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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-K

    ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

    TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file numbers 001-14141 and333-46983

L-3 COMMUNICATIONS HOLDINGS,INC.

L-3 COMMUNICATIONS CORPORATION

(Exact names of registrants asspecified in their charters)

|                                                              |  |                                       |  |  |  |  |
|--------------------------------------------------------------|--|---------------------------------------|--|--|--|--|
| Delaware                                                     |  | 13-3937434and 13-3937436              |
| (Stateor other jurisdiction of incorporation ororganization) |  | (I.R.S. Employer Identification Nos.) |
|                                                         |  |                                  |
| 600 Third Avenue,New York NY                                 |  | 10016                                 |
| (Address of principal executiveoffices)                      |  | (Zip Code)                            |
|                                                              |

(212)697-1111(Telephone number)

Securities registered pursuant to Section 12(b) of the Act:

|                                                                          |  |                                           |  |  |  |  |
|--------------------------------------------------------------------------|--|-------------------------------------------|--|--|--|--|
| Titleof each class                                                       |  | Name of each exchange on whichregistered: |
| L-3 Communications Holdings, Inc.common stock, par value $0.01 per share |  | New York StockExchange                    |
|                                                                          |

Securities registered pursuant toSection 12(g) of the Act:

None.

Indicate bycheck mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.    Yes        No

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best ofregistrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.    

Indicate by checkmark whether the registrant is an accelerated filer (as defined in theRule 12 b-2 of the Act)     Yes         No

The aggregate market value of the L-3 Communications Holdings, Inc.voting stock held by non-affiliates of the registrant as of June 30,2004 was approximately $6,654 million. For purposes of thiscalculation, the Registrants have assumed that their directors andexecutive officers are affiliates.

There were 116,337,095 sharesof L-3 Communications Holdings, Inc. common stock with a par value of$0.01 outstanding as of the close of business on February 25, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of thedefinitive proxy statement to be filed with Securities and ExchangeCommission ("SEC") pursuant to Regulation 14Arelating to the Registrant's Annual Meeting of Shareholders, tobe held on April 26, 2005, will be incorporated by reference in PartIII of this Form 10-K. Such proxy statement will be filed with the SECnot later than 120 days after the registrant's fiscal year endedDecember 31, 2004.

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L-3COMMUNICATIONS HOLDINGS, INC. L-3 COMMUNICATIONS CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K For the Year EndedDecember 31, 2004

PARTI

|            |  |                                                                                              |  |        |        |        |  |  |  |  |
|------------|--|----------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|--|--|
| Item1:     |  | Business                                                                                     |  |   | 1      |   |
|       |  |                                                                                         |  |   |   |   |
| Item2:     |  | Properties                                                                                   |  |   | 16     |   |
|       |  |                                                                                         |  |   |   |   |
| Item3:     |  | LegalProceedings                                                                             |  |   | 17     |   |
|       |  |                                                                                         |  |   |   |   |
| Item4:     |  | Submission of Matters to a Vote of SecurityHolders                                           |  |   | 18     |   |
|       |  |                                                                                         |  |   |   |   |
| PARTII     |  |                                                                                         |  |   |   |   |
|       |  |                                                                                         |  |   |   |   |
| Item5:     |  | Market for Registrant's Common Equity and RelatedStockholderMatters                          |  |   | 19     |   |
|       |  |                                                                                         |  |   |   |   |
| Item6:     |  | Selected FinancialData                                                                       |  |   | 20     |   |
|       |  |                                                                                         |  |   |   |   |
| Item7:     |  | Management's Discussion and Analysis of Results ofOperations and FinancialCondition          |  |   | 21     |   |
|       |  |                                                                                         |  |   |   |   |
| Item7A:    |  | Quantitative and Qualitative Disclosures about MarketRisk                                    |  |   | 48     |   |
|       |  |                                                                                         |  |   |   |   |
| Item8:     |  | Financial Statements and SupplementaryData                                                   |  |   | 48     |   |
|       |  |                                                                                         |  |   |   |   |
| Item9:     |  | Changes in and Disagreements with Accountants on Accountingand FinancialDisclosure           |  |   | 48     |   |
|       |  |                                                                                         |  |   |   |   |
| Item9A:    |  | Controls andProcedures                                                                       |  |   | 48     |   |
|       |  |                                                                                         |  |   |   |   |
| Item9B:    |  | OtherInformation                                                                             |  |   | 49     |   |
|       |  |                                                                                         |  |   |   |   |
| PARTIII    |  |                                                                                         |  |   |   |   |
|       |  |                                                                                         |  |   |   |   |
| Item10:    |  | Directors, Executive Officers and Key Employees of theRegistrant                             |  |   | 50     |   |
|       |  |                                                                                         |  |   |   |   |
| Item11:    |  | ExecutiveCompensation                                                                        |  |   | 50     |   |
|       |  |                                                                                         |  |   |   |   |
| Item12:    |  | Security Ownership of Certain Beneficial Owners andManagement and Related StockholderMatters |  |   | 50     |   |
|       |  |                                                                                         |  |   |   |   |
| Item13:    |  | Certain Relationships and RelatedTransactions                                                |  |   | 51     |   |
|       |  |                                                                                         |  |   |   |   |
| Item14:    |  | Principal Accounting Fees andServices                                                        |  |   | 51     |   |
|       |  |                                                                                         |  |   |   |   |
| PARTIV:    |  |                                                                                         |  |   |   |   |
|       |  |                                                                                         |  |   |   |   |
| Item15:    |  | Exhibits, Financial StatementSchedules                                                       |  |   | 51     |   |
|       |  |                                                                                         |  |   |   |   |
| Signatures |  |                                                                                         |  |   | 54     |   |
|            |

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PART I

Forconvenience purposes in this filing on Form 10-K, "L-3Holdings" refers to L-3 Communications Holdings, Inc., and"L-3 Communications" refers to L-3Communications Corporation, a wholly-owned operating subsidiary of L-3Holdings. "L-3","we", "us" and"our" refer to L-3 Holdings and itssubsidiaries, including L-3 Communications.

Item1.    Business

L-3 Holdings, a Delaware corporation organizedin 1997, derives all of its operating income and cash flow from itswholly-owned subsidiary, L-3 Communications. L-3 Communications, aDelaware corporation, was organized in April 1997. At December 31,2004, L-3 Holdings had no indebtedness other than its guarantee of theindebtedness under the bank credit facilities of L-3 Communications.L-3 Holdings' 51⁄4% Convertible SeniorSubordinated Notes were converted into L-3 Holdings' common stockin January 2004 and L-3 Holdings' 4% Senior SubordinatedConvertible Contingent Debt Securities (CODES) were converted into L-3Holdings' common stock in October 2004. In order to generate thefunds necessary to pay dividends declared and principal and interest onits outstanding indebtedness, if any, L-3 Holdings relies on dividendsand other payments from its subsidiaries or it must raise funds inpublic or private equity or debt offerings.

Overview

Weare a leading supplier of a broad range of products used in asubstantial number of aerospace and defense platforms. We also are amajor supplier of subsystems on many platforms, including those forsecure communication networks and communication products, mobilesatellite communications, information security systems, shipboardcommunications, naval power systems, fuzes and safety and armingdevices for missiles and munitions, microwave assemblies for radars andmissiles, telemetry and instrumentation and airport security systems.We also are a prime system contractor for aircraft modernization andoperations & maintenance (O&M), Intelligence, Surveillance andReconnaissance (ISR) collection systems, training and simulation, andgovernment support services. Our customers include the U.S. Departmentof Defense (DoD) and its prime contractors, the U.S. Department ofHomeland Security (DHS), U.S. Government intelligence agencies, majoraerospace and defense contractors, allied foreign government ministriesof defense, commercial customers and certain other U.S. federal, stateand local government agencies. For the year ended December 31, 2004,direct and indirect sales to the DoD provided 73.4% of oursales. For the year ended December 31, 2004, we generated (1) sales of$6,897.0 million, of which U.S. customers accounted for 86.9%and foreign customers, including commercial export sales, accounted for13.1%, (2) net cash from operating activities of $620.7 million,and (3) operating income of $748.6 million.

At December 31,2004, we had four reportable segments: (1) Secure Communications &ISR; (2) Training, Simulation & Government Services; (3) AircraftModernization, O&M and Products (formerly known as AviationProducts & Aircraft Modernization); and (4) Specialized Products.Financial information for our reportable segments is included inManagement's Discussion and Analysis of Results of Operations andFinancial Condition and in Note 18 of our consolidated financialstatements.

Business Strategy

We intend to grow oursales, improve our profitability and cash flows and build on ourposition as a leading supplier of systems, subsystems, products andservices to the DoD and other U.S. Government agencies, major aerospaceand defense prime contractors and allied foreign governments. Inexecuting our strategy, we expect that our primary focus will continueto be to grow our defense businesses. Our strategy to achieve ourobjectives includes:

Expanding SupplierRelationships.    As an independent supplier, we anticipate thatour growth will be driven by expanding our share of existing programsand by participating in new programs. We intend to identifyopportunities where we are able to use our existing customerrelationships and leverage the capabilities of our various businessesto expand the scope of products and services and to obtain

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customers. We also expect to benefit fromcontinued outsourcing of subsystems and products by prime contractors,which positions us to be a supplier to multiple bidders on primecontract bids. We also intend to grow sales by combining certain of ourproducts into subsystems that we can offer to customers.

Supporting Customer Requirements.    We intend tocontinue to align our research and development, manufacturing and newbusiness efforts to address our customers' requirements andprovide them with state-of-the-art products, services and solutions. Inaddition, we also intend to grow our sales by entering into"teaming" arrangements with select primesystem contractors and platform providers.

ImprovingOperating Margins.    We intend to continue to improve ouroperating performance by continuing to reduce overhead expenses,consolidating certain of our businesses and business processes andincreasing the productivity of our businesses.

LeveragingTechnical and Market Leadership Positions.    We are applyingour technical knowledge, expertise and capabilities to expand our coredefense businesses and to certain closely aligned defense markets andapplications, such as homeland security.

MaintainingDiversified Business Mix.    We have an attractive customerprofile and a diverse and broad business mix, with limited reliance onany single program. We also have a favorable balance ofcost-reimbursable type and fixed-price type contracts with significantfollow-on business opportunities.

Capitalizing on StrategicAcquisition Opportunities.    In addition to expanding ourexisting product base through new product development efforts, weintend to continue to acquire select businesses that will add newproducts or customers in areas that complement our presenttechnologies.

Selected Recent Business Acquisitions

During the year ended December 31, 2004, we used cash of $473.4million for business acquisitions. See "Management'sDiscussion and Analysis of Results of Operations and FinancialCondition—Business Acquisitions" for additionaldetail on our 2004 business acquisitions, including details of theirpurchase prices. The table below summarizes our business acquisitionsin 2004 that had a purchase price greater than $35.0million.

|                    |  |                  |  |                         |  |                           |  |                                                                                                                                                                                                                                      |  |  |  |  |  |  |  |  |  |  |
|--------------------|--|------------------|--|-------------------------|--|---------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Business           |  | DateAcquired     |  | Acquired From           |  | Purchase Price($millions) |  | BusinessDescription                                                                                                                                                                                                                  |
| BeamhitLLC         |  | May 13, 2004     |  | Beamhit LLCShareholders |  | $40.0                     |  | Develops and supplies lasermarksmanship trainingsystems.                                                                                                                                                                             |
|               |  |             |  |                    |  |                      |  |                                                                                                                                                                                                                                 |
| Brashear,LP        |  | June 14, 2004    |  | Brashear,LP             |  | $36.3                     |  | Designs, develops and manufactureselectro-optical systems, such as laser ranging and tracking systems,test range instrumentation, telescope systems, naval fire controlsystems, laser beam directors and ground fire controlsystems. |
|               |  |             |  |                    |  |                      |  |                                                                                                                                                                                                                                 |
| CommercialInfrared |  | November 9, 2004 |  | RaytheonCompany         |  | $44.2                     |  | Produces uncooled thermal infrareddetectors and imaging systems for the public safety, fire and rescue,security, transportation and industrialmarkets.                                                                               |
|               |  |             |  |                    |  |                      |  |                                                                                                                                                                                                                                 |
|                    |

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|                                                      |  |                  |  |                             |  |                           |  |                                                                                                                                                                             |  |  |  |  |  |  |  |  |  |  |
|------------------------------------------------------|--|------------------|--|-----------------------------|--|---------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Business                                             |  | DateAcquired     |  | Acquired From               |  | Purchase Price($millions) |  | BusinessDescription                                                                                                                                                         |
| Cincinnati Electronics,Inc.                          |  | December 9, 2004 |  | CMC ElectronicsInc.         |  | $176.4                    |  | Designs, develops and manufactures infraredimaging sensors and subsystems, infrared missile warning systems andspace launch electronicsubsystems.                           |
|                                                 |  |             |  |                        |  |                      |  |                                                                                                                                                                        |
| CanadianNavigation Systems and Space Sensors Systems |  | December 30,2004 |  | Northrop GrummanCorporation |  | $65.0                     |  | Designs, develops and integrateselectronic products and systems for aircraft and ground vehicles,specializing in navigation products, displays and systems supportservices. |
|                                                 |  |             |  |                        |  |                      |  |                                                                                                                                                                        |
|                                                      |

Productsand Services

Secure Communications & ISR

Thebusinesses in this segment provide products and services for the globalISR market, specializing in signals intelligence (SIGINT) andcommunications intelligence (COMINT) systems. These products andservices provide to the warfighter in real-time the unique ability tocollect and analyze unknown electronic signals from command centers,communication nodes and air defense systems for real-time situationawareness and response. The businesses in this segment also providesecure, high data rate communications systems for reconnaissance andsurveillance applications. We believe that our systems and products arecritical elements for a substantial number of major communication,command and control, intelligence gathering and space systems. Oursystems and products are used to connect a variety of airborne, space,ground and sea-based communication systems and are used in thetransmission, processing, recording, monitoring and disseminationfunctions of these communication systems. We sell these products andservices primarily to the DoD and U.S. Government intelligenceagencies. Major systems, products and services for this segmentinclude:

|              |                                                                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | highly specialized fleetmanagement and support services, including procurement, systemsintegration, sensor development, modifications and maintenance forsignals intelligence and ISR special mission aircraft and airbornesurveillance systems; |

|              |                                                                                                                        |
|--------------|------------------------------------------------------------------------------------------------------------------------|
| •  | strategic andtactical signals intelligence systems that detect, collect, identify,analyze and disseminate information; |

|              |                                                                                                                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | secure data links that enable networkedcommunications for airborne, space, ground and sea-based remoteplatforms, both manned and unmanned, for real-time informationcollection and dissemination to users; |

|              |                                                                                   |
|--------------|-----------------------------------------------------------------------------------|
| •  | secure terminal and communicationnetwork equipment and encryption management; and |

|              |                                                                                 |
|--------------|---------------------------------------------------------------------------------|
| •  | communication systems for surface andundersea vessels and manned space flights. |

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The table below provides additionalinformation for the systems, products and services, selectedapplications and selected platforms or end users of our SecureCommunications & ISR segment at December 31, 2004.

|                                                                                                                                                       |  |                                                                                                                                                         |        |                                                                                                              |  |        |        |        |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|
| Systems/Products/Services                                                                                                                             |  | Selected Applications                                                                                                                                   |        | Selected Platforms/EndUsers                                                                                  |
| ISRSystems                                                                                                                                            |  |                                                                                                                                                    |   |                                                                                                         |  |   |   |   |
| •  Primemission systems integration, sensor development and operations andsupport                                                      |  | •  Signal processing, airborneSIGINT applications, antenna technology, real-time process control andsoftware development                 |        | •  U.S. Air Force(USAF) and allied foreign militaries ISR aircraft platforms                  |
| •  Fleetmanagement of special mission aircraft, including avionics and missionsystem upgrades and logisticssupport                     |  | •  Measurement collection andsignal intelligence, specialmissions                                                                        |        | •  DoD and special customerswithin the U.S.Government                                         |
| NetworkCommunications                                                                                                                                 |  |                                                                                                                                                    |        |                                                                                                         |
| •  Airborne,space and surface data link terminals, ground stations, andtransportable tactical SATCOM (satellite communications)systems |  | •  High performance, widebandsecure communication links for relaying of intelligence andreconnaissance information                       |        | •  Mannedaircraft, Unmanned Aerial Vehicles (UAVs), naval ships, ground vehiclesandsatellites |
| •  Multi-bandManpack Receivers                                                                                                         |  | •  Portable,ruggedized terminals used for receiving reconnaissance video and sensordata from multiple airborneplatforms                  |        | •  U.S. Special OperationsCommand (USSOCOM), USAF and other DoDcustomers                      |
| •  ISRoperations and support                                                                                                           |  | •  Data linksupport and services, special applications, classified projects, sparesand repairs.                                          |        | •  USAF and U.S. Army ISRaircraftplatforms                                                    |
| •  Satellitecommand and control sustainment andsupport                                                                                 |  | •  Software integration, testand maintenance support, satellite control network and engineeringsupport for satellite launchsystems       |        | •  USAF Space Command (AFSC),USAF Satellite Control Network and launchranges                  |
| CommunicationsProducts                                                                                                                                |  |                                                                                                                                                    |        |                                                                                                         |
| •  Securecommunication terminals and equipment, and secure network encryptionproducts                                                  |  | •  Secure and non-secure voice,data and video communication for office, battlefield and secureinternet protocol (IP) networkapplications |        | •  DoD and U.S. Governmentintelligence agencies                                               |
| •  Ground-basedsatellite communication terminals andpayloads                                                                           |  | •  Interoperable, transportableground terminals                                                                                          |        | •  DoD and U.S.Government intelligenceagencies                                                |
| •  Satellitecommunication and trackingsystems                                                                                          |  | •  On-board satellite externalcommunications, video systems, solid state recorders and ground supportequipment                           |        | •  International SpaceStation, Space Shuttle and varioussatellites                            |
| •  Shipboardcommunications systems                                                                                                     |  | •  Internal andexternal communications (radiorooms)                                                                                      |        | •  U.S. Navy (USN), U.S. CoastGuard and allied foreign navies                                 |
|                                                                                                                                                       |

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Training, Simulation & GovernmentServices

The businesses in this segment provide teaching andtraining services, maintainance and logistics support for trainingdevices, communication systems support and engineering services andmarksmanship training systems and services. We sell these products andservices primarily to the DoD, U.S. Government intelligence agenciesand allied foreign governments. Major products and services for thissegment include:

|              |                                                                                                                                                                                                                                                                                                    |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | services designedto meet customer training requirements for aircrews, navigators,mission operators, gunners and maintenance technicians for virtuallyany platform, including military fixed and rotary wing aircraft, airvehicles and various ground vehicles, and computer-based trainingsystems; |

|              |                                                                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | communication systems andsoftware support, information technology services and a wide range ofengineering development services and integration support; |

|              |                                                                                                                                                                                                                                                                                                     |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | high-end engineering and informationsystems support services to the DoD, DHS and U.S. Governmentintelligence agencies for command, control, communications and ISRarchitectures, as well as for air warfare modeling and simulation toolsfor missile and space systems, UAVs and military aircraft; |

|              |                                                                                                                                                                                                                                                        |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | developing and managing extensiveprograms in the United States and internationally that focus onteaching, training and education, logistics, strategic planning,recruiting, organizational design, democracy transition and leadershipdevelopment; and |

|              |                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| •  | marksmanshiptraining systems and services and supply advanced integratedtechnologies for command and control security products andservices. |

The table below provides additional information forthe products and services, selected applications and selected platformsor end users of our Training, Simulation & Government Servicessegment at December 31, 2004.

|                                                                        |  |                                                                                                                                            |  |                                                                                                       |  |  |  |  |  |  |
|------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products/Services                                                      |  | Selected Applications                                                                                                                      |  | Selected Platforms/EndUsers                                                                           |
| Training andOperations                                                 |  |
| •  Trainingsystems, courseware and doctrinedevelopment  |  | •  Trainingand education services for U.S. and allied foreign armed forces,counterintelligence and law enforcementpersonnel |  | •  U.S. Army, U.S. MarineCorps, U.S. Department of State and allied foreigngovernments |
| •  CrisisIncident Management System                     |  | •  Emergencyoperations support associated with natural disasters, industrialaccidents and acts ofterrorism                  |  | •  Federal, state and localgovernment agencies for homelanddefense                     |
| •  WeaponsTraining                                      |  | •  Laser marksmanship trainingsystems and advanced integrated technologies for security products andservices                |  | •  DoD and law enforcementagencies                                                     |
| SimulationServices                                                     |  |
| •  Maintenanceand logistics support for trainingdevices |  | •  Simulation based training forfixed and rotary wing aircraft                                                              |  | •  USAF,USN, U.S. Army and allied foreign government ministries ofdefense              |
| •  Battlefieldand weapon simulation                     |  | •  Missile systemmodeling and simulation and design and manufacture custom ballisticmissile targets                         |  | •  U.S. Missile DefenseAgency (MDA)                                                    |
|                                                                        |

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|                                                                                                 |  |                                                                                                                       |  |                                                                                                                         |  |  |  |  |  |  |
|-------------------------------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products/Services                                                                               |  | Selected Applications                                                                                                 |  | Selected Platforms/EndUsers                                                                                             |
| •  Systemsupport and concept operations(CONOPS)                                  |  | •  C3ISR (Command,Control, Communications and ISR), modeling andsimulation                             |  | •  DoD, MDA, U.S. Governmentintelligence agencies, National Aeronautics & Space Administration(NASA) |
| GovernmentServices                                                                              |  |
| •  Surveillancesystems and products, including installation and logisticssupport |  | •  Automated security systemsfor bases and force protection, and remote surveillance for U.S.borders   |  | •  U.S. Department of HomelandSecurity (DHS) and USAF                                                    |
| •  Communicationsystems and software engineeringservices                         |  | •  Value-added, criticalsoftware support for C3ISR systems, electronic warfare andfire support systems |  | •  U.S. ArmyCommunications – Electronics Command (CECOM)                                           |
| •  Acquisitionmanagement and installationmanagement                              |  | •  Rapid fielding support forcombatants and physical locationmanagement                                |  | •  U.S. Army                                                                                             |
| •  Informationtechnology (IT) services                                           |  | •  ITinfrastructure modernization andoperations                                                        |  | •  U.S. Governmentintelligence agencies                                                                  |
|                                                                                                 |

Aircraft Modernization,O&M and Products

The businesses in this segment providespecialized aircraft modernization, upgrade, maintenance and logisticssupport services, highly mobile, quick response field teams, cockpitvoice and flight data recorders, traffic alert and collision avoidancesystems, terrain awareness warning systems, advanced cockpit avionicsproducts and ruggedized custom cockpit displays. We sell these productsand services primarily to the DoD, the Canadian Department of NationalDefense (DND) and commercial transport, regional, business and generalaviation aircraft manufacturers and commerical airlines. Major systems,products and services for this segment include:

|              |                                                                                                              |
|--------------|--------------------------------------------------------------------------------------------------------------|
| •  | engineering, modification, maintenance,logistics and upgrades for aircraft, vehicles and personnelequipment; |

|              |                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | turnkey aviation lifecycle management services that integrate custom developed andcommercial off-the-shelf products for various military fixed and rotarywing aircraft, including heavy maintenance and structural modificationsand interior modifications and constructions; |

|              |                                                                                                                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | aerospace and other technical servicesrelated to large fleet support, such as aircraft and vehiclemodernization, maintenance, repair and overhaul, logistics, and supplychain management for military training, tactical, cargo and utilityaircraft, anti-missile defense systems and tanks; |

|              |                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
| •  | advanced cockpit avionics products andspecialized avionics repair and overhaul services for various segmentsof the aviation market; |

|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | airbornetraffic and collision avoidance systems (TCAS) and terrain awarenesswarning systems (TAWS) for commercial and military applications; |

|              |                                                                                                                                      |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------|
| •  | commercial, solid-state, crash-protectedcockpit voice recorders, flight data recorders and cruise ship hardenedvoyage recorders; and |

|              |                                                                        |
|--------------|------------------------------------------------------------------------|
| •  | ruggedizedcustom cockpit displays primarily for military applications. |

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The table below provides additionalinformation for the systems, products and services, selectedapplications and selected platforms or end users of our AircraftModernization, O&M and Products segment at December 31, 2004.

|                                                                                                                 |  |                                                                                                                                                                              |  |                                                                                                                                     |  |  |  |  |  |  |
|-----------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Systems/Products/Services                                                                                       |  | Selected Applications                                                                                                                                                        |  | Selected Platforms/EndUsers                                                                                                         |
| AircraftModernization                                                                                           |  |
| •  Modernizationand life extension maintenance upgrades andsupport                               |  | •  Aircraft structuralmodifications and inspections, installation of mission equipment,navigation and avionicsproducts                                        |  | •  USSOCOM, USN, USAF, CanadianDND, various military, fixed and rotary wing aircraft and Head of State(HOS) aircraft |
| Operations & MaintenanceServices                                                                            |  |
| •  Logisticssupport, maintenance and refurbishment                                               |  | •  Aircraft maintenance repair and overhaul,flight operations support for training, cargo and special missionaircraft                                         |  | •  U.S. Army, USAF, USN,USSOCOM, Canadian DND and other allied foreignmilitaries                                     |
| •  ContractField Teams (CFT)                                                                     |  | •  Deployment ofhighly mobile, quick response field teams to customer locations tosupplement the customer's resources for various ground vehiclesand aircraft |  | •  U.S. Army, USAF, USN andU.S. Marine Corp(USMC)                                                                    |
| •  Contractoroperated and managed base supply(COMBS)                                             |  | •  Inventory managementactivities relating to flight support and maintenance, includingprocurement and field distribution                                     |  | •  Military training and cargoaircraft                                                                               |
| AviationProducts                                                                                                |  |
| •  Solidstate crash protected cockpit voice and flight datarecorders                             |  | •  Aircraft voice and flightdata recorders that continuously record voice and sounds from cockpitand aircraft intercommunications.                            |  | •  Commercial transport, business, regionaland militaryaircraft                                                      |
| •  TCAS(Traffic Alert and Collision Avoidance System)and terrain awarenesswarning systems (TAWS) |  | •  Reduce thepotential for midair aircraft collisions and crashes into terrain byproviding visual and audible warnings and maneuvering instructions topilots  |  | •  Commercial transport,business, regional and militaryaircraft                                                      |
| •  Advancedcockpit avionics                                                                      |  | •  Pilot safety,navigation and situation awarenessproducts                                                                                                    |  | •  Commercial transport,business, regional and militaryaircraft.                                                     |
| •  Cockpitand mission displays                                                                   |  | •  Highperformance, ruggedized flat panel and cathode ray tube displays andprocessors                                                                         |  | •  Various militaryaircraft                                                                                          |
|                                                                                                                 |

Specialized Products

Thebusinesses in this segment provide a broad range of products, includingnaval warfare products, security systems, telemetry and navigationproducts, sensors, training devices, premium fuzing products andmicrowave components. We sell these products primarily to the DoD,allied foreign militaries, the U.S. Transportation and SecurityAdministration (TSA) and commercial communication manufacturers andproviders. Major products for this segment include:

|              |                                                                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | naval warfare products, includingacoustic undersea warfare products for mine hunting, dipping andanti-submarine sonars and naval power distribution, conditioning,switching and protection equipment for surface and underseaplatforms; |

7

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|              |                                                                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | ruggedizationand integration of commercial off-the-shelf technology for displays,computers and electronic systems for military and commercialapplications; |

|              |                                                                                                                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | security systems foraviation and port applications, including those for detection ofexplosives, concealed weapons, contraband and illegal narcotics, and toinspect agricultural products and to examine cargo; |

|              |                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------|
| •  | telemetry, instrumentation, space andnavigation products, including products for tracking and flighttermination; |

|              |                                                                                  |
|--------------|----------------------------------------------------------------------------------|
| •  | premium fuzing productsand safety and arming devices for missiles and munitions; |

|              |                                                                                                                                                                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | imaging products and precisionstabilized electro-optic surveillance systems, including highmagnification lowlight, daylight and forward looking infrared sensors,laser range finders, illuminators and designators, and digital andwireless communication systems; |

|              |                                                                                                                                                                                                    |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | microwave components used in radarcommunication satellites, wireless communication equipment, electronicsurveillance, communication and electronic warfare applications andcountermeasure systems; |

|              |                                                        |
|--------------|--------------------------------------------------------|
| •  | highperformance antennas and ground based radomes; and |

|              |                                                                                                                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | training devices and motion simulatorswhich produce advanced virtual reality simulation and high-fidelityrepresentations of cockpits and mission stations for fixed and rotarywing aircraft and land vehicles. |

The table below providesadditional information for the products, selected applications andselected platforms or end users of our Specialized Products segment atDecember 31, 2004.

|                                                                                                                                |  |                                                                                                                              |  |                                                                                                                                          |  |  |  |  |  |  |
|--------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products                                                                                                                       |  | Selected Applications                                                                                                        |  | Selected Platforms/EndUsers                                                                                                              |
| NavalProducts                                                                                                                  |  |
| •  Airbornedipping sonars, submarine and surface ship towedarrays                                               |  | •  Submarine and surface shipdetection and localization                                                       |  | •  USN andallied foreignnavies                                                                                            |
| •  Navalpower delivery, conversion and switchingproducts                                                        |  | •  Switching, distribution andprotection, as well as frequency and voltageconversion                          |  | •  Naval submarines, surfaceships and aircraftcarriers                                                                    |
| •  Shipboardelectronics racks, rugged computers, rugged displays and communicationterminals                     |  | •  Ruggedized displays,computers and electronicsystems                                                        |  | •  Naval vessels and other DoDapplications                                                                                |
| Security                                                                                                                       |  |
| •  Explosivesdetection systems and airport security systems                                                     |  | •  Rapid scanning of passenger checkedbaggage and carry-on luggage, scanning of large cargo containers        |  | •  DHS, including the TSA, and domestic andforeign airports, state and local governments                                  |
| Training Devices and MotionSimulators                                                                                          |  |
|                                                                                                                           |  |
| •  Militaryaircraft flight simulators, reconfigurable training devices,distributed mission training (DMT)suites |  | •  Advance simulationtechnologies and training for pilots, navigators, flight engineers,gunners and operators |  | •  Fixed androtary winged aircraft and ground vehicles for USAF, USN, U.S. Army,Canadian DND and allied foreignmilitaries |
| Navigation&Sensors                                                                                                         |  |
| •  GPS(Global Positioning Systems)receivers                                                                     |  | •  Locationtracking                                                                                           |  | •  Guided projectiles andprecision munitions                                                                              |
|                                                                                                                                |

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|                                                                                                                            |  |                                                                                                                                      |  |                                                                                                                              |  |  |  |  |  |  |
|----------------------------------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products                                                                                                                   |  | Selected Applications                                                                                                                |  | Selected Platforms/EndUsers                                                                                                  |
| •  Navigationsystems and positioning navigationunits                                                        |  | •  Satellite launch and orbitingnavigation and navigation for ground vehicles and fire controlsystems                 |  | •  USAF, U.S. Army, USMC andNASA                                                                              |
| •  Ultra-widefrequency and advanced radar antennas and radomes                                              |  | •  Surveillance and radardetection                                                                                    |  | •  Military fixed and rotarywinged aircraft, SATCOM                                                           |
| •  Targetedstabilized camera systems with integrated sensors and wirelesscommunication systems              |  | •  Intelligence,Data Collection, Surveillance and Reconnaissance                                                      |  | •  DoD, intelligence and security agencies,law enforcement, manned and unmanned platforms                     |
| •  Telemetryand instrumentation systems                                                                     |  | •  Real-timedata acquisition, measurement, processing, simulation, distribution,display and storage for flighttesting |  | •  Aircraft, missiles andsatellites                                                                           |
| •  Airborneand ground based high energy laser beam directors and high trackingrate telescopes               |  | •  Directed energysystems, space surveillance, satellite laser ranging and lasercommunications                        |  | •  USAF andNASA                                                                                               |
| Premium FuzingProducts                                                                                                     |  |
|                                                                                                                       |  |
| •  FuzingProducts                                                                                           |  | •  Munitions and electronic andelectro- mechanical safety and arming devices(ESADs)                                   |  | •  Various DoD and alliedforeign military customers                                                           |
| MicrowaveComponents                                                                                                        |  |
|                                                                                                                       |  |
| •  Passivecomponents, switches and wirelessassemblies                                                       |  | •  Radio transmission,switching and conditioning, antenna and base station testing andmonitoring                      |  | •  DoD, wirelesscommunications service providers and original equipmentmanufacturers                          |
| •  Satelliteand wireless components (channel amplifiers, transceivers, converters,filters and multiplexers) |  | •  Satellitetransponder control, channel and frequencyseparation                                                      |  | •  SATCOM and wirelesscommunicationsequipment                                                                 |
| •  Travelingwave tubes, power modules, klystrons and digitalbroadcast                                       |  | •  Microwave vacuum electrondevices and power modules                                                                 |  | •  DoD andallied foreign military manned/unmanned platforms, various missileprograms and commercial broadcast |
|                                                                                                                            |

Backlog andOrders

We define funded backlog as the value of funded ordersreceived from customers, less the amount of sales recognized on thosefunded orders. We define funded orders as the value of contract awardsreceived from the U.S. Government, for which the U.S. Government hasappropriated funds, plus the value of contract awards and ordersreceived from customers other than the U.S. Government. For additionalinformation on our backlog and orders, see"Management's Discussion and Analysis of Results ofOperations and Financial Condition — Backlog andOrders."

Major Customers

For the yearended December 31, 2004, direct and indirect sales to the DoD providedapproximately 73.4% of our total sales. Approximately61.0% of our sales to the DoD were direct to the customer, andapproximately 39.0% of our sales to the DoD were indirectthrough prime system contractors and subcontractors of the DoD.Additionally, our sales to the DoD were distributed among the U.S.Armed Services, and as a percentage of total 2004 sales, 24.9%was to the U.S. Air Force, 19.0% to the U.S. Army, 15.6%to the U.S. Navy, 0.6% to the U.S. Marines and 13.3% toother defense-wide customers. All U.S. 

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Government customers, including the DoD andfederal, state and local agencies, accounted for 80.3% of ourtotal sales for 2004. For the year ended December 31, 2004, alliedforeign governments provided 8.4% of our total sales, andcommercial customers provided 11.3% of our total sales. Foradditional information regarding domestic and foreign sales, see Note18 to our audited consolidated financial statements.

Our U.S.Government sales are predominantly derived from contracts with agenciesof, and prime contractors to, the U.S. Government. Various U.S.Government agencies and contracting entities exercise independent andindividual purchasing decisions, subject to annual appropriations bythe U.S. Congress. For the year ended December 31, 2004, our largestcontract represented 4.6% of our sales and our five largestcontracts represented 17.2% of our sales.

Research andDevelopment

We conduct research and development activities thatconsist of projects involving basic research, applied research,development, and systems and other concept studies. We employscientific, engineering and other personnel to improve our existingproduct-lines and develop new products and technologies. As of December31, 2004, we employed approximately 21,900 engineers, a substantialportion of whom hold advanced degrees, and work on company sponsoredresearch and development efforts, customer funded research anddevelopment contracts and production and services contracts. For ananalysis of L-3's research and development costs, see"Management's Discussion and Analysis of Results ofOperations and Financial Condition — Research andDevelopment."

Competition

We encounterintense competition in all of our businesses. We believe that we are asignificant supplier for many of the products that we manufacture andservices we provide in our DoD, government and commercialbusinesses.

Our ability to compete for defense contracts dependson a variety of factors, including:

|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| •  | the effectiveness and innovation of ourtechnologies and research and development programs; |

|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| •  | our ability to offer better programperformance than our competitors at a lower cost; |

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | historical technical and scheduleperformance; and |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | the capabilities ofour facilities, equipment and personnel to undertake the programs forwhich we compete. |

In some instances, we are the incumbentsupplier or have been the sole provider for many years for certainprograms. We refer to such contracts as"sole-source" contracts. In such cases, theremay be other suppliers who have the capability to compete for theprograms involved, but they can only enter or reenter the market if thecustomer chooses to reopen the particular program to competition.Sole-source contracts are generally recompeted every three to fiveyears. Sole-source contracts accounted for 65.5% and competitivecontracts accounted for 34.5% of our total sales for the yearended December 31, 2004. The majority of our sales are derived fromcontracts with the U.S. Government and its prime contractors, which areprincipally awarded on the basis of negotiations or competitivebids.

We believe that the U.S. defense industry structurecontains three tiers of defense contractors. The first tier isdominated by five large prime system contractors: The Boeing Company,Lockheed Martin Corporation, Northrop Grumman Corporation, RaytheonCompany and General Dynamics Corporation, all of whom compete for majorplatform programs. The second tier defense contractors are generallysmaller products and niche subsystems contractors and is comprised oftraditional aerospace and defense companies, as well as the non-coreaerospace and defense businesses of certain larger industrialconglomerates. Some of the defense contractors in the second tier alsocompete for platform programs. We believe the second tier includes L-3,Honeywell International Inc., Rockwell Collins Inc., HarrisCorporation, ITT Industries, Inc., the North American operations of BAESystems PLC, Alliant Techsystems Inc., United Technologies Corporation,Computer Sciences Corporation, Science Applications InternationalCorporation, Titan Corporation and United Defense Industries Inc. Thethird tier represents the vendor base and supply chain for nicheproducts and is comprised of numerous smaller publicly and privatelyowned aerospace and defense contractors.

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We believe we are the aerospace anddefense supplier with the broadest and most diverse product portfolio.We primarily compete with second and third tier defense contractors. Wesupply our products and services to all of the five prime systemcontractors. However, we also compete directly with the large primesystem contractors for (i)   certain products and subsystemswhere they have vertically integrated businesses and (ii)  nicheareas where we are a prime system contractor, including aircraftmodernization and maintenance, ISR systems, simulation and training,and government services. We believe that most of our businesses enjoythe number one or number two competitive position in their respectivemarket niches. We believe that the primary competitive factors for ourbusinesses are technology, research and development capabilities,quality, cost, market position and past performance. In addition, ourability to compete for non "sole-source"contracts often requires us to "team" withone or more of the prime system contractors that bid and compete formajor platform programs. Furthermore, our ability to"team" with a prime system contractor isoften dependent upon the outcome of a competitive process forsubcontracts awarded by the prime contractors. We believe that we willcontinue to be a successful participant in the business areas in whichwe compete, based upon the quality and cost competitiveness of ourproducts and services.

Patents and Licenses

We do notbelieve that our patents, trademarks and licenses are material to ouroperations. Furthermore, our U.S. Government contracts generally permitus to use patents owned by other government contractors. Similarprovisions in U.S. Government contracts awarded to other companies makeit impossible for us to prevent the use of our patents in most domesticwork performed by other companies for the U.S. Government.

RawMaterials

In manufacturing our products, we use our ownproduction capabilities as well as a diverse base of third partysuppliers and subcontractors. Although aspects of certain of ourbusinesses require relatively scarce raw materials, we have notexperienced difficulty in our ability to procure raw materials,components, sub-assemblies and other supplies required in ourmanufacturing processes.

Contracts

A significantportion of our sales are derived from strategic, long-term programs andfrom sole-source contracts as discussed above. Our customersatisfaction and performance record is evidenced by our receipt ofperformance-based award fees exceeding 90% of the availableaward fees on average during the year ended December 31, 2004. Webelieve that our customers will award long-term, sole-source contractsto the most capable supplier in terms of quality, responsiveness,design, engineering and program management competency and cost.However, as discussed above, we are increasingly competing againstlarge prime system contractors for major subsystems business. As aconsequence of our competitive position, for the year ended December31, 2004, we won contract awards at a rate in excess of 53% onnew competitive contracts that we bid on, and at a rate in excess of95% on the contracts we rebid for which we were the incumbentsupplier.

Generally, our contracts are either fixed-price,cost-reimbursable or time-and-material. On a fixed-price type contract,we agree to perform the contractual statement of work for apredetermined contract price. Although a fixed-price type contractgenerally permits us to retain profits if the total actual contractcosts are less than the estimated contract costs, we bear the risk thatincreased or unexpected costs may reduce our profit or cause us tosustain losses on the contract. Conversely, on a cost-reimbursable typecontract we are paid our allowable incurred costs plus a profit, whichcan be fixed or variable, depending on the contract's feearrangement, up to predetermined funding levels determined by ourcustomers. In a time-and-materials type contract we are paid on thebasis of direct labor hours expended at specified fixed-price hourlyrates (that include wages, overhead, general and administrativeexpenses and profit) and materials at cost. Therefore, oncost-reimbursable type and time-and-material type contracts we do notbear the risks of unexpected cost overruns, provided that we do notincur costs that exceed the predetermined funded amounts. Generally, afixed-price type contract offers higher profit 

11

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margins than a cost-reimbursable type ortime-and-material type contracts, which is commensurate with thegreater levels of risk assumed on a fixed-price type contract. Ouroperating profit margins on fixed-price type contracts generally rangebetween 10% and 15%, while on cost-reimbursable typecontracts they generally range between 7% and 10%, and ontime-and-material type contracts they generally range between 8%and 12%.

We have a diverse business mix with limitedreliance on any single program, a balance of cost-reimbursable,time-and-material and fixed-price type contracts, a significantsole-source follow-on business and an attractive customer profile. Thetable below presents a summary of the percentage of our sales based onthe contract-type of the revenue arrangements which generated oursales.

|                      |  |                       |       |         |  |        |       |         |  |        |       |         |  |  |
|----------------------|--|-----------------------|-------|---------|--|--------|-------|---------|--|--------|-------|---------|--|--|
|                 |  | YearEnded December31, |
| Contract-Type        |  | 2004                  |       | 2003    |  | 2002   |
| Fixed-price          |  |                  | 60.6  | %  |  |   | 63.1  | %  |  |   | 65.8  | %  |
| Cost-reimbursable    |  |                  | 26.9  | %  |  |   | 29.8  | %  |  |   | 25.2  | %  |
| Time-and-material(1) |  |                  | 12.5  | %  |  |   | 7.1   | %  |  |   | 9.0   | %  |
| TotalSales           |  |                  | 100.0 | %  |  |   | 100.0 | %  |  |   | 100.0 | %  |
|                      |

|     |                                                                                            |
|-----|--------------------------------------------------------------------------------------------|
| (1) | Oursales from time-and-material type contracts also include sales on"task order"contracts. |

Substantially all of our cost-reimbursable typeand time-and-material type contracts are with U.S. Governmentcustomers. Substantially all of our sales to commercial customers aretransacted under fixed-price sales arrangements, and are included inour fixed-price contract sales.

Regulatory Environment

Most of our revenue arrangements with agencies of the U.S.Government, including the DoD, are subject to unique procurement andadministrative rules. These rules are based on both laws andregulations, including the U.S. Federal Acquisition Regulation (FAR),that (1) impose various profit and cost controls, (2) regulate theallocations of costs, both direct and indirect, to contracts and (3)provide for the non-reimbursement of unallowable costs. Unallowablecosts include lobbying expenses, interest expenses and certain costsrelated to business acquisitions, including, for example, theincremental depreciation and amortization expenses arising from fairvalue increases to the historical carrying values of acquired assets.Our contract administration and cost accounting policies and practicesare also subject to oversight by government inspectors, technicalspecialists and auditors.

Companies supplying defense-relatedequipment to the U.S. Government are subject to certain additionalbusiness risks specific to the U.S. defense industry. Among these risksis the ability of the U.S. Government to unilaterally suspend a companyfrom new contracts pending resolution of alleged violations ofprocurement laws or regulations. In addition, U.S. Government contractsare conditioned upon the continuing availability of Congressionalappropriations. Congress usually appropriates funds for a given programon a September 30 fiscal year basis, even though contract performancemay take several years. Consequently, at the outset of a major program,the contract is usually partially funded, and additional monies arenormally committed to the contract by the procuring agency only asappropriations are made by Congress for future fiscal years.

U.S. Government contracts are, by their terms, subject to unilateraltermination by the U.S. Government either for its convenience ordefault by the contractor if the contractor fails to perform thecontracts' scope of work. Upon termination, other than for acontractor's default, the contractor will normally be entitled toreimbursement for allowable costs and an allowance for profit. Foreigndefense contracts generally contain comparable provisions permittingtermination at the convenience of thegovernment.

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As is common in the U.S. defenseindustry, we are subject to business risks, including changes in theU.S. Government's procurement policies (such as greater emphasison competitive procurement), governmental appropriations, nationaldefense policies or regulations, service modernization plans, andavailability of funds. A reduction in expenditures by the U.S.Government for products and services of the type we manufacture andprovide, lower margins resulting from increasingly competitiveprocurement policies, a reduction in the volume of contracts orsubcontracts awarded to us or the incurrence of substantial contractcost overruns could materially adversely affect our business.

Certain of our sales are under foreign military sales (FMS)agreements directly between the U.S. Government and allied foreigngovernments. In such cases, because we serve only as the supplier, wedo not have unilateral control over the terms of the agreements. Thesecontracts are subject to extensive legal and regulatory requirementsand, from time to time, agencies of the U.S. Government investigatewhether our operations are being conducted in accordance with theselaws and regulations. Investigations could result in administrative,civil, or criminal liabilities, including repayments, disallowance ofcertain costs, or fines and penalties.

Certain of our sales aredirect commercial sales to allied foreign governments. These sales aresubject to U.S. Government approval and licensing under the Arms ExportControl Act. Legal restrictions on sales of sensitive U.S. technologyalso limit the extent to which we can sell our products to alliedforeign governments or private parties.

EnvironmentalMatters

Our operations are subject to various environmentallaws and regulations relating to the discharge, storage, treatment,handling, disposal and remediation of certain materials, substances andwastes used in our operations. We continually assess our obligationsand compliance with respect to these requirements. 

We have alsoassessed the risk of environmental contamination for our variousmanufacturing facilities, including our acquired businesses and, whereappropriate, have obtained indemnification, either from the sellers ofthose acquired businesses or through pollution liability insurance. Webelieve that our current operations are in substantial compliance withall existing applicable environmental laws and permits. We believe ourcurrent expenditures will allow us to continue to be in compliance withapplicable environmental laws and regulations. While it is difficult todetermine the timing and ultimate cost to be incurred in order tocomply with these laws, based upon available internal and externalassessments, with respect to those environmental loss contingencies ofwhich we are aware, we believe that after considering amounts accrued,there are no environmental loss contingencies that, individually or inthe aggregate, would be material to our consolidated results ofoperations, financial position or cash flows.

Despite ourcurrent level of compliance, new laws and regulations, stricterenforcement of existing laws and regulations, the discovery ofpreviously unknown contamination or the imposition of new clean-uprequirements may require us to incur costs in the future that couldhave a negative effect on our financial condition, results ofoperations or cash flows.

Pension Plans

In connectionwith our 1997 acquisition of the ten business units from LockheedMartin and the formation of L-3, we assumed certain defined benefitpension plan liabilities for present and former employees and retireesof certain businesses which were transferred from Lockheed Martin tous. Prior to this acquisition, Lockheed Martin received a letter fromthe Pension Benefit Guaranty Corporation (the"PBGC") that requested information regardingthe transfer of such pension plans and indicated that the PBGC believedcertain of such pension plans were underfunded using the PBGC'sactuarial assumptions. The PBGC assumptions result in a largerliability for accrued benefits than the assumptions used for financialreporting under Statement of Financial Accounting Standards No. 87. ThePBGC underfunding is related to the Communication Systems—Westand Aviation Recorders pension plans (the "SubjectPlans").

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With respect to the Subject Plans,Lockheed Martin entered into an agreement (the "LockheedMartin Commitment") with L-3 Communications and the PBGCdated as of April 30, 1997. The material terms and conditions of theLockheed Martin Commitment include a commitment by Lockheed Martin tothe PBGC to, under certain circumstances, assume sponsorship of theSubject Plans or provide another form of financial support for theSubject Plans. The Lockheed Martin Commitment will continue withrespect to any Subject Plan until such time as such Subject Plan is nolonger underfunded on a PBGC basis for two consecutive years or, at anytime after May 31, 2002, if we achieve investment grade credit ratingson all of our outstanding debt.

Upon the occurrence of certainevents, Lockheed Martin, at its option, has the right to decide whetherto cause us to transfer sponsorship of any or all of the Subject Plansto Lockheed Martin, even if the PBGC has not sought to terminate theSubject Plans. If Lockheed Martin did assume sponsorship of theseplans, it would be primarily liable for the costs associated withfunding the Subject Plans or any costs associated with the terminationof the Subject Plans, but we would be required to reimburse LockheedMartin for these costs. To date, there has been no impact on pensionexpense and funding requirements resulting from this arrangement. Inthe event Lockheed Martin assumes sponsorship of the Subject Plans wewould be required to reimburse Lockheed Martin for all amounts that itcontributes to, or costs it incurs with respect to, the Subject Plans.For the year ended December 31, 2004, we contributed $0.5 million tothe Subject Plans. For subsequent years, our funding requirements willdepend upon prevailing interest rates, return on pension plan assetsand underlying actuarial assumptions. At December 31, 2004, theaggregate projected benefit obligation was $230.3  million andthe aggregate plan assets were $157.9  million for the SubjectPlans

We have performed our obligations under the letteragreement with Lockheed Martin and the Lockheed Martin Commitment andhave not received any communications from the PBGC concerning actionsthat the PBGC contemplates taking in respect of the Subject Plans.

Employees

As of December 31, 2004, we employedapproximately 44,200 full-time and part-time employees, 87.7% ofwhom are located in the United States. Of these employees,approximately 19.8% are covered by 70 separate collectivebargaining agreements with various labor unions. Our ability to retainand train our employees is critical to the continued success of ourbusinesses. We have a continuing need for engineers, skilled andprofessional personnel to grow our businesses, obtain additional ordersfor our products and services and to satisfy contractual obligationsunder certain of our existing revenue arrangements. We believe thatrelations with our employees are positive.

AvailableInformation

We are subject to the informational requirements ofthe Securities Exchange Act of 1934 and, in accordance therewith, filereports and other information with the SEC. Such reports and otherinformation can be inspected and copied at the Public Reference Room ofthe SEC located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,Washington D.C. 20549 and at a regional public reference facilitymaintained by the SEC located at Citicorp Center, 500 West MadisonStreet, Suite 1400, Chicago, Illinois 60661. Copies of such materialcan be obtained from the Public Reference Room of the SEC at prescribedrates. You may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. Such material mayalso be accessed electronically by means of the SEC's home pageon the Internet at http://www.sec.gov.

You may also obtain afree copy of our annual reports on Form 10-K, quarterly reports on Form10-Q and current reports on Form 8-K and amendments to those reports onthe day of filing with the SEC or through our website on the Internetat http://www.L-3com.com.

The Company also has a CorporateGovernance webpage. You can access the Company's CorporateGovernance documents through our Internet site, www.L-3com.com byclicking on the "Investor Information" linkunder the heading "Investor Relations." TheCompany posts a Code of Ethics and Business Conduct on its InvestorInformation webpage under the link "Corporate EthicsGuidelines." 

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The Company's Code of Ethics andBusiness Conduct applies to all directors, officers and employees,including our chief executive officer, our chief financial officer, ourprincipal accounting officer and our controller. We will post anyamendments to the Code of Ethics and Business Conduct, and any waiversthat are required to be disclosed by the rules of either the SEC or theNew York Stock Exchange, Inc. ("NYSE"), onour Internet site. The information on the Company's Internet siteis not incorporated by reference into this report. You can request acopy of our code of ethics at no cost, by contacting Investor Relationsat (212) 850-5600.

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Item2.    Properties

The table below provides information aboutthe significant facilities and properties of each of our segments atDecember 31,2004.

|                                               |  |                           |         |        |  |        |         |        |  |  |
|-----------------------------------------------|--|---------------------------|---------|--------|--|--------|---------|--------|--|--|
| Location                                      |  | Owned                     |         | Leased |
|                                          |  | (thousandsof square feet) |
| L-3 Corporate Offices, New York,NY            |  |                      | — |   |  |   | 52.9    |   |
| WashingtonOperations, Arlington,VA            |  |                      | — |   |  |   | 13.3    |   |
| SecureCommunication &ISR:                 |  |                      |    |   |  |   |    |   |
| Camden,NJ                                     |  |                      | — |   |  |   | 575.0   |   |
| Mason,OH                                      |  |                      | 228.0   |   |  |   |    |   |
| Greenville,TX                                 |  |                      | — |   |  |   | 3,089.4 |   |
| Salt LakeCity,UT                              |  |                      | — |   |  |   | 703.3   |   |
| Training,Simulation & GovernmentServices: |  |                      |    |   |  |   |    |   |
| Huntsville,AL                                 |  |                      | — |   |  |   | 101.6   |   |
| ColoradoSprings,CO                            |  |                      | — |   |  |   | 75.3    |   |
| Kirkwood,NY                                   |  |                      | — |   |  |   | 428.0   |   |
| Arlington,TX                                  |  |                      | 21.3    |   |  |   | 29.2    |   |
| Alexandria,VA                                 |  |                      | — |   |  |   | 99.7    |   |
| Arlington,VA                                  |  |                      | — |   |  |   | 91.7    |   |
| Chantilly,VA                                  |  |                      | — |   |  |   | 103.9   |   |
| AircraftModernization, O&M andProducts:   |  |                      |    |   |  |   |    |   |
| Selma,AL                                      |  |                      | — |   |  |   | 174.0   |   |
| Phoenix,AZ                                    |  |                      | — |   |  |   | 90.3    |   |
| Sarasota,FL                                   |  |                      | — |   |  |   | 143.7   |   |
| Alpharetta,GA                                 |  |                      | 93.0    |   |  |   | — |   |
| RollingMeadows,IL                             |  |                      | 45.0    |   |  |   | 6.7     |   |
| Lexington,KY                                  |  |                      | — |   |  |   | 1,005.3 |   |
| GrandRapids,MI                                |  |                      | 110.0   |   |  |   | — |   |
| SouthMadison,MS                               |  |                      | — |   |  |   | 164.0   |   |
| Waco,TX                                       |  |                      | 801.4   |   |  |   | 221.1   |   |
| Edmonton,Canada                               |  |                      | — |   |  |   | 366.3   |   |
| Enfield,Canada                                |  |                      | 96.0    |   |  |   | — |   |
| Mirabel,Canada                                |  |                      | 397.2   |   |  |   | 81.2    |   |
| Toronto,Canada                                |  |                      | 258.5   |   |  |   | — |   |
| SpecializedProducts:                          |  |                      |    |   |  |   |    |   |
| Anaheim,CA                                    |  |                      | — |   |  |   | 474.2   |   |
| Menlo Park,CA                                 |  |                      | — |   |  |   | 98.3    |   |
| San Carlos,CA                                 |  |                      | 191.6   |   |  |   | — |   |
| San Diego,CA                                  |  |                      | 196.0   |   |  |   | 209.2   |   |
| Sylmar,CA                                     |  |                      | — |   |  |   | 253.0   |   |
| Largo,FL                                      |  |                      | 46.4    |   |  |   | — |   |
| Ocala,FL                                      |  |                      | 111.7   |   |  |   | — |   |
| St.Petersburg,FL                              |  |                      | — |   |  |   | 129.8   |   |
| Auburn,MA                                     |  |                      | — |   |  |   | 97.2    |   |
| Salem,NH                                      |  |                      | 55.8    |   |  |   | — |   |
| Budd Lake,NJ                                  |  |                      | — |   |  |   | 114.0   |   |
| Hauppauge,NY                                  |  |                      | — |   |  |   | 150.0   |   |
| Cincinnati,OH                                 |  |                      | 222.6   |   |  |   | — |   |
| Tulsa,OK                                      |  |                      | — |   |  |   | 133.3   |   |
| Lancaster,PA                                  |  |                      | — |   |  |   | 144.7   |   |
| Philadelphia,PA                               |  |                      | — |   |  |   | 165.0   |   |
| Pittsburgh,PA                                 |  |                      | — |   |  |   | 151.0   |   |
| Williamsport,PA                               |  |                      | 208.6   |   |  |   | — |   |
| Arlington,TX                                  |  |                      | 60.7    |   |  |   | 153.4   |   |
| Grand Prairie,TX                              |  |                      | — |   |  |   | 125.0   |   |
| Burlington,Canada                             |  |                      | — |   |  |   | 124.0   |   |
| Leer,Germany                                  |  |                      | 32.2    |   |  |   | 33.2    |   |
|                                               |

16

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At December 31, 2004, in the aggregate, weowned approximately 3.3 million square feet and leased approximately12.8 million square feet of manufacturing facilities andproperties.

Item 3.    Legal Proceedings

From time totime we are involved in legal proceedings arising in the ordinarycourse of our business. We believe that we are adequately reserved forthese liabilities and that there is no litigation that will have amaterial adverse effect on our consolidated results of operations,financial condition or cash flows. However, as discussed below, we area party to a number of material litigations, for which an adversedetermination could have a material adverse effect on our consolidatedfinancial position, results of operations or cash flows.

L-3Integrated Systems and its predecessors have been involved in alitigation with Kalitta Air arising from a contract to convert Boeing747 aircraft from passenger configuration to cargo freighters. Thelawsuit was brought in the northern district of California on January31, 1997. The aircraft were modified using Supplemental TypeCertificates (STCs) issued in 1988 by the Federal AviationAdministration (FAA) to Hayes International, Inc. (Hayes/Pemco) as asubcontractor to GATX/Airlog Company (GATX). Between 1988 and 1990,Hayes/Pemco modified five aircraft as a subcontractor to GATX using theSTCs. Between 1990 and 1994, Chrysler Technologies Airborne Systems,Inc. (CTAS), a predecessor to L-3 Integrated Systems, performed as asubcontractor to GATX and modified an additional five aircraft usingthe STCs. Two of the aircraft modified by CTAS were owned by AmericanInternational Airways, the predecessor to Kalitta Air. In 1996, the FAAdetermined that the engineering data provided by Hayes/Pemco supportingthe STCs was inadequate and issued an Airworthiness Directive thateffectively grounded the ten modified aircraft. The Kalitta Airaircraft have not been in revenue service since that date. The matterwas tried in January 2001 against GATX and CTAS with the jury findingfault on the part of GATX but rendering a unanimous defense verdict infavor of CTAS. Certain co-defendants had settled prior to trial. TheU.S. Ninth Circuit Court of Appeals reversed and remanded the trialcourt's summary judgment rulings in favor of CTAS regarding anegligence claim by Kalitta Air, which asserts that CTAS as an expertin aircraft modification should have known that the STCs weredeficient, and excluding certain evidence at trial. In preparation forretrial, Kalitta Air submitted to us an expert report on damages thatcalculated Kalitta Air's damages at either $232 million or $602million, depending on different factual assumptions. We retainedexperts whose reports indicate that, even in the event of an adversejury finding on the liability issues at trial, Kalitta Air has alreadyrecovered amounts from the other parties to the initial suit that webelieve more than fully compensated Kalitta Air for any damages itincurred. CTAS' insurance carrier has accepted defense of thematter with a reservation of its right to dispute its obligations underthe applicable insurance policy in the event of an adverse juryfinding. The trial began on January 18, 2005, and ended on March 2,2005 with a deadlocked jury and a mistrial. At trial, Kalitta Airclaimed damages of $235 million. Although no date has been set for anyfurther proceedings, a second retrial may be necessary in this matter.We believe that we have meritorious defenses and intend to continue tovigorously defend this matter. However, litigation is inherentlyuncertain and it is possible that an adverse decision could berendered, which could have a material adverse effect on ourconsolidated financial position, results of operations or cashflows.

On November 18, 2002, we initiated a proceeding againstOSI Systems, Inc. (OSI) in the United States District Court sitting inthe Southern District of New York seeking, among other things, adeclaratory judgment that we had fulfilled all of our obligations undera letter of intent with OSI (the "OSI Letter ofIntent"). Under the OSI Letter of Intent, we were tonegotiate definitive agreements with OSI for the sale of certainbusinesses we acquired from PerkinElmer, Inc. on June 14, 2002. OnFebruary 7, 2003, OSI filed an answer and counterclaims alleging, amongother things, that we defrauded OSI, breached obligations of fiduciaryduty to OSI and breached our obligations under the OSI Letter ofIntent. OSI is seeking damages in excess of $100 million, not includingpunitive damages. Under the OSI Letter of Intent, we proposed sellingto OSI the conventional detection business and the ARGUS business thatwe acquired from PerkinElmer, Inc. Negotiations with OSI lasted foralmost one year and ultimately broke down over issues regarding, amongother things, intellectual property, product-line definitions,allocation of employees and due diligence. Discovery on the matter isessentially complete. We believe that the claims asserted by OSI in itssuit are without merit and intend to vigorously defend against the OSIclaims.

17

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L-3 Communications Vertex Aerospace LLC(formerly known as Vertex Aerospace LLC and acquired by L-3Communications on December 1, 2003) (L-3 Vertex) is named as adefendant in one remaining wrongful death lawsuit in the United StatesDistrict Court, Western District of North Carolina arising from thecrash of Air Midwest Flight 5481 at Charlotte-Douglas InternationalAirport in Charlotte, North Carolina on January 8, 2003. The crashresulted in the deaths of nineteen passengers and two crewmembers. Eachof the lawsuits alleges contributing factors, including that theaccident was caused by the improper maintenance of the aircraft by L-3Vertex, and seeks to recover compensatory and punitive damages. Twentyclaims resulting from this incident have previously settled. TheNational Transportation Safety Board (NTSB) investigated the cause ofthe crash and has concluded that the crash was caused by the incorrectrigging of the elevator control system compounded by theairplane's center of gravity, which was substantially aft of thecertified limit, with several other contributing factors. L-3 Vertexbelieves that it has meritorious defenses to the pending lawsuit, andintends to defend the case vigorously. The actions have been tenderedto L-3 Vertex's insurance carrier, who has accepted the defenseof each action served upon L-3 Vertex to date. L-3 Vertex was alsoindemnified by Air Midwest for losses L-3 Vertex incurred arising outof its provision of maintenance services to Air Midwest. Based on theavailability of insurance and the indemnification from Air Midwest, wedo not believe we will have a material liability in this matter.

On July 1, 2004, lawsuits were filed on behalf of the estates of 31Russian children in the state courts of Washington, Arizona,California, Florida, New York and New Jersey against Honeywell,Honeywell TCAS, L-3 Communications, ACSS, Thales USA and Thales France.The suits are based on facts arising out of the crash over southernGermany of a Bashkirian Airways Tupelov TU 154M aircraft and a DHLBoeing 757 cargo aircraft. On-board the Tupelov aircraft were 12 crewmembers and 57 passengers, including 45 children. The Boeing aircraftcarried a crew of 3. Both aircrafts were equipped with Honeywell/ACSSModel 2000, Change 7 Traffic Collision and Avoidance Systems. Sensingthe other aircraft, the on-board DHL TCAS instructed the DHL pilot toclimb, and the Tupelov on-board TCAS instructed the Tupelov pilot todescend. However, the Swiss air traffic controller ordered the Tupelovpilot to climb. The Tupelov pilot disregarded the on-board TCAS and putthe Tupelov aircraft into a climb striking the DHL aircraft in midairat approximately 35,000 feet. All crew and passengers of both planeswere lost. Investigations by the NTSB after the crash revealed thatboth TCAS units were performing as designed. The suits allegenegligence and strict product liability based upon the design of theunits and the training provided to resolve conflicting commands andseek compensatory damages. Our insurers have accepted defense of thematter and retained counsel. All parties subsequently agreed tolitigate this matter in the Federal Court in New Jersey and to dismissthe actions brought in the state courts. Based on the defensesavailable to us and the insurance coverage, we do not expect L-3Communications or ACSS to incur a material liability in thismatter.

Item 4.    Submission of Matters to a Vote ofSecurity Holders

Notapplicable.

18

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PART II

Item5.    Market for Registrant's Common Equity and RelatedStockholder Matters

Price Range of Common Stock

The common stock of L-3 Holdings is traded on the New York StockExchange (the "NYSE") under the symbol"LLL". The table below sets forth, for eachof the quarterly periods indicated, the high and low closing price ofthe common stock as reported on the NYSE and the amount of dividendspaid per share.

|                                        |  |               |         |                           |  |        |        |        |  |        |        |        |  |  |
|----------------------------------------|--|---------------|---------|---------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                                   |  | DividendsPaid |         | Price Range ofCommonStock |
|                                   |  | High          |         | Low                       |  |
| **FiscalYear Ended December 31,2003:** |  |          |    |                      |  |   |   |   |  |   |   |   |
| QuarterEnded:                          |  |          |    |                      |  |   |   |   |  |   |   |   |
| March31,2003                           |  |          | — |                      |  | $      | 47.90  |   |  | $      | 35.60  |   |
| June30,2003                            |  |          | — |                      |  |   | 46.22  |   |  |   | 36.24  |   |
| September30,2003                       |  |          | — |                      |  |   | 51.09  |   |  |   | 42.35  |   |
| December31,2003                        |  |          | — |                      |  |   | 51.60  |   |  |   | 43.57  |   |
| **FiscalYear Ended December 31,2004:** |  |          |    |                      |  |   |   |   |  |   |   |   |
| QuarterEnded:                          |  |          |    |                      |  |   |   |   |  |   |   |   |
| March 31,2004                          |  | $             | 0.10    |                      |  | $      | 59.48  |   |  | $      | 49.80  |   |
| June30,2004                            |  |          | 0.10    |                      |  |   | 66.80  |   |  |   | 59.73  |   |
| September30,2004                       |  |          | 0.10    |                      |  |   | 67.00  |   |  |   | 56.50  |   |
| December31,2004                        |  |          | 0.10    |                      |  |   | 76.87  |   |  |   | 62.51  |   |
|                                        |

OnFebruary 10, 2005, L-3 Holdings announced that its Board of Directorshad increased L-3 Holdings' regular quarterly cash dividend by25% to $0.125 per share, payable on March 15, 2005, toshareholders of record at the close of business on February 22, 2005.L-3 Holdings paid its first cash dividend on March 15, 2004.

OnFebruary 25, 2005, the closing price of L-3 Holdings common stock, asreported by the NYSE, was $72.24 per share and the number of holders ofL-3 Holdings' common stock was approximately 86,000.

L-3Holdings relies on dividends paid by L-3 Communications to generate thefunds necessary to pay dividends on its common stock. See"Management's Discussion and Analysis –Liquidity and Capital Resources" for the financial andother restrictive covenants that limit the payment of dividends by L-3Communications to L-3 Holdings.

Equity CompensationPlan Information

The table below sets forth information aboutshares of L-3 Holdings common stock that may be issued under our equitycompensation plans as of December 31, 2004.

|                                                          |  |                                                                                           |           |                                                                            |  |                                                                                                                                          |       |           |  |        |           |        |  |  |
|----------------------------------------------------------|--|-------------------------------------------------------------------------------------------|-----------|----------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------|-------|-----------|--|--------|-----------|--------|--|--|
|                                                     |  | EquityCompensation PlanInformation                                                        |           |
| Plancategory                                             |  | Number of securities to be issued uponexercise of outstanding options, warrants andrights |           | Weighted-average exercise price ofoutstanding options, warrants and rights |  | Number ofsecurities remaining available for future issuance underequity compensation plans (excluding securitiesreflected in column (a)) |
|                                                     |  | (a)                                                                                       |           | (b)                                                                        |  | (c)                                                                                                                                      |
| Equity compensation plans approved by securityholders    |  |                                                                                      | 9,887,781 | (1)                                                                   |  | $                                                                                                                                        | 32.87 | (2)  |  |   | 6,016,521 |   |
| Equitycompensation plans not approved by securityholders |  |                                                                                      | 105,500   | (3)                                                                   |  |                                                                                                                                     | 44.45 |      |  |   | 291,500   |   |
| Total                                                    |  |                                                                                      | 9,993,281 |                                                                       |  | $                                                                                                                                        | 32.99 |      |  |   | 6,308,021 |   |
|                                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                 |
|-----|---------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includesthe 1999 Long-Term Performance Plan and the 1997 Stock Option Plan andincludes restricted stock awards of 78,840shares. |

|     |                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Thecalculation of the weighted average exercise price excludes the effectof the restricted stock awards of 78,840 shares, which have beengranted to employees at nocost. |

|     |                                                                           |
|-----|---------------------------------------------------------------------------|
| (3) | Representsthe 1998 Option Plan for Non-Employee Directors of L-3Holdings. |

19

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Item 6.    Selected Financial Data

We derived the selected financial data presented below atDecember 31, 2004 and 2003 and for each of the three years in theperiod ended December 31, 2004 from our audited consolidated financialstatements included elsewhere in this Form 10-K. We derived theselected financial data presented below for the years ended December31, 2001 and 2000 and at December 31, 2002, 2001 and 2000 from ouraudited consolidated financial statements not included in this Form10-K. You should read the selected financial data together with our"Management's Discussion and Analysis of Results ofOperations and Financial Condition" and our auditedconsolidated financial statements. Our results of operations, cashflows and financial position are impacted significantly by our businessacquisitions.

|                                                                    |  |                                    |         |         |  |         |         |         |  |         |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------|--|------------------------------------|---------|---------|--|---------|---------|---------|--|---------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                               |  | YearEnded December31,              |         |
|                                                               |  | 2004                               |         | 2003    |  | 2002(1) |         | 2001(1) |  | 2000(1) |
|                                                               |  | (inmillions, except per sharedata) |         |
| **Statementof OperationsData:**                                    |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Sales                                                              |  | $                                  | 6,897.0 |    |  | $       | 5,061.6 |    |  | $       | 4,011.2 |    |  | $      | 2,347.4 |    |  | $      | 1,910.1 |    |
|                                                               |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Operatingincome                                                    |  |                               | 748.6   |    |  |    | 581.0   |    |  |    | 454.0   |    |  |   | 275.3   |    |  |   | 222.7   |    |
| Otherexpense (income),net                                          |  |                               | (7.3    | )  |  |    | (0.2    | )  |  |    | (5.0    | )  |  |   | (1.8    | )  |  |   | (4.4    | )  |
| Interestexpense                                                    |  |                               | 145.3   |    |  |    | 132.7   |    |  |    | 122.5   |    |  |   | 86.4    |    |  |   | 93.0    |    |
| Losson retirement ofdebt                                           |  |                               | 5.0     |    |  |    | 11.2    |    |  |    | 16.2    |    |  |   | — |    |  |   | — |    |
| Minorityinterests in net income of consolidatedsubsidiaries        |  |                               | 8.9     |    |  |    | 3.5     |    |  |    | 6.2     |    |  |   | 4.4     |    |  |   | — |    |
| Provisionfor incometaxes                                           |  |                               | 214.8   |    |  |    | 156.2   |    |  |    | 111.6   |    |  |   | 70.8    |    |  |   | 51.4    |    |
| Incomebefore cumulative effect of a change in accounting principle |  |                               | 381.9   |    |  |    | 277.6   |    |  |    | 202.5   |    |  |   | 115.5   |    |  |   | 82.7    |    |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |    |  |    | — |    |  |    | (24.4   | )  |  |   | — |    |  |   | — |    |
| Netincome                                                          |  | $                                  | 381.9   |    |  | $       | 277.6   |    |  | $       | 178.1   |    |  | $      | 115.5   |    |  | $      | 82.7    |    |
|                                                               |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Basicearnings per commonshare:                                     |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Incomebefore cumulative effect of a change in accountingprinciple  |  | $                                  | 3.54    |    |  | $       | 2.89    |    |  | $       | 2.33    |    |  | $      | 1.54    |    |  | $      | 1.24    |    |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |    |  |    | — |    |  |    | (0.28   | )  |  |   | — |    |  |   | — |    |
| Netincome                                                          |  | $                                  | 3.54    |    |  | $       | 2.89    |    |  | $       | 2.05    |    |  | $      | 1.54    |    |  | $      | 1.24    |    |
| Dilutedearnings per commonshare:(2)                                |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Incomebefore cumulative effect of a change in accountingprinciple  |  | $                                  | 3.33    |    |  | $       | 2.62    |    |  | $       | 2.13    |    |  | $      | 1.47    |    |  | $      | 1.18    |    |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |    |  |    | — |    |  |    | (0.23   | )  |  |   | — |    |  |   | — |    |
| Netincome                                                          |  | $                                  | 3.33    |    |  | $       | 2.62    |    |  | $       | 1.90    |    |  | $      | 1.47    |    |  | $      | 1.18    |    |
| Weightedaverage common sharesoutstanding:                          |  |                               |    |    |  |    |    |    |  |    |    |    |  |   |    |    |  |   |    |    |
| Basic                                                              |  |                               | 107.8   |    |  |    | 96.0    |    |  |    | 86.9    |    |  |   | 74.9    |    |  |   | 66.7    |    |
| Diluted                                                            |  |                               | 117.4   |    |  |    | 113.9   |    |  |    | 105.2   |    |  |   | 85.4    |    |  |   | 69.9    |    |
| Cashdividends declared per share on L-3 Holdings' commonstock      |  | $                                  | 0.40    |    |  | $       | — |    |  | $       | — |    |  | $      | — |    |  | $      | — |    |
| **BalanceSheet Data (at period end):**                             |  |                               |    |    |  |
| Workingcapital                                                     |  | $                                  | 1,632.5 |    |  | $       | 1,013.5 |    |  | $       | 929.4   |    |  | $      | 717.8   |    |  | $      | 360.9   |    |
| Totalassets                                                        |  |                               | 7,780.8 |    |  |    | 6,505.3 |    |  |    | 5,242.3 |    |  |   | 3,339.2 |    |  |   | 2,463.5 |    |
| Long-termdebt                                                      |  |                               | 2,189.8 |    |  |    | 2,457.3 |    |  |    | 1,847.8 |    |  |   | 1,315.3 |    |  |   | 1,095.0 |    |
| Minorityinterests                                                  |  |                               | 77.5    |    |  |    | 76.2    |    |  |    | 73.2    |    |  |   | 69.9    |    |  |   | — |    |
| Shareholders'equity                                                |  |                               | 3,799.8 |    |  |    | 2,574.5 |    |  |    | 2,202.2 |    |  |   | 1,213.9 |    |  |   | 692.6   |    |
|                                                                    |

|  |
|--|
|  |  |
|  |

|     |                                                                                       |
|-----|---------------------------------------------------------------------------------------|
| (1) | Inaccordance with SFAS 142, effective January  1, 2002, we ceasedamortizing goodwill. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Reported diluted EPSamounts for the years ended prior to January 1, 2004 have been restatedin accordance with EITF 04-8, The Effect of Contingently ConvertibleDebt on Diluted Earnings Per Share. The impact of applying EITF04-8 to our 4% Senior Subordinated Convertible Contingent DebtSecurities (CODES) resulted in (1) an increase to diluted weightedaverage common shares outstanding of 7.8 million shares for 2003 and2002, (2) a non-cash reduction of $0.09 to diluted EPS for 2003, (3) anon-cash reduction of $0.05 to diluted EPS before cumulative effect ofa change in accounting principle for 2002, and (4) a non-cash reductionof $0.03 to diluted EPS for 2002. The CODES were not included indiluted weighted average common shares outstanding for 2001 becausetheir impact on diluted EPS was anti-dilutive. Diluted weighted averagecommon shares outstanding and diluted EPS for 2000, were not affectedby EITF 04-8 because we issued the CODES in 2001. |

20

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Item 7.    Management'sDiscussion and Analysis of Results of Operations and FinancialCondition

Overview

We are a leading supplier of abroad range of products used in a substantial number of aerospace anddefense platforms. We also are a major supplier of subsystems on manyplatforms, including those for secure communication networks andcommunication products, mobile satellite communications, informationsecurity systems, shipboard communications, naval power systems, fuzesand safety and arming devices for missiles and munitions, microwaveassemblies for radars and missiles, telemetry and instrumentation, andairport security systems. We also are a prime system contractor foraircraft modernization and O&M, ISR collection platforms, trainingand simulation, and government support services. The substantialmajority of our sales are generated using written revenue arrangements,or contracts. Most of these contracts require us to design, develop,manufacture, modify, upgrade, test and integrate complex aerospace andelectronic equipment, and to provide related engineering and technicalservices according to the buyer's specifications. Our primarycustomer is the DoD. For the year ended December 31, 2004, direct salesto the DoD and indirect sales to the DoD through its prime contractorsand subcontractors provided $5,060.1 million, or 73.4% of ourconsolidated sales. Our other customers include the DHS, U.S.Government intelligence agencies, major aerospace and defensecontractors, allied foreign government ministries of defense,commercial customers and certain other U.S. federal, state and localgovernment agencies.

Our objective is to grow our salesorganically and through business acquisitions and to improve ourprofitability. To achieve these objectives we intend to expand ourshare of existing programs and to participate in new programs byleveraging our existing customer relationships. We expect to continueto benefit from the outsourcing of subsystems, components and productsby prime contractors. We plan to continue to align our research anddevelopment, manufacturing and new business efforts to complement ourcustomers' requirements and to provide state-of-the-art products.We plan to maintain a diversified and broad business mix with limitedreliance on any single program, a favorable balance ofcost-reimbursable and fixed-price type contracts, a significantfollow-on business and an attractive customer profile. A significantportion of our growth strategy is to selectively acquire companies orassets that complement and enhance our existing businesses. See—"Business Acquisitions" below.

We have four reportable segments: (1) Secure Communications &ISR; (2) Training, Simulation & Government Services; (3) AircraftModernization, O&M and Products (formerly known as AviationProducts & Aircraft Modernization); and (4) SpecializedProducts.

Our Secure Communications & ISR segmentprovides products and services for the global ISR market as well assecure, high data rate communications systems and equipment primarilyfor military and other U.S. Government and allied foreign governmentreconnaissance and surveillance applications. We believe our systemsand products are critical elements for a substantial number of majorcommunication, command and control, intelligence gathering and spacesystems. Our systems and products are used to connect a variety ofairborne, space, ground and sea-based communication systems and areused in the transmission, processing, recording, monitoring anddissemination functions of these communication systems. Our Training,Simulation & Government Services segment provides maintenance andlogistics support for training devices, communication systems supportand engineering services, teaching and training services andmarksmanship training systems and services. Our Aircraft Modernization,O&M and Products segment provides specialized aircraftmodernization, upgrade and maintenance services and logistics supportservices, traffic alert and collision avoidance systems, terrainawareness warning systems, cockpit voice and flight data recorders,advanced cockpit avionics products and ruggedized custom cockpitdisplays. Our Specialized Products segment provides a broad range ofproducts, including naval warfare products, telemetry and navigationproducts, sensors, premium fuzing products, security systems, trainingdevices and microwave components.

In recent years,domestic and geo-political developments have significantly affected themarkets for defense systems, products and services. There has been afundamental and philosophical shift in focus from a"threat-based" model to one that emphasizesthe capabilities needed to defeat a full spectrum of adversaries, whichhas transformed the U.S. defense posture to a capabilities-basedorientation. This approach involves creating the ability for (1) a moreflexible response, with greater force agility and 

21

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stronger space capabilities, and (2) improvedmissile defense systems, network communications and informationsystems, and security systems. This transformation also includes anincreased emphasis on homeland defense. The Afghanistan and Iraq warshave confirmed several of the conclusions reached in the U.S.quadrennial Defense Review completed in 2001 and have also resulted inincreased DoD spending, primarily for war operations.

Over thepast several years, the DoD budgets have experienced increased focus oncommand, control, communications, intelligence, surveillance andreconnaissance (C3ISR), precision-guided weapons, unmannedaerial vehicles (UAVs), network-centric communications, SpecialOperations Forces (SOF) and missile defense. In addition, the DoDphilosophy has focused on a transformation strategy that balancesmodernization and recapitalization (or upgrading existing platforms)while enhancing readiness and joint operations. As a result, defensebudget program allocations continue to favor advanced informationtechnologies related to command, control and communications(C3) and ISR. Furthermore, the DoD's emphasis onsystem interoperability, force multipliers and providing battlefieldcommanders with real-time data is increasing the electronic content ofnearly all major military procurement and research programs. As aresult, it is expected that the DoD's budget for communicationsand defense electronics will continue to grow. We believe L-3 is wellpositioned to benefit from the expected increased spending in thoseareas. While there is no assurance that the requested DoD budgetincreases, particularly those for the DoD Procurement account, andResearch, Development, Test and Evaluation account (collectivelyreferred to as the "DoD Investment Account"),will continue to be approved by Congress, the current outlook is one ofincreased DoD spending, which we believe will continue to positivelyaffect L-3's future orders and sales and favorably affect ourfuture operating profits and cash flows because of increased salevolumes. Conversely, a decline in the DoD budget would generally have anegative effect on future orders, sales, operating profits and cashflows of defense contractors, including L-3, depending on the weaponsplatforms and programs affected by such budget reductions. However, L-3believes that its businesses are significant participants in thesectors of the DoD Investment Account and Operations and Maintenanceaccount that are the highest priority for U.S. military transformation,and we believe that they will continue to be, even in a declining DoDbudget environment.

In addition, increased emphasis on U.S.homeland security may increase demand for our capabilities in areassuch as security systems, information security, crisis management,preparedness and prevention services, and civilian securityoperations.

Most of our contracts (revenue arrangements) withthe U.S. Government are subject to U.S. Defense Contract Audit Agencyaudits and various cost controls, and include standard provisions fortermination for the convenience of the U.S. Government. Multiyear U.S.Government contracts and related orders are subject to cancellation iffunds for contract performance for any subsequent year becomeunavailable. Foreign government contracts generally include comparableprovisions relating to termination for the convenience of the relevantforeign government.

Business Acquisitions

A significantcomponent of our growth strategy has been to enhance our existingproduct base through selective business acquisitions that will add newproducts in areas that complement our present technologies. We intendto continue acquiring select businesses that (1) exhibit significantmarket positions in their business areas, (2) offer products thatcomplement and/or extend our product offerings and expand our customerbase, and (3) display positive sales, earnings and cash flowprospects.

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Thetable below summarizes the more significant acquisitions that we havecompleted during 2002, 2003 and 2004, referred to herein as businessacquisitions. During 2004, we used cash of $473.4 million for businessacquisitions. See "Statement of Cash Flows—InvestingActivities."

|                                                                                                                                                                       |  |                   |  |                  |         |                |  |  |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------|--|------------------|---------|----------------|--|--|--|--|
| BusinessAcquisitions                                                                                                                                                  |  | Date Acquired     |  | PurchasePrice(1) |
|                                                                                                                                                                  |  |              |  | (inmillions)     |
| **2002**                                                                                                                                                              |  |
| AircraftIntegration Systems (AIS) business of RaytheonCompany                                                                                                         |  | March8,2002       |  | $                | 1,148.7 | (2)       |
| DetectionSystems                                                                                                                                                      |  | June 14, 2002     |  |             | 110.3   |           |
| TelosCorporation (a California Corporation)                                                                                                                           |  | July 19,2002      |  |             | 22.3    |           |
| ComCept, Inc.                                                                                                                                                         |  | July 31,2002      |  |             | 37.1    | (3)       |
| Technology,Management and Analysis Corporation (TMA)                                                                                                                  |  | September 23,2002 |  |             | 52.7    |           |
| Electron Devices andDisplays-Navigation Systems – San  Diego businesses ofNorthrop Grumman(4)                                                                   |  | October 25,2002   |  |             | 135.7   |           |
| Wolf Coach, Inc.                                                                                                                                                      |  | October31,2002    |  |             | 7.2     | (5)       |
| InternationalMicrowave Corporation (IMC)                                                                                                                              |  | November 8,2002   |  |             | 41.1    |           |
| WestwoodCorporation                                                                                                                                                   |  | November 13,2002  |  |             | 22.1    |           |
| Wescam Inc.                                                                                                                                                           |  | November 21,2002  |  |             | 124.3   |           |
| Ship Analytics,Inc                                                                                                                                                    |  | December 19,2002  |  |             | 20.0    | (6)       |
| **2003**                                                                                                                                                              |  |
| AvionicsSystems business of Goodrich Corporation(7)                                                                                                                   |  | March28, 2003     |  |             | 188.7   |           |
| Aeromet, Inc.                                                                                                                                                         |  | May 30,2003       |  |             | 18.4    |           |
| Klein AssociatesInc.                                                                                                                                                  |  | September 30,2003 |  |             | 29.4    |           |
| Military Aviation Servicesbusiness of Bombardier, Inc. (MAS)                                                                                                          |  | October 31,2003   |  |             | 89.6    | (8)       |
| VertexAerospace LLC (Vertex)                                                                                                                                          |  | December 1,2003   |  |             | 664.8   | (9)       |
| Certaindefense and aerospace assets of IPICOM, Inc.                                                                                                                   |  | December 10,2003  |  |             | 27.6    |           |
| **2004**                                                                                                                                                              |  |
| BeamhitLLC                                                                                                                                                            |  | May 13, 2004      |  |             | 40.0    | (10)(11)  |
| Brashear, LP                                                                                                                                                          |  | June 14,2004      |  |             | 36.3    |           |
| Commercial Infrared business ofRaytheon Company(12)                                                                                                                   |  | November 9,2004   |  |             | 44.2    |           |
| Cincinnati Electronics,Inc.                                                                                                                                           |  | December 9,2004   |  |             | 176.4   | (10)(13)  |
| CanadianNavigation Systems and Space Sensors System business of NorthropGrumman(14)                                                                                   |  | December 30,2004  |  |             | 65.0    | (10)      |
| AVISYS,Inc., General Electric Driver Development business, Bay Metals, D.P.Associates, certain video security product lines of Sarnoff Corporationand BAI Aerosystems |  | Various           |  |             | 72.7    | (15)      |
|                                                                                                                                                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                        |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Thepurchase price represents the contractual consideration for theacquired business, excluding adjustments for net cash acquired andacquisition costs. |

|     |                                                                                                                                                                                                                                                                                                                                                                 |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes$18.7 million related to additional assets contributed by RaytheonCompany (Raytheon) to AIS. Following the acquisition, we changedAIS's name to L-3 Communications Integrated Systems (IS). Thepurchase price is subject to adjustment based on actual closing datetangible net assets, as discussed in Note 3 to the consolidatedfinancial statements. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | The purchase priceconsists of $14.5 million of cash and 229,494 shares of L-3Holdings' common stock valued at $10.6 million, which were paidon the closing date of the acquisition, plus an additional 219,028shares of L-3 Holdings' common stock valued at $12.0 millionissued during 2003 and 2004, which was based on Comcept'sfinancial performance for the fiscal years ended June 30, 2003 and2004. |

|     |                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Following the acquisition, we changedthe name of the Displays-Navigation Systems - San Diego business to L-3Ruggedized Command & Control. |

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|     |                                                                                                                                                                      |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Excludes additionalpurchase price, not to exceed $1.4 million, which is contingent uponthe financial performance of Wolf Coach for the year ending December31, 2005. |

|     |                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Excludes additional purchaseprice, not to exceed $4.5 million, which is contingent upon thefinancial performance of Ship Analytics for the year ending December31, 2005. |

|     |                                                                                                               |
|-----|---------------------------------------------------------------------------------------------------------------|
| (7) | Following the acquisition, wechanged the name of Avionics Systems to L-3 Communications AvionicsSystems, Inc. |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Includes a $2.2 million finalpurchase price adjustment paid in October of 2004, which was based onthe actual closing date net assets of MAS. |

|     |                                                                                                                                                                     |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | Includes a $3.3 million purchase price adjustmentpaid on the closing date and a $11.5 million final purchase priceadjustment paid during the second quarter of2004. |

|      |                                                                                                                                    |
|------|------------------------------------------------------------------------------------------------------------------------------------|
| (10) | The purchase price is subject toadjustment based on actual closing date net assets or net workingcapital of the acquired business. |

|      |                                                                                                                                                       |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Excludesadditional purchase price, which is contingent upon the financialperformance of Beamhit for the years ending December 31, 2005, 2006 and2007. |

|      |                                                                                                                                 |
|------|---------------------------------------------------------------------------------------------------------------------------------|
| (12) | Following the acquisition, wechanged the name of the Commercial Infrared business to L-3Communications Infrared Products (LIP). |

|      |                                                                                       |
|------|---------------------------------------------------------------------------------------|
| (13) | Includes a $5.4 million preliminary purchase priceadjustment paid on the closingdate. |

|      |                                                                                                                                                                   |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14) | Following the acquisition, we changedthe name of the Canadian Navigation Systems and Space Sensors Systembusiness to L-3 Communications Electronics Systems(LES). |

|      |                                                                                                                                                                                                               |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (15) | Excludes additional purchase price,expected not to exceed $31.5 million, which is contingent upon thefinancial performance of certain of these acquired businesses for yearsended December 31, 2005 and 2006. |

|  |
|--|
|  |  |
|  |

Additionally,during 2002, 2003 and 2004, we purchased other businesses, whichindividually and in the aggregate were not material to our consolidatedresults of operations, financial position or cash flows during the yearacquired.

All of our business acquisitions are included in ourconsolidated results of operations from their respective effectivedates of acquisition. We regularly evaluate potential businessacquisitions and joint venture transactions. On February 3, 2005, weacquired substantially all of the components of the Marine Controlsdivision of CAE and will acquire the remaining business componentsafter we receive the required regulatory approvals. On February 25,2005, we acquired the Propulsion Systems business unit of GeneralDynamics. On February 28, 2005, we acquired the Electron DynamicDevices business of the Boeing Company. The aggregate purchase pricepaid in cash for these business acquisitions was $471.8 million. Wefinanced these acquisitions using cash on hand. We have not enteredinto any other agreements with respect to any material transactionsthrough the date of this filing.

Critical AccountingPolicies

Our significant accounting policies are described inNote 2 to the consolidated financial statements. The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimatesand assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of sales andcosts and expenses during the reporting period. The most significant ofthese estimates and assumptions relate to (i) contract revenues andcosts, (ii) market values for inventories reported at lower of cost ormarket, (iii) pension and postretirement benefit obligations, (iv)preliminary purchase price allocations for the acquired assets andassumed liabilities of acquired businesses, (v) recoverability andvaluation of recorded amounts of long-lived assets, identifiableintangible assets and goodwill, (vi) income taxes, including thevaluations of deferred tax assets, (vii) litigation reserves, and(viii) environmental obligations. Actual amounts will differ from theseestimates. We believe that our critical accounting estimates have thefollowing attributes: (1) we are required to make assumptions aboutmatters that are uncertain and inherently risky at the time of theestimate; (2) use of reasonably different assumptions could havechanged our estimates, particularly with respect to estimates ofcontract revenues and costs, and (3) changes in the estimate could havea material effect on our financial condition or results of operations.We believe the following critical accounting policies contain the moresignificant judgments and estimates used in the preparation of ourfinancial statements.

Contract Revenue Recognition andContract Estimates.    The substantial majority of our contracts(revenue arrangements) require us to design, develop, manufacture,modify, upgrade, test and integrate 

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complex aerospace and electronic equipment,and to provide related engineering and technical services according tothe buyer's specifications. These sales are transacted usingwritten revenue arrangements or contracts, which are generally eitherfixed price, cost-reimbursable or time and material. These contractsare covered by the American Institute of Certified Public AccountantsStatement of Position 81-1, Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts (SOP 81-1)and Accounting Research Bulletin No. 45, Long-term Construction-TypeContracts (ARB 45). In addition, cost-reimbursable contracts arealso specifically covered by Accounting Research Bulletin No. 43,Chapter 11, Section A, Government Contracts, Cost-Plus-Fixed FeeContracts (ARB 43). Substantially all of our cost-reimbursable andtime and material contracts are with the U.S. Government, primarilywith the Department of Defense. Certain of our contracts with the U.S.Government are multi-year contracts that are funded annually by thecustomer, and sales on these multi-year contracts are based on amountsappropriated (funded) by the U.S. Government.

Sales and profitson fixed-price contracts are substantially recognized usingpercentage-of-completion methods of accounting. Sales and profits onfixed-price production contracts under which units are produced anddelivered in a continuous or sequential process are recorded as unitsare delivered based on their contractual selling prices (the"units-of-delivery" method). Sales andprofits on other fixed-price production contracts under which units arenot produced and delivered in a continuous or sequential process orunder which a relatively few number of units are produced are recordedbased on the ratio of incurred costs to total estimated costs atcompletion of the contract (the"cost-to-cost" method). Under thepercentage-of-completion methods of accounting, a single estimatedtotal profit margin is used to recognize profit for each contract overits entire period of performance, which can exceed one year. Sales andprofits on fixed-price contracts that require us to perform servicesthat are not related to production of tangible assets are recognized inaccordance with SAB No. 104, Revenue Recognition (SAB 104).

Accounting for the sales on a fixed-price contract requires thepreparation of estimates of (1) the total contract revenue, (2) thetotal costs at completion, which is equal to the sum of the actualincurred costs to date on the contract and the estimated costs tocomplete the contract's statement of work, and (3) themeasurement of progress towards completion. The estimated profit orloss at completion on a contract is equal to the difference between thetotal estimated contract revenue and the total estimated cost atcompletion. Under the units-of-delivery percentage-of-completionmethod, sales on a fixed-price contract are recorded as the units aredelivered during the period at an amount equal to the contractualselling price of those units. Under the cost-to-costpercentage-of-completion method, sales on a fixed-price contract arerecorded at amounts equal to the ratio of cumulative costs incurred andtotal estimated costs at completion, multiplied by (i) the totalestimated contract revenue, less (ii) the cumulative sales recognizedin prior periods. The profit recorded on a contract in any period usingeither the units-of-delivery method or cost-to-cost method is equal to(i) the current estimated total profit margin multiplied by thecumulative sales recognized, less (ii) the amount of cumulative profitpreviously recorded for the contract. In the case of a contract forwhich the total estimated costs exceed the total estimated revenues, aloss arises, and a provision for the entire loss is recorded in theperiod that it becomes evident. The unrecoverable costs on a losscontract that are expected to be incurred in future periods arerecorded as a component of other current liabilities entitled"Estimated cost in excess of estimated contract value tocomplete contracts in process." Adjustments to originalestimates for a contract's revenue, estimated costs at completionand estimated profit or loss are often required as work progressesunder a contract, as experience is gained and as more information isobtained, even though the scope of work required under the contract maynot change, or if contract modifications occur.

Sales oncost-reimbursable type contracts are recognized as allowable costs areincurred on the contract and become billable to the customer, at anamount equal to the allowable costs plus the estimated profit on thosecosts. The estimated profit on a cost-reimbursable contract isgenerally fixed or variable based on the contract fee arrangement.Sales on time-and-material type contracts are recognized at an amountequal to the direct labor hours expended multiplied by the contractualfixed rate per hour, plus the actual costs of material and other directnon-labor costs. On a time-and-material contract the fixed hourly ratesinclude amounts for the cost of direct labor, indirect contract costsand profit. Cost-reimbursable or time-and-material contracts generallycontain less estimation risks than fixed-price contracts.

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The impact of revisions in profitestimates for all types of contracts are recognized on a cumulativecatch-up basis in the period in which the revisions are made.Provisions for anticipated losses on contracts are recorded in theperiod in which they become evident. Amounts representing contractchange orders or claims are included in sales only when they can bereliably estimated and their realization is reasonably assured. Therevisions in contract estimates, if significant, can materially affectour results of operations and cash flows, as well as our valuations ofcontracts in process.

Goodwill and Identifiable IntangibleAssets.    In accordance with Statement of Financial AccountingStandards (SFAS) No. 141, Business Combinations, we allocate thecost of acquired businesses (commonly referred to as the purchase priceallocation) to the assets acquired and liabilities assumed based ontheir estimated fair values at the date of acquisition. As part of thepurchase price allocations for our acquired businesses, identifiableintangible assets are recognized as assets apart from goodwill if theyarise from contractual or other legal rights, or if they are capable ofbeing separated or divided from the acquired business and sold,transferred, licensed, rented or exchanged, unless the intangible assetis comprised of the assembled workforce of the acquired business.

Generally, the substantial majority of the intangible assets fromthe businesses that we acquire are derived from the intellectualcapital of the management, administrative, scientific, engineering andtechnical employees of the acquired businesses. The success of ourbusinesses is primarily dependent on the management, contracting,engineering and technical skills and knowledge of our employees, ratherthan productive capital (machinery and equipment). Generally, patents,trademarks and licenses are not material to our acquired businesses.Furthermore, our U.S. Government contracts (revenue arrangements)generally permit other companies to use our patents in most domesticwork performed by such other companies for the U.S. Government.Therefore, the substantial majority of the intangible assets for ouracquired businesses are recognized as goodwill.

The valuesassigned to acquired identifiable intangible assets for customerrelationships and technology are determined, as of the date ofacquisition, based on estimates and judgments regarding expectationsfor the estimated future after-tax cash flows from those assets overtheir lives, including the probability of expected future contractrenewals and sales, less a cost-of-capital charge, all of which isdiscounted to present value. If actual future after-tax cash flowsdiffer significantly from their estimates, we may be required to recordan impairment charge to write down the identifiable intangible assetsto their realizable values. The value assigned to goodwill equals theamount of the purchase price of the business acquired in excess of thesum of the amounts assigned to identifiable acquired assets, bothtangible and intangible, less liabilities assumed. At December 31,2004, we had goodwill of $4,054.8 million and identifiable intangibleassets of $185.8 million.

We review goodwill and intangibleassets for impairment whenever events or changes in circumstancesindicate that the carrying amount of these assets may not berecoverable, and also review goodwill annually in accordance with SFASNo. 142, Goodwill and Other Intangible Assets (SFAS  142).SFAS No. 142 requires that goodwill be tested, at a minimum, annuallyfor each reporting unit using a two-step process. A reporting unit isan operating segment, as defined in paragraph 10 of SFAS No. 131,Disclosures About Segments of an Enterprise and RelatedInformation, or a component of an operating segment. A component ofan operating segment is a reporting unit if the component constitutes abusiness for which discrete financial information is available and isreviewed. Two or more components of an operating segment may beaggregated and deemed a single reporting unit if the components havesimilar economic characteristics. The first step is to identify anypotential impairment by comparing the carrying value of the reportingunit to its fair value. If a potential impairment is identified, thesecond step is to compare the implied fair value of goodwill with thecarrying value of the goodwill to measure the impairment loss. The fairvalue of a reporting unit is estimated using a discounted cash flowvaluation approach, and is dependent on estimates for future sales,operating income, depreciation and amortization, income tax payments,working capital changes, and capital expenditures, as well as, expectedgrowth rates for cash flows and long-term interest rates, all of whichare impacted by economic conditions related to the industries in whichwe operate as well as conditions in the U.S. capital markets. A declinein estimated fair value of a reporting unit could result in animpairment charge to goodwill, which could have a material adverseeffect on our business, financial condition and results ofoperations.

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Pension Plan and Postretirement BenefitPlan Obligations.    The obligations for our pension plans andpostretirement benefit plans and the related annual costs of employeebenefits are calculated based on several long-term assumptions,including discount rates for employee benefit liabilities, rates ofreturn on plan assets, expected annual rates for salary increases foremployee participants in the case of pension plans, and expected annualincreases in the costs of medical and other health care benefits in thecase of postretirement benefit obligations. These long-term assumptionsare subject to revision based on changes in interest rates, financialmarket conditions, expected versus actual returns on plan assets,participant mortality rates and other actuarial assumptions, includingfuture rates of salary increases, benefit formulas and levels, andrates of increase in the costs of benefits. Changes in the assumptions,if significant, can materially affect the amount of annual net periodicbenefit costs recognized in our results of operations from one year tothe next, the liabilities for the pension plans and postretirementbenefit plans, and our annual cash requirements to fund theseplans.

Valuation of Deferred Income Tax Assets andLiabilities.    At December 31, 2004, we had net deferred taxassets of $119.1 million, including $3.8 million for loss carryforwardsand $18.5 million for tax credit carryforwards which are subject tovarious limitations and will expire if unused within their respectivecarryforward periods. Deferred income taxes are determined separatelyfor each of our tax-paying entities in each tax jurisdiction. Thefuture realization of our deferred income tax assets ultimately dependson our ability to generate sufficient taxable income of the appropriatecharacter (for example, ordinary income or capital gains) within thecarryback and carryforward periods available under the tax law, and toa lesser extent, our ability to execute successful tax planningstrategies. Based on our estimates of the amounts and timing of futuretaxable income and tax planning strategies, we believe that L-3 will beable to realize its deferred tax assets. A change in the ability of ouroperations to continue to generate future taxable income, or ourability to implement desired tax planning strategies, could affect ourability to realize the future tax deductions underlying our netdeferred tax assets, and require us to provide a valuation allowanceagainst our net deferred tax assets. The recognition of a valuationallowance would result in a reduction to net income and if significant,could have a material impact on our effective tax rate, results ofoperations and financial position in any given period.

Resultsof Operations

The following information should be read inconjunction with our consolidated financial statements. Our results ofoperations for the periods presented are impacted significantly by ourbusiness acquisitions. See Note 3 to the audited consolidated financialstatements for a discussion of our business acquisitions.

Presentation of Sales and Costs and Expenses.    On thestatements of operations, L-3 presents its sales and costs and expensesin two categories, "Contracts, primarily U.S.Government" and "Commercial, primarilyproducts." For a detailed description of these twocategories, refer to Note 2 to the audited consolidated financialstatements.

The tables below provide two presentations of sales,operating income and operating margin data for L-3 for the years endedDecember 31, 2004, 2003 and 2002. The first table presents the selecteddata segregated between L-3's U.S. Government contractorbusinesses and L-3's commercial businesses. The second tablepresents the selected data by reportable segment. See Note 18 to theaudited consolidated financial statements.

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|                                                 |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                            |  | YearEnded December31, |
|                                            |  | 2004                  |         | 2003    |  | 2002   |
|                                            |  | (inmillions)          |
| **Statement of OperationsPresentation**         |  |                  |    |    |  |   |    |    |  |   |    |    |
| Sales:                                          |  |                  |    |    |  |   |    |    |  |   |    |    |
| Contracts,primarily U.S.Government(1)           |  | $                     | 6,155.6 |    |  | $      | 4,401.7 |    |  | $      | 3,581.3 |    |
| Commercial,primarilyproducts(1)                 |  |                  | 741.4   |    |  |   | 659.9   |    |  |   | 429.9   |    |
| Consolidated                                    |  | $                     | 6,897.0 |    |  | $      | 5,061.6 |    |  | $      | 4,011.2 |    |
| Operatingincome:                                |  |                  |    |    |  |   |    |    |  |   |    |    |
| Contracts,primarily U.S.Government(1)           |  | $                     | 678.8   |    |  | $      | 537.9   |    |  | $      | 442.3   |    |
| Commercial,primarilyproducts(1)                 |  |                  | 69.8    |    |  |   | 43.1    |    |  |   | 11.7    |    |
| Consolidated                                    |  | $                     | 748.6   |    |  | $      | 581.0   |    |  | $      | 454.0   |    |
| Operatingmargin(2):                             |  |                  |    |    |  |   |    |    |  |   |    |    |
| Contracts,primarily U.S.Government              |  |                  | 11.0    | %  |  |   | 12.2    | %  |  |   | 12.3    | %  |
| Commercial,primarilyproducts                    |  |                  | 9.4     | %  |  |   | 6.5     | %  |  |   | 2.7     | %  |
| Consolidated                                    |  |                  | 10.9    | %  |  |   | 11.5    | %  |  |   | 11.3    | %  |
| **ReportableSegmentPresentation**               |  |                  |    |    |  |   |    |    |  |   |    |    |
| Sales(3):                                       |  |                  |    |    |  |   |    |    |  |   |    |    |
| SecureCommunications &ISR                   |  | $                     | 1,663.6 |    |  | $      | 1,439.4 |    |  | $      | 1,053.3 |    |
| Training,Simulation & GovernmentServices(4) |  |                  | 1,259.6 |    |  |   | 1,009.3 |    |  |   | 808.6   |    |
| AircraftModernization, O&M andProducts(5)   |  |                  | 2,289.8 |    |  |   | 1,019.6 |    |  |   | 677.5   |    |
| SpecializedProducts(4)                          |  |                  | 1,684.0 |    |  |   | 1,593.3 |    |  |   | 1,471.8 |    |
| Consolidated                                    |  | $                     | 6,897.0 |    |  | $      | 5,061.6 |    |  | $      | 4,011.2 |    |
| Operatingincome:                                |  |                  |    |    |  |   |    |    |  |   |    |    |
| SecureCommunications &ISR                   |  | $                     | 218.0   |    |  | $      | 172.9   |    |  | $      | 103.5   |    |
| Training,Simulation & GovernmentServices(4) |  |                  | 149.2   |    |  |   | 115.5   |    |  |   | 96.8    |    |
| AircraftModernization, O&M andProducts(5)   |  |                  | 249.6   |    |  |   | 147.8   |    |  |   | 105.7   |    |
| SpecializedProducts(4)                          |  |                  | 131.8   |    |  |   | 144.8   |    |  |   | 148.0   |    |
| Consolidated                                    |  | $                     | 748.6   |    |  | $      | 581.0   |    |  | $      | 454.0   |    |
| Operatingmargin(2):                             |  |                  |    |    |  |   |    |    |  |   |    |    |
| SecureCommunications &ISR                   |  |                  | 13.1    | %  |  |   | 12.0    | %  |  |   | 9.8     | %  |
| Training,Simulation & GovernmentServices(4) |  |                  | 11.8    | %  |  |   | 11.4    | %  |  |   | 12.0    | %  |
| AircraftModernization, O&M andProducts(5)   |  |                  | 10.9    | %  |  |   | 14.5    | %  |  |   | 15.6    | %  |
| SpecializedProducts(4)                          |  |                  | 7.8     | %  |  |   | 9.1     | %  |  |   | 10.1    | %  |
| Consolidated                                    |  |                  | 10.9    | %  |  |   | 11.5    | %  |  |   | 11.3    | %  |
|                                                 |

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| (1) | EffectiveJanuary 1, 2004, we combined our explosives detection systems (EDS)business into L-3 Communications Security and Detection Systems, ourIMC business into L-3 Communications Government Services, Inc. (GSI),the EMP business into our ESSCO business and the Apcom business intoour Communications Systems-East business (2004 Business Realignments).As a result of the 2004 Business Realignments, reclassificationsbetween "Contracts, primarily U.S.Government" and "Commercial, primarilyproducts" have been made to the prior period sales andoperating income amounts, however, since EDS was primarily a U.S.Government contracting business prior to 2003, the sales and operatingincome for EDS were not reclassified from 2002. Specifically, $96.5million of 2003 sales, $9.1 million of 2002 sales, $26.3 million of2003 operating income and $6.1 million of 2002 operating loss wasreclassified from "Contracts, primarily U.S.Government" to "Commercial, primarilyproducts". Additionally, $30.6 million of 2003 sales, $9.2million of 2002 sales, $2.1 million of 2003 operating income and $7.4million of 2002 operating loss was reclassified from"Commercial, primarily products," to"Contracts, primarily U.S. Government". The2004 Business Realignments and related reclassifications did not resultin any changes to our consolidated results of operations, financialposition or cash flow. |

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| (2) | Operating margin is equal to operatingincome as a percentage ofsales. |

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| (3) | Sales are afterintersegment eliminations. See Note 18 to the consolidated financialstatements. |

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| (4) | Effective January1, 2004, we combined our IMC business into GSI. As a result of thisrealignment of management responsibilities, $29.1 million of 2003sales, $2.3 million of 2002 sales, $3.9 million of 2003 operatingincome and $0.3 million of 2002 operating income was reclassified fromthe Specialized Products segment to the Training, Simulation &Government Services segment. This reclassification to our reportablesegments did not result in any changes to our consolidated results ofoperations, financial position or cashflows. |

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| (5) | During the 2004 ThirdQuarter, we changed the name of the reportable segment from AviationProducts & Aircraft Modernization to Aircraft Modernization,O&M and Products. The business and reporting units included in thisreportable segment were not changed. |

Year EndedDecember 31, 2004 Compared with Year Ended December 31, 2003

Consolidated sales increased by $1,835.4 million, or 36.3%,to $6,897.0 million for 2004 from $5,061.6 million for 2003. Organicsales growth for our defense businesses was 16.3%, or $721.6million, driven by continued strong demand for our securecommunications and ISR systems, aircraft modernization, aviationproducts, training and government services, training devices, sensorsand imaging products and naval power equipment and services. Organicsales growth for our commercial and other non-military businesses was6.6%, or $41.9 million, primarily due to increased volume forcommercial aviation products and security products, partially offset bylower sales volume for explosives detection systems (EDS). The decreasein EDS sales was caused primarily by a later-than-expected receipt ofan order from the U.S. Transportation and Security Administration. Theincrease in consolidated sales from acquired businesses was $1,071.9million, or 21.2%. We define "organic salesgrowth," as the increase or decrease in sales for thecurrent period compared to the prior period, excluding the increase insales attributable to acquired businesses to the extent the acquiredbusinesses were not included in our results of operations for the priorperiod, determined on a monthly basis. Our sales for"defense businesses" include our U.S.Government contractor businesses, all of which are presented under"Contracts, primarily U.S. Government"(Government Businesses) and commercial aviation products sold tomilitary customers, which is presented under "Commercial,primarily products" (Commercial Businesses).

Salesfrom our Government Businesses increased by $1,753.9 million, or39.8%, to $6,155.6 million for 2004 from $4,401.7 million for2003. The increase in sales from acquired businesses was $1,037.1million, or 23.6%. The acquired businesses include Aeromet,Klein, MAS, Vertex, and certain defense and aerospace assets of IPICOM,Inc., all of which were acquired in 2003, and AVISYS, Bay Metals,Beamhit, Brashear, Cincinnati Electronics, D.P. Associates, Inc. andthe GEDD business, all of which were acquired in 2004. Sales from ourCommercial Businesses increased by $81.5 million, or 12.4%, to$741.4 million for 2004 from $659.9 million for 2003. The increase insales from the Avionics Systems and Flight Systems Engineering acquiredbusinesses, which were acquired in 2003, and Infrared Products, whichwas acquired in 2004, was $34.8 million.

Consolidated costs andexpenses increased by $1,667.8 million, or 37.2%, to $6,148.4million for 2004 from $4,480.6 million for 2003. Costs and expenses forour Government Businesses increased by $1,613.0 million, or41.7%, to $5,476.8 million for 2004 from $3,863.8 million for2003. The costs and expenses related to the increase in sales fromacquired businesses was $973.1 million. The remaining increase isprimarily attributed to costs and expenses associated with the organicsales growth of our defense businesses. Cost of sales for L-3'sU.S. Government contractor businesses include selling, general and

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administrative (SG&A), independentresearch and development (IRAD) and bid and proposal (B&P) costs.These SG&A, IRAD and B&P costs are allowable indirect contractcosts that are allocated to our U.S. Government contracts in accordancewith U.S. Government regulations. We report SG&A, IRAD and B&Pcosts allocated to U.S. Government contracts as costs of sales when therelated contract sales are recognized, rather than account for them asperiod expenses. SG&A, IRAD and B&P costs included in costs andexpenses for L-3's Government Businesses were $582.8 million for2004 and $499.9 million for 2003. The increase of $82.9  millionwas primarily attributable to the MAS, Vertex and Brashear acquiredbusinesses and organic sales growth from our defense businesses. SeeNote 4 to our audited consolidated financial statements. Costs andexpenses for our Commercial Businesses increased by $54.8 million, or8.9%, to $671.6 million for 2004 from $616.8 million for 2003.Cost of sales increased by $41.9 million to $458.9 million for 2004from $417.0 million for 2003. The increase in cost of sales wasprimarily due to increased costs attributable to the Avionics Systemsacquired business and higher sales volume for our commercial aviationproducts. SG&A expenses increased by $0.9 million to $141.5 millionfor 2004 from $140.6 million for 2003, and declined as a percentage ofsales to 19.1% from 21.3% due to cost and expensereductions and sales volume increases. R&D expenses increased by$12.0 million to $71.2 million for 2004 from $59.2 million for 2003,primarily due to development expenditures for SmartdeckTM.

Consolidated operating income increased by $167.6 million, or28.8%, to $748.6 million for 2004 from $581.0 million for 2003.Consolidated operating margin decreased to 10.9% from11.5% for the 2004 compared to 2003. The changes in theoperating margins for our segments are discussed below. Operatingincome for our Government Businesses increased by $140.9 million, or26.2%, to $678.8 million for 2004 from $537.9 million for 2003.Operating margin declined by 1.2 percentage points to 11.0% for2004 from 12.2% for 2003. Operating margin decreased primarilydue to expected lower operating margins from the Vertex Aerospaceacquired business. The 2003 operating income also included a $4.5million gain related to the settlement of a claim. Operating income forour Commercial Businesses increased by $26.7 million, or 61.9%,to $69.8 million for 2004 from $43.1 million for 2003. Operating marginincreased by 2.9 percentage points to 9.4% for 2004 from6.5% for 2003, primarily because of cost reductions formicrowave components, higher sales volume for commercial aviationproducts and cost and expense reductions at our PrimeWaveCommunications business. These increases were partially offset bydevelopment expenditures for SmartdeckTM, certification costs fornew commercial aviation products and fewer than expected sales ofhigher margin EDS systems.

Interest expense increased by $12.6million to $145.3 million for 2004 from $132.7 million for 2003 becauseof higher levels of outstanding debt during 2004 compared to the levelsof outstanding debt during 2003. Average outstanding debt during 2004was $2,233.5 million compared to $2,059.5 million during 2003. Ouroutstanding debt increased as a result of the issuance of $650.0million of 5 7/8% senior subordinated notes inNovember 2004, $400.0 million of 6 1/8% seniorsubordinated notes in December of 2003 and $400.0 million of6 1/8% senior subordinated notes in May of 2003.The increase in our outstanding debt was partially offset by the earlyretirement of our $200.0 million of 8% senior subordinated notesin December 2004 and $180.0 million of 81⁄2% seniorsubordinated notes in June of 2003 and the conversion into L-3 HoldingsCommon Stock of our $420.0 million of 4% senior subordinatedconvertible contingent debt securities (CODES) in October 2004 and$300.0 million of 51⁄4% convertible senior subordinatednotes in January of 2004.

Other expense (income), net, for 2004was $7.3  million of income and includes $6.8 million of interestand investment income. Other expense (income), net for 2003 was $0.2million of income. The increase from 2003 to 2004 was primarily due tohigher interest and investment income.

Minority interest in netincome of consolidated subsidiaries increased by $5.4 million to $8.9million for 2004 from 3.5 million for 2003, primarily due to net incomefor the Army Fleet Support LLC, which is 80% owned by L-3.

The income tax provision for 2004 and 2003 is based on an effectiveincome tax rate of 36.0%.

Basic EPS increased by $0.65 to$3.54 for 2004 from $2.89 for 2003. Diluted EPS increased by $0.71 to$3.33 for 2004 from $2.62 for 2003. Net income for 2004 includes anafter-tax debt retirement charge of $3.2 million, or $0.03 per dilutedshare, relating to the retirement of $200.0 million of 8% seniorsubordinated notes. Net income for 2003 includes an after-tax debtretirement charge of $7.2 million, or 

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$.06 per diluted share related to theretirement of $180.0 million of 81⁄2% senior subordinatednotes. Excluding these debt retirement charges from both periods,diluted EPS would have increased by $0.68 for 2004 compared to2003.

Secure Communications & ISR

Sales within ourSecure Communications & ISR segment increased by $224.2 million, or15.6%, to $1,663.6 million for 2004 from $1,439.4 million for2003. Organic sales growth was $190.3 million, or 13.2%,reflecting continued strong demand from the DoD and other U.S.Government agencies for our secure network communications, ISR systemsand communications products. The increase in sales from acquiredbusinesses was $33.9 million, or 2.4%, and was primarilyattributable to Aeromet and certain defense and aerospace assets ofIPICOM, Inc., which were acquired in 2003.

Operating incomeincreased by $45.1 million to $218.0 million for 2004 from $172.9million for 2003 because of higher sales volume for communicationsproducts and ISR systems and lower operating losses for the PrimeWaveCommunications business due to cost and expense reductions. Operatingmargin increased by 1.1 percentage points to 13.1% for 2004 from12.0% for 2003, primarily because of organic sales growth forISR systems and communications products and cost reductions and loweroperating losses in 2004 as compared to 2003 for the PrimeWaveCommunications business. These improvements to operating margin werepartially offset by a loss related to the design, development andtesting activities on a production contract for transportable tacticalsatellite communications terminals, which reduced operating margin by0.2 percentage points.

Training, Simulation & GovernmentServices

Sales within our Training, Simulation & GovernmentServices segment increased by $250.3 million, or 24.8%, to$1,259.6 million for 2004 from $1,009.3 million for 2003. Organic salesgrowth was $227.3 million, or 22.5%, driven by increased volumefor both training and government services. The increase in sales fromacquired businesses was $23.0 million. The acquired businesses includeBeamhit and the GEDD business, both of which were acquired during thesecond quarter of 2004 and D.P. Associates, Inc., which was acquired onOctober 8, 2004.

Operating income increased by $33.7 million to$149.2 million for 2004 from $115.5 million for 2003 because of highersales volume for training and operations services. Operating marginincreased by 0.4 percentage points to 11.8% for 2004 from11.4% for 2003 due to cost efficiencies from the growth insales.

Aircraft Modernization, O&M and Products

Sales within our Aircraft Modernization, O&M and Productssegment increased by $1,270.2 million, or 124.6%, to $2,289.8million for 2004 from $1,019.6 million for 2003. The increase in salesfrom acquired businesses was $967.6 million. The acquired businessesinclude Vertex, MAS, Avionics Systems and Flight Systems Engineering,which were acquired during 2003, and AVISYS, which was acquired in June2004. Organic sales growth was $302.6 million, or 29.7%, drivenby higher sales for aircraft modernization, operations and maintenance,which includes the U.S. Army Aviation and Missile Command (AMCOM)contract, and commercial and military aviation products.

Operating income increased by $101.8 million to $249.6 million for2004 from $147.8 million for 2003 because of higher sales volume, whichwas partially offset by lower operating margin. Operating margindeclined by 3.6 percentage points to 10.9% for 2004 from14.5% for 2003. Margins from acquired businesses, primarilyVertex, decreased operating margin by 3.2 percentage points. Theremaining decrease was primarily due to higher sales volume of lowermargin aircraft modification and logistics support undercost-reimbursable-type contracts, partially offset by higher marginsfor commercial aviation products.

Specialized Products

Sales within our Specialized Products segment increased by $90.7million, or 5.7%, to $1,684.0 million for 2004 from $1,593.3million for 2003. The increase in sales from acquired businesses was$47.4 million. 

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The acquired businesses include Klein, whichwas acquired in September 2003, and Bay Metals, Brashear and InfraredProducts, which were acquired during 2004. Organic sales growth was$43.3 million, or 2.7%. The increase was driven by increasedsales of $92.8 million primarily for training devices, imagingproducts, naval power equipment and services, maintenance of securitysystems and fuzing products. These increases were partially offset byvolume declines of $49.5 million for EDS, ruggedized computers anddisplays and undersea warfare products.

Operating incomedecreased by $13.0 million to $131.8 million for 2004 from $144.8million for 2003 primarily because of changes in product sales mix forsecurity products and telemetry products, and a $4.5 million gain in2003 related to a settlement of a claim recorded in 2003. Thesedecreases were partially offset by operating income for naval powerequipment businesses in 2004, as compared to operating losses in 2003,cost reductions for microwave components and higher volume for imagingproducts and naval power equipment and services. Operating margindecreased by 1.3 percentage points to 7.8% for 2004 from9.1% for 2003. Operating margin decreased by 1.7 percentagepoints primarily due to lower margins for security products, includingfewer than expected sales of higher margin EDS and 0.3 percentagepoints due to the settlement of a claim recorded in 2003. Thesedecreases were partially offset by an increase of 0.7 percentage pointsfor naval power equipment businesses.

Year EndedDecember 31, 2003 Compared with Year Ended December 31, 2002

Consolidated sales increased by $1,050.4 million, or 26.2%,to $5,061.6 million for 2003 from sales of $4,011.2 million for 2002.The increase in consolidated sales from acquisitions was $833.6million, or 20.8%. Organic sales growth for our defensebusinesses was 15.4%, or $499.8 million, and was driven bycontinued strong demand for secure communications and intelligence,surveillance and reconnaissance (ISR) systems and products, aircraftmodernization, simulation and training services, government services,and an increase in shipments of naval power equipment. Organic salesfor our commercial businesses declined by 10.6%, or $45.4million, due to the continued weakness in the aviation andcommunications markets. Sales for explosives detection systems (EDS)decreased $237.6 million primarily because the initial installation ofEDS at major U.S. airports by the U.S. Transportation SecurityAdministration (TSA) was completed by the end of 2002. Consolidatedorganic sales growth, excluding the EDS business, from both periods was12.4%. Consolidated organic sales growth for all of ourbusinesses, including the decline for the EDS business, was $216.8million, or 5.4%.

Sales from our Government Businesses,which comprises our defense businesses, excluding commercial aviationproducts sold to military customers, and in 2002, our EDS business,increased by $820.4 million, or 22.9%, to $4,401.7 million for2003 from $3,581.3 million for 2002. The increase in sales fromacquired businesses was $659.7 million, or 18.4%. The acquiredbusinesses include IS, Telos, ComCept, TMA, Electron Devices,Ruggedized Command & Control, IMC, Westwood, Wescam and ShipAnalytics, which were acquired in 2002 and Aeromet, Klein, MAS, Vertexand certain defense and aerospace assets of IPICOM, Inc., which wereacquired during 2003. Excluding sales from acquired businesses, salesincreased by $253.5 million primarily because of organic sales growthfrom our defense businesses for ISR and secure communications systemsand products, aircraft modernization, communications software andengineering support services, training services, navigation productsand naval power equipment. These increases were partially offset by adecline in sales volume primarily from our EDS business, and to alesser extent, from our fuzing products, training devices, underseawarfare products and display systems. Additionally, sales were reducedby $92.8 million because of a reclassification, primarily related tothe EDS business, between our Government Businesses and our CommercialBusinesses due to the 2004 Business Realignments discussed in the tableabove.

Sales from our Commercial Businesses increased by $230.0million, or 53.5%, to $659.9 million for 2003 from $429.9million for 2002. The increase in sales from acquired businesses was$173.9 million, or 40.5%. The acquired businesses includeDetection Systems and Wolf Coach, which were acquired in 2002 andAvionics Systems, which was acquired during 2003. Excluding sales fromacquired businesses, organic sales declined for our commercialbusinesses by $36.7 million, due primarily to lower revenues foraviation and communications products caused by weak demand in thosecommercial markets. Additionally, sales increased by $92.8 million as aresult of the reclassification due to the 2004 BusinessRealignments.

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Consolidated costs and expenses increasedby $923.4 million to $4,480.6 million for 2003 from $3,557.2 millionfor 2002, consistent with the increase in sales.

Costs andexpenses for our Government Businesses increased by $724.8 million to$3,863.8 million for 2003 from $3,139.0 million for 2002. Approximately81% of the increase is attributable to our acquired businesses.The remaining increase is primarily attributed to organic sales growthfrom our defense businesses for ISR and secure communications systemsand products, aircraft modernization, communications software andengineering support services, training services, navigation productsand naval power equipment. These increases were partially offset bydeclines from our EDS business, fuzing products, training devices anddisplay systems due to lower volume. SG&A, IRAD and B&P costsincluded in cost of sales for our Government Businesses were $499.9million, or 11.4% of sales for 2003, compared to $432.8 million,or 12.1% of sales for 2002 (See Notes 2 and 4 to ourconsolidated financial statements).

Costs and expenses for ourCommercial Businesses increased by $198.6 million to $616.8 million for2003 from $418.2 million for 2002. The increase was primarily due toincreased sales attributable to our acquired businesses, as well as a$3.9 million provision for bad debt and inventory for the PrimeWaveCommunications business. SG&A expenses increased by $28.6 millionto $140.6 million or 21.3% of sales for 2003 from $112.0 millionor 26.1% of sales for 2002. The increase was primarilyattributable to acquired businesses and increased costs for securityproducts due to maintenance costs associated with detection systemsplaced in service. This increase was partially offset by lower SG&Aexpenses at the PrimeWave Communications business and our commercialcommunications products businesses due to cost and expense reductions.Research and development (R&D) expenses increased by $23.5 millionto $59.2 million for 2003 from $35.7 million for 2002. The increase wasprimarily due to the Avionics Systems acquired business and developmentexpenses for cargo security products, partially offset by lower R&Dexpenses incurred at the PrimeWave Communications business because ofcost and expense reductions.

Consolidated operating incomeincreased by $127.0 million to $581.0 million for 2003 from $454.0million for 2002. The increase was primarily due to higher sales fromall of our segments. Consolidated operating margin increased slightlyby 0.2 percentage points to 11.5% for 2003 from 11.3% for2002. The changes in the operating margins for our segments arediscussed below.

Operating income for our Government Businessesincreased by $95.6 million to $537.9 million for 2003 from $442.3million for 2002. Operating income was reduced by $22.9 million becauseof the reclassification due to the 2004 Business Realignments.Operating margin declined slightly by 0.1 percentage points to12.2% for 2003 from 12.3% for 2002. The reclassificationdue to the 2004 Business Realignments reduced operating margin by 0.3percentage points. Operating margin increased by 0.2 percentage pointsprimarily due to sales growth and cost improvements for ISR and securecommunications systems and products and naval power equipment.

Operating income for our Commercial Businesses increased by $31.4million to $43.1 million for 2003 from $11.7 million for 2002.Operating income increased by $22.9 million because of thereclassification due to the 2004 Business Realignments. Operatingmargin improved by 3.8 percentage points to 6.5% for 2003 from2.7% for 2002. The reclassification due to the 2004 BusinessRealignments increased operating margin by 3.0 percentage points. Theremaining increase was due to lower losses from certain commercialbusinesses due to cost and expense reductions and higher margins fromthe Avionics Systems acquired business, partially offset by lowermargins on commercial aviation products and microwave components due tolower sales volume and higher development expenses for cargo securityproducts.

Interest expense increased by $10.2 million to $132.7million for 2003 from $122.5 million for 2002. The increase isattributable to the higher average outstanding debt during 2003 andlower savings from fixed-to-variable interest rate swap agreements of$1.0 million.

Other income decreased by $4.7 million to $0.2million in 2003 from $4.9 million in 2002. The decrease was due tolower interest income earned because of lower average cash and cashequivalents balances, a loss of $2.2 million recorded related to thesale of the commercial broadband test equipment assets of our Celeritybusiness and an increase in losses on our investments accounted forusing the equity method during 2003 compared to 2002.

The 2003period includes a charge of $11.2 million ($7.2 million after-tax, or$0.06 per diluted share) for the early retirement of $180 million ofour 81⁄2% Senior Subordinated Notes due 2008. See"Liquidity 

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and Capital Resources." The2002 period includes a charge of $16.2 million ($9.9 million after-tax,or $0.09 per diluted share) for the early retirement of $225 million ofour 10 3/8% Senior Subordinated Notes due2007.

Minority interest decreased by $2.7 million to $3.5million for 2003 from $6.2 million for 2002 because of lower net incomefor Aviation Communications and Surveillance Systems (ACSS) due tolower sales caused by weakness in the commercial aviation market during2003 and higher product development expenses.

The income taxprovision for 2003 is based on an effective income tax rate of36.0%, compared with an effective income tax rate of35.5% for 2002.

Basic earnings per share (EPS) beforecumulative effect of a change in accounting principle increased by$0.56 to $2.89 for 2003 from $2.33 for 2002. Diluted EPS beforecumulative effect of a change in accounting principle increased by$0.49 to $2.62 for 2003 from $2.13 for 2002. Net income for 2002includes a charge, net of income taxes, of $24.4 million ($0.28 perbasic share and $0.23 per diluted share) for the cumulative effect of achange in accounting principle for goodwill impairment in connectionwith the adoption of SFAS No. 142. Including the effect of a change inaccounting principle, basic EPS for 2002 was $2.05 and diluted EPS for2002 was $1.90.

Diluted weighted-average common sharesoutstanding increased by 8.3% to 113.9 million for 2003 from105.2 million for 2002. The increase principally reflects theadditional shares outstanding from the sale of 14.0 million shares ofL-3 Holdings common stock on June 28, 2002.

SecureCommunications & ISR

Sales within our Secure Communications& ISR segment increased by $386.1 million, or 36.7%, to$1,439.4 million for 2003 from $1,053.3 million for 2002. Organic salesgrowth was $250.4 million, or 23.8%, due to continued strongdemand and increased spending by the DoD and other U.S. Governmentagencies for our secure communications and ISR systems and products,which were partially offset by a decline in sales of $5.5 million forthe PrimeWave Communications business. The increase in sales fromacquired businesses was $135.7 million. The acquired businesses includeIS and ComCept, which were acquired during 2002, and Aeromet andcertain defense and aerospace assets of IPICOM, Inc., which wereacquired during 2003.

Operating income increased by $69.4million to $172.9 million for 2003 from $103.5 million for 2002 becauseof higher sales and operating margin. Operating margin increased to12.0% for 2003 from 9.8% for 2002 because of higherorganic sale growth for defense systems and products, cost improvementsand lower losses at our PrimeWave Communications business.

Training, Simulation & Government Services

Sales withinour Training, Simulation & Government Services segment increased by$200.7 million, or 24.8%, to $1,009.3 million for 2003 from$808.6 million for 2002. Organic sales growth was $81.7 million, or10.1%, driven by training and government services, includingcommunications software support and engineering support. The increasein sales from the Telos, TMA, IMC and Ship Analytics acquiredbusinesses, which were all acquired in 2002, was $119.0 million.

Operating income increased by $18.7 million to $115.5 million for2003 from $96.8 million for 2002 because of higher sales, which werepartially offset by lower operating margin. Operating margin declinedby 0.6 percentage points to 11.4% for 2003 from 12.0% for2002. The decrease was primarily due to higher sales fromcost-reimbursable type and time and material type contracts, whichgenerally are less profitable than fixed-priced type contracts. Marginsincreased by 0.3 percentage points from acquired businesses.

Aircraft Modernization, O&M and Products

Sales withinour Aircraft Modernization, O&M and Products segment increased by$342.1 million, or 50.5%, to $1,019.6 million for 2003 from$677.5 million for 2002. Organic sales growth was $129.9 million, or19.2%, primarily due to $144.7 million for aircraftmodernization and modification driven by DoD 

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demand. This increase was partially offsetby volume declines of $10.8 million for commercial aviation productscaused by the continued weakness in the commercial aviation markets andvolume declines of $4.0 million primarily for display systems due tothe timing of contractual shipments. The increase in sales fromacquired businesses was $212.2 million. The acquired businesses includeIS, which was acquired in 2002, and Avionics Systems, MAS and Vertex,which were acquired in 2003.

Operating income increased by $42.1million to $147.8 million for 2003 from $105.7 million for 2002 becauseof higher aircraft modernization sales, which were partially offset bylower sales for commercial aviation products and lower operatingmargin. Operating margin declined by 1.1 percentage points to14.5% for 2003 from 15.6% for 2002. Volume declines forcommercial aviation products, which have higher margins than aircraftmodification sales, decreased operating margin by 0.9 percentagepoints. Similarly, margins decreased by 0.4 percentage points primarilydue to volume growth for aircraft modernization, which earns lowermargins than commercial aviation products. These decreases werepartially offset by the Avionics Systems and MAS acquired businesses,which increased margin by 0.2 percentage points.

SpecializedProducts

Sales within our Specialized Products segmentincreased by $121.5 million, or 8.3%, to $1,593.3 million for2003 from $1,471.8 million for 2002. Organic sales declined16.7%, or $245.2 million, or $7.6 million, or 0.5%,excluding the decline for EDS. EDS sales declined by $237.6 million(discussed below). Volume declined by $46.4 million for fuzing andacoustic undersea warfare products and training devices because ofcertain contracts approaching their scheduled completion and the timingof sales on 2003 orders. Volume declined by $22.3 million for telemetryproducts and microwave components due to the continued weakness in thecommercial communications markets. These decreases were partiallyoffset by an increase of $46.6 million for naval power equipment due tohigher shipments arising from the resolution of the production andquality control issues at the SPD Electrical Systems business and $14.5million primarily for FTSATs and guidance products due to strong demandfrom the DoD. The increase in sales from acquired businesses was $366.7million. The acquired businesses include Detection Systems, RuggedizedCommand & Control, Electron Devices, Wolf Coach, Westwood andWescam, all of which were acquired in 2002, and Klein, which wasacquired in 2003.

Sales of EDS declined by $237.6 million to$101.5 million for 2003 compared with $339.1 million for 2002,primarily because the initial installation of EDS at major U.S.airports by the TSA was completed by the end of 2002, which reduced theTSA's procurement requirements for new systems.

Operatingincome decreased by $3.2 million to $144.8 million for 2003 from $148.0million for 2002. Operating margin decreased by 1.0 percentage pointsto 9.1% for 2003 from 10.1% for 2002. Lower sales for EDSreduced operating margin by 0.6 percentage points. Volume declines fortelemetry, fuzing and undersea warfare products lowered operatingmargin by 0.5 percentage points. Lower margins from acquired businessesreduced operating margin by 0.6 percentage points. The resolution ofproduction quality problems for naval power equipment caused increasedshipments and reduced rework costs, which increased operating margin by0.5 percentage points. The settlement of a claim increased operatingmargin by 0.2 percentage points.

Liquidity and CapitalResources

Balance Sheet

Contracts in process increasedby $363.7 million to $1,979.0 million at December 31, 2004 from$1,615.3 million at December 31, 2003. The increase included (i) $77.1million related to business acquisitions, (ii) $41.2 million ofnon-cash reclassifications to billed and unbilled receivablesassociated with certain billings in excess of costs and estimatedprofits and (iii) $245.4 million principally from:

|              |                                                                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | increases of $121.3 million in unbilledcontract receivables due to sales exceeding deliveries and billings forsecure network communications, ISR systems, communications products,training and government services, aircraft modernization andmaintenance and the AMCOM contract; |

|              |                                                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | increases of $84.8 million in billedreceivables because of higher sales volume of secure networkcommunications systems, training devices and aircraftmodernization; |

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|              |                                                                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | increases of$24.3 million in inventoried contract costs primarily for aircraftmodernization, secure network communications and ruggedized computers;and |

|              |                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------|
| •  | increases of $15.0 million ininventories at lower of cost or market due to increases for securityproducts. |

L-3's days receivable outstanding (DRO) was 71.8at December 31, 2004, compared with 70.3 at December 31, 2003. Wecalculate our DRO by dividing (i) our aggregate end of period billedreceivables and net unbilled contract receivables, by (ii) our salesfor the last twelve-month period adjusted, on a pro forma basis, toinclude sales from business acquisitions that we completed as of theend of the period (which amounted to $7,184.7 million), multiplied by365.

L-3's billed receivables, net of uncollectibleaccount allowances, increased by $144.6 million to $781.9 million atDecember 31, 2004, compared to $637.3 million at December 31, 2003. Theincrease in billed receivables was primarily from L-3's U.S.Government contractor businesses and related to organic sales growth,as well as the 2004 business acquisitions. The uncollectible accountsallowance decreased by $8.7 million to $16.5 million at December 31,2004, compared to $25.2 million at December 31, 2003, because ofwrite-offs of uncollectible accounts in 2004. The uncollectibleaccounts relate to L-3's commercial businesses. Our U.S.Government and allied foreign government customers, which generated88.9% of L-3's sales for 2004, present very lowuncollectible account risks due to their high credit quality and,therefore, generally require no uncollectible account allowances.

L-3's days inventory held (DIH) was 33.3 at December 31, 2004,compared with 36.3 at December 31, 2003. We calculate DIH by dividing(i) our aggregate end of period net inventoried contract costs andinventories at lower of cost or market, by (ii) our cost of sales forthe last twelve-month period adjusted on a pro forma basis to includecost of sales from business acquisitions that we completed as of theend of the period (which amounted to $6,200.1 million), multiplied by365.

The increase in property, plant and equipment (PP&E)during 2004 was principally related to the Infrared Products,Cincinnati Electronics and Electronics Systems acquired businesses. Thepercentage of depreciation expense to average gross PP&E increasedto 12.4% for 2004 from 11.9% for 2003. The increase wasattributable to the impact of business acquisitions completed during2003. We did not change any of the depreciation methods or assetsestimated useful lives that L-3 uses to calculate its depreciationexpense.

Goodwill increased by $402.4 million to $4,054.8million at December 31, 2004, from $3,652.4 million at December 31,2003. The increase was comprised of (i) $366.5 million for businessacquisitions completed during 2004, (ii) $36.0 million for increases topurchase price payments for certain acquisitions completed prior toJanuary 1, 2004, related to final closing date net assets of theacquired businesses and contingent purchase price adjustments orearnouts, which were resolved during the period, and (iii) a decreaseof $0.1 million primarily related to final estimates of fair value foracquired assets and liabilities assumed in connection with businessacquisitions completed prior to January 1, 2004.

The increase inaccounts payable was due to increased purchases from third-partyvendors and subcontractors to support higher volumes for sales andrelated contracts-in-process, and the timing of payments for suchpurchases and to business acquisitions completed during 2004. Theincrease in accrued employment costs was due to the timing of paymentsof salaries and wages to employees and to business acquisitionscompleted during 2004. The increase in billings in excess of costs andestimated profits was primarily due to an increase in collections formilestone billings on contracts for training devices and servicesrelated to the completion of certain performance milestones and anincrease for contracts in process with credit balances. The decrease inother current liabilities was primarily due to the payment of theremaining purchase price for the acquisition of certain aerospace anddefense assets of IPICOM, Inc., and to cash payments for costs incurredin excess of contract values for certain contracts in a loss position.The increase in pension and postretirement benefit liabilities wasprimarily due to the increase in the minimum liability of $23.1million, discussed below. The increase in other liabilities was due toamounts from our acquired businesses.

Customer advancesincreased by $49.3 million because collections exceeded liquidations,primarily related to cash payments received on contracts with foreigncustomers for ISR systems, acoustic undersea 

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warfare products and aircraft modernizationand to the business acquisitions we completed during 2004. The timingof collections and liquidation of customer advances are prescribed bycontract terms, and generally do not coincide because collectionsmostly occur upon the award of a contract and during the earlierperiods of performance. Conversely, liquidations mostly occur duringlater periods of performance as products are delivered and other workitems are completed. Additionally, customer advances do not affect ordetermine the timing of revenue recognition for a contract becausecustomer advances are a contract financing method.

PensionPlans

L-3 maintains defined benefit pension plans coveringemployees at certain of its businesses. At December 31, 2004, ourbalance sheet included a pension benefits liability of $273.8 million,an increase of $40.4 million from $233.4 million at December 31, 2003.The increase is due to pension expense recognized exceeding our pensionfunding and an increase in the minimum liability of $23.1 million. Atthe end of 2004, L-3's projected benefit obligation, whichincludes accumulated benefits plus the incremental benefitsattributable to projected future salary increases for coveredemployees, was $1,131.6 million and exceeded the fair value ofL-3's pension plan assets of $734.6 million by $397.0 million. Atthe end of 2003, L-3's projected benefit obligation was $902.1million and exceeded the fair value of L-3's pension plan assetsof $561.7 million by $340.4 million. The increase in the unfundedstatus of our pension plans of $56.6 million from $340.4 million at theend of 2003 to $397.0 million at the end of 2004 was principally due tothe $62.2 million actuarial loss that we experienced in 2004. Our 2004actuarial loss was primarily due to the reduction in the discount rateby 25 basis points to 6.00% at the end of 2004 from 6.25%at the end of 2003, which increased the present value of L-3'sprojected benefit obligations at the end of 2004 by $44.0 million. Thedifference between the unfunded status amount of $397.0 million at theend of 2004 and the pension liability recorded on our balance sheet of$273.8 million is attributable to the cumulative net unrecognizedactuarial losses. In accordance with SFAS No. 87, Employer'sAccounting for Pensions, the actuarial gains and losses that ourpension plans experience are not recognized in pension expense in theyear incurred, but rather deferred and amortized to pension expense infuture periods over the estimated average remaining service periods ofthe covered employees. (See Note 16 to our consolidated financialstatements.)

L-3 uses a November 30 measurement date todetermine its end of year (December 31) pension benefit obligations andfair value of pension plan assets, and a fiscal year ending November 30to determine its annual pension expense, including actual returns onplan assets. L-3's actual return on plan assets for 2004, basedon the fiscal year ended November 30, 2004, was $56.8 million, or10.1%, on the fair value of plan assets at the beginning of thefiscal year.

Our pension expense for 2004 was $74.8 million. Weexpect pension expense for 2005 to be between $90 million and $100million. As discussed above, at the end of 2004 we reduced our discountrate from 6.25% to 6.00%, which will increase theinterest cost component of pension expense for 2005. The higherinterest cost in our estimated 2005 pension expense is expected to besubstantially offset by the increase of $172.8 million in our pensionplan assets during 2004, which will increase our expected return onplan assets by approximately $15.0 million, and decrease our estimatedpension expense by the same amount. Our actual pension expense for 2005will be based upon a number of factors, including the effect of anyadditional business acquisitions for which we assume liabilities forpension benefits, actual pension plan contributions and changes (ifany) to our pension assumptions for 2005, including the discount rate,expected long-term return on plan assets and salary increases.

Our contributions for the full year 2004 were $60.9 million. For2005, we expect to contribute approximately $70.0 million to ourpension plans. A substantial portion of our pension plan contributionsfor L-3's businesses that are U.S. Government contractors arerecoverable as allowable indirect contract costs at amounts generallyequal to the annual pension contributions.

Our projected benefitobligation and annual pension expense are significantly affected by thediscount rate assumption we use. For example, an additional reductionto the discount rate of 25 basis points would have increased ourprojected benefit obligation at December 31, 2004 by approximately $43million, and our estimated pension expense for 2005 by approximately $7million. Conversely, an increase 

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to the discount rate of 25 basis pointswould have decreased our projected benefit obligation at December 31,2004 by approximately $44 million, and our estimated pension expensefor 2005 by approximately $7 million.

Our shareholders'equity at December 31, 2004 reflects a non-cash charge of $5.3 million(net of tax) to record the increase in accumulated other comprehensiveloss due to additional minimum pension liability recognized for theyear ended December 31, 2004 in accordance with SFAS No. 87. Thisnon-cash charge had no effect on our compliance with the financialcovenants of our debt agreements and did not impact our results ofoperations for 2004.

Statement of Cash Flows

Our cashposition was $653.4 million at December 31, 2004 and $134.9 million atDecember 31, 2003 and 2002. The table below provides a summary of ourcash flows for the periodsindicated.

|                                     |  |                       |        |         |  |        |          |         |  |        |          |         |  |  |
|-------------------------------------|--|-----------------------|--------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                |  | YearEnded December31, |
|                                |  | 2004                  |        | 2003    |  | 2002   |
|                                |  | (inmillions)          |
| Net cash from operatingactivities   |  | $                     | 620.7  |    |  | $      | 456.1    |    |  | $      | 318.5    |    |
| Netcash used in investingactivities |  |                  | (555.5 | )  |  |   | (1,088.1 | )  |  |   | (1,810.5 | )  |
| Netcash from financingactivities    |  |                  | 453.3  |    |  |   | 632.0    |    |  |   | 1,265.9  |    |
| Netincrease (decrease) incash       |  | $                     | 518.5  |    |  | $      | —  |    |  | $      | (226.1   | )  |
|                                     |

OperatingActivities

We generated $620.7 million of cash from operatingactivities during 2004, an increase of $164.6 million from the $456.1million generated during 2003. Net income increased by $104.2 million.Non-cash expenses increased by $63.4 million to $316.1 million in 2004from $252.7 million in 2003, primarily for depreciation andamortization, contributions to employee savings plans in L-3 Holdingscommon stock and deferred income taxes. Deferred income taxes increasedby $28.7 million to $123.4 million for 2004 from $94.7 million for2003, primarily because of larger estimated tax deductions arising fromour recent business acquisitions. During 2004, we used cash for changesin operating assets and liabilities of $77.3 million, compared to $74.2million for 2003. The use of cash for contracts in process wasprimarily driven by increases in unbilled contract receivables andbilled receivables arising from the organic sales growth for ourbusinesses, as discussed above under "Liquidity andCapital Resources — Balance Sheet" and"Results of Operations". The use of cash forother current assets was primarily due to deposits paid to vendorsduring 2004. The use of cash for other assets was primarily due toinvestments in equipment for training devices and airport securitysystems leased to customers and capitalized software development costsfor new products. The source of cash for accounts payable was due toincreased purchases of materials, components and services required forthe increase in sales during the year and the timing of payments forsuch purchases. The increase in the number of employees and the timingof payments for salaries and wages was a source of cash because costsand expenses for salaries and wages exceeded the cash payments. Thesource of cash for billings in excess of costs and estimated profitswas due to cash collections for milestone billings on certain contractsprimarily for training devices. The source of cash related to customeradvances was due to receipt on certain foreign contracts awarded duringthe 2004 fourth quarter. The use of cash for other current liabilitieswas due to the payment upon settlement of a foreign currency hedgingforward contract and cash payments for costs incurred in excess ofestimated contract values for certain contracts in a loss position. Thesource of cash from the change in pension and postretirement benefitliabilities was due to expenses exceeding related cash contributions.Pension plan contributions in 2004 amounted to $60.9 million, andexceeded our originally planned contributions for 2004 by more than $5million. We expect to contribute approximately $70.0 million to ourpension plans in 2005.

During 2003, we generated $456.1 millionof cash from operating activities, an increase of $137.6 million from$318.5 million generated during 2002. Net income increased by $99.5million. Non-cash expenses increased by $14.9 million to $252.7 millionin 2003 from $237.8 million in 2002, primarily for 

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depreciation and amortization, contributionsto employee savings plans in L-3 Holdings common stock and deferredincome taxes. During 2003, we used cash for changes in operating assetsand liabilities of $74.2 million, compared to $97.4 million in2002.

Our cash flows from operating activities during 2003reflect increases in unbilled receivables and other assets. The use ofcash for accounts payable was due to the timing of payments. The use ofcash for other current liabilities was to fund contracts in a lossposition for which estimated costs exceeded the estimated contractvalue, and was partially offset by cash collections for milestonebillings in excess of costs incurred primarily for training devices.The timing of payments to employees for salaries and wages was a sourceof cash. Pension plan contributions in 2003 amounted to $60.8 million.The source of cash from other liabilities was generated primarily fromterminating interest rate swap agreements. During 2003, we terminatedinterest rate swap agreements, which is discussed in"Derivative Financial Instruments", andgenerated cash proceeds related to deferred gains on them of $19.9million, of which $2.1 million was recorded in other currentliabilities and $17.8 million was recorded in other liabilities. For2002, we also terminated interest rate swap agreements and generatedcash proceeds related to net deferred gains on them of $16.8million.

Our cash flows from operating activities during 2002reflect increases in billed and unbilled receivables, other currentassets and other assets. The use of cash related to customer advanceswas due to liquidations on certain foreign contracts. The use of cashfor other current liabilities was to fund contracts in a loss positionfor which estimated costs exceed the estimated contract value, and waspartially offset by an increase in accrued warranty costs primarily forexplosive detection systems delivered in 2002. The timing of paymentsto employees for salaries and wages, as well as the timing of interestpayments, was a source of cash. The source of cash in other liabilitieswas primarily due to deferred gains on the termination of our swapagreements. Pension plan contributions in 2002 amounted to $47.4million.

Our cash from operating activities includes interestpayments on debt of $138.2 million for 2004, $119.9 million for 2003and $109.3 million for 2002. Our interest expense also includesamortization of deferred debt issue costs and deferred gains onterminated interest rate swap agreements, which are non-cash items.

Our cash from operating activities includes income tax payments, netof refunds, of $37.0 million for 2004, $17.3 million for 2003 and $2.1million for 2002. Our income tax payments were substantially less thanour provisions for income taxes reported on our statements ofoperations primarily because of income tax deductions from our acquiredbusinesses structured as asset purchases and income tax deductions forcompensation expense arising from the exercise of employee stockoptions. The income tax deductions from the exercise of employee stockoptions are accounted for as a reduction to current income taxespayable and an increase to shareholders' equity (see Note 13 toour consolidated financial statements). L-3 receives substantial incometax deductions from its business acquisitions that are structured asasset purchases for income tax purposes. The effect of these income taxdeductions is that our cash payments for income taxes are less than ourprovision for income taxes reported on the statement of operations.This difference is presented in the deferred income tax provision onour statement of cash flows. The deferred income tax provisionprimarily results from deducting amortization of tax intangibles,including goodwill, from the business acquisitions structured as assetpurchases on L-3's income tax returns over 15 years, inaccordance with income tax rules and regulations, while no goodwillamortization is recorded for financial reporting purposes, inaccordance with SFAS No. 142. We expect that the business acquisitionsL-3 has completed through December 31, 2004 will continue to generatesubstantial annual deferred tax benefits through 2019. While theseincome tax deductions are reported as changes to deferred income taxliabilities and assets, they are not differences that are scheduled toreverse in future periods from normal operations. Rather, they willonly reverse if L-3 sells its acquired businesses or incurs a goodwillimpairment loss for them, because in either case, L-3's financialreporting amounts for goodwill would be greater than the income taxbasis for goodwill. L-3 also receives significant income tax deductionsand deferred tax benefits from its acquired businesses structured asasset purchases for income tax purposes from accelerated depreciationof plant and equipment.

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Investing Activities

During 2004, we used $473.4 million of cash for businessacquisitions. We paid $424.0 million in connection with our 2004business acquisitions discussed above. We also paid $11.5 million forthe final contractual purchase price adjustment for the Vertex acquiredbusiness. We also paid $37.9 million primarily for the remainingcontractual purchase price for the IPICOM, Inc. assets, and forearnouts.

During 2003, we invested $1,014.4 million to acquirebusinesses, primarily for Vertex, Avionics Systems and MAS. During2002, we invested $1,742.1 million to acquire businesses, primarily forIntegrated Systems and Detection Systems. Cash used for businessacquisitions included earnout payments on certain business acquisitionsof $11.4 million for 2004, $8.5 million for 2003, and $1.8 million for2002.

On February 3, 2005, we acquired substantially all of theMarine Controls division of CAE and we will acquire the remainingbusiness operations following the receipt of required approvals. OnFebruary 25, 2005, we acquired the Propulsion Systems business unit ofGeneral Dynamics. On February 28, 2005, we acquired the ElectronDynamic Devices business of the Boeing Company. The aggregate purchaseprice paid in cash for these business acquisitions was $471.8 million.We financed these acquisitions using cash on hand.

Financing Activities

Debt

SeniorCredit Facilities.    At December 31, 2004, the senior creditfacilities were comprised of a $500.0 million five-year revolvingcredit facility maturing on May 15, 2006 and a $250.0 million 364-dayrevolving facility. The 364-day revolving credit facility expired onFebruary 22, 2005.

At December 31, 2004, available borrowingsunder our senior credit facilities were $677.5 million, afterreductions for outstanding letters of credit of $72.5 million. Therewere no outstanding borrowings under our senior credit facilities atDecember 31, 2004.

On March 9, 2005, we entered into a newfive-year senior revolving credit facility maturing on March  9,2010 and allowing for total aggregate borrowings of up to $1.0 billion.At March 9, 2005, available borrowings under our new senior creditfacility were approximately $906 million, after reductions foroutstanding letters of credit of approximately $94 million. At the timewe entered into this facility, our existing senior credit facility wasterminated.

Certain lenders and the administrative agent underthe existing senior credit facility and the new senior credit facilityhave provided us with various financial advisory, investment banking,commercial banking and other services from time to time, for which theyhave received customary fees.

Redemptions and RelatedConversion of Convertible Debt into Common Stock.    On October5, 2004, L-3 Holdings announced a full redemption of all the $420.0million of its 4.00% Senior Subordinated Convertible ContingentDebt Securities (CODES) due 2011, which expired on Thursday, October21, 2004. On October 21, 2004, holders of $419.8 million of theprincipal amount of CODES exercised their conversion rights andconverted such CODES into 7,800,797 shares of L-3 Holdings commonstock. The remaining $0.2 million of the CODES were redeemed for cashon October 25, 2004, at a redemption price of 102.0% of theprincipal amount, plus accrued and unpaid interest (includingcontingent interest) to October 25, 2004. On December 22, 2003, L-3Holdings announced a full redemption of $300.0 million of its5.25% Convertible Senior Subordinated Notes due 2009(Convertible Notes), which expired on January 9, 2004. Holders of$299.8 million of the Convertible Notes exercised their conversionrights and converted such notes into 7,357,327 shares of L-3Holdings' common stock. The remaining $0.2 million of ConvertibleNotes were redeemed for cash.

Redemptions of SeniorSubordinated Notes.    On November 12, 2004, L-3 Communicationsinitiated a full redemption of all of the outstanding $200.0 millionaggregate principal amount of 8% Senior Subordinated Notes due2008. Such notes were redeemed by us at a redemption price of102.667% of the principal amount thereof, plus accrued andunpaid interest. We completed this redemption on December 

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13, 2004. In connection with the earlyredemption of the $200.0 million of 8% Senior SubordinatedNotes, we recorded a pre-tax debt retirement charge of $5.0million.

On May 21, 2003, L-3 Communications initiated a fullredemption of all the outstanding $180.0 million aggregate principalamount of 81⁄2% Senior Subordinated Notes due2008 (May 1998 Notes). On June 20, 2003, we purchased and paid cash forall the outstanding May 1998 notes, including accrued interest. During2003, we recorded a pre-tax charge of $11.2 million.

On June 6,2002, L-3 Communications commenced a tender offer to purchase any andall of its $225.0 million aggregate principal amount of10 3/8% Senior Subordinated Notes due 2007. Thetender offer expired on July 3, 2002. On June 25, 2002, L-3Communications sent a notice of redemption for all of its10 3/8% Senior Subordinated Notes due 2007 thatremained outstanding after the expiration of the tender offer. Uponsending the notice, the remaining notes became due and payable at theredemption price as of July 25, 2002. During 2002, we recorded apre-tax charge of $16.2 million.

Debt Issuances.    Thetable below presents a summary of our issuances of debt obligations for2002, 2003 and 2004. Our outstanding debt obligations, all of which aresenior subordinated debt, are rated as of January 2005 as BB+ byStandard & Poor's, BB by Fitch Ratings and Ba3 byMoody's. For additional details about the terms of our debt, seeNote 8 to our consolidated financial statements.

|                                                      |  |                  |  |                 |        |          |  |                                     |         |             |  |                                 |        |        |  |        |        |           |  |                       |  |  |  |  |  |  |
|------------------------------------------------------|--|------------------|--|-----------------|--------|----------|--|-------------------------------------|---------|-------------|--|---------------------------------|--------|--------|--|--------|--------|-----------|--|-----------------------|--|--|--|--|--|--|
| Descriptionof Debt Issuances                         |  | IssueDate        |  | PrincipalAmount |        | Discount |  | CommissionsandOtherOfferingExpenses |         | NetProceeds |  | Semi-AnnualInterestPaymentDates |
|                                                 |  | (inmillions)     |
| **L-3Communications**                                |  |             |  |            |   |     |  |                                |    |        |  |                            |   |   |  |   |   |      |  |                  |
| 5 7/8%Senior Subordinated Notes due January 15,2015  |  | November12,2004  |  | $               | 650.0  |     |  | $                                   | — |        |  | $                               | 11.0   |   |  | $      | 639.0  | (1)  |  | January 15andJuly 15  |
| 6 1/8% SeniorSubordinated Notes due January 15, 2014 |  | December 22,2003 |  |            | 400.0  |     |  |                                | 7.4     |        |  |                            | 2.6    |   |  |   | 390.0  | (2)  |  | January15 and July 15 |
| 6 1/8%Senior Subordinated Notes due July  15, 2013   |  | May 21,2003      |  |            | 400.0  |     |  |                                | 1.8     |        |  |                            | 7.2    |   |  |   | 391.0  | (3)  |  | January15 and July 15 |
| 7 5/8%Senior Subordinated Notes due June 15, 2012    |  | June 28,2002     |  |            | 750.0  |     |  |                                | — |        |  |                            | 18.5   |   |  |   | 731.5  | (4)  |  | June15 andDecember 15 |
|                                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Thenet proceeds from this offering were used to redeem the 8%Senior Subordinated Notes due 2008 and to increase cash and cashequivalents. |

|     |                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The net proceeds from thisoffering were used to repay $275.0 million of borrowings outstandingunder our senior credit facilities and to increase cash and cashequivalents. |

|     |                                                                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | The net proceeds from thisoffering were used to redeem the 81⁄2% SeniorSubordinated Notes due 2008 and to increase cash and cashequivalents. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | The net proceeds from thisoffering and the concurrent sale of 14.0 million shares of our commonstock, discussed below under "Equity," wereused to (a) repay $500.0 million borrowed on March 8, 2002, under oursenior subordinated bridge loan facility, (b) repay the indebtednessoutstanding under our senior credit facilities, (c) repurchase andredeem the 10 3/8% Senior Subordinated Notes due2007 (discussed above) and (d) increase cash and cashequivalents. |

Debt Covenants and OtherProvisions.    The new senior credit facility, which was enteredinto on March 9, 2005, and senior subordinated notes agreements containfinancial covenants and other restrictive covenants. See Note 8 to ourconsolidated financial statements for a description of our debt andrelated financial covenants under our new senior credit facility. Weare in compliance with those covenants in all material respects. Thenew senior credit facility and the senior subordinated notes indentureslimit the ability of L-3 Communications to pay dividends to and makeinvestments in L-3 Holdings, subject to exceptions, as described inNote 8 to our consolidated financial statements.

The new seniorcredit facility contains cross default provisions that are triggeredwhen a payment default occurs or certain other defaults occur thatwould allow the acceleration of indebtedness, guarantee obligations orcertain other agreements of L-3 Communications or its subsidiaries inan aggregate amount of at least $40.0 million and those defaults (otherthan payment defaults and defaults that have resulted in acceleration)have not been cured after 10 days. The senior subordinated notesindentures contain cross acceleration provisions that are triggeredwhen holders of the indebtedness of L-3 Holdings, L-3 

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Communications or their restrictedsubsidiaries (or the payment of which is guaranteed by such entities)accelerate at least $10.0 million in aggregate principal amount ofthose obligations. The new senior credit facility and the seniorsubordinated notes indentures also contain other customary events ofdefault.

The borrowings under the new senior credit facility areguaranteed by L-3 Holdings and by substantially all of the materialwholly-owned domestic subsidiaries of L-3 Communications on a seniorbasis. The payments of principal and premium, if any, and interest onthe senior subordinated notes are unconditionally guaranteed, on anunsecured senior subordinated basis, jointly and severally, bysubstantially all of L-3 Communications' restricted subsidiariesother than its foreign subsidiaries. The guarantees of the seniorsubordinated notes rank pari passu with one another and are junior tothe guarantees of the new senior credit facility.

In the eventthat the long-term debt rating of L-3 Communications is reduced belowBBB−, or the equivalent. by two of the three rating agencies,Standard & Poor's Rating Services, Moody's InvestorsService, Inc., or Fitch Ratings, L-3 Holdings will be required, within45 business days, to pledge 100% of the capital stock of L-3Communications, and L-3 Communications and each subsidiary guarantorwill be required to pledge 100% of the capital stock of each oftheir material wholly-owned domestic subsidiaries and 65% oftheir material wholly-owned foreign subsidiaries, in favor of thelenders under the new senior credit facility.

Equity

In January of 2004, L-3 Holdings announcedthat its Board of Directors had declared L-3's first quarterlycash dividend of $0.10 per share, payable on March 15, 2004. L-3Holdings' Board of Directors declared three additional quarterlydividends of $0.10 per share, all of which were paid in 2004. L-3Holdings paid cash dividends of $43.4 million in aggregate toshareholders in 2004. The 2004 cash dividends were paid on March 15,June 15, September 15 and December 15.

On February 10, 2005, weannounced that our Board of Directors had increased L-3's regularquarterly cash dividend by 25% to $0.125 per share, payable onMarch 15, 2005, to shareholders of record at the close of business onFebruary 22, 2005. On February 22, 2005, L-3 Holdings had 116,333,428shares of common stock outstanding.

On June 28, 2002, L-3Holdings sold 14.0 million shares of its common stock in a publicoffering for $56.60 per share. Upon closing, we received net proceedsof $766.8 million after deducting underwriting discounts andcommissions and other offering expenses. The net proceeds from thissale and the concurrent sale of senior subordinated notes by L-3Communications were used to (i) repay $500.0 million borrowed on March8, 2002, under our senior subordinated bridge loan facility, (ii) repaythe indebtedness outstanding under our senior credit facilities, (iii)repurchase and redeem the 10 3/8% SeniorSubordinated Notes due 2007 discussed above and (iv) increase cash andcash equivalents.

On April 23, 2002, we announced that our Boardof Directors had authorized a two-for-one stock split on all shares ofL-3 Holdings common stock. The stock split entitled all shareholders ofrecord at the close of business on May 6, 2002 to receive oneadditional share of L-3 Holdings common stock for every share held onthat date. The additional shares were distributed to shareholders inthe form of a stock dividend on May 20, 2002. Upon completion of thestock spilt, L-3 Holdings had approximately 80 million shares of commonstock outstanding.

Anticipated Sources of CashFlow

Based upon our current level of operations, we believe thatour cash from operating activities, together with available borrowingsunder the new senior credit facilities, will be adequate to meet ouranticipated requirements for working capital, capital expenditures,commitments, research and development expenditures, contingent purchaseprices, program and other discretionary investments, L-3Holdings' dividends and interest payments for the foreseeablefuture. There can be no assurance, however, that our business willcontinue to generate cash flows at current levels, or that currentlyanticipated improvements will be achieved. If we are unable to generatesufficient cash flow from operations to service our debt, we may berequired to sell assets, reduce capital expenditures, refinance

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all or a portion of our existing debt orobtain additional financing. Our ability to make scheduled principalpayments or to pay interest on or to refinance our indebtedness dependson our future performance and financial results, which, to a certainextent, are subject to general conditions in or affecting the defenseindustry and to general economic, political, financial, competitive,legislative and regulatory factors beyond our control. There can be noassurance that sufficient funds will be available to enable us toservice our indebtedness, to make necessary capital expenditures and tomake discretionary investments.

ContractualObligations

The table below presents our contractualobligations at December 31, 2004.

|                                                                        |  |              |         |                            |  |                 |         |                   |  |                   |         |        |  |        |         |        |  |        |         |        |  |  |
|------------------------------------------------------------------------|--|--------------|---------|----------------------------|--|-----------------|---------|-------------------|--|-------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                   |  |         |         | Year(s)Ending December 31, |
| ContractualObligations:                                                |  | Total        |         | 2005                       |  | 2006–2007 |         | 2008 – 2009 |  | 2010andthereafter |
|                                                                   |  | (inmillions) |
| Long-termdebt(1)                                                       |  | $            | 2,200.0 |                       |  | $               | — |              |  | $                 | — |   |  | $      | — |   |  | $      | 2,200.0 |   |
| Non-cancelable operatingleases                                         |  |         | 579.5   |                       |  |            | 115.7   |              |  |              | 142.1   |   |  |   | 104.1   |   |  |   | 217.6   |   |
| Notespayable and capital leaseobligations                              |  |         | 13.9    |                       |  |            | 0.7     |              |  |              | 0.7     |   |  |   | 0.5     |   |  |   | 12.0    |   |
| Purchaseobligations(2)                                                 |  |         | 846.9   |                       |  |            | 696.6   |              |  |              | 99.0    |   |  |   | 34.9    |   |  |   | 16.4    |   |
| Otherlong-termliabilities(3)                                           |  |         | 147.7   |                       |  |            | 83.0    | (4)          |  |              | 42.7    |   |  |   | 1.8     |   |  |   | 20.2    |   |
| Contractualcommitments for earnout payments on businessacquisitions(5) |  |         | 37.4    |                       |  |            | 1.4     |              |  |              | 36.0    |   |  |   | — |   |  |   | — |   |
| Total                                                                  |  | $            | 3,825.4 |                       |  | $               | 897.4   |              |  | $                 | 320.5   |   |  | $      | 141.3   |   |  | $      | 2,466.2 |   |
|                                                                        |

|  |
|--|
|  |  |
|  |

|     |                                                          |
|-----|----------------------------------------------------------|
| (1) | Long-termdebt includes scheduled principal paymentsonly. |

|     |                                                                                                                                          |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents open purchaseorders at December 31, 2004 for amounts expected to be paid for goodsor services that are legally binding on us. |

|     |                                                                                                                                                                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Other long-term liabilities primarilyconsists of workers compensation, deferred compensation and litigationsettlement accruals for the years ending December 31, 2006 andthereafter and also includes pension and postretirement benefit plancontributions that we expect to pay in 2005. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Our pension and postretirement benefitplan funding policy is generally to contribute in accordance with costaccounting standards that affect government contractors, subject to theInternal Revenue Code and regulations thereon. For 2005, we expect tocontribute approximately $70.0 million to our pension plans and $13.0million to our postretirement benefit plans. Due to the currentuncertainty of the amounts used to compute our expected pension andpostretirement benefit plan funding, we believe it is not practicableto reasonably estimate such future funding for periods in excess of 1year. |

|     |                                                                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Represents additionalpurchase payments for business acquisitions that are contingent uponthe post-aquisition financial performance of the acquiredbusiness. |

Off Balance Sheet Arrangements

OnDecember 31, 2002, we entered into two real estate lease agreements, aslessee, with a third-party lessor, which expire on December 31, 2005and are accounted for as operating leases. On or before the leaseexpiration date, we can exercise options under the lease agreements toeither renew the leases, purchase both properties for $28.0 million, orsell both properties on behalf of the lessor (the "SaleOption"). If we elect the Sale Option, we must pay thelessor a residual guarantee amount of $22.7 million for bothproperties, on or before the lease expiration date, and at the timeboth properties are sold, we must pay the lessor a supplemental rentequal to the gross sales proceeds in excess of the residual guaranteeamount not to exceed $5.3 million.

We have a contract to provideand operate for the U.S. Air Force (USAF) a full-service trainingfacility, including simulator systems adjacent to a USAF base inOklahoma. We acted as the construction agent on behalf of thethird-party owner-lessors for procurement and construction for thesimulator systems, which were completed and delivered in August 2002.On December 31, 2002, we, as lessee, entered into an operating leaseagreement for a term of 15 years for one of the simulator systems withthe owner-lessor. At the end of the lease term, we may elect topurchase the simulator system at fair market value, which can be noless than $2.6 million and no greater than $6.4 million. If we do notelect to purchase the simulator system, then on the date of expiration,we shall pay to the lessor, as additional rent, $2.6 million and returnthe simulator system to the lessor. The aggregate non-cancelable rentalpayments 

43

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under this operating lease are $32.5million, including the additional rent of $2.6 million. On February 27,2003, we, as lessee, entered into an operating lease agreement for aterm of 15 years for the remaining simulation systems with theowner-lessor. At the end of the lease term, we may elect to purchasethe simulator systems at fair market value, which can be no less than$4.1 million and no greater than $14.5 million. If we do not elect topurchase the simulator systems, then on the date of expiration, weshall return the simulator systems to the lessor. The aggregatenon-cancelable rental payments under this operating lease are $53.3million.

Derivative FinancialInstruments

Included in ourderivative financial instruments are foreign currency forwardcontracts, foreign currency put options and interest rate swapagreements. All of our derivative financial instruments that aresensitive to market risk are entered into for purposes other thantrading.

Interest Rate Risk.    Our financialinstruments that are sensitive to changes in interest rates includeborrowings under the senior credit facilities and interest rate swapagreements, all of which are denominated in U.S. dollars. At December31, 2004, there were no outstanding borrowings under our senior creditfacilities. The interest rates on the senior subordinated notes arefixed-rate and are not affected by changes in interest rates. Dependingon interest rate levels, we may enter into interest rate swapagreements to convert certain of our fixed interest rate debtobligations to variable interest rates, or terminate any existinginterest rate swap agreements. The variable interest rate paid by us isequal to (i) the variable rate basis, plus (ii) the variable ratespread. See Note 8 to the audited consolidated financial statements fora detailed table of our interest rate swap agreement that is currentlyoutstanding, and a table that presents the activity for our terminatedinterest rate swap agreements through December 31, 2004.

Outstanding interest rate swap agreements reduced interestexpense by $4.5 million during 2004, compared to $5.5 million during2003. Interest expense was reduced by $4.2 million for 2004, comparedto $3.1 million for 2003 for amortization of deferred gains onterminated interest rate swap agreements. For every basis point(0.01%) that the six-month USD LIBOR interest rate is greaterthan 4.58%, we will incur an additional $10,000 of interestexpense above the fixed interest rate on $100.0 million of seniorsubordinated notes calculated on a per annum basis until maturity.Conversely, for every basis point that the six-month USD Libor interestrate is less than 4.58%, we will recognize interest income of$10,000 on $100.0 million of senior subordinated notes calculated on aper annum basis until maturity.

When we enter into interest rateswap agreements, we attempt to manage exposure to counterparty creditrisk by only entering into agreements with major financial institutionsthat are expected to be able to fully perform under the terms of suchagreements. Cash payments between us and the counterparties are made inaccordance with the terms of the interest rate swap agreements. Suchpayments are recorded as adjustments to interest expense. Additionaldata on our debt obligations, our applicable borrowing spreads includedin the interest rates we pay on borrowings under the senior creditfacilities and interest rate swap agreements are provided in Notes 8and 9 to our audited consolidated financial statements.

Foreign Currency Exchange Risk.    We conduct some of ouroperations outside the U.S. in functional currencies other than theU.S. dollar. Additionally, some of our U.S. and foreign operations havecontracts with customers which are denominated in currencies other thanthe functional currencies of those operations. To mitigate the riskassociated with certain of these contracts denominated in foreigncurrency we have entered into foreign currency forward contracts andput options. At December 31, 2004, the notional value of foreigncurrency forward contracts was $126.3 million and the fair value ofthese contracts was $2.1 million, which represented a liability. Therewere no foreign currency put options outstanding at December 31, 2004.We account for these contracts as cash flow hedges.

EquityPrice Risk.    Our equity investments in common stocks, jointventures and limited liability corporations are subject to equity pricerisk, including equity risk. The fair values of our investments arebased on quoted market prices for investments which are readilymarketable securities, and estimated fair value for nonreadilymarketable securities, which is generally equal to historical costunless such investment has experienced an other-than-temporaryimpairment. Both the carrying values and estimated fair values of suchinvestments amounted to $30.3 million at the end of 2004.

44

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Backlog and Orders

We definefunded backlog as the value of funded orders received from customers,less the amount of sales recognized on those funded orders. We definefunded orders as the value of contract awards received from the U.S.Government, for which the U.S. Government has appropriated funds, plusthe value of contract awards and orders received from customers otherthan the U.S. Government. The table below presents our funded backlog,percent of funded backlog at December 31, 2004 expected to be recordedas sales in 2005 and funded orders for each of our reportablesegments.

|                                              |  |                              |         |                                                                                  |  |              |         |        |  |        |      |         |  |        |         |        |  |        |         |        |  |  |
|----------------------------------------------|--|------------------------------|---------|----------------------------------------------------------------------------------|--|--------------|---------|--------|--|--------|------|---------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                         |  | FundedBacklogat December 31, |         | Percentage ofDecember 31,2004Funded BacklogExpected to beRecorded asSales in2005 |  | FundedOrders |
| ReportableSegment:                           |  | 2004                         |         | 2003                                                                             |  |         |         | 2004   |  | 2003   |
| SecureCommunications &ISR                |  | $                            | 1,351.9 |                                                                             |  | $            | 1,075.3 |   |  |   | 85.0 | %  |  | $      | 1,871.3 |   |  | $      | 1,544.1 |   |
| Training,Simulation & GovernmentServices |  |                         | 662.4   |                                                                             |  |         | 591.3   |   |  |   | 80.4 |    |  |   | 1,296.7 |   |  |   | 1,176.3 |   |
| AircraftModernization, O&M andProducts   |  |                         | 1,231.5 |                                                                             |  |         | 993.1   |   |  |   | 77.2 |    |  |   | 2,487.2 |   |  |   | 1,101.1 |   |
| SpecializedProducts                          |  |                         | 1,512.1 |                                                                             |  |         | 1,233.6 |   |  |   | 69.1 |    |  |   | 1,908.5 |   |  |   | 1,655.9 |   |
| Consolidated                                 |  | $                            | 4,757.9 |                                                                             |  | $            | 3,893.3 |   |  |   | 77.3 | %  |  | $      | 7,563.7 |   |  | $      | 5,477.4 |   |
|                                              |

Ourfunded backlog does not include the full value of our contract awardsincluding those pertaining to multi-year, cost-plus reimbursablecontracts, which are generally funded on an annual basis. Fundedbacklog also excludes the sales value of unexercised contract optionsthat may be exercised by customers under existing contracts and thesales value of purchase orders that we may receive under indefinitequantity contracts or basic ordering agreements.

Research andDevelopment

The following table presents L-3's (i)company-sponsored (independent) research and development costs and (ii)customer-funded research and development costs, which are incurred onrevenue arrangements to perform research and development services forcustomers. See Note 2 to the consolidated financial statements for adiscussion of L-3's accounting policies for research anddevelopmentcosts.

|                                                 |  |                       |        |        |  |        |        |        |  |        |        |        |  |  |
|-------------------------------------------------|--|-----------------------|--------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                                            |  | YearEnded December31, |
|                                            |  | 2004                  |        | 2003   |  | 2002   |
| Company-SponsoredResearch and DevelopmentCosts: |  |                  |   |   |  |   |   |   |  |   |   |   |
| U.S.Government ContractorBusinesses             |  | $                     | 149.4  |   |  | $      | 129.4  |   |  | $      | 124.2  |   |
| CommercialBusinesses                            |  |                  | 71.2   |   |  |   | 59.2   |   |  |   | 35.7   |   |
| Total                                           |  | $                     | 220.6  |   |  | $      | 188.6  |   |  | $      | 159.9  |   |
| Customer-FundedResearch and DevelopmentCosts    |  | $                     | 689.2  |   |  | $      | 573.1  |   |  | $      | 480.9  |   |
|                                                 |

Contingencies

We are engaged in providing products and services under contractswith the U.S. Government and, to a lesser degree, under foreigngovernment contracts, some of which are funded by the U.S. Government.All such contracts are subject to extensive legal and regulatoryrequirements, and, periodically, agencies of the U.S. Governmentinvestigate whether such contracts were and are being conducted inaccordance with these requirements. Under U.S. Government procurementregulations, an indictment by a federal grand jury could result in thesuspension for a period of time from eligibility for awards of newgovernment contracts. A conviction could result in debarment fromcontracting with the federal government for a specified term.Additionally, in the event that U.S. Government expenditures forproducts and services of the type we manufacture and provide arereduced and not offset by greater commercial sales or other newprograms or products or business acquisitions, there may be a reductionin the volume of contracts or subcontracts awarded to us. We arecurrently cooperating with the U.S. Government on severalinvestigations, none of which we anticipate will have a materialadverse effect on our consolidated financial position, results ofoperations or cash flows.

45

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We continually assess our obligationswith respect to applicable environmental protection laws. While it isdifficult to determine the timing and ultimate cost that we will incurto comply with these laws, based upon available internal and externalassessments, with respect to those environmental loss contingencies ofwhich we are aware, we believe that even without considering potentialinsurance recoveries, if any, there are no environmental losscontingencies that, individually or in the aggregate, would be materialto our consolidated financial position, results of operations or cashflows. Also, we have been periodically subject to litigation, claims orassessments and various contingent liabilities incidental to ourbusiness. We accrue for these contingencies when it is probable that aliability has been incurred and the amount of the loss can bereasonably estimated.

In connection with the IS acquisition weassumed responsibility for implementing certain corrective actionsrequired under federal law to remediate the Greenville, Texas sitelocation, and to pay a portion of those remediation costs. Thehazardous substances requiring remediation have been substantiallycharacterized, and the remediation system has been partiallyimplemented. We have estimated that our share of the remediation costwill not exceed $2.5 million, and will be incurred over a period of 25years. We have established adequate reserves for these costs.

With respect to those investigative actions, items of litigation,claims or assessments of which we are aware, we are of the opinion thatthe likelihood of loss is less than probable that, after taking intoaccount certain provisions for these matters, the ultimate resolutionof any such investigative actions, items of litigation, claims orassessments will have a material adverse effect on our consolidatedfinancial position, results of operations or cash flows. For adescription of our legal proceedings, see Item 3 — LegalProceedings.

Recently Issued Accounting Standards

InDecember of 2004, the FASB revised its FASB Statement No. 123,Accounting for Stock Based Compensation (SFAS 123) and renamedit FASB Statement No. 123, Share-Based Payment (SFAS 123R). SFAS123R requires that compensation expense relating to share-based paymenttransactions be recognized in financial statements at estimated fairvalue. The scope of SFAS 123R includes a wide range of share-basedcompensation arrangements, including share options, restricted shareplans, performance-based awards, share appreciation rights and employeeshare purchase plans. This standard replaces SFAS 123 and supersedesAPB Opinion No. 25, Accounting for Stock Issued to Employees. Weare required to adopt the provisions of SFAS 123R for the interimperiod ending September 30, 2005. We are currently assessing theprovisions of SFAS 123R. We previously elected not to adopt the fairvalue based method of accounting for stock-based employee compensationas permitted by SFAS 123. The adoption of SFAS 123R will result in therecording of non-cash compensation expenses, which we do not currentlyrecognize in our financial statements. In accordance with SFAS 123, wedisclose pro forma net income and earnings per share adjusted fornon-cash compensation expense arising from the estimated fair value ofshare-based payment transactions. For a further discussion of ouraccounting for stock-based employee compensation and disclosure of ourpro forma historical net income and earnings per share, see Note 2 tothe audited consolidated financial statements.

The U.S. enactedthe American Jobs Creation Act of 2004 (the American Jobs Creation Act)in October 2004, which contains many provisions affecting corporatetaxation. The American Jobs Creation Act phases out theextraterritorial income (ETI) exclusion benefit for export sales andphases in a new tax deduction for income from qualified domesticproduction activities (QPA) over a transition period beginning in 2005.In December 2004, the FASB issued FASB Staff Position 109-1 (FSP109-1), which provides guidance that the QPA deduction should betreated as a special income tax deduction as described in SFAS 109. Assuch, QPA has no impact on our deferred tax assets or liabilitiesexisting as of the enactment date. Rather, the QPA deduction will bereported in the period that the deductions are claimed on our incometax returns. While we have not completed our evaluation of the netimpact of the American Jobs Creation Act, we believe that the benefitfrom the phase-in of the QPA deduction will be substantially equivalentto the lost benefit from the phase-out of the ETI exclusion in 2005. Wedo not expect that the other provisions included in the American JobsCreation Act will have a significant impact on our financial position,results of operations or cash flows.

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On September 30, 2004, the EITF reached aconsensus on issue No. 04-8, The Effect of Contingently ConvertibleDebt on Diluted Earnings per Share. See "Results ofOperations" above for a description of EITF No. 04-8 andits impact on our results of operations.

On December 8, 2003,President Bush signed the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act). This Act introduces a federalsubsidy to employers who sponsor retiree health care benefit plans thatprovide a benefit that is at least actuarially equivalent to MedicarePart D. On January 21, 2005, the Centers for Medicare and MedicalServices (CMS) released final regulations implementing the Act. We havenot determined the possible effect of the final regulations on ouraccumulated postretirement benefit obligation. In May of 2004, the FASBissued FASB Staff Position 106-2, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003 (FSP 106-2). FSP 106-2 provides guidanceon the accounting for the effects of the Act and requires certaindisclosures regarding the effect of the federal subsidy provided by theAct. In accordance with FSP 106-2 we have accounted for the effect ofthe Act on a preliminary basis and disclosed the effect in Note 16 ofour audited consolidated financial statements.

Inflation

The effect of inflation on our sales and earnings has not beensignificant. Although a majority of our sales are made under long-termcontracts (revenue arrangements), the selling prices of such contracts,established for deliveries in the future, generally reflect estimatedcosts to be incurred in these future periods. In addition, some of ourcontracts provide for price adjustments through cost escalationclauses.

Forward-Looking Statements

Certain of thematters discussed concerning our operations, cash flows, financialposition, economic performance and financial condition, including inparticular, the likelihood of our success in developing and expandingour business and the realization of sales from backlog, includeforward-looking statements within the meaning of Section 27A of theSecurities Act and Section 21E of the Exchange Act.

Statementsthat are predictive in nature, that depend upon or refer to events orconditions or that include words such as"expects,""anticipates,""intends," "plans,""believes,""estimates" and similar expressions areforward-looking statements. Although we believe that these statementsare based upon reasonable assumptions, including projections of orders,sales, operating margins, earnings, cash flow, research and developmentcosts, working capital, capital expenditures and other projections,they are subject to several risks and uncertainties, and therefore, wecan give no assurance that these statements will be achieved. Suchstatements will also be influenced by factors such as:

|              |                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our dependence on the defenseindustry and the business risks peculiar to that industry, includingchanging priorities or reductions in the U.S. Government defensebudget; |

|              |                                                                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our reliance oncontracts with a limited number of agencies of, or contractors to, theU.S. Government and the possibility of termination of governmentcontracts by unilateral government action or for failure toperform; |

|              |                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the extensive legaland regulatory requirements surrounding our contracts with the U.S.Government and the results of any investigation of our contractsundertaken by the U.S. Government. |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | our ability to obtain futuregovernment contracts on a timely basis; |

|              |                                                                                                          |
|--------------|----------------------------------------------------------------------------------------------------------|
| •  | the availability of governmentfunding and changes in customer requirements for our products andservices; |

|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| •  | our significantamount of debt and the restrictions contained in our debtagreements; |

|              |                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|
| •  | our ability tocontinue to retain and train our existing employees and to recruit andhire new qualified and skilled employees; |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | our collective bargainingagreements and our ability to favorably resolve labor disputes shouldthey arise; |

|              |                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the business andeconomic conditions in the markets in which we operate, including thosefor the commercial aviation and communications markets; |

47

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|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | economicconditions, competitive environment, international business andpolitical conditions and timing of international awards andcontracts; |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | our extensive use offixed-price type contracts as compared to cost-reimbursable type andtime-and-material type contracts; |

|              |                                                                                           |
|--------------|-------------------------------------------------------------------------------------------|
| •  | our ability to identify futureacquisition candidates or to integrate acquired operations; |

|              |                                                                                                      |
|--------------|------------------------------------------------------------------------------------------------------|
| •  | the rapid change of technology andhigh level of competition in the communication equipment industry; |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | our introduction of new productsinto commercial markets or our investments in commercial products orcompanies; |

|              |                                                                                                                                                                                                              |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | pension,environmental or legal matters or proceedings, including the KalittaAir and OSI Systems matters and various other market, competition andindustry factors, many of which are beyond our control; and |

|              |                                                                                                                                                                                                                            |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the fair values of our assets,including identifiable intangible assets and the estimated fair valueof the goodwill balances for our reporting units, which can be impairedor reduced by the other factors discussed above. |

Readersof this document are cautioned that our forward-looking statements arenot guarantees of future performance and the actual results ordevelopments may differ materially from the expectations expressed inthe forward-looking statements.

As for theforward-looking statements that relate to future financial results andother projections, actual results will be different due to the inherentuncertainties of estimates, forecasts and projections and may be betteror worse than projected and such differences could be material. Giventhese uncertainties, you should not place any reliance on theseforward-looking statements. These forward-looking statements alsorepresent our estimates and assumptions only as of the date that theywere made. We expressly disclaim a duty to provide updates to theseforward-looking statements, and the estimates and assumptionsassociated with them, after the date of this filing to reflect eventsor changes or circumstances or changes in expectations or theoccurrence of anticipated events.

Item7A.    Quantitative and Qualitative Disclosures about MarketRisk

Data regarding quantitative and qualitativedisclosures related to our market risk sensitive financial instrumentsare presented in (i) "Management's Discussion andAnalysis of Results of Operations and Financial Condition —Liquidity and Capital Resources — Derivative FinancialInstruments" included herein under Item 7 and (ii) Note 9to the consolidated financial statements.

Item8.    Financial Statements and Supplementary Data

SeeFinancial Statements beginning on page F-1.

Item9.    Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure

Not applicable.

Item 9A.    Controls and Procedures

Conclusions Regarding Effectiveness of DisclosureControls and Procedures

We maintain disclosure controlsand procedures that are designed to ensure that information required tobe disclosed in our reports under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission's rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chairman and Chief Executive Officer and ourChief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosures. Any controls and procedures, no matterhow well designed and operated, can provide only reasonable assuranceof achieving the desired control objectives. Our management, with theparticipation of our Chairman and Chief Executive Officer and our ChiefFinancial Officer, has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of December 31,2004. Based upon that evaluation and subject to the foregoing, ourChairman and Chief Executive Officer and our Chief Financial Officerconcluded that the design and operation of our disclosure controls andprocedures provided reasonable assurance that the disclosure controlsand procedures are effective to accomplish their objectives.

48

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In addition, there wasno change in our internal control over financial reporting thatoccurred during the quarter ended December 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

Management's Report on Internal Control OverFinancial Reporting

As required by the SECrules and regulations for the implementation of Section 404 of theSarbanes-Oxley Act, our management is responsible for establishing andmaintaining adequate internal control over financial reporting.L-3's internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financialreporting and the preparation of our consolidated financial statementsfor external reporting purposes in accordance with generally acceptedaccounting principles. Our internal control over financial reportingincludes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of L-3,(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of consolidated financial statements inaccordance with generally accepted accounting principles, and that ourreceipts and expenditures are being made only in accordance withauthorizations of L-3's management and directors, and (3) providereasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition of our assets that couldhave a material effect on the consolidated financial statements.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detectmisstatements in our consolidated financial statements. Also,projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree or compliance with thepolicies or procedures may deteriorate.

Management assessed the effectiveness of L-3Holdings' and L-3 Communications' internal control overfinancial reporting as of December 31, 2004. In making theseassessments, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Based on ourassessments and those criteria, management determined that L-3 Holdingsand L-3 Communications maintained effective internal control overfinancial reporting as of December 31, 2004.

Our independent registered public accounting firmhas audited and issued their report on management's assessmentsof the effectiveness of our internal control over financial reportingas of December 31, 2004. See page F-2 to our consolidated financialstatements for their report.

Item 9B: OtherInformation

On March 11, 2005, our Board ofDirectors elected Michael T. Strianese as chief financial officer,effective immediately. On December 27, 2004, we announced that Mr.LaPenta had decided to retire as L-3's President and ChiefFinancial Officer effective April 1, 2005, and that he also would beleaving the L-3 Board of Directors at thattime.

As previously reported on Form 8-K datedMarch 7, 2005, the Compensation Committee of our Board of Directorsapproved the base salaries for the fiscal year ended December 31, 2005for the named executive officers of the Company as set forthbelow.

|                                                                                               |  |                 |         |        |  |  |
|-----------------------------------------------------------------------------------------------|--|-----------------|---------|--------|--|--|
| Nameand Position                                                                              |  | 2005 BaseSalary |
| Frank C.LanzaChairman and Chief ExecutiveOfficer                                              |  | $               | 975,000 |   |
| Michael T.StrianeseSenior Vice President and Chief Financial Officer                          |  | $               | 480,000 |   |
| Christopher C. CambriaSenior VicePresident, Secretary and GeneralCounsel                      |  | $               | 430,000 |   |
| Charles J.SchaferSenior Vice President, Business Operations andPresident of the ProductsGroup |  | $               | 380,000 |   |
|                                                                                               |

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PARTIII

Item 10.    Directors, Executive Officers and KeyEmployees of the Registrant

The following table providesinformation concerning the directors and executive officers of theRegistrants as of March 11,2005.

|                           |  |        |    |          |  |                                                                                               |  |  |  |  |
|---------------------------|--|--------|----|----------|--|-----------------------------------------------------------------------------------------------|--|--|--|--|
| Name                      |  | Age    |    | Position |
| FrankC. Lanza             |  |   | 73 |     |  | Chairman, ChiefExecutive Officer andDirector                                                  |
| Robert V.LaPenta          |  |   | 59 |     |  | President andDirector(1)                                                                      |
| Michael T.Strianese       |  |   | 48 |     |  | Senior Vice President and Chief FinancialOfficer                                              |
| Christopher C.Cambria     |  |   | 46 |     |  | Senior Vice President, Secretary and GeneralCounsel                                           |
| Charles J.Schafer         |  |   | 57 |     |  | Senior VicePresident and President and Chief Operating Officer of ProductsGroup               |
| James W.Dunn              |  |   | 60 |     |  | Senior Vice President and President and ChiefOperating Officer of Sensors and SimulationGroup |
| Jimmie V. Adams           |  |   | 68 |     |  | VicePresident — Washington D.C.Operations                                               |
| David T.Butler III        |  |   | 48 |     |  | Vice President — Mergers,Acquisitions and Corporate Strategy                            |
| Ralph G.D'Ambrosio        |  |   | 37 |     |  | Vice President —Finance                                                                 |
| Kenneth R. Goldstein      |  |   | 59 |     |  | VicePresident — Taxes                                                                   |
| Robert W.RisCassi         |  |   | 69 |     |  | Vice President                                                                                |
| StephenM. Souza           |  |   | 52 |     |  | Vice President —Treasurer                                                               |
| Dr. Jill J.Wittels        |  |   | 55 |     |  | Vice President — BusinessDevelopment                                                    |
| Claude R. Canizares(2)    |  |   | 59 |     |  | Director                                                                                      |
| Thomas A.Corcoran(2)(3)   |  |   | 60 |     |  | Director                                                                                      |
| RobertB.Millard(2)        |  |   | 54 |     |  | Director                                                                                      |
| JohnM.Shalikashvili(3)(4) |  |   | 68 |     |  | Director                                                                                      |
| ArthurL.Simon(2)(4)       |  |   | 72 |     |  | Director                                                                                      |
| AlanH.Washkowitz(3)(4)    |  |   | 64 |     |  | Director                                                                                      |
| JohnP.White               |  |   | 67 |     |  | Director                                                                                      |
|                           |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | RobertV. LaPenta will retire as President and Director of L-3 effective April1, 2005 and will not stand for re-election for director at our 2005stockholders meeting. Effective March 11, 2005, Michael T. Strianeseassumed the responsibilities of Chief FinancialOfficer. |

|     |                               |
|-----|-------------------------------|
| (2) | Member of the AuditCommittee. |

|     |                                      |
|-----|--------------------------------------|
| (3) | Member of the CompensationCommittee. |

|     |                                                         |
|-----|---------------------------------------------------------|
| (4) | Member of theNominating/Corporate Governance Committee. |

All ExecutiveOfficers serve at the discretion of the Board of Directors.

Theremaining information called for by Item 10 is incorporated herein byreference to the definitive proxy statement relating to the AnnualMeeting of Shareholders of L-3 Holdings, to be held on April 26, 2005.L-3 Holdings will file such definitive proxy statement with theSecurities and Exchange Commission pursuant to regulation 14A within120 days after the end of the fiscal year covered by this Form10-K.

Item 11.    Executive Compensation

Theinformation called for by Item 11 is incorporated herein by referenceto the definitive proxy statement referred to above in Item 10.

Item 12.    Security Ownership of Certain Beneficial Owners andManagement and Related                    StockholderMatters

The information called for by Item 12 is incorporatedherein by reference to the definitive proxy statement referred to abovein Item 10.

50

----

Item 13.    Certain Relationships andRelated Transactions

The information called for by Item 13 isincorporated herein by reference to the definitive proxy statementreferred to above in Item 10.

Item 14.    PrincipalAccounting Fees and Services

This information called for byItem 14 is incorporated herein by reference to the definitive proxystatement referred to above in Item 10.

Item15.    Exhibits, Financial Statement Schedules

(a)(1) Financial statements filed as part of thisreport:

|                                                                                                     |  |            |     |        |  |  |
|-----------------------------------------------------------------------------------------------------|--|------------|-----|--------|--|--|
|                                                                                                |  | PageNumber |
| Report of Independent Registered Public AccountingFirm                                              |  |       | F-2 |   |
| Consolidated Balance Sheets as ofDecember 31, 2004 and December 31, 2003                            |  |       | F-4 |   |
| Consolidated Statements of Operations for the years endedDecember 31, 2004, 2003 and 2002           |  |       | F-5 |   |
| Consolidated Statements of Shareholders' Equity for theyears ended December 31, 2004, 2003 and 2002 |  |       | F-6 |   |
| Consolidated Statements of Cash Flows for the years endedDecember 31, 2004, 2003 and 2002           |  |       | F-7 |   |
| Notesto Consolidated FinancialStatements                                                            |  |       | F-8 |   |
|                                                                                                     |

(a)(2)    FinancialStatement Schedules

Not applicable

(b)    Exhibits

Exhibits identified inparentheses below are on file with the SEC and are incorporated hereinby reference to such previousfilings.

|            |  |                                                                                                                                                                                                                                                                 |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | DescriptionofExhibit                                                                                                                                                                                                                                            |
| 3.1        |  | Certificateof Incorporation of L-3 Communications Holdings, Inc. (incorporated byreference to Exhibit 3.1 to the Company's Quarterly Report onForm 10-Q for the period ended June 30,2002).                                                                     |
| 3.2        |  | By-Laws of L-3 CommunicationsHoldings, Inc. (incorporated by reference to Exhibit 3.2 to theRegistration Statement on Form S-1 No.333-46975).                                                                                                                   |
| 3.3        |  | Certificate of Incorporationof L-3 Communications Corporation (incorporated by reference to Exhibit3.1 to L-3 Communications Corporation's Registration Statement onForm S-4 No. 333-31649).                                                                    |
| 3.4        |  | Bylaws of L-3Communications Corporation (incorporated by reference to Exhibit 3.2 toL-3 Communications Corporation's Registration Statement on FormS-4 No. 333-31649).                                                                                          |
| 4.1        |  | Form of Common StockCertificate (incorporated by reference to Exhibit 4.1 to L-3Communications Holdings' Registration Statement on Form S-1 No.333-46975).                                                                                                      |
| 10.6       |  | Employment Agreement datedApril 30, 1997 between Frank C. Lanza and L-3 Communications Holdings,Inc. (incorporated by reference to Exhibit 10.5 to L-3 CommunicationsHoldings' Registration Statement on Form S-1 No.333-46975).                                |
| 10.11      |  | 1997 Stock Option Plan forKey Employees (incorporated by reference to Exhibit 10.11 to L-3Communications Holdings' Registration Statement on Form S-1, No.333-70125).                                                                                           |
| 10.12      |  | Non-Qualified Stock OptionAgreement dated as of April 30, 1997 by and between L-3 CommunicationsHoldings, Inc. and Frank C. Lanza (incorporated by reference to Exhibit10.12 to L-3 Communications Holdings' Registration Statement onForm S-1, No. 333-70125). |
|            |

51

----

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |  |
|------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | DescriptionofExhibit                                                                                                                                                                                                                                                                                                                                                                              |
| 10.13      |  | Non-Qualified StockOption Agreement dated as of April 30, 1997 by and between L-3Communications Holdings, Inc. and Robert V. LaPenta (incorporated byreference to Exhibit 10.13 to L-3 Communications Holdings'Registration Statement on Form S-1, No.333-70125).                                                                                                                                 |
| 10.15      |  | 1998 Directors Option Planfor Non-Employee Directors of L-3 Communications Holdings, Inc(incorporated by reference to Exhibit 10.15 to the Company'sAnnual Report on Form 10-K filed on March 31,1999).                                                                                                                                                                                           |
| 10.16      |  | 1999 Long Term Performance Plandated as of April 27, 1999 (incorporated by reference to Exhibit 10.16to the Company's Annual Report on Form 10-K filed on March 30,2000).                                                                                                                                                                                                                         |
| 10.20      |  | L-3 Communications CorporationPension Plan (incorporated by reference to Exhibit 10.10 to L-3Communications Holdings' Registration Statement on Form S-1, No.333-46975).                                                                                                                                                                                                                          |
| 10.25      |  | L-3 CommunicationsCorporation Employee Stock Purchase Plan (incorporated by reference toAppendix A of L-3 Communications Holdings' Definitive ProxyStatement filed on April 2,2001).                                                                                                                                                                                                              |
| 10.32      |  | Indenture dated as of December22, 2003 ("December 2003 Indenture") amongL-3 Communications Corporation, the Guarantors named therein and TheBank of New York, as Trustee (incorporated by reference to Exhibit10.33 to the Company's Annual Report on Form 10-K for the yearended December 31, 2003).                                                                                             |
| 10.33      |  | Indenturedated as of May 21, 2003 ("May 2003Indenture") among L-3 Communications Corporation, theGuarantors named therein and The Bank of New York, as Trustee(incorporated by reference to Exhibit 4.1 to L-3 CommunicationsCorporation's Registration Statement on Form S-4, No.333-106106).                                                                                                    |
| **10.40    |  | Credit Agreement, datedas of March 9, 2005, among L-3 Communications Corporation, L-3Communications Holdings, Inc. and certain subsidiaries of the Companyfrom time to time party thereto as guarantors, the lenders from time totime party thereto, and Bank of America, N.A., as administrativeagent.                                                                                           |
| **10.55    |  | Supplemental Indenture datedas of March 10, 2005 among L-3 Communications Corporation, The Bank ofNew York, as trustee, and the guarantors named therein to the May 2003Indenture.                                                                                                                                                                                                                |
| 10.58      |  | Asset Purchase Agreementdated as of January 11, 2002 among Raytheon Company, Raytheon AustraliaPty Ltd. and L-3 Communications Corporation (incorporated by referenceto Exhibit 10.59 of the Company's Annual Report on Form 10-K forthe year ended December 31,2001).                                                                                                                            |
| 10.59      |  | Amendment dated as of March 8,2002 among Raytheon Company, Raytheon Australia Pty Ltd., L-3Communications Corporation, L-3 Communications Integrated Systems L.P.and L-3 Communications Australia Pty Ltd to the Asset PurchaseAgreement dated as of January 11, 2002 (incorporated by reference toExhibit 10.60 of the Company's Annual Report on Form 10-K for theyear ended December 31,2001). |
| 10.61      |  | Indenture dated as of November12, 2004 (the "2004 Indenture") among L-3Communications Corporation, the Guarantors and The Bank of New York, asTrustee (incorporated by reference to Exhibit 4.1 to L-3 CommunicationsCorporation's Registration Statement on Form S-4, No.333-122499).                                                                                                            |
| 10.62      |  | Indenture dated as ofJune 28, 2002, ("2002 Indenture") among L-3Communications Corporation, the guarantors named therein and The Bankof New York, as Trustee (incorporated by reference to Exhibit 4.1 ofL-3 Communications Corporation's Registration Statement on FormS-4, No. 333-99757).                                                                                                      |
|            |

52

----

|            |  |                                                                                                                                                                                                                                                                 |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | DescriptionofExhibit                                                                                                                                                                                                                                            |
| **10.63    |  | SupplementalIndenture dated as of March 10, 2005 among L-3 CommunicationsCorporation, The Bank of New York, as trustee, and the guarantors namedtherein to the June 2002 Indenture.                                                                             |
| 10.64      |  | Transaction Agreement dated as of October 21,2003 by and among L-3 Communications Corporation, RAAH I, LLC andVertex Aerospace LLC (incorporated by reference to Exhibit 10.95 to theCompany's Annual Report on Form 10-K for the year ended December31, 2003). |
| **10.65    |  | Supplemental Indenturedated as of March 10, 2005 among L-3 Communications Corporation, TheBank of New York, as trustee, and the guarantors named therein to theDecember 2003 Indenture.                                                                         |
| 10.66      |  | Amendment tothe L-3 Communications Holdings, Inc. 1999 Long Term Performance Plan(incorporated by reference to Exhibit 4.4 of L-3 Holdings'Registration Statement on Form S-8, No.333-120393).                                                                  |
| 10.67      |  | Amendment to the L-3Communications Holdings, Inc. 1999 Long Term Performance Plan(incorporated by reference to Exhibit 4.5 of L-3 Holdings'Registration Statement on Form S-8, No.333-120393).                                                                  |
| **10.68    |  | Supplemental Indenturedated as of March 10, 2005 among L-3 Communications Corporation, TheBank of New York, as trustee, and the guarantors named therein to the2004 Indenture.                                                                                  |
| **10.96    |  | Form of L-3Communications Holdings, Inc. 1998 Directors Stock Option PlanNonqualified Stock OptionAgreement.                                                                                                                                                    |
| 10.97      |  | Form of L-3 CommunicationsHoldings, Inc. 1999 Long Term Performance Plan Nonqualified StockOption Agreement (incorporated by reference to Exhibit 10.97 of theCompany's Quarterly Report on Form 10-Q for the period endedSeptember 30, 2004).                  |
| 10.98      |  | 2005 BaseSalaries for Named Executive Officers (incorporated by reference to theCompany's Form 8-K filed on March 7,2005).                                                                                                                                      |
| *11        |  | L-3 Communications Holding, Inc.Computation of Basic Earnings Per Share and Diluted Earnings PerShare.                                                                                                                                                          |
| **12       |  | Ratio of Earnings to FixedCharges.                                                                                                                                                                                                                              |
| **21       |  | Subsidiaries of theRegistrant.                                                                                                                                                                                                                                  |
| **23.1     |  | Consent ofPricewaterhouseCoopersLLP.                                                                                                                                                                                                                            |
| **31.1     |  | Certification of Chief ExecutiveOfficer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act, asamended.                                                                                                                                 |
| **31.2     |  | Certification of ChiefFinancial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of theSecurities Exchange Act, as amended.                                                                                                                                |
| **32       |  | Section 1350Certifications.                                                                                                                                                                                                                                     |
|            |

|  |
|--|
|  |  |
|  |

|   |                                                                                                                                                                                                      |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * | Theinformation required in this exhibit is presented on Note 12 to theConsolidated Financial Statements as of December 31, 2004 in accordancewith the provisions of SFAS No. 128, Earnings PerShare. |

|    |               |
|----|---------------|
| ** | Filedherewith |

53

----

Signatures

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrants have duly caused thisreport to be signed on their behalf by the undersigned, thereunto dulyauthorized, on March 15,2005.

|        |  |                                  |  |                                                  |  |  |  |  |  |  |
|--------|--|----------------------------------|--|--------------------------------------------------|--|--|--|--|--|--|
|   |  | L-3COMMUNICATIONS HOLDINGS, INC. |
|   |  | L-3 COMMUNICATIONSCORPORATION    |
|   |  | By:                              |  | /s/ Michael T.Strianese                          |
|   |  | Title:                           |  | Senior VicePresident and Chief Financial Officer |
|        |

Pursuant tothe requirements of the Securities Exchange Act of 1934, this reporthas been signed by the following persons on behalf of the Registrantson March 15, 2005 and in the capacitiesindicated.

|                          |  |                                                                               |
|--------------------------|--|-------------------------------------------------------------------------------|
| Signature                |  | Title                                                                         |
|                          |
| /s/Frank C. Lanza        |  | Chairman,Chief Executive Officer (Principal Executive Officer) andDirector    |
|                          |
| Frank C. Lanza           |
|                          |
|      |  | President andDirector                                                         |
|                          |
| Robert V.LaPenta         |
|                          |
| /s/ Michael T.Strianese  |  | SeniorVice President and Chief Financial Officer (Principal FinancialOfficer) |
|                          |
| Michael T. Strianese     |
|                          |
| /s/ Ralph G.D'Ambrosio   |  | Vice President - Finance (PrincipalAccounting Officer)                        |
|                          |
| Ralph G.D'Ambrosio       |
|                          |
| /s/ Claude R.Canizares   |  | Director                                                                      |
|                          |
| Claude R.Canizares       |
|                          |
| /s/ ThomasA. Corcoran    |  | Director                                                                      |
|                          |
| Thomas A.Corcoran        |
|                          |
| /s/ Robert B.Millard     |  | Director                                                                      |
|                          |
| Robert B.Millard         |
|                          |
| /s/ John M.Shalikashvili |  | Director                                                                      |
|                          |
| John M.Shalikashvili     |
|                          |
| /s/Arthur L. Simon       |  | Director                                                                      |
|                          |
| Arthur L.Simon           |
|                          |
| /s/ Alan H.Washkowitz    |  | Director                                                                      |
|                          |
| Alan H.Washkowitz        |
|                          |
| /s/ John P.White         |  | Director                                                                      |
|                          |
| John P.White             |
|                          |

54

----

INDEX TOFINANCIAL STATEMENTS

Consolidated Financial Statements as ofDecember 31, 2004 and 2003 and for the years ended December 31, 2004,2003 and 2002

|                                                                                                    |  |     |  |  |  |  |
|----------------------------------------------------------------------------------------------------|--|-----|--|--|--|--|
| Reportof Independent Registered Public Accounting Firm                                             |  | F-2 |
| ConsolidatedBalance Sheets as of December 31, 2004 and December 31, 2003                           |  | F-4 |
| Consolidated Statements of Operationsfor the years ended December 31, 2004, 2003 and 2002          |  | F-5 |
| Consolidated Statements ofShareholders' Equity for the years ended December 31, 2004,2003 and 2002 |  | F-6 |
| ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2003and 2002           |  | F-7 |
| Notes to ConsolidatedFinancial Statements                                                          |  | F-8 |
|                                                                                                    |

F-1

----

REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of     L-3Communications Holdings, Inc. and L-3 Communications Corporation:

We have completed an integrated audit of the 2004 consolidatedfinancial statements and of the internal control over financialreporting as of December 31, 2004 for each of L-3 CommunicationsHoldings, Inc. ("L-3 Holdings") and L-3Communications Corporation ("L-3Communications") and subsidiaries' (collectively,the "Company") and audits of the December 31,2003 and 2002 consolidated financial statements of L-3 Holdings and L-3Communications in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on ouraudits, are presented below.

Consolidated financialstatements

In our opinion, the consolidated financialstatements listed in the index appearing under Item 15(a)(1)present fairly, in all material respects, the financial position of L-3Holdings and L-3 Communications and subsidiaries at December 31, 2004and 2003**,** and the results of each of their operations and eachof their cash flows for each of the three years in the period endedDecember 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America. These financial statementsare the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis forour opinions.

As indicated in Note 12 to the consolidatedfinancial statements, in 2004 the Company adopted the provisions ofEmerging Issues Task Force Issue No. 04-8, The Effect ofContingently Convertible Debt on Diluted Earnings Per Share. Asindicated in Note 5 to the consolidated financial statements, in 2002the Company adopted the provisions of Statement of Financial AccountingStandards No. 142, Goodwill and Other Intangible Assets.

Internal control over financial reporting

Also, in ouropinion, management's assessments, included in Management'sReport on Internal Control Over Financial Reporting appearing underItem 9A, that L-3 Holdings and L-3 Communications maintained effectiveinternal control over financial reporting as of December 31, 2004 basedon criteria established in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO), are fairly stated, in all materialrespects, based on those criteria. Furthermore, in our opinion, L-3Holdings and L-3 Communications maintained, in all material respects,effective internal control over financial reporting as of December 31,2004, based on criteria established in Internal Control –Integrated Framework issued by the COSO. The Company'smanagement is responsible for maintaining effective internal controlover financial reporting and for its assessments of the effectivenessof internal control over financial reporting. Our responsibility is toexpress opinions on management's assessments and  on theeffectiveness of L-3 Holdings' and L-3 Communications'internal control over financial reporting based on our audits. Weconducted our audits of internal control over financial reporting inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained inall material respects. An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management's assessment, testingand evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we consider necessaryin the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

F-2

----

A company's internal control overfinancial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company'sinternal control over financial reporting includes those policies andprocedures that (i)  pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii)  providereasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii)  providereasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financialstatements.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPNew York, New York March 15,2005

F-3

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

CONSOLIDATED BALANCESHEETS

(in thousands, except share data)

|                                                                                                                                                                                                                                  |  |             |           |         |  |        |           |         |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                                                                                                                                                                             |  | December31, |
|                                                                                                                                                                                                                             |  | 2004        |           | 2003    |
| **ASSETS**                                                                                                                                                                                                                       |  |
| Currentassets:                                                                                                                                                                                                                   |  |        |      |    |  |   |      |    |
| Cash and cashequivalents                                                                                                                                                                                                         |  | $           | 653,419   |    |  | $      | 134,876   |    |
| Contractsinprocess                                                                                                                                                                                                               |  |        | 1,979,027 |    |  |   | 1,615,348 |    |
| Deferredincometaxes                                                                                                                                                                                                              |  |        | 127,066   |    |  |   | 152,785   |    |
| Othercurrentassets                                                                                                                                                                                                               |  |        | 48,812    |    |  |   | 34,693    |    |
| Totalcurrentassets                                                                                                                                                                                                               |  |        | 2,808,324 |    |  |   | 1,937,702 |    |
|                                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| Property,plant and equipment,net                                                                                                                                                                                                 |  |        | 556,972   |    |  |   | 519,749   |    |
| Goodwill                                                                                                                                                                                                                         |  |        | 4,054,814 |    |  |   | 3,652,436 |    |
| Identifiableintangibleassets                                                                                                                                                                                                     |  |        | 185,804   |    |  |   | 162,156   |    |
| Deferredincometaxes                                                                                                                                                                                                              |  |        | —   |    |  |   | 100,482   |    |
| Deferred debtissue costs                                                                                                                                                                                                         |  |        | 35,997    |    |  |   | 48,572    |    |
| Otherassets                                                                                                                                                                                                                      |  |        | 138,854   |    |  |   | 84,225    |    |
| Totalassets                                                                                                                                                                                                                      |  | $           | 7,780,765 |    |  | $      | 6,505,322 |    |
|                                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| **LIABILITIESAND SHAREHOLDERS'EQUITY**                                                                                                                                                                                           |  |        |      |    |  |
| Currentliabilities:                                                                                                                                                                                                              |  |        |      |    |  |   |      |    |
| Accountspayable,trade                                                                                                                                                                                                            |  | $           | 281,456   |    |  | $      | 195,548   |    |
| Accruedemploymentcosts                                                                                                                                                                                                           |  |        | 304,257   |    |  |   | 239,690   |    |
| Accruedexpenses                                                                                                                                                                                                                  |  |        | 69,678    |    |  |   | 72,880    |    |
| Billingsin excess of costs and estimatedprofits                                                                                                                                                                                  |  |        | 138,308   |    |  |   | 71,235    |    |
| Customeradvances                                                                                                                                                                                                                 |  |        | 107,334   |    |  |   | 58,078    |    |
| Incometaxes                                                                                                                                                                                                                      |  |        | 84,394    |    |  |   | 70,159    |    |
| Othercurrentliabilities                                                                                                                                                                                                          |  |        | 190,413   |    |  |   | 216,622   |    |
| Totalcurrentliabilities                                                                                                                                                                                                          |  |        | 1,175,840 |    |  |   | 924,212   |    |
|                                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| Pensionand postretirementbenefits                                                                                                                                                                                                |  |        | 409,089   |    |  |   | 371,452   |    |
| Otherliabilities                                                                                                                                                                                                                 |  |        | 128,733   |    |  |   | 101,651   |    |
| Long-termdebt                                                                                                                                                                                                                    |  |        | 2,189,806 |    |  |   | 2,457,300 |    |
| Totalliabilities                                                                                                                                                                                                                 |  |        | 3,903,468 |    |  |   | 3,854,615 |    |
| Commitmentsandcontingencies                                                                                                                                                                                                      |  |        |      |    |  |   |      |    |
|                                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| Minorityinterests                                                                                                                                                                                                                |  |        | 77,536    |    |  |   | 76,211    |    |
|                                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| Shareholders'equity:                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| L-3 Holdings'common stock; $.01 par value; authorized 300,000,000 shares,issued and outstanding 115,681,992 and 97,077,495 shares (L-3Communications' common stock; $.01 par value, 100 sharesauthorized, issued andoutstanding) |  |        | 2,780,458 |    |  |   | 1,893,488 |    |
| Retainedearnings                                                                                                                                                                                                                 |  |        | 1,095,929 |    |  |   | 757,467   |    |
| Unearnedcompensation                                                                                                                                                                                                             |  |        | (3,932    | )  |  |   | (3,622    | )  |
| Accumulatedother comprehensiveloss                                                                                                                                                                                               |  |        | (72,694   | )  |  |   | (72,837   | )  |
| Totalshareholders'equity                                                                                                                                                                                                         |  |        | 3,799,761 |    |  |   | 2,574,496 |    |
| Totalliabilities and shareholders'equity                                                                                                                                                                                         |  | $           | 7,780,765 |    |  | $      | 6,505,322 |    |
|                                                                                                                                                                                                                                  |

Seenotes to consolidated financial statements.

F-4

----

L-3 COMMUNICATIONS HOLDINGS, INC.ANDL-3 COMMUNICATIONS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(in thousands, except pershare data)

|                                                                                                  |  |                       |           |         |  |        |           |         |  |        |           |         |  |  |
|--------------------------------------------------------------------------------------------------|--|-----------------------|-----------|---------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                                             |  | YearEnded December31, |
|                                                                                             |  | 2004                  |           | 2003    |  | 2002   |
| Sales:                                                                                           |  |                  |      |    |  |   |      |    |  |   |      |    |
| Contracts,primarily U.S.Government                                                               |  | $                     | 6,155,598 |    |  | $      | 4,401,743 |    |  | $      | 3,581,271 |    |
| Commercial,primarilyproducts                                                                     |  |                  | 741,399   |    |  |   | 659,851   |    |  |   | 429,958   |    |
| Totalsales                                                                                       |  |                  | 6,896,997 |    |  |   | 5,061,594 |    |  |   | 4,011,229 |    |
| Costsandexpenses:                                                                                |  |                  |      |    |  |   |      |    |  |   |      |    |
| Contracts,primarily U.S.Government                                                               |  |                  | 5,476,742 |    |  |   | 3,863,805 |    |  |   | 3,139,013 |    |
| Commercial,primarilyproducts:                                                                    |  |                  |      |    |  |   |      |    |  |   |      |    |
| Cost ofsales                                                                                     |  |                  | 458,893   |    |  |   | 416,980   |    |  |   | 270,584   |    |
| Selling,general and administrativeexpenses                                                       |  |                  | 141,549   |    |  |   | 140,622   |    |  |   | 111,956   |    |
| Researchand developmentexpenses                                                                  |  |                  | 71,194    |    |  |   | 59,166    |    |  |   | 35,697    |    |
| Totalcosts andexpenses                                                                           |  |                  | 6,148,378 |    |  |   | 4,480,573 |    |  |   | 3,557,250 |    |
| Operatingincome                                                                                  |  |                  | 748,619   |    |  |   | 581,021   |    |  |   | 453,979   |    |
| Otherexpense (income),net                                                                        |  |                  | (7,252    | )  |  |   | (215      | )  |  |   | (4,921    | )  |
| Interestexpense                                                                                  |  |                  | 145,348   |    |  |   | 132,683   |    |  |   | 122,492   |    |
| Minorityinterests in net income of consolidatedsubsidiaries                                      |  |                  | 8,862     |    |  |   | 3,515     |    |  |   | 6,198     |    |
| Losson retirement ofdebt                                                                         |  |                  | 4,973     |    |  |   | 11,225    |    |  |   | 16,187    |    |
| Incomebefore income taxes and cumulative effect of a change in accountingprinciple               |  |                  | 596,688   |    |  |   | 433,813   |    |  |   | 314,023   |    |
| Provisionfor incometaxes                                                                         |  |                  | 214,808   |    |  |   | 156,173   |    |  |   | 111,556   |    |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  |                  | 381,880   |    |  |   | 277,640   |    |  |   | 202,467   |    |
| Cumulativeeffect of a change in accounting principle, net of income taxbenefit of $6,428 (Note5) |  |                  | —   |    |  |   | —   |    |  |   | (24,370   | )  |
| Netincome                                                                                        |  | $                     | 381,880   |    |  | $      | 277,640   |    |  | $      | 178,097   |    |
| L-3Holdings' earnings per commonshare:                                                           |  |                  |      |    |  |   |      |    |  |   |      |    |
| Basic:                                                                                           |  |                  |      |    |  |   |      |    |  |   |      |    |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  | $                     | 3.54      |    |  | $      | 2.89      |    |  | $      | 2.33      |    |
| Cumulativeeffect of a change in accountingprinciple                                              |  |                  | —   |    |  |   | —   |    |  |   | (0.28     | )  |
| Netincome                                                                                        |  | $                     | 3.54      |    |  | $      | 2.89      |    |  | $      | 2.05      |    |
| Diluted:                                                                                         |  |                  |      |    |  |   |      |    |  |   |      |    |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  | $                     | 3.33      |    |  | $      | 2.62      |    |  | $      | 2.13      |    |
| Cumulativeeffect of a change in accountingprinciple                                              |  |                  | —   |    |  |   | —   |    |  |   | (0.23     | )  |
| Netincome                                                                                        |  | $                     | 3.33      |    |  | $      | 2.62      |    |  | $      | 1.90      |    |
| L-3Holdings' weighted average common sharesoutstanding:                                          |  |                  |      |    |  |   |      |    |  |   |      |    |
| Basic                                                                                            |  |                  | 107,838   |    |  |   | 96,022    |    |  |   | 86,943    |    |
| Diluted                                                                                          |  |                  | 117,372   |    |  |   | 113,869   |    |  |   | 105,216   |    |
|                                                                                                  |

Seenotes to consolidated financial statements.

F-5

----

L-3 COMMUNICATIONS HOLDINGS, INC.ANDL-3 COMMUNICATIONS CORPORATION

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITYFor the Years EndedDecember 31, 2004, 2003 and 2002 (in thousands)

|                                                                                                                         |  |                          |         |                          |  |                  |        |                      |  |                                             |           |         |  |        |           |         |  |        |        |         |  |        |         |         |  |        |           |         |  |        |
|-------------------------------------------------------------------------------------------------------------------------|--|--------------------------|---------|--------------------------|--|------------------|--------|----------------------|--|---------------------------------------------|-----------|---------|--|--------|-----------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--------|-----------|---------|--|--------|
|                                                                                                                    |  | L-3Holdings' CommonStock |         | AdditionalPaid-inCapital |  | RetainedEarnings |        | UnearnedCompensation |  | AccumulatedOtherComprehensive Income (Loss) |           | Total   |
|                                                                                                                    |  | SharesIssued             |         | Par Value                |  |
| Balance at December31,2001                                                                                              |  |                     | 78,497  |                     |  | $                | 785    |                 |  | $                                           | 938,252   |    |  | $      | 301,730   |    |  | $      | (3,205 | )  |  | $      | (23,670 | )  |  | $      | 1,213,892 |    |
| Comprehensiveincome:                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Netincome                                                                                                               |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   | 178,097   |    |  |   |   |    |  |   |    |    |  |   | 178,097   |    |
| Minimumpension liability, net of $29,859 taxbenefit                                                                     |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (45,580 | )  |  |   | (45,580   | )  |
| Foreigncurrency translation adjustment, net of $1,626 taxbenefit                                                        |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | 65      |    |  |   | 65        |    |
| Unrealizedlosses on hedging instruments reclassified to net income from othercomprehensive loss, net of $198 taxexpense |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | 323     |    |  |   | 323       |    |
| Unrealizedlosses on hedging instruments, net of $275 taxbenefit                                                         |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (437    | )  |  |   | (437      | )  |
|                                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 132,468   |    |
| Sharesissued:                                                                                                           |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Saleof commonstock                                                                                                      |  |                     | 14,000  |                     |  |             | 140    |                 |  |                                        | 766,640   |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 766,780   |    |
| Employeesavingsplans                                                                                                    |  |                     | 529     |                     |  |             | 5      |                 |  |                                        | 28,133    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 28,138    |    |
| Businessacquisitionconsideration                                                                                        |  |                     | 229     |                     |  |             | 2      |                 |  |                                        | 10,605    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 10,607    |    |
| Exerciseof stockoptions                                                                                                 |  |                     | 970     |                     |  |             | 10     |                 |  |                                        | 30,665    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 30,675    |    |
| Employeestock purchaseplan                                                                                              |  |                     | 352     |                     |  |             | 4      |                 |  |                                        | 17,474    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 17,478    |    |
| Grantof restrictedstock                                                                                                 |  |                     |    |                     |  |             |   |                 |  |                                        | 2,231     |    |  |   |      |    |  |   | (2,231 | )  |  |   |    |    |  |   | —   |    |
| Amortizationof unearnedcompensation                                                                                     |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   | 2,134  |    |  |   |    |    |  |   | 2,134     |    |
| Other                                                                                                                   |  |                     |    |                     |  |             |   |                 |  |                                        | 30        |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 30        |    |
| Balanceat December 31,2002                                                                                              |  |                     | 94,577  |                     |  |             | 946    |                 |  |                                        | 1,794,030 |    |  |   | 479,827   |    |  |   | (3,302 | )  |  |   | (69,299 | )  |  |   | 2,202,202 |    |
| Comprehensiveincome:                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Netincome                                                                                                               |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   | 277,640   |    |  |   |   |    |  |   |    |    |  |   | 277,640   |    |
| Minimumpension liability, net of $2,313 taxbenefit                                                                      |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (4,189  | )  |  |   | (4,189    | )  |
| Foreigncurrency translation adjustment, net of $141 taxbenefit                                                          |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (245    | )  |  |   | (245      | )  |
| Unrealizedgains on hedging instruments, net of $571 taxexpense                                                          |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | 896     |    |  |   | 896       |    |
|                                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 274,102   |    |
| Sharesissued:                                                                                                           |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Employeesavingsplans                                                                                                    |  |                     | 912     |                     |  |             | 9      |                 |  |                                        | 39,485    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 39,494    |    |
| Businessacquisitionconsideration                                                                                        |  |                     | 110     |                     |  |             | 1      |                 |  |                                        | 4,968     |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 4,969     |    |
| Exerciseof stockoptions                                                                                                 |  |                     | 835     |                     |  |             | 8      |                 |  |                                        | 22,722    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 22,730    |    |
| Employeestock purchase plan                                                                                             |  |                     | 603     |                     |  |             | 6      |                 |  |                                        | 26,378    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 26,384    |    |
| Conversionof 51⁄4% Convertible Senior SubordinatedNotes                                                            |  |                     | 40      |                     |  |             | 1      |                 |  |                                        | 1,629     |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 1,630     |    |
| Grantof restrictedstock                                                                                                 |  |                     |    |                     |  |             |   |                 |  |                                        | 3,295     |    |  |   |      |    |  |   | (3,295 | )  |  |   |    |    |  |   | —   |    |
| Amortizationof unearnedcompensation                                                                                     |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   | 2,975  |    |  |   |    |    |  |   | 2,975     |    |
| Other                                                                                                                   |  |                     |    |                     |  |             |   |                 |  |                                        | 10        |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 10        |    |
| Balanceat December 31,2003                                                                                              |  |                     | 97,077  |                     |  |             | 971    |                 |  |                                        | 1,892,517 |    |  |   | 757,467   |    |  |   | (3,622 | )  |  |   | (72,837 | )  |  |   | 2,574,496 |    |
| Comprehensiveincome:                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Netincome                                                                                                               |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   | 381,880   |    |  |   |   |    |  |   |    |    |  |   | 381,880   |    |
| Minimumpension liability, net of $3,773 taxbenefit                                                                      |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (5,290  | )  |  |   | (5,290    | )  |
| Foreigncurrency translation adjustment, net of $4,541 taxexpense                                                        |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | 7,098   |    |  |   | 7,098     |    |
| Unrealizedlosses on hedging instruments, net of $1,222 taxbenefit                                                       |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | (1,911  | )  |  |   | (1,911    | )  |
| Unrealizedloss on securities, reclassified to net income from othercomprehensive loss, net of $154 taxexpense           |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   | 246     |    |  |   | 246       |    |
|                                                                                                                    |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 382,023   |    |
| Cashdividends paid on commonstock                                                                                       |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   | (43,418   | )  |  |   |   |    |  |   |    |    |  |   | (43,418   | )  |
| Sharesissued:                                                                                                           |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   |      |    |
| Employeesavingsplans                                                                                                    |  |                     | 871     |                     |  |             | 9      |                 |  |                                        | 53,828    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 53,837    |    |
| Businessacquisitionconsideration                                                                                        |  |                     | 110     |                     |  |             | 1      |                 |  |                                        | 6,981     |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 6,982     |    |
| Exerciseof stockoptions                                                                                                 |  |                     | 1,532   |                     |  |             | 15     |                 |  |                                        | 68,818    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 68,833    |    |
| Employeestock purchase plan                                                                                             |  |                     | 705     |                     |  |             | 7      |                 |  |                                        | 32,924    |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 32,931    |    |
| Conversionof 51⁄4% Convertible Senior SubordinatedNotes                                                            |  |                     | 7,317   |                     |  |             | 73     |                 |  |                                        | 292,246   |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 292,319   |    |
| Conversionof 4% Senior Subordinated Convertible Contingent Debt Securities(CODES)                                       |  |                     | 7,801   |                     |  |             | 78     |                 |  |                                        | 430,353   |    |  |   |      |    |  |   |   |    |  |   |    |    |  |   | 430,431   |    |
| Grantof restrictedstock                                                                                                 |  |                     |    |                     |  |             |   |                 |  |                                        | 3,635     |    |  |   |      |    |  |   | (3,635 | )  |  |   |    |    |  |   | —   |    |
| Amortizationof unearnedcompensation                                                                                     |  |                     |    |                     |  |             |   |                 |  |                                        |      |    |  |   |      |    |  |   | 3,325  |    |  |   |    |    |  |   | 3,325     |    |  |   |   |   |
| Other                                                                                                                   |  |                     | 269     |                     |  |             | 3      |                 |  |                                        | (2,001    | )  |  |   |      |    |  |   |   |    |  |   |    |    |  |   | (1,998    | )  |
| Balanceat December 31,2004                                                                                              |  |                     | 115,682 |                     |  | $                | 1,157  |                 |  | $                                           | 2,779,301 |    |  | $      | 1,095,929 |    |  | $      | (3,932 | )  |  | $      | (72,694 | )  |  | $      | 3,799,761 |    |
|                                                                                                                         |

Seenotes to consolidated financial statements.

F-6

----

L-3 COMMUNICATIONS HOLDINGS, INC.ANDL-3 COMMUNICATIONS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in thousands)

|                                                                           |  |                       |          |         |  |        |            |         |  |        |            |         |  |  |
|---------------------------------------------------------------------------|--|-----------------------|----------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                      |  | YearEnded December31, |
|                                                                      |  | 2004                  |          | 2003    |  | 2002   |
| **Operatingactivities:**                                                  |  |
| Netincome                                                                 |  | $                     | 381,880  |    |  | $      | 277,640    |    |  | $      | 178,097    |    |
| Cumulativeeffect of a change in accountingprinciple                       |  |                  | —  |    |  |   | —    |    |  |   | 24,370     |    |
| Losson retirement ofdebt                                                  |  |                  | 4,973    |    |  |   | 11,225     |    |  |   | 16,187     |    |
| Depreciation                                                              |  |                  | 91,541   |    |  |   | 77,340     |    |  |   | 66,230     |    |
| Amortizationof intangibles and otherassets                                |  |                  | 27,408   |    |  |   | 18,083     |    |  |   | 9,630      |    |
| Amortizationof deferred debt issue costs (included in interestexpense)    |  |                  | 7,195    |    |  |   | 7,977      |    |  |   | 7,392      |    |
| Deferredincome taxprovision                                               |  |                  | 123,409  |    |  |   | 94,747     |    |  |   | 79,092     |    |
| Minorityinterests in net income of consolidatedsubsidiaries               |  |                  | 8,862    |    |  |   | 3,515      |    |  |   | 6,198      |    |
| Contributionsto employee savings plans in L–3 Holdings' commonstock |  |                  | 53,837   |    |  |   | 39,494     |    |  |   | 28,138     |    |
| Othernon-cashitems                                                        |  |                  | (1,128   | )  |  |   | 279        |    |  |   | 515        |    |
| Subtotal                                                                  |  |                  | 697,977  |    |  |   | 530,300    |    |  |   | 415,849    |    |
| Changesin operating assets and liabilities, excluding acquiredamounts:    |  |
| Contracts inprocess                                                       |  |                  | (245,430 | )  |  |   | (120,397   | )  |  |   | (75,031    | )  |
| Othercurrentassets                                                        |  |                  | (15,298  | )  |  |   | (1,731     | )  |  |   | (15,257    | )  |
| Otherassets                                                               |  |                  | (32,953  | )  |  |   | (15,861    | )  |  |   | (16,641    | )  |
| Accountspayable                                                           |  |                  | 62,168   |    |  |   | (19,503    | )  |  |   | (21,904    | )  |
| Accruedemploymentcosts                                                    |  |                  | 54,805   |    |  |   | 20,558     |    |  |   | 30,100     |    |
| Accruedexpenses                                                           |  |                  | (3,361   | )  |  |   | 5,646      |    |  |   | (2,581     | )  |
| Billingsin excess of costs and estimatedprofits                           |  |                  | 14,071   |    |  |   | 18,325     |    |  |   | (24,744    | )  |
| Customeradvances                                                          |  |                  | 33,728   |    |  |   | (4,773     | )  |  |   | (11,272    | )  |
| Incometaxes                                                               |  |                  | 53,865   |    |  |   | 44,081     |    |  |   | 30,852     |    |
| Othercurrentliabilities                                                   |  |                  | (20,452  | )  |  |   | (36,206    | )  |  |   | (9,263     | )  |
| Pensionand postretirementbenefits                                         |  |                  | 9,455    |    |  |   | 5,088      |    |  |   | (1,670     | )  |
| Otherliabilities                                                          |  |                  | 7,214    |    |  |   | 19,008     |    |  |   | 20,517     |    |
| Allother operating activities, principally foreign currencytranslation    |  |                  | 4,882    |    |  |   | 11,528     |    |  |   | (495       | )  |
| Subtotal                                                                  |  |                  | (77,306  | )  |  |   | (74,237    | )  |  |   | (97,389    | )  |
| Netcash from operatingactivities                                          |  |                  | 620,671  |    |  |   | 456,063    |    |  |   | 318,460    |    |
| **Investingactivities:**                                                  |  |
| Business acquisitions, net of cashacquired                                |  |                  | (473,433 | )  |  |   | (1,014,439 | )  |  |   | (1,742,133 | )  |
| Proceedsfrom sale ofbusinesses                                            |  |                  | —  |    |  |   | 8,795      |    |  |   | —    |    |
| Capitalexpenditures                                                       |  |                  | (80,507  | )  |  |   | (82,874    | )  |  |   | (62,058    | )  |
| Dispositionsof property, plant andequipment                               |  |                  | 11,968   |    |  |   | 3,854      |    |  |   | 3,548      |    |
| Otherinvestingactivities                                                  |  |                  | (13,471  | )  |  |   | (3,393     | )  |  |   | (9,885     | )  |
| Netcash used in investingactivities                                       |  |                  | (555,443 | )  |  |   | (1,088,057 | )  |  |   | (1,810,528 | )  |
| **Financingactivities:**                                                  |  |
| Borrowings under revolving creditfacilities                               |  |                  | —  |    |  |   | 295,000    |    |  |   | 566,000    |    |
| Repaymentof borrowings under revolving creditfacilities                   |  |                  | —  |    |  |   | (295,000   | )  |  |   | (566,000   | )  |
| Borrowingsunder bridge loanfacility                                       |  |                  | —  |    |  |   | —    |    |  |   | 500,000    |    |
| Repaymentof borrowings under bridge loanfacility                          |  |                  | —  |    |  |   | —    |    |  |   | (500,000   | )  |
| Proceedsfrom sale of senior subordinatednotes                             |  |                  | 650,000  |    |  |   | 790,788    |    |  |   | 750,000    |    |
| Redemptionof senior subordinatednotes                                     |  |                  | (205,751 | )  |  |   | (187,650   | )  |  |   | (237,468   | )  |
| Proceedsfrom sale of L–3 Holdings' common stock,net                 |  |                  | —  |    |  |   | —    |    |  |   | 766,780    |    |
| Debtissuancecosts                                                         |  |                  | (12,619  | )  |  |   | (9,591     | )  |  |   | (19,759    | )  |
| Cashdividends paid on commonstock                                         |  |                  | (43,418  | )  |  |   | —    |    |  |   | —    |    |
| Proceedsfrom exercise of stockoptions                                     |  |                  | 52,176   |    |  |   | 14,273     |    |  |   | 17,372     |    |
| Proceedsfrom employee stock purchaseplan                                  |  |                  | 32,931   |    |  |   | 26,384     |    |  |   | 17,478     |    |
| Distributionspaid to minorityinterests                                    |  |                  | (7,537   | )  |  |   | (1,975     | )  |  |   | (2,854     | )  |
| Otherfinancingactivities                                                  |  |                  | (12,467  | )  |  |   | (215       | )  |  |   | (25,647    | )  |
| Netcash from financingactivities                                          |  |                  | 453,315  |    |  |   | 632,014    |    |  |   | 1,265,902  |    |
| Netincrease (decrease) incash                                             |  |                  | 518,543  |    |  |   | 20         |    |  |   | (226,166   | )  |
| Cashand cash equivalents, beginning of theperiod                          |  |                  | 134,876  |    |  |   | 134,856    |    |  |   | 361,022    |    |
| Cashand cash equivalents, end of theperiod                                |  | $                     | 653,419  |    |  | $      | 134,876    |    |  | $      | 134,856    |    |
|                                                                           |

Seenotes to consolidated financialstatements.

F-7

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Dollars in thousands, except per sharedata)

1.    Description of Business

L-3 Communications Holdings, Inc. conducts its operations andderives all of its operating income and cash flow from its wholly-ownedsubsidiary, L-3 Communications Corporation (L-3 Communications). L-3Communications Holdings, Inc. (L-3 Holdings and together with itssubsidiaries, L-3 or the Company) is a leading supplier of a broadrange of products used in a substantial number of aerospace and defenseplatforms. L-3 also is a major supplier of subsystems on manyplatforms, including those for secure communication networks andcommunication products, mobile satellite communications, informationsecurity systems, shipboard communications, naval power systems, fuzesand safety and arming devices for missiles and munitions, microwaveassemblies for radars and missiles, telemetry and instrumentation andairport security systems. The Company also is a prime system contractorfor aircraft modernization and operations & maintenance (O&M),Intelligence, Surveillance and Reconnaissance (ISR) collection systems,training and simulation and government support services. TheCompany's customers include the U.S. Department of Defense (DoD)and its prime contractors, the U.S. Department of Homeland Security(DHS), U.S. Government intelligence agencies, major aerospace anddefense contractors, allied foreign government ministries of defense,commercial customers and certain other U.S. federal, state and localgovernment agencies.

The Company has four reportable segments:(1) Secure Communications & ISR; (2) Training, Simulation &Government Services; (3) Aircraft Modernization, O&M and Products(formerly known as Aviation Products & Aircraft Modernization); and(4) Specialized Products.

The Secure Communications & ISRsegment provides products and services for the global ISR market aswell as secure, high data rate communications systems and equipmentprimarily for reconnaissance and surveillance applications. The Companybelieves that these systems and products are critical elements for asubstantial number of major communication, command and control,intelligence gathering and space systems. These systems and productsare used to connect a variety of airborne, space, ground and sea-basedcommunication systems and are used in the transmission, processing,recording, monitoring and dissemination functions of thesecommunication systems. The Training, Simulation & GovernmentServices segment provides maintenance and logistics support fortraining devices, communications systems support and engineeringservices, teaching and training services, and marksmanship trainingsystems and services. The Aircraft Modernization, O&M and Productssegment provides specialized aircraft modernization, upgrade andmaintenance services and logistics support services, traffic alert andcollision avoidance systems, terrain awareness warning systems, cockpitvoice and flight data recorders, advanced cockpit avionics products andruggedized custom cockpit displays. The Specialized Products segmentprovides a broad range of products, including naval warfare products,telemetry and navigation products, sensors, premium fuzing products,security systems, training devices and microwave components.

2.    Summary of Significant Accounting Policies

Basis of Presentation:    The accompanying financialstatements comprise the consolidated financial statements of L-3Holdings and L-3 Communications. L-3 Holdings' only asset is itsinvestment in the common stock of L-3 Communications, its wholly-ownedsubsidiary. L-3 Holdings' obligations of51⁄4% Convertible Senior Subordinated Notes due2009 and 4% Senior Subordinated Convertible Contingent DebtSecurities due 2011 (CODES) were converted into L-3 Holdings'common stock during 2004. L-3 Holdings has also guaranteed theborrowings under the senior credit facilities of L-3 Communications.L-3 Holdings' obligations have been jointly, severally, fully andunconditionally guaranteed by L-3 Communications and certain of itsdomestic subsidiaries, and accordingly, such debt has been reflected asdebt of L-3 Communications in its consolidated financial statements inaccordance with the U.S. Securities and 

F-8

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Exchange Commission's (SEC) StaffAccounting Bulletin (SAB) No. 54. In addition, all issuances of andconversions into L-3 Holdings' equity securities, includinggrants of stock options and restricted stock by L-3 Holdings toemployees of L-3 Communications, have been reflected in theconsolidated financial statements of L-3 Communications. As a result,the consolidated financial positions, results of operations and cashflows of L-3 Holdings and L-3 Communications are substantially thesame. See Note 20 for additional information.

Principles OfConsolidation:    The consolidated financial statements of theCompany include all wholly-owned and significant majority-ownedsubsidiaries. All significant intercompany transactions are eliminatedin consolidation. Investments in equity securities, joint ventures andlimited liability corporations over which the Company has significantinfluence but does not have voting control are accounted for by theequity method. Investments over which the Company does not havesignificant influence and do not have readily determinable fair valuesare accounted for using the cost method.

Sales And Costs AndExpenses Presentation:    The Company presents its sales andcosts and expenses in two categories on the statement of operations,"Contracts, primarily U.S. Government" and"Commercial, primarily products." Sales andcosts and expenses for the Company's businesses that areprimarily U.S. Government contractors are presented as"Contracts, primarily U.S. Government." Thesales for the Company's U.S. Government contractor businesses aretransacted using written revenue arrangements, or contracts, whichprimarily require the Company to design, develop, manufacture, modify,upgrade, test and integrate complex aerospace and electronic equipment,and to provide related engineering and technical services according tothe buyer's specifications. Such buyers are predominantly theU.S. Department of Defense and other agencies of the U.S. Government,allied foreign government ministries of defense and defense primecontractors. These contracts are covered by the American Institute ofCertified Public Accountants (AICPA) Statement of Position 81-1,Accounting for Performance of Construction — Type and certainProduction-Type Contracts (SOP 81-1), Accounting Research BulletinNo. 43, Chapter 11, Section A, Government Contracts, Cost-Plus-FixedFee Contracts (ARB 43) and Accounting Research Bulletin No. 45,Long-Term Construction Type Contracts (ARB 45). Sales reportedunder "Contracts, primarily U.S. Government"also include certain sales from contracts with domestic and foreigncommercial customers, which also are within the scope of SOP 81-1 andARB 45. Additionally, certain fixed price contacts require the Companyto perform services that are not related to the production of tangibleassets which are not covered by SOP- 81-1, and these sales arerecognized in accordance with the SEC's SAB No. 104, RevenueRecognition (SAB 104). Sales and costs and expenses for theCompany's businesses whose customers are primarily commercialbusiness enterprises are presented as "Commercial,primarily products". Most of these sales are recognized inaccordance with SAB 104, and substantially all of the related revenuearrangements are not within the scope of SOP 81-1, ARB 43 or ARB 45.The Company's commercial businesses are substantially comprisedof Aviation Communication & Surveillance Systems (ACSS), AviationRecorders, Microwave Components, Security & Detection Systems andAvionics Systems.

Cash and Cash Equivalents:    Cashequivalents consist of highly liquid investments with a maturity ofthree months or less at time of purchase.

RevenueRecognition:    The substantial majority of the Company'sdirect and indirect sales to the U.S. Government and certain of theCompany's sales to allied foreign governments and commercialcustomers are within the scope of SOP 81-1, ARB 43 and ARB 45 and salesand profits on them are recognized using percentage-of-completionmethods of accounting. Sales and profits on fixed-price productioncontracts under which units are produced and delivered in a continuousor sequential process are recorded as units are delivered based ontheir contractual selling prices (the"units-of-delivery" method). Sales andprofits on fixed-price production contracts under which units are notproduced and delivered in a continuous or sequential process, or underwhich a relatively few number of units are 

F-9

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

produced, are recorded based on the ratio oftotal actual incurred costs to date to the total estimated costs foreach contract (the "cost-to-cost" method).Under the percentage-of-completion methods of accounting, a singleestimated total profit margin is used to recognize profit for eachcontract over its entire period of performance, which can exceed oneyear. Amounts representing contract change orders or claims areincluded in sales and estimated contract values only when they can bereliably estimated and their realization is reasonably assured. Losseson contracts are recognized in the period in which they are determined.The impact of revisions of contract estimates, which may result fromcontract modifications, performance or other reasons, are recognized ona cumulative catch-up basis in the period in which the revisions aremade. Sales and profits on fixed-price contracts that require us toperform services that are not related to production of tangible assetsare recognized in accordance with SAB 104.

Sales and profits oncost-reimbursable type contracts that are within the scope of ARB 43 inaddition to SOP 81-1 are recognized as allowable costs are incurred onthe contract and become billable to the customer, at an amount equal tothe allowable costs plus the estimated profit on those costs. Theestimated profit on a cost-reimbursable contract is generally fixed orvariable based on the contract fee arrangement. Incentive and awardfees on these contracts are recorded as revenue when the conditionsunder which they are earned are reasonably assured of being met.

Sales and profits on time and material type contracts are recognizedon the basis of direct labor hours expended at fixed hourly rates plusthe cost of materials and other specified costs.

Sales onarrangements that are not within the scope of SOP 81-1, ARB 43 or ARB45 are recognized in accordance with SAB 104. Sales are recognized whenthere is persuasive evidence of an arrangement, delivery has occurredor services have been performed, the selling price to the buyer isfixed or determinable and collectibility is reasonably assured. Forfixed-price contracts that are not within the scope of SOP 81-1, whichthe performance of services are not related to production of tangibleassets and do not contain measurable units of work performed, sales arerecognized on straight-line basis over the contractual service period.For fixed-price service contracts that are not within the scope of SOP81-1, and contain measurable units of work performed, sales arerecognized when the units of work are completed.

Contractsin Process:    Contracts in process include receivables andinventories for contracts that are within the scope of SOP 81-1, ARB 43and ARB 45, as well as receivables and inventories related to othercontractual arrangements. Billed Receivables represent the uncollectedportion of amounts recorded as sales and billed to customers for allrevenue arrangements, net of allowances for uncollectible accounts.Unbilled Contract Receivables represent accumulated incurred costs andearned profits or losses on contracts in process that have beenrecorded as sales, primarily using the cost-to-cost percentage ofcompletion method, which have not yet been billed to customers.Inventoried Contract Costs represent incurred costs on contracts inprocess that have not yet been recognized as costs and expenses becausethe related sales, which are primarily recorded using theunits-of-delivery percentage of completion method, have not beenrecognized. Contract costs include direct costs and indirect costs,including overhead costs. As discussed below in Note 4, theCompany's inventoried contract costs for U.S. Governmentcontracts, and contracts with prime contractors or subcontractors ofthe U.S. Government include allocated general and administrative costs,independent research and development costs and bid and proposal costs.Contracts in Process contain amounts relating to contracts and programswith long performance cycles, a portion of which may not be realizedwithin one year. For contracts in a loss position, the unrecoverablecosts expected to be incurred in future periods are recorded inEstimated Costs in Excess of Estimated Contract Value to CompleteContracts in Process, which is a component of Other CurrentLiabilities. Under the terms of certain revenue arrangements(contracts) with the U.S. Government, the Company may receive progresspayments as it incurs costs, or milestone payments as it performs work.The U.S. Government has a security interest in the Unbilled ContractReceivables and Inventoried Contract Costs to which progress paymentshave been applied, and such progress payments are reflected as areduction 

F-10

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

of the related Unbilled Contract Receivablesand Inventoried Contract Costs. Milestone payments that have beenreceived in excess of contract costs and estimated profits on revenuearrangements are reported on the Company's balance sheet as acomponent of current liabilities as Billings in Excess of Costs andEstimated Profits. Customer Advances are reported in the balance sheetas a component of current liabilities.

Inventories other thanInventoried Contract Costs are stated at the lower of cost or marketprimarily using the average cost method.

The Company values itsacquired contracts in process on the date of acquisition at contractvalue less the Company's estimated costs to complete the contractand a reasonable profit allowance on the Company's completioneffort commensurate with the profit margin that the Company earns onsimilar contracts.

Derivative FinancialInstruments:    The Company has entered into interest rate swapagreements and foreign currency forward contracts. Derivative financialinstruments also include embedded derivatives. The Company'sinterest rate swap agreements have been accounted for as fair valuehedges. The difference between the variable interest rates paid on theinterest rate swap agreements and the fixed interest rate on the debtinstrument underlying the swap agreements is recorded as increases ordecreases to interest expense. Upon termination of an interest rateswap agreement, the cash received or paid that relates to the futurevalue of the swap agreements at the termination date is a deferred gainor loss, which is recognized as a decrease or increase to interestexpense over the remaining term of the underlying debt instrument.Foreign currency forward contracts are accounted for as cash flowhedges. Gains and losses on foreign currency forward contracts arerecognized in earnings when the underlying hedged transaction withincontracts in process affects earnings. The embedded derivatives relatedto the issuance of the Company's debt are recorded at fair valuewith changes reflected in the statement of operations.

Property, Plant and Equipment:    Property, plant andequipment are stated at cost, less accumulated depreciation.Depreciation is computed by applying principally the straight-linemethod to the estimated useful lives of the related assets. Usefullives range substantially from 10 to 40 years for buildings andimprovements and 3 to 10 years for machinery, equipment, furniture andfixtures. Leasehold improvements are amortized over the shorter of thelease term or the estimated useful life of the improvements. Whenproperty or equipment is retired or otherwise disposed of, the net bookvalue of the asset is removed from the Company's balance sheetand the net gain or loss is included in the determination of operatingincome.

Debt Issue Costs:    Costs to issue debt arecapitalized and deferred when incurred, and subsequently amortized tointerest expense over the term of the related debt using a method thatapproximates the effective interest method.

IdentifiableIntangible Assets:    Identifiable intangible assets representassets acquired as part of the Company's business acquisitionsand include customer relationships, technology and non-competeagreements. Effective January 1, 2002, the initial measurement of theseintangible assets has been based on their fair values. The valuesassigned to acquired identifiable intangible assets are determined, asof the date of acquisition, based on estimates and judgements regardingexpectations for the estimated future after-tax cash flows from thoseassets over their lives, including the probability of expected futurecontract renewals and sales, less a cost-of-capital charge, all ofwhich is discounted to present value. Identifiable intangible assetsare amortized over their estimated useful lives as the economicbenefits are consumed, ranging from 5 to 20 years.

Goodwill:    Effective January 1, 2002, the Companyaccounts for goodwill in accordance with Statement of FinancialAccounting Standards (SFAS) No. 142, Goodwill and other IntangibleAssets. The 

F-11

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

carrying value of goodwill and indefinitelived identifiable intangible assets are not amortized, but are testedfor impairment based on their estimated fair values using discountedcash flows valuation at the beginning of each year, and whenever eventsor changes in circumstances indicate that the carrying amount of theseassets may not be recoverable. Prior to January 1, 2002, goodwill wasamortized on a straight-line basis over periods ranging from 15 to 40years except for goodwill related to acquisitions consummated afterJune 30, 2001. Prior to the adoption of SFAS 142, the Company evaluatedthe carrying amount of goodwill by reference to current and estimatedprofitability and undiscounted cash flows.

IncomeTaxes:    The Company provides for income taxes using theliability method. Deferred income tax assets and liabilities reflecttax carryforwards and the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financialreporting and income tax purposes, as determined under enacted tax lawsand rates. The effect of changes in tax laws or rates is accounted forin the period of enactment. Valuation allowances for deferred taxassets are provided when it is more likely than not that the assetswill not be realized, considering, when appropriate, tax planningstrategies. 

Research and Development:    Independentresearch and development costs sponsored by the Company include bid andproposal costs, and relate to both U.S. Government products andservices and those for commercial and foreign customers. Theindependent research and development (IRAD) and bid and proposal costs(B&P) for the Company's businesses that are U.S. Governmentcontractors are recoverable indirect contract costs that are allocatedto our U.S. Government contracts in accordance with U.S. Governmentprocurement regulations, and are specifically excluded from the scopeof SFAS No. 2, Accounting for Research and Development Costs(SFAS 2). In accordance with SOP 81-1 and the AICPA Audit andAccounting Guide, Audits of Federal Government Contractors, theCompany includes IRAD and B&P costs allocated to U.S. Governmentcontracts in inventoried contract costs, and charges them to costs ofsales when the related contract sales are recognized as revenue.Research and development costs for the Company's businesses thatare not U.S. Government contractors are expensed as incurred inaccordance with SFAS 2.

Customer-funded research and developmentcosts are incurred pursuant to contracts (revenue arrangements) toperform research and development activities according to customerspecifications. These costs are not accounted for as research anddevelopment expenses in accordance with SFAS 2, and are also notindirect contract costs. Instead, these costs are direct contract costsand are expensed when the corresponding revenue is recognized, which isgenerally as the research and development services are performed.Customer-funded research and development costs are substantially allincurred under cost-reimbursable type contracts with the U.S.Government.

Computer Software Costs:    TheCompany's software development costs for computer softwareproducts to be sold, leased or marketed that are incurred afterestablishing technological feasibility for the computer softwareproducts are capitalized as other assets and amortized on a product byproduct basis using the amount that is the greater of the straight-linemethod over the useful life or the ratio of current revenues to totalestimated revenues in accordance with SFAS No. 86, Accounting forthe Costs of Computer Software to Be Sold, Leased or OtherwiseMarketed. Substantially all of the capitalized software developmentcosts pertain to products of the Company's commercial businesses.Capitalized software development costs, net of accumulatedamortization, was $34,557 at December 31, 2004 and $29,990 at December31, 2003, and is included in Other Assets on the consolidated balancesheets. Amortization expense for capitalized software development costswas $7,760 for 2004, $6,917 for 2003 and $5,209 for 2002.

Stock-Based Compensation:    The Company accounts foremployee stock-based compensation under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees. Compensation expense foremployee stock-based compensation is recognized in income based on theexcess, if any, of the fair value of L-3 Holdings' stock at thegrant 

F-12

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

date of the award or other measurement dateover the amount an employee must pay to acquire the stock. When theexercise price for stock-based compensation arrangements granted toemployees equals or exceeds the fair value of the L-3 Holdings commonstock at the date of grant, the Company does not recognize compensationexpense. The Company elected not to adopt the fair value based methodof accounting for stock-based employee compensation as permitted by theFinancial Accounting Standards Board's (FASB) Statement ofFinancial Accounting Standards (SFAS) No. 123, Accounting forStock-Based Compensation (SFAS 123), as amended by SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure-anamendment of SFAS No. 123. Had the Company adopted the fair valuebased method provisions of SFAS 123 for all of its stock-basedcompensation, it would have recorded a non-cash expense for theestimated fair value of the stock-based compensation arrangements thatthe Company has granted to its employees amortized over the vestingperiod of the grants. Stock-based employee compensation is a non-cashexpense, because the Company settles its stock-based compensationobligations by issuing shares of common stock instead of settling suchobligations with cash payments. All of the stock options granted toemployees by the Company are non-qualified stock options under U.S.income tax regulations. As discussed below in Recently IssuedAccounting Standards, SFAS 123 was revised in December 2004.

Thetable below presents the "as reported" netincome and L-3 Holdings earnings per share (EPS) and the"pro forma" net income and L-3 Holdings EPSthat the Company would have reported if the Company had elected torecognize non-cash compensation expense in accordance with the fairvalue based method of accounting of SFAS 123.

|                          |  |                       |         |        |  |        |         |        |  |        |         |        |  |  |  |  |  |  |  |  |  |  |
|--------------------------|--|-----------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|--|--|--|--|--|--|--|--|
|                     |  | YearEnded December31, |         |
|                     |  | 2004                  |         | 2003   |  | 2002   |         |
| Netincome:               |  |                  |    |   |  |   |    |   |  |   |    |   |  |
| Asreported               |  | $                     | 381,880 |   |  | $      | 277,640 |   |  | $      | 178,097 |   |  |
| Proforma                 |  |                  | 358,776 |   |  |   | 259,997 |   |  |   | 160,079 |   |  |
| L-3Holdings Basic EPS:   |  |                  |    |   |  |
| Asreported               |  | $                     | 3.54    |   |  | $      | 2.89    |   |  | $      | 2.05    |   |  |
| Proforma                 |  |                  | 3.33    |   |  |   | 2.71    |   |  |   | 1.84    |   |  |
| L-3Holdings Diluted EPS: |  |                  |    |   |  |
| Asreported               |  | $                     | 3.33    |   |  | $      | 2.62    |   |  | $      | 1.90    |   |  |
| Proforma                 |  |                  | 3.13    |   |  |   | 2.47    |   |  |   | 1.72    |   |  |
|                          |

Theassumptions used to calculate the fair value of stock options at theirgrant dates are presented in Note 14.

ProductWarranties:    Product warranty costs are accrued when revenueis recognized for the covered products. Product warranty expense isrecognized based on the terms of the product warranty and the relatedestimated costs. Accrued warranty costs are reduced as product warrantycosts are incurred.

Use of Estimates:    Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and thereported amounts of sales and costs and expenses during the reportingperiod. The most significant of these estimates and assumptions relateto contract revenue, profit and loss recognition, market values forinventories reported at lower of cost or market, pension andpostretirement benefit obligations, recoverability and valuation ofrecorded amounts of long-lived assets, identifiable intangible assets,goodwill, income taxes, including the valuations of 

F-13

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

deferred tax assets, litigation reserves andenvironmental obligations. Changes in estimates are reflected in theperiods during which they become known. Actual amounts will differ fromthese estimates.

Recently Issued AccountingStandards:    In December of 2004, the FASB revised its FASBStatement No. 123, Accounting for Stock Based Compensation (SFAS123) and renamed it FASB Statement No. 123, Share-Based Payment(SFAS 123R). SFAS 123R requires that compensation expense relating toshare-based payment transactions be recognized in financial statementsat estimated fair value. The scope of SFAS 123R includes a wide rangeof share-based compensation arrangements, including share options,restricted share plans, performance-based awards, share appreciationrights, and employee share purchase plans. This standard replaces SFAS123 and supersedes APB Opinion No. 25, Accounting for Stock Issuedto Employees. The Company is required to adopt the provisions ofSFAS 123R for the interim period ending September 30, 2005. The Companyis currently assessing the provisions of SFAS 123R. The Companypreviously elected not to adopt the fair value based method ofaccounting for stock-based employee compensation as permitted by SFAS123. The adoption of SFAS 123R will result in the recording of non-cashcompensation expenses, which is not currently recognized in theCompany's financial statements. In accordance with SFAS 123, theCompany discloses pro forma net income and earnings per share adjustedfor non-cash compensation expense arising from the estimated fair valueof share-based payment transactions. See "Stock-BasedCompensation" above for a further discussion of theCompany's accounting for stock-based employee compensation anddisclosure of pro forma historical net income and earnings pershare.

The U.S. enacted the American Jobs Creation Act of 2004(the American Jobs Creation Act) in October 2004 which contains manyprovisions affecting corporate taxation. The American Jobs Creation Actphases out the extraterritorial income (ETI) exclusion benefit forexport sales and phases in a new tax deduction for income fromqualified domestic production activities (QPA) over a transition periodbeginning in 2005. In December 2004, the FASB issued FASB StaffPosition 109-1 (FSP 109-1), which provides guidance that the QPAdeduction should be treated as a special income tax deduction asdescribed in SFAS 109. As such, QPA has no impact on theCompany's deferred tax assets or liabilities existing as of theenactment date. Rather, the QPA deduction will be reported in theperiod that the deductions are claimed on the Company's incometax returns. While the Company has not completed its evaluation of thenet impact of the American Jobs Creation Act, the Company believes thatthe benefit from the phase-in of the OPA deduction will besubstantially equivalent to the lost benefit from the phase-out of theETI exclusion in 2005. The Company does not expect that the otherprovisions included in the American Jobs Creation Act will have asignificant impact on the Company's financial position, resultsof operations or cash flows.

On September 30, 2004, the EITFreached a consensus on issue No. 04-8, The Effect of Contingently,Convertible Debt on Diluted Earnings per Share. See Note 12 for adescription of EITF No. 04-8 and its impact on the Company'sresults of operations.

On December 8, 2003, President Bushsigned the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (the Act). This Act introduces a federal subsidy toemployers who sponsor retiree health care benefit plans that provide abenefit that is at least actuarially equivalent to Medicare Part D. OnJanuary 21, 2005, the Centers for Medicare and Medical Services (CMS)released final regulations implementing the Act. The Company has notdetermined the possible effect of the final regulations on itsaccumulated postretirement benefit obligation. In May of 2004, the FASBissued FASB Staff Position 106-2, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003 (FSP 106-2). FSP 106-2 provides guidanceon the accounting for the effects of the Act and requires certaindisclosures regarding the effect of the federal subsidy 

F-14

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

provided by the Act. In accordance with FSP106-2 the Company has accounted for the effect of the Act on apreliminary basis and disclosed the effect in Note 16 of these auditedconsolidated financial statements.

Reclassifications:    Effective January 1, 2004, theCompany combined its explosives detection systems (EDS) business intoL-3 Security and Detection Systems, its IMC business into L-3Government Services, Inc., the EMP business into its ESSCO business andthe Apcom business into its Communication Systems-East business (2004Business Realignments). As a result of the 2004 Business Realignments,reclassifications between "Contracts, primarily U.S.Government" and "Commercial, primarilyproducts" have been made to the prior period sales andoperating income amounts, however, since EDS was primarily a U.S.Government contracting business prior to 2003, the sales and operatingincome for EDS were not reclassified for 2002 and 2001. Specifically,$96,456 of 2003 sales, $9,070 of 2002 sales, $26,293 of 2003 operatingincome and $6,149 of 2002 operating loss was reclassified from"Contracts, primarily U.S. Government" to"Commercial, primarily products."Additionally, $30,645 of 2003 sales, $9,239 of 2002 sales, $2,126 of2003 operating income and $7,432 of 2002 operating loss wasreclassified from "Commercial, primarilyproducts" to "Contracts, primarily U.S.Government." The 2004 Business Realignments and relatedreclassifications did not result in any changes to the Company'sconsolidated results of operations, financial position or cashflow.

3.    Acquisitions

    2004Business Acquisitions

During 2004, in separatetransactions, the Company acquired 11 businesses, for an aggregatepurchase price of $434,673 in cash, plus acquisition costs. Based onpreliminary purchase price allocations, the goodwill recognized forthese business acquisitions was $366,529, of which $110,810 is expectedto be deductible for income tax purposes. Goodwill of $183,460 waspreliminarily assigned to the Secure Communications & ISR segment,$51,639 to the Training, Simulation & Government Services segment,$60,612 to the Aircraft Modernization, O&M and Products segment and$70,818 to the Specialized Products segment. The 2004 businessacquisitions were financed with cash on hand. The purchase prices forBeamhit LLC, AVISYS, Inc., D.P. Associates, Inc., CincinnatiElectronics, Inc., BAI Aerosystems, Inc. and L-3 Electronic Systems aresubject to adjustment based on the closing date net assets or networking capital of the respective acquired business. The Companycompleted the business acquisitions listed below during 2004:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Substantially all of the assets and certainspecified liabilities of Beamhit LLC on May 13, 2004, for $40,000 incash, plus additional consideration contingent upon the financialperformance of Beamhit for the years ending December 31, 2005, 2006 and2007. Any such additional consideration will be accounted for asgoodwill. Beamhit is a developer and supplier of laser marksmanshiptraining systems, and adds a series of new products to theCompany's expanding role in readiness training and simulationproducts and services; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Substantially allof the assets and liabilities of Brashear, LP on June 14, 2004, for$36,290 in cash. Brashear is a developer and supplier of complexelectro-optical systems, including laser ranging and tracking systems,test range instrumentation, telescope systems, naval fire controlsystems and laser beam directors for military and internationalcustomers. Brashear adds new capabilities to the Company's rolein advanced optics; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Substantially allof the assets and liabilities of the Commercial Infrared business ofRaytheon Company (Raytheon) on November 9, 2004, for $44,212 in cash.The business was renamed L-3 Communications Infrared Products (InfraredProducts). Infrared Products is a leading producer of uncooled thermalimaging products for the public safety, fire and rescue, security,transportation and industrial markets; |

F-15

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|              |                                                                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding stock of Cincinnati Electronics, Inc. on December 9, 2004,for $176,438 in cash. Cincinnati Electronics designs and manufactures arange of infrared (IR) detectors, imaging sensors, missile warningsystems, space launch vehicle products and spacecraft electronics; |

|              |                                                                                                                                                                                                                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding stock of theCanadian Navigation Systems and Space Sensors System business ofNorthrop Grumman on December 30, 2004, for $65,000 in cash. Thebusiness was renamed L-3 Electronics Systems (LES). LES designs,develops and integrates electronic products and systems for aviationand ground vehicles, primarily in Canada and the United States; and |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | AVISYS, Inc., the General Electric DriverDevelopment (GEDD) business, Bay Metals and Fabrication, Inc., BAIAerosystems (BAI), certain video security product lines of SarnoffCorporation and D.P. Associates, Inc. for an aggregate purchase priceof $72,733 in cash, plus additional consideration, expected not toexceed $31,500, which is contingent upon the financial performance forcertain of these acquired businesses for the years ending December 31,2005 and 2006. |

    2003 Business Acquisitions

Vertex Aerospace.    On December 1, 2003, the Companyacquired Vertex Aerospace LLC (Vertex). In May of 2004, the Company andthe seller of Vertex Aerospace agreed to a final purchase price of$664,750, based on the closing date net assets of Vertex Aerospace. Thefinal purchase price, excluding acquisition costs, represents an$11,500 increase to the contractual consideration paid prior to May of2004. Based on the final purchase price allocation for Vertex, goodwillof $498,643 was assigned to the Aircraft Modernization, O&M andProducts segment and approximately $440,362 is expected to bedeductible for income tax purposes. Vertex is a leading provider ofaerospace and other technical services to the U.S. Department ofDefense and other U.S. Government agencies. Vertex's servicesinclude logistics support, modernization and maintenance for fixed androtary wing aircraft, supply chain management and pilot training.Vertex's engineering and technical staff support tactical, cargoand utility aircraft and other defense-related platforms.

F-16

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The table below presents a summary of thefinal purchase price allocation for Vertex, which includes the finalappraisals and other valuations of fair values of the assets acquiredand liabilities assumed on the closing date of the acquisition(December 1, 2003).

|                              |  |        |         |        |  |  |
|------------------------------|--|--------|---------|--------|--|--|
| Cash                         |  | $      | 2,187   |   |
| Contractsin process          |  |   | 163,494 |   |
| Deferred incometaxes         |  |   | 14,059  |   |
| Other currentassets          |  |   | 1,490   |   |
| Property, plant andequipment |  |   | 28,563  |   |
| Goodwill                     |  |   | 498,643 |   |
| Intangibleassets             |  |   | 49,335  |   |
| Deferred incometaxes         |  |   | 939     |   |
| Total assetsacquired         |  |   | 758,710 |   |
| Currentliabilities           |  |   | 79,624  |   |
| Long-termliabilities         |  |   | 11,114  |   |
| Totalliabilities assumed     |  |   | 90,738  |   |
| Netassets acquired           |  | $      | 667,972 |   |
|                              |

During2003, in separate transactions, the Company also acquired fivebusinesses for an aggregate consideration of $353,611 in cash, plusacquisition costs. These acquisitions were financed with cash on hand.Based on the final purchase price allocations, the goodwill recognizedfor these business acquisitions was $315,582, of which $300,631 isexpected to be deductible for income tax purposes. Goodwill of $44,603was assigned to the Secure Communications & ISR segment, $246,430was assigned to the Aircraft Modernization, O&M and Productssegment and $24,549 was assigned to the Specialized Products segment.The Company completed the business acquisitions listed below during2003:

|              |                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Certain defense and aerospaceassets of IPICOM, Inc. (IPICOM) on December 10, 2003. This acquisitionadds innovative optical networking technology to the Company'sexisting and growing ISR and secure communicationsbusinesses; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | The net assets of theMilitary Aviation Services (MAS) business of Bombardier, Inc. onOctober 31, 2003. MAS provides a full range of technical services inthe areas of aircraft maintenance, repair and upgrade for militaryaircraft, and the refurbishment and modernization of selectedcommercial aircraft. Its customers include the Canadian Armed Forces,the DoD, aerospace and defense prime contractors and foreign militaryorganizations; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstandingcommon stock of Klein Associates, Inc. (Klein), a business unit of OYOCorporation of Japan, on September 30, 2003. Klein designs,manufactures and supports side-scan sonar, sub-bottom profilers andrelated instruments and accessories for undersea search and survey,including intrusion detection systems for port security applications.Klein provides complimentary product capabilities, which the Companyhas integrated into L-3's port and maritime security systemsofferings. Klein is also synergistic with the Company's acousticundersea warfare products; |

|              |                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding common stock of Aeromet, Inc. (Aeromet), on May 30, 2003.Aeromet designs, develops and integrates infrared and optical systemsfor airborne ISR. The acquisition advances the Company's strategyto expand its electro-optical and infrared product lines and providesthe Company with the ability to apply Aeromet's technology toL-3's current ISR products; and |

F-17

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|              |                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding common stock of the avionics systems (Avionics Systems)business of Goodrich Corporation, on March 28, 2003. Avionics Systemsdevelops and manufactures innovative avionics solutions forsubstantially all segments of the aviation market, and sells itsproducts to the military, business jet, general aviation, rotary wingaircraft and air transport markets. |

    2002 BusinessAcquisitions

Aircraft Integration Systems.    OnMarch 8, 2002, the Company acquired the assets of Aircraft IntegrationSystems (AIS), a division of Raytheon Company (Raytheon), forapproximately $1,148,700 in cash, which includes $1,130,000 for theoriginal contract purchase price, and an increase to the contractpurchase price of approximately $18,700 related to additional netassets received at closing, plus acquisition costs. Following theacquisition, the Company changed AIS's name to L-3 CommunicationsIntegrated Systems (IS). The purchase price is subject to adjustmentbased on the IS closing date net tangible book value, as defined in theasset purchase agreement. Based on the purchase price allocation forIS, the goodwill recognized was $765,879, of which $514,728 is expectedto be deductible for income tax purposes. Goodwill of $520,798 wasassigned to the Secure Communications & ISR segment and $245,081was assigned to the Aircraft Modernization, O&M and Productssegment. The Company acquired IS because it is a long-standing supplierof critical communication and signal intelligence and unique sensorsystems for special customers within the U.S. Government.

TheCompany is continuing its discussions with Raytheon regarding theadjustment of the purchase price for the acquisition of AIS. The AISpurchase price submitted by Raytheon to the Company amounted toapproximately $1,163,000. The Company believes that, in accordance withthe terms of the AIS asset purchase agreement concerning the closingdate balance sheet, the purchase price for AIS submitted by Raytheonshould be reduced by $100,000 to $1,063,000. In accordance with theasset purchase agreement, the Company and Raytheon are in the formalprocess of settling the disagreement and engaging a neutral accountantto arbitrate the final purchase price. Any amount received by theCompany for a reduction to the AIS purchase price will be recorded as areduction to goodwill.

During 2002, in separate transactions,the Company also acquired ten businesses for an aggregate considerationof $572,735, plus acquisition costs. Based on the final purchase priceallocations, the goodwill recognized for the business acquisitions was$412,237, of which $76,193 is expected to be deductible for income taxpurposes. Goodwill of $36,435 was assigned to the Secure Communications& ISR segment, $110,376 was assigned to the Training, Simulation& Government Services segment and $265,426 was assigned to theSpecialized Products segment. The Company completed the businessacquisitions listed below during2002.

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding commonstock of the detection systems business of PerkinElmer (DetectionSystems) on June 14, 2002. Detection Systems offers X-ray screening forseveral major security applications, including: (1) aviation systemsfor checked and oversized baggage, break bulk cargo and air freight;(2) port and border applications including pallets, break bulk and airfreight; and (3) facility protection, such as parcels, mail and cargo.Detection Systems has a broad range of systems and technology.Detection Systems' customer base includes major airlines andairports, a number of domestic agencies, such as the U.S. CustomsService, U.S. Marshals Service, U.S. Department of Agriculture and U.S.Department of State, and international authorities throughout Europe,Asia and South America; |

|              |                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding common stock of Telos Corporation (Telos), a businessincorporated in California, which provides software development forcommand, control and communications and other related services formilitary and national security requirements, on July 19,2002; |

F-18

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|              |                                                                                                                                                                                                                                                              |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding common stock of ComCept, Inc. (ComCept), a company withnetwork-centric warfare capabilities, including requirementsdevelopment, modeling, simulation, communications and systemsdevelopment and integration for ISR, on July 31, 2002; |

|              |                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding common stock ofTechnology, Management and Analysis Corporation (TMA), a provider ofprofessional services to the DoD, primarily in support of the Navalsurface and combat fleet, on September 23, 2002. The core competenciesof TMA include engineering, logistics, ship test and trials, networkengineering and support and hardware and softwareproducts; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | The net assets of NorthropGrumman's Electron Devices and Displays-Navigation Systems-SanDiego businesses on October 25, 2002. Electron Devices is a supplier ofmicrowave power devices to major prime contractors on key militaryprograms, including missile seekers, aircraft navigation and landingsystems, airborne and ground radar and electronic warfare andcommunications systems. Following the acquisition, the Company changedthe name of Electron Devices to L-3 Communications Electron Devices(Electron Devices). Displays-Navigation Systems is a supplier ofruggedized displays and computer and electronic systems for bothmilitary and commercial applications. Following the acquisition, theCompany changed the name of Displays-Navigation Systems to L-3Communications Ruggedized Command and Control Solutions (RuggedizedCommand & Control); |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of theoutstanding common stock of Wolf Coach, Inc. (Wolf Coach), a producerof mobile communications vehicles, which are sold to customers in thetelevision industry, the military and to the homeland defense market,on November 1, 2002. The acquisition is subject to additional purchaseprice not to exceed $1,350 which is contingent upon the financialperformance of Wolf Coach for the fiscal year ending October 31, 2005.Any such additional consideration will be accounted for asgoodwill; |

|              |                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding commonstock of International Microwave Corporation (IMC), a globalcommunications company that provides wireless communications, networksupport services, information technology, defense communications andenhanced surveillance systems, on November 8, 2002; |

|              |                                                                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding common stock ofWestwood Corporation (Westwood), a supplier of shipboard power control,switchgear and power distribution systems to the United States Navy,Army, Air Force and Coast Guard, on November 13, 2002; |

|              |                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding common stock ofWescam Inc. (Wescam), a designer and manufacturer of systems fordefense applications that capture images from mobile platforms andtransmit them in real time to tactical command centers forinterpretation and for commercial broadcast applications to productionfacilities; and |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstandingcommon stock of Ship Analytics, Inc. (Ship Analytics), a producer ofcrisis management software that provides command and control forhomeland security applications, on December 19, 2002. Ship Analyticsalso designs, manufactures and operates real-time simulation systemsfor critical shipboard operations for commercial maritime and navalcustomers. The acquisition is subject to additional purchase price notto exceed $4,500, which is contingent upon the financial performance ofShip Analytics for the year ending December 31, 2005. Any suchadditional consideration will be accounted for as goodwill. |

Additionally, during the years ended December 31, 2004, 2003 and2002, the Company purchased other businesses, which, individually andin the aggregate, were not material to the Company's consolidatedresults of operations, financial position or cash flows in the yearacquired.

F-19

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Substantially all of the acquisitionswere initially financed with cash on hand or borrowings under theCompany's bank credit facilities.

All of the businessacquisitions are included in the Company's results of operationsfrom their respective effective dates of acquisition. The assets andliabilities recorded in connection with the purchase price allocationsfor the acquisitions of Beamhit, Brashear, AVISYS, GEDD, Bay MetalsInfrared Products, Cincinnati Electronics, LES, D.P. Associates andBAI, all of which were acquired in 2004, are based upon preliminaryestimates of fair values for contracts in process, inventories,estimated costs in excess of estimated contract value to completecontracts in process in a loss position, identifiable intangibles,goodwill, plant and equipment, and deferred income taxes. Actualadjustments will be based on the final purchase prices, including thepayment of contingent consideration and final appraisals and otheranalyses of fair values, which are in process. The Company expects tocomplete the preliminary purchase price allocations in 2005. TheCompany does not expect the differences between the preliminary andfinal purchase price allocations for these acquisitions to bematerial.

    Unaudited Pro Forma Statement of OperationsData

Assuming the business acquisitions the Companycompleted during 2004 occurred on January 1, 2004, the unaudited proforma sales, net income and diluted earnings per share would have beenapproximately $7,184,700, $381,100 and $3.32, respectively, for theyear ended December 31, 2004.

Assuming the business acquisitionsthe Company completed during 2004 and 2003 occurred on January 1, 2003,the unaudited pro forma sales, net income and diluted earnings pershare would have been approximately $6,160,800, $291,200 and $2.74,respectively, for the year ended December 31, 2003.

Assuming thebusiness acquisitions the Company completed during 2003 and 2002occurred on January 1, 2002, the unaudited pro forma sales,income before cumulative effect of a change in accounting principle,net income and diluted earnings per share would have been approximately$5,474,500, $198,500, $174,100 and $1.74, respectively, for the yearended December 31, 2002.

The pro forma results disclosed in thepreceding paragraphs are based on various assumptions and are notnecessarily indicative of the results of operations that would haveoccurred had the Company completed the acquisitions on January 1, 2002,January 1, 2003 and January 1, 2004.

    BusinessAcquisitions Completed After the Balance Sheet Date

OnFebruary 3, 2005, the Company acquired substantially all of the MarineControls division of CAE. The remaining business operations of theMarine Controls division will be acquired following the receipt ofrequired approvals. On February 25, 2005, the Company acquired thePropulsion Systems business unit of General Dynamics. On February 28,2005, the Company acquired the Electron Dynamic Devices business of theBoeing Company. The aggregate purchase price paid in cash for thesebusiness acquisitions was $471,807. The Company financed theseacquisitions using cash on hand.

F-20

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

4.    Contracts in Process

Thecomponents of contracts in process are presented in the table below.The unbilled contract receivables, inventoried contract costs andunliquidated progress payments are principally related to contractswith the U.S. Government and prime contractors or subcontractors of theU.S.Government.

|                                                          |  |             |           |         |  |        |           |         |  |  |
|----------------------------------------------------------|--|-------------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                     |  | December31, |
|                                                     |  | 2004        |           | 2003    |
| Billedreceivables, less allowances of $16,541 and$25,221 |  | $           | 781,931   |    |  | $      | 637,254   |    |
| Unbilledcontractreceivables                              |  |        | 810,720   |    |  |   | 676,604   |    |
| Less:unliquidated progresspayments                       |  |        | (179,276  | )  |  |   | (193,672  | )  |
| Unbilledcontract receivables,net                         |  |        | 631,444   |    |  |   | 482,932   |    |
| Inventoriedcontract costs,gross                          |  |        | 432,741   |    |  |   | 353,247   |    |
| Less:unliquidated progresspayments                       |  |        | (50,927   | )  |  |   | (17,624   | )  |
| Inventoriedcontract costs,net                            |  |        | 381,814   |    |  |   | 335,623   |    |
| Inventoriesat lower of cost ormarket                     |  |        | 183,838   |    |  |   | 159,539   |    |
| Totalcontracts inprocess                                 |  | $           | 1,979,027 |    |  | $      | 1,615,348 |    |
|                                                          |

UnbilledContract Receivables.    Unbilled contract receivables representaccumulated incurred costs and earned profits on contracts that havebeen recorded as sales, which have not yet been billed to customers.The majority of unbilled contract receivables arise from thecost-to-cost percentage-of-completion (POC) method, which is used torecord sales on certain fixed-price contracts as costs are incurred atamounts equal to the ratio of cumulative costs incurred to totalestimated costs at completion, multiplied by the total estimatedcontract revenue. Unbilled contract receivables from fixed price-typecontracts are converted to billed receivables when amounts are invoicedto customers according to contractual billing terms, which generallyoccur when deliveries or other performance milestones are completed. Toa lesser extent, unbilled contract receivables also arise from costreimbursable-type contracts and time & material-type contracts, forrevenue amounts that have not been billed by the end of the accountingperiod due to the timing of preparation of invoices for customers. TheCompany believes that approximately 89% of the unbilled contractreceivables at December 31, 2004 will be billed and collected withinone year.

Unliquidated ProgressPayments.    Unliquidated progress payments arise from fixedprice-type contracts with the U.S. Government that contain progresspayment clauses, and represent progress payment invoices which havebeen collected in cash, but have not yet been liquidated. Progresspayment invoices are billed to the customer as contract costs areincurred at an amount generally equal to 75% to 80% ofincurred costs. Unliquidated progress payments are liquidated asdeliveries or other contract performance milestones are completed, atan amount equal to a percentage of the contract sales price for theitems delivered or work performed, based on a contractual liquidationrate. Therefore, unliquidated progress payments are a contra assetaccount, and are classified against unbilled contract receivables ifrevenue for the underlying contract is recorded using the cost-to-costPOC method, and against inventoried contract costs if revenue isrecorded using the units-of-delivery POC method.

InventoriedContract Costs.    In accordance with SOP 81-1 and the AICPAAudit and Accounting Guide, Audits of Federal GovernmentContractors, the Company's Inventoried Contract Costs includeselling, general and administrative (SG&A) costs, independentresearch and development (IRAD) costs and bid and proposal (B&P)costs allocated to U.S. Government contracts (revenue arrangements) forwhich the U.S. Government is the end customer, because they arereimbursable indirect contract costs on 

F-21

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

revenue arrangements with the U.S.Government, pursuant to U.S. Government procurement regulations. TheCompany accounts for SG&A, IRAD and B&P costs allocated to U.S.Government contracts as product costs, instead of period expenses, andcharges them to costs of sales when sales are recognized. Therefore,such allocated indirect costs are included in inventoried contractcosts prior to the recognition of cost of sales for the related revenuearrangement (contract).

The table below presents a summary ofSG&A, IRAD and B&P costs included in inventoried contract costsand the changes to them, including amounts used in the determination ofcosts and expenses for "Contracts, primarily U.S.Government." The cost data in the table below does notinclude the SG&A and research and development expenses for theCompany's businesses that are primarily not U.S. governmentcontractors, which are separately presented on the statements ofoperations under costs and expenses for "Commercial,primarily products" and are expensed asincurred.

|                                                                                                            |  |                       |          |         |  |        |          |         |  |        |          |         |  |  |
|------------------------------------------------------------------------------------------------------------|--|-----------------------|----------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                                                                                       |  | YearEnded December31, |
|                                                                                                       |  | 2004                  |          | 2003    |  | 2002   |
| Amountsincluded in inventoried contract costs at beginning ofperiod                                        |  | $                     | 38,024   |    |  | $      | 52,253   |    |  | $      | 19,970   |    |
| Add:Amounts included in acquired inventoried contract        costs |  |                  | 5,555    |    |  |   | —  |    |  |   | 34,417   |    |
| Amountsincurred during theperiod(1)                                                                        |  |                  | 582,933  |    |  |   | 485,694  |    |  |   | 430,622  |    |
| Less:Amounts charged to costs and expenses during the period                                               |  |                  | (582,848 | )  |  |   | (499,923 | )  |  |   | (432,756 | )  |
| Amountsincluded in inventoried contract costs at end ofperiod                                              |  | $                     | 43,644   |    |  | $      | 38,024   |    |  | $      | 52,253   |    |
|                                                                                                            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------|
| (1) | Incurred costs include IRAD and B&P costs of $149,388 for2004, $129,366 for 2003, and $124,248 for2002. |

Inventories at Lower of Cost orMarket.    The table below presents the components ofInventories at lower of cost or market at December 31, 2004 and2003.

|                                            |  |        |         |        |  |        |         |        |  |  |
|--------------------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                       |  | 2004   |         | 2003   |
| Finishedgoods                              |  | $      | 42,577  |   |  | $      | 44,254  |   |
| Work inprocess                             |  |   | 51,302  |   |  |   | 49,559  |   |
| Raw materials,components andsub-assemblies |  |   | 89,959  |   |  |   | 65,726  |   |
| Total                                      |  | $      | 183,838 |   |  | $      | 159,539 |   |
|                                            |

5.    Goodwilland Other Intangible Assets

Effective January 1, 2002, theCompany ceased recording goodwill amortization expense and begantesting goodwill for impairment based on estimated fair values at thebeginning of the year using a discounted cash flows valuation. Based onthe estimated fair values of the Company's reporting units as ofJanuary 1, 2002, the goodwill for certain space and broadbandcommercial communications businesses included in the SpecializedProducts segment was impaired. In the first quarter of 2002, theCompany completed its valuation of the assets and liabilities for thesebusinesses and recorded an impairment charge of $24,370, net of a$6,428 income tax benefit. The impairment charge was recorded as acumulative effect of a change in accounting principle effective January1, 2002, in accordance with the adoption provisions of SFAS No.142.

F-22

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Goodwill.    The table belowpresents the changes in goodwill allocated to each of our reportablesegments during the year ended December 31, 2004.

|                         |  |                              |         |                                               |  |                                           |         |                     |  |                   |           |        |  |        |           |        |  |        |           |        |  |  |
|-------------------------|--|------------------------------|---------|-----------------------------------------------|--|-------------------------------------------|---------|---------------------|--|-------------------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                    |  | SecureCommunications&ISR |         | Training, Simulation & GovernmentServices |  | AircraftModernization,O&M andProducts |         | SpecializedProducts |  | ConsolidatedTotal |
| BalanceJanuary 1,2004   |  | $                            | 726,880 |                                          |  | $                                         | 511,651 |                |  | $                 | 1,350,818 |   |  | $      | 1,063,087 |   |  | $      | 3,652,436 |   |
| Businessacquisitions    |  |                         | 193,739 |                                          |  |                                      | 52,414  |                |  |              | 78,300    |   |  |   | 77,925    |   |  |   | 402,378   |   |
| BalanceDecember 31,2004 |  | $                            | 920,619 |                                          |  | $                                         | 564,065 |                |  | $                 | 1,429,118 |   |  | $      | 1,141,012 |   |  | $      | 4,054,814 |   |
|                         |

Duringthe year ended December 31, 2004, goodwill was increased by a total of$402,378, which was comprised of (i) $366,529 for business acquisitionscompleted during the year ended December 31, 2004, (See Note 3) (ii)$36,034 for increases to purchase price payments for certain businessacquisitions completed prior to January 1, 2004, related to the finalclosing date net assets and contingent purchase price adjustments orearnouts, which were resolved during the period, and (iii) a decreaseof $185 primarily related to final estimates of fair value for assetsacquired and liabilities assumed in connection with businessacquisitions completed prior to January 1, 2004.

IdentifiableIntangible Assets.    The gross carrying amount and accumulatedamortization balances of the Company's identifiable intangibleassets that are subject to amortization are presented in the tablesbelow. The Company has no indefinite-lived identifiable intangibleassets.

|                                                                |  |                     |         |                         |  |                   |        |        |  |        |         |        |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------------------------|--|---------------------|---------|-------------------------|--|-------------------|--------|--------|--|--------|---------|--------|--|--|--|--|--|--|--|--|--|--|
|                                                           |  | December31,2004     |         |
|                                                           |  | GrossCarryingAmount |         | AccumulatedAmortization |  | NetCarryingAmount |        |
| Identifiableintangible assets that are subject toamortization: |  |                |    |                    |  |              |   |   |  |   |    |   |  |
| Customerrelationships                                          |  | $                   | 164,041 |                    |  | $                 | 17,709 |   |  | $      | 146,332 |   |  |
| Technology                                                     |  |                | 43,595  |                    |  |              | 5,303  |   |  |   | 38,292  |   |  |
| Non-competeagreements                                          |  |                | 2,000   |                    |  |              | 820    |   |  |   | 1,180   |   |  |
| Total                                                          |  | $                   | 209,636 |                    |  | $                 | 23,832 |   |  | $      | 185,804 |   |  |
|                                                                |

|                                                                |  |                     |         |                         |  |                   |        |        |  |        |         |        |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------------------------|--|---------------------|---------|-------------------------|--|-------------------|--------|--------|--|--------|---------|--------|--|--|--|--|--|--|--|--|--|--|
|                                                           |  | December31,2003     |         |
|                                                           |  | GrossCarryingAmount |         | AccumulatedAmortization |  | NetCarryingAmount |        |
| Identifiableintangible assets that are subject toamortization: |  |                |    |                    |  |              |   |   |  |   |    |   |  |
| Customerrelationships                                          |  | $                   | 154,770 |                    |  | $                 | 6,519  |   |  | $      | 148,251 |   |  |
| Technology                                                     |  |                | 14,500  |                    |  |              | 2,325  |   |  |   | 12,175  |   |  |
| Non-competeagreements                                          |  |                | 2,000   |                    |  |              | 270    |   |  |   | 1,730   |   |  |
| Total                                                          |  | $                   | 171,270 |                    |  | $                 | 9,114  |   |  | $      | 162,156 |   |  |
|                                                                |

F-23

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The Company recorded amortization expensefor its identifiable intangible assets of $14,718 for 2004, $6,610 for2003 and $1,337 for 2002. Based on gross carrying amounts at December31, 2004, the Company's estimate for identifiable intangibleassets amortization expense for the years ending December 31, 2005through 2009 are presented in the tablebelow.

|                        |  |                              |        |        |  |  |
|------------------------|--|------------------------------|--------|--------|--|--|
| YearEnding December31, |  | EstimatedAmortizationExpense |
| 2005                   |  | $                            | 20,629 |   |
| 2006                   |  |                         | 19,978 |   |
| 2007                   |  |                         | 18,732 |   |
| 2008                   |  |                         | 16,381 |   |
| 2009                   |  |                         | 15,110 |   |
|                        |

6.    OtherCurrent Liabilities and Other Liabilities

The components ofother current liabilities are presented in the tablebelow.

|                                                                                                       |  |             |         |        |  |        |         |        |  |  |
|-------------------------------------------------------------------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                                                                                  |  | December31, |
|                                                                                                  |  | 2004        |         | 2003   |
| Accruedproduct warrantycosts                                                                          |  | $           | 49,816  |   |  | $      | 41,184  |   |
| Estimated costin excess of estimated contract value to complete contracts in processin a lossposition |  |        | 49,695  |   |  |   | 52,063  |   |
| Accruedinterest                                                                                       |  |        | 29,871  |   |  |   | 25,898  |   |
| Aggregatepurchase price payable for acquiredbusinesses                                                |  |        | 9,648   |   |  |   | 28,331  |   |
| Notespayable and capital leaseobligations                                                             |  |        | — |   |  |   | 9,312   |   |
| Deferredrevenues                                                                                      |  |        | 5,019   |   |  |   | 7,850   |   |
| Current portionof net deferred gains from terminated interest rate swapagreements                     |  |        | 3,284   |   |  |   | 4,246   |   |
| Other                                                                                                 |  |        | 43,080  |   |  |   | 47,738  |   |
| Totalother currentliabilities                                                                         |  | $           | 190,413 |   |  | $      | 216,622 |   |
|                                                                                                       |

Thecomponents of other liabilities are presented in the tablebelow.

|                                                                                       |  |             |         |        |  |        |         |        |  |  |
|---------------------------------------------------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                                                                  |  | December31, |
|                                                                                  |  | 2004        |         | 2003   |
| Non-currentportion of net deferred gains from terminated interest rate swapagreements |  | $           | 21,928  |   |  | $      | 29,224  |   |
| Accruedworkerscompensation                                                            |  |        | 19,401  |   |  |   | 14,549  |   |
| Long-termdeferred taxliabilities                                                      |  |        | 7,990   |   |  |   | — |   |
| Fair valueof interest rate swapagreements                                             |  |        | 2,036   |   |  |   | — |   |
| Notespayable and capital leaseobligations                                             |  |        | 13,911  |   |  |   | 1,485   |   |
| Non-currentportion of accrued product warrantycosts                                   |  |        | — |   |  |   | 4,630   |   |
| Othernon-currentliabilities                                                           |  |        | 63,467  |   |  |   | 51,763  |   |
| Totalotherliabilities                                                                 |  | $           | 128,733 |   |  | $      | 101,651 |   |
|                                                                                       |

F-24

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The table below presents the changes inthe Company's accrued product warranty costs for the year endedDecember 31, 2004.

|                                                                  |  |        |         |         |  |  |  |  |  |  |
|------------------------------------------------------------------|--|--------|---------|---------|--|--|--|--|--|--|
| Balanceat January 1,2004                                         |  | $      | 45,814  |    |  |
| Acquisitions during thisperiod                                   |  |   | 3,003   |    |  |
| Accruals for productwarranties issued during theperiod           |  |   | 19,856  |    |  |
| Accruals for productwarranties existing before January 1,2004(1) |  |   | 3,518   |    |  |
| Settlementsmade during theperiod                                 |  |   | (22,375 | )  |  |
| Balance atDecember 31,2004                                       |  | $      | 49,816  |    |  |
|                                                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------|
| (1) | Representschanges to estimated product warranty costs related to sales recognizedprior to January  1, 2004. |

7.    Property, PlantandEquipment

|                                               |  |             |          |         |  |        |          |         |  |  |  |  |  |  |  |  |  |  |
|-----------------------------------------------|--|-------------|----------|---------|--|--------|----------|---------|--|--|--|--|--|--|--|--|--|--|
|                                          |  | December31, |          |
|                                          |  | 2004        |          | 2003    |  |
| Land                                          |  | $           | 35,399   |    |  | $      | 35,668   |    |  |
| Buildingsandimprovements                      |  |        | 207,855  |    |  |   | 147,860  |    |  |
| Machinery,equipment, furniture andfixtures    |  |        | 465,214  |    |  |   | 417,978  |    |  |
| Leaseholdimprovements                         |  |        | 143,366  |    |  |   | 138,654  |    |  |
| Grossproperty, plant andequipment             |  |        | 851,834  |    |  |   | 740,160  |    |  |
| Less:accumulated depreciation andamortization |  |        | (294,862 | )  |  |   | (220,411 | )  |  |
| Property,plant and equipment,net              |  | $           | 556,972  |    |  | $      | 519,749  |    |  |
|                                               |

Depreciationexpense for property, plant and equipment was $91,541 for 2004, $77,340for 2003, and $66,230 for 2002.

8.    Debt

Thecomponents of long-term debt and a reconciliation to the carryingamount of long-term debt are presented in the table below.

|                                                                      |  |             |           |         |  |        |           |         |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------------------------------|--|-------------|-----------|---------|--|--------|-----------|---------|--|--|--|--|--|--|--|--|--|--|
|                                                                 |  | December31, |           |
|                                                                 |  | 2004        |           | 2003    |  |
| **L-3Communications:**                                               |  |        |      |    |  |   |      |    |  |
| Borrowingsunder Senior Credit Facilities                             |  | $           | —   |    |  | $      | —   |    |  |
| 8% Senior Subordinated Notes due2008                                 |  |        | —   |    |  |   | 200,000   |    |  |
| 7 5/8%Senior Subordinated Notes due2012                              |  |        | 750,000   |    |  |   | 750,000   |    |  |
| 6 1/8%Senior Subordinated Notes due2013                              |  |        | 400,000   |    |  |   | 400,000   |    |  |
| 6 1/8%Senior Subordinated Notes due2014                              |  |        | 400,000   |    |  |   | 400,000   |    |  |
| 5 7/8%Senior Subordinated Notes due2015                              |  |        | 650,000   |    |  |   | —   |    |  |
|                                                                 |  |        | 2,200,000 |    |  |   | 1,750,000 |    |  |
| **L-3Holdings:**                                                     |  |        |      |    |  |   |      |    |  |
| 51⁄4%Convertible Senior Subordinated Notes due2009              |  |        | —   |    |  |   | 298,370   |    |  |
| 4%Senior Subordinated Convertible Contingent Debt Securities due2011 |  |        | —   |    |  |   | 420,000   |    |  |
| Principalamount of long-termdebt                                     |  |        | 2,200,000 |    |  |   | 2,468,370 |    |  |
| Less:Unamortizeddiscounts                                            |  |        | (8,158    | )  |  |   | (11,070   | )  |  |
| Fairvalue of interest rate swap agreements                           |  |        | (2,036    | )  |  |   | —   |    |  |
| Carryingamount of long-termdebt                                      |  | $           | 2,189,806 |    |  | $      | 2,457,300 |    |  |
|                                                                      |

F-25

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

L-3 Communications

AtDecember 31, 2004, the Company's Senior Credit Facilities werecomprised of a $500,000 five-year revolving credit facility maturing onMay 15, 2006 and a $250,000 364-day revolving facility. The 364-dayrevolving credit facility expired on February 22, 2005.

AtDecember 31, 2004, available borrowings under the Company'sSenior Credit Facilities were $677,521, after reductions foroutstanding letters of credit of $72,479. There were no outstandingborrowings under the Senior Credit Facilities at December 31,2004.

On March 9, 2005, the Company entered into a new five-yearsenior revolving credit facility (the New Senior Credit Facility)maturing on March 9, 2010 and allowing for total aggregate borrowingsof up to $1,000,000. At March 9, 2005, available borrowings under ournew senior credit facility were approximately $906,000, afterreductions for outstanding letters of credit of approximately $94,000.At the time the Company entered into this facility, the existing seniorcredit facility was terminated.

Borrowings under the New SeniorCredit Facility bear interest, at L-3 Communications' option, ateither: (i) a "base rate" equal to the higherof 0.50% per annum above the latest federal funds rate and theBank of America "prime rate" (as defined)plus a spread ranging from 0.75% to 0.00% per annumdepending on L-3 Communications' Debt Rating at the time ofdetermination or (ii) a "LIBOR rate" (asdefined) plus a spread ranging from 1.75% to 0.625% perannum depending on L-3 Communications' Debt Rating at the time ofdetermination. The Debt Rating is based on the ratings as determined byStandard & Poor's Ratings Services, Moody's InvestorsService, Inc. and Fitch Ratings of the Company'snon-credit-enhanced, senior unsecured long-term debt.

L-3Communications pays commitment fees calculated on the daily amounts ofthe available unused commitments under the New Senior Credit Facilityat a rate ranging from 0.375% to 0.125% per annum,depending on L-3 Communications' Debt Rating in effect at thetime of determination. L-3 Communications pays letter of credit feescalculated at a rate ranging from 1.3125% to 0.46875% perannum for performance and commercial letters of credit and 1.75%to 0.625% for financial letters of credit, in each casedepending on L-3 Communications' Debt Rating at the time ofdetermination.

On November 12, 2004, L-3 Communications sold$650,000 of 5 7/8% Senior Subordinated Notes dueJanuary 15, 2015 (2004 Notes) with interest payable semi-annually onJanuary 15 and July 15 of each year commencing January 15, 2005. Thenet cash proceeds from this offering amounted to approximately $639,000after deducting commissions and other offering expenses and were usedto redeem the Company's 8% Senior Subordinated Notes due2008 and to increase cash and cash equivalents. The 2004 Notes aregeneral unsecured obligations of L-3 Communications and aresubordinated in right of payment to all existing and future senior debtof L-3 Communications. On or after January 15, 2010, the 2004 Notes aresubject to redemption at any time, at the option of L-3 Communications,in whole or in part, at redemption prices (plus accrued and unpaidinterest) starting at 102.938% of the principal amount (plusaccrued and unpaid interest) during the 12-month period beginningJanuary 15, 2010 and declining annually to 100% of principal(plus accrued and unpaid interest) on January 15, 2013 and thereafter.Prior to January 15, 2008, L-3 Communications may redeem up to35% of the 2004 Notes with the proceeds of certain equityofferings at a redemption price of 105.875% of the principalamount (plus accrued and unpaid interest).

On November 12, 2004,L-3 Communications initiated a full redemption of all of itsoutstanding $200,000 aggregate principal amount of 8% SeniorSubordinated Notes due 2008 (December 1998 Notes). Such notes wereredeemed by L-3 Communications at a redemption price of 102.667%of the principal amount thereof, plus accrued and unpaid interest. Thisredemption was completed on December 13, 2004. In connection with theearly redemption of the December 1998 Notes, the Company recorded apre-tax 

F-26

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

debt retirement charge of $4,969. The changewas comprised of premiums of $5,334 and $2,751 to write off theremaining balance of unamortized debt issue costs relating to thesenotes, partially offset by a gain of $3,116 to recognize the remainingbalance of the deferred gain on the terminated interest rate swapagreements relating to these notes.

On December 22, 2003, L-3Communications sold $400,000 of 6  1/8% SeniorSubordinated Notes due January 15, 2014 (December 2003 Notes) at adiscount of $7,372. The discount was recorded as a reduction to theprincipal amount of the notes and is amortized as interest expense overthe term of the notes. The effective interest rate of the December 2003Notes is 6.31% per annum. Interest is payable semi-annually onJanuary 15 and July 15 of each year. The net cash proceeds from thisoffering amounted to approximately $390,000 after deducting thediscounts, commissions and other offering expenses and were used torepay $275,000 of borrowings outstanding under the Senior CreditFacilities and to increase cash and cash equivalents. The December 2003Notes are general unsecured obligations of L-3 Communications and aresubordinated in right of payment to all existing and future senior debtof L-3 Communications. On or after January 15, 2009, the December 2003Notes are subject to redemption at any time, at the option of L-3Communications, in whole or in part, at redemption prices (plus accruedand unpaid interest) starting at 103.063% of the principalamount (plus accrued and unpaid interest) during the 12-month periodbeginning January 15, 2009 and declining annually to 100% ofprincipal (plus accrued and unpaid interest) on January 15, 2012 andthereafter. Prior to January 15, 2007, L-3 Communications may redeem upto 35% of the December 2003 Notes with the proceeds of certainequity offerings at a redemption price of 106.125% of theprincipal amount (plus accrued and unpaid interest). 

On May 21,2003, L-3 Communications sold $400,000 of 6 1/8% Senior Subordinated Notes due July 15,2013 (May 2003 Notes) at a discount of $1,840. The discount wasrecorded as a reduction to the principal amount of the notes and isamortized as interest expense over the term of the notes. The effectiveinterest rate of the May 2003 Notes is 6.17% per annum. Interestis payable semi-annually on January 15 and July 15 of each year. Thenet cash proceeds from this offering amounted to approximately $391,000after deducting discounts, commissions and other offering expenses andwere used to redeem the 81⁄2% SeniorSubordinated Notes due 2008 and to increase cash and cash equivalents.The May 2003 Notes are general unsecured obligations of L-3Communications and are subordinated in right of payment to all existingand future senior debt of L-3 Communications. On or after July 15,2008, the May 2003 Notes are subject to redemption at any time, at theoption of L-3 Communications, in whole or in part, at redemption prices(plus accrued and unpaid interest) starting at 103.063% of theprincipal amount (plus accrued and unpaid interest) during the 12-monthperiod beginning July 15, 2008 and declining annually to 100% ofprincipal (plus accrued and unpaid interest) on July 15, 2011 andthereafter. Prior to July 15, 2006, L-3 Communications may redeem up to35% of the May 2003 Notes with the proceeds of certain equityofferings at a redemption price of 106.125% of the principalamount (plus accrued and unpaid interest).

On May 21, 2003, L-3Communications initiated a full redemption of all its outstanding$180,000 aggregate principal amount of 81⁄2% SeniorSubordinated Notes due 2008 (May 1998 Notes). On June 20, 2003, L-3Communications purchased and paid cash for all the outstanding May 1998Notes, including accrued interest. During 2003, L-3 Communicationsrecorded a pre-tax charge of $11,225, comprising of premiums and othertransaction costs of $7,795 and $3,430 to write-off the unamortizedbalance of debt issue costs and the deferred loss on the terminatedinterest rate swap agreements related to the May 1998 Notes.

InJune of 2002, L-3 Communications sold $750,000 of7 5/8% Senior Subordinated Notes due June 15,2012 (June 2002 Notes) with interest payable semi-annually on June 15and December 15 of each year. The net proceeds from this offering andthe concurrent sale of common stock by L-3 Holdings (see Note 10) wereused to (i) repay $500,000 borrowed on March 8, 2002, under theCompany's senior subordinated 

F-27

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

bridge loan facility, (ii) repay theindebtedness outstanding under the Company's Senior CreditFacilities, (iii) repurchase and redeem the10 3/8% Senior Subordinated Notes due 2007 and(iv) increase cash and cash equivalents. The June 2002 Notes aregeneral unsecured obligations of L-3 Communications and aresubordinated in right of payment to all existing and future senior debtof L-3 Communications. The June 2002 Notes are subject to redemption atany time, at the option of L-3 Communications, in whole or in part, onor after June 15, 2007 at redemption prices (plus accrued and unpaidinterest) starting at 103.813% of the principal amount (plusaccrued and unpaid interest) during the 12-month period beginning June15, 2007 and declining annually to 100% of principal (plusaccrued and unpaid interest) on June 15, 2010 and thereafter. Prior toJune 15, 2005, L-3 Communications may redeem up to 35% of theJune 2002 Notes with the proceeds of certain equity offerings at aredemption price of 107.625% of the principal amount (plusaccrued and unpaid interest).

In June of 2002, L-3Communications commenced a tender offer to purchase any and all of its$225,000 aggregate principal amount of 10 3/8%Senior Subordinated Notes due 2007. The tender offer expired on July 3,2002. On June 25, 2002, L-3 Communications sent a notice of redemptionfor all of its 10 3/8% Senior Subordinated Notesdue 2007 that remained outstanding after the expiration of the tenderoffer. Upon sending the notice, the remaining notes became due andpayable at the redemption price as of July 25, 2002. During 2002, theCompany recorded a pre-tax charge of $16,187, comprised of premiums,fees and other transaction costs of $12,469 and $3,718 to write-off theremaining balance of unamortized debt issue costs relating to thesenotes.

Depending on interest rate levels, the Company may enterinto interest rate swap agreements to convert certain of its fixedinterest rate debt obligations to variable interest rates, or terminateany existing interest rate swap agreements. The variable interest ratepaid by the Company under the swap agreements is equal to (i) thevariable rate basis, plus (ii) the variable rate spread. The tablebelow presents the Company's interest rate swap agreement that iscurrentlyoutstanding.

|               |  |                                                     |  |                |         |                    |  |                            |  |                          |      |         |  |                     |  |  |  |  |  |  |  |  |
|---------------|--|-----------------------------------------------------|--|----------------|---------|--------------------|--|----------------------------|--|--------------------------|------|---------|--|---------------------|--|--|--|--|--|--|--|--|
| InceptionDate |  | FixedRate Debt Obligation                           |  | NotionalAmount |         | VariableRate Basis |  | Average VariableRateSpread |  | Interest SettlementDates |
| March2004     |  | $400,000 of6 1/8% Senior Subordinated Notes due2014 |  | $              | 100,000 |               |  | Six-MonthUSDLIBOR(1)       |  |                     | 1.55 | %  |  | January15and July15 |
|               |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                     |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | The six-monthUSD LIBOR interest rate was 2.78% on December 31, 2004,2.20% on September 30, 2004, 1.94% on June 30, 2004 and1.16% on March 31, 2004. |

F-28

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The table below presents theCompany's terminated interest rate swap agreements activitythrough December 31,2004.

|               |  |                 |  |                                                         |  |                |         |                            |  |                                       |        |                       |  |        |        |                                            |  |                                           |        |         |  |        |         |        |  |        |        |         |  |        |         |         |  |  |  |  |  |  |
|---------------|--|-----------------|--|---------------------------------------------------------|--|----------------|---------|----------------------------|--|---------------------------------------|--------|-----------------------|--|--------|--------|--------------------------------------------|--|-------------------------------------------|--------|---------|--|--------|---------|--------|--|--------|--------|---------|--|--------|---------|---------|--|--|--|--|--|--|
|          |  |            |  |                                                    |  |           |         |                       |  | CashProceeds ReceivedatTermination(1) |        | December 31,2004      |
| InceptionDate |  | TerminationDate |  | FixedRateDebtObligation                                 |  | NotionalAmount |         | AverageVariableRatePaid(2) |  | Interest ExpenseReduction(3)          |        | DeferredGain(Loss)(4) |  | Total  |        | CumulativeRecognized DeferredGain(Loss)(5) |  | BalanceofUnamortizedDeferredGain(Loss)(6) |
| April2004     |  | September2004   |  | $400,000of 6 1/8% Senior Subordinated Notes due2014     |  | $              | 100,000 |                       |  |                                  | 2.9    | %                |  | $      | 542    |                                       |  | $                                         | (542   | )  |  | $      | — |   |  | $      | (15    | )  |  | $      | (527    | )  |
| March2004     |  | September2004   |  | $400,000 of 6 1/8% SeniorSubordinated Notes due2014     |  | $              | 100,000 |                       |  |                                  | 3.6    | %                |  |   | 415    |                                       |  |                                      | (415   | )  |  |   | — |   |  |   | (11    | )  |  |   | (404    | )  |
| July2003      |  | September2003   |  | $400,000of 6 1/8% Senior Subordinated Notes due2013     |  | $              | 400,000 |                       |  |                                  | 2.1    | %                |  |   | 2,687  |                                       |  |                                      | 8,017  |    |  |   | 10,704  |   |  |   | 1,024  |    |  |   | 6,993   |    |
| March2003     |  | June2003        |  | $750,000 of 7 5/8% SeniorSubordinated Notes due2012     |  | $              | 200,000 |                       |  |                                  | 4.4    | %                |  |   | 1,578  |                                       |  |                                      | 6,727  |    |  |   | 8,305   |   |  |   | 1,152  |    |  |   | 5,575   |    |
| January2003   |  | March 2003      |  | $750,000 of7 5/8% Senior Subordinated Notes due2012     |  | $              | 200,000 |                       |  |                                  | 4.0    | %                |  |   | 1,202  |                                       |  |                                      | 5,238  |    |  |   | 6,440   |   |  |   | 1,015  |    |  |   | 4,223   |    |
| June2002      |  | September 2002  |  | $750,000 of7 5/8% Senior Subordinated Notes due2012     |  | $              | 200,000 |                       |  |                                  | 4.1    | %                |  |   | 1,762  |                                       |  |                                      | 12,173 |    |  |   | 13,935  |   |  |   | 2,821  |    |  |   | 9,352   |    |
| November2001  |  | August 2002     |  | $180,000 of81⁄2% Senior Subordinated Notes due2008 |  | $              | 180,000 |                       |  |                                  | 5.3    | %                |  |   | 1,186  |                                       |  |                                      | (559   | )  |  |   | 627     |   |  |   | (559   | )  |  |   | — |    |
| July2001      |  | June 2002       |  | $200,000 of 8% SeniorSubordinated Notes due2008         |  | $              | 200,000 |                       |  |                                  | 3.9    | %                |  |   | 3,446  |                                       |  |                                      | 5,229  |    |  |   | 8,675   |   |  |   | 5,229  |    |  |   | — |    |
|          |  |            |  |                                                    |  |           |    |                       |  |                                  |   |                  |  | $      | 12,818 |                                       |  | $                                         | 35,868 |    |  | $      | 48,686  |   |  | $      | 10,656 |    |  | $      | 25,212  |    |
|               |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Cashproceeds received at termination are included in cash from operatingactivities on L-3's statement of cash flows in the periodreceived. |

|     |                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents the averagevariable interest rate L-3 paid for the interest payment period inwhich the interest rate swap agreements were terminated. |

|     |                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Represents the interest expense reduction forthe interest payment period in which the interest rate swap agreementswere terminated. |

|     |                                                                                                                                                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Represents themark-to-market value of the interest rate swap agreements attermination date, which is being amortized over the remaining term ofthe underlying debt instrument. |

|     |                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Represents the cumulative amount of deferredgain (loss) recognized as a reduction (increase) to interest expensethrough December 31, 2004. |

|     |                                                                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Thecurrent portion of unamortized deferred gains at December 31, 2004,aggregating $3,284, is included in other current liabilities. Theremaining $21,928 is included in other liabilities. |

L-3 Holdings

On October 5, 2004, L-3 Holdingsannounced a full redemption of all the $420,000 of its 4.00%Senior Subordinated Convertible Contingent Debt Securities (CODES) due2011, which expired on Thursday, October 21, 2004. On October 21, 2004,holders of $419,785 of the principal amount of CODES exercised theirconversion rights and converted such CODES into 7,800,797 shares of L-3Holdings common stock. The remaining $215 of the CODES were redeemedfor cash on October 25, 2004, at a redemption price of 102.0% ofthe principal amount, plus accrued and unpaid interest (includingcontingent interest) to October 25, 2004. As a result of theconversions and redemptions, L-3's principal amount of long-termdebt decreased by $418,219 and shareholders' equity increased by$430,431, including the transfer of the related deferred tax liabilityof $21,398 and unamortized debt issue costs of $8,960 to additionalpaid-in-capital.

F-29

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

On December 22, 2003, L-3 Holdingsannounced a full redemption of $300,000 of its 5.25% ConvertibleSenior Subordinated Notes due 2009 (Convertible Notes), which expiredon January 9, 2004. At December 31, 2003, holders of approximately$1,630 of the Convertible Notes had exercised their conversion rightsand converted such notes into 40,000 shares of L-3 Holdings commonstock. On January 9, 2004, holders of $298,183 of the Convertible Notesexercised their conversion rights and converted such notes into7,317,327 shares of L-3 Holdings common stock. The remaining $187 ofConvertible Notes were redeemed on January 12, 2004 for cash. As aresult of these conversions and redemptions, L-3's principalamount of long-term debt decreased by $298,370 and shareholders'equity increased by $292,319 in January 2004 compared to December 31,2003.

Covenants

The New Senior CreditFacilities and Senior Subordinated Notes indentures contain financialand other restrictive covenants that limit, among other things, theability of the Company to borrow additional funds, incur liens, makeinvestments, merge or consolidate, dispose of assets, or pay dividends.The Company is in compliance with those covenants in all materialrespects. The Company's New Senior Credit Facility containscovenants that require that (i) the Company's ConsolidatedLeverage Ratio be less than or equal to 4.0 to 1.0, (ii) theCompany's Consolidated Senior Leverage Ratio be less than orequal to 3.0 to 1.0 and (iii) the Company's Consolidated InterestCoverage Ratio be greater than or equal to 3.0 to 1.0. Calculations ofthe Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio andConsolidated Interest Coverage Ratio are to take into accountacquisitions on a pro forma basis as if they had occurred at thebeginning of the applicable period.

The Consolidated LeverageRatio is defined as the ratio of Consolidated Funded Indebtedness,minus the lesser of actual unrestricted domestic cash balances inexcess of $25,000 and $250,000, to Consolidated EBITDA. ConsolidatedFunded Indebtedness is equal to the sum of (1) outstanding indebtednessfor borrowed money or for preferred stock accounted for as indebtedness(which is referred to under the New Senior Credit Facility as"disqualified preferred stock"), (2) thedeferred purchase price of property or services, (3) capitalized leaseobligations and (4) outstanding indebtedness of L-3 Holdings guaranteedby L-3 Communications or its subsidiaries. Consolidated EBITDA is equalto consolidated net income of L-3 Communications (excluding (A)impairment losses incurred on goodwill and other intangible assets oron debt and equity investments, (B) gains or losses incurred on theretirement of debt, (C) extraordinary gains and losses, (D) gains andlosses in connection with asset dispositions, and (E) non-cash gains orlosses on discontinued operations) for the applicable period, plusconsolidated interest expense (including consolidated interest expenseof L-3 Holdings for indebtedness guaranteed by L-3 Communications andits subsidiaries), income taxes, depreciation and amortization expenseand non-cash stock-based compensation expenses.

The ConsolidatedSenior Leverage Ratio is defined as the ratio of Consolidated FundedIndebtedness, minus subordinated debt of L-3 Communications andindebtedness of L-3 Holdings that is guaranteed by L-3 Communicationson a subordinated basis, to Consolidated EBITDA. The ConsolidatedInterest Coverage Ratio is defined as the ratio of Consolidated EBITDAto cash interest expense of L-3 Communications and its subsidiariesplus cash interest expense of L-3 Holdings with respect to indebtednessguaranteed by L-3 Communications or any of its subsidiaries.

Inaddition, the Senior Subordinated Notes indentures contain covenantsthat restrict the ability of L-3 Communications to incur indebtednessand issue capital stock that matures or is redeemable 91 days or lessafter the maturity date of such series of notes, and the ability of itsrestricted subsidiaries to incur indebtedness or issue preferred stock,unless the Company's Fixed Charge Coverage Ratio would have beenat least 2.0 to 1.0 on a pro forma basis. The covenants are subject toseveral exceptions, including an exception for indebtedness undercredit facilities up to a specified amount. The Fixed Charge Coverage

F-30

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Ratio is defined as the ratio ofConsolidated Cash Flow to Fixed Charges of L-3 Communications and itsrestricted subsidiaries. Consolidated Cash Flow is equal to theconsolidated net income of L-3 Communications, plus extraordinarylosses, net losses realized upon an asset sale, income taxes of L-3Communications and its restricted subsidiaries, consolidated interestexpense of L-3 Communications and its restricted subsidiaries (whetheror not capitalized), depreciation and amortization expense of L-3Communications and its restricted subsidiaries, and other non-cashexpenses of L-3 Communications and its restricted subsidiaries, minusnon-cash items not in the ordinary course of business that increasedconsolidated net income. Fixed Charges are equal to consolidatedinterest expense of the Company and its restricted subsidiaries(whether or not capitalized), third-party interest expense guaranteedor secured by the Company and its restricted subsidiaries and preferredstock dividends of the Company and its restricted subsidiaries (otherthan dividends payable in capital stock of L-3 Communications), grossedup for taxes. Calculations of the Fixed Charge Coverage Ratio are totake into account incurrence, assumption or redemption of indebtednessand acquisitions on a pro forma basis as if they had occurred at thebeginning of the applicable period and are to exclude Consolidated CashFlow from discontinued operations and businesses disposed of andrelated Fixed Charges under non-continuing obligations.

The NewSenior Credit Facility limits the ability of L-3 Communications to paydividends to and make investments in L-3 Holdings. However, the NewSenior Credit Facility permits L-3 Communications to:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | fund payments of interest on indebtednessof L-3 Holdings and to fund payments of dividends on disqualifiedpreferred stock issued by L-3 Holdings, so long as (1) any suchindebtedness or disqualified preferred stock is guaranteed by L-3Communications and (2) the proceeds received by L-3 Holdings from theissuance of such indebtedness or disqualified preferred stock have beeninvested by L-3 Holdings in L-3 Communications; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | fund payments and prepayments of principalof indebtedness of L-3 Holdings and to fund optional and mandatoryredemptions of disqualified preferred stock issued by L-3 Holdings, solong as (1) any such indebtedness or disqualified preferred stock isguaranteed by L-3 Communications and (2) the amount of such fundingsdoes not exceed the aggregate amount of investments made by L-3Holdings in L-3 Communications with the proceeds from any issuance ofindebtedness or disqualified preferred stock by L-3 Holdings afterMarch  9, 2005 that is guaranteed by L-3 Communications; |

|              |                                                                                               |
|--------------|-----------------------------------------------------------------------------------------------|
| •  | pay regularly scheduled dividends ondisqualified preferred stock issued by L-3Communications; |

|              |                                                                                                                                                                                                                                 |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | redeem disqualifiedpreferred stock issued by L-3 Communications so long as the amount ofsuch redemptions does not exceed the aggregate proceeds received by L-3Communications from the issuance of disqualified preferredstock; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | pay other dividends on and makeother redemptions of its equity interests (including for the benefit ofL-3 Holdings) and make other investments in L-3 Holdings, so long as nodefault or event of default has occurred and is continuing, up to anaggregate amount of $1,000,000, increased (or decreased) quarterly byan amount equal to 50% of the consolidated net income (ordeficit) of L-3 Communications for the quarter, plus (1) 100% ofthe proceeds from any issuance of capital stock (other thandisqualified preferred stock) by L-3 Holdings after March  9,2005 if those proceeds were invested in L-3 Communications, plus (2)100% of the proceeds from any issuance of indebtedness ordisqualified preferred stock by L-3 Holdings after March  9, 2005if those proceeds were invested in L-3 Communications and theindebtedness or disqualified preferred stock is not guaranteed by L-3Communications, plus (3) 100% of the proceeds of any issuancesof capital stock (other than disqualified preferred stock) by L-3Communications after March 9, 2005, minus (4) the aggregate amount ofsubordinated debt of L-3 Communications |

F-31

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|        |                                                                                                                                                                                                                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | prepaid after March  9, 2005 (otherthan in connection with a refinancing) in excess of the aggregateproceeds received from the issuance of subordinated debt by L-3Communications after March  9, 2005 (other than in connectionwith a refinancing). |

The New Senior Credit Facility containscross default provisions that are triggered when a payment defaultoccurs or certain other defaults occur that would allow theacceleration of indebtedness, guarantee obligations or certain otheragreements of L-3 Communications or its subsidiaries in an aggregateamount of at least $40,000 and those defaults (other than paymentdefaults and defaults that have resulted in acceleration) have not beencured after 10 days. The Senior Subordinated Notes indentures containcross acceleration provisions that are triggered when holders of theindebtedness of L-3 Holdings, L-3 Communications or their restrictedsubsidiaries (or the payment of which is guaranteed by such entities)accelerate at least $10,000 in aggregate principal amount of thoseobligations.

In addition, the Senior Subordinated Notesindentures contain provisions that limit the ability of L-3Communications to pay dividends to L-3 Holdings and make investments inL-3 Holdings, subject to exceptions. The indentures permit L-3Communications to make such restricted payments so long as it would beable to incur at least one dollar of additional indebtedness under theFixed Charge Coverage Ratio test described above and meets otherconditions. Assuming the New Senior Credit Facility had been in effectat December 31, 2004, the restricted payments provisions therein wouldhave been more restrictive as of such date than the other conditionscontained in the Senior Subordinated Notes indentures.

Subordination and Guarantees

The borrowings underthe New Senior Credit Facility are guaranteed by L-3 Holdings and bysubstantially all of the material wholly-owned domestic subsidiaries ofL-3 Communications on a senior basis. The payment of principal andpremium, if any, and interest on the Senior Subordinated Notes areunconditionally guaranteed, on an unsecured senior subordinated basis,jointly and severally, by substantially all of L-3Communications' restricted subsidiaries other than its foreignsubsidiaries. The guarantees of the Senior Subordinated Notes rank paripassu with one another and are junior to the guarantees of the NewSenior Credit Facility.

In the event that the long-term debtrating of L-3 Communications is reduced below BBB−, or theequivalent, by two of the three rating agencies, Standard &Poor's Ratings Services, Moody's Investors Service, Inc. orFitch Ratings, L-3 Holdings will be required, within 45 business days,to pledge 100% of the capital stock of L-3 Communications, andL-3 Communications and each subsidiary guarantor will be required topledge 100% of the capital stock of each of their materialwholly-owned domestic subsidiaries and 65% of their materialwholly-owned foreign subsidiaries, in favor of the lenders under theNew Senior Credit Facility.

9.    Financial Instruments

Fair Value of Financial Instruments.    At December 31,2004 and 2003, the Company's financial instruments consistedprimarily of cash and cash equivalents, billed receivables, notesreceivable, equity securities, trade accounts payable, customeradvances, Senior Credit Facilities, Senior Subordinated Notes,Convertible Notes, CODES, foreign currency forward contracts, interestrate swap agreements and embedded derivatives related to the issuanceof the CODES. The carrying amounts of cash and cash equivalents, billedreceivables, trade accounts payable, Senior Credit Facilities, andcustomer advances are representative of their respective fair valuesbecause of the short-term maturities or expected settlement dates ofthese instruments. The Company's investments in nonreadilymarketable securities are stated at estimated fair value, which isgenerally equal to historical cost, except for those that have

F-32

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

experienced other-than-temporaryimpairments. The Senior Subordinated Notes are registered, unlistedpublic debt which are traded in the over-the-counter market and theirfair values are based on quoted trading activity. The fair values ofthe Convertible Notes and CODES are based on quoted prices for the sameor similar issues. The fair values of foreign currency forwardcontracts were estimated based on exchange rates at December 31, 2004and 2003. The fair values of the embedded derivatives were estimated bydiscounting expected cash flows using quoted market interest rates. Thecarrying amounts and estimated fair values of the Company'sfinancial instruments are presented in the tablebelow.

|                                                                    |  |                |           |                    |  |                |           |                    |  |        |           |         |  |        |           |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|--------------------------------------------------------------------|--|----------------|-----------|--------------------|--|----------------|-----------|--------------------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|                                                               |  | December31,    |           |
|                                                               |  | 2004           |           | 2003               |  |
|                                                               |  | CarryingAmount |           | EstimatedFairValue |  | CarryingAmount |           | EstimatedFairValue |  |
| Notesreceivable                                                    |  | $              | 2,700     |               |  | $              | 2,700     |               |  | $      | 1,200     |    |  | $      | 1,200     |    |  |
| Investmentsin equity securities accounted for using the costmethod |  |           | 1,528     |               |  |           | 1,528     |               |  |   | 3,033     |    |  |   | 3,033     |    |  |
| SeniorSubordinatedNotes                                            |  |           | 2,189,806 |               |  |           | 2,291,750 |               |  |   | 1,740,923 |    |  |   | 1,775,375 |    |  |
| ConvertibleNotes                                                   |  |           | —   |               |  |           | —   |               |  |   | 298,370   |    |  |   | 375,946   |    |  |
| CODES                                                              |  |           | —   |               |  |           | —   |               |  |   | 418,007   |    |  |   | 460,950   |    |  |
| Foreigncurrency forwardcontracts                                   |  |           | (2,121    | )             |  |           | (2,121    | )             |  |   | 1,153     |    |  |   | 1,153     |    |  |
| Embeddedderivatives                                                |  |           | —   |               |  |           | —   |               |  |   | (2,666    | )  |  |   | (2,666    | )  |  |
|                                                                    |

InterestRate Risk Management.    The Company has entered into interestrate swap agreements on certain of its Senior Subordinated Notes totake advantage of variable interest rates, which are lower than thefixed rates on those notes. These swap agreements exchanged the fixedinterest rate for a variable interest rate on a notional amount equalto either a portion or the entire principal amount of the relatednotes, were denominated in U.S. dollars and have designated maturitieswhich occurred on the interest payment dates of the related SeniorSubordinated Notes. Cash payments received from or paid to thecounterparties on the interest rate swap agreements are the differencebetween the amount that the fixed interest rates are greater than orless than the variable contract rates on the designated maturity dates,multiplied by the notional amounts underlying the respective interestrate swap agreements. Cash payments or receipts between the Company andcounterparties were recorded as a component of interest expense. TheCompany manages exposure to counterparty credit risk by entering intothe interest rate swap agreements only with major financialinstitutions that are expected to fully perform under the terms of suchagreements. The notional amounts are used to measure the volume ofthese agreements and do not represent exposure to credit loss. See Note8 for a table of our interest rate swap agreement that was outstandingas of December 31, 2004.

Foreign Currency Exchange RiskManagement.    The Company conducts its operations outside theU.S. in functional currencies other than the U.S. dollar. Additionally,some of the Company's U.S. and foreign operations have contractswith customers which are denominated in currencies other than thefunctional currencies of those operations. To mitigate the riskassociated with certain of these contracts denominated in foreigncurrency, the Company has entered into foreign currency forwardcontracts and put options. The Company's activities involvingforeign currency forward contracts and put options are designed tohedge the foreign denominated cash paid or received, primarily Canadiandollar, Euro, British Pound and U.S. dollar. The Company managesexposure to counterparty credit risk by entering into foreign currencyforward contracts only with major financial institutions that areexpected to fully perform under the terms of such contracts. Thenotional amounts are used to measure the volume of these contracts anddo not represent exposure to foreign currency losses.

F-33

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

There were no foreign currency put optioncontracts outstanding at December 31, 2004 and 2003. Information withrespect to foreign currency forward contracts is presented in the tablebelow.

|                                  |  |                |         |                |  |                |        |                |  |   |        |        |  |   |       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|----------------------------------|--|----------------|---------|----------------|--|----------------|--------|----------------|--|---|--------|--------|--|---|-------|--------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|                             |  | December31,    |         |
|                             |  | 2004           |         | 2003           |  |
|                             |  | NotionalAmount |         | UnrealizedLoss |  | NotionalAmount |        | UnrealizedGain |  |
| Foreigncurrency forwardcontracts |  | $              | 126,256 |           |  | $              | (2,121 | )         |  | $ | 71,390 |   |  | $ | 1,153 |   |  |
|                                  |

10.    L-3Holdings Common Stock

In 2004, L-3 Holdings' Board ofDirectors declared four quarterly cash dividends each for $0.10 pershare, which aggregated $43,418.

On February 10, 2005, L-3Holdings' Board of Directors increased its regular quarterly cashdividend by 25% to $0.125 per share, payable on March 15, 2005,to shareholders of record on February 22, 2005.

On June 28,2002, L-3 Holdings sold 14,000,000 shares of its common stock in apublic offering for $56.60 per share. Upon closing, L-3 Holdingsreceived net proceeds after deducting discounts, commissions and otheroffering expenses of $766,780. The net proceeds from this sale, whichwere contributed to L-3 Communications, and the concurrent sale ofsenior subordinated notes by L-3 Communications (See Note 8) were usedto (i) repay $500,000 borrowed on March 8, 2002, under theCompany's senior subordinated bridge loan facility, (ii) repaythe indebtedness outstanding under the Company's Senior CreditFacilities, (iii) repurchase and redeem the 10 3/8% SeniorSubordinated Notes due 2007 and (iv) increase cash and cashequivalents.

On April 23, 2002, the Company announced that itsBoard of Directors authorized a two-for-one stock split on all sharesof L-3 Holdings common stock. The stock split entitled all shareholdersof record at the close of business on May 6, 2002 to receive oneadditional share of L-3 Holdings common stock for every share held onthat date. The additional shares were distributed to shareholders inthe form of a stock dividend on May 20, 2002. Upon completion of thestock split, L-3 Holdings had approximately 80 million shares of commonstock outstanding. All of L-3 Holdings' historical share andearnings per share (EPS) data have been restated to give effect to thestock split.

On April 23, 2002, the Company's shareholdersapproved an increase in the number of authorized shares of L-3 Holdingscommon stock from 100,000,000 to 300,000,000 and an increase in thenumber of authorized shares of L-3 Holdings preferred stock from25,000,000 to 50,000,000.

On June 29, 2001, the Companyestablished the L-3 Communications Corporation Employee Stock PurchasePlan (ESPP) and registered 3,000,000 shares of L-3 Holdings commonstock, which may be purchased by employees of L-3 CommunicationsCorporation, its U.S. subsidiaries and certain of its foreignsubsidiaries through payroll deductions. In general, an eligibleemployee who participates in the ESPP may purchase L-3 Holdings'common stock at a fifteen percent discount. The Company received$32,931, $26,384 and $17,478 of employee contributions for the ESPP in2004, 2003 and 2002, respectively. These contributions were recorded asa component of shareholders' equity in the consolidated balancesheet. L-3 Holdings issued 705,178 shares in 2004, 603,599 shares in2003 and 352,054 shares in 2002 of its common stock to the trustee ofthe ESPP. In January 2005, the Company issued 322,764 shares of L-3Holdings' common stock to the trustee of the ESPP relating tocontributions received during the period July 1, 2004 to December 31,2004.

F-34

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

11.    Accumulated Other ComprehensiveLoss

The changes in the Company's accumulated othercomprehensive balances for each of the three years ended December 31,2004 are presented in the tablebelow.

|                             |  |                                       |        |                              |  |                                              |         |                                    |  |                                           |        |         |  |        |         |         |  |        |         |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|-----------------------------|--|---------------------------------------|--------|------------------------------|--|----------------------------------------------|---------|------------------------------------|--|-------------------------------------------|--------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|                        |  | Foreigncurrencytranslationadjustments |        | Unrealizedlossesonsecurities |  | Unrealizedgains (losses)onhedginginstruments |         | Minimumpensionliabilityadjustments |  | AccumulatedothercomprehensiveIncome(loss) |        |
| Balance at January 1,2002   |  | $                                     | (2,852 | )                       |  | $                                            | (246    | )                             |  | $                                         | (163   | )  |  | $      | (20,409 | )  |  | $      | (23,670 | )  |  |
| Periodchange                |  |                                  | 65     |                         |  |                                         | — |                               |  |                                      | (114   | )  |  |   | (45,580 | )  |  |   | (45,629 | )  |  |
| Balanceat December 31,2002  |  |                                  | (2,787 | )                       |  |                                         | (246    | )                             |  |                                      | (277   | )  |  |   | (65,989 | )  |  |   | (69,299 | )  |  |
| Periodchange                |  |                                  | (245   | )                       |  |                                         | — |                               |  |                                      | 896    |    |  |   | (4,189  | )  |  |   | (3,538  | )  |  |
| Balanceat December 31,2003  |  |                                  | (3,032 | )                       |  |                                         | (246    | )                             |  |                                      | 619    |    |  |   | (70,178 | )  |  |   | (72,837 | )  |  |
| Periodchange                |  |                                  | 7,098  |                         |  |                                         | 246     |                               |  |                                      | (1,911 | )  |  |   | (5,290  | )  |  |   | 143     |    |  |
| Balanceat December 31, 2004 |  | $                                     | 4,066  |                         |  | $                                            | — |                               |  | $                                         | (1,292 | )  |  | $      | (75,468 | )  |  | $      | (72,694 | )  |  |
|                             |

12.    L-3 Holdings Earnings Per Share

A reconciliation of basic anddiluted earnings per share (EPS) is presented in the table below.

|                                                                                                                    |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                               |  | YearEnded December31, |
|                                                                                                               |  | 2004                  |         | 2003    |  | 2002   |
| **Basic:**                                                                                                         |  |                  |    |    |  |   |    |    |  |   |    |    |
| Incomebefore cumulative effect of a change in accountingprinciple                                                  |  | $                     | 381,880 |    |  | $      | 277,640 |    |  | $      | 202,467 |    |
| Cumulativeeffect of a change in accounting principle, net of incometaxes                                           |  |                  | — |    |  |   | — |    |  |   | (24,370 | )  |
| Netincome                                                                                                          |  | $                     | 381,880 |    |  | $      | 277,640 |    |  | $      | 178,097 |    |
| Weightedaverage common sharesoutstanding                                                                           |  |                  | 107,838 |    |  |   | 96,022  |    |  |   | 86,943  |    |
| Basicearnings per share before cumulative effect of a change in accountingprinciple                                |  | $                     | 3.54    |    |  | $      | 2.89    |    |  | $      | 2.33    |    |
| Basicearnings pershare                                                                                             |  | $                     | 3.54    |    |  | $      | 2.89    |    |  | $      | 2.05    |    |
| **Diluted:**                                                                                                       |  |                  |    |    |  |   |    |    |  |   |    |    |
| Incomebefore cumulative effect of a change in accountingprinciple                                                  |  | $                     | 381,880 |    |  | $      | 277,640 |    |  | $      | 202,467 |    |
| After-taxinterest expense savings on the assumed conversion of convertibledebt                                     |  |                  | 9,147   |    |  |   | 20,797  |    |  |   | 21,315  |    |
| Incomebefore cumulative effect of a change in accounting principle, includingassumed conversion of convertibledebt |  |                  | 391,027 |    |  |   | 298,437 |    |  |   | 223,782 |    |
| Cumulativeeffect of a change in accounting principle, net of incometaxes                                           |  |                  | — |    |  |   | — |    |  |   | (24,370 | )  |
| Netincome, including assumed conversion of convertibledebt                                                         |  | $                     | 391,027 |    |  | $      | 298,437 |    |  | $      | 199,412 |    |
| Commonand potential commonshares:                                                                                  |  |                  |    |    |  |   |    |    |  |   |    |    |
| Weightedaverage common sharesoutstanding                                                                           |  |                  | 107,838 |    |  |   | 96,022  |    |  |   | 86,943  |    |
| Assumedexercise of stockoptions                                                                                    |  |                  | 9,836   |    |  |   | 7,573   |    |  |   | 7,750   |    |
| Assumedpurchase of common shares fortreasury                                                                       |  |                  | (6,731  | )  |  |   | (4,888  | )  |  |   | (4,642  | )  |
| Assumedconversion of convertibledebt                                                                               |  |                  | 6,429   |    |  |   | 15,162  |    |  |   | 15,165  |    |
| Commonand potential commonshares                                                                                   |  |                  | 117,372 |    |  |   | 113,869 |    |  |   | 105,216 |    |
| Dilutedearnings per share before cumulative effect of a change in accountingprinciple                              |  | $                     | 3.33    |    |  | $      | 2.62    |    |  | $      | 2.13    |    |
| Dilutedearnings pershare                                                                                           |  | $                     | 3.33    |    |  | $      | 2.62    |    |  | $      | 1.90    |    |
|                                                                                                                    |

F-35

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Non-Cash Reductions to Diluted EPSFrom New Accounting Rule.    On September 30, 2004, the EmergingIssues Task Force (EITF) of the Financial Accounting Standards Board(FASB) reached a consensus on EITF Issue No. 04-8, The Effect ofContingently Convertible Debt on Diluted Earnings Per Share, whichaddresses when the diluted effect of contingently convertible debtinstruments should be included in diluted earnings per share (EPS).EITF 04-8 requires that contingently convertible debt instruments areto be included in the computation of diluted EPS regardless of whetherthe market price trigger has been met. EITF 04-8 also requires thatprior period diluted EPS amounts presented for comparative purposes berestated. The Company adopted the provisions of EITF 04-8 during the2004 fourth quarter. The impact of applying EITF 04-8 to L-3 HoldingsCODES resulted in non-cash reductions to the Company's reporteddiluted EPS of $0.09 from $2.71 to $2.62 for the year ended December31, 2003, and $0.03 from $1.93 to $1.90 for the year ended December 31,2002. See Note  8 above for a discussion of the conversion andredemption of the CODES, which occurred during October  2004.

13.    Income Taxes

Income before income taxes andcumulative effect of a change in accounting principle is summarized inthe tablebelow.

|                                                                                   |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------------------------------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                              |  | 2004   |         | 2003   |  | 2002   |
| Domestic                                                                          |  | $      | 558,998 |   |  | $      | 404,340 |   |  | $      | 295,405 |   |
| Foreign                                                                           |  |   | 37,690  |   |  |   | 29,473  |   |  |   | 18,618  |   |
| Incomebefore income taxes and cumulative effect of a change inaccountingprinciple |  | $      | 596,688 |   |  | $      | 433,813 |   |  | $      | 314,023 |   |
|                                                                                   |

Thecomponents of the Company's current and deferred portions of theprovision for income taxes are presented in the table below.

|                                        |  |                       |         |         |  |        |         |         |  |        |         |        |  |  |
|----------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                                   |  | YearEnded December31, |
|                                   |  | 2004                  |         | 2003    |  | 2002   |
| Currentincome taxprovision:            |  |
| Federal                                |  | $                     | 64,065  |    |  | $      | 36,251  |    |  | $      | 26,759  |   |
| Stateandlocal                          |  |                  | 11,436  |    |  |   | 11,966  |    |  |   | 1,254   |   |
| Foreign                                |  |                  | 15,898  |    |  |   | 13,209  |    |  |   | 4,451   |   |
| Subtotal                               |  |                  | 91,399  |    |  |   | 61,426  |    |  |   | 32,464  |   |
| Deferredincome tax provision(benefit): |  |
| Federal                                |  |                  | 108,621 |    |  |   | 87,343  |    |  |   | 63,593  |   |
| Stateandlocal                          |  |                  | 16,567  |    |  |   | 9,301   |    |  |   | 11,568  |   |
| Foreign                                |  |                  | (1,779  | )  |  |   | (1,897  | )  |  |   | 3,931   |   |
| Subtotal                               |  |                  | 123,409 |    |  |   | 94,747  |    |  |   | 79,092  |   |
| Totalprovision for incometaxes         |  | $                     | 214,808 |    |  | $      | 156,173 |    |  | $      | 111,556 |   |
|                                        |

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

A reconciliation of the statutory federalincome tax rate to the effective income tax rate of the Company ispresented in the tablebelow.

|                                                                        |  |                       |      |         |  |        |      |         |  |        |      |         |  |  |
|------------------------------------------------------------------------|--|-----------------------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                                                   |  | YearEnded December31, |
|                                                                   |  | 2004                  |      | 2003    |  | 2002   |
| Statutoryfederal income taxrate                                        |  |                  | 35.0 | %  |  |   | 35.0 | %  |  |   | 35.0 | %  |
| Stateand local income taxes, net of federal income taxbenefit          |  |                  | 3.2  |    |  |   | 3.4  |    |  |   | 3.8  |    |
| Foreignincometaxes                                                     |  |                  | (0.7 | )  |  |   | 0.7  |    |  |   | 0.2  |    |
| Foreignsales corporation and extraterritorial income exclusionbenefits |  |                  | (1.2 | )  |  |   | (1.5 | )  |  |   | (1.9 | )  |
| Researchand experimentation and other taxcredits                       |  |                  | (1.1 | )  |  |   | (1.9 | )  |  |   | (2.1 | )  |
| Other,net                                                              |  |                  | 0.8  |    |  |   | 0.3  |    |  |   | 0.5  |    |
| Effectiveincome taxrate                                                |  |                  | 36.0 | %  |  |   | 36.0 | %  |  |   | 35.5 | %  |
|                                                                        |

Theprovision for income taxes excludes current tax benefits related tocompensation expense deductions for income tax purposes arising fromthe exercise of stock options by the Company's employees, whichwere credited directly to shareholders' equity of $16,657 for2004, $8,457 for 2003 and $13,303 for 2002. These tax benefits reducedcurrent income taxes payable.

The significant components of theCompany's net deferred tax assets and liabilities are presentedin the tablebelow.

|                                          |  |             |         |        |  |        |         |        |  |  |
|------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                     |  | December31, |
|                                     |  | 2004        |         | 2003   |
| Deferredtax assets:                      |  |
| Inventoriedcosts                         |  | $           | 36,936  |   |  | $      | 29,036  |   |
| Compensationand benefits                 |  |        | 49,887  |   |  |   | 36,173  |   |
| Pensionand postretirementbenefits        |  |        | 143,145 |   |  |   | 139,308 |   |
| Property,plant andequipment              |  |        | — |   |  |   | 6,347   |   |
| Incomerecognition on contracts inprocess |  |        | 16,683  |   |  |   | 48,621  |   |
| Losscarryforwards                        |  |        | 3,783   |   |  |   | 17,184  |   |
| Taxcreditcarryforwards                   |  |        | 18,529  |   |  |   | 36,066  |   |
| Other                                    |  |        | 43,816  |   |  |   | 25,094  |   |
| Totaldeferred taxassets                  |  |        | 312,779 |   |  |   | 337,829 |   |
| Deferredtax liabilities:                 |  |
| Goodwill and other intangibleassets      |  |        | 153,563 |   |  |   | 84,476  |   |
| Property,plant andequipment              |  |        | 22,012  |   |  |   | — |   |
| Other                                    |  |        | 18,128  |   |  |   | 86      |   |
| Totaldeferred taxliabilities             |  |        | 193,703 |   |  |   | 84,562  |   |
| Netdeferred taxassets                    |  | $           | 119,076 |   |  | $      | 253,267 |   |
|                                          |

F-37

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The following table presents theclassification of the Company's net deferred taxassets.

|                                           |  |             |         |         |  |        |         |        |  |  |
|-------------------------------------------|--|-------------|---------|---------|--|--------|---------|--------|--|--|
|                                      |  | December31, |
|                                      |  | 2004        |         | 2003    |
| Current deferred taxassets                |  | $           | 127,066 |    |  | $      | 152,785 |   |
| Long-termdeferred tax assets(liabilities) |  |        | (7,990  | )  |  |   | 100,482 |   |
| Totalnet deferred taxassets               |  | $           | 119,076 |    |  | $      | 253,267 |   |
|                                           |

AtDecember 31, 2004, the Company's loss carryforwards included $390of federal net operating loss carryforwards that are subject tolimitations and will expire, if unused, between 2011 and 2021, and$58,433 of state net operating losses that will expire, if unused,between 2005 and 2021. The Company also has $18,529 of tax creditcarryforwards primarily related to U.S. federal and state research andexperimentation credits and state investment tax credits that willexpire, if unused, primarily beginning in 2012. The Company believesthat it will generate sufficient taxable income, of the appropriatecharacter, to utilize these loss and credit carryforwards before theyexpire.

The Company is subject to ongoing tax examinations invarious jurisdictions, which may result in challenges to tax positionstaken and, accordingly, the Company may record adjustments toprovisions based on the probable outcomes of such matters. However, theCompany believes that the resolution of these matters, afterconsidering amounts accrued, will not have a material effect on itsfinancial position, results of operations or cash flows.

14.    Stock Options

In April 1999, the Company adoptedthe 1999 Long Term Performance Plan (1999 Plan). Awards under the 1999Plan may be granted to any employee or to any other individual whoprovides services to or on behalf of the Company or any of itssubsidiaries, subject to the discretion of the Compensation Committeeof the Board of Directors. Awards under the 1999 Plan may be in theform of stock options, stock appreciation rights (SARs), restrictedstock and other incentive awards, consistent with the 1999 Plan. InApril 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan).The 1997 Plan authorizes the Compensation Committee of the Board ofDirectors to grant stock options to key employees of the Company andits subsidiaries. Awards under both plans are in the form of L-3Holdings common stock. At December 31, 2004, the number of shares ofL-3 Holdings' common stock authorized for grant under the 1999Plan and 1997 Plan was 23,411,630, of which 6,308,021 shares wereavailable for awards under these plans. The price at which stockoptions may be granted at shall not be less than the fair market valueof L-3 Holdings' common stock on the date of grant. In general,options expire after 10 years and are exercisable ratably over a threeyear period on the annual anniversary of the date of grant. All of theawards under the 1999 Plan and 1997 Plan granted to employees arenon-qualified stock options for U.S. income tax regulations.

TheCompany awards shares of restricted stock of L-3 Holdings to employeesunder the 1999 Plan. The Company awarded 80,831 shares on January 1,2004, 88,245 shares on January 1, 2003, and 54,958 shares on January 1,2002. The aggregate fair values of the restricted stock awards on theirgrant dates were $4,151 in 2004, $3,963 in 2003 and $2,473 in 2002. Therestricted stock awards granted on January 1, 2004, January 1, 2003 andJanuary 1, 2002 vest three years after the date of grant. Compensationexpense charged against pre-tax earnings for these restricted stockawards was $3,325 in 2004, $2,975 in 2003 and $2,134 in 2002.Shareholders' Equity has been reduced by $3,932 at December 31,2004 for unearned compensation on these restricted stockawards.

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The table below presents theCompany's stock option activity over the past three years underthe 1999 Plan and 1997 Plan.

|                                                    |  |                  |        |                                |  |        |       |        |  |  |
|----------------------------------------------------|--|------------------|--------|--------------------------------|--|--------|-------|--------|--|--|
|                                               |  | Numberof Options |        | Weighted Average ExercisePrice |
|                                               |  | (inthousands)    |        |
| Outstanding at January 1, 2002(4,216exercisable)   |  |             | 7,980  |                           |  | $      | 16.68 |   |
| Optionsgranted                                     |  |             | 2,169  |                           |  |   | 52.02 |   |
| Optionsexercised                                   |  |             | (970   | )                         |  |   | 17.99 |   |
| Optionscancelled                                   |  |             | (155   | )                         |  |   | 35.62 |   |
| Outstanding at January 1, 2003 (5,216exercisable)  |  |             | 9,024  |                           |  |   | 24.71 |   |
| Optionsgranted                                     |  |             | 2,301  |                           |  |   | 40.92 |   |
| Optionsexercised                                   |  |             | (835   | )                         |  |   | 17.24 |   |
| Optionscancelled                                   |  |             | (406   | )                         |  |   | 39.95 |   |
| Outstandingat January 1, 2004 (5,919exercisable)   |  |             | 10,084 |                           |  |   | 28.41 |   |
| Optionsgranted                                     |  |             | 1,665  |                           |  |   | 63.98 |   |
| Optionsexercised                                   |  |             | (1,532 | )                         |  |   | 34.07 |   |
| Optionscancelled                                   |  |             | (303   | )                         |  |   | 45.37 |   |
| Outstandingat December 31, 2004 (6,311exercisable) |  |             | 9,914  |                           |  | $      | 32.99 |   |
|                                                    |

Thetable below summarizes information about the Company's stockoptions outstanding at December 31, 2004.

|                         |  |                  |       |                              |  |                                                    |       |                   |  |                                |     |        |  |        |         |        |  |        |         |        |  |  |
|-------------------------|--|------------------|-------|------------------------------|--|----------------------------------------------------|-------|-------------------|--|--------------------------------|-----|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                    |  | Outstanding      |       | Exercisable                  |
| Rangeof Exercise Prices |  | Number ofOptions |       | WeightedAverageExercisePrice |  | WeightedAverage Remaining Contractual Life (Years) |       | Number of Options |  | Weighted AverageExercise Price |
|                    |  | (inthousands)    |       |                         |  |                                               |       | (inthousands)     |  |                           |
| $3.24                   |  |             | 3,147 |                         |  | $                                                  | 3.24  |              |  |                           | 2.5 |   |  |   | 3,147   |   |  | $      | 3.24    |   |
| $11.00                  |  |             | 78    |                         |  |                                               | 11.00 |              |  |                           | 3.3 |   |  |   | 78      |   |  |   | 11.00   |   |
| $16.38–$23.13     |  |             | 433   |                         |  |                                               | 19.69 |              |  |                           | 4.6 |   |  |   | 433     |   |  |   | 19.69   |   |
| $29.00–$39.70     |  |             | 1,936 |                         |  |                                               | 35.65 |              |  |                           | 7.2 |   |  |   | 1,301   |   |  |   | 35.65   |   |
| $45.11–$60.84     |  |             | 3,470 |                         |  |                                               | 52.04 |              |  |                           | 8.2 |   |  |   | 1,352   |   |  |   | 51.00   |   |
| $68.16                  |  |             | 850   |                         |  |                                               | 68.16 |              |  |                           | 9.9 |   |  |   | — |   |  |   | — |   |
| Total                   |  |             | 9,914 |                         |  | $                                                  | 32.99 |              |  |                           | 6.2 |   |  |   | 6,311   |   |  | $      | 21.38   |   |
|                         |

Theweighted average fair values of awarded stock options, calculated attheir dates of grant, were $19.63 for 2004, $13.22 for 2003 and $18.75for 2002. In accordance with APB 25, no compensation expense wasrecognized on the stock option awards because they were granted atexercise prices equal to the stock price of L-3 Holdings common stockon the grant date.

For purposes of estimating the fair valueprovisions of SFAS 123, the Company estimates the fair value of itsstock options at the date of grant using the Black-Scholesoption-pricing valuation model. The weighted average assumptions usedin the valuation models are presented in the table below.

|                                  |  |                       |      |         |  |        |      |         |  |        |         |         |  |  |
|----------------------------------|--|-----------------------|------|---------|--|--------|------|---------|--|--------|---------|---------|--|--|
|                             |  | YearEnded December31, |
|                             |  | 2004                  |      | 2003    |  | 2002   |
| Expectedholding period (inyears) |  |                  | 4.2  |    |  |   | 4.0  |    |  |   | 4.0     |    |
| Expectedvolatility               |  |                  | 35.6 | %  |  |   | 38.3 | %  |  |   | 39.2    | %  |
| Expecteddividendyield            |  |                  | 0.7  | %  |  |   | 0.2  | %  |  |   | — |    |
| Risk-freeinterestrate            |  |                  | 3.1  | %  |  |   | 2.5  | %  |  |   | 4.0     | %  |
|                                  |

F-39

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

15.    Commitments andContingencies

Operating Leases.    The Company leasescertain facilities and equipment under agreements expiring at variousdates through 2028. The following table presents future minimumpayments under non-cancelable operating leases with initial orremaining terms in excess of one year at December 31, 2004.

|            |  |            |         |           |  |        |        |        |  |        |         |        |  |  |
|------------|--|------------|---------|-----------|--|--------|--------|--------|--|--------|---------|--------|--|--|
|       |  | RealEstate |         | Equipment |  | Total  |
| 2005       |  | $          | 99,812  |      |  | $      | 15,860 |   |  | $      | 115,672 |   |
| 2006       |  |       | 65,277  |      |  |   | 11,311 |   |  |   | 76,588  |   |
| 2007       |  |       | 57,618  |      |  |   | 7,872  |   |  |   | 65,490  |   |
| 2008       |  |       | 49,210  |      |  |   | 5,459  |   |  |   | 54,669  |   |
| 2009       |  |       | 44,386  |      |  |   | 5,114  |   |  |   | 49,500  |   |
| Thereafter |  |       | 165,491 |      |  |   | 52,131 |   |  |   | 217,622 |   |
| Total      |  | $          | 481,794 |      |  | $      | 97,747 |   |  | $      | 579,541 |   |
|            |

Realestate lease commitments have been reduced by minimum sublease rentalincome of $8,106 due in the future under non-cancelable subleases.Leases covering major items of real estate and equipment containrenewal and/or purchase options. Rent expense, net of sublease incomewas $79,401 for 2004, $71,779 for 2003 and $65,277 for 2002.

OnDecember 31, 2002, the Company entered into two real estate leaseagreements, as lessee, with a third-party lessor, which expire onDecember 31, 2005 and are accounted for as operating leases. On orbefore the lease expiration date, the Company can exercise optionsunder the lease agreements to either renew the leases, purchase bothproperties for $28,000, or sell both properties on behalf of the lessor(the "Sale Option"). If the Company electsthe Sale Option, the Company must pay the lessor a residual guaranteeamount of $22,673 for both properties, on or before the leaseexpiration date, and at the time both properties are sold, the Companymust pay the lessor a supplemental rent equal to the gross salesproceeds in excess of the residual guarantee amount not to exceed$5,327. For these real estate lease agreements, if the gross salesproceeds are less than the sum of the residual guarantee amount and thesupplemental rent, the Company is required to pay a supplemental rentto the extent the reduction in the fair value of the properties aredemonstrated by an independent appraisal to have been caused by theCompany's failure to properly maintain the properties. Theaggregate residual guarantee amounts of $22,673 are included in thefuture minimum payments under non-cancelable real estate operatinglease payments relating to the expiration dates of such leases.

The Company has a contract to provide and operate for the U.S. AirForce (USAF) a full-service training facility, including simulatorsystems adjacent to a USAF base in Oklahoma. The Company acted as theconstruction agent on behalf of the third-party owner-lessors forprocurement and construction for the simulator systems, which werecompleted and delivered in August 2002. On December 31, 2002, theCompany, as lessee, entered into an operating lease agreement for aterm of 15 years for one of the simulator systems with theowner-lessor. At the end of the lease term, the Company may elect topurchase the simulator system at fair market value, which can be noless than $2,552 and no greater than $6,422. If the Company does notelect to purchase the simulator system then on the date of expiration,the Company shall pay to the lessor, as additional rent, $2,552 andreturn the simulator system to the lessor. The aggregate remainingnon-cancelable rental payments under this operating lease are $29,333,including the additional rent of $2,552. On February 27, 2003, theCompany, as lessee, entered into an operating lease agreement for aterm of 15 years for the remaining simulation systems with theowner-lessor. At the end of the lease term, the Company may elect topurchase the simulator systems at fair market value, which can be noless than $4,146 and no greater than $14,544. If the Company does notelect to purchase 

F-40

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

the simulator systems, then on the date ofexpiration, the Company shall return the simulator systems to thelessor. The aggregate remaining non-cancelable rental payments underthis operating lease are $47,662.

U.S. Government ProcurementRegulations.     A substantial majority of the Company'srevenues are generated from providing products and services underlegally binding agreements, or contracts with U.S. Governmentcustomers. The U.S. Government contracts are subject to extensive legaland regulatory requirements, and, from time to time, agencies of theU.S. Government investigate whether such contracts were and are beingconducted in accordance with these requirements. The Company iscurrently cooperating with the U.S. Government on severalinvestigations, none of which the Company anticipates will have amaterial adverse effect on its consolidated financial position, resultsof operations or cash flows. Under U.S. Government procurementregulations, an indictment of the Company by a federal grand jury couldresult in the Company being suspended for a period of time fromeligibility for awards of new government contracts. A conviction couldresult in debarment from contracting with the federal government for aspecified term. In addition, all of the Company's U.S. Governmentcontracts are subject to audit and various pricing and cost controls,and include standard provisions for termination for the convenience ofthe U.S. Government. U.S. Government contracts and related orders aresubject to cancellation if funds for contracts become unavailable orfor termination for the convenience of the U.S. Government. Foreigngovernment contracts generally include comparable provisions relatingto termination for the convenience of the relevant foreigngovernment.

Environmental Matters.    Managementcontinually assesses the Company's obligations with respect toapplicable environmental protection laws. While it is difficult todetermine the timing and ultimate cost to be incurred by the Company inorder to comply with these laws, based upon available internal andexternal assessments, with respect to those environmental losscontingencies of which management is aware, the Company believes that,after considering amounts accrued there are no environmental losscontingencies that, individually or in the aggregate, would be materialto the Company's consolidated results of operations. The Companyaccrues for these contingencies when it is probable that a liabilityhas been incurred and the amount of the liability can be reasonablyestimated.

In connection with the Integrated Systems businessacquisition, the Company assumed responsibility for implementingcertain corrective actions, required under federal law to remediate theGreenville, Texas site location, and to pay a portion of thoseremediation costs. The hazardous substances requiring remediation havebeen substantially characterized, and the remediation system has beenpartially implemented. The Company has estimated that its share of theremediation cost will not exceed $2,500, and will be incurred over aperiod of 25 years. The Company believes that it has establishedadequate reserves for these costs.

LitigationMatters.    Additionally, the Company has been periodicallysubject to litigation, claims or assessments and various contingentliabilities incidental to its businesses or assumed in connection withcertain business aquisitions. With respect to those investigativeactions, items of litigation, claims or assessments of which it isaware, management of the Company believes that the likelihood of lossis less than probable that after taking into account certain provisionsfor these matters, the ultimate resolution of any such investigativeactions, items of litigation, claims or assessments will not have amaterial adverse effect on the consolidated financial position, resultsof operations or cash flows of the Company. However, as discussedbelow, the Company is a party to a number of material litigations, forwhich an adverse determination could have a material adverse effect onthe consolidated financial position, results of operations or cashflows of the Company.

L-3 Integrated Systems and its predecessorshave been involved in a litigation with Kalitta Air arising from acontract to convert Boeing 747 aircraft from passenger configuration tocargo freighters. The 

F-41

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

lawsuit was brought in the northern districtof California on January 31, 1997. The aircraft were modified usingSupplemental Type Certificates (STCs) issued in 1988 by the FederalAviation Administration (FAA) to Hayes International, Inc.(Hayes/Pemco) as a subcontractor to GATX/Airlog Company (GATX). Between1988 and 1990, Hayes/Pemco modified five aircraft as a subcontractor toGATX using the STCs. Between 1990 and 1994, Chrysler TechnologiesAirborne Systems, Inc. (CTAS), a predecessor to L-3 Integrated Systems,performed as a subcontractor to GATX and modified an additional fiveaircraft using the STCs. Two of the aircraft modified by CTAS wereowned by American International Airways, the predecessor to KalittaAir. In 1996, the FAA determined that the engineering data provided byHayes/Pemco supporting the STCs was inadequate and issued anAirworthiness Directive that effectively grounded the ten modifiedaircraft. The Kalitta Air aircraft have not been in revenue servicesince that date. The matter was tried in January 2001 against GATX andCTAS with the jury finding fault on the part of GATX but rendering aunanimous defense verdict in favor of CTAS. Certain co-defendants hadsettled prior to trial. The U.S. Ninth Circuit Court of Appealsreversed and remanded the trial court's summary judgment rulingsin favor of CTAS regarding a negligence claim by Kalitta Air, whichasserts that CTAS as an expert in aircraft modification should haveknown that the STCs were deficient, and excluding certain evidence attrial. In preparation for retrial, Kalitta Air submitted to us anexpert report on damages that calculated Kalitta Air's damages ateither $232,000 or $602,000, depending on different factualassumptions. The Company has retained experts whose reports indicatethat, even in the event of an adverse jury finding on the liabilityissues at trial, Kalitta Air has already recovered amounts from theother parties to the initial suit that the Company believes more thanfully compensated Kalitta Air for any damages it incurred. CTAS'insurance carrier has accepted defense of the matter with a reservationof its right to dispute its obligations under the applicable insurancepolicy in the event of an adverse jury finding. The trial began onJanuary 18, 2005, and ended on March 2, 2005 with a deadlocked jury andmistrial. At trial, Kalitta Air claimed damages of $235,000. Althoughno date has been set for any further proceedings, a second retrial maybe necessary in this matter. The Company believes that it hasmeritorious defenses and intends to continue to vigorously defend thismatter. However, litigation is inherently uncertain and it is possiblethat an adverse decision could be rendered, which could have a materialadverse effect on the consolidated financial position, results ofoperations or cash flows of the Company.

On November 18, 2002,the Company initiated a proceeding against OSI Systems, Inc. (OSI) inthe United States District Court sitting in the Southern District ofNew York seeking, among other things, a declaratory judgment that theCompany had fulfilled all of its obligations under a letter of intentwith OSI (the "OSI Letter of Intent"). Underthe OSI Letter of Intent, the Company was to negotiate definitiveagreements with OSI for the sale of certain businesses the Companyacquired from PerkinElmer, Inc. on June 14, 2002. On February 7, 2003,OSI filed an answer and counterclaims alleging, among other things,that the Company defrauded OSI, breached obligations of fiduciary dutyto OSI and breached its obligations under the OSI Letter of Intent. OSIseeks damages in excess of $100,000, not including punitive damages.Under the OSI Letter of Intent, the Company proposed selling to OSI theconventional detection business and the ARGUS business that the Companyacquired from PerkinElmer, Inc. Negotiations with OSI lasted for almostone year and ultimately broke down over issues regarding, among otherthings, intellectual property, product-line definitions, allocation ofemployees and due diligence. Discovery on the matter is essentiallycomplete. The Company believes that the claims asserted by OSI in itssuit are without merit and intends to vigorously defend against the OSIclaims.

L-3 Communications Vertex Aerospace LLC (formerly knownas Vertex Aerospace LLC and acquired by the Company on December 1,2003) (L-3 Vertex) is named as a defendant in one remaining wrongfuldeath lawsuit in the United States District Court, Western District ofNorth Carolina arising from the crash of Air Midwest Flight 5481 atCharlotte-Douglas International Airport in Charlotte, North

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Carolina on January 8, 2003. The crashresulted in the deaths of nineteen passengers and two crewmembers. Eachof the lawsuits alleges contributing factors, including that theaccident was caused by the improper maintenance of the aircraft by L-3Vertex, and seeks to recover compensatory and punitive damages. Twentyclaims resulting from this incident have previously settled. TheNational Transportation Safety Board (NTSB) investigated the cause ofthe crash and has concluded that the crash was caused by the incorrectrigging of the elevator control system compounded by theairplane's center of gravity, which was substantially aft of thecertified limit, with several other contributing factors. L-3 Vertexbelieves that it has meritorious defenses to the pending lawsuit, andintends to defend the case vigorously. The actions have been tenderedto L-3 Vertex's insurance carrier, who has accepted the defenseof each action served upon L-3 Vertex to date. L-3 Vertex was alsoindemnified by Air Midwest for losses L-3 Vertex incurred arising outof its provision of maintenance services to Air Midwest. Based on theavailability of insurance and the indemnification from Air Midwest, theCompany does not believe it will have a material liability in thismatter.

On July 1, 2004, lawsuits were filed on behalf of theestates of 31 Russian children in the state courts of Washington,Arizona, California, Florida, New York and New Jersey againstHoneywell, Honeywell TCAS, the Company, ACSS, Thales USA and ThalesFrance. The suits are based on facts arising out of the crash oversouthern Germany of a Bashkirian Airways Tupelov TU 154M aircraft and aDHL Boeing 757 cargo aircraft. On-board the Tupelov aircraft were 12crew members and 57 passengers, including 45 children. The Boeingaircraft carried a crew of 3. Both aircrafts were equipped withHoneywell/ACSS Model 2000, Change 7 Traffic Collision and AvoidanceSystems. Sensing the other aircraft, the on-board DHL TCAS instructedthe DHL pilot to climb, and the Tupelov on-board TCAS instructed theTupelov pilot to descend. However, the Swiss air traffic controllerordered the Tupelov pilot to climb. The Tupelov pilot disregarded theon-board TCAS and put the Tupelov aircraft into a climb striking theDHL aircraft in midair at approximately 35,000 feet. All crew andpassengers of both planes were lost. Investigations by the NTSB afterthe crash revealed that both TCAS units were performing as designed.The suits allege negligence and strict product liability based upon thedesign of the units and the training provided to resolve conflictingcommands and seek compensatory damages. The Company's insurershave accepted defense of the matter and retained counsel. All partiessubsequently agreed to litigate this matter in the Federal Court in NewJersey and to dismiss the actions brought in the state courts. Based onthe defenses available to the Company and ACSS and the insurancecoverage, the Company does not expect to incur a material liability inthis matter.

16.    Pensions and Other Employee Benefits

The Company maintains multiple pension plans, both contributory andnon-contributory, covering employees at certain locations. Eligibilityfor participation in these plans varies and benefits are generallybased on the participant's compensation and/or years of service.The Company's funding policy is generally to contribute inaccordance with cost accounting standards that affect governmentcontractors, subject to the Internal Revenue Code and regulationsthereon. Plan assets are invested primarily in listed stocks, mutualfunds, bonds, U.S. Government obligations and U.S. Government agencyobligations.

The Company also provides postretirement medicaland life insurance benefits for retired employees and dependents atcertain locations. Participants are eligible for these benefits whenthey retire from active service and meet the eligibility requirementsfor the Company's pension plans. These benefits are fundedprimarily on a pay-as-you-go basis with the retiree generally paying aportion of the cost through contributions, deductibles and coinsuranceprovisions.

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The following table summarizes theaggregate balance sheet impact, as well as the benefit obligations,assets and funded status for all of the Company's pension andpostretirement benefit plans. The Company uses a November 30measurement date to calculate its end of year (December 31) benefitobligations, fair value of plan assets and annual net periodic benefitcost.

|                                                            |  |              |           |                             |  |        |          |         |  |        |          |         |  |        |          |         |  |  |  |  |  |  |
|------------------------------------------------------------|--|--------------|-----------|-----------------------------|--|--------|----------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|--|--|--|--|
|                                                       |  | PensionPlans |           | Postretirement BenefitPlans |  |
|                                                       |  | 2004         |           | 2003                        |  | 2004   |          | 2003    |  |
| **Changein benefit obligation:**                           |  |
| Benefit obligation at thebeginning of theyear              |  | $            | 902,132   |                        |  | $      | 713,925  |    |  | $      | 141,153  |    |  | $      | 129,406  |    |  |
| Servicecost                                                |  |         | 54,957    |                        |  |   | 45,901   |    |  |   | 4,336    |    |  |   | 3,803    |    |  |
| Interestcost                                               |  |         | 55,127    |                        |  |   | 49,789   |    |  |   | 8,066    |    |  |   | 7,781    |    |  |
| Participants'contributions                                 |  |         | 1,075     |                        |  |   | 246      |    |  |   | 1,663    |    |  |   | 1,006    |    |  |
| Amendments                                                 |  |         | 4,851     |                        |  |   | 9,657    |    |  |   | (3,842   | )  |  |   | (6,796   | )  |  |
| Actuarialloss                                              |  |         | 62,183    |                        |  |   | 76,863   |    |  |   | 965      |    |  |   | 6,972    |    |  |
| Actuarialgain due to medicare subsidy                      |  |         | —   |                        |  |   | —  |    |  |   | (4,734   | )  |  |   | —  |    |  |
| Obligationsassumed in connection with businessacquisitions |  |         | 92,845    |                        |  |   | 25,754   |    |  |   | 880      |    |  |   | 2,272    |    |  |
| Settlement                                                 |  |         | (16,938   | )                      |  |   | —  |    |  |   | —  |    |  |   | (107     | )  |  |
| Foreigncurrency exchange ratechanges                       |  |         | 6,102     |                        |  |   | 8,452    |    |  |   | 1,382    |    |  |   | 2,965    |    |  |
| Benefitspaid                                               |  |         | (30,757   | )                      |  |   | (28,455  | )  |  |   | (7,799   | )  |  |   | (6,149   | )  |  |
| Benefitobligation at end of theyear                        |  | $            | 1,131,577 |                        |  | $      | 902,132  |    |  | $      | 142,070  |    |  | $      | 141,153  |    |  |
| **Changein plan assets:**                                  |  |
| Fair value of plan assets atbeginning of theyear           |  | $            | 561,753   |                        |  | $      | 431,771  |    |  | $      | 8,739    |    |  | $      | —  |    |  |
| Actual return on planassets                                |  |         | 56,838    |                        |  |   | 64,043   |    |  |   | 890      |    |  |   | 121      |    |  |
| Assetsacquired in connection with businessacquisitions     |  |         | 96,144    |                        |  |   | 24,122   |    |  |   | —  |    |  |   | —  |    |  |
| Employercontributions                                      |  |         | 60,928    |                        |  |   | 60,846   |    |  |   | 13,652   |    |  |   | 13,761   |    |  |
| Participants'contributions                                 |  |         | 1,075     |                        |  |   | 246      |    |  |   | 1,663    |    |  |   | 1,006    |    |  |
| Settlement                                                 |  |         | (16,938   | )                      |  |   | —  |    |  |   | —  |    |  |   | —  |    |  |
| Foreigncurrency exchange ratechanges                       |  |         | 5,543     |                        |  |   | 9,180    |    |  |   | —  |    |  |   | —  |    |  |
| Benefitspaid                                               |  |         | (30,757   | )                      |  |   | (28,455  | )  |  |   | (7,799   | )  |  |   | (6,149   | )  |  |
| Fairvalue of plan assets at end of theyear                 |  | $            | 734,586   |                        |  | $      | 561,753  |    |  | $      | 17,145   |    |  | $      | 8,739    |    |  |
|                                                       |  |         |      |                        |  |   |     |    |  |
| **Fundedstatus of theplans**                               |  | $            | (396,991  | )                      |  | $      | (340,379 | )  |  | $      | (124,925 | )  |  | $      | (132,414 | )  |  |
| Unrecognizedactuarialloss                                  |  |         | 267,635   |                        |  |   | 224,641  |    |  |   | 3,995    |    |  |   | 7,706    |    |  |
| Unrecognizedprior servicecost                              |  |         | 13,458    |                        |  |   | 9,631    |    |  |   | (14,370  | )  |  |   | (13,347  | )  |  |
| Netamountrecognized                                        |  | $            | (115,898  | )                      |  | $      | (106,107 | )  |  | $      | (135,300 | )  |  | $      | (138,055 | )  |  |
| **Amountsrecognized in the balance sheets consistof:**     |  |
| Accrued benefitliability                                   |  | $            | (273,789  | )                      |  | $      | (233,397 | )  |  | $      | (135,300 | )  |  | $      | (138,055 | )  |  |
| Prepaidbenefit cost (included in OtherAssets)              |  |         | 19,890    |                        |  |   | 12,432   |    |  |   | —  |    |  |   | —  |    |  |
| Intangibleasset (included in OtherAssets)                  |  |         | 14,080    |                        |  |   | —  |    |  |   | —  |    |  |   | —  |    |  |
| Accumulatedother comprehensiveloss                         |  |         | 123,921   |                        |  |   | 114,858  |    |  |   | —  |    |  |   | —  |    |  |
| Netamountrecognized                                        |  | $            | (115,898  | )                      |  | $      | (106,107 | )  |  | $      | (135,300 | )  |  | $      | (138,055 | )  |  |
|                                                            |

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The aggregate accumulated benefitobligation (ABO) for all of the Company's pension plans combinedwas $909,202 at year end 2004 and $721,123 at year end 2003. The tablebelow presents the aggregate ABO and fair value of plan assets forthose pension plans with ABO in excess of the fair value of plan assetsat year end 2004 and 2003.

|                              |  |        |         |        |  |        |         |        |  |  |
|------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                         |  | 2004   |         | 2003   |
| Accumulatedbenefitobligation |  | $      | 797,796 |   |  | $      | 701,855 |   |
| Fairvalue of planassets      |  |   | 585,631 |   |  |   | 534,338 |   |
|                              |

The tablebelow summarizes the weighted average assumptions used to determine thebenefit obligations for the Company's pension and postretirementplans disclosed at December 31, 2004 and 2003.

|                             |  |              |      |                             |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|-----------------------------|--|--------------|------|-----------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                        |  | PensionPlans |      | Postretirement BenefitPlans |
|                        |  | 2004         |      | 2003                        |  | 2004   |      | 2003    |
| **Benefitobligations:**     |  |
| Discountrate                |  |         | 6.00 | %                      |  |   | 6.25 | %  |  |   | 6.00 | %  |  |   | 6.25 | %  |
| Rateof compensationincrease |  |         | 4.50 | %                      |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |
|                             |

Thefollowing table summarizes the components of net periodic benefit costfor the Company's pension and postretirement benefit plans forthe years ended December 31, 2004, 2003 and2002.

|                                             |  |              |         |                             |  |        |         |         |  |        |         |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|---------------------------------------------|--|--------------|---------|-----------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                        |  | PensionPlans |         | Postretirement BenefitPlans |
|                                        |  | 2004         |         | 2003                        |  | 2002   |         | 2004    |  | 2003   |         | 2002    |
| **Componentsof net periodic benefit cost:** |  |
| Servicecost                                 |  | $            | 54,957  |                        |  | $      | 45,901  |    |  | $      | 35,825  |    |  | $      | 4,336  |    |  | $      | 3,803  |    |  | $      | 3,777   |    |
| Interestcost                                |  |         | 55,127  |                        |  |   | 49,789  |    |  |   | 43,108  |    |  |   | 8,066  |    |  |   | 7,781  |    |  |   | 7,779   |    |
| Amortizationof prior servicecost            |  |         | 1,123   |                        |  |   | 625     |    |  |   | 312     |    |  |   | (2,864 | )  |  |   | (2,326 | )  |  |   | (1,701  | )  |
| Expectedreturn on planassets                |  |         | (51,242 | )                      |  |   | (39,357 | )  |  |   | (40,663 | )  |  |   | (1,138 | )  |  |   | (155   | )  |  |   | — |    |
| Recognizedactuarial (gain)loss              |  |         | 11,620  |                        |  |   | 13,591  |    |  |   | 3,246   |    |  |   | 255    |    |  |   | (743   | )  |  |   | (530    | )  |
| Recognitiondue tosettlement                 |  |         | 3,238   |                        |  |   | — |    |  |   | 62      |    |  |   | (38    | )  |  |   | (155   | )  |  |   | — |    |
| Netperiodic benefitcost                     |  | $            | 74,823  |                        |  | $      | 70,549  |    |  | $      | 41,890  |    |  | $      | 8,617  |    |  | $      | 8,205  |    |  | $      | 9,325   |    |
|                                             |

Thetable below summarizes the weighted average assumptions used todetermine the net periodic benefit cost for the years ended December31, 2004, 2003 and 2002.

|                                        |  |              |      |                             |  |        |      |         |  |        |      |         |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|----------------------------------------|--|--------------|------|-----------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                   |  | PensionPlans |      | Postretirement BenefitPlans |
|                                   |  | 2004         |      | 2003                        |  | 2002   |      | 2004    |  | 2003   |      | 2002    |
| **Netperiodic benefit cost:**          |  |
| Discountrate                           |  |         | 6.25 | %                      |  |   | 6.75 | %  |  |   | 7.25 | %  |  |   | 6.25 | %  |  |   | 6.75 | %  |  |   | 7.25 | %  |
| Expectedlong-term return on planassets |  |         | 9.00 | %                      |  |   | 9.00 | %  |  |   | 9.50 | %  |  |   | 9.00 | %  |  |   | 9.00 | %  |  |   | n.a. |    |
| Rateof compensationincrease            |  |         | 4.50 | %                      |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |
|                                        |

Theexpected long-term return on plan asset assumption represents theaverage rate that the Company expects to earn over the long-term on theassets of the Company's benefit plans, including those fromdividends, interest income and capital appreciation. The assumption hasbeen determined based on expectations regarding future rates of returnfor the plans' investment portfolio, with consideration given tothe allocation of investments by asset class and historical rates ofreturn for each individual asset class.

The annual increase incost of benefits (health care cost trend rate) is assumed to be anaverage of 9.75% in 2005 and is assumed to gradually decrease toa rate of 5.0% in 2011 and thereafter. Assumed 

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

health care cost trend rates have asignificant effect on amounts reported for postretirement medicalbenefit plans. A one percentage point decrease in the assumed healthcare cost trend rates would have the effect of decreasing the aggregateservice and interest cost by $568 and the postretirement medicalobligations by $5,769. A one percentage point increase in the assumedhealth care cost trend rate would have the effect of increasing theaggregate service and interest cost by $702 and the postretirementmedical obligations by $6,344.

Plan Assets.    TheCompany's Benefit Plan Committee (Committee) has theresponsibility to formulate the investment policies and strategies forthe plans' assets. These policies and strategies are: (1) investassets of the plans in a manner consistent with the fiduciary standardsof ERISA; (2) preserve the plans' assets; (3) maintain sufficientliquidity to fund benefit payments and pay expenses; (4) evaluate theperformance of investment managers; and (5) achieve, on average, aminimum total rate of return equal to the established benchmarks foreach asset category.

The Committee retains a professionalinvestment consultant to advise and help ensure that the above policiesand strategies are met. The Committee does not involve itself with theday to day operations and selection process of individual securitiesand investments, and, accordingly, has retained the professionalservices of investment management organizations to fulfill those tasks.The investment management organizations have investment discretion overthe assets placed under their management. The Committee provides eachinvestment manager with specific investment guidelines relevant to itsasset class.

The Committee has established the allowable rangethat plans' assets may be invested in for each major assetcategory and regularly monitors each to make sure that the actualinvestment allocation remains within guidelines. The table belowpresents the range for each major category of the plans' assetsat December 31,2004.

|                         |  |               |  |  |  |  |
|-------------------------|--|---------------|--|--|--|--|
| AssetCategory           |  | Range         |
| Domesticequity          |  | 40%–60% |
| Internationalequity     |  | 5%–15%  |
| Fixedincome             |  | 25%–35% |
| Realestatesecurities    |  | 5%–15%  |
| Cashand cashequivalents |  | 0%–20%  |
|                         |

Thefollowing table presents the Company's pension plan andpostretirement benefit plan weighted-average asset allocations atyear-end 2004 and 2003, by assetcategory.

|                                          |  |        |     |         |  |        |     |         |  |  |
|------------------------------------------|--|--------|-----|---------|--|--------|-----|---------|--|--|
| AssetCategory                            |  | 2004   |     | 2003    |
| Domesticequity                           |  |   | 46  | %  |  |   | 44  | %  |
| Internationalequity                      |  |   | 14  |    |  |   | 7   |    |
| Fixed incomesecurities                   |  |   | 23  |    |  |   | 25  |    |
| Real estatesecurities                    |  |   | 7   |    |  |   | 7   |    |
| Other, primarily cashand cashequivalents |  |   | 10  |    |  |   | 17  |    |
| Total                                    |  |   | 100 | %  |  |   | 100 | %  |
|                                          |

Contributions.    For2005, the Company expects to contribute cash of approximately $70,000to its pension plans and $13,000 to its postretirement benefitplans.

In connection with the Company's acquisition in1997 of the ten business units from Lockheed Martin and the formationof the Company, the Company assumed certain defined benefit pensionplan liabilities for present and former employees and retirees ofcertain businesses, which were transferred from Lockheed Martin to theCompany. Lockheed Martin also has provided the Pension Benefit Guaranty

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L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

Corporation (PBGC) with commitments toassume sponsorship or other forms of financial support under certaincircumstances with respect to the Company's pension plans forCommunication Systems West and Aviation Recorders (the"Subject Plans"). Upon the occurrence ofcertain events, Lockheed Martin, at its option, has the right to decidewhether to cause the Company to transfer sponsorship of any or all ofthe Subject Plans to Lockheed Martin, even if the PBGC has not soughtto terminate the Subject Plans. If Lockheed Martin did assumesponsorship of these plans, it would be primarily liable for the costsassociated with funding the Subject Plans or any costs associated withthe termination of the Subject Plans but the Company would be requiredto reimburse Lockheed Martin for these costs. To date, there has beenno impact on pension expense and funding requirements resulting fromthis arrangement. However, should Lockheed Martin assume sponsorship ofthe Subject Plans or if these plans were terminated, the impact of anyincreased pension expenses or funding requirements could be material tothe Company. For the year ended December 31, 2004, the Companycontributed $492 to the Subject Plans. The Company has performed itsobligations under the letter agreement with Lockheed Martin and theLockheed Martin Commitment and has not received any communications fromthe PBGC concerning actions which the PBGC contemplates taking inrespect of the Subject Plans.

Estimated Future BenefitPayments.    The following table presents expected pension andpostretirement benefit payments and expected postretirement subsidiesdue to the Medicare Act described in Note  2, which reflectexpected future service, as appropriate.

|                |  |                 |         |                        |  |                 |        |        |  |        |         |        |  |  |
|----------------|--|-----------------|---------|------------------------|--|-----------------|--------|--------|--|--------|---------|--------|--|--|
|           |  |            |         | PostretirementBenefits |
|           |  | PensionBenefits |         | BenefitPayments        |  | SubsidyReceipts |
| 2005           |  | $               | 35,246  |                   |  | $               | 7,446  |   |  | $      | — |   |
| 2006           |  |            | 38,812  |                   |  |            | 8,042  |   |  |   | 58      |   |
| 2007           |  |            | 42,122  |                   |  |            | 8,533  |   |  |   | 81      |   |
| 2008           |  |            | 46,211  |                   |  |            | 8,902  |   |  |   | 113     |   |
| 2009           |  |            | 50,313  |                   |  |            | 9,461  |   |  |   | 138     |   |
| Years2010-2014 |  |            | 325,733 |                   |  |            | 52,885 |   |  |   | 1,179   |   |
|                |

EmployeeSavings Plans.    Under its various employee savings plans, theCompany matches the contributions of participating employees up to adesignated level. The extent of the match, vesting terms and the formof the matching contributions vary among the plans. Under these plans,the Company's matching contributions in L-3 Holdings'common stock and cash were $61,184 for 2004, $43,262 for 2003 and$36,120 for 2002.

17.    Supplemental Cash FlowInformation

|                                                                                                                |  |                       |         |        |  |        |         |        |  |        |         |        |  |  |
|----------------------------------------------------------------------------------------------------------------|--|-----------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                                                           |  | YearEnded December31, |
|                                                                                                           |  | 2004                  |         | 2003   |  | 2002   |
| Interestpaid                                                                                                   |  | $                     | 138,213 |   |  | $      | 119,940 |   |  | $      | 109,301 |   |
| Incometaxpayments                                                                                              |  |                  | 41,112  |   |  |   | 24,373  |   |  |   | 8,004   |   |
| Incometaxrefunds                                                                                               |  |                  | 4,088   |   |  |   | 7,075   |   |  |   | 5,877   |   |
| Noncashtransactions:                                                                                           |  |
| Common stock issued forbusiness acquisitionconsideration                                                       |  |                  | 6,982   |   |  |   | 4,969   |   |  |   | 10,607  |   |
| Conversionof 4% senior subordinated convertible contingent debt securities(CODES) to L-3 Holdings' commonstock |  |                  | 419,785 |   |  |   | — |   |  |   | — |   |
| Conversionof 51⁄4% convertible senior subordinated notesto L-3 Holdings' commonstock                      |  |                  | 298,181 |   |  |   | 1,630   |   |  |   | — |   |
|                                                                                                                |

F-47

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

18.    Segment Information

TheCompany has four reportable segments: (1) Secure Communications &ISR, (2) Training, Simulation & Government Services, (3) AircraftModernization, O&M and Products and (4) Specialized Products, whichare described in Note 1. The Company evaluates the performance of itsoperating segments and reportable segments based on their sales andoperating income. All corporate expenses are allocated to theCompany's divisions using an allocation methodology prescribed byU.S. Government regulations for government contractors. Accordingly,all costs and expenses are included in the Company's measure ofsegment profitability.

|                             |  |                                |           |                                               |  |                                           |           |                     |  |           |           |                                  |  |                   |           |        |  |        |         |        |  |        |         |         |  |        |           |        |  |        |
|-----------------------------|--|--------------------------------|-----------|-----------------------------------------------|--|-------------------------------------------|-----------|---------------------|--|-----------|-----------|----------------------------------|--|-------------------|-----------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|-----------|--------|--|--------|
|                        |  | SecureCommunications & ISR |           | Training, Simulation& Government Services |  | AircraftModernization,O&M andProducts |           | SpecializedProducts |  | Corporate |           | Eliminationof Intersegment Sales |  | ConsolidatedTotal |
| **2004**                    |  |                           |      |                                          |  |                                      |      |                |  |      |      |                             |  |              |      |   |  |   |    |   |  |   |    |    |  |   |      |   |  |   |   |   |
| Sales                       |  | $                              | 1,667,804 |                                          |  | $                                         | 1,281,277 |                |  | $         | 2,290,858 |                             |  | $                 | 1,734,714 |   |  | $      | — |   |  | $      | (77,656 | )  |  | $      | 6,896,997 |   |
| Operatingincome             |  |                           | 218,008   |                                          |  |                                      | 149,262   |                |  |      | 249,579   |                             |  |              | 131,770   |   |  |   | — |   |  |   | — |    |  |   | 748,619   |   |
| Totalassets                 |  |                           | 1,499,214 |                                          |  |                                      | 977,542   |                |  |      | 2,252,285 |                             |  |              | 2,160,563 |   |  |   | 891,161 |   |  |   | — |    |  |   | 7,780,765 |   |
| Capitalexpenditures         |  |                           | 26,530    |                                          |  |                                      | 4,318     |                |  |      | 15,846    |                             |  |              | 33,404    |   |  |   | 409     |   |  |   | — |    |  |   | 80,507    |   |
| Depreciationandamortization |  |                           | 32,241    |                                          |  |                                      | 7,567     |                |  |      | 32,336    |                             |  |              | 46,805    |   |  |   | — |   |  |   | — |    |  |   | 118,949   |   |
| **2003**                    |  |
| Sales                       |  | $                              | 1,440,596 |                                          |  | $                                         | 1,037,354 |                |  | $         | 1,021,861 |                             |  | $                 | 1,634,517 |   |  | $      | — |   |  | $      | (72,734 | )  |  | $      | 5,061,594 |   |
| Operatingincome             |  |                           | 172,903   |                                          |  |                                      | 115,487   |                |  |      | 147,834   |                             |  |              | 144,797   |   |  |   | — |   |  |   | — |    |  |   | 581,021   |   |
| Totalassets                 |  |                           | 1,201,187 |                                          |  |                                      | 781,186   |                |  |      | 2,043,677 |                             |  |              | 1,961,754 |   |  |   | 517,518 |   |  |   | — |    |  |   | 6,505,322 |   |
| Capitalexpenditures         |  |                           | 25,982    |                                          |  |                                      | 3,082     |                |  |      | 10,281    |                             |  |              | 43,206    |   |  |   | 323     |   |  |   | — |    |  |   | 82,874    |   |
| Depreciationandamortization |  |                           | 29,169    |                                          |  |                                      | 7,977     |                |  |      | 18,720    |                             |  |              | 39,557    |   |  |   | — |   |  |   | — |    |  |   | 95,423    |   |
| **2002**                    |  |
| Sales                       |  | $                              | 1,054,297 |                                          |  | $                                         | 828,627   |                |  | $         | 677,846   |                             |  | $                 | 1,477,655 |   |  | $      | – |   |  | $      | (27,196 | )  |  | $      | 4,011,229 |   |
| Operatingincome             |  |                           | 103,449   |                                          |  |                                      | 96,843    |                |  |      | 105,680   |                             |  |              | 148,007   |   |  |   | — |   |  |   | — |    |  |   | 453,979   |   |
| Totalassets                 |  |                           | 1,149,016 |                                          |  |                                      | 690,564   |                |  |      | 965,038   |                             |  |              | 1,898,972 |   |  |   | 538,718 |   |  |   | — |    |  |   | 5,242,308 |   |
| Capitalexpenditures         |  |                           | 19,350    |                                          |  |                                      | 4,957     |                |  |      | 14,035    |                             |  |              | 23,542    |   |  |   | 174     |   |  |   | — |    |  |   | 62,058    |   |
| Depreciationandamortization |  |                           | 23,692    |                                          |  |                                      | 6,857     |                |  |      | 15,513    |                             |  |              | 29,798    |   |  |   | — |   |  |   | — |    |  |   | 75,860    |   |
|                             |

Corporateassets not allocated to the reportable segments primarily include cashand cash equivalents, corporate office fixed assets, deferred incometax assets and deferred debt issuance costs. In addition, substantiallyall of the Company's assets are located in NorthAmerica.

F-48

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

The Company's sales attributable toU.S. customers and foreign customers, based on location of thecustomer, is summarized in the table below.

|               |  |                       |           |        |  |        |           |        |  |        |           |        |  |  |
|---------------|--|-----------------------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|          |  | YearEnded December31, |
|          |  | 2004                  |           | 2003   |  | 2002   |
| U.S.          |  | $                     | 5,993,746 |   |  | $      | 4,208,273 |   |  | $      | 3,436,219 |   |
| Foreign:      |  |
| Canada        |  |                  | 234,910   |   |  |   | 127,936   |   |  |   | 63,447    |   |
| UnitedKingdom |  |                  | 112,802   |   |  |   | 158,836   |   |  |   | 115,910   |   |
| Australia     |  |                  | 71,926    |   |  |   | 51,949    |   |  |   | 62,103    |   |
| Germany       |  |                  | 56,258    |   |  |   | 60,763    |   |  |   | 61,024    |   |
| Other         |  |                  | 427,355   |   |  |   | 453,837   |   |  |   | 272,526   |   |
| Totalforeign  |  |                  | 903,251   |   |  |   | 853,321   |   |  |   | 575,010   |   |
| Consolidated  |  | $                     | 6,896,997 |   |  | $      | 5,061,594 |   |  | $      | 4,011,229 |   |
|               |

Salesto principal customers are summarized in the table below.

|                                   |  |                       |           |        |  |        |           |        |  |        |           |        |  |  |
|-----------------------------------|--|-----------------------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                              |  | YearEnded December31, |
|                              |  | 2004                  |           | 2003   |  | 2002   |
| U.S. Governmentagencies           |  | $                     | 5,538,852 |   |  | $      | 3,843,025 |   |  | $      | 3,107,271 |   |
| Alliedforeigngovernments          |  |                  | 581,300   |   |  |   | 506,508   |   |  |   | 395,062   |   |
| Commercialexport                  |  |                  | 321,951   |   |  |   | 346,813   |   |  |   | 179,948   |   |
| Other(principally U.S.commercial) |  |                  | 454,894   |   |  |   | 365,248   |   |  |   | 328,948   |   |
| Consolidated                      |  | $                     | 6,896,997 |   |  | $      | 5,061,594 |   |  | $      | 4,011,229 |   |
|                                   |

TheCompany's sales by product and services are summarized in thetable below.

|                                                                        |  |                       |           |         |  |        |           |         |  |        |           |         |  |  |
|------------------------------------------------------------------------|--|-----------------------|-----------|---------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                   |  | YearEnded December31, |
|                                                                   |  | 2004                  |           | 2003    |  | 2002   |
| Products:                                                              |  |
| ISRsystems                                                             |  | $                     | 826,708   |    |  | $      | 714,622   |    |  | $      | 403,179   |    |
| Aircraftmodernization                                                  |  |                  | 820,009   |    |  |   | 654,093   |    |  |   | 517,309   |    |
| Communicationsystems for intelligence collection and imageryprocessing |  |                  | 469,175   |    |  |   | 401,383   |    |  |   | 303,650   |    |
| Navalpower, control and sonarsystems                                   |  |                  | 429,737   |    |  |   | 418,019   |    |  |   | 280,564   |    |
| Microwave components and telemetry and spaceproducts                   |  |                  | 395,409   |    |  |   | 377,768   |    |  |   | 271,664   |    |
| Secure communicationsproducts                                          |  |                  | 392,533   |    |  |   | 339,166   |    |  |   | 300,200   |    |
| Aviationproducts                                                       |  |                  | 381,217   |    |  |   | 288,926   |    |  |   | 216,134   |    |
| Precision guidance and munitions                                       |  |                  | 338,084   |    |  |   | 348,513   |    |  |   | 373,452   |    |
| Securityand detectionsystems                                           |  |                  | 236,039   |    |  |   | 253,052   |    |  |   | 428,984   |    |
| Trainingdevices and motionsimulators                                   |  |                  | 202,219   |    |  |   | 160,718   |    |  |   | 144,310   |    |
| Sensorsand imagingproducts                                             |  |                  | 152,162   |    |  |   | 103,287   |    |  |   | 7,233     |    |
| Subtotalproducts                                                       |  |                  | 4,643,292 |    |  |   | 4,059,547 |    |  |   | 3,246,679 |    |
| Services:                                                              |  |
| Aircraftmaintenance and logistics supportservices                      |  |                  | 1,101,019 |    |  |   | 79,651    |    |  |   | —   |    |
| Governmentand supportservices                                          |  |                  | 822,097   |    |  |   | 734,732   |    |  |   | 571,692   |    |
| Trainingservices                                                       |  |                  | 459,180   |    |  |   | 302,622   |    |  |   | 256,935   |    |
| Subtotalservices                                                       |  |                  | 2,382,296 |    |  |   | 1,117,005 |    |  |   | 828,627   |    |
| Intercompanyeliminations                                               |  |                  | (128,591  | )  |  |   | (114,958  | )  |  |   | (64,077   | )  |
| Consolidated                                                           |  | $                     | 6,896,997 |    |  | $      | 5,061,594 |    |  | $      | 4,011,229 |    |
|                                                                        |

F-49

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

19.    Unaudited Quarterly FinancialData

Unaudited summarized financial data by quarter for theyears ended December 31, 2004 and 2003 is presented in the tablebelow.

|                 |  |         |           |         |  |              |           |            |  |        |           |        |  |        |           |        |  |  |
|-----------------|--|---------|-----------|---------|--|--------------|-----------|------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|            |  | March31 |           | June 30 |  | September 30 |           | December31 |
| **2004**        |  |
| Sales           |  | $       | 1,521,644 |    |  | $            | 1,679,985 |       |  | $      | 1,784,132 |   |  | $      | 1,911,236 |   |
| Operatingincome |  |    | 151,602   |    |  |         | 178,118   |       |  |   | 199,360   |   |  |   | 219,539   |   |
| Netincome       |  |    | 72,008    |    |  |         | 88,071    |       |  |   | 102,490   |   |  |   | 119,311   |   |
| BasicEPS        |  |    | 0.69      |    |  |         | 0.83      |       |  |   | 0.96      |   |  |   | 1.05      |   |
| DilutedEPS      |  |    | 0.65      |    |  |         | 0.78      |       |  |   | 0.89      |   |  |   | 1.01      |   |
|                 |

|                 |  |         |           |         |  |              |           |            |  |        |           |        |  |        |           |        |  |  |
|-----------------|--|---------|-----------|---------|--|--------------|-----------|------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|            |  | March31 |           | June 30 |  | September 30 |           | December31 |
| **2003**        |  |
| Sales           |  | $       | 1,089,047 |    |  | $            | 1,226,881 |       |  | $      | 1,264,611 |   |  | $      | 1,481,055 |   |
| Operatingincome |  |    | 108,837   |    |  |         | 128,746   |       |  |   | 152,372   |   |  |   | 191,066   |   |
| Netincome       |  |    | 49,737    |    |  |         | 53,379    |       |  |   | 76,107    |   |  |   | 98,417    |   |
| BasicEPS        |  |    | 0.52      |    |  |         | 0.56      |       |  |   | 0.79      |   |  |   | 1.02      |   |
| DilutedEPS      |  |    | 0.49      |    |  |         | 0.52      |       |  |   | 0.71      |   |  |   | 0.90      |   |
|            |  |    |      |    |  |         |      |       |  |   |      |   |  |   |      |   |
|                 |

20.    FinancialInformation of L-3 Communications and Its Subsidiaries

Total shareholders' equity for L-3 Communicationsequals that of L-3 Holdings, but the components, common stock andadditional paid-in capital, are different. The table below presentsinformation regarding the balances and changes in common stock andadditional paid-in capital of L-3 Communications for each of the threeyears ended December 31, 2004.

|                               |  |                               |         |          |  |                           |                     |        |  |        |           |        |  |        |           |        |  |  |  |  |  |  |
|-------------------------------|--|-------------------------------|---------|----------|--|---------------------------|---------------------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|--|--|--|--|
|                          |  | L-3Communications CommonStock |         |     |  |                      |                     |   |  |   |
|                          |  | SharesIssued                  |         | ParValue |  | Additional Paid-inCapital |                     | Total  |  |
| Balance at December 31,2001   |  |                          | 100     |     |  | $                         | —             |   |  | $      | 939,037   |   |  | $      | 939,037   |   |  |
| Contributionsfrom L-3Holdings |  |                          |    |     |  |                      |                |   |  |   | 855,939   |   |  |   | 855,939   |   |  |
| Balanceat December 31,2002    |  |                          | 100     |     |  |                      | —             |   |  |   | 1,794,976 |   |  |   | 1,794,976 |   |  |
| Contributionsfrom L-3Holdings |  |                          | — |     |  |                      | —             |   |  |   | 98,512    |   |  |   | 98,512    |   |  |
| Balanceat December 31,2003    |  |                          | 100     |     |  |                      | —             |   |  |   | 1,893,488 |   |  |   | 1,893,488 |   |  |
| Contributionsfrom L-3Holdings |  |                          | — |     |  |                      | —             |   |  |   | 886,970   |   |  |   | 886,970   |   |  |
| Balanceat December 31, 2004   |  |                          | 100     |     |  | $                         |   — |   |  | $      | 2,780,458 |   |  | $      | 2,780,458 |   |  |
|                               |

Thenet proceeds received by L-3 Holdings from the sale of its commonstock, exercise of L-3 Holdings employee stock options and L-3 Holdingscommon stock contributed to the Company's savings plans arecontributed to L-3 Communications. L-3 Holding common stock issued toholders of the Convertible Notes and CODES who converted such noteswere also contributed to L-3 Communications. See Notes 2 and 8.

The debt of L-3 Communications, including the Senior SubordinatedNotes and borrowings under amounts drawn against the Senior CreditFacilities are guaranteed, on a joint and several, full and

F-50

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

unconditional basis, by certain of itswholly-owned domestic subsidiaries (the "GuarantorSubsidiaries"). See Note 8. The foreign subsidiaries andcertain domestic subsidiaries of L-3 Communications (the"Non-Guarantor Subsidiaries") do notguarantee the debt of L-3 Communications. None of the debt of L-3Communications has been issued by its subsidiaries. There are norestrictions on the payment of dividends from the GuarantorSubsidiaries to L-3 Communications.

In lieu of providingseparate audited financial statements for the Guarantor Subsidiaries,the Company has included the accompanying condensed combining financialstatements based on Rule 3-10 of SEC Regulation S-X. The Company doesnot believe that separate financial statements of the GuarantorSubsidiaries are material to users of the financial statements.

The following condensed combining financial information present theresults of operations, financial position and cash flows of (i) L-3Holdings, excluding L-3 Communications, (ii) L-3 Communications,excluding its consolidated subsidiaries (the"Parent"), (iii) the Guarantor Subsidiaries,(iv) the Non-Guarantor Subsidiaries and (v) the eliminations to arriveat the information for L-3 Communications on a consolidatedbasis.

F-51

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Dollars in thousands, except per sharedata)

|                                                            |  |             |           |                           |  |                       |           |                           |  |              |           |                               |  |        |         |        |  |        |            |         |  |        |           |        |  |  |
|------------------------------------------------------------|--|-------------|-----------|---------------------------|--|-----------------------|-----------|---------------------------|--|--------------|-----------|-------------------------------|--|--------|---------|--------|--|--------|------------|---------|--|--------|-----------|--------|--|--|
|                                                       |  | L-3Holdings |           | L-3Communications(Parent) |  | GuarantorSubsidiaries |           | Non-GuarantorSubsidiaries |  | Eliminations |           | ConsolidatedL-3Communications |
| **Condensed CombiningBalanceSheets:**                      |  |
| **AtDecember 31, 2004:**                                   |  |
| Currentassets:                                             |  |
| Cash and cashequivalents                                   |  | $           | —   |                      |  | $                     | 643,173   |                      |  | $            | (45,220   | )                        |  | $      | 55,466  |   |  | $      | —    |    |  | $      | 653,419   |   |
| Contractsinprocess                                         |  |        | —   |                      |  |                  | 591,018   |                      |  |         | 1,111,253 |                          |  |   | 276,756 |   |  |   | —    |    |  |   | 1,979,027 |   |
| Othercurrentassets                                         |  |        | —   |                      |  |                  | 127,465   |                      |  |         | 39,390    |                          |  |   | 9,023   |   |  |   | —    |    |  |   | 175,878   |   |
| Totalcurrentassets                                         |  |        | —   |                      |  |                  | 1,361,656 |                      |  |         | 1,105,423 |                          |  |   | 341,245 |   |  |   | —    |    |  |   | 2,808,324 |   |
| Goodwill                                                   |  |        | —   |                      |  |                  | 885,242   |                      |  |         | 2,709,731 |                          |  |   | 459,841 |   |  |   | —    |    |  |   | 4,054,814 |   |
| Otherassets                                                |  |        | —   |                      |  |                  | 307,929   |                      |  |         | 492,264   |                          |  |   | 117,434 |   |  |   | —    |    |  |   | 917,627   |   |
| Investmentin and amounts due from consolidatedsubsidiaries |  |        | 3,799,761 |                      |  |                  | 4,259,200 |                      |  |         | 831,062   |                          |  |   | 40,000  |   |  |   | (8,930,023 | )  |  |   | —   |   |
| Totalassets                                                |  | $           | 3,799,761 |                      |  | $                     | 6,814,027 |                      |  | $            | 5,138,480 |                          |  | $      | 958,520 |   |  | $      | (8,930,023 | )  |  | $      | 7,780,765 |   |
| Currentliabilities                                         |  | $           | —   |                      |  | $                     | 495,190   |                      |  | $            | 489,500   |                          |  | $      | 191,150 |   |  | $      | —    |    |  | $      | 1,175,840 |   |
| Otherlong-termliabilities                                  |  |        | —   |                      |  |                  | 329,270   |                      |  |         | 182,679   |                          |  |   | 25,873  |   |  |   | —    |    |  |   | 537,822   |   |
| Long-termdebt                                              |  |        | —   |                      |  |                  | 2,189,806 |                      |  |         | —   |                          |  |   | — |   |  |   | —    |    |  |   | 2,189,806 |   |
| Minorityinterests                                          |  |        | —   |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 77,536  |   |  |   | —    |    |  |   | 77,536    |   |
| Shareholders'equity                                        |  |        | 3,799,761 |                      |  |                  | 3,799,761 |                      |  |         | 4,466,301 |                          |  |   | 663,961 |   |  |   | (8,930,023 | )  |  |   | 3,799,761 |   |
| Totalliabilities and shareholders'equity                   |  | $           | 3,799,761 |                      |  | $                     | 6,814,027 |                      |  | $            | 5,138,480 |                          |  | $      | 958,520 |   |  | $      | (8,930,023 | )  |  | $      | 7,780,765 |   |
| **AtDecember 31, 2003:**                                   |  |
| Currentassets:                                             |  |
| Cash and cashequivalents                                   |  | $           | —   |                      |  | $                     | 155,375   |                      |  | $            | (41,291   | )                        |  | $      | 20,792  |   |  | $      | —    |    |  | $      | 134,876   |   |
| Contracts inprocess                                        |  |        | —   |                      |  |                  | 528,056   |                      |  |         | 817,547   |                          |  |   | 269,745 |   |  |   | —    |    |  |   | 1,615,348 |   |
| Othercurrentassets                                         |  |        | —   |                      |  |                  | 159,194   |                      |  |         | 21,928    |                          |  |   | 6,356   |   |  |   | —    |    |  |   | 187,478   |   |
| Totalcurrentassets                                         |  |        | —   |                      |  |                  | 842,625   |                      |  |         | 798,184   |                          |  |   | 296,893 |   |  |   | —    |    |  |   | 1,937,702 |   |
| Goodwill                                                   |  |        | —   |                      |  |                  | 805,388   |                      |  |         | 2,425,591 |                          |  |   | 421,457 |   |  |   | —    |    |  |   | 3,652,436 |   |
| Otherassets                                                |  |        | —   |                      |  |                  | 356,346   |                      |  |         | 446,403   |                          |  |   | 112,435 |   |  |   | —    |    |  |   | 915,184   |   |
| Investmentin and amounts due from consolidatedsubsidiaries |  |        | 3,290,873 |                      |  |                  | 3,708,989 |                      |  |         | 596,696   |                          |  |   | 21,052  |   |  |   | (7,617,610 | )  |  |   | —   |   |
| Totalassets                                                |  | $           | 3,290,873 |                      |  | $                     | 5,713,348 |                      |  | $            | 4,266,874 |                          |  | $      | 851,837 |   |  | $      | (7,617,610 | )  |  | $      | 6,505,322 |   |
| Currentliabilities                                         |  | $           | —   |                      |  | $                     | 396,868   |                      |  | $            | 370,468   |                          |  | $      | 156,876 |   |  | $      | —    |    |  | $      | 924,212   |   |
| Other long-termliabilities                                 |  |        | —   |                      |  |                  | 284,684   |                      |  |         | 167,275   |                          |  |   | 21,144  |   |  |   | —    |    |  |   | 473,103   |   |
| Long-termdebt                                              |  |        | 716,377   |                      |  |                  | 2,457,300 |                      |  |         | —   |                          |  |   | — |   |  |   | (716,377   | )  |  |   | 2,457,300 |   |
| Minorityinterests                                          |  |        | —   |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 76,211  |   |  |   | —    |    |  |   | 76,211    |   |
| Shareholders'equity                                        |  |        | 2,574,496 |                      |  |                  | 2,574,496 |                      |  |         | 3,729,131 |                          |  |   | 597,606 |   |  |   | (6,901,233 | )  |  |   | 2,574,496 |   |
| Totalliabilities and shareholders'equity                   |  | $           | 3,290,873 |                      |  | $                     | 5,713,348 |                      |  | $            | 4,266,874 |                          |  | $      | 851,837 |   |  | $      | (7,617,610 | )  |  | $      | 6,505,322 |   |
|                                                            |

F-52

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|                                                             |  |             |         |                           |  |                       |           |                           |  |              |           |                               |  |        |         |         |  |        |          |         |  |        |           |         |  |  |
|-------------------------------------------------------------|--|-------------|---------|---------------------------|--|-----------------------|-----------|---------------------------|--|--------------|-----------|-------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--------|-----------|---------|--|--|
|                                                        |  | L-3Holdings |         | L-3Communications(Parent) |  | GuarantorSubsidiaries |           | Non-GuarantorSubsidiaries |  | Eliminations |           | ConsolidatedL-3Communications |
| **CondensedCombining Statements ofOperations:**             |  |
| **Forthe year ended****December 31,2004:**                  |  |
| Sales                                                       |  | $           | — |                      |  | $                     | 2,038,704 |                      |  | $            | 4,051,825 |                          |  | $      | 834,169 |    |  | $      | (27,701  | )  |  | $      | 6,896,997 |    |
| Costsandexpenses                                            |  |        | — |                      |  |                  | 1,782,128 |                      |  |         | 3,651,414 |                          |  |   | 742,537 |    |  |   | (27,701  | )  |  |   | 6,148,378 |    |
| Operatingincome                                             |  |        | — |                      |  |                  | 256,576   |                      |  |         | 400,411   |                          |  |   | 91,632  |    |  |   | —  |    |  |   | 748,619   |    |
| Otherexpense (income),net                                   |  |        | — |                      |  |                  | (20,108   | )                    |  |         | 805       |                          |  |   | (670    | )  |  |   | 12,721   |    |  |   | (7,252    | )  |
| Interestexpense                                             |  |        | 15,020  |                      |  |                  | 143,926   |                      |  |         | 635       |                          |  |   | 13,508  |    |  |   | (27,741  | )  |  |   | 145,348   |    |
| Minorityinterests in net income of consolidatedsubsidiaries |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 8,862   |    |  |   | —  |    |  |   | 8,862     |    |
| Losson retirement ofdebt                                    |  |        | — |                      |  |                  | 4,973     |                      |  |         | —   |                          |  |   | — |    |  |   | —  |    |  |   | 4,973     |    |
| Provision(benefit) for incometaxes                          |  |        | (5,407  | )                    |  |                  | 46,002    |                      |  |         | 143,630   |                          |  |   | 25,176  |    |  |   | 5,407    |    |  |   | 214,808   |    |
| Equityin net income of consolidatedsubsidiaries             |  |        | 391,493 |                      |  |                  | 300,097   |                      |  |         | —   |                          |  |   | — |    |  |   | (691,590 | )  |  |   | —   |    |
| Netincome                                                   |  | $           | 381,880 |                      |  | $                     | 381,880   |                      |  | $            | 255,341   |                          |  | $      | 44,756  |    |  | $      | (681,977 | )  |  | $      | 381,880   |    |
| **Forthe year ended December 31,2003:**                     |  |
| Sales                                                       |  | $           | — |                      |  | $                     | 1,918,288 |                      |  | $            | 2,715,558 |                          |  | $      | 445,485 |    |  | $      | (17,737  | )  |  | $      | 5,061,594 |    |
| Costsandexpenses                                            |  |        | — |                      |  |                  | 1,635,998 |                      |  |         | 2,464,534 |                          |  |   | 397,778 |    |  |   | (17,737  | )  |  |   | 4,480,573 |    |
| Operatingincome                                             |  |        | — |                      |  |                  | 282,290   |                      |  |         | 251,024   |                          |  |   | 47,707  |    |  |   | —  |    |  |   | 581,021   |    |
| Otherexpense (income),net                                   |  |        | — |                      |  |                  | (9,575    | )                    |  |         | 92        |                          |  |   | 784     |    |  |   | 8,484    |    |  |   | (215      | )  |
| Interestexpense                                             |  |        | 34,058  |                      |  |                  | 131,734   |                      |  |         | 501       |                          |  |   | 8,932   |    |  |   | (42,542  | )  |  |   | 132,683   |    |
| Minorityinterests in net income of consolidatedsubsidiaries |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 3,515   |    |  |   | —  |    |  |   | 3,515     |    |
| Losson retirement ofdebt                                    |  |        | — |                      |  |                  | 11,225    |                      |  |         | —   |                          |  |   | — |    |  |   | —  |    |  |   | 11,225    |    |
| Provision(benefit) for incometaxes                          |  |        | (12,261 | )                    |  |                  | 53,607    |                      |  |         | 90,155    |                          |  |   | 12,411  |    |  |   | 12,261   |    |  |   | 156,173   |    |
| Equityin net income of consolidatedsubsidiaries             |  |        | 299,437 |                      |  |                  | 182,341   |                      |  |         | —   |                          |  |   | — |    |  |   | (481,778 | )  |  |   | —   |    |
| Netincome                                                   |  | $           | 277,640 |                      |  | $                     | 277,640   |                      |  | $            | 160,276   |                          |  | $      | 22,065  |    |  | $      | (459,981 | )  |  | $      | 277,640   |    |
| **Forthe year ended December 31,2002:**                     |  |
| Sales                                                       |  | $           | — |                      |  | $                     | 1,875,389 |                      |  | $            | 1,895,410 |                          |  | $      | 260,799 |    |  | $      | (20,369  | )  |  | $      | 4,011,229 |    |
| Costsandexpenses                                            |  |        | — |                      |  |                  | 1,622,200 |                      |  |         | 1,736,233 |                          |  |   | 219,186 |    |  |   | (20,369  | )  |  |   | 3,557,250 |    |
| Operatingincome                                             |  |        | — |                      |  |                  | 253,189   |                      |  |         | 159,177   |                          |  |   | 41,613  |    |  |   | —  |    |  |   | 453,979   |    |
| Otherexpense (income),net                                   |  |        | — |                      |  |                  | (11,202   | )                    |  |         | 286       |                          |  |   | (262    | )  |  |   | 6,257    |    |  |   | (4,921    | )  |
| Interestexpense                                             |  |        | 35,499  |                      |  |                  | 120,774   |                      |  |         | 1,622     |                          |  |   | 6,353   |    |  |   | (41,756  | )  |  |   | 122,492   |    |
| Minorityinterests in net income of consolidatedsubsidiaries |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 6,198   |    |  |   | —  |    |  |   | 6,198     |    |
| Losson retirement ofdebt                                    |  |        | — |                      |  |                  | 16,187    |                      |  |         | —   |                          |  |   | — |    |  |   | —  |    |  |   | 16,187    |    |
| Provision(benefit) for incometaxes                          |  |        | (13,880 | )                    |  |                  | 44,942    |                      |  |         | 56,145    |                          |  |   | 10,469  |    |  |   | 13,880   |    |  |   | 111,556   |    |
| Cumulativeeffect of a change in accountingprinciple         |  |        | — |                      |  |                  | (14,749   | )                    |  |         | —   |                          |  |   | (9,621  | )  |  |   | —  |    |  |   | (24,370   | )  |
| Equityin net income of consolidatedsubsidiaries             |  |        | 199,716 |                      |  |                  | 110,358   |                      |  |         | —   |                          |  |   | — |    |  |   | (310,074 | )  |  |   | —   |    |
| Netincome                                                   |  | $           | 178,097 |                      |  | $                     | 178,097   |                      |  | $            | 101,124   |                          |  | $      | 9,234   |    |  | $      | (288,455 | )  |  | $      | 178,097   |    |
|                                                             |

F-53

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|                                                  |  |             |          |                           |  |                       |            |                           |  |              |          |                               |  |        |          |         |  |        |            |         |  |        |            |         |  |  |
|--------------------------------------------------|--|-------------|----------|---------------------------|--|-----------------------|------------|---------------------------|--|--------------|----------|-------------------------------|--|--------|----------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                             |  | L-3Holdings |          | L-3Communications(Parent) |  | GuarantorSubsidiaries |            | Non-GuarantorSubsidiaries |  | Eliminations |          | ConsolidatedL-3Communications |
| **CondensedCombining Statements of CashFlows:**  |  |
| **Forthe year ended****December 31,2004:**       |  |
| **Operatingactivities:**                         |  |
| Net cash from operatingactivities                |  | $           | —  |                      |  | $                     | 219,057    |                      |  | $            | 311,748  |                          |  | $      | 89,866   |    |  | $      | —    |    |  | $      | 620,671    |    |
| **Investingactivities:**                         |  |
| Business acquisitions, net ofcashacquired        |  |        | —  |                      |  |                  | (102,341   | )                    |  |         | (303,550 | )                        |  |   | (67,542  | )  |  |   | —    |    |  |   | (473,433   | )  |
| Otherinvestingactivities                         |  |        | (164,220 | )                    |  |                  | (407,959   | )                    |  |         | (38,651  | )                        |  |   | (6,492   | )  |  |   | 535,312    |    |  |   | (82,010    | )  |
| Netcash used in investingactivities              |  |        | (164,220 | )                    |  |                  | (510,300   | )                    |  |         | (342,201 | )                        |  |   | (74,034  | )  |  |   | 535,312    |    |  |   | (555,443   | )  |
| **Financingactivities:**                         |  |
| Proceeds from sale of seniorsubordinatednotes    |  |        | —  |                      |  |                  | 650,000    |                      |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | 650,000    |    |
| Redemptionof senior subordinatednotes            |  |        | —  |                      |  |                  | (205,751   | )                    |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | (205,751   | )  |
| Otherfinancing activities,net                    |  |        | 164,220  |                      |  |                  | 334,792    |                      |  |         | 26,524   |                          |  |   | 18,842   |    |  |   | (535,312   | )  |  |   | 9,066      |    |
| Netcash from financingactivities                 |  |        | 164,220  |                      |  |                  | 779,041    |                      |  |         | 26,524   |                          |  |   | 18,842   |    |  |   | (535,312   | )  |  |   | 453,315    |    |
| Netincrease (decrease) incash                    |  |        | —  |                      |  |                  | 487,798    |                      |  |         | (3,929   | )                        |  |   | 34,674   |    |  |   | —    |    |  |   | 518,543    |    |
| Cashand cash equivalents, beginning of theperiod |  |        | —  |                      |  |                  | 155,375    |                      |  |         | (41,291  | )                        |  |   | 20,792   |    |  |   | —    |    |  |   | 134,876    |    |
| Cashand cash equivalents, end of theperiod       |  | $           | —  |                      |  | $                     | 643,173    |                      |  | $            | (45,220  | )                        |  | $      | 55,466   |    |  | $      | —    |    |  | $      | 653,419    |    |
| **Forthe year ended****December 31,2003:**       |  |
| **Operatingactivities:**                         |  |
| Net cash from (used in) operatingactivities      |  | $           | —  |                      |  | $                     | 219,890    |                      |  | $            | 240,672  |                          |  | $      | (4,499   | )  |  | $      | —    |    |  | $      | 456,063    |    |
| **Investingactivities:**                         |  |
| Business acquisitions, net ofcashacquired        |  |        | —  |                      |  |                  | (53,626    | )                    |  |         | (869,863 | )                        |  |   | (90,950  | )  |  |   | —    |    |  |   | (1,014,439 | )  |
| Otherinvestingactivities                         |  |        | (98,512  | )                    |  |                  | (1,000,542 | )                    |  |         | (23,530  | )                        |  |   | (10,359  | )  |  |   | 1,059,325  |    |  |   | (73,618    | )  |
| Netcash used in investingactivities              |  |        | (98,512  | )                    |  |                  | (1,054,168 | )                    |  |         | (893,393 | )                        |  |   | (101,309 | )  |  |   | 1,059,325  |    |  |   | (1,088,057 | )  |
| **Financingactivities:**                         |  |
| Proceeds from sale ofsenior subordinatednotes    |  |        | —  |                      |  |                  | 790,788    |                      |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | 790,788    |    |
| Redemptionof senior subordinatednotes            |  |        | —  |                      |  |                  | (187,650   | )                    |  |         |     |                          |  |   | —  |    |  |   | —    |    |  |   | (187,650   | )  |
| Otherfinancing activities,net                    |  |        | 98,512   |                      |  |                  | 260,094    |                      |  |         | 618,678  |                          |  |   | 110,917  |    |  |   | (1,059,325 | )  |  |   | 28,876     |    |
| Netcash from financingactivities                 |  |        | 98,512   |                      |  |                  | 863,232    |                      |  |         | 618,678  |                          |  |   | 110,917  |    |  |   | (1,059,325 | )  |  |   | 632,014    |    |
| Netincrease (decrease) incash                    |  |        | —  |                      |  |                  | 28,954     |                      |  |         | (34,043  | )                        |  |   | 5,109    |    |  |   | —    |    |  |   | 20         |    |
| Cashand cash equivalents, beginning of theperiod |  |        | —  |                      |  |                  | 126,421    |                      |  |         | (7,248   | )                        |  |   | 15,683   |    |  |   | —    |    |  |   | 134,856    |    |
| Cashand cash equivalents, end of theperiod       |  | $           | —  |                      |  | $                     | 155,375    |                      |  | $            | (41,291  | )                        |  | $      | 20,792   |    |  | $      | —    |    |  | $      | 134,876    |    |
|                                                  |

F-54

----

L-3COMMUNICATIONS HOLDINGS, INC.AND L-3 COMMUNICATIONSCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS —(continued)(Dollars in thousands, except per sharedata)

|                                                     |  |             |          |                           |  |                       |            |                           |  |              |            |                               |  |        |          |         |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------|--|-------------|----------|---------------------------|--|-----------------------|------------|---------------------------|--|--------------|------------|-------------------------------|--|--------|----------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                |  | L-3Holdings |          | L-3Communications(Parent) |  | GuarantorSubsidiaries |            | Non-GuarantorSubsidiaries |  | Eliminations |            | ConsolidatedL-3Communications |
| **For the yearended****December 31,2002:**          |  |
| **Operatingactivities:**                            |  |
| Net cash fromoperatingactivities                    |  | $           | —  |                      |  | $                     | 137,837    |                      |  | $            | 169,221    |                          |  | $      | 11,402   |    |  | $      | —    |    |  | $      | 318,460    |    |
| **Investingactivities:**                            |  |
| Business acquisitions, net ofcashacquired           |  |        | —  |                      |  |                  | (146,913   | )                    |  |         | (1,499,891 | )                        |  |   | (95,329  | )  |  |   | —    |    |  |   | (1,742,133 | )  |
| Otherinvestingactivities                            |  |        | (855,939 | )                    |  |                  | (1,627,853 | )                    |  |         | (27,130    | )                        |  |   | (8,632   | )  |  |   | 2,451,159  |    |  |   | (68,395    | )  |
| Netcash used in investingactivities                 |  |        | (855,939 | )                    |  |                  | (1,774,766 | )                    |  |         | (1,527,021 | )                        |  |   | (103,961 | )  |  |   | 2,451,159  |    |  |   | (1,810,528 | )  |
| **Financingactivities:**                            |  |
| Proceeds from saleof senior subordinated notes      |  |        | —  |                      |  |                  | 750,000    |                      |  |         | —    |                          |  |   | —  |    |  |   | —    |    |  |   | 750,000    |    |
| Redemptionof senior subordinated notes              |  |        | —  |                      |  |                  | (237,468   | )                    |  |         | —    |                          |  |   | —  |    |  |   | —    |    |  |   | (237,468   | )  |
| Proceedsfrom sale of L-3 Holdings' common stock,net |  |        | 766,780  |                      |  |                  | —    |                      |  |         | —    |                          |  |   | —  |    |  |   | —    |    |  |   | 766,780    |    |
| Otherfinancingactivities                            |  |        | 89,159   |                      |  |                  | 930,608    |                      |  |         | 1,354,964  |                          |  |   | 63,018   |    |  |   | (2,451,159 | )  |  |   | (13,410    | )  |
| Netcash from financingactivities                    |  |        | 855,939  |                      |  |                  | 1,443,140  |                      |  |         | 1,354,964  |                          |  |   | 63,018   |    |  |   | (2,451,159 | )  |  |   | 1,265,902  |    |
| Netdecrease incash                                  |  |        | —  |                      |  |                  | (193,789   | )                    |  |         | (2,836     | )                        |  |   | (29,541  | )  |  |   | —    |    |  |   | (226,166   | )  |
| Cashand cash equivalents, beginning of theperiod    |  |        | —  |                      |  |                  | 320,210    |                      |  |         | (4,412     | )                        |  |   | 45,224   |    |  |   | —    |    |  |   | 361,022    |    |
| Cashand cash equivalents, end of theperiod          |  | $           | —  |                      |  | $                     | 126,421    |                      |  | $            | (7,248     | )                        |  | $      | 15,683   |    |  | $      | —    |    |  | $      | 134,856    |    |
|                                                     |

F-55

----