Is It Time To Play Offense or Defense with Defense Stocks? American Association of Individual Investors (DC Chapter)

1. Is It Time To Play Offense or Defense with Defense Stocks? American Association of Individual Investors (DC Chapter) September 16, 2006 Kevin P. DeSanto, Vice President Houlihan Lokey Investment Banking Services Aerospace •Defense • Government Group 1800 Tysons Blvd., 3rd Floor McLean, Virginia 22102 703.847.5225 Los Angeles New York Chicago San Francisco Minneapolis Washington D.C. Dallas Atlanta London Paris Frankfurt

2. Table of Contents

3. Disclaimer Houlihan Lokey Howard & Zukin and Houlihan Lokey are trade names for Houlihan, Lokey, Howard & Zukin, Inc. and its subsidiaries and affiliates which include: Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a California corporation, a registered investment advisor, which provides investment advisory, fairness opinion, solvency opinion, valuation opinion, restructuring advisory and portfolio management services; Houlihan Lokey Howard & Zukin Capital, Inc., a California corporation, a registered broker-dealer and SIPC member firm, which provides investment banking, private placement, merger, acquisition and divestiture services; and Houlihan Lokey Howard & Zukin (Europe) Limited, a company incorporated in England which is authorized and regulated by the U.K. Financial Services Authority, which provides investment banking, restructuring advisory, merger, acquisition and divestiture services, valuation opinion and private placement services. Houlihan Lokey gathers its data from sources it considers reliable; however, it does not guarantee the accuracy or completeness of the information provided within this publication. The material presented reflects information known to the authors at the time this presentation was written, and this information is subject to change. Houlihan Lokey makes no warranties, expressed or implied, regarding the accuracy of this material. The views expressed in this material accurately reflect the personal views of the author regarding the subject securities and issuers. Officers, directors and partners in the Houlihan Lokey group of companies may have positions in the securities of the companies discussed. This presentation does not constitute a recommendation with respect to the securities of any company discussed herein, is not intended to provide information upon which to base an investment decision, and should not be construed as such. Houlihan Lokey or its affiliates may from time to time provide investment banking or related services to these companies. Like all Houlihan Lokey employees, the author of this presentation receives compensation that is affected by overall firm profitability. Any public companies included in the Houlihan Lokey indices are companies commonly used for industry information to show performance within a sector. They do not include all public companies that could be categorized within the sector and were not created as benchmarks; they do not imply benchmarking and do not constitute recommendations for a particular security and/or sector. The charts and graphs used in this report have been compiled by Houlihan Lokey solely for purposes of illustration. This presentation mentions a number of companies; however, none of these companies is the subject of this presentation.  The companies mentioned include Houlihan Lokey financial restructuring and other financial advisory clients, as well as companies involved in transactions where Houlihan Lokey has provided these services to other participants in the transactions. This material may not be reproduced in any format by any means or redistributed without the prior written consent of Houlihan Lokey.

4. Introduction

5. Houlihan Lokey Overview Introduction Premier Middle Market Investment Bank # 1 Advisor on Middle Market M&A Transactions # 1 Provider of Fairness Opinions # 1 Financial Restructuring Practice • 700+ people, in 11 offices worldwide, allow Houlihan Lokey to provide clients in-depth global exposure and end-to-end advisory solutions • Senior officers in the US and Europe have strong Wall Street credentials and serve more than 1,000 clients annually, ranging from closely-held companies to Fortune 500 Corporations • Partnered with ORIX Corporation (NYSE: IX, TSE: 8591), a leading integrated financial services group headquartered in Tokyo

6. Background of Kevin P. DeSanto Introduction • Mr. DeSanto is a Vice President in the Aerospace•Defense•Government (“ADG”) investment banking group in the Washington, DC office of Houlihan Lokey. His responsibilities include overall engagement management and execution for corporate finance assignments, primarily mergers and acquisitions. In addition, Mr. DeSanto coordinates the ADG Group’s defense and government services industry coverage efforts and has been quoted in publications including Washington Technology, Government Corporate News and Fortune Magazine. • Regarding mergers and acquisitions experience, Mr. DeSanto provides clients both sell-side and buy-side transaction support. Select clients have included bd Systems, L-3 Communications, Development Alternatives, Manufacturing Technology, Impact Innovations Group, OAO Technology Solutions, Eagan, McAllister & Associates, Quality Research and Radian. In addition, he participates in a variety of financial advisory engagements including transaction fairness, solvency analysis and recapitalization strategies. • Mr. DeSanto earned a B.S. in business administration with a concentration in finance from Georgetown University’s McDonough School of Business. He is licensed with the NASD as a General Securities Representative (Series 7, 63).

7. Discussion Summary Introduction • Develop Framework for Analyzing the Publicly-traded Defense Companies • Perspectives on Key Trends in the DoD Budget • Overview of Critical Industry and Company-specific Factors • Assess Current Pricing on a Relative Basis • Identify the Multiple Avenues Available to Invest in “Defense” • Answer Your Questions (When I Know the Answer)

8. Defense Industry Pyramid Introduction $200 Million

9. How to Play in Defense Introduction Opportunities to Benefit From Diversified Business Models in a Recovering Market that has Meaningful Defense Exposure? Aerospace A Bevy of Options for Capitalizing on Key DoD Themes and Strategies – Where Will the $ Flow? Defense Services Companies Supporting High Priority Initiatives Within the DoD – How Low Can They Go? Government Where is the Value - Smaller Pure-plays, Traditional Defense/Government Contractors or Diversified Industrials? Homeland Security

10. Other Ways to Play in Defense Introduction • State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies) • Engineering & Construction (e.g., Jacobs Engineering, Fluor, Tetra Tech, URS) • Diversified IT (e.g., CSC, EDS, Perot, Unisys, Wireless Facilities) • Foreign (e.g., VT Group, Serco Group) • SPACs (e.g, Good Harbor, Federal Services Acquisition Corp.)

11. Why Investors Play in Defense Introduction $500 Billion Market (Revenue and EV) Strong Investment Returns $70 Billion Unused Debt Capacity Revenue & Margin Visibility ADG Liquid Private Market (1,500 transactions since 2000) Leverageable Assets Supports National Priorities Identifiable Long-Term Growth Drivers

12. Signs of the Times Introduction Companies Remain Enthusiastic About Growth Opportunities…But Investors are Becoming More Cautious Industry Trends Support of IPOs, Secondaries and Acquisition Strategies…But Investors are Becoming More Cautious Public Markets Widely Available Sources of Capital at All Levels of the Capital Structure…At Increased Cost Financing Broadened Buyer Universe, Stable Activity and Pricing…But Increased Regulatory Scrutiny M&A Markets

13. Budget Perspectives

14. Overall DoD Budget “Temperature” BudgetPerspectives • On-going Federal Budget Deficits • Slower Baseline Budget Growth • Administration – Democrat vs. Republican • DoD vs. Civilian vs. Homeland Security • “War Tax” • QDR/BRAC • Investment Accounts vs. O&M Spending

15. DoD Budget Relative to Federal Deficit BudgetPerspectives 8% CAGR 6% CAGR

16. Healthy Defense Budget BudgetPerspectives • “Better than expected…” • President’s Nearly $440 Billion FY2007 Defense Budget Request was Approximately 5% Greater Than FY2006 • Investment Accounts (Total Procurement and RDT&E) Expected to Grow at 4.6% CAGR from FY2007 to FY2011 • Mismatch Between Outlays and Actual Expected Costs of Conflicts Raise Concerns About Viability of Major Programs (e.g., JSF, F-22) • Supplemental Budgets Unlikely to Continue

17. Projected Declines in Overall DoD Budget BudgetPerspectives

18. FY2007 Appropriations Breakdown BudgetPerspectives

19. Congressional Impact on Procurement BudgetPerspectives

20. QDR Perspectives BudgetPerspectives • QDR Linked to FY2007 Defense Budget Request as They Were Submitted to Congress Simultaneously • Evolutionary QDR Focus Areas • Defending the Homeland • Defeating Terrorist Extremism • Helping Shape the Choices of Countries at Strategic Crossroads • Countering Weapons of Mass Destruction (“WMD”)

21. QDR Perspectives (Cont.) BudgetPerspectives • Transformational Communications Architecture Enhances Land-based Network and Satellite Communication and High-bandwidth, Survivable Internet protocol • Long-term Programs Maintained – FCS, F-22 and JSF • Doubling of UAV Capacity and Development of New Long Range Bomber by FY2018 • Investment in Joint Mobility, Intelligence, Surveillance and Reconnaissance • Increase in Special Operations Forces • Acquisition Reform

22. QDR Perspectives (Cont.) BudgetPerspectives • Accelerate Army’s Movement to Modular/Deployable Units and Headquarters • Orienting Joint Air Capabilities – Larger Payloads, Longer Range and Penetration of Denied Areas • Build Joint Maritime Forces for “Closer-to-Conflict” Support • “Knowledge-Based Forces” Partially Shifts Traditional Focus on Guns/Ships/Planes to C4ISR Systems • Development of Tools for Assessing, Analyzing and Delivering Information • Commitment to Spend for “Long War”

23. 2005 BRAC Impact BudgetPerspectives 2005 BRAC Losers 2005 BRAC Winners

24. 2005 BRAC Impact (Cont.) BudgetPerspectives • $1.3 Billion in Expected Savings Over Next 20 Years • Creates Many Opportunities, Mostly IT and Communications Related • Secure Systems Transition • Uninterrupted IT Infrastructure • Network Storage • Business Process Re-Engineering • Business System Modernization • Commitment to Outsource Non-core DoD Functions

25. Program Funding Issues/Cost Estimates BudgetPerspectives • Program Cost Growth More Serious Issue as Budgets Slow • GAO • 30% of FY2006 RDT&E Budget Spent on “Rework” • Planned Future Investments in New Weapons Systems up 100% ($700 Billion to $1.4 Trillion) Despite Flawed Process • Future Combat Systems (Boeing/SAIC) • $82.7 Billion < $127.2 Billion (54% Excess) • Joint Strike Fighter (Lockheed Martin) • $62 Million/Plane < $82 Million/Plane (33% Excess) • Another Comanche?

26. Impact of News Events on Defense Stocks BudgetPerspectives

27. Industry Perspectives

28. Major Themes That Impact Public Markets Industry Perspectives • Financial Performance • Achieving Growth and Earnings Targets • Budget Chatter - Perception vs. Reality • Large Cap vs. Small Cap • Receptivity to IPOs, Secondary Offerings and SPACs • Sector Rotation • Shareholders vs. Customers • M&A – Buy vs. Divestiture • Share Buybacks • Contract Awards • Credit Markets

29. Company Attributes That Drive Value Industry Perspectives Business / Qualitative Market Share Gains Priority Market Involvement Employee Base/Security Clearances Business / Capability Focus Defensible Budget Access Management Team Long-Term Customer Relationships Deep Technical Expertise Prime Contract Positions Proprietary Technology Financial / Quantitative Meet or Beat Estimates Performance Track Record Controlled Balance Sheet No Historical Mishaps Backlog and Long-term Contracts Contract Types/Profitability

30. Company-Specific Strategy Focus Industry Perspectives • Customer Priorities • Congressional Sentiments • Technology Acceleration • DoD Transformation • Growing Importance of Software and Services • Priority Markets • C4ISR • Homeland Security • Intelligence • Training and Simulation • Networking and Communications • Obsolescence Management • Big-ticket Programs

31. Customer Demand Continuing To Grow Industry Perspectives • Outsourcing • Global War on Terrorism • Supplemental Budgets • Transformation • Technology Upgrades • Homeland Security • Aging Infrastructure (People and Technology)

32. Changing Nature of Customer Relationships Industry Perspectives • GWACs, Schedules and Enterprise MACs • Contract Bundling • Sole-Source vs. Competitive • Set-Aside Programs • Contract Terms • Arcane Infrastructure • Expedited Process? • Prime vs. Sub vs. Teaming vs. JV • Earmarks/Plus-Ups

33. Competition Increasing Industry Perspectives • Highly Fragmented Industry • Larger Contracts = Do or Die • Knowledge Transfer • Partner or Competitor? • New Entrants • “Katrina Effect” • B&P Costs • Security Clearances

34. Consolidation and Divestitures Industry Perspectives • Active M&A Market • Portfolio Management • Energizes Growth • Deployment of Capital • Differentiation and Diversification • Commercial? • New Market Entrants • Accretion/Dilution

35. Cash Flow Industry Perspectives • Strong, Predictable Margins • Margin Expansion Opportunities • Limited Capital Expenditures • Real Backlog/Bookings vs. Opportunities • Earnings Visibility • Clean Balance Sheets • Availability/Cost of Capital for Financing

36. Factors That Could Reshape Market Industry Perspectives • Changes in Security Threats and Priorities • Old/On-going - Iraq/Afghanistan • New - Iran/China • Changes in Congress/Administration • End of Supplemental Spending • More Non-Defense Discretionary Spending • Healthcare and Retirement Costs • Talent Pool • Tax Payer Revolt • Excitement in Broader Markets

37. Market Dynamics Aerospace

38. Aerospace Capabilities of Companies • Aircraft Replacement Parts • Antennas • Avionics & Surveillance • Electronics and Power Systems • Life Support Systems • Lighting Products • Modeling, Simulation and Training • Motors, Actuators, Switches and Cables • Process, Analytical and Test Instruments • Sensors

39. Aerospace Pricing at Highest Levels in Past 10 Years • Investors are Optimistic About Commercial Aerospace • Orders are Leading Indicator for Valuations • 2005 Saw a Very Strong Spike in Aircraft Orders That Will Provide the Backlog for Strong Future Deliveries • 2005 Expected to be Peak in Order Cycle, but Strong Backlog Exists • Rise in Valuations Typically Precedes a Recovery • Valuations are Typically Highest in the Early Phases of a Market Recovery • Many “Aerospace” Companies Have Meaningful Portions of Business Derived From the Defense and Government Markets

40. Aerospace Public Company Pricing – EV/Revenue x

41. Aerospace Public Company Pricing – EV/EBITDA x

42. Aerospace Comparative Aerospace Subsector Public Multiples

43. Aerospace Current Performance Metrics • EV calculated as of September 13, 2006

44. Source: Factset Pricing as of 9/13/2006 Aerospace Aerospace vs. S&P 500

45. Aerospace Recent Pricing Changes • YTD Pricing as of Stock Price Closes September 13, 2006

46. Aerospace Subsectors Defined

47. Market Dynamics Defense

48. Defense Capabilities of Companies • Combat Systems Development, Production and Support • Electronic Warfare Systems • Information Systems & Technology • Manned and Unmanned Airborne Systems • Marine Systems • Missile Defense • Ordnance and Tactical Systems • Radar and Air Defense Systems • Satellite and Space Systems • Technical Services

49. Defense Valuations Steady Recently • Valuations Remain Above 10-year Averages • Growth From On-going “Operations” and Subsequent “Replenishment” • Big-ticket Programs Have Stabilized From a Budget Stand-point, Although Not Out of the Weeds Yet • Budget Pressures Have Been Offset by Strong Recent Earnings • Highest Valuations in Subsectors – C4ISR, Force Protection • “Primes” are Consistent

50. Defense Public Company Pricing – EV/Revenue x