A New Year and A New Administration:
What will it mean for the U.S. Defense and Security
Markets?
David Fishering, Industry Analyst
Lindsay Voss, Industry Analyst
Aerospace and Defense
January 15, 2009

Focus Points
Economic Impact on Defense and Security
Finding opportunity in 2009 and Beyond
Key Defense Issues for the New Administration
Defense and Security
Defense Budget Forecasts and Breakdown
Trends, Challenges, and Growth Areas for Defense
Security Budget Forecasts and Breakdown
Trends, Challenges, and Growth Areas for Security
New Security Administration Policies and Changes
Conclusions
2

Economic Impact on Defense and Security
Historical Defense Spending, 1960-2008
900.0
Defense Spending Supplemental Spending
800.0
700.0
600.0
Spending ($ Billion)
500.0
400.0
300.0
200.0
100.0
0.0
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
Source: Frost & Sullivan
Defense/Security Budget 2001-2008 GDP Growth 2001-2007 GDP Real Growth Rate 2001-2007
Defense Security
6.0
800.0 16,000.0
700.0 14,000.0 5.0
12,000.0
600.0
4.0
500.0 10,000.0
Percent (%)
$ Billion
$ Billion
3.0
400.0 8,000.0
6,000.0
300.0 2.0
4,000.0
200.0
1.0
2,000.0
100.0
0.0
0.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
Source: Frost & Sullivan Source: Frost & Sullivan Source: Frost & Sullivan
<GPS> 3

Key Defense Issues for the New Administration
Reequipping the Ground Forces and National
New Focus in Afghanistan
Guard
Expanding Intelligence Capabilities While
ISR on the Pakistan Border
Improving Oversight
Building Secure Relationships with Allies Acquisition Reform
Determining the Appropriate Course for Soldier
Continuation of Supplemental Funding
Modernization
Build the Non-Military Aspect of National
Formation of More Joint Programs
Security
Stabilizing Operations in Iraq Expanding the SOF
<GPS> 4

Defense Budget Forecast
U.S. Defense Budget Growth U.S. O&M Budget Projection
Funding Growth
• The overall U.S. Defense budget is expected to increase
slowly over the next three years with a CAGR of 1.1 195.0 6.0
percent 190.0
5.0
185.0
• O&M will increase with a 2.9% CAGR
Funding ($ Billion)
180.0 4.0
Growth (%)
• RDT&E will face notable reductions with a (4.9%) CAGR 175.0
3.0
170.0
• Procurement will increase overall with a 1.8% CAGR
165.0 2.0
• Increases in procurement are expected due to efforts to 160.0
1.0
reequip the ground forces
155.0
• RDT&E will be reduced as several major aircraft programs 150.0 0.0
2008 2009 2010 2011 2012
transition to procurement, and other large and immature
R&D programs are cutback
Source: Frost & Sullivan
U.S. RDT&E Budget Projection U.S. Procurement Budget Projection
Funding Growth
78.0 1.0
Funding Growth
116.0 7.0
76.0 0.0
114.0
74.0 -1.0 6.0
Funding ($ Billion)
112.0
Funding ($ Billion)
72.0 -2.0
110.0 5.0
Growth (%)
70.0 -3.0
Growth (%)
108.0
4.0
68.0 -4.0 106.0
104.0
66.0 -5.0 3.0
102.0
64.0 -6.0
2.0
100.0
62.0 -7.0
98.0 1.0
60.0 -8.0 96.0
94.0 0.0
58.0 -9.0
2008 2009 2010 2011 2012
2008 2009 2010 2011 2012
Source: Frost & Sullivan
Source: Frost & Sullivan
<GPS> 5

Defense Budget Breakdown
U.S. Budget Breakdown by Service U.S. Army Procurement Breakdown (2008)
Navy/USMC Air Force Army Joint
600.0 Aircraft Missiles Weapons & Vehicles
Ammunition Other Procurement JIEDDO
500.0
2.1%
Funding ($ Billion)
17.2%
400.0
300.0
6.8%
200.0
52.1%
100.0
12.7%
0.0
2007 2008 2009 2010 2011 2012 9.1%
Source: Frost & Sullivan Source: Frost & Sullivan
U.S. Navy/USMC Procurement Breakdown (2008) U.S. Air Force Procurement Breakdown (2008)
Aircraft Weapons Ships
Aircraft Missiles Other Procurement Ammunition
Other Procurement Ammunition USMC
2.6%
7.7%
2.0%
32.9%
14.1% 36.7%
45.6%
8.0%
35.3% Source: Frost & Sullivan
Source: Frost & Sullivan 15.2%
<GPS> 6

Growth Areas in Defense
Focus on Integration, Training and Services Provide End-Users Practical Solutions
Spending Grow th Rate
500.0 12.0
Spending ($ Million)
10.0
400.0
Growth Rate (%)
8.0
300.0 6.0
4.0
200.0
2.0
100.0
0.0
0.0 -2.0
2007 2008 2009 2010 2011 2012 2013
UAS Services are an expanding market Segment Defense Technologies Meeting the Need
Source: Frost & Sullivan
Look to Defense’s Top Growth Areas for Opportunities Participate in the HOT C4ISR Programs
Commercial SATCOM Near Space
AEHF DTN
WGS Hawkeye
WIN-T/JBC-P AESA
TACSAT Targeting Pods
Commercial Imagery SIAP
Reset and new manufacture SINCGARS
SDR Interim sets
UAVs & S&R: Top Defense Growth Areas NextGen/CANES
Radar Wideband Comms
Foreign Government and Commercial Space Radar

Key Defense Industry Trends and Challenges
• Despite being on the chopping block for the last two years, programs such as the Navy’s Littoral Combat Ship (LCS) will have some
support from President elect Obama in 2009 and beyond
• It is expected however that the U.S. Navy’s acquisition system will change and this will have an impact on not only ship programs
Ships but other naval acquisitions programs as well
Unmanned • Increased focus on unmanned systems capabilities and less focus on the platform (Sensors, Data Links, Navigation, GCSs)
• Companies are looking to expand their Unmanned Systems product offerings through partnering and acquisition
• The UAS industry in the U.S. is increasingly becoming consolidated with approximately 80 percent of the market held by four
Systems companies
Weapons
• Significant budget resources will be allocated to upgrade programs for fire control systems
• Missiles will have improvements to the seeker and control technology and will have “re-pours” or new propulsion packages
procured
Systems
Ground • Army vehicle reset is having a profound impact on the U.S. Defense vehicle industry for both manufacturers and suppliers
• Reset and refurbishment will positively impact vehicle procurement for the next 3-5 years
• The Joint Light Tactical Vehicle program could face setbacks however since the U.S. Army is consistently placing orders for new
Vehicles HMMWVs
• Parts Manufacturing Authority (PMA) parts manufacturers are increasingly be challenged by original equipment manufacturers in
Military
the military aircraft MRO space
• High aircraft engine cost in an emerging challenge for the military aircraft MRO market
• The aging military aircraft fleet however is increasing the potential for MRO revenue over the next 5-10 years
MRO
Training
• Budget constraints and an inability to sustain funding sources for T&S programs has been restraining the market
• As resources are pulled to support ongoing conflicts in Iraq and Afghanistan, training and simulation has become less of a priority
• The growth in popularity of unmanned systems is helping to spur T&S for this market area, particularly in the UAS market segment
Simulation
• Reequipping and expanding the ground forces and SOF will be key in 2009
• Technology focuses will be on communications, Intelligence, and Surveillance
• Possible funding shifts from the AF and the Navy to help rebuild the Army and the USMC
C4ISR
• Programs facing cutbacks in 2009 and beyond: FCS, TSAT, JTRS, and Manned Airborne ISR

Security Budget Forecast
DHS Budget Forecast, FY 2007-2012
The DHS budget is expected to be up about 5%
Total Budget Authority Growth
from last year (the budget is still pending and
60 16
DHS is operating under a CFR) 14
50
12
Growth in the budget is expected to have a
Funding ($ Million)
40
10
Growth (%)
CAGR of 4.5% between FY 2008-2012 30 8
6
Despite economic uncertainties and the Obama 20
4
Administration’s understatement of HLS thus 10
2
far, Frost & Sullivan sees very little change in 0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
the trends of DHS budget authority Fiscal Year
Source: Frost & Sullivan
DHS Budget Breakdown by Agencies and Offices, FY 2009
DHS Budget Breakdown by Category, FY 2009
0.7% 4.8% Dept. Ops. A&O USCIS
FLETC
Managem ent and NPPD 1.0% 1.0% 5.1%
13.3%
1.0% S&T
3.0%
Operations USSS
2.0%
3.0%
DNDO
Research and
1.0%
Developm ent, Training,
USCG FEMA
and Services
19.0% 12.9%
Protection, Preparedness,
Response, and Recovery
FEMA Grants
4.0%
Security, Enforcem ent,
81.2% TSA
and Investigations CBP
13.9%
ICE 22.0%
10.9%
Source: Frost & Sullivan Source: Frost & Sullivan
9

U.S. Security Market
Homeland Security Market Revenues by Segment
(U.S.), 2007-2012
$15.5 Billion
$11.0 Billion
18,000.0
18.6%
15,000.0
18.2%
12,000.0
Million USD
3.8%
9,000.0 11.6%
4.5% 6,000.0
7.1%
10.0%
3,000.0
9.1%
0.0
2007 2008 2009 2010 2011 2012
38.6%
Emerg.
Mass
Land CIP Maritime Seaport
Aviation
36.4% Resp.
Trans.
Border
10%
18%
11%
10.4%
11.8%
4%
9.9%
10.0%
2012
2007 11%
Source: Frost & Sullivan
8% 38%
The U.S. homeland security market is expected to witness modest growth over the next five years. High growth
segments include CIP, Seaport, and Emergency Response
10

Key Security Industry Trends and Challenges
• COTS solutions to improve situational awareness are likely to replace the SBInet concept in the near-term
Border
• Immigration policy will be a major focus in the next administration, this may take away from a focus on technology deployment
• Deadlines for programs such as US-VISIT are expected to be extended again in the future, despite large-scale rollout of biometric
passports and other identification methods
• Global development of small to mid- size airports (over 400 by 2028) is expected to increase demand for security measures
Aviation
• An average passenger growth of over 5 percent per year through 2012 will necessitate the deployment of more security technology
• The potential increases in baseline international airport security standards could create growth opportunities
• TSA procurement can lead to “false hope”, only a few technology deployments have led to sustainable business
• Mandates for increased security in the chemical industry along with infrastructure security grant programs have created demand in
Critical
a segment that is extremely dependent on the occurrence of events
Infrastructure
• Infrastructure is expected to be a focus of the next administration but spending could be targeted at improving rather than securing
• DHS has nearly $300 million that has been marked for cyber security; potentially lucrative this segment still has many uncertainties
• Having taken control of the Deepwater program Congress has now stripped the Coast Guard of its management rights, setting the
program even further behind schedule
• Maritime Domain Awareness remains a top priority and there is a major push to deploy integrated C4ISR systems to fill this gap
Maritime
• Mandates for 100 percent scanning and screening of cargo have necessitated the development of this market.
• Advanced technologies are meeting staunch resistance by government, putting deployment opportunities in question
• Supply chain security, trusted shipper and verification programs have become a favorite of lawmakers over inspection technology
Seaport • Shipping container traffic is expected to grow about 9 percent year over year by 2015 creating a need for more security systems
• Mass transport systems are increasingly being seen as “soft” targets for both criminal and terrorist activity. Intelligent & durable
surveillance systems within “rolling stock” are key revenue generators.
Mass
• Emphasis on low TCO, self-diagnosing CCTV systems, automatic wireless image downloads and innovative passenger screening
Transport
technologies will push R&D efforts within this threat domain.
• Interoperability remains an issue at the state and local level. Governance and budgets have become the biggest restraint despite
the availability of solutions. CBRNE detection technology is facing major challenges in the absence of a major CBRNE event
Emergency • At the strategic level, emergency managers are demanding integrated C3 systems to improve situational awareness and response
Response • The emergence of USNORTHCOM and its three incident response units could make it a key influencer, despite its support only role
© 2008 Frost & Sullivan
11
www.frost.com

Hot Spots in Security
Integration of COTS Solutions Understand and Meet the Needs of the End-User
Systems
Sensors System of
Systems
Provide Solutions for Today’s Security Problems Tap Into the Global HLS Market
Communications
Cyber Security
Critical Infrastructure Protection

New Administration Policies and Challenges
Stated Policy Goals Challenges
• Defeat Terrorism Worldwide • Maintaining Focus and Execution Through the
Transition Process
• Prevent Nuclear Terrorism
• Developing a More Mature Acquisition
• Strengthen American Biosecurity
Process to help increase the Likelihood of
• Improve Intelligence Capacity and Protect Civil Success
Liberties
• Supporting R&D Activities for Innovative
• Protect Critical Infrastructure Technologies and Small Businesses
• Modernize America’s Aging Infrastructure • Strengthening the Public-Private Partnership
• Securing the Border and Overhauling the
Likely DHS Focus Under Napolitano
Immigration System
• Developing CONOPS for the National Guard • Creating Interoperability of C4ISR Systems
and NORTHCOM across the Federal State and Local Agencies
• Redeveloping and Executing the Virtual Fence • Fulfilling Mandates for 100 percent scanning of
Concept on the Border air and sea cargo
• Enhancing Federal, State and Local • Understanding and Defining the role of the
Cooperation Military in Homeland Security

Conclusions
Defense and Security Funding will be stable through 2010
Top Factors Driving Growth in the Defense Market will be Reequipping the troops and Ongoing
Wartime Operations
Top Factors Driving Growth in the Security Market will be the fulfillment of unmet needs from the
last administration and the ever present demands for security in times of uncertainty
The Downturn in the Global Economy is expected to have a minimal Impact on the U.S. Defense and
Security Markets
Any major changes in Defense and Security policy or spending are unlikely in the near-term:
Technologies and Programs that are getting the job done will be well positioned under the new
administration

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