R-`C7H5\P\&YE!1CO&A0DR47+I,X:HN=+'Q.8!TAY;V._J/
M3^"V[/!N2P7KV9JUJUBS7Y2[,UJCYPT683&&ZZM$,?[C:Q2\#Y-DK+,U;J5:
MMJYRBIE9Z+;`>VO!"QS?O:TYYWLZ7WR/@.=MY3D^1BQL%H6LK5NU&LO.K3@1
MPN8YT<C?N2`GMU`@]_P4IQ%G,N+8NA5RD3;D^2S71Y4]@36*]5S>[GR,:!*\
M=)))]O?V&]S_`(KE\YR7&9"@R(P5\7D:SR^0-(DFBZ6=OIOU/LH5O`,W+7\/
MZSQ#"W$8NY3O2,D&XWRU_+!;_K?-LJ1\/<+RG'OP>/S/'L+5J82F^LR^)!//
M.X]@8B->6T@;=ON5TY$1%J9/&X_*U'4LG1KW:KR"Z&Q$)&.(.QMI[=BH3[!<
M'_8[`_[OB_Y5*2X+"38EN&EQ%&3%L`#:;J[3"`#L:9K78]_14WF?A?@,Q@I<
M?@\-@<5:E>S=H8UA<U@.R&].B"=`;!]"5J4?#O(OSU*YFYN.VL7#5-23'08D
MQQ21`]3!TN>YH+'=P==MN^JM/V"X/^QV!_W?%_RJ3M8#!V\9#B;6'H3XZ'I\
MJK)78Z)FAH:81H:![+!C.*\8Q-H7,5Q[%4K(:6B:M4CC>`?4;`WI<RROAMF[
MN/Y;-7?#6R\^9GOXJ8/!ZHY(Q&^-Q]@]I<"/R*\H^'G*K5KB[+&3;B8,#A6U
MHI8&QV'.L/'3+\KP1T]';>OR7N/X7RW%\.@X[-C,3G:&-R4ICIW2W_/*CN["
MUY!\J1KB[]Q]>RC'^'/)'\7Y-5Q^(K8J+(6J<M+"_'F5D'E/#I'F0]@7?0?3
M\E8\KAN=9[,,Y)9Q=#&V\30LQ8NI'>\]S[,S>GS'/Z6@-`]O784-2\*^0X5G
M$YZN9_2'Z-<Z"Q2D9'"UE><'XCI>!MYVXD=1/U6')\<\4J?"!P7$4Z4M6O'-
M7_2`LL#;59S7@1NC<WJ9)\P[@ZWZE=`SO#_TUX6_9"/=1_Z/AAB\UW5Y4D8:
M6AQ'KIS0"1^.EHXQOB/F+M:IFZ=#"XJ&O)'<?7L-L27GEG2TL^4>6T$]7U]E
M7N/\,Y6'<.P.2QU*ICN+VC8_24-D/-S75TAL>MLWU?-U+S`<`Y!1H<)AL0U_
M,Q.9LW+6I0=1O+BTCZGN.RKIPV?XMR;@59N/K6\F,CF;454V`QLC'M:0.O1`
M=T[UOW]5-8W@O+,8<5REE"I9R\&9NY*;#BT&L#;+0WI;(1T]3>D'?IW/=?%G
MP^Y(_$R9*3&0/RUK-3Y1U:ED75IJ0D:&@0S@=/7\HZNH:/MZ*1X_PSE\=CA-
MO,R1328R_<L6.J5KI(HI(^EC7.``D?OU=^*KU3PZYG1PG%V_!]=KCTMR$1T<
MK\/)9BF/4)&2=/R$$D%I]1]/1=6\.,!+QWC3:EBLVM9FGDL30MM.L!KGG_7<
M!LZ`)[:V3I6M$1$1$1$1$1$1$1$1$1$1$1?#XHWN8Y\;7.8=M)&RT_A]%]HB
M(B(B(B(B(B(B(B(B(B(B(B^71QN>R1S&E[-]+B.XW]%](B(B(B(B(B(B(B(B
M(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(B(FTVL-JS!4K36K,C8X
M(6.DD>[L&M`V2?P`"H47B4WX>',7.+Y:IQF=[6Q9>3R^CI<=-D?&'=;&'MIQ
M'H1]5T/83:;53R/.,3CN=X_AEMDL=R_7\Z&<Z\LDEP#/7?4>@Z[?1?-7G6*G
MPG)LR^&>&M@+5BK8Z^G<CH@"2W1]]@#>NZU:'B1@K7`K7-9(K4%*JY[)Z[VC
MSF2-<&]&@==1);KO^L/1?./Y\]V0=CLWQK)8>T^G)<K"9T<C9XV#;@',)#7:
M_5*TL7XI5+4&)O7N.Y?'8K*2-BK9"<1NA+W=FAW0\N:"1K9"E<MX@8;%\YQW
M#K$=@V[K6_V[0/*B<[JZ&..][=TG7YA?&8YT8,]:P&"X_D,[?HQMDNBJZ.-E
M<.&VM+GN`+R.X:%,<;Y+0Y)@/TSBHYWM'6QU>1O1*R1G9T;@3V<#V]==PJWC
M_$.W<Y"_CXX5FXKT38Y)VODKZAC>=!YU)W'Y;/;T5EDY3@C3REBEDZE]^-A?
M-8AJV&2/8&@D@@'L>VNZU\=S+`6<-B,I;R-7&MRL+):T-VPR-[NH=@`3W/?V
M4G?S>&QUNO3OY6E5M6.T,,]AK'R_]4$[/[DNYS#4+T&/NY:C6N6/]#7FL,9)
M)_U6D[/[E\7>08*A:%.[FL?6LN>U@AFLL8\N=]T=).]GV^J]BS^"FAMSQ9G'
MOAIOZ+,C;+"V!V]:>=Z:=]NZU_M7Q@Q^8.1XGH\_X?J^,CUYNM]&]_>U[>JW
MI,MBXX[<LF2ILCINZ;+G3M`@/T>=_*>X]?JM:UR/C].<5[><QL$QD$0CDM,:
M[K(V&Z)WL@@Z7Q%GZIRN7H6&_#,QL<4LEB:5@8YKP3OUVT#7<N`_#:RP\AP,
MV+DR\.:Q\F-CWUVVV6&)OYOWH?Q47E^=\5Q5+&WI\Q5DJ9&R*T$\$K9&%Q]2
M7`Z#1[N]!L;6Y4Y)0F_3#[+V4X,9/Y4L\\T881TAW7L.^4=_UM%;46=PDU"+
M(Q9B@^E*\1QV&V6&-[CZ-#MZ)_!?,'(<#8QT^4@S6/EQ\!(EM,LL,49'KU.!
MT/WK9QN1Q^5J-N8R]6NU7$ALU>5LC#KUT02%MHB(B(B(B(FTVHOD&6_0M$9!
M]*Q9K,D'Q!@;U.@C[[DZ?5P;VV!LZV='2B,-S7'YS)C'X>"6X62RML31.:8J
M\;"0U[G`Z/61\K1W(V>P&U:]IM-KF;/%BF*LF4GXWF(L)%<-27):B=%&X/Z-
MN`?U!N]=]>ZO<><PTF4=B(\M1?DVCJ=4;889@/7?1O?_``7D&=PEC(3XVOEZ
M,MZN"9JS+#'21@>I<T'8_>LM#+8O).>W'9*I;+&M>X5YFR=+7;Z2=$]CHZ^N
MBJ;DO$419'*U\/QK*9FKAW%F1MU#&&Q.`VYK0YP,CFCU#59*O*N/V,?3O_I:
MI!%<@9/"+$K8GECB`#TN((^8AOY]EM19O#2Y1^(BRU%^2C&WU&V&&5H_%F]C
M^"^QE\48&V!DZ9A?-\.V03MZ3+O70#O75OMKU6%O(<"Z['0;F\<ZY*]S&0"T
MPR.<TZ<`W>R0?4>RE$1$1$1$1$7S(QLL;HWC;7`M(WKL57N+<+X[Q22S)@Z4
MM=UAK6R%]F678;O7WW'7J?18^.\&XSQO)39/#T98+<S'1O>^U+("TN#C\KW$
M#N![+3M>&_%I9\Q<AJ3PWLK!8@GG%J5W:9I#R&.<6CU^G9<VG\+\WE7#'9+!
M8Z"R\-BM<@BRDSO-B`#265?NM>Y@`[_*"21[+JEC@O&;/(8.134979.`QNCE
M%J4`%@`;\@=TG0'T[^Z^\]PCC?(,K6RV5I2S7:[6MB>VU+&`&N+A\K7`'N?<
M+)R#AW'N17Z>0RU.2:S3_P!"YMF2,-^8.]&N`/<#U5'YEPN[R7Q(M3.@EAJ'
MCS8ZN0'85[C+/F1D'UV-;_+:IM3C/.\CPV[Q^YB'5;V=Y-);OR2-_L(X0UCR
MXZ.RUSVZ&O714Y5XYR_'OYQB;_'\=FJV9A9D(XH@^&I)/U`21`EQ<UQ`#@=^
MK1W"P\>Q.;CS/D\<QG*\=@#C[3+]+-2]47F&,B)D`<XG?5ZD=M!8J6,Y+FN`
M\;X`[BF5HN@EK_'W[@C9#%'&_K<6:<7.<>P`T%I9CAG/<W7Y-R6*K4K6[61;
M>JU;$3S<:*Q(@#'!W2-M)[$'>U88K/*N*Y#DN5J\4OW'\@9#>J&&'SOA[/E`
M.AG8'!P`=^L.RL7@Q0R53C^6LYBA-0R-_,6K<]61G2(G.([,/ZS=`?,.Q[K5
MO<?S=GG/-;%2&2O'?P$=6I;/9OG:<-`_@2%S_B7#LT86"7#YJK<QV$M5'MDI
M5Z\,CWPEOEA[#U3[<>H./N._JM2SPWD<#*(OX?*V(;?'JM!K*E""RZ%[6D/B
M<9#_`&/?YNL?7\%-V.+W\5D\I4S'#,ARJ+(XJC4HO+F_V1C9TOCDE!_LCU:=
MUCUUM9.5<;RC+7,\?-Q"UE[F?9`W%WHFMECK!L8;TOD<08^@C>_UM;7G(>#Y
MJR[G9LXAV0M2X6A!3LF,.,TS&`2%A/?>V[6OR'A>;%3EU?&8&5D=S`8^&)D,
M8:)9F/:7C0]7``[6;E'`[<MSF+J/&6ED^`K14_+@;IT[2.H,_P!H`#^"T\YB
M.40X;G7'X^*Y6W8S?PUBM8B8TPZ:R/K#G$_>!:1TZ))_BI3-\*OW:_B?/)Q[
MS[EV*J,=(Z%KGR%L3>KRR>XTX>WN%K<AXCR:Z[ECX\38F98J8<^62!\8V$`S
M1`D]SV]/?2V.0XZW>Q=O(83P[LXRM9RU1\WFP>;.Z.-C@9FT]A@+20W1WU;V
M0H5G#^01826:7C-^UY',(LI\.^"$335?+^8AC2&;)T"T:'\%,9OBV>ENYZ^[
M`V;=%G**V2DI`#JNU6Q:<&M)T_1(^7WTM._Q+,9AN3OU^,6:F(R?(\?8BQ<T
M36/9#&US9I7Q@Z:';[CU[+<Y)PN^[)<\^&P%W]'37,;9ILQ_ELZC&QWF/8QP
MZ7])/=AUU?56[P;J9RM4S4F7QOPT<]L/@FEI-ISV1TZ<^2%A+6GT`UK:Z4B(
MB(B(B(HSD&#QO(<7)B\M`Z:G(YKG,;*^,DM.Q\S2#ZCZJH?Y'_#_`/\`1%G_
M`'E9_P#F)_D?\/\`_P!$6?\`>5G_`.8HS/\`A!QDT1#@L067)GB,V)\E9+:S
M#O<G3YGSD>S>P)(V=;4)@/!+%XW(ZMT77<9-/*QS'WY8Y(&`GRI&F,M#NIN@
MYI&P=$'6PK=_D?X!_P"B+/\`O*S_`/,3_(_X?_\`HBS_`+RL_P#S%*<>\/>)
M\<R3<GA\?-#;:QS`]]R:4=)]>SWD?\%1N$>&LM[$3Q\GMYJ*J<M/8.(=*UM:
M4"7J8YS0WJ(/8_>[JLX+A/(6YVOCK]3,17*^8DO?I""E7;!W>2)?B">MP((!
MC]?P[)P?AF>K9+#4LCC<Q#=Q4UB66RVG79`>H/W_`)P#US!X(&O4;^@73?!?
MC3>.<#QT5G$LH9:9A-WJ8!*]P>[IZSZG0/;Z;53=CN0X"'DG&8</R"5V0RTN
M0QN1PTK8FN\S1Z)I2?[,`C1V.X]/Q<;XIF<EROB.0Y;B9K9J8![+$UUHEZ+0
MF);U;WMP!V/XJ(PW%\W&WCO'W\7MQ9W'9_\`2%W/N8T130^8YSG"7>WES2T=
M'X=UY#B.3,QM/C'V5RGFU.6LR,EOH;\.8#,2'-=O;NQ[Z'8>JB:&,LYJEF<3
MBN+V)<I/RZ6:/-,B9Y==C)@7%TF^II`WH>_5V7Z:"(B(B(B(B(B(B(B\_6_<
MO!ZC\UZ?O?N7RWU/Y(WU7H^Z5X[T'Y+Z;Z(/O%?(]_R0^@_)>G[P1WWD/ZR'
MW_)#[_DO'>J]/HY#[_DO#]W]Z>Q7OLY/8?FA_67K?1>HB(B(B(B(B(B(B\;Z
M+S]9>#[R^F^@7R?O+T>H_)/UE\^_[USKP7__`&3R/_\`N*__`-\+I*(B(B(B
"_]D_
`
end
</TEXT>
</DOCUMENT>
</SUBMISSION>
