Excluding supplemental appropriations (which provide funds in addition to the regular appropriations level and often arise when an emergency requires immediate funding), the 2005 defense budget was $401.7 billion, a 7% increase over the 2004 budget of $375.3 billion. According to the President’s 2006 Department of Defense budget request, the defense budget is expected to grow at a compound annual growth rate of 4.7% through 2009. Additionally, the U.S. defense budget has been augmented by wartime supplemental appropriations since September 11, 2001. There were supplemental appropriations in the amounts of $15.9 billion in 2002, $78.5 billion in 2003, $87.0 billion in 2004 and $80.9 billion in 2005.

Internationally, the increased cooperative effort to combat terrorism and domestic unrest has caused governments and militaries to enhance and modernize their military and law enforcement capabilities dramatically. With the proliferation of regional conflicts that have the potential to escalate, international governments have realized the importance of maintaining a ready and mobile military force with lightweight weapons, which can deploy and maneuver quickly. In light of the importance of equipping a military force with modern and lightweight small arms, it is expected these numbers to increase.

The M4 is a fully/semi-automatic, air-cooled, magazine-fed, gas-operated carbine. The M4 carbine is based on simplicity of operation, maximum interchangeability of parts and ease of maintenance. The M4 carbine features a four-position sliding buttstock allowing it to adapt to soldiers of different sizes and physical characteristics as well as various firing positions. The Company has designed it so that all parts are completely interchangeable with other M4 carbines, ensuring quality, commonality of parts and reduced maintenance costs. The M4 Commando, a derivative of the M4 carbine, is the most compact of the Company’s 5.56 millimeter family of weapons.

The Company’s Automatic Rifle, or CAR, is a newly designed weapon system that is its candidate to replace the M249 Squad Automatic Weapon and will be one of the four variants for its submission under the OICW-Increment I RFP. The CAR is a gas-operated, air-cooled, magazine-fed, fully automatic weapon with a firing rate of 600-750 rounds per minute.

The 9 mm Submachine Gun, or SMG, is a lightweight, compact weapon encompassing the same straight-line construction and design as the M4 carbine. This straight-line construction, coupled with the low recoil associated with 9 mm ammunition, the SMG provides highly accurate fire with less muzzle climb, especially in full automatic fire.

The M16 is a fully/semi-automatic, air-cooled, magazine-fed, gas-operated rifle. The M16A4 Rifle version features a removable carrying handle with an integral rail-mounting system.

The M203 grenade launcher is a lightweight, single-shot, breech-loaded 40 millimeter weapon designed for attachment to M16 rifles, M4 carbines and law enforcement rifles, creating a versatile combination weapon system capable of firing 5.56 millimeter rifle ammunition as well as a whole range of 40 millimeter high explosive and special purpose ammunition (including non-lethal ammunition).

Law Enforcement Carbine is specially designed law enforcement weapon system features many of the combat proven advantages of the military M4 carbine and is designed for tactical deployment and traditional patrol. It offers a semi-automatic only mode. The Law Enforcement Carbine rifle is also available with a step-cut barrel that allows it to accept a grenade launcher for nonlethal options.

Cost of sales was $14.6 million for the first quarter ended April 3, 2005, an increase of $2.3 million, or 18.5%, from cost of sales of $12.3 million for the first quarter ended April 4, 2004.

Selling expenses and commissions were unchanged at $1.3 million in each of the first quarters ended April 4, 2004 and April 3, 2005.

Operating income for the first quarter ended April 3, 2005 was $3.6 million, a decrease of $0.4 million, or 8.8%, from operating income of $4.0 million for the first quarter ended April 4, 2004.