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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, 2003

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

(212) 697-1111(Telephone number)

Securitiesregistered 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 27,2003 was approximately $3,896 million. For purposes of thiscalculation, the Registrants have assumed that their directors andexecutive officers are affiliates.

There were 105,338,853 sharesof L-3 Communications Holdings, Inc. common stock with a par value of$0.01 outstanding as of the close of business on February 27, 2004.

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 27, 2004, 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, 2003.

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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, 2003

PARTI

|            |  |                                                                                                                      |  |        |        |        |  |  |  |  |
|------------|--|----------------------------------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|--|--|
| Item1:     |  | Business                                                                                                             |  |   | 1      |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item2:     |  | Properties                                                                                                           |  |   | 25     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item3:     |  | LegalProceedings                                                                                                     |  |   | 26     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item4:     |  | Submission of Matters to a Vote of SecurityHolders                                                                   |  |   | 27     |   |
|       |  |                                                                                                                 |  |   |   |   |
| PARTII     |  |                                                                                                                 |  |   |   |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item5:     |  | Market for Registrant's Common Equity and RelatedStockholderMatters                                                  |  |   | 28     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item6:     |  | Selected FinancialData                                                                                               |  |   | 29     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item7:     |  | Management's Discussion and Analysis of Results ofOperations and Financial    Condition          |  |   | 30     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item7A:    |  | Quantitative and Qualitative Disclosures about MarketRisk                                                            |  |   | 60     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item8:     |  | Financial Statements and SupplementaryData                                                                           |  |   | 60     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item9:     |  | Changes in and Disagreements with Accountants on Accountingand Financial    Disclosure           |  |   | 60     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item9A:    |  | Controls andProcedures                                                                                               |  |   | 60     |   |
|       |  |                                                                                                                 |  |   |   |   |
| PARTIII    |  |                                                                                                                 |  |   |   |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item10:    |  | Directors and Executive Officers of theRegistrant                                                                    |  |   | 62     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item11:    |  | ExecutiveCompensation                                                                                                |  |   | 62     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item12:    |  | Security Ownership of Certain Beneficial Owners andManagement and Related     StockholderMatters |  |   | 62     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item13:    |  | Certain Relationships and RelatedTransactions                                                                        |  |   | 62     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Item14:    |  | Principal Accounting Fees andServices                                                                                |  |   | 63     |   |
|       |  |                                                                                                                 |  |   |   |   |
| PARTIV:    |  |                                                                                                                 |  |   |   |   |
|       |  |
| Item15:    |  | Exhibits, Financial Statement Schedules and Reports on Form8-K                                                       |  |   | 63     |   |
|       |  |                                                                                                                 |  |   |   |   |
| Signatures |  |                                                                                                                 |  |   | 68     |   |
|            |

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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. The only obligationsof L-3 Holdings at December 31, 2003, were its 51⁄4%Convertible Senior Subordinated Notes due 2009, substantially all ofwhich converted into L-3 Holdings' common stock in January 2004,and its 4% Senior Subordinated Convertible Contingent DebtSecurities due 2011 (CODES), which are jointly and severally guaranteedby substantially all of its direct and indirect domestic subsidiaries,including L-3 Communications. L-3 Holdings also has guaranteed theindebtedness under the bank credit facilities of L-3 Communications. Inorder to generate the funds necessary to pay principal and interest onits indebtedness, L-3 Holdings relies on dividends and other paymentsfrom its subsidiaries or it must raise funds in public or privateequity or debt offerings.

Overview

We are a leadingsupplier of a broad range of products used in a substantial number ofaerospace and defense platforms. We also are a major supplier ofsubsystems on many platforms, including those for secure communicationnetworks, mobile satellite communications, information securitysystems, shipboard communications, naval power systems, fuzes andsafety 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 maintenance, Intelligence, Surveillance andReconnaissance (ISR) collection platforms, simulation and training, andgovernment systems support services. Our businesses employ proprietarytechnologies and capabilities, and we believe our businesses haveleading positions in their respective primary markets. Our customersinclude the U.S. Department of Defense (DoD) and its prime contractors,certain U.S. Government intelligence agencies, major aerospace anddefense contractors, foreign governments, commercial customers andcertain other U.S. federal, state and local government agencies. Forthe year ended December 31, 2003, direct and indirect sales to the DoDprovided 69.3% of our sales, and sales to commercial customers,foreign governments and U.S. federal, state and local governmentagencies other than the DoD provided 30.7% of our sales. For theyear ended December 31, 2003, we had sales of $5,061.6 million, ofwhich U.S. customers accounted for 83.1% and foreign customers,including commercial export sales, accounted for 16.9%, andoperating income of $581.0 million.

We have four reportablesegments: (1) Secure Communications & ISR; (2) Training, Simulation& Support Services; (3) Aviation Products & AircraftModernization; and (4) Specialized Products. Financial information forour reportable segments is included in Management's Discussionand Analysis of Results of Operations and Financial Condition and inNote 18 of our consolidated financial statements. 

SecureCommunications & ISR

Our businesses in this segment provideproducts and services for the global ISR market, specializing insignals intelligence and communications intelligence systems. Theseproducts and services provide the warfighter in real-time the uniqueability to collect and analyze unknown electronic signals from commandcenters, communication nodes and air defense systems for real-timesituation awareness and response. The businesses in this segment alsoprovide secure, high data rate communications systems for military andother U.S. Government and foreign government reconnaissance andsurveillance applications. We believe 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. Our major securecommunication programs and systems include:

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|  |              |                                                                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | secure datalinks for airborne, satellite, ground and sea-based remote platforms,both manned and unmanned, for real-time information collection anddissemination to users; |

|  |              |                                                                                                                                                                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | highlyspecialized fleet management and support, including procurement,systems integration, sensor development, modification and maintenancefor signals intelligence and ISR special mission aircraft and airbornesurveillance systems; |

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

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

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

Training, Simulation& Support Services.

Our businesses in this segment providea full range of training, simulation and support services,including:

|  |              |                                                                                                                                                                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | services designed tomeet customer training requirements for aircrews, navigators, missionoperators, gunners and maintenance technicians for virtually anyplatform, including military fixed and rotary wing aircraft, airvehicles and various ground vehicles; |

|  |              |                                                                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | communication software support,information technology services and a wide range of engineeringdevelopment services and integration support; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | high-end engineering and informationsupport services used for command, control, communications and ISRarchitectures, as well as for air warfare modeling and simulation toolsfor applications used by the DoD, Department of Homeland Security andU.S. Government intelligence agencies, including missile and spacesystems, Unmanned Aerial Vehicles (UAVs) and military aircraft; |

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

|  |              |                                                                                                          |
|--|--------------|----------------------------------------------------------------------------------------------------------|
|  | •  | producing crisis managementsoftware and providing command and control for homeland securityapplications. |

Aviation Products & AircraftModernization.

Our businesses in this segment provide aviationproducts and aircraft modernization services, including:

|  |              |                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------|
|  | •  | airborne traffic and collisionavoidance systems (TCAS) for commercial and military applications; |

|  |              |                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------|
|  | •  | commercial, solid-state,crash-protected cockpit voice recorders, flight data recorders andmaritime hardened voyage recorders; |

|  |              |                                                                              |
|--|--------------|------------------------------------------------------------------------------|
|  | •  | ruggedized custom displays formilitary and high-end commercial applications; |

|  |              |                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | turnkey aviation life cycle managementservices that integrate custom developed and commercial off-the-shelfproducts for various military fixed and rotary wing aircraft, includingheavy maintenance and structural modifications and interior completionfor Head-of-State aircraft; |

|  |              |                                                                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | engineering, modification,maintenance, logistics and upgrades for U.S. Special Operations Commandaircraft, vehicles and personnel equipment; |

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|  |              |                                                                                                                                                                                                                                                                                                                                           |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | aerospace andother technical services related to large fleet support, such asaircraft and vehicle modernization, maintenance, repair and overhaul,logistics support, and supply chain management, primarily for militarytraining, tactical, cargo and utility aircraft, and the Patriot MissileSystem and M1 Abrams Main Battle Tank; and |

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

Specialized Products.

Ourbusinesses in this segment supply products, including components,subsystems and systems, to military and commercial customers in severalniche markets. These products 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; |

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

|  |              |                                                                                                                                                                                                                                                                   |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | security andsurveillance systems for aviation, port and border applications,including those for perimeter security and for detection of explosives,concealed weapons, contraband and illegal narcotics, and to inspectagricultural products and to examine cargo; |

|  |              |                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------|
|  | •  | telemetry, instrumentation, space andnavigation products, including tracking and flight termination; |

|  |              |                                                                                  |
|--|--------------|----------------------------------------------------------------------------------|
|  | •  | premium fuzing products and safety andarming devices for missiles and munitions; |

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

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

|  |              |                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | 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; and |

|  |              |                                                                                                                                                                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | precision stabilized electro-opticsurveillance systems, including high magnification lowlight, daylightand forward looking infrared sensors, laser range finders, illuminatorsand designators, and digital and wireless communication systems. |

Industry Overview

The U.S. defense industry has undergonedramatic consolidation over the past decade resulting in the emergenceof five dominant prime system contractors: The Boeing Company, LockheedMartin Corporation, Northrop Grumman Corporation, Raytheon Company andGeneral Dynamics Corporation. We believe that one outcome of thisconsolidation is that the DoD must ensure that vertical integrationdoes not diminish the fragmented, yet critical DoD vendor base.Additionally, we believe it has become uneconomical for the primecontractors to design, develop and manufacture numerous essentialproducts, components and subsystems for their own use. As the primecontractors continue to evaluate their core competencies andcompetitive positions, focusing their resources on larger programs andplatforms, we expect the prime contractors to continue to exitnon-strategic business areas and procure these needed elements on morefavorable terms from independent, commercially oriented suppliers.Examples of this trend include recent divestitures of certain non-coredefense-related businesses by several of the prime contractors.

The focus on cost reduction by the prime contractors and the DoD isalso driving increased use of commercial off-the-shelf products forupgrades of existing systems and in new systems. We believe the primecontractors will continue to apply their resources and capabilities onmajor platforms and systems, utilizing commercially oriented"best of breed" suppliers to producesubsystems, components and 

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products. We believe successful suppliers willcontinue to use their resources to complement and support, rather thancompete with, the prime contractors. We anticipate that severalrelationships between the major prime contractors and their primarysuppliers will continue to evolve in a fashion similar to thoseemployed in the automotive and commercial aircraft industries. Weexpect that these relationships will be defined by criticalpartnerships encompassing increasingly greater outsourcing of non-coreproducts and systems by the prime contractors to their key merchantsuppliers and increasing supplier participation in the development offuture programs. We believe that early involvement in the upgrading ofexisting systems and the design and engineering of new systemsincorporating the prime contractor outsourced products will providemerchant suppliers, including us, with a competitive advantage insecuring new business and provide the prime contractors withsignificant cost reduction opportunities through the coordination ofthe design, development and manufacturing processes. However,notwithstanding these defense industry outsourcing trends, all of thedominant prime system contractors have some vertically integratedbusinesses, which causes suppliers of defense products and subsystems,including L-3, to compete directly against the prime system contractorsin certain business areas.

Business Strategy

We intendto grow our sales, improve our profitability and build on our positionas a leading supplier of systems, products and services to the majorcontractors in the aerospace and defense industry, as well as the U.S.Government. We also intend to continue to leverage our expertise andproducts into selected new commercial and civil business areas where wecan adapt our existing products and technologies. Our strategy toachieve these objectives includes:

Expand SupplierRelationships.    We have developed strong relationships withthe DoD, several other U.S. Government agencies and all of the majorU.S. defense prime contractors, enabling us to identify new businessopportunities and anticipate customer needs. As an independentsupplier, we anticipate that our growth will be driven by expanding ourshare of existing programs and by participating in new programs. Weidentify opportunities where we are able to use our strongrelationships to increase our business presence and allow customers toreduce their costs. We also expect to benefit from continuedoutsourcing of subsystems, components and products by primecontractors, which positions us to be a supplier to multiple bidders onprime contract bids.

Support CustomerRequirements.    A significant portion of our sales is derivedfrom strategic, long-term programs and from programs for which we havebeen the incumbent supplier, and in many cases acted as the soleprovider over many years. Our customer satisfaction and excellentperformance record are evidenced by our receipt of performance-basedaward fees exceeding 90% of the available award fees on averageduring the year ended December 31, 2003. We believe that primecontractors will increasingly award long-term, outsourcing contracts tothe best-of-breed merchant suppliers they believe to be most capable onthe basis of quality, responsiveness, design, engineering and programmanagement support as well as cost. We intend to continue to align ourresearch and development, manufacturing and new business efforts tocomplement our customers' requirements and providestate-of-the-art products.

Improve OperatingMargins.    We have a history of improving the operatingperformance of the businesses we acquire by reducing their overheadcosts, administrative expenses and facilities costs, increasing sales,improving contract bidding and proposals controls and practices andincreasing competitive contract award win rates. We intend to continueto improve our operating performance by continuing to reducing overheadexpenses, consolidating certain of our businesses and businessprocesses and increasing the productivity of our businesses.

Leverage Technical and Market Leadership Positions.    Wehave developed strong, proprietary technical capabilities that haveenabled us to capture the number one or number two market position inmost of our key business areas, including secure, high data ratecommunications systems, solid state aviation recorders, securitysystems, telemetry, instrumentation and space products, advancedantenna products and high performance microwave components. We continueto invest in company-sponsored independent research and development,including bid and proposal costs, in addition to making substantialinvestments in our technical and manufacturing resources. Further, wehave a highly skilled workforce, including approximately 19,100engineers. We are applying our technical expertise and 

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capabilities to several closely alignedcommercial business markets and applications such as transportation andbroadband wireless communications and we expect to continue to exploreother similar commercial opportunities.

Maintain DiversifiedBusiness Mix.    We have a diverse and broad business mix withlimited reliance on any single program, a favorable balance ofcost-reimbursable and fixed-price contracts, a significant follow-onbusiness and an attractive customer profile. Our largest program, acost-reimbursable contract for U.S. Special Operations Forces LogisticsSupport, represented 4.4% of our sales for the year endedDecember 31, 2003. No other program represented more than 2.9%of sales for the year ended December 31, 2003. Furthermore,36.9% of our sales for 2003 were from cost reimbursablecontracts and time-and-material contracts, and 63.1% were fromfixed-price contracts, providing us with a mix of predictableprofitability (cost-reimbursable and time-and-material) and highermargin (fixed-price) business. We also enjoy a favorable mix of defenseand non-defense business, with direct and indirect sales to the DoDaccounting for 69.3%, and sales to commercial customers, foreigngovernments and U.S. federal, state and local government agencies otherthan the DoD accounting for the remaining 30.7% of our sales forthe year ended December 31, 2003. We intend to leverage this businessprofile to expand our merchant supplier business base.

Capitalize on Strategic AcquisitionOpportunities.    Recent U.S. defense industry consolidation hasdramatically reduced the number of traditional middle-tier aerospaceand defense companies, which are smaller than the five dominant primesystem contractors and larger than the many smaller publicly andprivately owned companies, as well as the non-core aerospace anddefense businesses of the prime contractors. We intend to enhance ourexisting product base through internal research and development effortsand selective acquisitions that will add new products in areas thatcomplement our present technologies. We intend to continue acquiringselect, smaller publicly and privately owned companies, as well asnon-core aerospace and defense businesses of larger companies, thatexhibit the following criteria:

|  |              |                                                          |
|--|--------------|----------------------------------------------------------|
|  | •  | significant market position(s) intheir business area(s); |

|  |              |                                                                            |
|--|--------------|----------------------------------------------------------------------------|
|  | •  | productofferings which complement and/or extend our product offerings; and |

|  |              |                                                  |
|--|--------------|--------------------------------------------------|
|  | •  | positive sales, earnings and cash flowprospects. |

Selected Recent Acquisitions

During the yearended December 31, 2003, we used cash of $1,014.4 million to acquirebusinesses (See Management's Discussion and Analysis of Resultsof Operations and Financial Condition—Statement of CashFlows—Investing Activities). The table below summarizes thecontractual purchase price for the more significant businesses that weacquired in 2003. The purchase prices disclosed below do not includeadjustments for net cash acquired and acquisition costs. For certain ofthese acquisitions, the purchase price may be subject to adjustmentbased on actual closing date net assets, net working capital of theacquired business and/or the post-acquisition financial performance ofthe acquired business.

|                  |  |               |  |                           |  |                           |  |                                                                                                                                                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|------------------|--|---------------|--|---------------------------|--|---------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Business         |  | Date Acquired |  | Acquired From             |  | Purchase Price($millions) |  | Business Description                                                                                                                                                                                                              |
| Avionics Systems |  | March28, 2003 |  | GoodrichCorporation       |  | $188.7                    |  | Develops andmanufactures innovative avionics solutions for substantially allsegments of the aviation market, and sells its products to themilitary, business jet, general aviation, rotary wing aircraft and airtransportmarkets. |
| Aeromet,Inc.     |  | May 30, 2003  |  | Aeromet, Inc.Shareholders |  | $17.5                     |  | Designs, develops and integratesinfrared and optical systems for airborneISR.                                                                                                                                                     |
|                  |

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|                           |  |                   |  |                        |  |                           |       |                      |  |                                                                                                                                                                                                                                                                                                                                                    |  |  |  |  |  |  |  |  |
|---------------------------|--|-------------------|--|------------------------|--|---------------------------|-------|----------------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|
| Business                  |  | Date Acquired     |  | Acquired From          |  | Purchase Price($millions) |       | Business Description |
| KleinAssociates           |  | September30, 2003 |  | OYOCorporation ofJapan |  | $                         | 30.0  |                 |  | 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 securityapplications.                                                                                                                                 |
| MilitaryAviation Services |  | October 31,2003   |  | Bombardier,Inc.        |  | $                         | 87.4  |                 |  | Providessystems engineering support and avionics modernization, and provides afull range of technical services in the areas of aircraft maintenance,repair and upgrade for military aircraft and business and regional jetsand the refurbishment and modernization of selected commercialaircraft.                                                 |
| VertexAerospace LLC       |  | December 1, 2003  |  | VeritasCapital         |  | $                         | 650.0 |                 |  | Providerof aerospace and other technical services to the U.S. Department ofDefense and other government agencies. Services include logisticssupport, fixed and rotary wing aircraft modernization and maintenance,supply chain management and pilot training. Support for tactical, cargoand utility aircraft and other defense-related platforms. |
|                           |

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Products and Services

Secure Communications & ISR

The systems and products,selected applications and selected platforms or end users of our SecureCommunications & ISR segment at December 31, 2003 are summarized inthe table below.

|                                                                             |  |                                                                                                                                                           |  |                                                                                                            |  |  |  |  |  |  |
|-----------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Systems/Products                                                            |  | Selected Applications                                                                                                                                     |  | Selected Platforms/EndUsers                                                                                |
| SignalsIntelligence                                                         |  |                                                                                                                                                      |  |                                                                                                       |
| •  Primemission systems integration and sensordevelopment    |  | •  Signalprocessing, airborne radio frequency applications, antennatechnology, real-time process control and softwaredevelopment           |  | •  USAFBig Safari Fleet, Rivet Joint, Combat Sent, Cobraball and subsystemsfor U-2 and EP-3 |
| HighData RateCommunications                                                 |  |                                                                                                                                                      |  |                                                                                                       |
| •  Widebanddata links and groundterminals                    |  | •  High performance, widebandsecure communication links for relaying of intelligence andreconnaissance information                         |  | •  Mannedaircraft, UAVs, naval ships, terminals andsatellites                               |
| SatelliteCommunicationTerminals                                             |  |                                                                                                                                                      |  |                                                                                                       |
| •  Ground-basedsatellite communication terminals andpayloads |  | •  Interoperable, transportableground terminals                                                                                            |  | •  Remote personnelprovided with communication links to distantforces                       |
| SpaceCommunication and SatelliteControl                                     |  |                                                                                                                                                      |  |                                                                                                       |
| •  Satellitecommunication and trackingsystem                 |  | •  On-board satelliteexternal communications, video systems, solid state recordersand ground supportequipment                              |  | •  International SpaceStation, Space Shuttle and varioussatellites                          |
| •  Satellitecommand and control sustainment andsupport       |  | •  Software integration, testand maintenance support satellite control network and engineeringsupport for satellite launchsystem           |  | •  U.S. Air Force SatelliteControl Network and rocket launchsystem                          |
| MilitaryCommunications                                                      |  |                                                                                                                                                      |  |                                                                                                       |
| •  Shipboardcommunications systems                           |  | •  Internaland external communications (radioroom)                                                                                         |  | •  Navalvessels                                                                             |
| InformationSecuritySystems                                                  |  |                                                                                                                                                      |  |                                                                                                       |
| •  Securecommunication terminals andequipment                |  | •  Secure and non-securevoice, data and video communication for office and battlefieldutilizing Integrated Services Digital Network (ISDN) |  | •  U.S. Armed services, intelligenceand security agencies                                   |
|                                                                             |

We believe that weare an established leader in the development, construction andinstallation of communication systems for high performance intelligencecollection, imagery processing and ground, air, sea and satellitecommunications for the DoD and other U.S. Government agencies. Weprovide secure, high data rate, real-time communication systems forsurveillance, reconnaissance and other intelligence collection systems.We also design, develop, produce and integrate communication systemsand support equipment for space, ground and naval applications, as wellas provide communication software support services to military andrelated government intelligence markets. Businesses of the SecureCommunications & ISR segment include high data rate communicationslinks, satellite communications terminals, naval vessel communicationsystems, space communications and satellite control systems, signalintelligence information processing systems, information securitysystems, tactical battlefield sensor systems and commercialcommunication systems.

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Signals Intelligence (SIGINT)

Webelieve that we are a world leader in SIGINT and ISR systems providingunique, highly specialized fleet management and support for specialmission aircraft, including prime mission systems integration, sensordevelopment, aircraft modernization and maintenance and procurement fora range of customers, primarily under classified contracts. Our primarymission in this area is to support the USAF Big Safari fleet, includingthe Rivet Joint, Combat Sent and Cobra Ball RC-135 aircraft, throughlong-term sole-source contracts.

High Data RateCommunications

We believe that we are a technology leader inhigh data rate, covert, jam-resistant microwave communications used inmilitary and other national agency reconnaissance and surveillanceapplications. Our product line covers a full range of tactical andstrategic secure point-to-point and relay data transmission systems,products and support services that conform to military and intelligencespecifications. Our systems and products are capable of providingbattlefield commanders with real-time, secure surveillance andtargeting information and were used extensively by U.S. armed forces inthe war operations in Bosnia and Kosovo, and are being used forOperation Iraqi Freedom in Iraq and Operation Enduring Freedom inAfghanistan.

Our current family of strategic and tactical datalinks or CDL (Common Data Link) systems are considered DoD standardsfor data link hardware. Our primary focus is spread spectrum securecommunication links technology, which involves transmitting a datasignal with a high-rate noise signal making it difficult to detect byothers, and then re-capturing the signal and removing the noise. Ourdata links use point-to-point and point-to-multipointarchitectures.

We provide these secure high bandwidth productsto the U.S. Air Force, the U.S. Navy, the U.S. Army and various U.S.Government agencies, many through long-term programs. The scope ofthese programs include air-to-ground, air-to-air, ground-to-air andsatellite communications such as the U-2 Support Program, GUARDRAIL,ASTOR and major UAV (unmanned aerial vehicle) programs, such asPredator, Global Hawk and Fire Scout.

We remain the industryleader in the mobile airborne satellite terminal product market,delivering mobile satellite communication services to many airborneplatforms. These services provide real-time connectivity between thebattlefield and non-local exploiters of ISR data.

SatelliteCommunication Terminals

We provide ground-to-satellite, highavailability, real-time global communications capability through afamily of transportable field terminals used to communicate withcommercial, military and international satellites. These terminalsprovide remote personnel with constant and effective communicationcapability and provide communication links to distant forces. Our TSS(TriBand SATCOM Subsystem) employs a 6.25 meter dish with a singlepoint feed that provides C, Ku and X band communication to support theU.S. Army. We also offer an 11.3 meter antenna satellite terminal whichis transportable on two C-130 aircraft. The SHF (Super High Frequency)PTS (Portable Terminal System) is a lightweight (28 pounds), portableterminal, which communicates through DSCS, NATO or SKYNET satellitesand brings connectivity to small military tactical units and mobilecommand posts.

We provide System Engineering andSoftware/Life-cycle support to the Air Force Satellite control networkas well as the eastern and western test ranges. These contracts wererecently won and are scheduled to remain in effect beyond 2010.

Space Communications and Satellite Control

We have producedand are delivering three communication subsystems for the ISS(International Space Station). These systems will control all ISS radiofrequency communications and external video activities. We also providesolid-state recorders and memory units for data capture, storage,transfer and retrieval for space applications. Our standard NASA taperecorder has completed over five million hours of service without amission failure. Our recorders are on National Oceanic &Atmospheric Administration weather satellites, the Earth ObservingSatellite, AM spacecraft and Landsat-7 Earth-monitoring 

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spacecraft. We have extended this technologyto our Strategic Tactical Airborne Recorder (S/TARTM) whichwas selected for the new Shared Reconnaissance Port (SHARP) Program. Wealso provide space and satellite system simulation, satelliteoperations and computer system training, depot support, networkengineering, resource scheduling, launch system engineering, support,software integration and test through cost-plus contracts with the U.S.Air Force.

Military Communications

We provideintegrated, computer controlled switching systems for the interior andexterior voice and data needs of naval vessels. Our products includethe MarCom Integrated Voice Communication Systems for Aegisclass destroyers and for the LPD amphibious ship class. We produced theMarCom Baseband Switch for Los Angeles class submarines. OurMarCom secure digital switching system provides an integratedapproach to the specialized voice and data communications needs ofshipboard environments, for internal and external communications,command and control and air traffic control. Along with the KeyswitchIntegrated Terminals, MarCom provides automated switching ofradio/cryptocircuits, which results in significant time savings.Without MarCom it would take approximately one hour to switch twelveradio/cryptocircuits using the previously existing switching system.Our Marcom secure digital switching system is able to switch thesame number of radio/cryptocircuits in approximately twelve seconds. Wealso offer on-board, high data rate communications systems, whichprovide a data link for carrier battle groups, which are interoperablewith the U.S. Air Force's Surveillance/reconnaissance terminals.We supply the "communications on the move"capability needed for the digital battlefield by packaging advancedcommunications into the U.S. Army's Interim Brigade Combat TeamCommander's Vehicle.

Information Security Systems

We believe that we are a leader in the development of securecommunications equipment for both military and commercial applications.We are producing the next generation digital, ISDN-compatible STE(secure terminal equipment). STE provides clearer voice andapproximately thirteen-times faster data/fax transmission capabilitiesthan the previous generation of secure telecommunications equipment.STE also supports secure conference calls and secure videoteleconferencing. STE uses a CryptoCard security system which consistsof a small, portable, cryptographic module holding the algorithms, keysand personalized credentials to identify its user for securecommunications access. We also provide the workstation component of theU.S. Government's EKMS (Electronic Key Management System), thenext generation of information security systems. EKMS is thegovernment's system to replace current"paper" encryption keys that are used tosecure government communications with"electronic" encryption keys. Thework-station component we provide produces and distributes theelectronic keys. We also develop specialized strategic and tacticalsignal intelligence systems to detect, acquire, collect, and processinformation derived from electronic sources. These systems are used byclassified customers for intelligence gathering and require high-speeddigital signal processing and high-density custom hardwaredesigns.

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Training, Simulation & SupportServices

The products and services, selected applications andselected platforms or end users of our Training, Simulation &Support Services segment at December 31, 2003 are summarized in thetable below.

|                                                         |  |                                                                                                                                                                                                       |  |                                                                                                                      |  |  |  |  |  |  |
|---------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products/Services                                       |  | Selected Applications                                                                                                                                                                                 |  | Selected Platforms/EndUsers                                                                                          |
| Training andSimulation                                  |  |                                                                                                                                                                                                  |  |                                                                                                                 |
| •  Battlefieldand WeaponSimulation       |  | •  Missilesystem modeling andsimulation•  Design and manufacturecustom ballistic missile targets that are ground launched andair launched for threat replicationtargets |  | •  U.S.Army MissileCommand    •  U.S. ArmyMissileCommand           |
| •  Training                              |  | •  Trainingfor soldiers on complex command and controlsystems                                                                                                                          |  | •  DoD                                                                                                |
|                                                    |  | •  Trainingand logistics services and training devicesupport                                                                                                                           |  | •  DoD and foreigngovernments                                                                         |
| •  Human PatientSimulators               |  | •  MedicalTraining                                                                                                                                                                     |  | •  Medical schools,nursing schools, andDoD                                                            |
| EngineeringDevelopment and IntegrationSupport           |  |                                                                                                                                                                                                  |  |                                                                                                                 |
| •  SystemSupport                         |  | •  C3ISR (Command,Control, Communications, Intelligence, Surveillance andReconnaissance), modeling andsimulation                                                                       |  | •  U.S. Armed services,intelligence and security agencies, MDA, NASA and other U.S.Governmentagencies |
| •  Communicationsoftware supportservices |  | •  Value-added, criticalsoftware support for C3I (Command, Control,Communication and Intelligence) systems and other engineeringand technical services                                 |  | •  DoD, FAA andNASA                                                                                   |
| •  Crisis IncidentManagement System      |  | •  Emergencyoperations support associated with natural disasters,industrial accidents and acts ofterrorism                                                                             |  | •  Federal, state and localgovernment agencies for homelanddefense                                    |
|                                                         |

Training and Simulation

We believe that we are a leading provider of training, simulationand support services to the U.S. and foreign military agencies.

Our products and services are designed to meet customer trainingrequirements for aircrews, navigators, mission operators, gunners andmaintenance technicians for virtually any platform, including militaryfixed and rotary wing aircraft, air vehicles and various groundvehicles. As one of the leading suppliers of training services, webelieve that we are able to leverage our unique full-servicecapabilities to develop fully integrated, innovative solutions fortraining systems, to propose and provide program upgrades andmodifications, and to provide hands-on, best-in-class trainingoperations in accordance with customer requirements in a timely manner.In addition, we are developing, demonstrating, evaluating andtransitioning training technologies and methods for use by warfightersat the U.S. Air Force's Fighter Training Research Division.

We also design and develop prototypes of ballistic missile targetsfor present and future threat scenarios. We provide high-fidelitycustom targets to the DoD that are complementary to the U.S.Government's growing focus and priority on national missiledefense and space programs. We are the only provider of ballisticmissile targets that has successfully launched a ballistic missiletarget from an Air Force Cargo Aircraft.

We also develop andmanage extensive programs in the United States and internationally,focusing on training and education, strategic planning, organizationaldesign, democracy transition and leadership 

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development. To provide these services, weutilize a pool of experienced former armed service, law enforcement andother national security professionals. In the United States, ourpersonnel are instructors in the U.S. Army's Force ManagementSchool and other schools and courses and are also involved inrecruiting for the U.S. Army. In addition, we own approximately40% of Medical Education Technologies, Inc., which has developedand is producing human patient simulators for sale to medical teachingand training institutions and the DoD.

We also produce incidentmanagement software to support Emergency Management and HomelandSecurity applications for first responders to crisis situations.

Engineering Development and Integration Support

We believethat we are a premier provider of numerous air campaign modeling andsimulation tools for applications, such as Thunder, Storm and Brawler,for the U.S. Air Force Studies and Analysis Agency, and of spacescience research for NASA. We also provide high-end systems support forthe HAWK and PATRIOT missile systems, Unmanned Aerial Vehicles (UAVs),the Cooperative Engagement Capacity (CEC) Program, and the F/A-18.

Our products and services specialize in communication systems,training and simulation equipment and a broad range of hardware andsoftware for the U.S. Army, Air Force and Navy, the Federal AviationAdministration and the Missile Defense Agency (MDA). As one of theleading suppliers of high-end engineering and information support, webelieve we are able to provide value-added C3ISR engineeringsupport, wargames simulation and modeling of battlefieldcommunications.

Our Ilex Systems business provides systems andsoftware engineering products and services for military applications.We specialize in the innovative application of state-of-the-artsoftware technology and software development methodologies to producecomprehensive real-time solutions satisfying our customers'systems and software needs. We specialize in providing engineeringservices to the U.S. Army military intelligence community, includingthe Communications-Electronics Command (CECOM) Software EngineeringCenter. These engineering services include the development andmaintenance of Intelligence, Electronic Warfare, Fusion and Sensorsystems and software.

Aviation Products & AircraftModernization

The systems and products, selected applicationsand selected platforms or end users of our Aviation Products &Aircraft Modernization segment at December 31, 2003, are summarized inthe table below.

|                                                                                     |  |                                                                                                                                                                                                                                |  |                                                                                                                                                                          |  |  |  |  |  |  |
|-------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Systems/Products                                                                    |  | Selected Applications                                                                                                                                                                                                          |  | Selected Platforms/EndUsers                                                                                                                                              |
| AviationProducts                                                                    |  |                                                                                                                                                                                                                           |  |                                                                                                                                                                     |
| •  Solidstate crash protected cockpit voice and flight datarecorders |  | •  Voicerecorders that continuously record the most recent 30-120 minutes ofvoice and sounds from cockpit and aircraft inter- communications.Flight data recorders record the last 25 hours of flightparameters |  | •  Businessand commercial aircraft and certain military transport aircraft; soldto both aircraft manufacturers and airlines under the Fairchild brandname |
| •  TCAS(Traffic Alert and Collision AvoidanceSystem)                 |  | •  Reduce the potential formidair aircraft collisions by providing visual and audible warnings andmaneuvering instructions topilots                                                                             |  | •  Commercial and businessregional and military transportaircraft                                                                                         |
| •  Advancedcockpitavionics                                           |  | •  Design,manufacture and supply quality pilot safety and situation awarenessproducts                                                                                                                           |  | •  Commercialand business regional and military transportaircraft                                                                                         |
|                                                                                     |

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|                                                                  |  |                                                                                                                                                                |  |                                                                                                                                          |  |  |  |  |  |  |
|------------------------------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Systems/Products                                                 |  | Selected Applications                                                                                                                                          |  | Selected Platforms/EndUsers                                                                                                              |
| DisplayProducts                                                  |  |                                                                                                                                                           |  |                                                                                                                                     |
| •  Cockpitand mission displays andcontrols        |  | •  Highperformance, ruggedized flat panel and cathode ray tube displays andprocessors                                                           |  | •  Militaryaircraft, including surveillance, fighters and bombers, attackhelicopters, transport aircraft and landvehicles |
| AircraftModernization                                            |  |
| •  Highend aviation product modernizationservices |  | •  Turnkeyaviation life cycle management services, including installation ofspecial mission equipment, aircraft navigation and avionicsproducts |  | •  Variousmilitary and commercial wide body and rotary wingaircraft                                                       |
|                                                                  |

Aviation and MaritimeRecorders

We manufacture commercial, solid-state,crash-protected recorders, commonly known as black boxes, under theFairchild brand name for the aviation and maritime industries,and have delivered approximately 59,100 flight recorders to aircraftmanufacturers and airlines around the world. We believe we are theleading manufacturer of commercial cockpit voice recorders and flightdata recorders. The hardened voyage recorder, launched from ourstate-of-the-art aviation technology, and expanded to include cuttingedge internet communication protocols, has taken an early leadershipposition within the maritime industry. We offer three types ofrecorders:

|              |                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------|
| •  | the cockpit voicerecorder, which records the last 30 to 120 minutes of crew conversationand ambient sounds from the cockpit; |

|              |                                                                                                                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the flight data recorder, which recordsthe last 25 hours of aircraft flight parameters, such as speed,altitude, acceleration and thrust from each engine and direction of theflight in its final moments; and |

|              |                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| •  | thehardened voyage recorder, which stores and protects 12 hours of voice,radar, radio and shipboard performance data on solid state memory. |

Recorders are highly ruggedized instruments, designed to absorb theshock equivalent to that of an object traveling at 268 knots andstopping in 18 inches, resist fire to 1,100 degrees centigrade andresist pressure to 20,000 feet undersea for 30 days. Our recorders aremandated and regulated by various worldwide agencies for use incommercial airlines and many business aviation aircraft. In addition,our aviation recorders are certified and approved for installation atmany of the world's leading aircraft original equipmentmanufacturers (OEMs), while our maritime recorders are an integralcomponent of a mandated recording system for numerous vessels thattravel on international waters. The U.S. military has required theinstallation of black boxes in military transport aircraft.

Wehave completed development of a combined voice and data recorder and weare developing an enhanced recorder that monitors engine and otheraircraft parameters for use in maintenance and safety applications.

Traffic Alert and Collision Avoidance Systems (TCAS)

TCASis an avionics safety system that was developed to reduce the potentialfor mid-air collisions. The system is designed to operate independentlyfrom the air traffic control (ATC) system to provide a complementarysupplement to the existing ATC system. TCAS operates by transmittinginterrogations that elicit replies from transponders in nearbyaircraft. The system tracks aircraft within certain range and altitudebands to determine whether they have the potential to become acollision threat.

There are two levels of TCAS protectioncurrently in operation: TCAS I and TCAS II. In the United States,passenger aircraft with 10 to 30 seats must be equipped with a TCAS Isystem. The TCAS II system 

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is required for passenger aircraft with morethan 30 seats. These aircraft, as well as aircraft used in all-cargooperations, must also be equipped with either Mode S or Mode Ctransponders. The transponder provides altitude and airplaneidentification to TCAS-equipped aircraft as well as to the ATCsystem.

If the TCAS I system calculates that an aircraft may bea threat, it provides the pilot with a visual and audible trafficadvisory. The advisory information provides the intruderaircraft's range and relative altitude/bearing. In addition totraffic advisories, a TCAS II system will provide the pilot aresolution advisory (RA). This resolution advisory recommends avertical maneuver to provide separation from the intruder aircraft.

TCAS systems have proven to be very effective, with many documentedsuccessful RAs. TCAS II has been in worldwide operation in manyaircraft types since 1990. Today, over 16,700 airline, corporate andmilitary aircraft are equipped with TCAS II-type systems, logging over100 million hours of operation. The number of reported near mid-aircollisions in the U.S. has decreased significantly since 1989, a periodduring which both passenger and cargo air traffic has increasedsubstantially.

We have introduced our Traffic and TerrainCollision Avoidance System (T2CASTM), a safetyavionics system that integrates aircraft performance-based TerrainAwareness Warning System (TAWS) capability into our TCAS. Unlike ourcompetitors' products, T2CAS is a true terrainavoidance system that bases its operator alerts on an aircraft'sactual ability to climb at a given moment, instead of usingpredetermined computations. T2CAS reduces weight, powerconsumption, space requirements, and wiring because it's acombined TCAS and TAWS solution. Our TCAS customers can simply swap outthe TCAS box for the new T2CAS box and use existing powerand wiring. T2CAS was certified by the FAA on February 11,2003.

All of our TCAS products, including T2CAS, aresold by our consolidated subsidiary, Aviation Communications &Surveillance Systems L.L.C. (ACSS). We own 70% of ACSS.

Advanced Cockpit Avionics

We manufacture advanced cockpitavionics and provide specialized avionics repair and overhaul servicesfor the general, business, regional, military and commercial aviationmarkets. We offer a family of products specializing inelectro-mechanical and solid-state gyros, collision avoidance systems,lightning detection systems, terrain awareness and warning systems,emergency power supplies and flat panel multifunction displays.

Display Products

We design, develop and manufactureruggedized displays for military and high-end commercial applications.Our current product lines include a family of high performance displayprocessing systems, which use either a cathode ray tube or an activematrix liquid crystal display. Our displays are used in numerousairborne, ship-board and ground-based platforms and are designed tosurvive in military and harsh environments.

AircraftModernization

We are dedicated to providing solutions thatintegrate custom-developed and commercial off-the-shelf products tosatisfy military and commercial aviation requirements. We have a broadrange of capabilities in the design, development, manufacturing,installation and integration of complex special purpose airbornesystems, aircraft modifications and related services on numerous typesof multi-engine aircraft, various rotary platforms and logisticssupport for government and commercial customers. We believe that we area leader in maritime patrol aircraft (MPA) upgrades and maintenance,for both domestic and international customers.

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Specialized Products

Theproducts, selected applications and selected platforms or end users ofour Specialized Products segment at December 31, 2003 are summarized inthe table below.

|                                                                                                           |  |                                                                                                                                      |  |                                                                                                                                |  |  |  |  |  |  |
|-----------------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Products                                                                                                  |  | Selected Applications                                                                                                                |  | Selected Platforms/EndUsers                                                                                                    |
| NavalWarfareProducts                                                                                      |  |                                                                                                                                 |  |                                                                                                                           |
| •  Airbornedipping sonars                                                                  |  | •  Submarine detectionand localization                                                                                |  | •  Various militaryhelicopters                                                                                  |
| •  Side scansonars                                                                         |  | •  Submerged minecountermeasures                                                                                      |  | •  U.S. Navy and foreignnavies                                                                                  |
| •  Submarine andsurface ship towed arrays                                                  |  | •  Submarineand surface ship detection andlocalization                                                                |  | •  U.S. Navy and foreignnavies                                                                                  |
| •  Naval andcommercial power delivery and switchingproducts                                |  | •  Switching, distribution andprotection, as well as frequency and voltageconversion                                  |  | •  All naval combatants:submarines, surface ships and aircraftcarriers                                          |
| •  Commercialtransfer switches, uninterruptible power supplies and powerproducts           |  | •  Production and maintenanceof systems and high-speed switches for power interruptionprevention                      |  | •  Federal AviationAdministration, internet service providers, financial institutionsand railtransportation     |
| •  Shipboardelectronics racks, rugged computers, rugged displays andcommunicationterminals |  | •  Ruggedized displays,computers and electronicsystems                                                                |  | •  Naval Vessels and otherDoD applications                                                                      |
| SecuritySystems                                                                                           |  |                                                                                                                                 |  |                                                                                                                           |
| •  Explosivesdetection systems                                                             |  | •  Rapid scanning ofpassenger checked baggage and carry-on luggage, scanning of large cargocontainers                 |  | •  Airports, embassies,federal and state facilities, customs, borderpatrol                                      |
|                                                                                                      |  |                                                                                                                                 |  |                                                                                                                           |
| •  Surveillanceproducts                                                                    |  | •  Remote surveillance forU.S. border and navalproducts                                                               |  | •  Border Patrol, Immigrationand Naturalization Service, U.S. Customs and U.S.Navy                              |
| Telemetry, Instrumentation and SpaceProducts                                                              |  |                                                                                                                                 |  |                                                                                                                           |
| •  Aircraft,missile and satellite telemetry and instrumentationsystems                     |  | •  Real-time dataacquisition, measurement, processing, simulation, distribution,display and storage for flighttesting |  | •  Aircraft, missiles andsatellites                                                                             |
| •  Globalsatellite communicationssystems                                                   |  | •  Satellite transmission ofvoice, video and data                                                                     |  | •  Rural telephonyor private networks, direct to home uplinks, satellite newsgathering and widebandapplications |
| NavigationProducts                                                                                        |  |                                                                                                                                 |  |                                                                                                                           |
| •  GPS(Global Positioning Systems)receivers                                                |  | •  Locationtracking                                                                                                   |  | •  Guided projectiles andprecisionmunitions                                                                     |
| •  Navigationsystems and subsystems, gyroscopes, reaction wheels, starsensor               |  | •  Spacenavigation                                                                                                    |  | •  Hubble Space Telescope,Delta IV launch vehicle and satellites                                                |
| PremiumFuzingProducts                                                                                     |  |                                                                                                                                 |  |                                                                                                                           |
| •  FuzingProducts                                                                          |  | •  Munitions and electronic andelectro-mechanical safety and arming devices(ESADs)                                    |  | •  Various DoD and foreignmilitary customers                                                                    |
|                                                                                                           |

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|                                                                                                                           |  |                                                                                                                                                                                                                             |        |                                                                                                                     |  |        |        |        |  |  |
|---------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|
| Products                                                                                                                  |  | Selected Applications                                                                                                                                                                                                       |        | Selected Platforms/EndUsers                                                                                         |
| MicrowaveComponents                                                                                                       |  |                                                                                                                                                                                                                        |   |                                                                                                                |  |   |   |   |
| •  Passivecomponents, switches and wirelessassemblies                                                      |  | •  Radiotransmission, switching and conditioning, antenna and base stationtesting and monitoring, broad-band and narrow-band applications(wireless, Specialized Mobile Radio (SMR) and paginginfrastructure) |        | •  DoD,telephony service providers and original equipmentmanufacturers                               |
| •  Safetyproducts                                                                                          |  | •  Radiofrequency monitoring and measurement forsafety                                                                                                                                                       |        | •  Monitorcellular base station and industrial radio frequencyemissions                              |
| •  Satellite andwireless components (channel amplifiers, transceivers,converters, filters andmultiplexers) |  | •  Satellitetransponder control, channel and frequencyseparation                                                                                                                                             |        | •  Communicationssatellites and wireless communicationsequipment                                     |
| •  Amplifiers andamplifier based components (amplifiers, up/down convertersand Kaassemblies)               |  | •  Automatedtest equipment military electronic warfare, ground and spacecommunications                                                                                                                       |        | •  DoDand commercial satelliteoperators                                                              |
| •  Traveling wavetubes, power modules, klystrons and digitalbroadcast                                      |  | •  Microwavevacuum electron devices and power modules to military and commercialmarkets                                                                                                                      |        | •  DoD/Foreign,military- manned/unmanned platforms, various missile programsand commercial broadcast |
| AntennaProducts                                                                                                           |  |                                                                                                                                                                                                                        |   |                                                                                                                |  |   |   |   |
| •  Ultra-widefrequency and advanced radar antennas and rotaryjoints                                        |  | •  Surveillanceand radardetection                                                                                                                                                                            |        | •  Militaryaircraft including surveillance, fighters and bombers, attackhelicopters andtransport     |
| •  Precisionantennas serving major military and commercial frequencies,including Kaband                    |  | •  Antennasfor high frequency, millimeter satellitecommunications                                                                                                                                            |        | •  Variousmilitary and commercial customers including scientificastronomers                          |
| Training Devices and MotionSimulators                                                                                     |  |                                                                                                                                                                                                                        |   |                                                                                                                |  |   |   |   |
| •  MilitaryAircraft FlightSimulators                                                                       |  | •  Trainingfor pilots, navigators, flight engineers, gunners andoperators                                                                                                                                    |        | •  Militaryfixed and rotary winged aircraft and groundvehicles                                       |
| Electro-OpticalSensors                                                                                                    |  |                                                                                                                                                                                                                        |   |                                                                                                                |  |   |   |   |
| •  Targetedstabilized camera systems with integrated sensors andwireless communicationsystems              |  | •  Intelligence,Data Collection, Surveillance and Reconnaissance                                                                                                                                             |        | •  DoD,intelligence and security agencies, law enforcement, mannedand unmannedplatforms              |
|                                                                                                                      |  |                                                                                                                                                                                                                        |   |                                                                                                                |  |   |   |   |
|                                                                                                                           |

NavalWarfare Products

We believe that we are one of theworld's leading suppliers of acoustic undersea warfare systems.Our experience spans a wide range of platforms, including helicopters,submarines and surface ships. Our products include towed array sonar,hull mounted sonar, airborne dipping sonar, ocean mapping sonar andside scan sonar for navies around the world.

We believe that weare also a leading provider of state-of-the-art power electronicssystems and electrical power delivery systems and subsystems. Weprovide communications and control systems for the military andcommercial customers. We offer the following:

|              |                                                                                                                                                                                                                                                                   |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | military power propulsion, distributionand conversion equipment and components, each of which focus on motordrives switching, distribution and protection, and also provideengineering design and development, manufacturing and overhaul andrepair services; and |

|              |                                                    |
|--------------|----------------------------------------------------|
| •  | ship control andinterior communications equipment. |

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Telemetry, Instrumentation and SpaceProducts

We believe that we are a leader in the development andmarketing of component products and systems used in telemetry andinstrumentation for airborne applications such as satellites, aircraft,UAVs, launch vehicles, guided missiles, projectiles and targets.Telemetry involves the collection of data for various equipmentperformance parameters and is required when the object under test ismoving too quickly or is of too great a distance to use a directconnection to collect such data. Telemetry products measure, process,receive and collect thousands of parameters of a platform'soperation, including heat, vibration, stress and operationalperformance and transmit this data to the ground.

Additionally,our satellite telemetry equipment transmit data necessary for groundprocessing. These applications demand high reliability of theircomponents because of the high cost of satellite repair and the needfor uninterrupted service. Telemetry products also provide the dataused to terminate the flight of missiles and rockets under errantconditions and/or at the end of a mission. These telemetry andcommand/control products are currently used for a variety of missileand satellite programs.

We offer value-added solutions thatprovide our customers with complex product integration andcomprehensive support. Within the satellite ground segment equipmentmarket, we focus on the telephony, video broadcasting and multimedianiches. Our customers include foreign communications companies,domestic and international prime communications infrastructurecontractors, telecommunications and satellite service providers,broadcasters and media-related companies. We also provide spaceproducts for advanced guidance and control systems, includinggyroscopes, controlled momentum devices and star sensors. Theseproducts are used on satellites, launch vehicles, the Hubble Telescope,the Space Shuttle and the International Space Station.

Navigation Products

We provide airborne equipment and datalink systems that gather critical information and then process, formatand transmit the data to the ground from communications satellites,spacecraft, aircraft and missiles. These products are available in bothcommercial off-the-shelf and custom configurations and include softwareand software engineering services. Our primary customers include manyof the major defense contractors who manufacture aircraft, missiles,warheads, launch vehicles and munitions. Our ground stationinstrumentation receives, encrypts and/or decrypts the serial stream ofcombined data in real-time as it is received from the airborneplatform. We believe that we are a leader in digital GPS receivertechnology for high performance military applications. These GPSreceivers are currently in use on aircraft, cruise missiles andprecision guided bombs and provide highly accurate positioning andnavigational information. Additionally, we provide navigation systemsfor high performance weapon pointing and positioning systems forprograms such as Multiple Launch Rocket System (MLRS) and Mortar FireControl System (MFCS).

Premium Fuzing Products

Webelieve that we are a leading provider of premium fuzing products,including proximity fuzes, electronic and electro-mechanical safety andarming devices (ESADs) and self-destruct/sub-munition grenade fuzes.ESADs prevent the inadvertent firing and detonation of guided missilesduring handling, flight operations and the initial phases of launch.Our proximity fuzes are used in smart munitions. All of these areconsidered to be critical safety and arming products. Additionally,during missile flight the ESAD independently analyzes flight conditionsand determines safe separation distance after a missile launch.

Microwave Components

We are a premier worldwide supplier ofcommercial off-the-shelf and custom, high performance radio frequency(RF) microwave components, assemblies and instruments supplying thewireless communications, industrial and military markets. We are also aleading provider of state-of-the-art space-qualified commercialsatellite and strategic military RF products and millimeter amplifierbased products. We sell many of these components under thewell-recognized Narda brand name through a comprehensive catalogof standard, stocked hardware. We also sell our products through adirect sales force and an extensive network of market representatives.Specific catalog offerings include wireless 

16

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products, electro-mechanical switches, powerdividers and hybrids, couplers/detectors, attenuators, terminations andphase shifters, isolators and circulators, adapters, control products,sources, mixers, waveguide components, RF safety products, powermeters/monitors and custom passive products. Passive components aregenerally purchased in both narrow and broadband frequencyconfigurations by wireless equipment manufacturers, wireless serviceproviders and military equipment suppliers. Commercial applicationsinclude cellular and PCS base station automated test equipment, andequipment for the paging industry. Military applications includeelectronic surveillance and countermeasure systems.

Ourspace-qualified and wireless components separate various signals anddirect them to sections of the satellites' payload. Our mainsatellite products are channel amplifiers and linearizers, payloadproducts, transponders and antennas. Channel amplifiers amplify theweak signals received from earth stations, and then drive the poweramplifier tubes that broadcast the signal back to earth. Linearizers,used either in conjunction with a channel amplifier or by themselves,pre-distort a signal to be transmitted back to earth before it enters atraveling wave tube for amplification. This pre-distortion is exactlythe opposite of the distortion created at peak power by the travelingwave tube and, consequently, has a cancellation effect that keeps thesignal linear over a much larger power band of the tube. The travelingwave tube and area covered by the satellite is significantlyincreased.

Narda is the world's largest supplier ofnon-ionizing radiation safety detection equipment. These devices areused to quantify and alarm of exposure to excessive RF radiation. Thisequipment is used by wireless tower operators and the military toprotect personnel, and insure compliance to various publishedstandards. We design and manufacture both broad and narrow bandamplifiers and amplifier-based products in the microwave and millimeterwave frequencies. We use these amplifiers in defense and communicationsapplications. These devices can be narrow band for communication needsor broadband for electronic warfare.

We offer standard packagedamplifiers for use in various test equipment and system applications.We design and manufacture millimeter range (at least 20 to 38GHz)amplifier products for use in emerging communication applications suchas back haul radios, LMDS (Local Multipoint Distribution Service) andground terminals for LEO satellites. Narda filters are sold to some ofthe world's leading service providers and base station OEMs.Robust demand continues for Narda filters due to ongoing systemupgrades by service providers for 2.5G and 3.0G applications gearedtoward providing higher data rate capabilities for the commercialcellular and PCS marketplace.

We also design, manufacture andmarket solid state, broadband wireless communications infrastructureequipment, subsystems and modules used to provide point-to-multipoint(PMP) and point-to-point (PTP) terrestrial and satellite-baseddistribution services in frequency bands from 24 to 38 Gigahertz. Ourproducts include solid-state power amplifiers, hub transmitters, activerepeaters, cell-to-cell relays, Internet access systems and othermillimeter wave-based modules and subsystems. These products are usedin various applications, such as broadband communications, local loopservices and Ka-band satellite communications.

We also providemicrowave vacuum electron devices and power modules for manned andunmanned airborne radars, F-14, F-16, Predator and Global Hawkplatforms and for missile applications for the AMRAAM and Patriot. Inaddition, we provide modules for VHF TV transmitters.

AntennaProducts

We produce high performance antennas under theRandtron brand name that are designed for:

|              |                                                             |
|--------------|-------------------------------------------------------------|
| •  | surveillance of high-resolution,ultra-wide frequency bands; |

|              |                                                                                       |
|--------------|---------------------------------------------------------------------------------------|
| •  | detectionof low radar cross-section targets and low radar cross-sectioninstallations; |

|              |                                       |
|--------------|---------------------------------------|
| •  | severe environmentalapplications; and |

|              |                        |
|--------------|------------------------|
| •  | polarizationdiversity. |

Our primary product is a sophisticated 24-footdiameter antenna used on all E-2C surveillance aircraft. This airborneantenna is a rotating aerodynamic radome containing a UHF surveillanceradar antenna, an IFF antenna, and forward and aft auxiliary antennas.We have been funded to begin the 

17

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development of the next generation for thisantenna. We also produce broadband antennas for a variety of tacticalaircraft, and rotary joints for the AWAC antenna. We have deliveredover 2,000 sets of antennas for aircraft in 2003 and have a backlog oforders through 2005.

We are a leading supplier of ground basedradomes used for air traffic control, weather radar, defense andscientific purposes. These radomes enclose an antenna system as aprotective shield against the environment and are intended to enhancethe performance of an antenna system.

Training Devices andMotion Simulators

Our training devices and motion simulatorsbusiness designs, develops and manufacturers advanced virtual realitysimulation and high-fidelity representations of cockpits and missionstations for aircraft and land vehicles. We have developed flightsimulators for most of the U.S. military aircraft in active operation.We have numerous proprietary technologies and fully-developed systemsintegration capabilities that provide us with a competitive advantage.Our proprietary software is used for visual display systems,high-fidelity system models, database production, digital radar landmass image simulation and creation of synthetic environments. We arealso a leader in developing training systems that allow multipletrainees at multiple sites to engage in networked group, unit and taskforce training and combat simulations.

Security Systems

We also design, manufacture and install screening systems to screenpackages for explosives, firearms and contraband in airports, securitycheck points, cruise lines, government and, commercial and militarybuildings. In addition, we provide cargo-screening systems for rapidinspection of incoming goods through rapidly deployable mobile systemsto high-throughput, high-penetration fixed systems. We also provideremote robust video surveillance systems (Watch Tower) to monitor theU.S./Canada and U.S./Mexico border and Naval ports.

ElectroOptical Cameras

We also design and manufacture wireless visualinformation systems that capture images from mobile platforms andtransmit them in real time to tactical command centers forinterpretation or to production facilities for broadcast.

Developing Commercial and Civil Opportunities

Part of ourgrowth stategy is to identify applications for commercial customers andU.S. Government agencies (other than the DoD) from select products andtechnologies that we currently sell to our defense customers. Webelieve our largest opportunities are in the transportation market,where we offer:

|              |                                                                          |
|--------------|--------------------------------------------------------------------------|
| •  | an explosives detectionsystem for screening checked baggage at airports; |

|              |                                                                                        |
|--------------|----------------------------------------------------------------------------------------|
| •  | X-ray screening products for cargo, airfreight, port and border security applications; |

|              |                           |
|--------------|---------------------------|
| •  | maritime voyagerecorders; |

|              |                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | a maritime automaticidentification system (which is a collision avoidance tool used toimprove situational awareness for the bridge crew while facilitatingcommunication between vessels and vessel identification); and |

|              |                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------|
| •  | an enhanced aviation collision avoidanceproduct that adds ground proximity warning to airborne collisionavoidance. |

We are also offering a broad range of components andproducts used in commercial communications networks.

We havedeveloped the majority of our commercial and civil products employingtechnology used in our defense businesses. Except for our explosivesdetection systems, sales generated from our developing commercial andcivil opportunities have not been material to us. These new commercialproducts are subject to certain risks and may require us to:

|              |                                                                         |
|--------------|-------------------------------------------------------------------------|
| •  | develop and maintain marketing, sales andcustomer support capabilities; |

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|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | spendadditional research and development costs to sustain and enhance our anexisting products and to develop newproducts; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | secure sales and customersupport capabilities; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | obtain customerand/or regulatory certification; |

|              |                                                                                                                                                      |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | respond to rapidly changing technologiesincluding those developed by others that may render our products andsystems obsolete or non-competitive; and |

|              |                                                                      |
|--------------|----------------------------------------------------------------------|
| •  | obtain customer acceptance of theseproducts and product performance. |

Our efforts to expand ourpresence in commercial and civil markets require significant resources,including additional working capital and capital expenditures, as wellas the use of our management's time. Our ability to sell certaincommercial products, particularly our broadband wireless communicationsproducts, depends to a significant degree on the efforts of independentdistributors or communications service providers and on the financialviability of our existing and target customers, including their abilityto obtain financing. Certain of our existing and target customers areagencies or affiliates of governments of emerging and under-developedcountries or private business enterprises operating in those countries.In addition, we have made equity investments in entities that plan tocommence operations as communications service providers using some ofour commercial products. We can give no assurance that thesedistributors or service providers will be able to market our productsor their services successfully or that we will be able to realize areturn on our investment in them. We also cannot assure you that wewill be successful in addressing these risks or in developing thesecommercial and civil business opportunities. 

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'sDiscussion and Analysis of Results of Operations and FinancialCondition — Backlog and Orders.

Major Customers

For the year ended December 31, 2003, direct and indirect sales tothe DoD provided approximately 69.3% of our sales. Approximately61.2% of our sales to the DoD were directly to the customer, andapproximately 38.8% of our sales to the DoD were indirect to itsprime contractors and subcontractors. All U.S. Government customers,including federal, state and local agencies, accounted for 76.3%of our sales for 2003. For the year ended December 31, 2003, foreigngovernments provided 10.0% of our sales, and commercialcustomers provided 13.7% of our sales.

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. As of December 31, 2003, we had approximately 1,000contracts with a value exceeding one million. Our largest programrepresented 4.4% of our sales for the year ended December 31,2003. No other program represented more than 2.9% of sales forthe year ended December 31, 2003. For the year ended December 31, 2003,sales from our five largest programs amounted to $719.8 million, or14.2% of our sales.

Research and Development

Weconduct research and development activities that consist of projectsinvolving basic research, applied research, development, and systemsand other concept studies. We employ scientific, engineering and otherpersonnel to improve our existing product-lines and develop newproducts and technologies. As of December 31, 2003, we employedapproximately 19,100 engineers, a substantial portion of whom holdadvanced degrees. For an analysis of L-3's research anddevelopment costs, see Management's Discussion and Analysis ofResults of Operations and Financial Condition—Research andDevelopment.

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Competition

We encounter intensecompetition 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.

Defense and Government Business

Our abilityto compete for defense contracts depends on a variety of factors,including:

|              |                                                                                           |
|--------------|-------------------------------------------------------------------------------------------|
| •  | the effectiveness andinnovation of our technologies and research and developmentprograms; |

|              |                                                                                          |
|--------------|------------------------------------------------------------------------------------------|
| •  | our ability to offer betterprogram performance than our competitors at a lower cost; and |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | the capabilities of our facilities,equipment and personnel to undertake the programs for which wecompete. |

In some instances, we are the incumbent supplier orhave been the sole provider for many years for certain programs. Werefer to such contracts as "sole-source"contracts. In such cases, there may be other suppliers who have thecapability to compete for the programs involved, but they can onlyenter or reenter the market if the customer chooses to reopen orre-compete the particular program to competition. Sole-source contractsaccounted for 63.3% and competitive contracts accounted for36.7% of our total sales for the year ended December 31, 2003.The majority of our sales are derived from contracts with the U.S.Government and its prime contractors, which are principally awarded onthe basis of negotiations or competitive bids.

We believe thatthe U.S. defense industry structure contains three tiers of defensecontractors. The first tier is dominated by five large prime systemcontractors: The Boeing Company, Lockheed Martin Corporation, NorthropGrumman Corporation, Raytheon Company and General Dynamics Corporation,all of whom compete for major platform programs. The second tierdefense contractors are generally smaller products and niche subsystemscontractors and is comprised of traditional aerospace and defensecompanies, as well as the non-core aerospace and defense businesses ofcertain larger industrial conglomerates. Some of the defensecontractors in the second tier also compete for platform programs. Webelieve the second tier includes L-3, Honeywell International Inc.,Rockwell Collins Inc., Harris Corporation, ITT Industries, Inc., theNorth American operations of BAE Systems PLC, Alliant Techsystems Inc.,United Technologies Corporation, Computer Science Corporation, ScienceApplications International Corporation, and United Defense IndustriesInc. The third tier, represents the vendor base and supply chain forniche products and is comprised of numerous smaller publicly andprivately owned aerospace and defense contractors.

We believe weare the aerospace and defense supplier with the broadest and mostdiverse product portfolio. We supply our products and services to allof the five prime system contractors and in several cases directly tothe end customers. We primarily compete with third tier contractors andcertain of the second tier contractors. However, we also competedirectly with the large prime system contractors for certain productsand subsystems where they have vertically integrated businesses, and inthe areas of aircraft modernization and maintenance, ISR, simulationand training, and government services, where L-3 is a system supplier.We are larger than all of the third tier contractors and believe wehave greater resources than all of them. We believe that most of ourbusinesses enjoy the number one or number two competitive position intheir respective market niches. We believe that the primary competitivefactors for our businesses are technology, research and developmentcapabilities, quality, cost, market position and past performance. Inaddition, our ability to compete for non "solesource" contracts often requires us to"team" with one or more of the prime systemcontractors that bid and compete for major platform programs.Furthermore, our ability to "team" with aprime system contractor is often dependent upon the outcome of acompetitive process for subcontracts awarded by the prime contractors.We believe that we will continue to be a successful participant in thebusiness areas in which we compete, based upon the quality and costcompetitiveness of our products and services.

CommercialActivities

Our commercial sales increased to 11.7% ofour total sales for the year ended December 31, 2003 compared with10.7% for the year ended December 31, 2002. We do not expect ourcommercial sales to 

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appreciably increase on a relative basis inthe future. Our ability to compete for commercial business depends on avariety of factors, including:

|              |          |
|--------------|----------|
| •  | Pricing; |

|              |                                   |
|--------------|-----------------------------------|
| •  | Product features and performance; |

|              |                                            |
|--------------|--------------------------------------------|
| •  | Reliability, scalability andcompatibility; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Customer relationships,service and support; and |

|              |                   |
|--------------|-------------------|
| •  | Brandrecognition. |

In these markets, we compete with variouscompanies, several of which are listed below:

|                                                                                                       |  |                                                            |  |  |  |  |
|-------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------|--|--|--|--|
|         •    RockwellCollins, Inc.;  |  | •    Honeywell InternationalInc.; |
|         •    GlobecommSystems, Inc.; |  | •    Smiths Industries; and       |
|         •    ViaSat,Inc.;            |  | •    Airspan Networks,Inc.        |
|                                                                                                       |

We believe that our sales in these businessareas will remain relatively constant as a percentage of our totalsales.

Patents and Licenses

We do not believe that ourpatents, trademarks and licenses are material to our operations.Furthermore, our U.S. Government contracts generally permit us to usepatents owned by other government contractors. Similar provisions inU.S. Government contracts awarded to other companies make it impossiblefor us to prevent the use of our patents in most domestic workperformed 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. For the year ended December 31, 2003,approximately 63.3% of our sales were generated from sole-sourcebusiness and 36.7% from competitive business. Our customersatisfaction and performance record are evidenced by our receipt ofperformance-based award fees exceeding 90% of the availableaward fees on average during the year ended December 31, 2003. Webelieve that our customers will award long-term, sole-source,outsourcing contracts to the most capable merchant supplier in terms ofquality, responsiveness, design, engineering and program managementsupport, as well as cost. As a consequence of our strong competitiveposition, for the year ended December 31, 2003, we won contract awardsat a rate in excess of 55% on new competitive contracts that webid on, and at a rate in excess of 95% on the contracts we rebidfor which we were the incumbent supplier.

Generally, ourcontracts are either fixed-price or cost-reimbursable. On a fixed-pricecontract, we agree to perform the scope of work required by thecontract for a predetermined contract price. Although a fixed-pricecontract generally permits us to retain profits if the total actualcontract costs are less than the estimated contract costs, we bear therisk that increased or unexpected costs may reduce our profit or causeus to sustain losses on the contract. Conversely, on acost-reimbursable contract we are paid our allowable incurred costsplus a profit which can be fixed or variable depending on thecontract's fee arrangement up to predetermined funding levelsdetermined by our customers. Therefore, on a cost-reimbursable contractwe do not bear the risks of unexpected cost overruns, provided that wedo not incur costs that exceed the predetermined funded amounts.Generally, a fixed-price contract offers higher 

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profit margins than a cost-reimbursablecontract, which is commensurate with the greater levels of risk assumedon a fixed-price contract. Our operating profit margins on fixed-pricecontracts generally range between 10% and 15%, while ourprofit margins on cost-reimbursable contracts generally range between7% and 10%.

We have a diverse business mix withlimited reliance on any single program, a balance of cost-reimbursableand fixed-price type contracts, a significant sole-source follow-onbusiness and an attractive customer profile. For the year endedDecember 31, 2003, 63.1% of our sales were generated fromfixed-price type contracts and 36.9% from cost-reimbursable typecontracts and time-and-material type contracts, providing us with asales mix of higher profit margin (fixed-price) business andpredictable profitability (cost-reimbursable and time-and-material).See Management's Discussion and Analysis of Results of Operationsand Financial Condition – Critical Accounting Policies.Substantially all of our cost-reimbursable type contracts are with theU.S. Government, including the DoD. Substantially all of our sales tocommercial customers are transacted under fixed-price salesarrangements, and are included in our fixed-price contract sales.

Regulatory Environment

Most of our U.S. Government businessis subject to unique procurement and administrative rules based on bothlaws and regulations, including the U.S. Federal Acquisition Regulation(FAR) that provide various profit and cost controls, rules forallocations of costs, both direct and indirect, to contracts andnon-reimbursement of unallowable costs such as lobbying expenses,interest expenses and certain costs related to business acquisitions,including for example the incremental depreciation and amortizationexpenses arising from fair value increases to the historical carryingvalues of acquired assets. Our contract administration and costaccounting policies and practices are also subject to oversight bygovernment inspectors, technical specialists and auditors.

Companies supplying defense-related equipment to the U.S. Governmentare subject to certain additional business risks specific to the U.S.defense industry. Among these risks are the ability of the U.S.Government to unilaterally suspend a company from new contracts pendingresolution of alleged violations of procurement laws or regulations. Inaddition, U.S. Government contracts are conditioned upon the continuingavailability of Congressional appropriations. Congress usuallyappropriates funds for a given program on a September 30 fiscal yearbasis, even though contract performance may take several years.Consequently, at the outset of a major program, the contract is usuallypartially funded, and additional monies are normally committed to thecontract by the procuring agency only as appropriations are made byCongress for future fiscal years.

U.S. Government contracts are,by their terms, subject to unilateral termination by the U.S.Government either for its convenience or default by the contractor ifthe contractor fails to perform the contracts' scope of work.Upon termination other than for a contractor's default, thecontractor will normally be entitled to reimbursement for allowablecosts and an allowance for profit. Foreign defense contracts generallycontain comparable provisions permitting termination at the convenienceof the government. To date, none of our significant fixed-pricecontracts have been terminated.

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 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.

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Certain of our sales are directcommercial sales to foreign governments. These sales are subject toU.S. Government approval and licensing under the Arms Export ControlAct. Legal restrictions on sales of sensitive U.S. technology alsolimit the extent to which we can sell our products to foreigngovernments or private parties.

Environmental Matters

Our operations are subject to various environmental laws andregulations relating to the discharge, storage, treatment, handling,disposal and remediation of certain materials, substances and wastesused in our operations. We continually assess our obligations andcompliance with respect to these requirements. 

In connectionwith the acquisition on March 8, 2002 of the Aircraft IntegrationSystems business from Raytheon, we assumed responsibility forimplementing certain corrective actions, required under federal law toremediate the Greenville, Texas site location, and to pay a portion ofthose remediation costs. The hazardous substances requiring remediationhave been substantially characterized, and the remediation system hasbeen partially implemented. We have estimated that our share of theremediation cost will not exceed $2.5 million, and will be incurredover a period of 25 years. We have established adequate reserves forthese costs.

We have also assessed the risk of environmentalcontamination for the various manufacturing facilities of our otheracquired businesses and, where appropriate, have obtainedindemnification, either from the sellers of those acquired businessesor through pollution liability insurance. We believe that our currentoperations are in substantial compliance with all existing applicableenvironmental laws and permits. We believe our current expenditureswill allow us to continue to be in compliance with applicableenvironmental laws and regulations. While it is difficult to determinethe timing and ultimate cost to be incurred in order to comply withthese laws, based upon available internal and external assessments,with respect to those environmental loss contingencies of which we areaware, we believe that even without considering potential insurancerecoveries, if any, there are no environmental loss contingencies that,individually or in the aggregate, would be material to our consolidatedresults of operations, financial position or cash flows.

Despiteour current 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") which 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 -- West andAviation Recorders pension plans (the "SubjectPlans").

With respect to the Subject Plans,Lockheed Martin entered into an agreement (the "LockheedMartin Commitment") among Lockheed Martin, L-3Communications and the PBGC dated as of April 30, 1997. The materialterms and conditions of the Lockheed Martin Commitment include acommitment by Lockheed Martin to the PBGC to, under certaincircumstances, assume sponsorship of the Subject Plans or provideanother form of financial support for the Subject Plans. The LockheedMartin Commitment will continue with respect to any Subject Plan untilsuch time as such Subject Plan is no longer underfunded on a PBGC basisfor two consecutive years or, at any time after May 31, 2002, if weachieve investment grade credit ratings.

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Upon the occurrence of certain events,Lockheed Martin, at its option, has the right to decide whether tocause us to transfer sponsorship of any or all of the Subject Plans toLockheed 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, 2003, we contributed $4.8 million tothe Subject Plans. For subsequent years, our funding requirements willdepend upon prevailing interest rates, return on pension plan assetsand underlying actuarial assumptions.

We have performed ourobligations under the letter agreement with Lockheed Martin and theLockheed Martin Commitment and have not received any communicationsfrom the PBGC concerning actions which the PBGC contemplates taking inrespect of the Subject Plans.

Employees

As of December31, 2003, we employed approximately 38,700 full-time and part-timeemployees, the majority of whom are located in the United States. Ofthese employees, approximately 21.4% are covered by 56 separatecollective bargaining agreements with various labor unions. Our abilityto retain and train our employees is critical to the continued successof L-3's businesses. We have a continuing need for skilled andprofessional personnel to meet contract schedules and obtain new andongoing orders for our products. We believe that relations with ouremployees are positive.

Available Information

We aresubject to the informational requirements of the Securities ExchangeAct of 1934 and, in accordance therewith, file reports and otherinformation with the SEC. Such reports and other information can beinspected and copied at the Public Reference Section of the SEC locatedat Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.20549 and at a regional public reference facility maintained by the SEClocated at Citicorp Center, 500 West Madison Street, Suite 1400,Chicago, Illinois 60661. Copies of such material can be obtained fromthe Public Reference Section of the SEC at prescribed rates. Suchmaterial may also be accessed electronically by means of theSEC's home page on the Internet athttp://www.sec.gov.

You may also obtain a free copy ofour annual reports on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K and amendments to those reports on the dayof filing with the SEC or through our website on the Internet athttp://www.l-3com.com.

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Item2.    Properties

The table below provides information aboutour significant facilities and properties at December 31,2003.

|                                               |  |                           |         |        |  |        |         |        |  |  |
|-----------------------------------------------|--|---------------------------|---------|--------|--|--------|---------|--------|--|--|
| Location                                      |  | Owned                     |         | Leased |
|                                          |  | (thousandsof square feet) |
| L-3 Corporate Offices, New York,NY            |  |                      | — |   |  |   | 51.2    |   |
| WashingtonOperations, Arlington,VA            |  |                      | — |   |  |   | 8.3     |   |
| SecureCommunication &ISR:                 |  |                      |    |   |  |   |    |   |
| Camden,NJ                                     |  |                      | — |   |  |   | 575.0   |   |
| Greenville,TX                                 |  |                      | — |   |  |   | 3,043.5 |   |
| Salt Lake City,UT                             |  |                      | — |   |  |   | 561.6   |   |
| Training,Simulation & SupportServices:    |  |                      |    |   |  |   |    |   |
| Huntsville,AL                                 |  |                      | — |   |  |   | 101.6   |   |
| Colorado Springs,CO                           |  |                      | — |   |  |   | 77.0    |   |
| Orlando,FL                                    |  |                      | — |   |  |   | 175.1   |   |
| Kirkwood,NY                                   |  |                      | — |   |  |   | 428.0   |   |
| Arlington,TX                                  |  |                      | 21.3    |   |  |   | 47.5    |   |
| Alexandria,VA                                 |  |                      | — |   |  |   | 94.5    |   |
| Arlington,VA                                  |  |                      | — |   |  |   | 84.7    |   |
| Chantilly,VA                                  |  |                      | — |   |  |   | 88.8    |   |
| AviationProducts & AircraftModernization: |  |                      |    |   |  |   |    |   |
| Selma,AL                                      |  |                      | — |   |  |   | 205.5   |   |
| Phoenix,AZ                                    |  |                      | — |   |  |   | 90.3    |   |
| Sarasota,FL                                   |  |                      | — |   |  |   | 143.7   |   |
| Alpharetta,GA                                 |  |                      | 93.0    |   |  |   | — |   |
| Rolling Meadows,IL                            |  |                      | 45.0    |   |  |   | 6.7     |   |
| Lexington,KY                                  |  |                      | — |   |  |   | 273.2   |   |
| Grand Rapids,MI                               |  |                      | 110.0   |   |  |   | — |   |
| South Madison,MS                              |  |                      | — |   |  |   | 164.0   |   |
| Waco,TX                                       |  |                      | 761.8   |   |  |   | 221.1   |   |
| Calgary,Canada                                |  |                      | 65.5    |   |  |   | — |   |
| Edmonton,Canada                               |  |                      | — |   |  |   | 366.3   |   |
| Mirabel,Canada                                |  |                      | 397.2   |   |  |   | 81.2    |   |
| SpecializedProducts:                          |  |                      |    |   |  |   |    |   |
| Anaheim,CA                                    |  |                      | — |   |  |   | 474.2   |   |
| Menlo Park,CA                                 |  |                      | — |   |  |   | 97.5    |   |
| San Carlos,CA                                 |  |                      | 191.6   |   |  |   | — |   |
| San Diego,CA                                  |  |                      | 196.0   |   |  |   | 202.6   |   |
| Sylmar,CA                                     |  |                      | — |   |  |   | 253.0   |   |
| Largo,FL                                      |  |                      | 46.4    |   |  |   | — |   |
| Ocala,FL                                      |  |                      | 111.7   |   |  |   | — |   |
| St. Petersburg,FL                             |  |                      | — |   |  |   | 112.0   |   |
| Budd Lake,NJ                                  |  |                      | — |   |  |   | 114.0   |   |
| Hauppauge,NY                                  |  |                      | 90.0    |   |  |   | 150.0   |   |
| Cincinnati,OH                                 |  |                      | 222.6   |   |  |   | — |   |
| Tulsa,OK                                      |  |                      | — |   |  |   | 129.9   |   |
| Lancaster,PA                                  |  |                      | — |   |  |   | 143.8   |   |
| Philadelphia,PA                               |  |                      | — |   |  |   | 210.5   |   |
| Williamsport,PA                               |  |                      | 208.6   |   |  |   | — |   |
| Arlington,TX                                  |  |                      | 60.7    |   |  |   | 135.1   |   |
| Grand Prairie,TX                              |  |                      | — |   |  |   | 125.0   |   |
| Burlington,Canada                             |  |                      | — |   |  |   | 124.0   |   |
| Leer,Germany                                  |  |                      | 32.2    |   |  |   | 33.2    |   |
|                                               |

At December 31,2003, in the aggregate, we owned approximately 2.7 million square feetand leased approximately 11.5 million square feet of manufacturingfacilities and properties.

25

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Item 3.    Legal Proceedings

From time to time we are involved in legal proceedings arising inthe ordinary course of our business. We believe that we are adequatelyreserved for these liabilities and that there is no litigation thatwill have a material adverse effect on our consolidated results ofoperations, financial condition or cash flows.

On August 6,2002, Aviation Communications & Surveillance Systems, LLC (ACSS), asubsidiary of L-3 Communications Corporation, was sued by HoneywellInternational Inc. and Honeywell Intellectual Properties, Inc.(collectively, "Honeywell") for allegedinfringement of patents that relate to terrain awareness avionics. Thelawsuit was filed in the United States District Court for the Districtof Delaware. In December of 2002, Honeywell withdrew without prejudicethe lawsuit against ACSS and agreed to proceed with non-bindingarbitration. We had previously investigated the Honeywell patents andbelieve that ACSS has valid defenses against Honeywell's patentinfringement suit. In addition, ACSS has been indemnified to a certainextent by Thales Avionics, which provided ACSS with the allegedinfringing technology. Thales Avionics owns 30% of ACSS. In theopinion of management, the ultimate disposition of Honeywell'spending claim will not result in a material liability to us.

L-3Integrated Systems and its predecessors have been involved in alitigation with Kalitta Air (Kalitta Air) arising from a contract toconvert Boeing 747 aircraft from passenger configuration to cargofreighters. The lawsuit was brought in the northern district ofCalifornia 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 Ninth Circuit Court of Appeals has reversedand remanded the trial court's summary judgment rulings in favorof CTAS regarding a negligence claim by Kalitta Air, which asserts thatCTAS as an expert in aircraft modification should have known that theSTCs were deficient, and excluding certain evidence at trial. Based onthis ruling, it appears likely that the matter will have to be retried.In August of 2003, Kalitta Air has recalculated its damages based onconsequential damage theories of lost revenues and income anddiminution in value of the business and is asserting damages in excessof $500 million. CTAS' insurance carrier has accepted defense ofthe matter with a reservation of rights. The Company continues tobelieve that it has meritorious defenses and intends to vigorouslydefend this matter.

The Company and L-3 Communications Securityand Detection Systems (L-3 SDS) have been named, along with many otherdefendants, including other security screening systems manufacturers,as defendants in a number of lawsuits brought in the Southern Districtof New York by or on behalf of the victims of the terrorist attacks onSeptember 11, 2001. Counsel for the plaintiffs have represented to thecourt that they intend to amend some or all of their complaints todelete certain of the defendants, including the Company and L-3 SDS,and to date, approximately 60 of the complaints have been amended todrop the Company and L-3 SDS as a defendant. In addition, the court hasruled that the plaintiffs who complete their applications for reliefunder a federal fund may not pursue judicial action. The court hasordered that the plaintiffs file final amended complaints by March 31,2004 at which time the Company and L-3 SDS will know how many, if any,actions will be pending against them. The complaints allege variouscauses of action, including claims of wrongful death, negligence,strict liability and breach of contract, and seek compensatory andpunitive damages. The Company and L-3 SDS believe that they havemeritorious defenses to these actions and intend to vigorously defendthe lawsuits. The Company purchased L-3 SDS from PerkinElmer, Inc.(PerkinElmer) on June 14, 2002. The actions have been tendered to theCompany's and PerkinElmer's insurance carriers, who haveaccepted the defense of these matters.

26

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On November 18, 2002, we initiated aproceeding against OSI Systems, Inc. (OSI) in the United StatesDistrict Court sitting in the Southern District of New York seeking,among other things, a declaratory judgment that we had fulfilled all ofour obligations under a letter of intent with OSI (the"OSI Letter of Intent"). Under the OSI Letterof Intent, we were to negotiate definitive agreements with OSI for thesale of certain businesses we acquired from PerkinElmer, Inc. on June14, 2002. On February  7, 2003, OSI filed an answer andcounterclaims in the New York action alleging, among other things, thatwe breached our obligations under the OSI Letter of Intent and seekingdamages in excess of $100 million, not including punitive damages.Under the OSI Letter of Intent, we proposed selling to OSI theconventional detection business and the ARGUS business that we recentlyacquired 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. We believe that the claims asserted by OSIin its suit are without merit and intend to defend against the OSIclaims vigorously.

L-3 Communications Vertex Aerospace LLC(formerly known as Vertex Aerospace LLC and acquired by the Company onDecember 1, 2003) ("L-3 Vertex") is named asa defendant in nine wrongful death lawsuits in the District Court, 17thJudicial District, Tarrant County, Texas; in the Circuit Court of the17th Judicial Circuit, Broward County, Florida; and in the UnitedStates District Court, Western District of North Carolina arising fromthe crash 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. Nodiscovery has taken place in the lawsuits at this time. Eight claimsresulting from this incident have previously settled. The NationalTransportation Safety Board (NTSB) investigated the cause of the crashand has concluded that the crash was caused by the incorrect rigging ofthe elevator control system compounded by the airplane's centerof gravity, which was substantially aft of the certified limit, withseveral other contributing factors. L-3 Vertex believes that it hasmeritorious defenses to the pending lawsuits, and intends to defend thecases vigorously. The actions have been tendered to L-3 Vertex'sinsurance carrier, who has accepted the defense of each action servedupon L-3 Vertex to date. L-3 Vertex was also indemnified by Air Midwestfor losses L-3 Vertex incurred arising out of its provision ofmaintenance services to Air Midwest. Based on the availability ofinsurance and the indemnification from Air Midwest, we do not believewe will have a material liability in this matter.

Item4.    Submission of Matters to a Vote of Security Holders

Notapplicable.

27

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PART II

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

Price Range of Common Stock

Thecommon stock of L-3 Holdings is traded on the New York Stock Exchange(the "NYSE") under the symbol"LLL". The following table sets forth, foreach of the quarterly periods indicated, the high and low closing priceof the common stock as reported on the NYSE.

|                                           |  |                           |        |        |  |        |        |        |  |  |  |  |  |  |
|-------------------------------------------|--|---------------------------|--------|--------|--|--------|--------|--------|--|--|--|--|--|--|
|                                      |  | PriceRange of CommonStock |        |
|                                      |  | High                      |        | Low    |  |
| **FiscalYear Ended December 31,2002:**    |  |                      |   |   |  |   |   |   |  |
| QuarterEnded:                             |  |                      |   |   |  |   |   |   |  |
|     March 31,2002     |  | $                         | 58.23  |   |  | $      | 44.09  |   |  |
|     June 30,2002      |  |                      | 65.99  |   |  |   | 51.35  |   |  |
|     September 30,2002 |  |                      | 57.50  |   |  |   | 42.29  |   |  |
|     December 31,2002  |  |                      | 53.75  |   |  |   | 41.09  |   |  |
| **FiscalYear Ended December 31,2003:**    |  |                      |   |   |  |   |   |   |  |
| QuarterEnded:                             |  |                      |   |   |  |   |   |   |  |
|     March 31,2003     |  | $                         | 47.90  |   |  | $      | 35.60  |   |  |
|     June 30,2003      |  |                      | 46.22  |   |  |   | 36.24  |   |  |
|     September 30,2003 |  |                      | 51.09  |   |  |   | 42.35  |   |  |
|     December 31,2003  |  |                      | 51.60  |   |  |   | 43.57  |   |  |
|                                           |

On February 27,2004, the closing price of L-3 Holdings common stock, as reported bythe NYSE, was $53.52 per share and the number of holders of L-3Holdings' common stock was approximately 75,000.

L-3Communications is a wholly owned subsidiary of L-3 Holdings.

Equity Compensation Plan Information

The table below setsforth information with respect to shares of L-3 Holdings common stockthat may be issued under our equity compensation plans as of December31,2003.

|                                                          |  |                                                                                           |            |                                                                           |  |                                                                                                                                          |         |           |  |        |         |        |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------------------|--|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------|---------|-----------|--|--------|---------|--------|--|--|--|--|--|--|--|--|--|--|
| Plancategory                                             |  | Number of securities tobe issued upon exercise of outstanding options,warrants and rights |            | Weighted-average exerciseprice of outstanding options, warrants andrights |  | Number of securities remaining available forfuture issuance under equity compensation plans(excluding securities reflected in column(a)) |         |
|                                                     |  | (a)                                                                                       |            | (b)                                                                       |  | (c)                                                                                                                                      |         |
| Equitycompensation plans approved by securityholders     |  |                                                                                      | 10,399,327 | (1)                                                                  |  | $                                                                                                                                        | 28.41   | (2)  |  |   | 954,914 |   |  |
| Equitycompensation plans not approved by securityholders |  |                                                                                      | —    |                                                                      |  |                                                                                                                                     | — |      |  |   | — |   |  |
|     Total                            |  |                                                                                      | 10,339,327 |                                                                      |  | $                                                                                                                                        | 28.41   |      |  |   | 954,914 |   |  |
|                                                          |

|  |
|--|
|  |  |
|  |

| (1) | Includesthe 1999 Long-term Performance Plan and the 1997 Stock Option Plan.Included in column (a) are restricted stock awards of 315,544shares. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The calculationof the weighted average exercise price excludes the effect of therestricted stock awards of 315,544 shares, which have been granted toemployees at no cost. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Dividend Policy

On January26, 2004, L-3 Holdings announced that its Board of Directors haddeclared L-3's first quarterly cash dividend of $0.10 per share,payable on March 15, 2004, to shareholders of record at the close ofbusiness on February 17, 2004. On February 17, 2004, L-3 Holdings had105,227,879 shares of common stock outstanding.

28

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Item 6.    Selected Financial Data

We derived the selected financial data presented below at December31, 2003 and 2002 and for each of the three years in the period endedDecember 31, 2003 from our audited consolidated financial statementsincluded elsewhere in the Form 10-K. We derived the selected financialdata presented below for the years ended December 31, 2000 and 1999 andat December 31, 2001, 2000 and 1999 from our audited consolidatedfinancial statements not included in the Form 10-K. You should read theselected financial data together with our"Management's Discussion and Analysis of Results ofOperations and Financial Condition" and our auditedconsolidated financial statements. The results of operations areimpacted significantly by our acquisitions.

|                                                                    |  |                                    |         |        |  |        |         |         |  |        |         |           |  |        |         |           |  |        |         |           |  |  |
|--------------------------------------------------------------------|--|------------------------------------|---------|--------|--|--------|---------|---------|--|--------|---------|-----------|--|--------|---------|-----------|--|--------|---------|-----------|--|--|
|                                                               |  | YearEnded December31,              |
|                                                               |  | 2003                               |         | 2002   |  | 2001   |         | 2000    |  | 1999   |
|                                                               |  | (inmillions, except per sharedata) |
| **Statement of OperationsData:**                                   |  |                               |    |   |  |   |    |    |  |   |    |      |  |
| Sales                                                              |  | $                                  | 5,061.6 |   |  | $      | 4,011.2 |    |  | $      | 2,347.4 |      |  | $      | 1,910.1 |      |  | $      | 1,405.5 |      |
| Operatingincome                                                    |  |                               | 581.0   |   |  |   | 454.0   |    |  |   | 275.3   | (1)  |  |   | 222.7   | (1)  |  |   | 150.5   | (1)  |
| Interestand otherincome                                            |  |                               | 0.2     |   |  |   | 5.0     |    |  |   | 1.8     |      |  |   | 4.4     |      |  |   | 5.5     |      |
| Interestexpense                                                    |  |                               | 132.7   |   |  |   | 122.5   |    |  |   | 86.4    |      |  |   | 93.0    |      |  |   | 60.6    |      |
| Losson retirement ofdebt                                           |  |                               | 11.2    |   |  |   | 16.2    |    |  |   | — |      |  |   | — |      |  |   | — |      |
| Minorityinterest                                                   |  |                               | 3.5     |   |  |   | 6.2     |    |  |   | 4.4     |      |  |   | — |      |  |   | — |      |
| Provisionfor incometaxes                                           |  |                               | 156.2   |   |  |   | 111.6   |    |  |   | 70.8    |      |  |   | 51.4    |      |  |   | 36.7    |      |
| Incomebefore cumulative effect of a change in accounting principle |  |                               | 277.6   |   |  |   | 202.5   |    |  |   | 115.5   |      |  |   | 82.7    |      |  |   | 58.7    |      |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |   |  |   | (24.4   | )  |  |   | — |      |  |   | — |      |  |   | — |      |
| Netincome                                                          |  | $                                  | 277.6   |   |  | $      | 178.1   |    |  | $      | 115.5   | (2)  |  | $      | 82.7    | (2)  |  | $      | 58.7    | (2)  |
| Earningsper commonshare:                                           |  |
| Basic:                                                             |  |
| Incomebefore cumulative effect of a change in accountingprinciple  |  | $                                  | 2.89    |   |  | $      | 2.33    |    |  | $      | 1.54    | (3)  |  | $      | 1.24    | (3)  |  | $      | 0.91    | (3)  |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |   |  |   | (0.28   | )  |  |   | — |      |  |   | — |      |  |   | — |      |
| Netincome                                                          |  | $                                  | 2.89    |   |  | $      | 2.05    |    |  | $      | 1.54    | (3)  |  | $      | 1.24    | (3)  |  | $      | 0.91    | (3)  |
| Diluted:                                                           |  |                               |    |   |  |
| Incomebefore cumulative effect of a change in accountingprinciple  |  | $                                  | 2.71    |   |  | $      | 2.18    |    |  | $      | 1.47    | (3)  |  | $      | 1.18    | (3)  |  | $      | 0.88    | (3)  |
| Cumulativeeffect of a change in accountingprinciple                |  |                               | — |   |  |   | (0.25   | )  |  |   | — |      |  |   | — |      |  |   | — |      |
| Netincome                                                          |  | $                                  | 2.71    |   |  | $      | 1.93    |    |  | $      | 1.47    | (3)  |  | $      | 1.18    | (3)  |  | $      | 0.88    | (3)  |
| Weightedaverage common sharesoutstanding:                          |  |                               |    |   |  |
| Basic                                                              |  |                               | 96.0    |   |  |   | 86.9    |    |  |   | 74.9    |      |  |   | 66.7    |      |  |   | 64.2    |      |
| Diluted                                                            |  |                               | 106.1   |   |  |   | 97.4    |    |  |   | 85.4    |      |  |   | 69.9    |      |  |   | 67.0    |      |
| **BalanceSheet Data (at period end):**                             |  |
| Workingcapital                                                     |  | $                                  | 1,013.5 |   |  | $      | 929.4   |    |  | $      | 717.8   |      |  | $      | 360.9   |      |  | $      | 255.5   |      |
| Totalassets                                                        |  |                               | 6,492.9 |   |  |   | 5,242.3 |    |  |   | 3,339.2 |      |  |   | 2,463.5 |      |  |   | 1,628.7 |      |
| Long-termdebt                                                      |  |                               | 2,457.3 |   |  |   | 1,847.8 |    |  |   | 1,315.3 |      |  |   | 1,095.0 |      |  |   | 605.0   |      |
| Minorityinterest                                                   |  |                               | 76.2    |   |  |   | 73.2    |    |  |   | 69.9    |      |  |   | — |      |  |   | — |      |
| Shareholders'equity                                                |  |                               | 2,574.5 |   |  |   | 2,202.2 |    |  |   | 1,213.9 |      |  |   | 692.6   |      |  |   | 583.2   |      |
|                                                                    |

29

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|  |
|--|
|  |  |
|  |

| (1) | EffectiveJanuary 1, 2002, we ceased amortizing goodwill. Goodwill amortizationexpense recorded in years prior to 2002 was $42.3 million in 2001,$35.0 million in 2000 and $20.6 million in1999. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Net income, asadjusted to exclude goodwill amortization expense, net of income taxexpense, was $149.4 million in 2001, $112.3 million in 2000 and $76.2million in 1999. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Basicearnings per share, as adjusted to exclude goodwill amortizationexpense, was $1.99 in 2001, $1.68 in 2000 and $1.19 in 1999. Dilutedearnings per share, as adjusted, was $1.87 in 2001, $1.61 in 2000 and$1.14 in 1999. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Item 7.    Management's Discussionand Analysis of Results of Operations and Financial Condition

Overview

We are a leading supplier of a broad range ofproducts used in a substantial number of aerospace and defenseplatforms. We also are a major supplier of subsystems on manyplatforms, including those for secure communication networks, 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 andmaintenance, ISR collection platforms, simulation and training, andgovernment systems support services. The substantial majority of oursales are generated using written contractual arrangements. Thecontracts require us to design, develop, manufacture, modify, test andintegrate complex aerospace and electronic equipment and to providerelated engineering and technical services according to specificationsprovided by our customers. Our primary customer is the DoD. For theyear ended December 31, 2003, sales directly to the DoD and indirectsales to the DoD through its prime contractors and subcontractorsprovided $3,510 million, or 69.3% of our consolidated sales. Ourother customers include certain U.S. Government intelligence agencies,major aerospace and defense contractors, foreign governments,commercial customers and certain other U.S. federal, state and localgovernment agencies.

Our objective is to grow our salesorganically and through acquisitions and to improve our profitability.To achieve these objectives we intend to expand our share of existingprograms and participate in new programs by leveraging the strongrelationships that we have developed with the DoD, several other U.S.Government agencies and all of the major U.S. defense primecontractors. We expect to continue to benefit from the outsourcing ofsubsystems, components and products by prime contractors. We plan tocontinue to align our research and development, manufacturing and newbusiness efforts to complement our customers' requirements and toprovide state-of-the-art products. We plan to maintain a diversifiedand broad business mix with limited reliance on any single program, afavorable balance of cost-reimbursable and fixed-price contracts, asignificant follow-on business and an attractive customer profile. Asignificant portion of our growth strategy is to selectively acquirecompanies or assets that complement and enhance our existingbusinesses. See "Acquisitions" below.

We have four reportable segments: (1) Secure Communications &ISR; (2) Training, Simulation & Support Services; (3) AviationProducts & Aircraft Modernization; and (4) Specialized Products.Our Secure Communications & ISR segment provides products andservices for the global ISR market as well as secure, high data ratecommunications systems and equipment primarily for military and otherU.S. Government reconnaissance and surveillance applications. Webelieve our systems and products are critical elements for asubstantial number of major communication, command and control,intelligence gathering and space systems. Our systems and products areused 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. Our Training, Simulation & Support Servicessegment produces training systems and related support services, andprovides a wide range of engineering development services andintegration support, a full range of teaching, training, logistics andcommunication software support services, crisis management software andcustom ballistic targets. Our Aviation Products & AircraftModernization segment provides our TCAS products, cockpit voice, flightdata and cruise ship hardened voyage recorders, ruggedized customdisplays and specialized aircraft modernization, upgrade andmaintenance services. Our Specialized Products segment provides navalwarfare products, telemetry, instrumentation, space and navigationproducts, premium fuzing products, security and surveillance systems,training devices and motion simulators, electro-optic surveillancesystems, ruggedized commercial off-the-shelf technology and microwavecomponents.

30

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In recent years, domestic andgeo-political developments have significantly affected the markets fordefense systems, products and services. The events of September 11,2001 created uncertainty and exposed vulnerabilities in the securityand the overall defense of the U.S. homeland. In the conclusions of theU.S. Quadrennial Defense Review (QDR), completed during 2001, there wasa fundamental and philosophical shift in focus from a"threat-based" model to one that emphasizesthe capabilities needed to defeat a full spectrum of adversaries.Transforming the nation's defense posture to a capabilities-basedapproach involves creating the ability for a more flexible response,with greater force mobility, stronger space capabilities, missiledefense, improved and network-centric communications and informationsystems security and an increased emphasis on homeland defense. TheAfghanistan and Iraq wars have confirmed several of the conclusionsreached in the QDR and have also resulted in increased DoD spending,primarily for war operations.

The fiscal year 2004 (fiscal yearbeginning October 1, 2003, or FY 2004) DoD budget, excluding the Iraqand Afghanistan war supplemental appropriations, was $375.2 billion, anincrease of 2.9% over the fiscal year 2003 (FY 2003) DoD budget.On February 2, 2004, the Bush Administration released its currentFuture Year Defense Plan (FYDP) for the fiscal year 2005 (FY 2005) tofiscal year 2009 (FY 2009), and its DoD budget request for FY 2005 of$401.7 billion. The FY 2005 budget request indicates an increase of7.1% over the FY 2004 budget. We believe the DoD investmentaccount, which is comprised of the procurement and research,development, test and evaluation (RDT&E) components of the DoDbudget, is a better indicator of DoD spending applicable to defensecontractors than the total DoD budget because it generally representsthe amounts that are expended for military hardware, services andtechnology. The investment account increased 10.1% in FY 2004over FY 2003, and the current FYDP indicates a compounded annual growthrate of 5.8% from FY 2004 to FY 2009. However, the DoDinvestment account is not the only indicator of revenue growthpotential for the defense industry, because (i) the DoD budget and DoDspending for all defense weapons platforms and programs do not grow ordecline at the same rate, (ii) there are timing differences between DoDbudget authority and actual DoD spending, (iii) an individual defensecontractor's revenue growth potential will be affected by itsparticipation on the various weapons platforms and programs, includingits individual performance on specific programs, and (iv) changingmilitary needs and program performance can affect whether specificprograms receive continued funding or whether they are cancelled.Additionally, the operations and maintenance (O&M) account of theDoD budget, which is $127.6 billion for FY 2004, represents anothersource of funding applicable to defense contractors. We estimate that$20 billion to $25 billion of the O&M account is expended annuallyas awards to defense contractors. The table below presents a summary ofthe current FYDP for the total DoD budget and investment account,including actual amounts for FY 2003 and for FY 2004.

|                         |  |                |       |        |  |      |       |        |  |      |       |        |  |      |       |               |  |   |       |        |  |   |       |        |  |   |       |        |  |        |     |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|-------------------------|--|----------------|-------|--------|--|------|-------|--------|--|------|-------|--------|--|------|-------|---------------|--|---|-------|--------|--|---|-------|--------|--|---|-------|--------|--|--------|-----|---------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|                    |  | FY03           |       | FY04   |  | FY05 |       | FY06   |  | FY07 |       | FY08   |  | FY09 |       | FY04-FY09CAGR |  |
|                    |  | ($in billions) |       |
| Total DoD budget(1)     |  | $              | 364.6 |   |  | $    | 375.2 |   |  | $    | 401.7 |   |  | $    | 422.6 |          |  | $ | 443.8 |   |  | $ | 465.6 |   |  | $ | 487.6 |   |  |   | 5.4 | %  |  |
| DoDInvestmentaccount(1) |  | $              | 126.8 |   |  | $    | 139.6 |   |  | $    | 143.8 |   |  | $    | 151.4 |          |  | $ | 161.3 |   |  | $ | 176.7 |   |  | $ | 184.7 |   |  |   | 5.8 | %  |  |
|                         |

| (1) | Budget amounts exclude the FY 2003 and FY 2004supplemental appropriations for the war operations in Iraq andAfghanistan. |
|-----|--------------------------------------------------------------------------------------------------------------------------|

Over the past several years, the DoD budgetshave experienced increased focus on command, control, communications,intelligence, surveillance and reconnaissance (C3ISR),precision-guided weapons, unmanned aerial vehicles (UAVs),network-centric communications, Special Operations Forces (SOF) andmissile defense. In addition, the DoD philosophy has focused on atransformation strategy that balances modernization andrecapitalization (or upgrading existing platforms) while enhancingreadiness and joint operations. As a result, defense budget programallocations continue to favor advanced information technologies relatedto command, control and communications (C3) and ISR.Furthermore, the DoD's emphasis on system interoperability, forcemultipliers and providing battlefield commanders with real-time data isincreasing the electronic content of nearly all major militaryprocurement and research programs. As a result, it is expected that theDoD's budget for communications and defense electronics willcontinue to grow. We believe L-3 is well positioned to benefit from theexpected increased spending in those areas. While there is no assurancethat the requested DoD budget increases, particularly those for theinvestment account, will continue to be approved by Congress, thecurrent outlook is one 

31

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of increased DoD spending, which we believewill continue to positively affect L-3's future orders and salesand favorably affect our future operating profits and cash flowsbecause of increased sale volumes. Conversely, a decline in the budgetfor the DoD investment account would generally have a negative affecton future orders, sales, operating profits and cash flows of defensecontractors, including L-3, depending on the weapons platforms andprograms affected by such budget reductions. However, L-3 believes thatits businesses are significant participants in the sectors of the DoDinvestment account and DoD O&M account that are the highestpriority for U.S. military transformation, and we believe that theywill continue to be, even in a declining DoD budget environment.

In addition, increased emphasis on U.S. homeland security mayincrease demand for our capabilities in areas such as security systems,information security, crisis management, preparedness and preventionservices, and civilian security operations.

All of our U.S.Government contracts are subject to audit and various cost controls,and include standard provisions for termination for the convenience ofthe U.S. Government. Multiyear U.S. Government contracts and relatedorders are subject to cancellation if funds for contract performancefor any subsequent year become unavailable. Foreign governmentcontracts generally include comparable provisions relating totermination for the convenience of the relevant foreign government.

Acquisitions

A significant component of our growth strategyhas been to enhance our existing product base through selectiveacquisitions that will add new products in areas that complement ourpresent technologies. We intend to continue acquiring select smallerpublicly and privately owned companies, as well as non-core aerospaceand defense businesses of larger companies, that (i) exhibitsignificant market position(s) in their business area(s), (ii) offerproducts that complement and/or extend our product offerings, and (iii)display positive sales, earnings and cash flowprospects.

32

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Thetable below summarizes the more significant acquisitions that we havecompleted during 2001, 2002 and 2003. During 2003 we used cash of$1,014.4 million to acquire businesses. See Statement of CashFlows—Investing Activities below.

|                                                                                                 |  |                   |  |                  |         |               |  |  |  |  |
|-------------------------------------------------------------------------------------------------|--|-------------------|--|------------------|---------|---------------|--|--|--|--|
| AcquiredBusiness                                                                                |  | Date Acquired     |  | PurchasePrice(1) |
|                                                                                            |  |              |  | (inmillions)     |
| KDI PrecisionProducts                                                                           |  | May 4,2001        |  | $                | 78.9    |          |  |
| EER Systems                                                                                     |  | May31, 2001       |  | $                | 124.4   |          |  |
| Spar AerospaceLimited                                                                           |  | November 23,2001  |  | $                | 146.8   |          |  |
| Emergent GovernmentServices Group                                                               |  | November 30,2001  |  | $                | 39.0    | (2)      |
| BT FuzeProducts                                                                                 |  | December 19,2001  |  | $                | 51.1    |          |  |
| SY Technology(SY)                                                                               |  | December 31,2001  |  | $                | 61.5    |          |  |
| Aircraft IntegrationSystems (AIS) business of Raytheon Company                                  |  | March 8,2002      |  | $                | 1,148.7 | (3)      |
| DetectionSystems                                                                                |  | June 14,2002      |  | $                | 110.0   | (4)      |
| TelosCorporation (a California Corporation)                                                     |  | July 19,2002      |  | $                | 22.3    |          |  |
| ComCept,Inc.                                                                                    |  | July 31,2002      |  | $                | 30.1    | (5)      |
| Technology,Management and Analysis Corporation (TMA)                                            |  | September 23,2002 |  | $                | 53.4    | (6)(7)   |
| ElectronDevices and Displays-Navigation Systems – San Diego businesses ofNorthrop Grumman |  | October 25,2002   |  | $                | 135.6   | (8)      |
| WolfCoach, Inc.                                                                                 |  | October 31,2002   |  | $                | 5.4     | (9)      |
| 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  |  | $                | 18.0    | (10)     |
| AvionicsSystems business of Goodrich Corporation                                                |  | March 28,2003     |  | $                | 188.7   | (11)     |
| Aeromet,Inc.                                                                                    |  | May 30,2003       |  | $                | 17.5    | (6)      |
| KleinAssociates Inc.                                                                            |  | September 30,2003 |  | $                | 30.0    | (6)      |
| MilitaryAviation Services business of Bombardier, Inc.(MAS)                                     |  | October 31,2003   |  | $                | 87.4    | (6)      |
| VertexAerospace LLC (Vertex)                                                                    |  | December 1,2003   |  | $                | 650.0   | (6)(12)  |
| Certain defense and aerospace assets ofIPICOM, Inc.                                             |  | December 10,2003  |  | $                | 27.5    | (6)      |
|                                                                                                 |

|  |
|--|
|  |  |
|  |

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

| 2) | Followingthe acquisition, we changed Emergent Government Services Group'sname to L-3 CommunicationsAnalytics. |
|----|---------------------------------------------------------------------------------------------------------------|

| 3) | Includes $18.7million related to additional assets contributed by Raytheon Company(Raytheon) to AIS. Following the acquisition, we changed AIS'sname to L-3 Communications Integrated Systems (IS). The purchase priceis subject to adjustment based on actual closing date tangible netassets, as discussed in Note 3 to the consolidated financialstatements. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4) | Includes a $10.0million preliminary purchase price adjustment. The purchase price issubject to further adjustment based on actual closing date net workingcapital. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5) | The purchase priceconsists of $14.5 million of cash and 229,494 shares of L-3 Holdingscommon stock valued at $10.6 million, which were paid on the closingdate of the acquisition, plus an additional 109,514 shares of L-3Holdings common stock valued at $5.0 million issued in July 2003, whichwas based on Comcept's financial performance for the fiscal yearended June 30, 2003. The purchase price excludes additional purchaseprice in the form of L-3 Holdings common stock not to exceed 109,544shares, which is contingent upon the financial performance of ComCeptfor the fiscal year ending June 30,2004. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6) | The purchase price issubject to adjustment based on actual closing date net assets or networking capital of the acquiredbusiness. |
|----|-----------------------------------------------------------------------------------------------------------------------------------|

| 7) | Following theacquisition, we changed TMA's name to L-3 Communications TMACorporation. |
|----|---------------------------------------------------------------------------------------|

| 8) | Following theacquisition, we changed the name of the Displays-Navigation Systems– San Diego's business to L-3 Ruggedized Command &Control. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 9) | Excludesadditional purchase price, not to exceed $2.7 million, which iscontingent upon the financial performance of Wolf Coach for the yearsending December 31, 2004 and2005. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10) | Excludes additionalpurchase price, not to exceed $9.0 million, which is contingent uponthe financial performance of Ship Analytics for the years endingDecember 31, 2004 and2005. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 11) | Following theacquisition, we changed the name of Avionics Systems to L-3Communications Avionics Systems,Inc. |
|-----|--------------------------------------------------------------------------------------------------------------|

| 12) | Excludes a $3.3 millionpurchase price adjustment paid on the closingdate. |
|-----|---------------------------------------------------------------------------|

|  |
|--|
|  |  |
|  |

Additionally, during 2001, 2002 and 2003 wepurchased other businesses, which individually and in the aggregatewere not material to our consolidated results of operations, financialposition or cash flows during the year acquired. The aggregate purchaseprice for these businesses was $24.0 million (all of which was paid incash), and the increase to our sales from them for 2003 compared to2002 was $2.5 million and for 2002 compared to 2001 was $14.5million.

All of our acquisitions have been accounted for aspurchase business combinations and are included in our consolidatedresults of operations from their effective dates of acquisition.

We regularly evaluate potential acquisitions and joint venturetransactions, but we have not entered into any other agreements withrespect to any material transactions at this time.

The tablebelow presents L-3's contractual contingent commitments foradditional purchase price or earnouts payable in cash for certain ofL-3's acquisitions.

|                             |  |        |     |        |  |        |         |        |  |        |         |        |  |        |      |        |  |  |
|-----------------------------|--|--------|-----|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|------|--------|--|--|
|                        |  | 2004   |     | 2005   |  | 2006   |         | Total  |
| **AcquiredBusinesses:**     |  |
| Coleman ResearchCorporation |  | $      | 2.3 |   |  | $      | — |   |  | $      | — |   |  | $      | 2.3  |   |
| Wolf Coach,Inc.             |  |   | 1.2 |   |  |   | 1.4     |   |  |   | 1.3     |   |  |   | 3.9  |   |
| ShipAnalytics,Inc.          |  |   | 4.5 |   |  |   | 4.5     |   |  |   | 4.5     |   |  |   | 13.5 |   |
| SYTechnology                |  |   | 1.5 |   |  |   | — |   |  |   | — |   |  |   | 1.5  |   |
| Total                       |  | $      | 9.5 |   |  | $      | 5.9     |   |  | $      | 5.8     |   |  | $      | 21.2 |   |
|                             |

Theseearnouts represent potential additional purchase price amounts that arecontingent upon the post-acquisition financial performance of theacquired business. The amounts payable in 2004 have been finalized asof December 31, 2003, and, accordingly, have been included in othercurrent liabilities, with a corresponding increase to goodwill atDecember  31, 2003. The contingent amounts for periods after 2004will be recorded as an increase to goodwill for the acquisition if theybecome payable. All earnout payments are reported as cash paid foracquisition of businesses within investing activities on the statementof cash flows in the period of the payment.

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 andprofit recognition, (ii) market values for inventories reported atlower of cost or market, (iii) pension and postretirement benefitobligations, (iv) valuation of long-lived assets, includingidentifiable intangible assets and goodwill, (v) income taxes,including the valuations of deferred tax assets, (vi) litigationreserves, and (vii) environmental obligations. Actual amounts willdiffer from these estimates. We believe that critical accountingestimates have the following attributes: (1) we are required to makeassumptions about matters that are uncertain at the time of theestimate; and (2) we could reasonably have used different estimates, or(3) changes in the estimate that are reasonably likely to occur, wouldhave a material effect on our financial condition or results ofoperations. We believe the following critical accounting policiescontain the more significant judgements and estimates used in thepreparation of our financial statements.

Contract RevenueRecognition and Contract Estimates.    The substantial majorityof our sales require us to design, develop, manufacture, modify, testand integrate complex aerospace and electronic 

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equipment, and to provide related engineeringand technical services according to specifications provided by ourcustomers. These sales are transacted using written contractualarrangements or contracts, which are generally either fixed price,cost-reimbursable or time and material. These contracts are within thescope of 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 within the scope of 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 recognized using percentage-of-completionmethods of accounting. Sales and profits on fixed-price productioncontracts whose units are produced and delivered in a continuous orsequential process are recorded as units are delivered based on theirselling prices (the "units-of-delivery"method). Sales and profits on other fixed-price contracts are recordedbased on the ratio of total actual incurred costs to date to the totalestimated costs at completion of the contract for each 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.

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, and 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 incurred 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.

Theimpact of revisions in profit estimates for all types of contracts arerecognized on a cumulative catch-up basis in the period in which therevisions are made. Provisions for anticipated losses on contracts arerecorded in the period in which they become evident. Amountsrepresenting contract change orders or claims are included in salesonly when they can be reliably estimated and their realization isreasonably 

35

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assured. The revisions in contract estimates,if significant, can materially affect our results of operations andcash flows, as well as our valuations of contracts in process.

For the year ended December 31, 2003: (1) sales on fixed-pricecontracts recognized using the units-of-deliverypercentage-of-completion method accounted for approximately20.8% of total sales, (2) sales on fixed-price contractsrecognized using the cost-to-cost percentage of completion methodaccounted for approximately 30.6% of total sales, (3) sales oncost-reimbursable contracts accounted for approximately 29.8% oftotal sales, and (4) time-and-material contracts accounted forapproximately 7.1% of total sales. The remaining 11.7% ofsales for the year ended December 31, 2003, pertain to fixed-pricerevenue arrangements principally with commercial customers, which arenot within the scope of SOP 81-1, ARB 43 or ARB 45 and are recorded asproducts are delivered or when services are performed, in accordancewith SEC SAB No. 104, Revenue Recognition (SAB 104).

Goodwill and Identifiable Intangible Assets.    Inaccordance with Statement of Financial Accounting Standards (SFAS) No.141, Business Combinations, L-3 allocates the cost of itsacquired 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 L-3's acquired businesses,identifiable intangible assets are recognized as assets apart fromgoodwill if they arise from contractual or other legal rights, or ifthey are capable of being separated or divided from the acquiredbusiness and sold, transferred, licensed, rented or exchanged, unlessthe intangible asset is comprised of the assembled workforce of theacquired business.

Generally, the substantial majority of theintangible assets from the businesses that L-3 acquires are derivedfrom the intellectual capital of the management, administrative,scientific, engineering and technical employees of the acquiredbusinesses. The success of L-3's businesses is primarilydependent on the management, contracting, engineering and technicalskills and knowledge of L-3's employees, rather than productivecapital (machinery and equipment). Generally, patents, trademarks andlicenses are not material to our acquired businesses. Furthermore, ourU.S. Government contracts generally permit other companies to use ourpatents in most domestic work performed by such other companies for theU.S. Government. Therefore, the substantial majority of the intangibleassets for L-3's acquired businesses are recognized asgoodwill.

The values assigned to acquired identifiableintangible assets for customer relationships and technology aredetermined, as of the date of acquisition, based on estimates andjudgements regarding expectations for the estimated future after-taxcash flows from those assets over their lives, including theprobability of expected future contract renewals and sales, less acost-of-capital charge, all of which is discounted to present value. Ifactual future after-tax cash flows differ significantly from theirestimates, we may be required to record an impairment charge to writedown the identifiable intangible assets to their realizable values. Thevalue assigned to goodwill equals the amount of the purchase price ofthe business acquired in excess of the sum of the amounts assigned toidentifiable acquired assets, both tangible and intangible, lessliabilities assumed. At December 31, 2003, L-3 had goodwill of $3,652.4million and identifiable intangible assets of $162.2 million.

L-3 reviews goodwill and intangible assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount ofthese assets may not be recoverable, and also reviews goodwill annuallyin accordance with SFAS No. 142, Goodwill and Other IntangibleAssets. SFAS No. 142 requires that goodwill be tested, at aminimum, annually for each reporting unit using a two-step process. Areporting unit is an operating segment, as defined in paragraph 10 ofSFAS No. 131, Disclosures About Segments of an Enterprise andRelated Information, or a component of an operating segment. Acomponent of an operating segment is a reporting unit if the componentconstitutes a business for which discrete financial information isavailable and is reviewed. Two or more components of an operatingsegment may be aggregated and deemed a single reporting unit if thecomponents have similar economic characteristics. The first step is toidentify any potential impairment by comparing the carrying value ofthe reporting unit to its fair value. If a potential impairment isidentified, the second step is to compare the implied fair value ofgoodwill with the carrying value of the goodwill to measure theimpairment loss. The fair value of a reporting unit is estimated usinga discounted cash flow valuation approach, and is dependent onestimates for future sales, operating income, depreciation andamortization, income tax 

36

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payments, working capital changes, andcapital expenditures, as well as, expected growth rates for cash flowsand long-term interest rates, all of which are impacted by economicconditions related to the industries in which we operate as well asconditions in the U.S. capital markets. A decline in estimated fairvalue of a reporting unit could result in an unexpected impairmentcharge to goodwill, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

Pension Plan and Postretirement Benefit Plan Obligations.    The obligations for our pension plans and postretirementbenefit plans and the related annual costs of employee benefits arecalculated based on several long-term assumptions, including discountrates for employee benefit liabilities, rates of return on plan assets,expected annual rates for salary increases for employee participants inthe case of pension plans, and expected annual increases in the costsof medical and other health care benefits in the case of postretirementbenefit obligations. These long-term assumptions are subject torevision based on changes in interest rates, financial marketconditions, expected versus actual returns on plan assets, participantmortality rates and other actuarial assumptions, including future ratesof salary increases, benefit formulas and levels, and rates of increasein the costs of benefits. Changes in the assumptions, if significant,can materially affect the amount of annual net periodic benefit costsrecognized in our results of operations from one year to the next, theliabilities for the pension plans and postretirement benefit plans, andour annual cash requirements to fund these plans.

Valuationof Deferred Income Tax Assets and Liabilities.    At December 31,2003, we had net deferred tax assets of $253.3 million, including $17.2million for loss carryforwards and $36.1 million for tax creditcarryforwards which are subject to various limitations and will expireif unused within their respective carryforward periods. Deferred incometaxes are determined separately for each of our tax-paying entities ineach tax jurisdiction. The future realization of our deferred incometax assets ultimately depends on our ability to generate sufficienttaxable income of the appropriate character (for example, ordinaryincome or capital gains) within the carryback and carryforward periodsavailable under the tax law, and to a lesser extent, our ability toexecute successful tax planning strategies. Based on our estimates ofthe amounts and timing of future taxable income and tax planningstrategies, we believe that L-3 will be able to realize its deferredtax assets. A change in the ability of our operations to continue togenerate future taxable income, or our ability to implement desired taxplanning strategies, could affect our ability to realize the future taxdeductions underlying our net deferred tax assets, and require us toprovide a valuation allowance against our net deferred tax assets. Therecognition of a valuation allowance would result in a reduction to netincome and if significant, could have a material impact on oureffective tax rate, results of operations and financial position in anygiven period.

Results of Operations

The followinginformation should be read in conjunction with our consolidatedfinancial statements. Our results of operations for the periodspresented are impacted significantly by our acquisitions. See Note 3 tothe consolidated financial statements for a discussion of ouracquisitions.

Presentation of Sales and Costs andExpenses.    L-3 presents its sales and costs and expenses in twocategories on the statement of operations, "Contracts,primarily U.S. Government" and "Commercial,primarily products." This categorization is based on howrevenue is recognized. Sales and costs and expenses for L-3'sbusinesses that are primarily U.S. Government contractors are presentedas "Contracts, primarily U.S. Government."The sales for L-3's U.S. Government contractor businesses aretransacted using written contractual arrangements for products andservices according to the specifications provided by the customer andare within the scope of SOP 81-1, ARB 43 and ARB 45. Sales reportedunder "Contracts, primarily U.S. Government"also include certain sales by L-3's U.S. Government contractorbusinesses transacted using contracts for domestic and foreigncommercial customers, which also are within the scope of SOP 81-1 andARB 45. Sales and costs and expenses for L-3's businesses whosecustomers are primarily commercial business enterprises are presentedas "Commercial, primarily products." Thesesales are recognized in accordance with SAB No. 104, and are not withinthe scope of SOP 81-1, ARB 43 or ARB 45. L-3's commercialbusinesses are substantially comprised of Aviation Communication &Surveillance Systems (ACSS), Aviation Recorders, Microwave Components,Detection Systems and Avionics Systems.

37

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The tables below provide two presentationsof selected statement of operations data for L-3. The first tablepresents the selected data segregated between L-3's U.S.Government contractor businesses and L-3's commercial businesses.See Note 2 to the audited consolidated financial statements. The secondtable presents the selected data by reportable segment. See Note 18 tothe audited consolidated financialstatements.

|                                                                      |  |                       |         |         |  |        |         |         |  |        |         |           |  |  |
|----------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|-----------|--|--|
|                                                                 |  | YearEnded December31, |
|                                                                 |  | 2003                  |         | 2002    |  | 2001   |
|                                                                 |  | (inmillions)          |
| **U.S. GovernmentContractors and Commercial BusinessesPresentation** |  |
| Sales:                                                               |  |
| Contracts,primarily U.S.Government                                   |  | $                     | 4,467.6 |    |  | $      | 3,581.1 |    |  | $      | 1,932.2 |      |
| Commercial,primarilyproducts                                         |  |                  | 594.0   |    |  |   | 430.1   |    |  |   | 415.2   |      |
| Consolidated                                                         |  | $                     | 5,061.6 |    |  | $      | 4,011.2 |    |  | $      | 2,347.4 |      |
| Operatingincome:                                                     |  |
| Contracts, primarily U.S.Government                                  |  | $                     | 562.1   |    |  | $      | 443.6   |    |  | $      | 232.6   | (1)  |
| Commercial,primarilyproducts                                         |  |                  | 18.9    |    |  |   | 10.4    |    |  |   | 42.7    | (1)  |
| Consolidated                                                         |  | $                     | 581.0   |    |  | $      | 454.0   |    |  | $      | 275.3   |      |
| Operatingmargin(2):                                                  |  |
| Contracts, primarily U.S.Government                                  |  |                  | 12.6    | %  |  |   | 12.4    | %  |  |   | 12.0    | %    |
| Commercial,primarilyproducts                                         |  |                  | 3.2     | %  |  |   | 2.4     | %  |  |   | 10.3    | %    |
| Consolidated                                                         |  |                  | 11.5    | %  |  |   | 11.3    | %  |  |   | 11.7    | %    |
| **ReportableSegmentPresentation**                                    |  |
| Sales(3):                                                            |  |
| SecureCommunications &ISR                                        |  | $                     | 1,439.4 |    |  | $      | 1,053.3 |    |  | $      | 450.5   |      |
| Training,Simulation & SupportServices                            |  |                  | 980.2   |    |  |   | 806.3   |    |  |   | 596.8   |      |
| AviationProducts & AircraftModernization                         |  |                  | 1,019.6 |    |  |   | 677.5   |    |  |   | 263.3   |      |
| SpecializedProducts                                                  |  |                  | 1,622.4 |    |  |   | 1,474.1 |    |  |   | 1,036.8 |      |
| Consolidated                                                         |  | $                     | 5,061.6 |    |  | $      | 4,011.2 |    |  | $      | 2,347.4 |      |
| Operatingincome:                                                     |  |
| Secure Communications &ISR                                       |  | $                     | 172.9   |    |  | $      | 103.5   |    |  | $      | 32.0    | (1)  |
| Training,Simulation & SupportServices                            |  |                  | 111.6   |    |  |   | 96.5    |    |  |   | 65.7    | (1)  |
| AviationProducts & AircraftModernization                         |  |                  | 147.8   |    |  |   | 105.7   |    |  |   | 85.6    | (1)  |
| SpecializedProducts                                                  |  |                  | 148.7   |    |  |   | 148.3   |    |  |   | 92.0    | (1)  |
| Consolidated                                                         |  | $                     | 581.0   |    |  | $      | 454.0   |    |  | $      | 275.3   |      |
| Operatingmargin(2):                                                  |  |
| Secure Communications &ISR                                       |  |                  | 12.0    | %  |  |   | 9.8     | %  |  |   | 7.1     | %    |
| Training,Simulation & SupportServices                            |  |                  | 11.4    | %  |  |   | 12.0    | %  |  |   | 11.0    | %    |
| AviationProducts & AircraftModernization                         |  |                  | 14.5    | %  |  |   | 15.6    | %  |  |   | 32.5    | %    |
| SpecializedProducts                                                  |  |                  | 9.2     | %  |  |   | 10.1    | %  |  |   | 8.9     | %    |
| Consolidated                                                         |  |                  | 11.5    | %  |  |   | 11.3    | %  |  |   | 11.7    | %    |
|                                                                      |

|  |
|--|
|  |  |
|  |

| (1) | Operatingincome includes goodwill amortization expense for the year endedDecember 31, 2001, of $31.3 million for "Contracts,primarily U.S. Government," $11.0 million for"Commercial, primarily products, $42.3 million for L-3 ona consolidated basis, $3.8 million for the Secure Communications &ISR segment, $7.1 million for the Training, Simulation & SupportServices segment, $7.7 million for the Aviation Products & AircraftModernization segment and $23.7 million for the Specialized Productssegment. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Operating margin is equal tooperating income as a percentage of sales. |
|-----|------------------------------------------------------------------------|

| (3) | Sales are after intersegment eliminations. See Note18 to the consolidated financial statements. |
|-----|-------------------------------------------------------------------------------------------------|

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

Consolidated salesincreased by $1,050.4 million, or $26.2%, to $5,061.6 millionfor 2003 from sales of $4,011.2 million for 2002. The increase inconsolidated sales from acquisitions was $833.6 million, or20.8%. Organic sales growth for our defense businesses was15.4%, or $500.2 million, and was driven by continued strongdemand for secure communications and intelligence, surveillance andreconnaissance (ISR) systems and products, aircraft modernization,simulation and training services, government services, and an increasein shipments of naval power equipment. Organic sales for our commercialbusinesses declined by 10.7%, or $45.8 million, due to thecontinued weakness in the aviation and communications markets. Salesfor explosives detection systems (EDS) decreased $237.6 millionprimarily because the initial installation of EDS at major U.S.airports by the U.S. Transportation Security Administration (TSA) wascompleted by the end of 2002. Consolidated organic sales growth,excluding the EDS business, from both periods was 12.4%.Consolidated organic sales growth for all of L-3's businesses,including the decline for the EDS business, was $216.8 million, or5.4%. 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 L-3's results of operations forthe entire current period and prior period. Our "defensebusinesses" are comprised of our U.S. Governmentcontractor businesses, other than our EDS business, all of which arepresented under "Contracts, primarily U.S.Government."

Sales from "Contracts,primarily U.S. Government," which comprises our defensebusinesses and our EDS business, increased by $886.5 million, or24.8%, to $4,467.6 million for 2003 from $3,581.1 million for2002. The increase in sales from acquired businesses was $632.9million, or 17.7%. The acquired businesses include IS, Telos,ComCept, TMA, Electron Devices, Ruggedized Command & Control,Westwood, Wescam and Ship Analytics, which were acquired in 2002 andAeromet, Klein, MAS, Vertex and certain defense and aerospace assets ofIPICOM, Inc., which were acquired during 2003. Organic sales growth forL-3's government businesses was $253.6 million, or 7.1%,primarily because of higher sales volume from our defense businessesfor ISR and secure communications systems and products, aircraftmodernization, communications software and engineering supportservices, training services, navigation products and naval powerequipment. These increases were partially offset by a decline in salesvolume primarily from our EDS business, and to a lesser extent, fromour fuzing products, training devices, undersea warfare products anddisplay systems.

Sales from "Commercial, primarilyproducts" increased by $163.9 million, or 38.1%, to$594.0 million for 2003 from $430.1 million for 2002. The increase insales from acquired businesses was $200.7 million, or 46.7%. Theacquired businesses include Detection Systems, IMC and Wolf Coach,which were acquired in 2002 and Avionics Systems, which was acquiredduring 2003. Organic sales for L-3's commercial businessesdeclined by 8.6%, or $36.8 million, due primarily to the lowerrevenues for aviation and communications products caused by continuedweak demand in those commercial markets.

Consolidated costs andexpenses increased by $923.4 million to $4,480.6 million for 2003 from$3,557.2 million for 2002, consistent with the increase in sales.

Costs and expenses for "Contracts, primarily U.S.Government" increased by $768.0 million to $3,905.5million for 2003 from $3,137.5 million for 2002. Approximately73% 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.

Cost of sales forL-3's U.S. Government contractor businesses include selling,general and administrative (SG&A), independent research anddevelopment (IRAD) and bid and proposal (B&P) costs. TheseSG&A, IRAD and B&P costs are allowable indirect contract coststhat are allocated to our U.S. Government contracts in accordance withU.S. Government regulations. We report SG&A, IRAD and B&P costsallocated 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

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in cost of sales for "Contracts,primarily U.S. Government" were $509.3 million, or11.4% of sales for 2003, compared to $431.5 million, or12.0% of sales for 2002 (See Notes 2 and 4 to our consolidatedfinancial statements).

Costs and expenses for"Commercial, primarily products" increased by$155.4 million to $575.1 million for 2003 from $419.7 million for 2002.The increase was primarily due to increased sales attributable to ouracquired businesses, as well as a $3.9 million provision for bad debtand inventory for the PrimeWave Communications business. SG&Aexpenses increased by $23.6 million to $137.6 million or 23.2%of sales for 2003 from $114.0 million or 26.5% of sales for2002. The increase was primarily attributable to acquired businessesand increased costs for security products due to maintenance costsassociated with detection systems placed in service. This increase waspartially offset by lower SG&A expenses at the PrimeWaveCommunications business and our commercial communications productsbusinesses due to cost and expense reductions. Research and development(R&D) expenses increased by $18.0 million to $52.8 million for 2003from $34.8 million for 2002. The increase was primarily due to theAvionics Systems acquired business and development expenses for cargosecurity products, partially offset by lower R&D expenses incurredat the PrimeWave Communications business because of cost and expensereductions.

Consolidated operating income increased by $127.0million to $581.0 million for 2003 from $454.0 million for 2002. Theincrease was primarily due to higher sales from all of our segments.Consolidated operating margin increased slightly by 0.2 percentagepoints to 11.5% for 2003 from 11.3% for 2002. The changesin the operating margins for our segments are discussed below.

Operating income for "Contracts, primarily U.S.Government" increased by $118.5 million to $562.1 millionfor 2003 from $443.6 million for 2002. Operating margin increased by0.2 percentage points to 12.6% for 2003 from 12.4% for2002. The increase in operating margin is due to organic sales growthand cost improvements for ISR and secure communications systems andproducts and naval power equipment.

Operating income for"Commercial, primarily products" increased by$8.5 million to $18.9 million for 2003 from $10.4 million for 2002.Operating margin improved by 0.8 percentage points to 3.2% for2003 from 2.4% for 2002. The improvement was primarily due tolower losses from certain commercial businesses due to cost and expensereductions and higher margins from the Avionics Systems acquiredbusiness. These increases were partially offset by lower margins oncommercial aviation products and microwave components due to lowersales 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.

Interest and other income decreased by $4.7million to $0.2 million in 2003 from $4.9 million in 2002. The decreasewas due to lower interest income earned because of lower average cashand cash equivalents balances, a loss of $2.2 million recorded relatedto the sale of the commercial broadband test equipment assets of ourCelerity business and an increase in losses on our investmentsaccounted for using the equity method during 2003 compared to 2002.

The 2003 period includes a charge of $11.2 million ($7.2 millionafter-tax, or $0.07 per diluted share) for the early retirement of $180million of our 81⁄2% Senior Subordinated Notesdue 2008. See "Liquidity and CapitalResources" below. The 2002 period includes a charge of$16.2 million ($9.9 million after-tax, or $0.11 per diluted share) forthe early retirement of $225 million of our10 3/8% Senior Subordinated Notes due 2007. Inaccordance with SFAS No. 145, the 2002 debt retirement charge, whichwas classified as an extraordinary item in the prior year presentation,has been reclassified as a component of income from continuingoperations.

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 continued weakness in the commercial aviationmarket 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. With respect to the expected effective incometax rate for 

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2004 compared to 2003, the current U.S.federal research and experimentation (R&E) tax credit is scheduledto expire on June 30, 2004. If the R&E tax credit is not renewed,L-3's 2004 effective income tax rate would increase. The R&Etax credit lowered L-3's 2003 effective income tax rate by1.9% points. Additionally, currently changes are being proposedto the U.S. federal tax laws for extra territorial income (ETI), andsome alternative proposals, if enacted, could cause an increase inL-3's 2004 effective income tax rate. The ETI tax credit loweredL-3's 2003 effective income tax rate by 1.5% points.

Basic earnings per share (EPS) before cumulative effect of a changein accounting principle increased by $0.56 to $2.89 for 2003 from $2.33for 2002. Diluted EPS before cumulative effect of a change inaccounting principle increased by $0.53 to $2.71 for 2003 from $2.18for 2002. Net income for 2002 includes a charge, net of income taxes,of $24.4 million ($0.28 per basic share and $0.25 per diluted share)for the cumulative effect of a change in accounting principle forgoodwill impairment in connection with the adoption of SFAS No. 142.Including the effect of a change in accounting principle, basic EPS for2002 was $2.05 and diluted EPS for 2002 was $1.93.

Dilutedweighted-average common shares outstanding increased by 8.9% to106.1 million for 2003 from 97.4 million for 2002. The increaseprincipally reflects the additional shares outstanding from the sale of14.0 million shares of L-3 Holdings common stock on June 28, 2002.

The 2003 and 2002 diluted EPS computations did not include theeffect of the 7.8 million shares of L-3 Holdings common stock that areissuable upon conversion of the $420.0 million of 4% SeniorSubordinated Convertible Contingent Debt Securities (CODES) because theconditions required for them to become convertible were not satisfied.However, if the CODES had been convertible, diluted EPS would have been$0.09 lower than reported for 2003 and diluted EPS, before cumulativeeffect of a change in accounting principle would have been $0.05 lowerthan reported for 2002.

Secure Communications & ISR

Sales within our Secure Communications & ISR segment increasedby $386.1 million, or 36.7%, to $1,439.4 million for 2003 from$1,053.3 million for 2002. Organic sales growth was $250.4 million, or23.8%, due to continued strong demand and increased spending bythe DoD and other U.S. Government agencies for our securecommunications and ISR systems and products, which were partiallyoffset by a decline in sales of $5.5 million for the PrimeWaveCommunications business. The increase in sales from acquired businesseswas $135.7 million. The acquired businesses include IS and ComCept,which were acquired during 2002, and Aeromet and certain defense andaerospace assets of IPICOM, Inc., which were acquired during 2003.

Operating income increased by $69.4 million to $172.9 million for2003 from $103.5 million for 2002 because of higher sales and operatingmargin. Operating margin increased to 12.0% for 2003 from9.8% for 2002 because of higher organic sale growth for defensesystems and products, cost improvements and lower losses at ourPrimeWave Communications business.

Training, Simulation &Support Services

Sales within our Training, Simulation &Support Services segment increased by $173.9 million, or 21.6%,to $980.2 million for 2003 from $806.3 million for 2002. Organic salesgrowth was $81.7 million, or 10.1%, driven by training andgovernment services, including communications software support andengineering support. The increase in sales from the Telos, TMA and ShipAnalytics acquired businesses, which were all acquired in 2002, was$92.2 million.

Operating income increased by $15.1 million to$111.6 million for 2003 from $96.5 million for 2002 because of highersales, which were partially offset by lower operating margin. Operatingmargin declined by 0.6 percentage points to 11.4% for 2003 from12.0% for 2002. The decrease was primarily due to higher salesfrom cost-reimbursable type and time and material type contracts, whichgenerally are less profitable than fixed-priced type contracts. Marginsincreased by 0.2 percentage points from acquired businesses.

Aviation Products & Aircraft Modernization

Sales withinour Aviation Products & Aircraft Modernization 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 

41

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million, or 19.2%, primarily due to$144.7 million for aircraft modernization and modification driven byDoD demand. This increase was partially offset by volume declines of$10.8 million for commercial aviation products caused by the continuedweakness in the commercial aviation markets and volume declines of $4.0million primarily for display systems due to the timing of contractualshipments. The increase in sales from acquired businesses was $212.2million. The acquired businesses include IS, which was acquired in2002, and Avionics Systems, MAS and Vertex, which were acquired in2003.

Operating income increased by $42.1 million to $147.8million for 2003 from $105.7 million for 2002 because of higheraircraft modernization sales, which were partially offset by lowersales for commercial aviation products and lower operating margin.Operating margin declined by 1.1 percentage points to 14.5% for2003 from 15.6% for 2002. Volume declines for commercialaviation products, which have higher margins than aircraft modificationsales, decreased operating margin by 0.9 percentage points. Similarly,margins decreased by 0.4 percentage points primarily due to volumegrowth for aircraft modernization, which earns lower margins thancommercial aviation products. These decreases were partially offset bythe Avionics Systems and MAS acquired businesses, which increasedmargin by 0.2 percentage points.

Specialized Products

Sales within our Specialized Products segment increased by $148.3million, or 10.1%, to $1,622.4 million for 2003 from $1,474.1million for 2002. Organic sales declined 16.6%, or $245.2million, or $7.6 million, or 0.5% excluding the decline for EDS.EDS sales declined by $237.6 million (discussed below). Volume declinedby $46.4 million for fuzing and acoustic undersea warfare products andtraining devices because of certain contracts approaching theirscheduled completion and the timing of sales on 2003 orders, which areexpected to increase in 2004. Volume declined by $22.3 million fortelemetry products and microwave components due to the continuedweakness in the commercial communications markets. These decreases werepartially offset by an increase of $46.6 million for naval powerequipment due to higher shipments arising from the resolution of theproduction and quality control issues at the SPD Electrical Systemsbusiness and $14.5 million primarily for FTSATs and guidance productsdue to strong demand from the DoD. The increase in sales from acquiredbusinesses was $393.5 million. The acquired businesses includeDetection Systems, Ruggedized Command & Control, Electron Devices,Wolf Coach, IMC, Westwood and Wescam, all of which were acquired in2002, and Klein, which was acquired in 2003.

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

Operating income increased by $0.4 million to $148.7million for 2003 from $148.3 million for 2002. Operating margindecreased by 0.9 percentage points to 9.2% for 2003 from10.1% for 2002. Lower sales for EDS reduced operating margin by0.6 percentage points. Volume declines for telemetry, fuzing andundersea warfare products lowered operating margin by 0.4 percentagepoints. Lower margins from acquired businesses reduced operating marginby 0.6 percentage points. The resolution of production quality problemsfor naval power equipment caused increased shipments and reduced reworkcosts, which increased operating margin by 0.5 percentage points. Thesettlement of a claim increased operating margin by 0.2 percentagepoints.

Year Ended December 31, 2002 Compared with YearEnded December 31, 2001

Consolidated sales increased by$1,663.8 million to $4,011.2 million for 2002 from $2,347.4 million for2001. Sales from "Contracts, primarily U.S.Government" increased by $1,648.9 million to $3,581.1million for 2002 from $1,932.2 million for 2001. The L-3 Analytics, BTFuze, ComCept, EER, Electron Devices, IS, KDI, Ruggedized Command &Control, Ship Analytics, Spar, SY, Telos, TMA, Wescam and Westwoodacquired businesses contributed $1,222.5 million of the increase insales. Excluding these acquisitions, sales grew $426.4 million, or22.1%, in 2002. Volume increased by $320.9 million for EDS,$156.8 million for secure communication systems, $20.6 million fortraining services and devices, $20.1 million for navigation andguidance products and $8.1 million for military displays products.These sales increases were partially offset by declines of $17.3million on naval power equipment and $14.5 million on static transferswitches used for commercial applications. Sales of ballistic missiletargets and services 

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declined $53.0 million. The remainingdecline in sales of $15.3 million was primarily related to acousticundersea warfare products because of lower volume on spares. Sales from"Commercial, primarily products" increased$14.9 million to $430.1 million for 2002 from $415.2 million for 2001.The Detection Systems, IMC and Wolf Coach acquired businessescontributed $93.9 million of the increase in sales. Excluding theseacquisitions, sales declined $79.0 million or 19.0%. Thisdecrease in sales was due to volume declines of $49.2 million oncommercial aviation products, $31.7 million on microwave components and$11.8 million on PrimeWave communication products. These declines werepartially offset by increases of $5.5 million for maritime voyagerecorders and $8.2 million primarily for technical and product supportservices for commercial customers.

"Commercial,primarily products" sales declined to 10.7% oftotal sales for 2002 from 17.7% for 2001. The decline wasprimarily attributable to the acquisitions we completed during 2002,including the IS acquisition, and to a lesser extent, the decline inour commercial sales. This decline was attributable to the continuedweakness in the commercial aviation and communications markets.

Consolidated costs and expenses increased by $1,485.1 million to$3,557.2 million for 2002 from $2,072.1 million for 2001, primarily asa result of the increase in sales. In accordance with SFAS No. 142, onJanuary 1, 2002 we stopped amortizing our goodwill to expenses.Goodwill amortization expense was $42.3 million for 2001. SFAS No. 142also requires that we evaluate the fair value of our goodwill annuallyto determine if it has been impaired. We evaluated the carrying valueof our goodwill as of January 1, 2002 in accordance with the transitionprovisions of SFAS No. 142 and wrote-off $30.8 million of goodwillrelated to certain of our space and broadband commercial communicationsbusinesses, which has been reported as a $24.4 million loss afterincome taxes for the cumulative effect of a change in accountingprinciple, as discussed below. If we experience any impairments to thecarrying value of our goodwill after January 1, 2002, we will have toreport them as a loss from operations. During 2002, we did not have anyother goodwill impairments.

Costs and expenses for"Contracts, primarily U.S. Government"increased by $1,437.9 million to $3,137.5 million for 2002 from$1,699.6 million for 2001. Approximately 75% of the increase isattributable to our acquired businesses. The remaining increase isprimarily attributed to internal growth for EDS and securecommunication systems. Goodwill amortization expense was $31.3 millionfor 2001. SG&A costs allocated to our U.S. Government contractswere $431.5 million for 2002 and $304.3 million for 2001 (see Note 4 toour consolidated financial statements).

Costs and expenses for"Commercial, primarily products" increased by$47.2 million to $419.7 million for 2002 from $372.5 million for 2001.The increase is primarily due to increased sales as a result of theDetection Systems acquired business, which was partially offset bylower expenses for microwave components products due to lower salesvolume. Goodwill amortization expense was $11.0 million for 2001.SG&A expenses, including R&D expenses, increased by $29.2million to $148.9 million for 2002 from $119.7 million for 2001,primarily because of SG&A expenses incurred by our acquiredbusinesses.

Consolidated operating income increased by $178.7million to $454.0 million for 2002 from $275.3 million for 2001. Theincrease was due to higher sales for all of our segments. The impact ofnot amortizing goodwill increased consolidated operating income by$42.3 million. Consolidated operating income as a percentage of sales(operating margin) declined by 0.4 percentage points to 11.3%for 2002 from 11.7% for 2001. The impact of not amortizinggoodwill increased consolidated operating margin by 1.1 percentagepoints. Operating margins compared to operating margins for 2001,excluding goodwill amortization expense, declined for our Training,Simulation & Support Services, Aviation Products & AircraftModernization and Specialized Products segments, and increased for ourSecure Communications & ISR segment. The changes in the operatingmargins for our segments are discussed below.

Operating incomefor "Contracts, primarily U.S Government"increased by $211.0 million to $443.6 million for 2002 from $232.6million for 2001. Operating margin increased by 0.4 percentage pointsto 12.4% for 2002, from 12.0% for 2001. The impact of notamortizing goodwill increased operating margin by 0.9 percentagepoints. Operating income for 2002 includes a loss of $3.0 million forthe settlement in June 2002 of certain litigations that we assumed inconnection with a business we acquired in 1999, which reduced operatingmargin for 2002 by 0.1 percentage points. The remaining decline inoperating margin was due to the absence in 2002 of a favorableperformance adjustment recorded in 2001 on the AVCATT 

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contract. Operating income includedapproximately $20 million of losses in both 2002 and 2001 related toour naval power equipment business that were caused by productionproblems which reduced sales volume and related costs to fixmanufacturing and quality control problems.

Operating income for"Commercial, primarily products" declined by$32.3 million to $10.4 million for 2002 from $42.7 million for 2001.Operating margin declined by 7.9 percentage points to 2.4% for2002 from 10.3% for 2001. The decline was principallyattributable to lower gross margin contributions from commercialaviation products, microwave components, and space and broadbandcommunication products because of volume declines, as well as continuedmarketing, selling and development expenses for the PrimeWave business.The impact of not amortizing goodwill partially offset these decreasesin operating margin by 2.6 percentage points.

Interest expenseincreased by $36.1 million to $122.5 million for 2002 from $86.4million for 2001. The increase is attributable to higher outstandingdebt for 2002 primarily related to the financing of the IS acquisition,which was partially offset by lower interest rates on our debt. Ourinterest rate swap agreements, which converted the fixed interest rateson $580.0 million of our senior subordinated notes to variable interestrates, reduced our interest expense for 2002 by $9.6 million because ofdeclining interest rates. In June of 2002, we also redeemed our $225.0million 10 3/8% senior subordinated notes andreplaced them with senior subordinated notes that have a7 5/8% fixed interest rate which reduced ourinterest expense by $3.1 million. See "Liquidity andCapital Resources – Financing Activities" below.

Interest and other income increased by $3.2 million to $4.9 millionfor 2002 from $1.7 million for 2001, principally due to interest incomeearned on our cash and cash equivalents. Additionally, 2001 included anet gain of $0.6 million, comprising a gain on the sale of a 30%interest in the ACSS business, largely offset by the write-down of thecarrying value of an investment in the common stock of atelecommunications company because the decline in value for that commonstock was determined to be other than temporary.

The income taxprovision for 2002 is based on an effective income tax rate of35.5%, compared with an effective income tax rate of38.0% for the year ended December 31, 2001. The decrease in theeffective income tax rate is primarily attributable to the adoption ofSFAS No. 142. Amortization expense for goodwill that is not deductiblefor income tax purposes caused an increase in our effective income taxrate prior to the adoption of SFAS No. 142.

Basic EPS beforecumulative effect of a change in accounting principle increased $0.79to $2.33 for 2002 from $1.54 for 2001. Diluted EPS before cumulativeeffect of a change in accounting principle increased $0.71 to $2.18 for2002 from $1.47 for 2001. The impact of not amortizing goodwill in 2002increased basic EPS before cumulative effect of a change in accountingprinciple by $0.45 and diluted EPS before cumulative effect of a changein accounting principle by $0.40. Excluding the increase in earningsattributable to not amortizing goodwill, basic EPS before cumulativeeffect of a change in accounting principle grew 17.1% anddiluted EPS before cumulative effect of a change in accountingprinciple grew 16.6%. Basic EPS was $2.05 and diluted EPS was$1.93 after an after-tax charge of $9.9 million ($0.11 per basic anddiluted share) for the early retirement of $225.0 million of our10 3/8% senior subordinated notes and a loss of$24.4 million ($0.28 per basic share and $0.25 per diluted share) forthe cumulative effect of a change in accounting principle for agoodwill impairment, recorded effective as of January 1, 2002 inconnection with the adoption of SFAS No. 142.

Dilutedweighted-average common shares outstanding increased by 14.1% to97.4 million for 2002 from 85.4 million for 2001. The increaseprincipally reflects the additional shares outstanding from the sale of9.2 million shares of our common stock effective May 2, 2001, and thesale of 14.0 million shares of our common stock effective June 28,2002.

The diluted EPS computation for 2002 did not include thedilutive effect of the 7.8 million shares of L-3 Holdings common stockthat are issuable upon conversion of the CODES (See Notes 8 and 12 tothe consolidated financial statements) because the conditions for theirconversion were not satisfied. However, if the CODES had beenconvertible, reported diluted EPS would have decreased by approximately$0.03 for 2002.

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Secure Communications & ISR

Sales for the Secure Communications & ISR segment increased by$602.8 million to $1,053.3 million for 2002 from $450.5 million for2001. The IS and ComCept acquired businesses, contributed $458.6million of sales. Excluding these acquisitions, sales grew $144.2million, or 32.0%. Volumes on secure communication systems,secure data links and military communications products increased $156.8million because of greater demand for secure communications from theDoD and U.S. Government intelligence agencies. These increases werepartially offset by a decrease in sales of $12.6 million primarily dueto lower volumes of PrimeWave communication products.

Operatingincome increased by $71.5 million to $103.5 million for 2002 from $32.0million for 2001 because of higher sales and operating margin.Operating margin improved by 2.7 percentage points to 9.8% for2002 compared to 7.1% for 2001. The impact of not amortizinggoodwill increased operating margin by 0.4 percentage points. Increasedvolume and cost improvements on secure communication systems increasedmargins by 1.7 percentage points. Higher losses for the PrimeWavebusiness in 2002 due to lower sales, higher marketing, selling anddevelopment expenses and a provision to increase the allowance fordoubtful accounts by $3.0 million lowered operating margin by 0.9percentage points. The remaining change in operating margins wasprincipally attributable to margins from the IS acquired business,which was higher than the segment operating margin for 2001.

Training, Simulation & Support Services

Sales for theTraining, Simulation & Support Services segment increased by $209.5million to $806.3 million for 2002 from $596.8 million for 2001. TheL-3 Analytics, EER, Ship Analytics, SY Technologies, Telos and TMAacquired businesses contributed $210.9 million of the increase insales. Excluding these acquisitions, sales declined $1.4 million, or0.2%. Sales for ballistic missile targets and services at ourColeman Research business declined by $53.0 million primarily becauseof a contract completed in 2002 and the delay in the award of itsfollow-on contract, which is related to the U.S. Missile DefenseAgency's decision to consolidate the target requirements for allof its major missile defense programs into a single contract for fiscalyear 2003. The decline in ballistic missile targets and services waslargely offset by volume increases for training services from newcontracts with the DoD, contracts competitively awarded during 2001 andsoftware and systems engineering services.

Operating incomeincreased by $30.8 million to $96.5 million for 2002 from $65.7 millionfor 2001 because of higher sales and operating margin. Operating marginincreased by 1.0 percentage points to 12.0% for 2002 compared to11.0% for 2001 principally because of the impact of notamortizing goodwill. 

Aviation Products & AircraftModernization

Sales for the Aviation Products & AircraftModernization segment increased $414.2 million to $677.5 million for2002 from $263.3 million for 2001. The IS and Spar acquired businessescontributed $446.5 million to sales. Excluding acquisitions, salesdeclined $32.3 million, or 12.3%, because of lower volumes forcommercial aviation recorders and TCAS products that were partiallyoffset by sales increases for military displays products and commercialmaritime voyage recorders. The decline in commercial aviation productssales was caused by a decline in orders and customer-directed deferralsof deliveries stemming from the continued downturn in the commercialaircraft industry that began in 2001 and which remained weak during2002.

Operating income increased by $20.1 million to $105.7million for 2002 from $85.6 million for 2001, because of higher salesfrom acquired businesses. Operating margin declined by 16.9 percentagepoints to 15.6% for 2002 from 32.5% for 2001. The impactof not amortizing goodwill increased operating margin by 1.1 percentagepoints. Lower volumes on TCAS and aviation recorders, increaseddevelopment expenses for a terrain awareness warning system and acommercial displays product-line reduced operating margin by 5.5percentage points. The remaining decrease in operating margin of 12.5percentage points was principally attributable to margins from the ISand Spar acquired businesses, which averaged 13.6% and werelower than the segment operating margin for 2001. Margins for ouraircraft modification businesses are lower than the margins for ourcommercial aviation products businesses, and the aircraft modificationbusinesses generated 68.1% of the segment's sales for 2002compared with only 5.7% for 2001, which reduced the overallmargin for the entire segment as we expected.

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Specialized Products

Sales forthe Specialized Products segment increased by $437.3 million to$1,474.1 million for 2002 from $1,036.8 million for 2001. The BT Fuze,Detection Systems, Electron Devices, IMC, KDI, Ruggedized Command &Control, Wescam, Westwood and Wolf Coach acquired businessescontributed $200.4 million of sales. Excluding these acquisitions,sales increased by $236.9 million, or 22.8%. Sales of EDS usedin airport security, principally relating to a contract from theTransportation Security Administration, contributed $320.9 million ofthe increase in sales. Navigation and guidance products sales alsoincreased by $20.1 million. These increases to sales were partiallyoffset by volume declines of $17.3 million on naval power equipmentarising from lower shipments caused by production capacity diverted tofixing quality control problems, $16.8 million on training devicesbecause certain contracts were completed in 2002, $15.9 million foracoustic undersea warfare products primarily arising from lower sparesvolume, and $14.5 million for commercial static transfer switchesbecause of the deterioration of the internet service provider market.The remaining decline of $39.6 million was principally on microwavecomponents and telemetry and space products arising from continuedsoftness and declining demand in the space, broadband and wirelesscommercial communications markets.

Operating income increased by$56.3 million to $148.3 million for 2002 from $92.0 million for 2001because of higher sales and operating margin. Operating margin improvedby 1.2 percentage points to 10.1% for 2002 compared to8.9% for 2001. The impact of not amortizing goodwill increasedoperating margin by 1.6 percentage points. Higher volumes for EDScaused an increase in operating margin of 2.6 percentage points. Theseincreases were partially offset by declines in operating margin thatwas primarily related to lower volumes on naval power equipment,microwave components and training devices, and the absence in 2002 of afavorable performance adjustment recorded in 2001 on the AVCATTcontract.

Liquidity and Capital Resources

BalanceSheet

Contracts in process increased by $297.3 million to$1,615.3 million at December 31, 2003 from $1,318.0 million at December31, 2002. The increase included $176.9 million related to acquiredbusinesses and $120.4 million principally from:

|              |                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | increases of $148.1 million in unbilledcontract receivables, net of unliquidated progress payments, due tosales of ISR systems and products, aircraft modernization andengineering support services, which were partially offset by amountsbilled and collected for the EDS business; |

|              |                                                                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | increases of $10.6 million ininventories at lower of cost or market due to increases for securityproducts, which were partially offset by reductions for the PrimeWaveCommunications business; |

|              |                                                                                                                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | decreasesof $24.6 million in inventoried contract costs due to deliveries of ISRsystems and products, which were partially offset by increases forsecurity products and secure communication equipment;and |

|              |                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | decreases of $13.7 million inbilled receivables because of collections for aircraft modernization,security products and the decline in EDS sales, which were partiallyoffset by billings because of sales growth for our defensebusinesses. |

L-3's days receivable outstanding (DRO) was70.3 at December 31, 2003, compared with 68.9 at December 31, 2002. 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 the acquisitions that we completed as of the end of the period(which amounted to $5,817.7 million), divided by 365.

L-3's billed receivables, net of uncollectible accountallowances, increased by $68.9 million to $637.3 million at December31, 2003, compared to $568.4 million at December 31, 2002. The increasein billed receivables was from L-3's U.S. Government contractorbusinesses and related to organic sales growth, as well as the Vertexand MAS business acquisitions. The uncollectible accounts allowanceincreased by 

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$12.4 million to $25.2 million at December31, 2003, compared to $12.8 million at December 31, 2002, and was forreceivables from L-3's commercial businesses. Our U.S. Governmentand foreign government customers, which generated 86.3% ofL-3's sales for 2003, present very low uncollectible accountrisks due to their high credit quality, and therefore, generallyrequire no uncollectible account allowances.

L-3's daysinventory held (DIH) was 36.3 at December 31, 2003, compared with 38.3at December 31, 2002. We calculate DIH by dividing (i) our aggregateend of period net inventoried contract costs and inventories at lowerof cost or market, by (ii) our cost of sales for the last twelve-monthperiod adjusted on a pro forma basis to include the acquisitions thatwe completed as of the end of the period, divided by 365.

Included in contracts in process at December 31, 2003 are net billedreceivables of $6.7 million and net inventories of $11.4 millionrelated to our PrimeWave Communications business. At December 31, 2002,we had $11.4 million of net billed receivables and $18.2 million of netinventories related to our PrimeWave Communications business.

The increase in property, plant and equipment (PP&E) during 2003was principally related to capital expenditures and the AvionicsSystems, Vertex and MAS acquired businesses. The percentage ofdepreciation expense to average gross PP&E declined to 11.9%for 2003 from 13.0% for 2002. The decline was attributable tofully depreciated PP&E, which is continuing to be used in certainof our operations despite having net carrying amounts of zero (afteraccumulated depreciation) and which will not be removed from thebalance sheet until they are retired or otherwise disposed. We did notchange any of the depreciation methods or estimated useful lives forassets that L-3 uses to calculate its depreciation expense.

Goodwill increased by $857.9 million to $3,652.4 million at December31, 2003, from $2,794.5 million at December 31, 2002. The increase wascomprised of (i) $796.2 million for acquisitions completed during 2003,(ii) $26.5 million for increases to purchase prices for certainacquisitions completed prior to January 1, 2003, related to finalclosing date net assets of the acquired businesses and contingentpurchase price adjustments or earnouts, which were resolved during theperiod, and (iii) $35.2 million primarily related to final estimates offair value for acquired assets and liabilities assumed on acquisitionscompleted prior to January 1, 2003.

The increase in accountspayable was primarily due to the Avionics Systems, Vertex and MASacquired businesses, partially offset by a decrease in accounts payabledue to the timing of payments. The increase in accrued expenses was dueto the Vertex and MAS acquired businesses and to the timing ofpayments. The increase in accrued employment costs was due to thetiming of payments of salaries and wages to employees, including thoseemployees of newly acquired businesses. The increase in other currentliabilities was primarily due to acquired businesses and an increase incollections for milestone billings in excess of costs incurred oncontracts for training devices and services related to the completionof certain performance milestones, which were partially offset by costincurred for accrued product warranties and for certain contracts inprocess in a loss position and a reduction for contracts in processwith credit balances. The increase in pension and postretirementliabilities was primarily due to the timing of payments. The increasein other liabilities was primarily due to amounts from our acquiredbusinesses and the deferred net gains recorded in connection with thetermination of the interest rate swap agreements during 2003 and, 2002,as discussed below.

Customer advances decreased by $4.6 millionbecause liquidations exceeded collections, primarily related toshipments and performance on contracts with foreign customers foracoustic undersea warfare products and aircraft modernization. Thetiming of collections and liquidation of customer advances areprescribed by contract terms, and generally do not coincide becausecollections mostly occur upon the award of a contract and during theearlier periods of performance. Conversely, liquidations mostly occurduring later periods of performance as products are delivered and otherwork items are completed. Additionally, customer advances do not affector determine 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, 2003, ourbalance sheet included a pension benefits liability of $221.0 million,an increase 

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of $15.9 million from $205.1 million atDecember 31, 2002. The increase is due to pension expense recognizedexceeding our pension funding and an increase in the minimum liabilityof $6.5 million. At the end of 2003, L-3's projected benefitobligation, which includes accumulated benefits plus the incrementalbenefits attributable to projected future salary increases for coveredemployees, was $902.1 million and exceeded the fair value ofL-3's pension plan assets of $561.7 million by $340.4 million. Atthe end of 2002, L-3's projected benefit obligation was $713.9million and exceeded the fair value of L-3's pension plan assetsof $431.7 million by $282.2 million. The increase in the unfundedstatus of our pension plans of $58.2 million from $282.2 million at theend of 2002 to $340.4 million at the end of 2003, was principally dueto the $76.9 million actuarial loss that we experienced in 2003. Thesubstantial majority of our 2003 actuarial loss was due to thereduction in the discount rate of 50 basis points that we made at theend of 2003 to 6.25% from 6.75% at the end of 2002, whichincreased the present value of L-3's projected benefitobligations at the end of 2003 by $62.0 million. The difference betweenthe unfunded status amount of $340.4  million at the end of 2003and the pension liability recorded on our balance sheet of $221.0million is attributable to net unrecognized actuarial losses partiallyoffset by the minimum pension liability of $114.9 million. Inaccordance with SFAS No. 87, Employer's Accounting forPensions, the actuarial gains and losses that our pension plansexperienced in 2003 were not recognized in pension expense for 2003.Instead, they were deferred and will be 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 2003, basedon the fiscal year ended November 30, 2003, was $64.0 million or14.8% on the fair value of plan assets at the beginning of thefiscal year. However, L-3's actual return on plan assets for thetwelve months ended December 31, 2003 was approximately $94.8 million,or 26.6%.

Our pension expense for 2003 was $70.5 million.We expect pension expense for 2004 to be between $70 million and $75million. As discussed above, at the end of 2003, we reduced ourdiscount rate from 6.75% to 6.25%, which will increasethe interest cost component of pension expense for 2004. The higherinterest cost in our estimated 2004 pension expense is expected to besubstantially offset by the increase of $130.0 million in our pensionplan assets during 2003, which will increase our expected return onplan assets by approximately $12.0 million, and decrease our estimatedpension expense by the same amount. Our actual pension expense for 2004will be based upon a number of factors, including the effect of anyadditional acquired businesses for which we assume liabilities forpension benefits, actual pension plan contributions and changes (ifany) to our pension assumptions for 2004, including the discount rate,expected long-term return on plan assets and salary increases.

Our contributions for the full year 2003 were $60.8 million. During2002 and 2003, the U.S. Congress granted plan sponsors an interest ratereduction for calculating minimum pension plan contributions. For 2004,we expect to contribute approximately $55.0 million to our pensionplans assuming the extension of such interest rate reduction, or $75.0million if the interest rate reduction is not extended. A substantialportion of our pension plan contributions for L-3's businessesthat are U.S. Government contractors are recoverable as allowableindirect contract costs at amounts generally equal to the annualpension contributions.

Our projected benefit obligation andannual pension expense are significantly affected by the discount rateassumption we use. For example, an additional reduction to the discountrate of 25 basis points would have increased our projected benefitobligation at December 31, 2003 by approximately $32 million, and ourestimated pension expense for 2004 by approximately $5 million.Conversely, an increase to the discount rate of 25 basis points wouldhave decreased our projected benefit obligation at December 31, 2003 byapproximately $32 million, and our estimated pension expense for 2004by approximately $5 million.

Our shareholders' equity atDecember 31, 2003 reflects a non-cash charge of $4.2 million (net oftax) to record the increase in the minimum pension liability for theyear ended December 31, 2003 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 2003.

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Statement of Cash Flows

Our cashposition was $134.9 million at December 31, 2003 and December 31, 2002and $361.0 million at December 31, 2001. The table below provides asummary of our cash flows for the periods indicated.

|                                     |  |                       |          |         |  |        |          |         |  |        |        |         |  |  |
|-------------------------------------|--|-----------------------|----------|---------|--|--------|----------|---------|--|--------|--------|---------|--|--|
|                                |  | YearEnded December31, |
|                                |  | 2003                  |          | 2002    |  | 2001   |
|                                |  | (inmillions)          |
| Net cash fromoperatingactivities    |  | $                     | 456.1    |    |  | $      | 318.5    |    |  | $      | 173.0  |    |  |
| Netcash used in investingactivities |  |                  | (1,088.1 | )  |  |   | (1,810.5 | )  |  |   | (424.9 | )  |
| Netcash from financingactivities    |  |                  | 632.0    |    |  |   | 1,265.9  |    |  |   | 580.3  |    |
| Netincrease (decrease) in cash      |  | $                     | —  |    |  | $      | (226.1   | )  |  | $      | 328.4  |    |
|                                     |

OperatingActivities

We generated $456.1 million of cash from operatingactivities during 2003, an increase of $137.6 million from $318.5million generated during 2002. Net income adjusted for non-cashexpenses and deferred income taxes increased by $114.4 million to$530.3 million for 2003 from $415.9 million for 2002. Deferred incometaxes increased primarily because of larger estimated tax deductionsarising from our recent acquisitions. Non-cash expenses consistprimarily of contributions of L-3 Holdings' common stock toemployee savings plans and depreciation and amortization. During 2003,the use of cash from the change in operating assets and liabilitiesdecreased to $74.2 million, compared to $97.4 million for 2002. The useof cash for contracts in process was driven by increases in unbilledreceivables primarily for our defense businesses, partially offset bycollections primarily for our EDS business. The use of cash for otherassets was primarily due to capitalized software development costs fornew products. The use of cash for accounts payable was due to thetiming of payments. The timing of payments to employees for salariesand wages was a source of cash because costs and expenses for salariesand wages exceeded cash payments for them. The source of cash from thechange in pension and postretirement benefits was due to expensesexceeding related cash contributions. Pension plan contributions in2003 amounted to $60.8 million, and exceeded our originally plannedcontributions for 2003 by more than $10 million. The use of cash forother current liabilities was to fund certain contracts in a lossposition for which estimated costs exceeded the estimated contractvalue, partially offset by cash collections for milestone billings inexcess of cost incurred on contracts primarily for trainingdevices.

The source of cash from other liabilities was generatedprimarily from terminating interest rate swap agreements. During 2003,we terminated interest 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.

During 2002, we generated $318.5 million of cash fromoperating activities, an increase of $145.5 million from $173.0 milliongenerated during 2001. Net income adjusted for non-cash expenses anddeferred income taxes increased by $132.4 million to $415.9 million in2002 from $283.5 million in 2001. During 2002, the use of cash from thechange in operating assets and liabilities decreased to $97.4 million,compared to $110.5 million in 2001.

Our cash flows fromoperating activities during 2002 reflect increases in billed andunbilled receivables, other current assets and other assets. The use ofcash related to customer advances was due to liquidations on certainforeign contracts. The use of cash for other current liabilities was tofund contracts in a loss position for which estimated costs exceed theestimated contract value, and was partially offset by an increase inaccrued warranty costs primarily for explosive detection systemsdelivered in 2002. The timing of payments to employees for salaries andwages, as well as the timing of interest payments, was a source ofcash. The source of cash in other liabilities was primarily due todeferred gains on the termination of our swap agreements. Pension plancontributions in 2002 amounted to $47.4 million.

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In 2001, we used cash for increases ininventories, receivables and negative operating margins related to ourPrimeWave business and naval power equipment products, as well as forincurred contract costs in excess of billings for the continued efforton the AVCATT contract. These uses of cash were partially offset by asettlement of certain items related to a services agreement and lowerincome tax payments.

Our cash from operating activities includesinterest payments on debt of $119.9 million for 2003, $109.3 millionfor 2002 and $81.6 million for 2001. Our interest expense also includesamortization of deferred debt issue costs and deferred gains onterminated interest swap agreements, which are non-cash items.

Our cash from operating activities includes income tax payments, netof refunds, of $17.3 million for 2003, $2.1 million for 2002, and $4.9million for 2001. 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 acquisitions of businesses that are structuredas asset purchases for income tax purposes. The effect of these incometax deductions is that our cash payments for income taxes are less thanour provision 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 acquisitions structured as asset purchaseson L-3's income tax returns over 15 years, in accordance withincome tax rules and regulations, while no goodwill amortization isrecorded for financial reporting purposes, in accordance with SFAS No.142. We expect that the acquisitions L-3 has completed through December31, 2003 will continue to generate substantial annual deferred taxbenefits through 2017. While these income tax deductions are reportedas changes to deferred income tax liabilities and assets, they are notdifferences that are scheduled to reverse in future periods from normaloperations. Rather, they will only reverse if L-3 sells its acquiredbusinesses or incurs a goodwill impairment loss for them, because ineither case, L-3's financial reporting amounts for goodwill wouldbe greater than the income tax basis for goodwill. L-3 also receivessignificant income tax deductions and deferred tax benefits from itsacquired businesses structured as asset purchases for income taxpurposes from accelerated depreciation of plant and equipment.

Investing Activities

During 2003, we used $1,014.4million of cash for acquisitions of businesses. We paid $988.3 millionto acquire Avionics Systems, Aeromet, MAS, Vertex and certain assets ofIPICOM, Inc. We also paid $26.1 million for certain acquisitions thatwe completed prior to January 1, 2003, for purchase price adjustmentsbased on final closing date net assets of the acquired businesses andearnouts, which were resolved during the period. During 2002, weinvested $1,742.1 million to acquire businesses, primarily forIntegrated Systems and Detection Systems. During 2001, we invested$446.9 million to acquire businesses.

On May 31, 2001, we sold a30% interest in ACSS to Thales Avionics for $75.2 million incash, which resulted in an after-tax gain of $4.3 million.

Financing Activities

Debt

Senior Credit Facilities.    At December 31, 2003, thesenior credit facilities were comprised of a $500.0 million five-yearrevolving credit facility maturing on May 15, 2006 and a $250.0 million364-day revolving facility. On February 24, 2004, the maturity date ofthe 364-day revolving credit facility was extended to February 22,2005.

At December 31, 2003,available borrowings under our senior credit facilities were $665.9million, after reductions for outstanding letters of credit of $84.1million. There were no outstanding borrowings under our senior creditfacilities at December 31, 2003.

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Redemptions.    On December 22,2003, L-3 Holdings 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. At December 31,2003, holders of approximately $1.6 million of the Convertible Noteshad exercised their conversion rights and converted such notes into40,000 shares of L-3 Holdings common stock. On January 9, 2004, holdersof $298.2 million of the Convertible Notes exercised their conversionrights and converted such notes into 7,317,327 shares of L-3 Holdingscommon stock. The remaining $0.2 million of Convertible Notes wereredeemed on January 12, 2004 for cash. As a result of these conversionsand redemptions, our principal amount of long-term debt decreased by$298.4 million and shareholders' equity increased by $292.3million in January 2004 compared to December  31, 2003.

OnMay 21, 2003, L-3 Communications initiated a full redemption of all theoutstanding $180.0 million aggregate principal amount of81⁄2% Senior Subordinated Notes due 2008 (May1998 Notes). On June 20, 2003, we purchased and paid cash for all theoutstanding May 1998 Notes, including accrued interest. During 2003, werecorded a pre-tax charge of $11.2 million, comprising of premiums andother transaction costs of $7.8 million and $3.4 million to write-offthe unamortized balance of debt issue costs and the deferred loss onthe terminated interest rate swap agreements related to the May 1998Notes.

On June 6, 2002, L-3 Communications commenced a tenderoffer to purchase any and all of its $225.0 million aggregate principalamount of 10 3/8% Senior Subordinated Notes due2007. The tender 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 ($9.9 million after-tax), comprised ofpremiums, fees and other transaction costs of $12.5 million and $3.7million to write-off the remaining balance of unamortized debt issuecosts relating to these notes.

Debt Issuances.    Thetable below presents a summary of our issuances of debt obligations for2001, 2002 and 2003. Our outstanding debt obligations, all of which aresenior subordinated debt, were rated BB– by Standard &Poor's and Ba3 by Moody's at December 31, 2003. Foradditional details about the terms of our debt, see Note 8 to ourconsolidated financial statements.

|                                                                                               |  |                 |  |                 |       |          |  |                                        |         |             |  |                                   |      |        |  |        |       |           |  |                         |  |  |  |  |  |  |
|-----------------------------------------------------------------------------------------------|--|-----------------|--|-----------------|-------|----------|--|----------------------------------------|---------|-------------|--|-----------------------------------|------|--------|--|--------|-------|-----------|--|-------------------------|--|--|--|--|--|--|
| Descriptionof Debt Issuances                                                                  |  | IssueDate       |  | PrincipalAmount |       | Discount |  | Commissionsand Other Offering Expenses |         | NetProceeds |  | Semi-Annual Interest PaymentDates |
|                                                                                          |  | (inmillions)    |
| **L-3Communications**                                                                         |  |
| 6 1/8%Senior Subordinated Notes due January 15,2014                                           |  | December22,2003 |  | $               | 400.0 |     |  | $                                      | 7.4     |        |  | $                                 | 1.6  |   |  | $      | 391.0 | (1)  |  | January15 and July15    |
| 6 1/8%Senior Subordinated Notes due July 15, 2013                                             |  | May 21,2003     |  |            | 400.0 |     |  |                                   | 1.8     |        |  |                              | 7.1  |   |  |   | 391.1 | (2)  |  | January15 and July15    |
| 7 5/8%Senior Subordinated Notes due June 15, 2012                                             |  | June 28,2002    |  |            | 750.0 |     |  |                                   | — |        |  |                              | 18.5 |   |  |   | 731.5 | (3)  |  | June15 and December15   |
| **L-3Holdings**                                                                               |  |
| 4% Senior SubordinatedConvertible Contingent Debt Securities (CODES) due September 15,2011(4) |  | October 24,2001 |  |            | 420.0 |     |  |                                   | — |        |  |                              | 12.8 |   |  |   | 407.2 | (5)  |  | March15 and September15 |
|                                                                                               |

|  |
|--|
|  |  |
|  |

| (1) | The netproceeds from this offering were used to repay $275.0 million ofborrowings outstanding under our senior credit facilities and toincrease cash and cash equivalents. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The net proceeds from this offering wereused to redeem the 8 1/2% Senior Subordinated Notes due 2008 andto increase cash and cash equivalents. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | The net proceeds from this offering andthe concurrent sale of 14.0 million shares of our common stock,discussed below under "-Equity," were used to(a) repay $500.0 million borrowed on March 8, 2002, under our seniorsubordinated bridge loan facility, (b) repay the indebtednessoutstanding under our senior credit facilities, (c) repurchase andredeem the 10 3/8% Senior Subordinated Notes due 2007 (discussedabove) and (d) increase cash and cash equivalents. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The CODES are convertible into L-3Holdings' common stock at a conversion price of $53.81 per share(7,804,878 shares) under certain circumstances as described in Note 8to our consolidated financial statements. Additionally, holders of theCODES have a right to receive contingent interest payments, not toexceed a per annum rate of 0.5% of the outstanding principalamount of the CODES, which will be paid on the CODES during anysix-month period following a six-month period |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | in which the average trading price of theCODES is above 120% of the principal amount of the CODES. Thecontingent interest payment provision was triggered for the periodbeginning September 15, 2002 to March 14, 2003 and resulted inadditional interest for that period of $0.8 million. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | The net proceeds from this offering wereused to increase cash and cash equivalents. |
|-----|-------------------------------------------------------------------------------------|

DebtCovenants.    The senior credit facilities, senior subordinatednotes and CODES agreements contain financial covenants and otherrestrictive covenants which remain in effect so long as we owe anyamount or any commitment to lend exists thereunder. See Note 8 to ourconsolidated financial statements for a description of our debt andrelated financial covenants at December 31, 2003. We are in compliancewith those covenants in all material respects. The senior creditfacilities limit the payment of dividends by L-3 Communications to L-3Holdings except for payment of franchise taxes, fees to maintain L-3Holdings' legal existence, income taxes up to certain amounts,interest accrued on the CODES or to provide for operating costs of upto $1.0 million annually. Under the covenant, L-3 Communications mayalso pay permitted dividends to L-3 Holdings:

|              |                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| •  | in an amount not to exceed $25.0 millionin any fiscal quarter, so long as no default or event of default hasoccurred and is continuing; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | in anamount not to exceed $200.0 million to permit L-3 Holdings torepurchase its common stock, so long as those dividends are paid withthe net proceeds of additional subordinated indebtedness issued by L-3Communications after January 1, 2004. L-3 Holdings may repurchase itscommon stock in an amount not to exceed $200.0 million, whether fromthe proceeds of dividends from L-3 Communications or of issuances ofpermitted convertible securities or capital stock of L-3 Holdings;and |

|              |                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | in an amount not to exceed $10.0million in any fiscal year to fund certain repurchases of common stockof L-3 Holdings from beneficiaries of equity compensation plans of L-3Communications, L-3 Holdings or their subsidiaries. L-3 Holdings maymake further payments of up to $2.0 million from the proceeds ofissuances of its common stock to repurchase common stock held bymanagement. |

The senior credit facilities contain cross defaultprovisions that are triggered when a payment default occurs or certainother defaults occur that would allow the acceleration of indebtedness,guarantee obligations or certain other agreements of L-3 Communicationsor its subsidiaries in an aggregate amount of at least $15.0 millionand those defaults have not been cured after 10 days. The seniorsubordinated notes and CODES indentures contain cross accelerationprovisions that are triggered when holders of the indebtedness of L-3Holdings, L-3 Communications or their restricted subsidiaries (or thepayment of which is guaranteed by such entities) accelerate at least$10.0 million in aggregate principal amount of those obligations.

The borrowings under the senior credit facilities are guaranteed byL-3 Holdings and by substantially all of the material domesticsubsidiaries of L-3 Communications on a senior basis. The payments ofprincipal and premium, if any, and interest on the senior subordinatednotes are unconditionally guaranteed, on an unsecured seniorsubordinated basis, jointly and severally, by substantially all of L-3Communications' restricted subsidiaries other than its foreignsubsidiaries. The guarantees of the senior subordinated notes arejunior to the guarantees of the senior credit facilities and rank paripassu with each other and the guarantees of the CODES. The CODES areunconditionally guaranteed, on an unsecured senior subordinated basis,jointly and severally, by L-3 Communications and substantially all ofits restricted subsidiaries other than its foreign subsidiaries. Theseguarantees rank junior to the guarantees of the senior creditfacilities and rank pari passu with each other and the guarantees ofthe senior subordinated notes.

Equity

On January26, 2004, we announced that our Board of Director's had declaredour first quarterly cash dividend of $0.10 per share, payable March 15,2004, to shareholders of record at the close of business on February17, 2004. On February 17, 2004, L-3 Holdings had 105,227,879 shares ofcommon stock outstanding.

On June 28, 2002, L-3 Holdings sold14.0 million shares of its common stock in a public offering for $56.60per share. Upon closing, we received net proceeds of $766.8 millionafter deducting underwriting 

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discounts and commissions and other offeringexpenses. The net proceeds from this sale and the concurrent sale ofsenior subordinated notes by L-3 Communications were used to (i) repay$500.0 million borrowed on March 8, 2002, under our senior subordinatedbridge loan facility, (ii) repay the indebtedness outstanding under oursenior credit facilities, (iii) repurchase and redeem the10 3/8% Senior Subordinated Notes due 2007discussed above and (iv) increase cash and cash equivalents.

OnApril 23, 2002, we announced that our Board of Directors had authorizeda two-for-one stock split on all shares of L-3 Holdings common stock.The stock split entitled all shareholders of record at the close ofbusiness on May 6, 2002 to receive one additional share of L-3 Holdingscommon stock for every share held on that date. The additional shareswere distributed to shareholders in the form of a stock dividend on May20, 2002. Upon completion of the stock spilt, L-3 Holdings hadapproximately 80 million shares of common stock outstanding.

OnMay 2, 2001, L-3 Holdings sold 9.2 million shares of its common stockin a public offering for $40.00 per share. In addition, as part of thetransaction, other selling stockholders, including affiliates of LehmanBrothers Inc., sold 4.7 million secondary shares. Upon closing, wereceived net proceeds of $353.6 million, which we used to repayborrowings outstanding under our senior credit facilities, pay for theKDI and EER acquisitions and to increase cash and cash equivalents.

Based upon our current level of operations, we believe that our cashfrom operating activities, together with available borrowings under thesenior credit facilities, will be adequate to meet our anticipatedrequirements for working capital, capital expenditures, commitments,research and development expenditures, contingent purchase prices,program and other discretionary investments, and interest payments forthe foreseeable future. There can be no assurance, however, that ourbusiness will continue to generate cash flow at current levels, or thatcurrently anticipated improvements will be achieved. If we are unableto generate sufficient cash flow from operations to service our debt,we may be required to sell assets, reduce capital expenditures,refinance all or a portion of our existing debt or obtain additionalfinancing. Our ability to make scheduled principal payments or to payinterest on or to refinance our indebtedness depends on our futureperformance and financial results, which, to a certain extent, aresubject to general conditions in or affecting the defense industry andto general economic, political, financial, competitive, legislative andregulatory factors beyond our control. There can be no assurance thatsufficient funds will be available to enable us to service ourindebtedness, to make necessary capital expenditures and to makediscretionary investments.

Contractual Obligations

The table below presents our contractual obligations at December 31,2003.

|                                                                 |  |              |  |                            |         |           |  |           |         |                   |  |        |         |        |  |        |         |        |  |  |  |  |
|-----------------------------------------------------------------|--|--------------|--|----------------------------|---------|-----------|--|-----------|---------|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|--|--|
|                                                            |  |         |  | Year(s)Ending December 31, |
| ContractualObligations:                                         |  | Total        |  | 2004                       |         | 2005-2006 |  | 2007-2008 |         | 2009andthereafter |
|                                                            |  | (inmillions) |
| Principal amount of L-3Communications Corporation long-termdebt |  | $1,750.0     |  | $                          | — |      |  | $         | — |              |  | $      | 200.0   |   |  | $      | 1,550.0 |   |
| Principalamount of L-3 Holdings Inc. long-termdebt              |  | 718.4        |  |                       | — |      |  |      | — |              |  |   | — |   |  |   | 718.4   |   |
| Non-cancelableoperatingleases                                   |  | 574.8        |  |                       | 82.6    |      |  |      | 158.3   |              |  |   | 106.6   |   |  |   | 227.3   |   |
| Notespayable and capital leaseobligations                       |  | 10.8         |  |                       | 9.3     |      |  |      | 1.5     |              |  |   | — |   |  |   | — |   |
| Purchaseobligations(1)                                          |  | 637.8        |  |                       | 587.3   |      |  |      | 48.4    |              |  |   | 1.6     |   |  |   | 0.5     |   |
| Otherlong-termliabilities(2)                                    |  | 96.9         |  |                       | 68.0    | (3)  |  |      | 11.2    |              |  |   | 3.7     |   |  |   | 14.0    |   |
| Total                                                           |  | $3,788.7     |  | $                          | 747.2   |      |  | $         | 219.4   |              |  | $      | 311.9   |   |  | $      | 2,510.2 |   |
|                                                                 |

|  |
|--|
|  |  |
|  |

| (1) | Representsopen purchase orders at December  31, 2003 for amounts expectedto be paid for goods or services that are legally binding onus. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Other long-term liabilities primarilyconsists of workers compensation, deferred compensation and litigationsettlement accruals for the years ending December 31, 2005 andthereafter and also includes pension and postretirement benefit plancontributions that we expect to pay in 2004. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Our pension and postretirement benefit plan fundingpolicy is generally to contribute in accordance with cost accountingstandards that affect government contractors, subject to the InternalRevenue Code and regulations thereon. During 2002 and 2003, U.S.Congress had granted plan sponsors an interest rate reduction forcalculating minimum pension plan contributions. For 2004, we expect tocontribute approximately $55.0 million to our pension plans, assumingthe extension of such interest |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | rate reduction, or $75.0 million if theinterest rate reduction is not extended and $13.0 million to ourpostretirement benefit plans. Due to the current uncertainty of theamounts used to compute our expected pension and postretirement benefitplan funding, we believe it is not practicable to reasonably estimatesuch future funding for periods in excess of 1 year. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Off Balance Sheet Arrangements

On December 31, 2002,we entered into two real estate lease agreements, as lessee, with athird-party lessor, which expire on December 31, 2005 and are accountedfor as operating leases. On or before the lease expiration date, we canexercise options under the lease agreements to either renew the leases,purchase both properties for $28.0 million, or sell both properties onbehalf of the lessor (the "Sale Option"). Ifwe elect the Sale Option, we must pay the lessor a residual guaranteeamount of $22.7 million for both properties, on or before the leaseexpiration date, and at the time both properties are sold, we must paythe lessor a supplemental rent equal to the gross sales proceeds inexcess of the residual guarantee amount not to exceed $5.3million.

We have a contract toprovide and operate for the U.S. Air Force (USAF) a full-servicetraining facility, including simulator systems near a USAF base. Weacted as the construction agent on behalf of the third-partyowner-lessors for procurement and construction for the simulatorsystems, which were completed and delivered in August 2002. On December31, 2002, we, as lessee, entered into an operating lease agreement fora term of 15 years for one of the simulator systems with theowner-lessor. At the end of the lease term, we may elect to purchasethe simulator system at fair market value, which can be no less than$2.6 million and no greater than $6.4 million. If we do not elect topurchase the simulator system, then on the date of expiration, we shallpay to the lessor, as additional rent, $2.6 million and return thesimulator system to the lessor. The aggregate non-cancelable rentalpayments under this operating lease are $32.5 million, including theadditional rent of $2.6 million. On February 27, 2003, we, as lessee,entered into an operating lease agreement for a term of 15 years forthe remaining simulation systems with the owner-lessor. At the end ofthe lease term, we may elect to purchase the simulator systems at fairmarket value, which can be no less than $4.1 million and no greaterthan $14.5 million. If we do not elect to purchase the simulatorsystems, then on the date of expiration, we shall return the simulatorsystems to the lessor. The aggregate non-cancelable rental paymentsunder this operating lease are $53.3 million.

DerivativeFinancial Instruments

Included in our derivative financialinstruments are foreign currency forward contracts, interest rate swapagreements and the embedded derivatives related to the issuance of ourCODES. All of our derivative financial instruments that are sensitiveto market risk are entered into for purposes other than trading.

Embedded Derivatives.    The contingent interest paymentand contingent conversion features of the CODES are embeddedderivatives which we bifurcated from the CODES and separately recordedon our balance sheet. On the date of issuance of the CODES, we ascribed$2.5 million of the net proceeds from the CODES to those embeddedderivatives which represented their aggregate fair value, and recordedit as a liability in accordance with SFAS No. 133. The subsequentincreases (decreases) to the fair values of the embedded derivativesare recorded as losses (gains) in the statement of operations. Theirfair values at December 31, 2003 were $2.7 million, which represents aliability.

Interest Rate Risk.    Our financialinstruments that are sensitive to changes in interest rates includeborrowings under the senior credit facilities all of which aredenominated in U.S. dollars. At December 31, 2003, there were nooutstanding borrowings under our senior credit facilities. The interestrates on the senior subordinated notes and CODES are fixed-rate and arenot affected by changes in interest rates. Depending on the interestrate environment we may enter into interest rate swap agreements toconvert the fixed interest rates on a portion of our outstanding debtto variable interest rates, or terminate any existing interest rateswap agreements. At December 31, 2003, we do not have any interest rateswap agreements in place. We may enter into interest rate swapagreements during 2004, depending on market interest rates andconditions. The table below presents the activity for our interest rateswap agreements through December 31, 2003.

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|               |  |                                                               |  |                |        |                              |  |                  |        |                                        |  |                        |  |        |      |                                              |  |                                              |      |         |  |        |      |        |  |        |      |         |  |        |         |        |  |  |  |  |  |  |
|---------------|--|---------------------------------------------------------------|--|----------------|--------|------------------------------|--|------------------|--------|----------------------------------------|--|------------------------|--|--------|------|----------------------------------------------|--|----------------------------------------------|------|---------|--|--------|------|--------|--|--------|------|---------|--|--------|---------|--------|--|--|--|--|--|--|
|          |  |                                                          |  |           |        |                         |  |             |        | CashProceeds Received atTermination(2) |  | December 31,2003       |
| InceptionDate |  | Fixed Rate Debt Obligation                                    |  | NotionalAmount |        | Average Variable RatePaid(1) |  | Termination Date |        | InterestExpense Reduction(3)           |  | Deferred Gain(Loss)(4) |  | Total  |      | CumulativeRecognized Deferred Gain (Loss)(5) |  | Balanceof Unamortized Deferred Gain(Loss)(6) |
|          |  |                                                          |  | (inmillions)   |
| July2003      |  | $400.0million of 6 1/8% Senior Subordinated Notes due2013     |  | $              | 400.0  |                         |  |             | 2.1    | %                                 |  | September2003          |  | $      | 2.7  |                                         |  | $                                            | 8.0  |    |  | $      | 10.7 |   |  | $      | 0.2  |    |  | $      | 7.8     |   |
| March2003     |  | $750.0 million of 7 5/8% SeniorSubordinated Notes due2012     |  | $              | 200.0  |                         |  |             | 4.4    | %                                 |  | June2003               |  |   | 1.6  |                                         |  |                                         | 6.7  |    |  |   | 8.3  |   |  |   | 0.4  |    |  |   | 6.3     |   |
| January2003   |  | $750.0million of 7 5/8% Senior Subordinated Notes due2012     |  | $              | 200.0  |                         |  |             | 4.0    | %                                 |  | March2003              |  |   | 1.2  |                                         |  |                                         | 5.2  |    |  |   | 6.4  |   |  |   | 0.4  |    |  |   | 4.8     |   |
| June2002      |  | $750.0 million of 7 5/8% SeniorSubordinated Notes due2012     |  | $              | 200.0  |                         |  |             | 4.1    | %                                 |  | September2002          |  |   | 1.7  |                                         |  |                                         | 12.2 |    |  |   | 13.9 |   |  |   | 1.6  |    |  |   | 10.6    |   |
| November2001  |  | $180.0 million of 81⁄2% SeniorSubordinated Notes due2008 |  | $              | 180.0  |                         |  |             | 5.3    | %                                 |  | August2002             |  |   | 1.2  |                                         |  |                                         | (0.6 | )  |  |   | 0.6  |   |  |   | (0.6 | )  |  |   | — |   |
| July2001      |  | $200.0 million of 8% Senior Subordinated Notesdue 2008        |  | $              | 200.0  |                         |  |             | 3.9    | %                                 |  | June2002               |  |   | 3.5  |                                         |  |                                         | 5.2  |    |  |   | 8.7  |   |  |   | 1.3  |    |  |   | 3.9     |   |
|          |  |                                                          |  |           |   |                         |  |             |   |                                   |  |                   |  | $      | 11.9 |                                         |  | $                                            | 36.7 |    |  | $      | 48.6 |   |  | $      | 3.3  |    |  | $      | 33.4    |   |
|               |

|  |
|--|
|  |  |
|  |

| (1) | Representsthe average variable interest rate we paid prior to the termination ofthe interest rate swap agreement. |
|-----|-------------------------------------------------------------------------------------------------------------------|

| (2) | Cashproceeds received at termination are included in cash from operatingactivities on L-3's statement of cash flows in the periodreceived. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Represents interest savingsearned for the period prior to the termination of the interest rateswap agreements. |
|-----|----------------------------------------------------------------------------------------------------------------|

| (4) | Represents the futurevalue of the interest rate swap agreements at termination date, whichis being amortized over the remaining term of the underlying debtinstrument. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Represents the cumulative amountof deferred gain recognized as a reduction to interest expense throughDecember 31, 2003. |
|-----|--------------------------------------------------------------------------------------------------------------------------|

| (6) | The current portion ofunamortized deferred gains at December 31, 2003, aggregating $4.2million, is included in other current liabilities. The remaining $29.2million is included in other liabilities. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

When we enterinto interest rate swap agreements, we attempt to manage exposure tocounterparty credit risk by only entering into agreements with majorfinancial institutions that are expected to be able to fully performunder the terms of such agreements. Cash payments between us and thecounterparties are made in accordance with the terms of the interestrate swap agreements. Such payments are recorded as adjustments tointerest expense. Additional data on our debt obligations, ourapplicable borrowing spreads included in the interest rates we pay onborrowings under the senior credit facilities and interest rate swapagreements are provided in Notes 8 and 9 to our consolidated financialstatements.

Foreign Currency Exchange Risk.    Weconduct some of our operations outside the U.S. in functionalcurrencies other than the U.S. dollar. Additionally, some of our U.S.and foreign operations have contracts with customers which aredenominated in currencies other than the functional currencies of thoseoperations. To mitigate the risk associated with certain of thesecontracts denominated in foreign currency we have entered into foreigncurrency forward contracts. At December 31, 2003, the notional value offoreign currency forward contracts was $71.4 million and the fair valueof these contracts was $1.2 million, which represented an asset. Weaccount for these contracts as cash flow hedges.

EquityPrice Risk.    Our equity investments in common stocks andlimited partnerships are subject to equity price risk, including equityrisk. The fair values of our investments are based on quoted marketprices for investments which are readily marketable securities, andestimated fair value for nonreadily marketable securities, which isgenerally equal to historical cost unless such investment hasexperienced an other-than-temporary impairment. Both the carryingvalues and estimated fair values of such instruments amounted to $20.0million at the end of 2003.

Backlog and Orders

Wedefine funded backlog as the value of funded orders received fromcustomers, less the amount of sales recognized on those funded orders.We define funded orders as the value of contract awards received fromthe U.S. Government, for which the U.S. Government has appropriatedfunds, plus the value of contract awards and orders received fromcustomers other than the U.S. Government. Our funded 

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backlog at December 31, 2003 was $3,893.3million and at December 31, 2002 was $3,228.6 million. We expect torecord as sales approximately 81.2% of our funded backlog as ofDecember 31, 2003 during 2004. However, there can be no assurance thatour funded backlog will become sales in any particular period, if atall. Funded orders received for the year ended December 31, 2003 were$5,477.4 million, $4,383.1 million for the year ended December 31, 2002and $2,456.1 million for the year ended December 31, 2001.

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'scompany-sponsored and customer-funded research and development costsfor 2003, 2002 and 2001. See Note 2 to the consolidated financialstatements for a discussion of L-3's accounting policies forresearch and developmentcosts.

|                                                 |  |                               |       |        |  |        |       |        |  |        |       |        |  |  |
|-------------------------------------------------|--|-------------------------------|-------|--------|--|--------|-------|--------|--|--------|-------|--------|--|--|
|                                            |  | Forthe Year Ended December31, |
|                                            |  | 2003                          |       | 2002   |  | 2001   |
| Company-SponsoredResearch and DevelopmentCosts: |  |
| U.S.Government ContractorBusinesses             |  | $                             | 135.7 |   |  | $      | 125.1 |   |  | $      | 81.0  |   |
| CommercialBusinesses                            |  |                          | 52.8  |   |  |   | 34.8  |   |  |   | 26.5  |   |
| Total                                           |  | $                             | 188.5 |   |  | $      | 159.9 |   |  | $      | 107.5 |   |
| Customer-FundedResearch and DevelopmentCosts    |  | $                             | 573.1 |   |  | $      | 480.9 |   |  | $      | 319.4 |   |
|                                                 |

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 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 acquisitions, there may be a reduction in thevolume of contracts or subcontracts awarded to us.

Wecontinually assess our obligations with respect to applicableenvironmental protection laws. While it is difficult to determine thetiming and ultimate cost to be incurred in order to comply with theselaws, based upon available internal and external assessments, withrespect to those environmental loss contingencies of which we areaware, we believe that even without considering potential insurancerecoveries, if any, there are no environmental loss contingencies that,individually or in the aggregate, would be material to our consolidatedfinancial position, results of operations or cash flows. Also, we havebeen periodically subject to litigation, claims or assessments andvarious contingent liabilities incidental to our business. We accruefor these contingencies when it is probable that a liability has beenincurred and the amount of the loss can be reasonably estimated.

In connection with the IS acquisition we assumed responsibility forimplementing certain corrective actions required under federal law toremediate the Greenville, Texas site location, and to pay a portion ofthose remediation costs. The hazardous substances requiring remediationhave been substantially characterized, and the remediation system hasbeen partially implemented. We have estimated that our share of theremediation cost will not exceed $2.5 million, and will be incurredover a period of 25 years. We have established adequate reserves forthese costs.

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On August 6, 2002, AviationCommunications & Surveillance Systems, LLC (ACSS), a subsidiary ofL-3 Communications Corporation, was sued by Honeywell InternationalInc. and Honeywell Intellectual Properties, Inc. (collectively,"Honeywell") for alleged infringement ofpatents that relate to terrain awareness avionics. The lawsuit wasfiled in the United States District Court for the District of Delaware.In December of 2002, Honeywell withdrew without prejudice the lawsuitagainst ACSS and agreed to proceed with non-binding arbitration. We hadpreviously investigated the Honeywell patents and believe that ACSS hasvalid defenses against Honeywell's patent infringement suit. Inaddition, ACSS has been indemnified to a certain extent by ThalesAvionics, which provided ACSS with the alleged infringing technology.Thales Avionics owns 30% of ACSS. In the opinion of management,the ultimate disposition of Honeywell's pending claim will notresult in a material liability to us.

L-3 Integrated Systems andits predecessors have been involved in a litigation with Kalitta Air(Kalitta Air) arising from a contract to convert Boeing 747 aircraftfrom passenger configuration to cargo freighters. The lawsuit wasbrought in the northern district of California on January 31, 1997. Theaircraft were modified using Supplemental Type Certificates (STCs)issued in 1988 by the Federal Aviation Administration (FAA) to HayesInternational, Inc. (Hayes/Pemco) as a subcontractor to GATX/AirlogCompany (GATX). Between 1988 and 1990, Hayes/Pemco modified fiveaircraft as a subcontractor to GATX using the STCs. Between 1990 and1994, Chrysler Technologies Airborne Systems, Inc. (CTAS), apredecessor to L-3 Integrated Systems, performed as a subcontractor toGATX and modified an additional five aircraft using the STCs. Two ofthe aircraft modified by CTAS were owned by American InternationalAirways, the predecessor to Kalitta Air. In 1996, the FAA determinedthat the engineering data provided by Hayes/Pemco supporting the STCswas inadequate and issued an Airworthiness Directive that effectivelygrounded the ten modified aircraft. The Kalitta Air aircraft have notbeen in revenue service since that date. The matter was tried inJanuary 2001 against GATX and CTAS with the jury finding fault on thepart of GATX but rendering a unanimous defense verdict in favor ofCTAS. Certain co-defendants had settled prior to trial. The NinthCircuit Court of Appeals has 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. Based on thisruling, it appears likely that the matter will have to be retried. InAugust of 2003, Kalitta Air has recalculated its damages based onconsequential damage theories of lost revenues and income anddiminution in value of the business and is asserting damages in excessof $500 million. CTAS' insurance carrier has accepted defense ofthe matter with a reservation of rights. The Company continues tobelieve that it has meritorious defenses and intends to vigorouslydefend this matter.

The Company and L-3 Communications Securityand Detection Systems (L-3 SDS) have been named, along with many otherdefendants, including other security screening systems manufacturers,as defendants in a number of lawsuits brought in the Southern Districtof New York by or on behalf of the victims of the terrorist attacks onSeptember 11, 2001. Counsel for the plaintiffs have represented to thecourt that they intend to amend some or all of their complaints todelete certain of the defendants, including the Company and L-3 SDS,and to date, approximately 60 of the complaints have been amended todrop the Company and L-3 SDS as a defendant. In addition, the court hasruled that the plaintiffs who complete their applications for reliefunder a federal fund may not pursue judicial action. The court hasordered that the plaintiffs file final amended complaints by March 31,2004, at which time the Company and L-3 SDS will know how many, if any,actions will be pending against them. The complaints allege variouscauses of action, including claims of wrongful death, negligence,strict liability and breach of contract, and seek compensatory andpunitive damages. The Company and L-3 SDS believe that they havemeritorious defenses to these actions and intend to vigorously defendthe lawsuits. The Company purchased L-3 SDS from PerkinElmer, Inc.(PerkinElmer) on June 14, 2002. The actions have been tendered to theCompany's and PerkinElmer's insurance carriers, who haveaccepted the defense of these matters.

On November 18, 2002, weinitiated a proceeding against OSI Systems, Inc. (OSI) in the UnitedStates District Court sitting in the Southern District of New Yorkseeking, among other things, a declaratory judgment that we hadfulfilled all of our obligations under a letter of intent with OSI (the"OSI Letter of Intent"). Under the OSI Letterof Intent, we were to negotiate definitive agreements with

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OSI for the sale of certain businesses weacquired from PerkinElmer, Inc. on June 14, 2002. On February 7,2003, OSI filed an answer and counterclaims in the New York actionalleging, among other things, that we breached our obligations underthe OSI Letter of Intent and seeking damages in excess of $100 million,not including punitive damages. Under the OSI Letter of Intent, weproposed selling to OSI the conventional detection business and theARGUS business that we recently acquired from PerkinElmer, Inc.Negotiations with OSI lasted for almost one year and ultimately brokedown over issues regarding, among other things, intellectual property,product-line definitions, allocation of employees and due diligence. Webelieve that the claims asserted by OSI in its suit are without meritand intend to defend against the OSI claims vigorously.

L-3Communications Vertex Aerospace LLC (formerly known as Vertex AerospaceLLC and acquired by the Company on December 1, 2003) ("L-3Vertex") is named as a defendant in nine wrongful deathlawsuits in the District Court, 17th Judicial District, Tarrant County,Texas; in the Circuit Court of the 17th Judicial Circuit, BrowardCounty, Florida; and in the United States District Court, WesternDistrict of North Carolina arising from the crash of Air Midwest Flight5481 at Charlotte-Douglas International Airport in Charlotte, NorthCarolina on January 8, 2003. The crash resulted in the deaths ofnineteen passengers and two crewmembers. Each of the lawsuits allegescontributing factors including that the accident was caused by theimproper maintenance of the aircraft by L-3 Vertex, and seeks torecover compensatory and punitive damages. No discovery has taken placein the lawsuits at this time. Eight claims resulting from this incidenthave previously settled. The National Transportation Safety Board(NTSB) investigated the cause of the crash and has concluded that thecrash was caused by the incorrect rigging of the elevator controlsystem compounded by the airplane's center of gravity, which wassubstantially aft of the certified limit, with several othercontributing factors. L-3 Vertex believes that it has meritoriousdefenses to the pending lawsuits, and intends to defend the casesvigorously. The actions have been tendered to L-3 Vertex'sinsurance carrier, who has accepted the defense of each action servedupon L-3 Vertex to date. L-3 Vertex was also indemnified by Air Midwestfor losses L-3 Vertex incurred arising out of its provision ofmaintenance services to Air Midwest. Based on the availability ofinsurance and the indemnification from Air Midwest, we do not believewe will have a material liability in this matter.

With respectto those investigative actions, items of litigation, claims orassessments of which we are aware, we are of the opinion that theprobability is remote that, after taking into account certainprovisions that have been made with respect to these matters, theultimate resolution of any such investigative actions, items oflitigation, claims or assessments will have a material adverse effecton our consolidated financial position, results of operations or cashflows.

Recently Issued Accounting Standards

In Decemberof 2003, the Financial Accounting Standards Board (FASB) revised itsFASB Interpretation No. 46, Consolidation of Variable InterestEntities (FIN 46R). FIN 46R clarifies the application of AccountingResearch Bulletin No. 51, Consolidated Financial Statements. FIN46R requires that a business enterprise review all of its legalstructures used to conduct its business activities, including those tohold assets, and its majority-owned subsidiaries, to determine whetherthose legal structures are variable interest entities (VIEs) requiredto be consolidated for financial reporting purposes by the businessenterprise. A VIE is a legal structure for which the holders of amajority voting interest may not have a controlling financial interestin the legal structure. FIN 46R provides guidance for identifying thoselegal structures and provides guidance for determining whether abusiness enterprise shall consolidate a VIE. FIN 46R requires that abusiness enterprise that holds a significant variable interest in a VIEmake new disclosures in their financial statements. We are required toadopt the provisions of FIN 46R for our interim period ending March 31,2004. We do not believe that L-3 holds any significant interests inVIEs that would require consolidation or additional disclosures.

In March of 2003, the Emerging Issues Task Force (EITF) issued EITFNo. 00-21, Accounting for Revenue Arrangements with MultipleDeliverables. EITF No. 00-21 addresses how to determine whether arevenue arrangement involving multiple deliverables contains more thanone unit of accounting for revenue recognition purposes, and howconsideration should be measured and allocated to the separateaccounting units. EITF No. 00-21 applies to all deliverables withincontractually binding arrangements in 

58

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all industries, except to the extent that adeliverable in a contractual arrangement is subject to other existinghigher-level authoritative literature. EITF 00-21 became effective forrevenue arrangements entered into after July 1, 2003. The adoption ofEITF No. 00-21 did not have a material effect on our financial positionor results of operations.

In May of 2003, the FASB issued SFASNo. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. This Statementapplies to certain financial instruments including mandatorilyredeemable financial instruments that, prior to SFAS No. 150 could havebeen accounted for as a component of equity. SFAS No. 150 requires thatthose instruments be classified as liabilities in statements offinancial position. SFAS No. 150 also requires disclosures aboutalternative ways of settling the instruments and the capital structureof entities whose shares are all mandatorily redeemable. SFAS No. 150is effective for these financial instruments entered into or modifiedafter May 31, 2003. For these financial instruments entered into beforeMay 31, 2003, SFAS No. 150 became effective for our interim periodbeginning July 1, 2003. We do not hold any financial instruments thatare within the scope of SFAS No. 150. Accordingly, SFAS No. 150 is notexpected to have a material effect on our consolidated results ofoperations or financial position.

On December 8, 2003, PresidentBush signed the Medicare Prescription Drug, Improvement andModernization Act of 2003 (DIMA). This Act introduces a federal subsidyto sponsors of retiree health care benefit plans that provide a benefitthat is at least actuarially equivalent to Medicare Part D. In Januaryof 2002, the FASB issued FASB Staff Position 106-1, Accounting andDisclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (FSP 106). In accordancewith FSP 106, we are electing to defer recognition of any potentialsavings on the measure of the accumulated postretirement benefit or netperiodic benefit cost as a result of DIMA until specific authoritativeguidance on the accounting of the federal subsidy is issued. Therefore,the consolidated financial statements and accompanying notes do notreflect the effects of the Act on our postretirement medical plans.

Inflation

The effect of inflation on our sales and earningshas not been significant. Although a majority of our sales are madeunder long-term contracts, 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,""intends" 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; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | our ability toobtain future government contracts on a timely basis; |

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

59

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|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| •  | oursignificant amount 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 that we operate including those forthe commercial aviation and communications markets; |

|              |                                                                                                                                            |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| •  | economic conditions, competitiveenvironment, international business and political conditions, timing ofinternational awards and contracts; |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | our extensive use of fixed-pricetype 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 technologyand high level of competition in the communication equipmentindustry; |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | our introductionof new products into commercial markets or our investments incommercial products or companies; |

|              |                                                                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | pension, environmental or legalmatters or proceedings and various other market, competition andindustry factors, many of which are beyond our control; and |

|              |                                                                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the fair values of our assetsincluding 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. |

Readers of thisdocument are cautioned that our forward-looking statements are notguarantees of future performance and the actual results or developmentsmay differ materially from the expectations expressed in theforward-looking statements.

As for the forward-lookingstatements that relate to future financial results and otherprojections, actual results will be different due to the inherentuncertainties of estimates, forecasts and projections and may be betteror worse than projected. Given these uncertainties, you should notplace any reliance on these forward-looking statements. Theseforward-looking statements also represent our estimates and assumptionsonly as of the date that they were made. We expressly disclaim a dutyto provide updates to these forward-looking statements, and theestimates and assumptions associated with them, after the date of thisfiling to reflect events or changes or circumstances or changes inexpectations or the occurrence of anticipated events.

Item7A.    Quantitative and Qualitative Disclosures about MarketRisk

Data regarding quantitative and qualitative disclosuresrelated to our market risk sensitive financial instruments arepresented 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.

Item9A.    Controls and Procedures

We maintain disclosurecontrols and procedures that are designed to ensure that informationrequired to be disclosed in our reports under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and ExchangeCommission's 

60

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rules and forms, and that such informationis accumulated and communicated to our management, including ourChairman and Chief Executive Officer and our President and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingrequired disclosures. Any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance ofachieving the desired control objectives. Our management, with theparticipation of our Chairman and Chief Executive Officer and ourPresident and Chief Financial Officer, has evaluated the effectivenessof the design and operation of our disclosure controls and proceduresas of December 31, 2003. Based upon that evaluation and subject to theforegoing, our Chairman and Chief Executive Officer and our Presidentand Chief Financial Officer concluded that the design and operation ofour disclosure controls and procedures provided reasonable assurancethat the disclosure controls and procedures are effective to accomplishtheir objectives.

In addition, there was no change in ourinternal control over financial reporting that occurred during thequarter ended December 31, 2003 that has materially affected, or isreasonably likely to materially affect, our internal control overfinancial reporting.

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PART III

Item 10.    Directors and Executive Officers of theRegistrant

The following table provides information concerningthe directors and executive officers of the Registrants as of February27,2004.

|                           |  |        |    |          |  |                                                                                 |  |  |  |  |
|---------------------------|--|--------|----|----------|--|---------------------------------------------------------------------------------|--|--|--|--|
| Name                      |  | Age    |    | Position |
| FrankC. Lanza             |  |   | 72 |     |  | Chairman, ChiefExecutive Officer and Director                                   |
| Robert V.LaPenta          |  |   | 58 |     |  | President, Chief Financial Officer andDirector                                  |
| Michael T.Strianese       |  |   | 47 |     |  | Senior Vice President,Finance                                                   |
| Christopher C.Cambria     |  |   | 45 |     |  | Senior Vice President, General Counsel andSecretary                             |
| Charles J.Schafer         |  |   | 56 |     |  | Senior Vice President -– BusinessOperations and President, Products Group |
| Jimmie V.Adams            |  |   | 67 |     |  | Vice President — Washington D.C.Operations                                |
| David T. ButlerIII        |  |   | 47 |     |  | Vice President —Planning                                                  |
| Ralph G.D'Ambrosio        |  |   | 36 |     |  | Vice President —Controller                                                |
| Kenneth R.Goldstein       |  |   | 57 |     |  | Vice President —Taxes                                                     |
| Joseph S. Paresi          |  |   | 48 |     |  | VicePresident — Product Development                                       |
| Robert W.RisCassi         |  |   | 68 |     |  | Vice President — Washington D.C.Operations                                |
| Stephen M. Souza          |  |   | 51 |     |  | VicePresident — Treasurer                                                 |
| Dr. Jill J.Wittels        |  |   | 54 |     |  | Vice President — BusinessDevelopment                                      |
| Claude R. Canizares(1)    |  |   | 58 |     |  | Director                                                                        |
| Thomas A.Corcoran(1)      |  |   | 59 |     |  | Director                                                                        |
| RobertB.Millard(2)        |  |   | 53 |     |  | Director                                                                        |
| JohnM.Shalikashvili(2)(3) |  |   | 67 |     |  | Director                                                                        |
| ArthurL.Simon(1)(3)       |  |   | 71 |     |  | Director                                                                        |
| AlanH.Washkowitz(2)(3)    |  |   | 63 |     |  | Director                                                                        |
|                           |

|  |
|--|
|  |  |
|  |

| (1) | Memberof the Audit Committee. |
|-----|-------------------------------|

| (2) | Member ofthe Compensation Committee. |
|-----|--------------------------------------|

| (3) | Memberof Nominating/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 Annual Meetingof Shareholders of L-3 Holdings, to be held on April 27, 2004. L-3Holdings will file such definitive proxy statement with the Securitiesand Exchange Commission pursuant to regulation 14A within 120 daysafter the end of the fiscal year covered by this Form 10-K.

Item 11.    Executive Compensation

The information calledfor by Item 11 is incorporated herein by reference to the definitiveproxy statement referred to above in Item 10.

|                                       |                                                                                               |
|---------------------------------------|-----------------------------------------------------------------------------------------------|
| Item12.      | Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters |

Theinformation called for by Item 12 is incorporated herein by referenceto the definitive proxy statement referred to above in Item 10.

Item 13.    Certain Relationships and Related Transactions

The information called for by Item 13 is incorporated herein byreference to the definitive proxy statement referred to above in Item10.

62

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Item 14.    Principal Accounting Feesand Services

This information called for by Item 14 isincorporated herein by reference to the definitive proxy statementreferred to above in Item 10.

Item 15.    Exhibits, FinancialStatement Schedules and Reports on Form 8-K

(a) Financialstatements filed as part of this report:

|                                                                                                    |  |             |     |        |  |  |
|----------------------------------------------------------------------------------------------------|--|-------------|-----|--------|--|--|
|                                                                                               |  | Page Number |
| Reportof Independent Auditors                                                                      |  |        | F-2 |   |
| ConsolidatedBalance Sheets as of December 31, 2003 and December 31, 2002                           |  |        | F-3 |   |
| Consolidated Statements of Operationsfor the years ended December 31, 2003, 2002 and 2001          |  |        | F-4 |   |
| Consolidated Statements ofShareholders' Equity for the years ended December 31, 2003, 2002and 2001 |  |        | F-5 |   |
| Consolidated Statements ofCash Flows for the years ended December 31, 2003, 2002 and 2001          |  |        | F-6 |   |
| Notes to Consolidated FinancialStatements                                                          |  |        | F-7 |   |
|                                                                                                    |

|           |                              |
|-----------|------------------------------|
| (a)  | FinancialStatement Schedules |

Notapplicable

|           |                          |
|-----------|--------------------------|
| (b)  | Reports Filed on Form8-K |

The following reports have been filed during the quarterended December 31, 2003:

|           |                                                                                                                                                                                                                                                                     |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (i)  | On December17, 2003, the Registrant filed a report on Form 8-K announcing to itsintention to raise $400.0 million through a private placement of seniorsubordinated notes and to redeem all of its outstanding 5.25%Convertible Senior Subordinated Notes due 2009. |

|            |                                                                                                                                                                                                                                                                                                              |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | On December 22, 2003, the Registrant fileda report on Form 8-K announcing the completion of its offering of$400.0 million principal amount of 6 1/8% SeniorSubordinated Notes due 2014 and the initiation of a full redemption ofall of its outstanding 5.25% Convertible Senior SubordinatedNotes due 2009. |

|           |          |
|-----------|----------|
| (c)  | Exhibits |

Exhibits identified in parentheses below are on file with the SECand are incorporated herein by reference to such previousfilings.

|            |  |                                                                                                                                                                                                 |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                           |
| 3.1        |  | Certificate of Incorporation ofL-3 Communications Holdings, Inc. (incorporated by reference to Exhibit3.1 to the Registrants' Quarterly Report on Form 10-Q for theperiod ended June 30, 2002). |
| 3.2        |  | By laws ofL-3 Communications Holdings, Inc. (incorporated by reference to Exhibit3.2 to the Registration 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).                          |
|            |

63

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|            |  |                                                                                                                                                                                                                                                                                                          |  |  |  |  |
|------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                                                                                                                                    |
| 4.1        |  | Form of Common StockCertificate (incorporated by reference to Exhibit 4.1 to theRegistrant's 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 theRegistrant's Registration Statement on Form S-1 No.333-46975).                                                                                     |
| 10.11      |  | 1997 Stock Option Plan forKey Employees (incorporated by reference to Exhibit 10.11 toRegistrant's 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 Registrant's Registration Statement on Form S-1, No.333-70125).                                                          |
| 10.13      |  | Non-Qualified Stock OptionAgreement dated as of April 30, 1997 by and between L-3 CommunicationsHoldings, Inc. and Robert V. LaPenta (incorporated by reference toExhibit 10.13 to Registrant's Registration Statement on Form S-1,No. 333-70125).                                                       |
| 10.15      |  | Option Plan forNon-Employee Directors of L-3 Communication's Holdings, Inc(incorporated by reference to Exhibit 10.15 to Registrant'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 Registrant's Registration annual report on Form 10-K filedon March 30, 2000).                                                                                                                    |
| 10.20      |  | L-3Communications Corporation Pension Plan (incorporated by reference toExhibit 10.10 to Registrant's Registration Statement on Form S-1,No. 333-46975).                                                                                                                                                 |
| 10.25      |  | L-3 CommunicationsCorporation Employee Stock Purchase Plan (incorporated by reference toAppendix A of the Registrant's Definitive Proxy Statement filedApril 2, 2001).                                                                                                                                   |
| 10.31      |  | Indenture dated as ofMay 21, 2003 ("May 2003 Indenture") betweenL-3 Communications Corporation 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).                                       |
| 10.32      |  | Indenture dated as ofDecember 11, 1998 ("December 1998 Indenture")among L-3 Communications Corporation, the Guarantors named therein andthe Bank of New York, as Trustee (incorporated by reference to Exhibit10.32 to Registrant's Registration Statement on Form S-1, No.333-70125).                   |
| **10.33    |  | Indenture dated as ofDecember 22, 2003 ("December 2003 Indenture")among L-3 Communications Corporation, Inc., the Guarantors namedtherein and the Bank of New York, asTrustee.                                                                                                                           |
| 10.40      |  | Third Amended and RestatedCredit Agreement dated as of May 16, 2001 among L-3 CommunicationsCorporation, the lenders named therein and the other parties thereto(incorporated by reference to Exhibit 10.40 of the Registrant'sAnnual Report on Form 10-K for the year ended December 31,2001).          |
| 10.41      |  | Second Amended and Restated364-Day Credit Agreement dated as of May 16, 2001 among L-3Communications Corporation, the lenders named therein and the otherparties thereto (incorporated by reference to Exhibit 10.41 of theRegistrant's Annual Report on Form 10-K for the year endedDecember 31, 2001). |
|            |

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|            |  |                                                                                                                                                                                                                                                                                                                                             |  |  |  |  |
|------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                                                                                                                                                                       |
| 10.42      |  | First Amendment toThird Amended and Restated Credit Agreement dated as of October 17,2001 among L-3 Communications Corporation, the lenders named thereinand the other parties thereto (incorporated by reference to Exhibit10.42 of the Registrant's Annual Report on Form 10-K for the yearended December 31, 2001).                      |
| 10.43      |  | FirstAmendment to Second Amended and Restated 364-Day Credit Agreement datedas of October 17, 2001 among L-3 Communications Corporation, thelenders named therein and the other parties thereto (incorporated byreference to Exhibit 10.43 of the Registrant's Annual Report onForm 10-K for the year ended December 31,2001).              |
| 10.44      |  | Second Amendment to ThirdAmended and Restated Credit Agreement dated as of February 25, 2002among L-3 Communications Corporation, the lenders named therein and theother parties thereto (incorporated by reference to Exhibit 10.44 ofthe Registrant's Annual Report on Form 10-K for the year endedDecember 31, 2001).                    |
| 10.45      |  | Consent and SecondAmendment to Second Amended and Restated 364-Day Credit Agreement datedas of February 25, 2002 among L-3 Communications Corporation, thelenders named herein and the other parties thereto (incorporated byreference to Exhibit 10.45 of the Registrant's Annual Report onForm 10-K for the year ended December 31,2001). |
| 10.46      |  | Consent, Waiver and OmnibusAmendment Regarding Third Amended and Restated Credit Agreement datedas of February 25, 2003 among L-3 Communications Corporation, thelenders named therein and the other partiesthereto.                                                                                                                        |
| 10.47      |  | Consent, Waiver and OmnibusAmendment Regarding Second Amended and Restated 364-Day CreditAgreement dated as of February 25, 2003 among L-3 CommunicationsCorporation, the lenders named therein and the other partiesthereto.                                                                                                               |
| **10.48    |  | Second Omnibus AmendmentRegarding Third Amended and Restated Credit Agreement dated as ofJanuary 23, 2004 among L-3 Communications Corporation, the lendersnamed therein and the other partiesthereto.                                                                                                                                      |
| **10.49    |  | Second Omnibus AmendmentRegarding Second Amended and Restated 364-Day Credit Agreement dated asof January 23, 2004 among L-3 Communications Corporation the lendersnamed therein and the other partiesthereto.                                                                                                                              |
| **10.50    |  | Consent, Waiver and ThirdOmnibus Amendment Regarding Second Amended and Restated 364 Day CreditAgreement dated as of February 24, 2004 among L-3 CommunicationsCorporation, the lenders named therein and the other partiesthereto.                                                                                                         |
| **10.51    |  | Third Omnibus AmendmentRegarding Third Amended and Restated Credit Agreement dated as ofFebruary 24, 2004 among L-3 Communications Corporation, the lendersnamed therein and the other partiesthereto.                                                                                                                                      |
| 10.53      |  | Indenture dated as of October24, 2001 ("2001 Indenture") among L-3Communications Holdings, Inc., the guarantors named therein and TheBank of New York, as trustee (Incorporated by reference to Exhibit 4.fof the Registrant's Registration Statement on form S-3, No.333-75558).                                                           |
| **10.55    |  | Supplemental Indenturedated as of February 25, 2004, among L-3 Communications Corporation,The Bank of New York, as trustee, and the guarantors named therein tothe May 2003 Indenture.                                                                                                                                                      |
| **10.56    |  | SupplementalIndenture dated as of February 25, 2004, among L-3 CommunicationsCorporation, The Bank of New York, as trustee, and the guarantors namedtherein to the December 1998 Indenture.                                                                                                                                                 |
|            |

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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  |  |
|------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description ofExhibit                                                                                                                                                                                                                                                                                                                                                                                |
| **10.58    |  | SupplementalIndenture dated as of February 25, 2004, among L-3 CommunicationsCorporation, L-3 Holdings, Inc., The Bank of New York, as trustee, andthe guarantors named therein to the 2001Indenture.                                                                                                                                                                                                |
| 10.59      |  | 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 Registrant's Annual Report on Form 10-Kfor the year ended December 31,2001).                                                                                                                            |
| 10.60      |  | 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 Registrant's Annual Report on Form 10-K forthe year ended December 31,2001). |
| 10.91      |  | Asset Purchase Agreementrelating to the Honeywell TCAS Business by and among Honeywell Inc.,L-3 Communications Corporation and, solely in respect of the Guarantyin Article XIV, Honeywell International Inc. dated as of February 10,2000 (incorporated by reference to Exhibit 10.91 of theRegistrant's Annual Report on Form 10-K for the year endedDecember 31, 2001).                           |
| 10.92      |  | Asset Purchase andSale Agreement, dated January 7, 2000 by and between L-3 CommunicationsCorporation and Raytheon Company (incorporated by reference to Exhibit10.92 of the Registrants' Annual Report on Form 10-K for the yearended December 31, 2000).                                                                                                                                            |
| 10.93      |  | Indenturedated as of June 28, 2002, ("2002 Indenture")among L-3 Communications Corporation, the guarantors named therein andThe Bank of New York, as Trustee (incorporated by reference to Exhibit4.1 of L-3 Communications Corporation's Registration Statement onForm S-4, No.333-99757).                                                                                                          |
| **10.94    |  | Supplemental Indenturedated as of February 25, 2004, among L-3 Communications Corporation,The Bank of New York, as trustee, and the guarantors named therein tothe 2002 Indenture.                                                                                                                                                                                                                   |
| **10.95    |  | TransactionAgreement dated as of October 21, 2003 by and among L-3 CommunicationsCorporation, RAAH I, LLC and Vertex AerospaceLLC.                                                                                                                                                                                                                                                                   |
| **10.96    |  | Supplemental Indenture dated asof February 25, 2004, among L-3 Communications Corporation, The Bank ofNew York, as trustee, and the guarantors named therein to the December2003 Indenture.                                                                                                                                                                                                          |
| *11        |  | L-3 CommunicationsHoldings, Inc. Computation of Basic Earnings Per Share and DilutedEarnings Per Share.                                                                                                                                                                                                                                                                                              |
| **12       |  | Ratio of Earningsto Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                   |
| **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, asamended.                                                                                                                                                                                                                                                                      |
| **32       |  | Section 1350Certifications.                                                                                                                                                                                                                                                                                                                                                                          |
|            |

|  |
|--|
|  |  |
|  |

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|         |                                                                                                                                                                                                       |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *  | Theinformation required in this exhibit is presented on Note 12 to theConsolidated Financial Statements as of December 31, 2003 in accordancewith the provisions of SFAS No. 128, Earnings Per Share. |

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

67

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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  4, 2004.

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

|  | By: /s/ Robert V.LaPenta   |
|--|--------------------------------------|

|  | Title:President and Chief Financial Officer |
|--|---------------------------------------------|

Pursuant to therequirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrants onMarch  4, 2004 and in the capacities indicated.

|                         |  |                                                             |  |  |  |  |
|-------------------------|--|-------------------------------------------------------------|--|--|--|--|
| Signature               |  | Title                                                       |
|                    |  |
| /s/Frank C. Lanza       |  | Chairman, Chief ExecutiveOfficer(Principal                  |
| Frank C. Lanza          |  | Executive Officer) andDirector                              |
|                    |  |                                                        |
| /s/Robert V. LaPenta    |  | President, Chief Financial Officer (PrincipalFinancial      |
| Robert V. LaPenta       |  | Officer) andDirector                                        |
|                    |  |                                                        |
| /s/Michael T. Strianese |  | Senior Vice President, Finance (PrincipalAccountingOfficer) |
| Michael T.Strianese     |  |                                                        |
|                    |  |                                                        |
| /s/Claude R.Canizares   |  | Director                                                    |
| Claude R.Canizares      |  |                                                        |
|                    |  |                                                        |
| /s/Thomas A.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       |  |                                                        |
|                         |

68

----

INDEX TOFINANCIAL STATEMENTS

Consolidated Financial Statements as ofDecember 31, 2003 and 2002 and for the years ended December 31, 2003,2002 and2001

|                                                                                                    |  |        |     |        |  |  |
|----------------------------------------------------------------------------------------------------|--|--------|-----|--------|--|--|
| Reportof Independent Auditors                                                                      |  |   | F-2 |   |
| ConsolidatedBalance Sheets as of December 31, 2003 and December 31,2002                            |  |   | F-3 |   |
| Consolidated Statements ofOperations for the years ended December 31, 2003, 2002 and2001           |  |   | F-4 |   |
| Consolidated Statements ofShareholders' Equity for the years ended December 31, 2003, 2002and 2001 |  |   | F-5 |   |
| Consolidated Statements of CashFlows for the years ended December 31, 2003, 2002 and2001           |  |   | F-6 |   |
| Notes to Consolidated FinancialStatements                                                          |  |   | F-7 |   |
|                                                                                                    |

F-1

----

REPORT OF INDEPENDENTAUDITORS

To the Board of Directors and Shareholdersof     L-3 Communications Holdings, Inc.

We haveaudited the accompanying consolidated balance sheets of L-3Communications Holdings, Inc. ("L-3Holdings") and L-3 Communications Corporation("L-3 Communications") and subsidiaries(collectively, the "Company") as of December31, 2003 and 2002, and the related consolidated statements ofoperations, shareholders' equity and cash flows for each of thethree years ended December 31, 2003. These financial statements are theresponsibility of the Company's management. Our responsibility isto express an opinion on these financial statements based on ouraudits.

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatements. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, theconsolidated financial position of L-3 Holdings and L-3 Communicationsand subsidiaries as of December 31, 2003 and 2002 and their respectiveconsolidated results of operations and cash flows for each of the threeyears ended December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

Asindicated in Note 5 to the financial statements, in 2002 the Companyadopted the provisions of Statement of Financial Accounting StandardsNo. 142, Goodwill and Other Intangible Assets.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLPNew York, NewYork January 27, 2004

F-2

----

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

CONSOLIDATED BALANCE SHEETS

(in thousands, except per sharedata)

|                                                                                                                                                                                                                                 |  |             |           |         |  |        |           |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                                                                                                                                                                            |  | December31, |
|                                                                                                                                                                                                                            |  | 2003        |           | 2002    |
| **ASSETS**                                                                                                                                                                                                                      |  |        |      |    |  |
| Currentassets:                                                                                                                                                                                                                  |  |        |      |    |  |
| Cash and cashequivalents                                                                                                                                                                                                        |  | $           | 134,876   |    |  | $      | 134,856   |    |
| Contractsinprocess                                                                                                                                                                                                              |  |        | 1,615,348 |    |  |   | 1,317,993 |    |
| Deferredincome taxes                                                                                                                                                                                                            |  |        | 152,785   |    |  |   | 143,634   |    |
| Othercurrentassets                                                                                                                                                                                                              |  |        | 34,693    |    |  |   | 42,891    |    |
| Totalcurrentassets                                                                                                                                                                                                              |  |        | 1,937,702 |    |  |   | 1,639,374 |    |
| Property,plant and equipment,net                                                                                                                                                                                                |  |        | 519,749   |    |  |   | 458,639   |    |
| Goodwill                                                                                                                                                                                                                        |  |        | 3,652,436 |    |  |   | 2,794,548 |    |
| Intangibleassets                                                                                                                                                                                                                |  |        | 162,156   |    |  |   | 90,147    |    |
| Deferredincometaxes                                                                                                                                                                                                             |  |        | 100,482   |    |  |   | 147,190   |    |
| Deferred debtissue costs                                                                                                                                                                                                        |  |        | 48,572    |    |  |   | 48,839    |    |
| Otherassets                                                                                                                                                                                                                     |  |        | 71,793    |    |  |   | 63,571    |    |
| Totalassets                                                                                                                                                                                                                     |  | $           | 6,492,890 |    |  | $      | 5,242,308 |    |
| LIABILITIESAND SHAREHOLDERS'EQUITY                                                                                                                                                                                              |  |        |      |    |  |   |      |    |
| Currentliabilities:                                                                                                                                                                                                             |  |        |      |    |  |   |      |    |
| Accountspayable,trade                                                                                                                                                                                                           |  | $           | 195,548   |    |  | $      | 167,240   |    |
| Accruedemploymentcosts                                                                                                                                                                                                          |  |        | 239,690   |    |  |   | 187,754   |    |
| Accruedexpenses                                                                                                                                                                                                                 |  |        | 72,880    |    |  |   | 56,763    |    |
| Customeradvances                                                                                                                                                                                                                |  |        | 58,078    |    |  |   | 62,645    |    |
| Accruedinterest                                                                                                                                                                                                                 |  |        | 25,898    |    |  |   | 18,395    |    |
| Incometaxes                                                                                                                                                                                                                     |  |        | 70,159    |    |  |   | 33,729    |    |
| Other currentliabilities                                                                                                                                                                                                        |  |        | 261,959   |    |  |   | 183,416   |    |
| Totalcurrentliabilities                                                                                                                                                                                                         |  |        | 924,212   |    |  |   | 709,942   |    |
| Pensionand postretirementbenefits                                                                                                                                                                                               |  |        | 359,020   |    |  |   | 343,527   |    |
| Otherliabilities                                                                                                                                                                                                                |  |        | 101,651   |    |  |   | 65,644    |    |
| Long-termdebt                                                                                                                                                                                                                   |  |        | 2,457,300 |    |  |   | 1,847,752 |    |
| Totalliabilities                                                                                                                                                                                                                |  |        | 3,842,183 |    |  |   | 2,966,865 |    |
| Commitmentsand contingencies                                                                                                                                                                                                    |  |
| Minorityinterest                                                                                                                                                                                                                |  |        | 76,211    |    |  |   | 73,241    |    |
| Shareholders'equity:                                                                                                                                                                                                            |  |
| L-3 Holdings' commonstock; $.01 par value; authorized 300,000,000 shares, issued andoutstanding 97,077,495 and 94,577,331 shares (L-3 Communications'common stock; $.01 par value, 100 shares authorized, issuedandoutstanding) |  |        | 1,893,488 |    |  |   | 1,794,976 |    |
| Retainedearnings                                                                                                                                                                                                                |  |        | 757,467   |    |  |   | 479,827   |    |
| Unearnedcompensation                                                                                                                                                                                                            |  |        | (3,622    | )  |  |   | (3,302    | )  |
| Accumulatedother comprehensiveloss                                                                                                                                                                                              |  |        | (72,837   | )  |  |   | (69,299   | )  |
| Totalshareholders'equity                                                                                                                                                                                                        |  |        | 2,574,496 |    |  |   | 2,202,202 |    |
| Totalliabilities and shareholders'equity                                                                                                                                                                                        |  | $           | 6,492,890 |    |  | $      | 5,242,308 |    |
|                                                                                                                                                                                                                            |  |        |      |    |  |   |      |    |
|                                                                                                                                                                                                                                 |

Seenotes to consolidated financial statements.

F-3

----

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

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(in thousands, except persharedata)

|                                                                                                  |  |                       |           |        |  |        |           |         |  |        |           |        |  |  |
|--------------------------------------------------------------------------------------------------|--|-----------------------|-----------|--------|--|--------|-----------|---------|--|--------|-----------|--------|--|--|
|                                                                                             |  | YearEnded December31, |
|                                                                                             |  | 2003                  |           | 2002   |  | 2001   |
| Sales:                                                                                           |  |                  |      |   |  |   |      |    |  |   |      |   |
| Contracts,primarily U.S.Government                                                               |  | $                     | 4,467,554 |   |  | $      | 3,581,102 |    |  | $      | 1,932,205 |   |
| Commercial,primarilyproducts                                                                     |  |                  | 594,040   |   |  |   | 430,127   |    |  |   | 415,217   |   |
| Totalsales                                                                                       |  |                  | 5,061,594 |   |  |   | 4,011,229 |    |  |   | 2,347,422 |   |
| Costsandexpenses:                                                                                |  |                  |      |   |  |   |      |    |  |   |      |   |
| Contracts,primarily U.S.Government                                                               |  |                  | 3,905,449 |   |  |   | 3,137,561 |    |  |   | 1,699,617 |   |
| Commercial,primarilyproducts:                                                                    |  |                  |      |   |  |   |      |    |  |   |      |   |
| Costofsales                                                                                      |  |                  | 384,727   |   |  |   | 270,800   |    |  |   | 252,790   |   |
| Selling,general and administrativeexpenses                                                       |  |                  | 137,626   |   |  |   | 114,052   |    |  |   | 93,238    |   |
| Researchand developmentexpenses                                                                  |  |                  | 52,771    |   |  |   | 34,837    |    |  |   | 26,447    |   |
| Totalcosts andexpenses                                                                           |  |                  | 4,480,573 |   |  |   | 3,557,250 |    |  |   | 2,072,092 |   |
| Operatingincome                                                                                  |  |                  | 581,021   |   |  |   | 453,979   |    |  |   | 275,330   |   |
| Interestand otherincome                                                                          |  |                  | 215       |   |  |   | 4,921     |    |  |   | 1,739     |   |
| Interestexpense                                                                                  |  |                  | 132,683   |   |  |   | 122,492   |    |  |   | 86,390    |   |
| Minorityinterest                                                                                 |  |                  | 3,515     |   |  |   | 6,198     |    |  |   | 4,457     |   |
| Losson retirement ofdebt                                                                         |  |                  | 11,225    |   |  |   | 16,187    |    |  |   | —   |   |
| Incomebefore income taxes and cumulative effect of a change in accountingprinciple               |  |                  | 433,813   |   |  |   | 314,023   |    |  |   | 186,222   |   |
| Provisionfor incometaxes                                                                         |  |                  | 156,173   |   |  |   | 111,556   |    |  |   | 70,764    |   |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  |                  | 277,640   |   |  |   | 202,467   |    |  |   | 115,458   |   |
| Cumulativeeffect of a change in accounting principle, net of income tax benefitof $6,428 (Note5) |  |                  | —   |   |  |   | (24,370   | )  |  |   | —   |   |
| Netincome                                                                                        |  | $                     | 277,640   |   |  | $      | 178,097   |    |  | $      | 115,458   |   |
| L-3Holdings' earnings per commonshare:                                                           |  |                  |      |   |  |   |      |    |  |   |      |   |
| Basic:                                                                                           |  |                  |      |   |  |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  | $                     | 2.89      |   |  | $      | 2.33      |    |  | $      | 1.54      |   |
| Cumulativeeffect of a change in accountingprinciple                                              |  |                  | —   |   |  |   | (0.28     | )  |  |   | —   |   |
| Netincome                                                                                        |  | $                     | 2.89      |   |  | $      | 2.05      |    |  | $      | 1.54      |   |
| Diluted:                                                                                         |  |                  |      |   |  |   |      |    |  |   |      |   |
| Incomebefore cumulative effect of a change in accountingprinciple                                |  | $                     | 2.71      |   |  | $      | 2.18      |    |  | $      | 1.47      |   |
| Cumulativeeffect of a change in accountingprinciple                                              |  |                  | —   |   |  |   | (0.25     | )  |  |   | —   |   |
| Netincome                                                                                        |  | $                     | 2.71      |   |  | $      | 1.93      |    |  | $      | 1.47      |   |
| L-3Holdings' weighted average common sharesoutstanding:                                          |  |                  |      |   |  |   |      |    |  |   |      |   |
| Basic                                                                                            |  |                  | 96,022    |   |  |   | 86,943    |    |  |   | 74,880    |   |
| Diluted                                                                                          |  |                  | 106,068   |   |  |   | 97,413    |    |  |   | 85,438    |   |
|                                                                                                  |

Seenotes to consolidated financial statements.

F-4

----

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

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY

For theYears Ended December 31, 2003, 2002 and 2001

(inthousands)

|                                                                                                                         |  |                          |        |                          |  |                  |        |                      |  |                                            |           |        |  |        |         |        |  |        |        |         |  |        |         |         |  |        |           |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------|--|--------------------------|--------|--------------------------|--|------------------|--------|----------------------|--|--------------------------------------------|-----------|--------|--|--------|---------|--------|--|--------|--------|---------|--|--------|---------|---------|--|--------|-----------|---------|--|--|
|                                                                                                                    |  | L-3Holdings' CommonStock |        | AdditionalPaid-inCapital |  | RetainedEarnings |        | UnearnedCompensation |  | AccumulatedOtherComprehensive Income(Loss) |           | Total  |
|                                                                                                                    |  | SharesIssued             |        | ParValue                 |  |
| Balance December31,2000                                                                                                 |  |                     | 67,213 |                     |  | $                | 672    |                 |  | $                                          | 515,254   |   |  | $      | 186,272 |   |  | $      | (2,457 | )  |  | $      | (7,172  | )  |  | $      | 692,569   |    |
| Comprehensiveincome:                                                                                                    |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |
| Netincome                                                                                                               |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   | 115,458 |   |  |   |   |    |  |   |    |    |  |   | 115,458   |    |
| Minimumpension liability, net of $11,955 taxbenefit                                                                     |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   | (19,519 | )  |  |   | (19,519   | )  |
| Foreigncurrency translation adjustment, net of $164 taxbenefit                                                          |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   | (268    | )  |  |   | (268      | )  |
| Unrealizedloss on securities, net of $111 taxbenefit                                                                    |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   | (180    | )  |  |   | (180      | )  |
| Unrealizedloss on securities reclassified to net income from other comprehensiveloss, net of $2,274 taxexpense          |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   | 3,632   |    |  |   | 3,632     |    |
| Unrealizedlosses on hedging instruments, net of $100 taxbenefit                                                         |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   | (163    | )  |  |   | (163      | )  |
|                                                                                                                    |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 98,960    |    |
| Sharesissued:                                                                                                           |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   |      |    |
| Saleof commonstock                                                                                                      |  |                     | 9,150  |                     |  |             | 92     |                 |  |                                       | 353,530   |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 353,622   |    |
| Employeesavingsplans                                                                                                    |  |                     | 418    |                     |  |             | 4      |                 |  |                                       | 16,864    |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 16,868    |    |
| Acquisitionconsideration                                                                                                |  |                     | 588    |                     |  |             | 6      |                 |  |                                       | 17,351    |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 17,357    |    |
| Exerciseof stockoptions                                                                                                 |  |                     | 1,128  |                     |  |             | 11     |                 |  |                                       | 28,253    |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 28,264    |    |
| Employeestock purchaseplan                                                                                              |  |                     |   |                     |  |             |   |                 |  |                                       | 4,861     |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 4,861     |    |
| Grantof restrictedstock                                                                                                 |  |                     |   |                     |  |             |   |                 |  |                                       | 2,118     |   |  |   |    |   |  |   | (2,118 | )  |  |   |    |    |  |   | —   |    |
| Amortizationof unearnedcompensation                                                                                     |  |                     |   |                     |  |             |   |                 |  |                                       |      |   |  |   |    |   |  |   | 1,370  |    |  |   |    |    |  |   | 1,370     |    |
| Other                                                                                                                   |  |                     |   |                     |  |             |   |                 |  |                                       | 21        |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 21        |    |
| BalanceDecember 31,2001                                                                                                 |  |                     | 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    |    |
| Acquisitionconsideration                                                                                                |  |                     | 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        |    |
| BalanceDecember 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    |    |
| Acquisitionconsideration                                                                                                |  |                     | 110    |                     |  |             | 1      |                 |  |                                       | 4,968     |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 4,969     |    |
| Exerciseof stockoptions                                                                                                 |  |                     | 835    |                     |  |             | 8      |                 |  |                                       | 22,722    |   |  |   |    |   |  |   |   |    |  |   |    |    |  |   | 22,730    |    |
| Employeestock purchaseplan                                                                                              |  |                     | 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        |    |
| BalanceDecember 31,2003                                                                                                 |  |                     | 97,077 |                     |  | $                | 971    |                 |  | $                                          | 1,892,517 |   |  | $      | 757,467 |   |  | $      | (3,622 | )  |  | $      | (72,837 | )  |  | $      | 2,574,496 |    |
|                                                                                                                         |

Seenotes to consolidated financial statements.

F-5

----

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

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                                      |  |                       |            |         |  |        |            |         |  |        |          |         |  |  |
|------------------------------------------------------------------------------------------------------|--|-----------------------|------------|---------|--|--------|------------|---------|--|--------|----------|---------|--|--|
|                                                                                                 |  | YearEnded December31, |
|                                                                                                 |  | 2003                  |            | 2002    |  | 2001   |
| **Operatingactivities:**                                                                             |  |                  |       |    |  |
| Netincome                                                                                            |  | $                     | 277,640    |    |  | $      | 178,097    |    |  | $      | 115,458  |    |
| Cumulativeeffect of a change in accountingprinciple                                                  |  |                  | —    |    |  |   | 24,370     |    |  |   | —  |    |
| Losson retirement ofdebt                                                                             |  |                  | 11,225     |    |  |   | 16,187     |    |  |   | —  |    |
| Goodwillamortization                                                                                 |  |                  | —    |    |  |   | —    |    |  |   | 42,356   |    |
| Depreciation                                                                                         |  |                  | 77,340     |    |  |   | 66,230     |    |  |   | 40,362   |    |
| Amortizationof intangibles and otherassets                                                           |  |                  | 18,083     |    |  |   | 9,630      |    |  |   | 4,233    |    |
| Amortizationof deferred debt issue costs (included in interestexpense)                               |  |                  | 7,977      |    |  |   | 7,392      |    |  |   | 6,388    |    |
| Deferredincome taxprovision                                                                          |  |                  | 94,747     |    |  |   | 79,092     |    |  |   | 52,638   |    |
| Minorityinterest                                                                                     |  |                  | 3,515      |    |  |   | 6,198      |    |  |   | 4,457    |    |
| Othernon-cash items, principally contributions to employee savingsplans in L-3 Holdings' commonstock |  |                  | 39,773     |    |  |   | 28,653     |    |  |   | 17,576   |    |
| Subtotal                                                                                             |  |                  | 530,300    |    |  |   | 415,849    |    |  |   | 283,468  |    |
| Changesin operating assets and liabilities, excluding acquiredamounts:                               |  |                  |       |    |  |   |       |    |  |   |     |    |
| Contractsinprocess                                                                                   |  |                  | (120,397   | )  |  |   | (75,031    | )  |  |   | (40,652  | )  |
| Othercurrentassets                                                                                   |  |                  | (1,731     | )  |  |   | (15,257    | )  |  |   | 1,643    |    |
| Otherassets                                                                                          |  |                  | (15,861    | )  |  |   | (16,641    | )  |  |   | (12,033  | )  |
| Accountspayable                                                                                      |  |                  | (19,503    | )  |  |   | (21,904    | )  |  |   | (43,165  | )  |
| Accruedemploymentcosts                                                                               |  |                  | 20,558     |    |  |   | 30,100     |    |  |   | 11,931   |    |
| Accruedexpenses                                                                                      |  |                  | 5,646      |    |  |   | (2,581     | )  |  |   | (20,300  | )  |
| Customeradvances                                                                                     |  |                  | (4,773     | )  |  |   | (11,272    | )  |  |   | 12,627   |    |
| Accruedinterest                                                                                      |  |                  | 7,503      |    |  |   | 7,199      |    |  |   | (3,047   | )  |
| Incometaxes                                                                                          |  |                  | 44,081     |    |  |   | 30,852     |    |  |   | 14,431   |    |
| Othercurrentliabilities                                                                              |  |                  | (25,384    | )  |  |   | (41,206    | )  |  |   | (37,555  | )  |
| Pensionand postretirementbenefits                                                                    |  |                  | 5,088      |    |  |   | (1,670     | )  |  |   | 4,550    |    |
| Otherliabilities                                                                                     |  |                  | 19,008     |    |  |   | 20,517     |    |  |   | 1,423    |    |
| Allother operating activities, principally foreign currencytranslation                               |  |                  | 11,528     |    |  |   | (495       | )  |  |   | (353     | )  |
| Subtotal                                                                                             |  |                  | (74,237    | )  |  |   | (97,389    | )  |  |   | (110,500 | )  |
| Net cash from operatingactivities                                                                    |  |                  | 456,063    |    |  |   | 318,460    |    |  |   | 172,968  |    |
| **Investingactivities:**                                                                             |  |                  |       |    |  |   |       |    |  |   |     |    |
| Acquisitionof businesses, net of cashacquired                                                        |  |                  | (1,014,439 | )  |  |   | (1,742,133 | )  |  |   | (446,911 | )  |
| Proceedsfrom sale ofbusinesses                                                                       |  |                  | 8,795      |    |  |   | —    |    |  |   | 75,206   |    |
| Capitalexpenditures                                                                                  |  |                  | (82,874    | )  |  |   | (62,058    | )  |  |   | (48,121  | )  |
| Dispositionof property, plant andequipment                                                           |  |                  | 3,854      |    |  |   | 3,548      |    |  |   | 1,237    |    |
| Otherinvestingactivities                                                                             |  |                  | (3,393     | )  |  |   | (9,885     | )  |  |   | (6,301   | )  |
| Netcash used in investingactivities                                                                  |  |                  | (1,088,057 | )  |  |   | (1,810,528 | )  |  |   | (424,890 | )  |
| **Financingactivities:**                                                                             |  |                  |       |    |  |   |       |    |  |   |     |    |
| Borrowingsunder revolving creditfacilities                                                           |  |                  | 295,000    |    |  |   | 566,000    |    |  |   | 316,400  |    |
| Repaymentof borrowings under revolving creditfacilities                                              |  |                  | (295,000   | )  |  |   | (566,000   | )  |  |   | (506,400 | )  |
| Borrowingsunder bridge loanfacility                                                                  |  |                  | —    |    |  |   | 500,000    |    |  |   | —  |    |
| Repaymentof borrowings under bridge loanfacility                                                     |  |                  | —    |    |  |   | (500,000   | )  |  |   | —  |    |
| Proceedsfrom sale of senior subordinatednotes                                                        |  |                  | 790,788    |    |  |   | 750,000    |    |  |   | 420,000  |    |
| Redemptionof senior subordinatednotes                                                                |  |                  | (187,650   | )  |  |   | (237,468   | )  |  |   | —  |    |
| Proceedsfrom sale of L-3 Holdings' common stock,net                                                  |  |                  | —    |    |  |   | 766,780    |    |  |   | 353,622  |    |
| Debtissuancecosts                                                                                    |  |                  | (9,591     | )  |  |   | (19,759    | )  |  |   | (16,671  | )  |
| Proceedsfrom exercise of stockoptions                                                                |  |                  | 14,273     |    |  |   | 17,372     |    |  |   | 16,325   |    |
| Proceedsfrom employee stock purchaseplan                                                             |  |                  | 26,384     |    |  |   | 17,478     |    |  |   | 4,861    |    |
| Distributionspaid to minorityinterest                                                                |  |                  | (1,975     | )  |  |   | (2,854     | )  |  |   | (2,530   | )  |
| Otherfinancingactivities                                                                             |  |                  | (215       | )  |  |   | (25,647    | )  |  |   | (5,343   | )  |
| Netcash from financingactivities                                                                     |  |                  | 632,014    |    |  |   | 1,265,902  |    |  |   | 580,264  |    |
| Netincrease (decrease) incash                                                                        |  |                  | 20         |    |  |   | (226,166   | )  |  |   | 328,342  |    |
| Cashand cash equivalents, beginning of theperiod                                                     |  |                  | 134,856    |    |  |   | 361,022    |    |  |   | 32,680   |    |
| Cashand cash equivalents, end of theperiod                                                           |  | $                     | 134,876    |    |  | $      | 134,856    |    |  | $      | 361,022  |    |
|                                                                                                      |

Seenotes to consolidated financialstatements.

F-6

----

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

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

1.    Description ofBusiness

L-3 Communications Holdings, Inc. conducts itsoperations and derives all its operating income and cash flow throughits wholly owned subsidiary, L-3 Communications Corporation("L-3 Communications"). L-3 CommunicationsHoldings, Inc. ("L-3 Holdings" and togetherwith its subsidiaries, "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, 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.The Company also is a prime system contractor for aircraftmodernization and maintenance, Intelligence, Surveillance andReconnaissance (ISR) collection platforms, simulation and training, andgovernment systems support services. The Company's customersinclude the U.S. Department of Defense (DoD) and its prime contractors,certain U.S. Government intelligence agencies, major aerospace anddefense contractors, foreign governments, commercial customers andcertain other U.S. federal, state and local government agencies.

The Company has four reportable segments: (1) Secure Communications& ISR; (2) Training, Simulation & Support Services; (3)Aviation Products & Aircraft Modernization; and (4) SpecializedProducts.

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 military and otherU.S. Government and foreign government reconnaissance and surveillanceapplications. The Company believes that its systems and products arecritical elements for a substantial number of major communication,command and control, intelligence gathering and space systems. TheCompany's 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. The majorsecure communications programs and systems include:

|  |              |                                                                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | secure data links for airborne,satellite, ground and sea-based remote platforms, both manned andunmanned, for real-time information collection and dissemination tousers; |

|  |              |                                                                                                                                                                                                                                         |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | highly specialized fleetmanagement and support, including procurement, systems integration,sensor development, modifications and maintenance for signalsintelligence and ISR special mission aircraft and airborne surveillancesystems; |

|  |              |                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------|
|  | •  | strategic and tacticalsignals intelligence systems that detect, collect, identify, analyzeand disseminate information; |

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

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

Training,Simulation & Support Services.    The businesses in thissegment provide a full range of training, simulation and supportservices, including:

|  |              |                                                                                                                                                                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | servicesdesigned to meet customer training requirements for aircrews,navigators, mission operators, gunners and maintenance technicians forvirtually any platform, including military fixed and rotary wingaircraft, air vehicles and various ground vehicles; |

F-7

----

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

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

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

|  |              |                                                                                                                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | high-end engineering and informationsupport services used for command, control, communications and ISRarchitectures, as well as for air warfare modeling and simulation toolsfor applications used by the DoD, Department of Homeland Security andU.S. Government intelligence agencies, including missile and spacesystems, Unmanned Aerial Vehicles (UAVs) and military aircraft; |

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

|  |              |                                                                                                          |
|--|--------------|----------------------------------------------------------------------------------------------------------|
|  | •  | producing crisis managementsoftware and providing command and control for homeland securityapplications. |

Aviation Products & AircraftModernization. The businesses in this segment provide aviationproducts and aircraft modernization services, including:

|  |              |                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------|
|  | •  | airborne traffic and collisionavoidance systems (TCAS) for commercial and military applications; |

|  |              |                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------|
|  | •  | commercial, solid-state,crash-protected cockpit voice recorders, flight data recorders andmaritime hardened voyage recorders; |

|  |              |                                                                              |
|--|--------------|------------------------------------------------------------------------------|
|  | •  | ruggedized custom displays formilitary and high-end commercial applications; |

|  |              |                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | turnkey aviation life cycle managementservices that integrate custom developed and commercial off-the-shelfproducts for various military fixed and rotary wing aircraft, includingheavy maintenance and structural modifications and interior completionfor Head-of-State aircraft; |

|  |              |                                                                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | engineering, modification,maintenance, logistics and upgrades for U.S. Special Operations Commandaircraft, vehicles and personnel equipment; |

|  |              |                                                                                                                                                                                                                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | aerospace and other technical servicesrelated to large fleet support, such as aircraft and vehiclemodernization, maintenance, repair and overhaul, logistics support, andsupply chain management, primarily for military training, tactical,cargo and utility aircraft, and the Patriot Missile System and M1Abrams Main Battle Tank;and |

|  |              |                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | advanced cockpit avionicsproducts and specialized avionics repair and overhaul services forvarious segments of the aviation market. |

SpecializedProducts.    The businesses in this segment supply products,including components, subsystems and systems to military and commercialcustomers in several niche markets. These products 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; |

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

|  |              |                                                                                                                                                                                                                                                                   |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | security andsurveillance systems for aviation, port and border applications,including those for perimeter security and for detection of explosives,concealed weapons, contraband and illegal narcotics, and to inspectagricultural products and to examine cargo; |

|  |              |                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------|
|  | •  | telemetry, instrumentation, space andnavigation products, including tracking and flight termination; |

F-8

----

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

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

|  |              |                                                                                 |
|--|--------------|---------------------------------------------------------------------------------|
|  | •  | premiumfuzing products and safety and arming devices for missiles andmunitions; |

|  |              |                                                                                                                                                                                                    |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | microwave componentsused in radar communication satellites, wireless communicationequipment, electronic surveillance, communication and electronicwarfare applications and countermeasure systems; |

|  |              |                                                    |
|--|--------------|----------------------------------------------------|
|  | •  | high performance antennas and groundbased radomes; |

|  |              |                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | training devicesand motion simulators which produce advanced virtual reality simulationand high-fidelity representations of cockpits and mission stations forfixed and rotary wing aircraft and land vehicles; and |

|  |              |                                                                                                                                                                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | precision stabilized electro-opticsurveillance systems, including high magnification lowlight, daylightand forward looking infrared sensors, laser range finders, illuminatorsand designators, and digital and wireless communication systems. |

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, and its only obligations are the51⁄4% Convertible Senior Subordinated Notes due2009, substantially all of which converted into L-3 Holdings'common stock in January 2004, and the 4% Senior SubordinatedConvertible Contingent Debt Securities due 2011 (CODES). L-3 Holdingshas also guaranteed the borrowings under the senior credit facilitiesof L-3 Communications. L-3 Holdings' obligations have beenjointly, severally, fully and unconditionally guaranteed by L-3Communications and certain of its domestic subsidiaries, andaccordingly, such debt has been reflected as debt of L-3 Communicationsin its consolidated financial statements in accordance with the U.S.Securities and Exchange Commission's (SEC) Staff AccountingBulletin (SAB) No. 54. In addition, all issuances of equity securitiesincluding grants of stock options and restricted stock by L-3 Holdingsto employees 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 over which the Company has significantinfluence but does not have voting control are accounted for by theequity method.

Sales and Costs and ExpensesPresentation:    The Company presents its sales and costs andexpenses 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 contractual arrangements, most of whichrequire the Company to design, develop, manufacture, modify, test andintegrate complex aerospace and electronic equipment, and to providerelated engineering and technical services according to specificationsprovided by the customer. These contracts are within the scope of theAmerican Institute of Certified Public Accountants Statement ofPosition 81-1, Accounting for Performance of Construction –Type and certain Production-Type Contracts (SOP 81-1) andAccounting Research Bulletin No. 43, Chapter 11, Section A,Government Contracts, Cost-Plus-Fixed Fee Contracts (ARB 43) andAccounting Research Bulletin No. 45, Long-Term Construction TypeContracts (ARB 45). Sales reported under "Contracts,primarily U.S. Government" also include certain sales bythe Company's U.S. Government contractor businesses transactedusing contracts for domestic and foreign commercial 

F-9

----

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

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

customers which also are within the scope ofSOP 81-1 and ARB 45. Sales and costs and expenses for theCompany's businesses whose customers are primarily commercialbusiness enterprises are presented as "Commercial,primarily products". These sales are recognized inaccordance with the SEC's SAB No. 104, Revenue Recognitionand are not within the scope of SOP 81-1, ARB 43 or ARB 45. TheCompany's commercial businesses are substantially comprised ofAviation Communication & Surveillance Systems (ACSS), AviationRecorders, Microwave Components, Detection Systems and AvionicsSystems.

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 foreign governments and commercial customersare within the scope of SOP 81-1 and ARB 45 and sales and profits onthem are recognized using percentage-of-completion methods ofaccounting. Sales and profits on fixed-price production contracts whoseunits are produced and delivered in a continuous or sequential processare recorded as units are delivered based on their selling prices (the"units-of-delivery" method). Sales andprofits on other fixed-price type contracts are recorded based on theratio of total actual incurred costs to date to the total estimatedcosts for each contract (the "cost-to-cost"method). 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 cost-reimbursable type contracts thatare within the scope of ARB  43 in addition to SOP 81-1 arerecognized as allowable costs are incurred on the contract and becomebillable to the customer, in an amount equal to the allowable costsplus the profit on those costs, which is generally fixed or variablebased on the contract fee arrangement. Incentive and award fees onthese contracts are recorded as revenue when the conditions under whichthey are earned are reasonably assured of being met.

Sales andprofits on time and material type contracts are recognized on the basisof direct labor hours incurred at a fixed negotiated rate per hour thatcovers the profit, cost of direct labor and indirect expenses, plus thecost of materials or other specified costs.

Sales onarrangements that are not within the scope of SOP 81-1, ARB  43or ARB 45 are recognized in accordance with the SEC's SAB No.104. Sales are recognized when there is persuasive evidence of anarrangement, delivery has occurred or services have been performed, theselling price to the buyer is fixed or determinable and collectibilityis reasonably assured.

Contracts inProcess:    Contracts in process include receivables andinventories for contracts that are within the scope of SOP 81-1,ARB  43 and ARB  45, as well as receivables and inventoriesrelated to other contractual arrangements. Billed Receivables representthe uncollected portion of amounts recorded as sales and billed tocustomers for all revenue arrangements, net of allowances foruncollectible accounts. Unbilled Contract Receivables representaccumulated incurred costs and earned profits or losses on contracts inprocess that have been recorded as sales, primarily using thecost-to-cost percentage of completion method, which have not yet beenbilled to customers. Inventoried Contract Costs represent incurredcosts on contracts in process that have not yet been recognized ascosts and expenses because the related sales, which are primarilyrecorded using the units-of-delivery percentage of completion method,have not been recognized. Contract costs include direct costs andindirect costs, including overhead costs. In accordance with SOP 81-1and the AICPA Audit and Accounting Guidelines, Audits of FederalGovernment Contractors, the Company's inventoried contractcosts for U.S. Government contracts, and contracts with primecontractors or subcontractors of the U.S. Government, also includeallocated general 

F-10

----

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

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

and administrative costs, independentresearch and development costs and bid and proposal costs. Contracts inProcess contain amounts relating to contracts and programs with longperformance cycles, a portion of which may not be realized within oneyear. For contracts in a loss position, the unrecoverable costsexpected to be incurred in future periods are recorded in EstimatedCosts in Excess of Estimated Contract Value to Complete Contracts inProcess, which is a component of Other Current Liabilities. Under thecontractual arrangements on certain contracts with the U.S. Government,the Company receives progress payments as it incurs costs. The U.S.Government has a security interest in the Unbilled Contract Receivablesand Inventoried Contract Costs to which progress payments have beenapplied, and such progress payments are reflected as a reduction of therelated Unbilled Contract Receivables and Inventoried Contract Costs.Customer Advances are classified as current liabilities.

Inventories other than Inventoried Contract Costs are stated at thelower of cost or market primarily using the average cost method.

The Company values its acquired contracts in process on the date ofacquisition at contract value less the Company's estimated coststo complete the contract and a reasonable profit allowance on theCompany's completion effort commensurate with the profit marginthat the Company earns on similar contracts.

DerivativeFinancial Instruments:    The Company has entered into interestrate swap agreements and foreign currency forward contracts. Derivativefinancial instruments also include embedded derivatives. TheCompany's interest rate swap agreements have been accounted foras fair value hedges. The difference between the variable interestrates paid on the interest rate swap agreements and the fixed interestrate on the debt instrument underlying the swap agreements is recordedas increases or decreases to interest expense. Upon termination of aninterest rate swap agreement, the cash received or paid that relates tothe future value of the swap agreements at the termination date is adeferred gain or loss, which is recognized as a decrease or increase tointerest expense over the remaining term of the underlying debtinstrument. Foreign currency forward contracts are accounted for ascash flow hedges. Gains and losses on foreign currency forwardcontracts are reported as a component of the underlying transactionwithin contracts in process. The embedded derivatives related to theissuance of the Company's debt are recorded at fair value withchanges reflected in the statement of operations.

Property,Plant and Equipment:     Property, plant and equipment arestated at cost, less accumulated depreciation. Depreciation is computedby applying principally the straight-line method to the estimateduseful lives of the related assets. Useful lives range substantiallyfrom 10 to 40 years for buildings and improvements and 3 to 10 yearsfor machinery, equipment, furniture and fixtures. Leaseholdimprovements are amortized over the shorter of the lease term or theestimated useful life of the improvements. When property or equipmentis retired or otherwise disposed of, the net book value of the asset isremoved from the Company's balance sheet and the net gain or lossis included in the determination of income.

Debt IssuanceCosts:    Costs to issue debt are capitalized and deferred whenincurred, and subsequently amortized to interest expense over the termof the related debt using a method that approximates the effectiveinterest method.

Identifiable IntangibleAssets:    Identifiable intangible assets represent assetsacquired as part of the Company's business acquisitions andinclude customer relationships, technology and non-compete agreements.Effective January 1, 2002, the initial measurement of these intangibleassets has been based on their fair values. The values assigned toacquired identifiable intangible assets are determined, as of the dateof 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 useful lives, which range from 5 to 20years.

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)

Goodwill:     Effective January1, 2002, the Company accounts for goodwill in accordance with Statementof Financial Accounting Standards (SFAS) No. 142, Goodwill and otherIntangible Assets. The 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 No. 142, the Companyevaluated the carrying amount of goodwill by reference to current andestimated profitability 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 allowable indirect contract costs that are allocated toour U.S. Government contracts in accordance with U.S. Governmentregulations, and are specifically excluded from the scope of SFAS No.2, Accounting for Research and Development Costs (SFAS No. 2).In accordance with SOP 81-1 and the AICPA Audit and Accounting Guide,Audits of Federal Government Contractors, the Company reportsIRAD and B&P costs allocated to U.S. Government contracts as costsof sales when the related contract sales are recognized, and are notaccounted for as period expenses. Research and development costs forthe Company's businesses that are not U.S. Government contractorsare expensed as incurred in accordance with SFAS No. 2.

Customer-funded research and development costs are incurred pursuantto contracts to perform research and development activities accordingto customer specifications. These costs are not accounted for asresearch and development expenses in accordance with SFAS No. 2, andare also not indirect contract costs. Instead, these costs are directcontract costs and are expensed when the corresponding revenue isrecognized, which is generally as the research and development servicesare performed. Customer-funded research and development costs aresubstantially all incurred under cost-reimbursable type contracts withthe 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 and civilbusinesses. Capitalized software development costs, net of accumulatedamortization, was $29,990 at December 31, 2003 and $25,724 at December31, 2002, and is included in other assets on the consolidated balancesheets. Amortization expense for capitalized software development costswas $6,917 for 2003, $5,209 for 2002 and $1,567 for 2001.

Stock-Based Compensation:    The Company accounts foremployee stock-based compensation under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25,

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)

Accounting for Stock Issued toEmployees. Compensation expense for employee stock-basedcompensation is recognized in income based on the excess, if any, ofL-3 Holdings' fair value of the stock at the grant date of theaward or other measurement date over the amount an employee must pay toacquire the stock. When the exercise price for stock-based compensationarrangements granted to employees equals or exceeds the fair value ofthe L-3 Holdings common stock at the date of grant, the Company doesnot recognize compensation expense. The Company elected not to adoptthe fair value based method of accounting for stock-based employeecompensation as permitted by the Financial Accounting StandardsBoard's (FASB) Statement of Financial Accounting Standards (SFAS)No. 123, Accounting for Stock-Based Compensation (SFAS 123),as amended by SFAS No. 148, Accounting for Stock-BasedCompensation-Transition and Disclosure-an amendment of SFAS No.123. Had the Company adopted the fair value based method provisionsof SFAS 123, 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. The table below compares the "asreported" net income and L-3 Holdings earnings per share(EPS) to the "pro forma" net income and L-3Holdings EPS that the Company would have reported if the Company hadelected to recognize compensation expense in accordance with the fairvalue based method of accounting of SFAS123.

|                          |  |                       |         |        |  |        |         |        |  |        |         |        |  |  |
|--------------------------|--|-----------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                     |  | YearEnded December31, |
|                     |  | 2003                  |         | 2002   |  | 2001   |
| Netincome:               |  |
| Asreported               |  | $                     | 277,640 |   |  | $      | 178,097 |   |  | $      | 115,458 |   |
| Proforma                 |  |                  | 259,997 |   |  |   | 160,079 |   |  |   | 107,573 |   |
| L-3Holdings Basic EPS:   |  |
| Asreported               |  | $                     | 2.89    |   |  | $      | 2.05    |   |  | $      | 1.54    |   |
| Proforma                 |  |                  | 2.71    |   |  |   | 1.84    |   |  |   | 1.44    |   |
| L-3Holdings Diluted EPS: |  |
| Asreported               |  | $                     | 2.71    |   |  | $      | 1.93    |   |  | $      | 1.47    |   |
| Proforma                 |  |                  | 2.54    |   |  |   | 1.75    |   |  |   | 1.38    |   |
|                          |

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 thecovered products are shipped to customers. Product warranty expense isrecognized based on the terms of the product warranty and the relatedestimated costs. Accrued warranty costs are reduced as these costs areincurred.

Use of Estimates:    The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of salesand costs and expenses during the reporting period. The mostsignificant of these estimates and assumptions relate to contractrevenue and profit recognition, market values for inventories reportedat lower of cost or market, pension and postretirement benefitobligations, recoverability and valuation of recorded amounts oflong-lived assets, identifiable intangible assets, including goodwill,income taxes, including the valuations of deferred tax assets,litigation reserves and environmental obligations. Changes in estimatesare reflected in the periods during which they become known. Actualamounts will differ from these estimates.

Recently IssuedAccounting Standards:     In December of 2003, the FASB revisedits FASB Interpretation No. 46, Consolidation of Variable InterestEntities (FIN 46R). FIN 46R clarifies the application of AccountingResearch Bulletin No. 51, Consolidated Financial Statements. FIN46R requires 

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)

that a business enterprise review all of itslegal structures used to conduct its business activities, includingthose to hold assets, and its majority-owned subsidiaries, to determinewhether those legal structures are variable interest entities (VIEs)required to be consolidated for financial reporting purposes by thebusiness enterprise. A VIE is a legal structure for which the holdersof a majority voting interest may not have a controlling financialinterest in the legal structure. FIN 46R provides guidance foridentifying those legal structures and provides guidance fordetermining whether a business enterprise shall consolidate a VIE. FIN46R requires that a business enterprise that holds a significantvariable interest in a VIE make new disclosures in their financialstatements. The Company is required to adopt the provisions of FIN 46Rfor its interim period ending March 31, 2004. The Company does notbelieve that it holds any significant interests in VIEs that wouldrequire consolidation or additional disclosures.

In March of2003, the Emerging Issues Task Force (EITF) issued EITF No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables.EITF No. 00-21 addresses how to determine whether a revenue arrangementinvolving multiple deliverables contains more than one unit ofaccounting for revenue recognition purposes, and how considerationshould be measured and allocated to the separate accounting units. EITFNo. 00-21 applies to all deliverables within contractually bindingarrangements in all industries, except to the extent that a deliverablein a contractual arrangement is subject to other existing higher-levelauthoritative literature. EITF 00-21 became effective for revenuearrangements entered into after July 1, 2003. The adoption of EITF No.00-21 did not have a material effect on the Company's financialposition or results of operations.

In May of 2003, the FASBissued SFAS No. 150, Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity. This Statementapplies to certain financial instruments, including mandatorilyredeemable financial instruments that, prior to SFAS No. 150 could havebeen accounted for as a component of equity. SFAS No. 150 requires thatthose instruments be classified as liabilities in statements offinancial position. SFAS No. 150 also requires disclosures aboutalternative ways of settling the instruments and the capital structureof entities whose shares are all mandatorily redeemable. SFAS No. 150is effective for these financial instruments entered into or modifiedafter May 31, 2003. For these financial instruments entered into beforeMay 31, 2003, SFAS No. 150 became effective for the interim periodbeginning July 1, 2003. The Company does not hold any financialinstruments that are within the scope of SFAS No. 150. Accordingly,SFAS No. 150 is not expected to have a material effect on theCompany's consolidated results of operations or financialposition.

On December 8, 2003, President Bush signed theMedicare Prescription Drug, Improvement and Modernization Act of 2003(DIMA). This Act introduces a federal subsidy to sponsors of retireehealth care benefit plans that provide a benefit that is at leastactuarially equivalent to Medicare Part D. In January of 2002, the FASBissued FASB Staff Position 106-1, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003 (FSP 106). In accordance with FSP 106,the Company is electing to defer recognition of any potential savingson the measure of the accumulated postretirement benefit or netperiodic benefit cost as a result of DIMA until specific authoritativeguidance on the accounting of the federal subsidy is issued. Therefore,the consolidated financial statements and accompanying notes do notreflect the effects of the Act on the Company's postretirementmedical plans.

Reclassifications:     Certainreclassifications have been made to conform prior-year amounts to thecurrent-year presentation.

3.    Acquisitions, Divestitureand Other Transactions

Acquisitions

VertexAerospace. On December 1, 2003, the Company acquired VertexAerospace LLC (Vertex) for $653,250 in cash, which includes $650,000for the original contract purchase price, and a purchase price

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)

adjustment paid on the closing date of$3,250, plus acquisition costs. The acquisition was financed with cashon hand and approximately $285,000 of borrowings under theCompany's senior credit facilities. Vertex is a leading providerof aerospace 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. Theacquisition will expand L-3's market for aircraft modernizationand maintenance when combined with Integrated Systems, Spar and MAS,and will also provide complementary service offerings for L-3'sexisting customers. Based on a preliminary purchase price allocationfor Vertex, goodwill of $483,766 was assigned to the Aviation Products& Aircraft Modernization segment and goodwill of approximately$440,000 is expected to be deductible for income tax purposes.

The table below presents a summary of the Vertex preliminaryestimates of fair values of the assets acquired and liabilities assumedon the closing date of the acquisition (December 1, 2003), includingpreliminary valuations of acquired contracts in process. Finalvaluations for the estimated fair values of the assets acquired andliabilities assumed are expected to be completed during 2004. TheCompany does not expect material differences betwen the preliminary andfinal purchase price allocation for Vertex. The purchase price forVertex is subject to adjustment based on the closing date net assets ofthe business. The Company expects to determine the final purchase pricewith the seller during 2004, and the Company estimates that suchdetermination will result in a decrease of up to approximately $14,000to the purchase price because of adjustments to contracts in processand plant and equipment. Any adjustment to the purchase price will berecorded as an adjustment to the preliminary goodwill amount forVertex.

|                              |  |        |         |        |  |  |
|------------------------------|--|--------|---------|--------|--|--|
| Cash                         |  | $      | 2,187   |   |
| Contractsin process          |  |   | 161,663 |   |
| Deferred incometaxes         |  |   | 14,096  |   |
| Other currentassets          |  |   | 1,621   |   |
| Property, plant andequipment |  |   | 31,050  |   |
| Goodwill                     |  |   | 483,766 |   |
| Intangibleassets             |  |   | 50,000  |   |
| Deferred incometaxes         |  |   | 2,397   |   |
| Total assetsacquired         |  |   | 746,780 |   |
| Currentliabilities           |  |   | 79,986  |   |
| Long-termliabilities         |  |   | 12,894  |   |
| Totalliabilitiesassumed      |  |   | 92,880  |   |
| Net assetsacquired           |  | $      | 653,900 |   |
|                              |

MilitaryAviation Services, Klein Associates, Aeromet, Avionics Systems andcertain defense and aerospace assets of IPICOM, Inc.  During 2003,in separate transactions, the Company acquired five businesses for anaggregate consideration of $351,116 in cash, plus acquisition costs.These acquisitions were financed with cash on hand. The purchase pricesfor Military Aviation Services, Klein Associates, Aeromet and certaindefense and aerospace assets of IPICOM, Inc. are subject to adjustmentbased on closing date net assets or net working capital of the acquiredbusinesses. The Company acquired the following:

|              |                                                                                                                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Certain defense and aerospaceassets of IPICOM, Inc. (IPICOM) on December 10, 2003. The Company paid$8,676 of the purchase price on the closing date, and the balance ofthe purchase price of $18,824 was recorded in other current liabilitiesat December 31, 2003 and subsequently |

F-15

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

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

|        |                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | paid in January of 2004. This acquisitionadds innovative optical networking technology to the Company'sexisting and growing ISR and secure communicationsbusinesses; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | The net assets ofthe Military 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 theoutstanding common stock of Klein Associates, Inc. (Klein), a businessunit of OYO Corporation 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 Companyintends to integrate into L-3's port and maritime securitysystems offerings. Klein is also synergistic with the Company'sacoustic undersea warfare products; |

|              |                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | All of the outstanding commonstock of Aeromet, Inc. (Aeromet), on May 30, 2003. Aeromet designs,develops and integrates infrared and optical systems for airborne ISR.The acquisition advances the Company's strategy to expand itselectro-optical and infrared product lines and provides the Companywith the ability to apply Aeromet's technology to L-3'scurrent ISR products; and |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Allof the outstanding common stock of the avionics systems (AvionicsSystems) business of Goodrich Corporation, on March 28, 2003. AvionicsSystems develops 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. The acquisition provides theCompany with enhanced manufacturing capabilities, expanded marketingexpertise, an expanded distribution network and increased efficienciesin research and development initiatives, which the Company expects touse to sell its avionics portfolio, including advanced displays,aviation recorders, transponders, collision avoidance and proximityawareness products. Avionics Systems also provides a unique set ofproducts to add to the Company's existing product line for thecommercial air transport, business jet and military aircraftmarkets. |

Based on preliminary purchase price allocations, thegoodwill recognized for the acquisitions of MAS, Klein, Aeromet,Avionics Systems and certain defense and aerospace assets of IPICOM was$311,901 and goodwill of approximately $281,000 is expected to bedeductible for income tax purposes. Goodwill of $43,068 was assigned tothe Secure Communication & ISR segment, $244,849 was assigned tothe Aviation Products & Aircraft Modernization segment and $23,984was assigned to the Specialized Products segment.

AircraftIntegration Systems.    On March 8, 2002, the Company acquiredthe assets of Aircraft Integration Systems (AIS), a division ofRaytheon Company (Raytheon), for approximately $1,148,700 in cash,which includes $1,130,000 for the original contract purchase price, andan increase to the contract purchase price of approximately $18,700related to additional net assets received at closing, plus acquisitioncosts. Following the acquisition, the Company changed AIS's nameto L-3 Communications Integrated Systems (IS). The purchase price issubject to adjustment based on the IS closing date net tangible bookvalue, as defined in the asset purchase agreement. The acquisition wasfinanced using approximately $229,000 of cash on hand, borrowings underthe Company's senior credit facilities of $420,000 and a $500,000senior subordinated bridge loan (See Note 8). The Company acquired ISbecause it is a long-standing supplier of critical COMINT, SIGINT andunique sensor systems for special customers within the U.S. Government.The Company believes that IS has excellent operating prospects

F-16

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

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

as its major customers increasingly focus onintelligence gathering and information distribution to the battlefield.The Company also believes there are significant opportunities to applyits proven business integration and cost control skills to furtherenhance IS's operating and financial performance. The Companyalso believes that IS creates significant opportunities for the sale ofthe Company's secure communications and aviation products,including communication links, signal processing, antennas, datarecorders, displays and traffic control and collision avoidancesystems.

The Company is continuing its discussions with RaytheonCompany (Raytheon) regarding the adjustment of the purchase price forthe acquisition of AIS. The AIS purchase price submitted by Raytheon tothe Company amounted to approximately $1,163,000. The Company believesthat, in accordance with the terms of the AIS asset purchase agreementconcerning the closing date balance sheet, the purchase price for AISsubmitted by Raytheon should be reduced by $100,000 to $1,063,000. Inaccordance with the asset purchase agreement, the Company and Raytheonhave begun the formal process to settle the disagreement and engage aneutral accountant to arbitrate the final purchase price. Any amountreceived by the Company for a reduction to the AIS purchase price willbe reported as a reduction to goodwill.

DetectionSystems.    On June 14, 2002, the Company completed theacquisition of the detection systems business of PerkinElmer (DetectionSystems) for $110,000 in cash, which includes $100,000 for the originalcontract purchase price, and an increase to the contract purchase priceof $10,000 related to a preliminary purchase price adjustment, plusacquisition costs. The purchase price is subject to final adjustmentbased on closing date net working capital, as defined. DetectionSystems offers X-ray screening for several major security applications,including: (1) aviation systems for checked and oversized baggage,break bulk cargo and air freight; (2) port and border applicationsincluding pallets, break bulk and air freight; and (3) facilityprotection such as parcels, mail and cargo. Detection Systems has abroad range of systems and technology, and an installed base of over16,000 units. Detection Systems' customer base includes majorairlines and airports, a number of domestic agencies, such as the U.S.Customs Service, U.S. Marshals Service, U.S. Department of Agricultureand U.S. Department of State, and international authorities throughoutEurope, Asia and South America. The acquisition broadens theCompany's capabilities and product offerings in the rapidlygrowing areas of airport security and other homeland defense markets,including explosive detection systems (EDS). The acquisition providesthe Company with enhanced manufacturing and marketing capabilities,which will be used as the Company works to meet growing demand for itsEDS products. Based on the final purchase price allocation forDetection Systems, goodwill of $69,225 was assigned to the SpecializedProducts segment and is not expected to be deductible for income taxpurposes.

Telos, ComCept and TMA.    During thethird quarter of 2002, in separate transactions, the Company acquiredthree businesses for an aggregate purchase price of $105,824, which wascomprised of $90,248 in cash, 339,008 shares of L-3 Holdings commonstock for part of the ComCept purchase price valued at $15,576, plusacquisition costs. The aggregate purchase price includes net purchaseprice increases of $1,891 based on closing date balance sheets of theacquired businesses and $6,969 of additional purchase price based onthe financial performance of the acquired businesses for various12-month periods ending in 2003. The Company acquired:

|  |              |                                                                                                                                                                                                                                                                                |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | all of the outstanding common stock ofTelos Corporation (Telos), a business incorporated in California, whichprovides software development for command, control and communicationsand other related services for military and national securityrequirements, on July 19, 2002; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | all of the outstanding common stock ofComCept, Inc. (ComCept), a company with network-centric warfarecapabilities, including requirements development, modeling, simulation,communications and systems development and integration for ISR, on July31, 2002. This acquisition is subject to additional consideration notto exceed 109,544 shares of L-3 Holdings common stock |

F-17

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

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

|  |        |                                                                                                                                                        |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | which is contingent upon the financialperformance of ComCept for the fiscal year ending June 30, 2004; andwhich will be accounted for as goodwill; and |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | 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 software products. |

Based on the final purchase price allocations, the goodwillrecognized for the acquisitions of Telos, ComCept and TMA was $95,053,of which $41,771 is expected to be deductible for income tax purposes.Goodwill of $29,003 was assigned to the Secure Communications & ISRsegment and $66,050 was assigned to the Training, Simulation &Support Services segment.

Northrop Grumman's ElectronDevices and Displays-Navigation Systems-San Diego Businesses, WolfCoach Inc., International Microwave Corporation, Westwood Corporation,Wescam Inc. and Ship Analytics, Inc.    During the fourth quarterof 2002, in separate transactions, the Company acquired sevenbusinesses for an aggregate purchase price of $346,487 in cash plusacquisition costs. The aggregate purchase price includes net purchaseprice increases of $2,043 based on closing date balance sheets of theacquired businesses and $5,678 of additional purchase price based onthe financial performance of the acquired businesses for the year endedDecember 31, 2003. The Companyacquired:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the net assets ofNorthrop Grumman's Electron Devices and Displays-NavigationSystems-San Diego businesses on October 25, 2002. Electron Devices is asupplier of microwave power devices to all major prime contractors onkey military programs, including missile seekers, aircraft navigationand landing systems, airborne and ground radar's and electronicwarfare and communications systems. Following the acquisition, theCompany changed Electron Devices name to L-3 Communications ElectronDevices (Electron Devices). Displays-Navigation Systems is a supplierof ruggedized displays and computer and electronic systems for bothmilitary and commercial applications. Following the acquisition, theCompany changed Displays-Navigation Systems' name to L-3Communications Ruggedized Command and Control Solutions (RuggedizedCommand & Control); |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | allof the outstanding common stock of Wolf Coach, Inc. (Wolf Coach), aproducer of mobile communications vehicles, for customers in thetelevision industry, the military and for the homeland defense market,on November 1, 2002. The acquisition is subject to additional purchaseprice not to exceed $2,700 which is contingent upon the financialperformance of Wolf Coach for the years ending December 31, 2004 and2005, and which will be accounted for as goodwill; |

|              |                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | 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 commonstock of Westwood Corporation (Westwood), a supplier of shipboard powercontrol, switchgear and power distribution systems to the United StatesNavy, Army, Air Force and Coast Guard, on November 13, 2002; |

|              |                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | all of the outstanding commonstock of Wescam Inc. (Wescam), a designer and manufacturer of systemsfor defense 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 |

F-18

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

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

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | allof the outstanding common stock of Ship Analytics, Inc (ShipAnalytics), a producer of crisis management software, providing commandand control for homeland security applications, on December 19, 2002.Ship Analytics also designs, manufactures and operates real-timesimulation systems for critical shipboard operations for commercialmaritime and naval customers. The acquisition is subject to additionalpurchase price not to exceed $9,000 which is contingent upon thefinancial performance of Ship Analytics for the years ending December31, 2004 and 2005, and which will be accounted for as goodwill. |

Based on the final purchase price allocations, the goodwillrecognized for the acquisitions of Electron Devices, Ruggedized Command& Control, Wolf Coach, IMC, Westwood, Wescam and Ship Analytics was$237,946, of which $40,606 is expected to be deductible for income taxpurposes. Goodwill of $225,668 was assigned to the Specialized Productssegment and $12,278 was assigned to the Training, Simulation &Support Services segment.

KDI, EER, Spar Aerospace, Emergent,BT Fuze and SY Technology.    During 2001, in separatetransactions, the Company acquired six businesses for an aggregatepurchase price of $501,694 in cash plus acquisition costs. Theaggregate purchase price includes net purchase price increases of$9,551 based on closing date balance sheets of the acquired businessesand $9,800 of additional purchase price based on the financialperformance of the acquired businesses for the years ended December 31,2002 and 2003. The Companyacquired:

|              |                                                                                   |
|--------------|-----------------------------------------------------------------------------------|
| •  | all of theoutstanding common stock of KDI Precision Products (KDI) on May 4,2001; |

|              |                                                                         |
|--------------|-------------------------------------------------------------------------|
| •  | all of theoutstanding common stock of EER Systems (EER) on May 31,2001; |

|              |                                                                                                                                    |
|--------------|------------------------------------------------------------------------------------------------------------------------------------|
| •  | all of the outstandingcommon stock of Spar Aerospace Limited (Spar), a leading provider ofhigh-end aviation product modernization; |

|              |                                                                                                                                                                                                                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | all of the outstanding commonstock of Emergent Government Services Group (Emergent), a provider ofengineering and information services to the U.S. Air Force, Army, Navyand intelligence agencies, on November 30, 2001. Following theacquisition, the Company changed Emergent's name to L-3Communications Analytics (L-3 Analytics); |

|              |                                                                                                                                                                                                                                            |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the net assets of BulovaTechnologies, a producer of military fuzes that prevent the inadvertentfiring and detonation of weapons during handling, on December 19, 2001.Bulova Technologies was later renamed BT Fuze Products (BT Fuze);and |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | the net assets of SYTechnology, Inc. (SY), a provider of air warfare simulation services,on December 31, 2001. |

Additionally, during the years endedDecember 31, 2003, 2002 and 2001, the Company purchased otherbusinesses, which individually and in the aggregate were not materialto the Company's consolidated results of operations, financialposition or cash flows in the year acquired.

Substantially allof the acquisitions were initially financed with cash on hand orborrowings under the Company's bank credit facilities.

Allof the Company's acquisitions have been accounted for as purchasebusiness combinations and are included in the Company's resultsof operations from their respective effective dates. The assets andliabilities recorded in connection with the purchase price allocationsfor the acquisitions of Avionics Systems, Aeromet, Klein, MAS, Vertexand certain defense and aerospace assets of IPICOM are based uponpreliminary estimates of fair values for contracts in process,inventories, estimated costs in excess of billings to completecontracts in process, identifiable intangibles, plant and equipment,litigation liabilities and deferred income taxes. Actual adjustmentswill be based on the final purchase prices and final appraisals andother analyses of fair values which are in process. The Company expectsto complete the 

F-19

----

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

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

purchase price allocations in 2004. 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 2003 and the related financing transactions occurredon January 1, 2003, the unaudited pro forma sales, net income anddiluted earnings per share would have been approximately $5,817,700,$298,100 and $2.90, respectively, for the year ended December 31,2003.

Assuming the business acquisitions the Company completedduring 2003 and 2002 and the related financing transactions occurred onJanuary 1, 2002, the unaudited pro forma sales, net income and dilutedearnings per share would have been approximately $5,474,500, $174,100and $1.77, respectively, for the year ended December 31, 2002.

Assuming the business acquisitions the Company completed during 2002and the related financing transactions occurred on January 1, 2002, theunaudited pro forma sales, net income and diluted earnings per sharewould have been approximately $4,699,100, $167,800 and $1.71,respectively, for the year ended December 31, 2002.

Assuming thebusiness acquisitions the Company completed during 2002 and 2001 andthe related financing transactions occurred on January 1, 2001, theunaudited pro forma sales, net income and diluted earnings per sharewould have been approximately $4,139,600, $113,900 and $1.21,respectively, for the year ended December 31, 2001.

The pro formaresults disclosed in the preceding paragraphs are based on variousassumptions and are not necessarily indicative of the result ofoperations that would have occurred had the Company completed theacquisitions and the related financing transactions on January 1, 2001,January 1, 2002 and January 1, 2003.

Divestiture and OtherTransactions

On May 31, 2001, the Company sold a30% interest in Aviation Communications and Surveillance SystemsLLC (ACSS) which comprised the Company's TCAS business to ThalesAvionics, a wholly owned subsidiary of Thales (formerly Thomson-CSF),for $75,206 of cash. L-3 continues to consolidate the financialstatements of ACSS.

Interest and other income for the year endedDecember 31, 2003 includes net losses of $1,292 from equity-methodinvestments and a loss of $2,180 in connection with the sale of thecommercial broadband test equipment assets of the Celerity business.The net proceeds from the sale were $8,795 and are included in Proceedsfrom Sale of Businesses in investing activities on the Statement ofCash Flows. Interest and other income for the year ended December 31,2001 includes a gain of $6,966 from the sale of a 30% interestin ACSS which was largely offset by a $6,341 write-down in the carryingamount of an investment in common stock. Also included in interest andother income for 2001 is a charge of $515 to account for the increase,in accordance with SFAS No. 133, in the fair value assigned to theembedded derivatives in L-3 Holdings' $420,000 4% SeniorSubordinated Contingent Debt Securities due 2011 sold in the fourthquarter of 2001, and a loss of $751 from an equity methodinvestment.

In March 2001, the Company settled certain itemswith a third party provider related to an existing services agreement.In connection with the settlement, L-3 received a net cash payment of$14,200. The payment represents a credit for fees being paid over theterm of the services agreement and incremental costs incurred by theCompany over the same period arising from performance deficienciesunder the services agreement. These incremental costs includeadditional operating costs for material management, vendor replacement,rework, warranty, manufacturing and engineering support, andadministrative activities. The $14,200 cash receipt was recorded as areduction of costs and expenses in 2001.

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, |
|                                                     |  | 2003        |           | 2002    |
| Billedreceivables, less allowances of $25,221 and$12,801 |  | $           | 637,254   |    |  | $      | 568,382   |    |
| Unbilledcontractreceivables                              |  |        | 676,604   |    |  |   | 490,678   |    |
| Less:unliquidated progresspayments                       |  |        | (193,672  | )  |  |   | (171,457  | )  |
| Unbilledcontract receivables,net                         |  |        | 482,932   |    |  |   | 319,221   |    |
| Inventoriedcontract costs,gross                          |  |        | 368,342   |    |  |   | 320,043   |    |
| Less:unliquidated progresspayments                       |  |        | (17,624   | )  |  |   | (13,507   | )  |
| Inventoriedcontract costs,net                            |  |        | 350,718   |    |  |   | 306,536   |    |
| Inventoriesat lower of cost ormarket                     |  |        | 144,444   |    |  |   | 123,854   |    |
| Totalcontracts inprocess                                 |  | $           | 1,615,348 |    |  | $      | 1,317,993 |    |
|                                                          |

TheCompany believes that approximately 84% of the unbilled contractreceivables at December 31, 2003 will be billed and collected withinone year.

The table below presents a summary of SG&A, IRADand B&P costs included in inventoried contract costs and thechanges to them, including amounts used in the determination of cost ofsales for "Contracts, primarily U.S.Government." The cost data in the tables below do 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 expensed asincurred.

|                                                            |  |                       |          |         |  |        |          |         |  |        |          |         |  |  |
|------------------------------------------------------------|--|-----------------------|----------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                                       |  | YearEnded December31, |
|                                                       |  | 2003                  |          | 2002    |  | 2001   |
| Balancein inventoried contract costs at beginning ofperiod |  | $                     | 52,253   |    |  | $      | 19,970   |    |  | $      | 24,396   |    |
| Add:Acquired inventoried contractcosts                     |  |                  | –  |    |  |   | 34,417   |    |  |   | 1,575    |    |
|   Incurredcosts(1)                               |  |                  | 496,461  |    |  |   | 429,386  |    |  |   | 298,317  |    |
| Less:Amounts included in cost of sales                     |  |                  | (509,314 | )  |  |   | (431,520 | )  |  |   | (304,318 | )  |
| Balancein inventoried contract costs at end ofperiod       |  | $                     | 39,400   |    |  | $      | 52,253   |    |  | $      | 19,970   |    |
|                                                            |

|  |
|--|
|  |  |
|  |

|           |                                                                                                                                                   |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  | Incurredcosts include IRAD and B&P costs of $135,761, $125,108, and $81,019for the years ended December 31, 2003, 2002 and 2001,respectively. |

F-21

----

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

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

5.    Goodwill and OtherIntangible Assets

Effective January 1, 2002, the Company ceasedrecording goodwill amortization expense and began testing goodwill forimpairment based on estimated fair values at the beginning of the yearusing a discounted cash flows valuation. Based on the estimated fairvalues of the Company's reporting units as of January 1, 2002,the goodwill for certain space and broadband commercial communicationsbusinesses included in the Specialized Products segment was impaired.In the first quarter of 2002, the Company completed its valuation ofthe assets and liabilities for these businesses and has recorded animpairment charge of $24,370, net of a $6,428 income tax benefit. Theimpairment charge was recorded as a cumulative effect of a change inaccounting principle effective January 1, 2002, in accordance with theadoption provisions of SFAS No. 142.

The table below presentsnet income and basic and diluted EPS for the year ended December 31,2003 and 2002 compared with those amounts for the same period in 2001,adjusted to exclude goodwill amortization, net of income taxes for2001.

|                                                                            |  |                       |         |        |  |        |         |        |  |        |         |        |  |  |
|----------------------------------------------------------------------------|--|-----------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                       |  | Yearended December31, |
|                                                                       |  | 2003                  |         | 2002   |  | 2001   |
| Reportedincome before cumulative effect of a change in accountingprinciple |  | $                     | 277,640 |   |  | $      | 202,467 |   |  | $      | 115,458 |   |
| Add:Goodwill amortization, net of income taxes and minorityinterest        |  |                  | — |   |  |   | — |   |  |   | 33,899  |   |
| Adjustedincome before cumulative effect of a change in accountingprinciple |  | $                     | 277,640 |   |  | $      | 202,467 |   |  | $      | 149,357 |   |
| Adjustednetincome                                                          |  | $                     | 277,640 |   |  | $      | 178,097 |   |  | $      | 149,357 |   |
| BasicEPS:                                                                  |  |
| Reported before cumulative effect of a changein accountingprinciple        |  | $                     | 2.89    |   |  | $      | 2.33    |   |  | $      | 1.54    |   |
| Goodwillamortization, net of income tax and minorityinterest               |  |                  | — |   |  |   | — |   |  |   | 0.45    |   |
| Adjustedbefore cumulative effect of a change in accountingprinciple        |  | $                     | 2.89    |   |  | $      | 2.33    |   |  | $      | 1.99    |   |
| Adjustednetincome                                                          |  | $                     | 2.89    |   |  | $      | 2.05    |   |  | $      | 1.99    |   |
| DilutedEPS:                                                                |  |
| Reported before cumulative effect of a changein accountingprinciple        |  | $                     | 2.71    |   |  | $      | 2.18    |   |  | $      | 1.47    |   |
| Goodwillamortization, net of income tax and minorityinterest               |  |                  | — |   |  |   | — |   |  |   | 0.40    |   |
| Adjustedbefore cumulative effect of a change in accountingprinciple        |  | $                     | 2.71    |   |  | $      | 2.18    |   |  | $      | 1.87    |   |
| Adjustednetincome                                                          |  | $                     | 2.71    |   |  | $      | 1.93    |   |  | $      | 1.87    |   |
|                                                                            |

F-22

----

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

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

Goodwill.    The tablebelow presents the changes in goodwill allocated to the reportablesegments during the year ended December 31, 2003. During 2003, theCompany reclassified the goodwill from the Microdyne acquiredbusinesses among its reportable segments to the reportable segmentswhere the goodwill is tested for impairment.

|                             |  |                               |         |                                           |  |                                               |         |                     |  |                    |           |        |  |        |           |         |  |        |           |         |  |  |
|-----------------------------|--|-------------------------------|---------|-------------------------------------------|--|-----------------------------------------------|---------|---------------------|--|--------------------|-----------|--------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                        |  | SecureCommunications& ISR |         | Training Simulation & SupportServices |  | Aviation Products & AircraftModernization |         | SpecializedProducts |  | Consolidated Total |
| **BalanceJanuary 1,2003**   |  | $                             | 722,135 |                                      |  | $                                             | 445,427 |                |  | $                  | 620,289   |   |  | $      | 1,006,697 |    |  | $      | 2,794,548 |    |
| Acquisitions                |  |                          | 50,724  |                                      |  |                                          | 12,594  |                |  |               | 730,529   |   |  |   | 68,216    |    |  |   | 862,063   |    |
| Reclassifications           |  |                          | (45,979 | )                                    |  |                                          | 22,869  |                |  |               | —   |   |  |   | 23,110    |    |  |   | —   |    |
| Saleofbusinesses            |  |                          | — |                                      |  |                                          | — |                |  |               | —   |   |  |   | (4,175    | )  |  |   | (4,175    | )  |
| **BalanceDecember 31,2003** |  | $                             | 726,880 |                                      |  | $                                             | 480,890 |                |  | $                  | 1,350,818 |   |  | $      | 1,093,848 |    |  | $      | 3,652,436 |    |
|                             |

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, 2003     |
|                                                           |  | GrossCarrying Amount |         | Accumulated Amortization |  | 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 |   |
|                                                                |

|                                                                |  |                      |        |                          |  |                   |       |        |  |        |        |        |  |  |
|----------------------------------------------------------------|--|----------------------|--------|--------------------------|--|-------------------|-------|--------|--|--------|--------|--------|--|--|
|                                                           |  | December31, 2002     |
|                                                           |  | GrossCarrying Amount |        | Accumulated Amortization |  | NetCarryingAmount |
| Identifiableintangible assets that are subject toamortization: |  |
| Customerrelationships                                          |  | $                    | 80,826 |                     |  | $                 | 600   |   |  | $      | 80,226 |   |
| Technology                                                     |  |                 | 9,825  |                     |  |              | 1,844 |   |  |   | 7,981  |   |
| Non-competeagreements                                          |  |                 | 2,000  |                     |  |              | 60    |   |  |   | 1,940  |   |
| Total                                                          |  | $                    | 92,651 |                     |  | $                 | 2,504 |   |  | $      | 90,147 |   |
|                                                                |

TheCompany recorded amortization expense for its identifiable intangibleassets of $6,610 for 2003 and $1,337 for 2002. Based on gross carryingamounts at December 31, 2003, the Company's estimate foridentifiable intangible assets amortization expense for the yearsending December  31, 2004 through 2008 are presented in the tablebelow.

F-23

----

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

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

|                        |  |                              |        |        |  |  |
|------------------------|--|------------------------------|--------|--------|--|--|
| YearEnding December31, |  | EstimatedAmortizationExpense |
| 2004                   |  | $                            | 17,007 |   |
| 2005                   |  | $                            | 18,678 |   |
| 2006                   |  | $                            | 17,543 |   |
| 2007                   |  | $                            | 16,647 |   |
| 2008                   |  | $                            | 14,247 |   |
|                        |

6.    OtherCurrent Liabilities and Other Liabilities

The components ofother current liabilities are presented in the tablebelow.

|                                                                                      |  |             |         |        |  |        |         |        |  |  |
|--------------------------------------------------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                                                                 |  | December31, |
|                                                                                 |  | 2003        |         | 2002   |
| Accruedproduct warrantycosts                                                         |  | $           | 41,184  |   |  | $      | 56,487  |   |
| Billings andamounts in excess of costs incurred on contracts inprocess               |  |        | 71,235  |   |  |   | 45,947  |   |
| Estimated costin excess of estimated contract value to complete contracts in process |  |        | 52,063  |   |  |   | 25,754  |   |
| Aggregate purchaseprice payable for acquiredbusinesses                               |  |        | 28,331  |   |  |   | 13,329  |   |
| Notespayable and capital leaseobligations                                            |  |        | 9,312   |   |  |   | 3,380   |   |
| Deferredrevenues                                                                     |  |        | 5,826   |   |  |   | 3,581   |   |
| Current portionof net deferred gains from terminated interest rate swapagreements    |  |        | 4,246   |   |  |   | 2,114   |   |
| Other                                                                                |  |        | 49,762  |   |  |   | 32,824  |   |
| Totalother currentliabilities                                                        |  | $           | 261,959 |   |  | $      | 183,416 |   |
|                                                                                      |

Thetable below presents the changes in the Company's accrued productwarranty costs for the year ended December 31, 2003.

|                                                               |  |        |         |         |  |  |  |  |  |  |
|---------------------------------------------------------------|--|--------|---------|---------|--|--|--|--|--|--|
| BalanceJanuary 1, 2003                                        |  | $      | 56,487  |    |  |
| Acquisitions duringthis period                                |  |   | 2,886   |    |  |
| Accruals for productwarranties issued during theperiod        |  |   | 21,092  |    |  |
| Accruals for productwarranties existing before January 1,2003 |  |   | 8,590   |    |  |
| Settlements made during theperiod                             |  |   | (47,871 | )  |  |
| BalanceDecember 31,2003                                       |  | $      | 41,184  |    |  |
|                                                               |

Thecomponents of other liabilities are presented in the tablebelow.

|                                                                                       |  |             |         |        |  |        |        |        |  |  |  |  |  |  |
|---------------------------------------------------------------------------------------|--|-------------|---------|--------|--|--------|--------|--------|--|--|--|--|--|--|
|                                                                                  |  | December31, |         |
|                                                                                  |  | 2003        |         | 2002   |  |
| Non-currentportion of net deferred gains from terminated interest rate swapagreements |  | $           | 29,224  |   |  | $      | 14,026 |   |  |
| Accruedworkerscompensation                                                            |  |        | 14,549  |   |  |   | 8,615  |   |  |
| Notespayable and capital leaseobligations                                             |  |        | 1,485   |   |  |   | 8,631  |   |  |
| Othernon-currentliabilities                                                           |  |        | 56,393  |   |  |   | 34,372 |   |  |
| Totalotherliabilities                                                                 |  | $           | 101,651 |   |  | $      | 65,644 |   |  |
|                                                                                       |

F-24

----

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

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

7.    Property, Plant andEquipment

|                                               |  |             |          |         |  |        |          |         |  |  |  |  |  |  |
|-----------------------------------------------|--|-------------|----------|---------|--|--------|----------|---------|--|--|--|--|--|--|
|                                          |  | December31, |          |
|                                          |  | 2003        |          | 2002    |  |
| Land                                          |  | $           | 35,668   |    |  | $      | 33,876   |    |  |
| Buildingsandimprovements                      |  |        | 147,860  |    |  |   | 121,830  |    |  |
| Machinery,equipment, furniture andfixtures    |  |        | 417,978  |    |  |   | 372,602  |    |  |
| Leaseholdimprovements                         |  |        | 138,654  |    |  |   | 121,814  |    |  |
| Grossproperty, plant andequipment             |  |        | 740,160  |    |  |   | 650,122  |    |  |
| Less:accumulated depreciation andamortization |  |        | (220,411 | )  |  |   | (191,483 | )  |  |
| Property,plant and equipment,net              |  | $           | 519,749  |    |  | $      | 458,639  |    |  |
|                                               |

Depreciationexpense for property, plant and equipment was $77,340 for 2003, $66,230for 2002, and $40,362 for 2001.

8.    Debt

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

|                                                                             |  |             |           |         |  |        |           |         |  |  |  |  |  |  |
|-----------------------------------------------------------------------------|--|-------------|-----------|---------|--|--------|-----------|---------|--|--|--|--|--|--|
|                                                                        |  | December31, |           |
|                                                                        |  | 2003        |           | 2002    |  |
| L-3Communications:                                                          |  |
| Borrowings under Senior CreditFacilities                                    |  | $           | —   |    |  | $      | —   |    |  |
| 81⁄2% SeniorSubordinated Notes due2008                                 |  |        | —   |    |  |   | 180,000   |    |  |
| 8%Senior Subordinated Notes due2008                                         |  |        | 200,000   |    |  |   | 200,000   |    |  |
| 7 5/8%Senior Subordinated Notes due2012                                     |  |        | 750,000   |    |  |   | 750,000   |    |  |
| 6 1/8%Senior Subordinated Notes due2013                                     |  |        | 400,000   |    |  |   | —   |    |  |
| 6 1/8%Senior Subordinated Notes due2014                                     |  |        | 400,000   |    |  |   | —   |    |  |
|                                                                        |  |        | 1,750,000 |    |  |   | 1,130,000 |    |  |
| L-3Holdings:                                                                |  |
| 51⁄4% ConvertibleSenior Subordinated Notes due2009                     |  |        | 298,370   |    |  |   | 300,000   |    |  |
| 4%Senior Subordinated Convertible Contingent Debt Securities due2011(CODES) |  |        | 420,000   |    |  |   | 420,000   |    |  |
| Principalamount of long-termdebt                                            |  |        | 2,468,370 |    |  |   | 1,850,000 |    |  |
| Less:Unamortizeddiscounts                                                   |  |        | (11,070   | )  |  |   | (2,248    | )  |  |
| Carryingamount of long-termdebt                                             |  | $           | 2,457,300 |    |  | $      | 1,847,752 |    |  |
|                                                                             |

L-3Communications

At December 31, 2003, the Company's SeniorCredit Facilities were comprised of a $500,000 five-year revolvingcredit facility maturing on May 15, 2006 and a $250,000 364-dayrevolving facility. On February 24, 2004, the maturity date of the364-day revolving credit facility was extended to February 22,2005.

At December 31, 2003, available borrowings under theCompany's Senior Credit Facilities were $665,933, afterreductions for outstanding letters of credit of $84,067. There were nooutstanding borrowings under the Senior Credit Facilities at December31, 2003.

Borrowings under the Senior Credit Facilities bearinterest, at L-3 Communications' option, at either: (i) a"base rate" equal to the higher of0.50% per annum above the latest federal funds rate and the Bank

F-25

----

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

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

of America "referencerate" (as defined) plus a spread ranging from 2.00%to 0.50% per annum depending on L-3 Communications' DebtRatio at the time of determination or (ii) a "LIBORrate" (as defined) plus a spread ranging from 3.00%to 1.50% per annum depending on L-3 Communications' DebtRatio at the time of determination. The Debt Ratio is defined as theratio of Consolidated Total Debt to Consolidated EBITDA. ConsolidatedTotal Debt is equal to outstanding debt plus capitalized leaseobligations and the outstanding amount of permitted convertiblesecurities of L-3 Holdings guaranteed by L-3 Communications or itssubsidiaries minus the lesser of actual unrestricted cash or $50,000.Consolidated EBITDA is equal to consolidated net income (excluding (i)impairment losses incurred on goodwill and identifiable intangibleassets or debt and equity investments, (ii) gains or losses incurred onthe retirement of debt, (iii) extraordinary gains or losses, (iv) gainsor losses in connection with asset dispositions, and (v) gains orlosses from discontinued operations) for the most recent four quarters,plus consolidated interest expense, income taxes, depreciation andamortization minus depreciation and amortization related to minorityinterest. At December 31, 2003, there were no borrowings outstandingunder the Senior Credit Facilities. L-3 Communications pays commitmentfees calculated on the daily amounts of the available unusedcommitments under the Senior Credit Facilities at a rate ranging from0.50% to 0.30% per annum, depending on L-3Communications' Debt Ratio in effect at the time ofdetermination. L-3 Communications pays letter of credit fees calculatedat a rate ranging from 1.50% to 0.75% per annum forperformance letters of credit and 3.00% to 1.50% for allother letters of credit, in each case depending on L-3Communications' Debt Ratio at the time of determination.

On December 22, 2003, L-3 Communications sold $400,000 of6 1/8% Senior Subordinated Notes due January 15,2014 (December 2003 Notes) at a discount of $7,372. The discount wasrecorded as a reduction to the principal amount of the notes and willbe amortized as interest expense over the term of the notes. Theeffective interest rate of the December 2003 Notes is 6.31% perannum. Interest is payable semi-annually on January 15 and July 15 ofeach year commencing July 15, 2004. The net cash proceeds from thisoffering amounted to approximately $391,000 after deducting thediscounts, commissions and other offering expenses. The net proceedsfrom this offering were used to repay $275,000 of borrowingsoutstanding under the Senior Credit Facilities and to increase cash andcash equivalents. The December 2003 Notes are general unsecuredobligations of L-3 Communications and are subordinated in right ofpayment to all existing and future senior debt of L-3 Communications.On or after January 15, 2009, the December 2003 Notes are subject toredemption at any time, at the option of L-3 Communications, in wholeor in part, at redemption prices (plus accrued and unpaid interest)starting at 103.063% of the principal amount (plus accrued andunpaid interest) during the 12-month period beginning January 15, 2009and declining annually to 100% of principal (plus accrued andunpaid interest) on January 15, 2012 and thereafter. Prior to January15, 2007, L-3 Communications may redeem up to 35% of theDecember 2003 Notes with the proceeds of certain equity offerings at aredemption price of 106.125% of the principal amount (plusaccrued and unpaid interest).

On May 21, 2003, L-3Communications sold $400,000 of 6 1/8% SeniorSubordinated Notes due July 15, 2013 (May 2003 Notes) at a discount of$1,840. The discount was recorded as a reduction to the principalamount of the notes and will be amortized as interest expense over theterm of the notes. The effective interest rate of the May 2003 Notes is6.17% per annum. Interest is payable semi-annually on January 15and July 15 of each year, commencing July 15, 2003. The net cashproceeds from this offering amounted to approximately $391,100 afterdeducting discounts, commissions and other offering expenses. The netproceeds from this offering were used to redeem the81⁄2% Senior Subordinated Notes due 2008 and toincrease cash and cash equivalents. The May 2003 Notes are generalunsecured obligations of L-3 Communications and are subordinated inright of payment to all existing and future senior debt of L-3Communications. On or after July 15, 2008, the May 2003 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 103.063% of the principal amount (plusaccrued and unpaid interest) during the 

F-26

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

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

12-month period beginning July 15, 2008 anddeclining annually to 100% of principal (plus accrued and unpaidinterest) on July 15, 2011 and thereafter. Prior to July 15, 2006, L-3Communications may redeem up to 35% of the May 2003 Notes withthe proceeds of certain equity offerings at a redemption price of106.125% of the principal amount (plus accrued and unpaidinterest).

On May 21, 2003, L-3 Communications initiated a fullredemption of all its outstanding $180,000 aggregate principal amountof 81⁄2% Senior Subordinated Notes due 2008(May 1998 Notes). On June 20, 2003, L-3 Communications purchased andpaid cash for all the outstanding May 1998 Notes, including accruedinterest. During 2003, L-3 Communications recorded a pre-tax charge of$11,225, comprising of premiums and other transaction costs of $7,795and $3,430 to write-off the unamortized balance of debt issue costs andthe deferred loss on the terminated interest rate swap agreementsrelated to the May 1998 Notes.

In June of 2002, L-3Communications sold $750,000 of 7 5/8% SeniorSubordinated Notes due June 15, 2012 (June 2002 Notes) with interestpayable semi-annually on June 15 and December 15 of each yearcommencing December 15, 2002. 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 bridge loan facility, (ii) repaythe indebtedness 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. During2002, the Company recorded a pre-tax charge of $16,187 ($9,858after-tax), comprised of premiums, fees and other transaction costs of$12,469 and $3,718 to write-off the remaining balance of unamortizeddebt issue costs relating to these notes.

In December of 1998,L-3 Communications sold $200,000 of 8% Senior Subordinated Notesdue August 1, 2008 (December 1998 Notes) with interest payablesemi-annually on February 1 and August 1 of each year commencingFebruary 1, 1999. The December 1998 Notes are general unsecuredobligations of L-3 Communications and are subordinated in right ofpayment to all existing and future senior debt of L-3 Communications.The December 1998 Notes are subject to redemption at any time, at theoption of L-3 Communications, in whole or in part, on or after August1, 2003 at redemption prices (plus accrued and unpaid interest)starting at 104% of principal (plus accrued and unpaid interest)during the 12-month period beginning August 1, 2003 and decliningannually to 100% of principal (plus accrued and unpaid interest)on August 1, 2006 and thereafter.

Depending on the interest rateenvironment the Company may enter into interest rate swap agreements toconvert the fixed interest rates on the Company's fixed rate debtobligations to variable interest rates or terminate any existinginterest rate swap agreements. At December 31, 2003, the Company doesnot have any interest rate swap agreements in place. The table belowpresents the 

F-27

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

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

Company's interest rate swap agreementsactivity through December 31,2003.

|               |  |                                                          |  |                |         |                              |  |                  |        |                                        |  |                        |  |        |        |                                             |  |                                              |        |         |  |        |        |        |  |        |       |         |  |        |         |        |  |  |  |  |  |  |
|---------------|--|----------------------------------------------------------|--|----------------|---------|------------------------------|--|------------------|--------|----------------------------------------|--|------------------------|--|--------|--------|---------------------------------------------|--|----------------------------------------------|--------|---------|--|--------|--------|--------|--|--------|-------|---------|--|--------|---------|--------|--|--|--|--|--|--|
|          |  |                                                     |  |           |         |                         |  |             |        | CashProceeds Received atTermination(2) |  | December 31,2003       |
|          |  |
| InceptionDate |  | Fixed Rate Debt Obligation                               |  | NotionalAmount |         | Average Variable RatePaid(1) |  | Termination Date |        | InterestExpense Reduction(3)           |  | Deferred Gain(Loss)(4) |  | Total  |        | CumulativeRecognized Deferred Gain(Loss)(5) |  | Balance of UnamortizedDeferred Gain(Loss)(6) |
| July2003      |  | $400,000 of 6 1/8% Senior Subordinated Notes due2013     |  | $              | 400,000 |                         |  |             | 2.1    | %                                 |  | September2003          |  | $      | 2,687  |                                        |  | $                                            | 8,017  |    |  | $      | 10,704 |   |  | $      | 205   |    |  | $      | 7,812   |   |
| March2003     |  | $750,000of 7 5/8 % Senior Subordinated Notes due2012     |  | $              | 200,000 |                         |  |             | 4.4    | %                                 |  | June2003               |  |   | 1,578  |                                        |  |                                         | 6,727  |    |  |   | 8,305  |   |  |   | 405   |    |  |   | 6,322   |   |
| January2003   |  | $750,000 of 7 5/8 % SeniorSubordinated Notes due2012     |  | $              | 200,000 |                         |  |             | 4.0    | %                                 |  | March2003              |  |   | 1,202  |                                        |  |                                         | 5,238  |    |  |   | 6,440  |   |  |   | 448   |    |  |   | 4,790   |   |
| June2002      |  | $750,000 of 7 5/8 % SeniorSubordinated Notes due2012     |  | $              | 200,000 |                         |  |             | 4.1    | %                                 |  | September2002          |  |   | 1,762  |                                        |  |                                         | 12,173 |    |  |   | 13,935 |   |  |   | 1,567 |    |  |   | 10,606  |   |
| November2001  |  | $180,000 of 81⁄2 % SeniorSubordinated Notes due2008 |  | $              | 180,000 |                         |  |             | 5.3    | %                                 |  | August2002             |  |   | 1,186  |                                        |  |                                         | (559   | )  |  |   | 627    |   |  |   | (559  | )  |  |   | — |   |
| July2001      |  | $200,000 of 8% Senior Subordinated Notes due2008         |  | $              | 200,000 |                         |  |             | 3.9    | %                                 |  | June2002               |  |   | 3,446  |                                        |  |                                         | 5,229  |    |  |   | 8,675  |   |  |   | 1,289 |    |  |   | 3,940   |   |
|          |  |                                                     |  |           |    |                         |  |             |   |                                   |  |                   |  | $      | 11,861 |                                        |  | $                                            | 36,825 |    |  | $      | 48,686 |   |  | $      | 3,355 |    |  | $      | 33,470  |   |
|               |

|  |
|--|
|  |  |
|  |

| (1) | Represents the average variable interest rate L-3 paidprior to the termination of the interest rate swap agreement. |
|-----|---------------------------------------------------------------------------------------------------------------------|

| (2) | Cash proceeds received attermination are included in cash from operating activities onL-3's statement of cash flows in the period received. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Represents interest savings earnedfor the period prior to the termination of the interest rate swapagreements. |
|-----|----------------------------------------------------------------------------------------------------------------|

| (4) | Representsthe future value of the interest rate swap agreements at terminationdate, which is being amortized over the remaining term of theunderlying debt instrument. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Represents the cumulative amountof deferred gain recognized as a reduction to interest expense throughDecember 31, 2003. |
|-----|--------------------------------------------------------------------------------------------------------------------------|

| (6) | Thecurrent portion of unamortized deferred gains at December 31, 2003,aggregating $4,246, is included in other current liabilities. Theremaining $29,224 is included in other liabilities. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

L-3Holdings

On December 22, 2003, L-3 Holdings announced a fullredemption of $300,000 of its 5.25% Convertible SeniorSubordinated Notes due 2009 (Convertible Notes), which expired onJanuary 9, 2004. At December 31, 2003, holders of approximately $1,630of the Convertible Notes had exercised their conversion rights andconverted such notes into 40,000 shares of L-3 Holdings common stock.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 $292,334 in January 2004 compared to December 31,2003.

In the fourth quarter of 2001, L-3 Holdings sold $420,000of 4% Senior Subordinated Convertible Contingent Debt Securities(CODES) due September 15, 2011. The net proceeds from this offeringamounted to approximately $407,200 after underwriting discounts andcommissions and other offering expenses. Interest is payablesemi-annually on March 15 and September 15 of each year commencingMarch 15, 2002. The CODES are convertible into L-3 Holdings'common stock at a conversion price of $53.813 per share (7,804,878shares) under any of the following circumstances: (i) during anyConversion Period (defined below) if the closing sales price of thecommon stock of L-3 Holdings is more than 120% of the conversionprice ($64.58) for at least 20 trading days in the 30 consecutivetrading-day period ending on the first day of the respective ConversionPeriod; (ii) during the five business day period following any 10consecutive trading-day period in which the average of the tradingprices for the CODES was less than 105% of the conversion value;(iii) if the credit ratings assigned to the CODES by eitherMoody's or Standard & Poor's are below certainspecified ratings, (iv) if they have been called for 

F-28

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

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

redemption by the Company, or (v) upon theoccurrence of certain specified corporate transactions. A ConversionPeriod is the period from and including the thirtieth trading day in afiscal quarter to, but not including, the thirtieth trading day of theimmediately following fiscal quarter. There are four Conversion Periodsin each fiscal year. The CODES are subject to redemption at any time atthe option of L-3 Holdings, in whole or in part, on or after October24, 2004 at redemption prices (plus accrued and unpaid interest —including contingent interest) starting at 102% of principal(plus accrued and unpaid interest — including contingentinterest) during the 12 month period beginning October 24, 2004 anddeclining annually to 100% of principal (plus accrued and unpaidinterest — including contingent interest) on September 15, 2006.The CODES are general unsecured obligations of L-3 Holdings and aresubordinated in right of payment to all existing and future senior debtof L-3.

Additionally, holders of the CODES have a right toreceive contingent interest payments, not to exceed a per annum rate of0.5% of the outstanding principal amount of the CODES, whichwill be paid on the CODES during any six-month period following asix-month period in which the average trading price of the CODESexceeds 120% of the principal amount of the CODES. Thecontingent interest payment provision was triggered for the periodbeginning September 15, 2002 to March 14, 2003 and resulted inadditional interest for that period of $840.

The contingentinterest payment provision as well as the ability of the holders of theCODES to exercise the conversion features as a result of changes in thecredit ratings assigned to the CODES have been accounted for asembedded derivatives. The initial aggregate fair values assigned to theembedded derivatives was $2,544, which was also recorded as a discountto the CODES. The carrying values assigned to the embedded derivativeswere recorded in other liabilities and are adjusted periodicallythrough other income (expense) for changes in their fair values.

Covenants

The Senior Credit Facilities, Senior SubordinatedNotes and CODES agreements contain financial and other restrictivecovenants that limit, among other things, the ability of the Company toborrow additional funds, dispose of assets, or pay cash dividends. TheCompany's most restrictive covenants are contained in the SeniorCredit Facilities, as amended. The covenants require that (i) theCompany's Debt Ratio be less than or equal to 4.25 for quartersending September 30, 2003 through June 30, 2004, 4.00 for quartersending September 30, 2004 through June 30, 2005 and 3.50 for quartersending September 30, 2005 and thereafter, (ii) the Company'sSenior Debt Ratio be less than or equal to 2.50 to 1.0 and (iii) theCompany's Interest Coverage Ratio be greater than or equal to3.00. The Senior Debt Ratio is defined as the ratio of ConsolidatedSenior Debt to Consolidated EBITDA. Consolidated Senior Debt is definedas Consolidated Total Debt other than subordinated debt. The InterestCoverage Ratio is equal to the ratio of Consolidated EBITDA toConsolidated Cash Interest Expense. Consolidated Cash Interest Expenseis equal to interest expense less the amortization of deferred debtissue costs included in interest expense. For purposes of calculatingthe financial covenants under the Senior Credit Facilities, the CODESare considered debt of L-3 Communications. The Senior Credit Facilitiesalso limit the payment of dividends by L-3 Communications to L-3Holdings except for payment of franchise taxes, fees to maintain L-3Holdings' legal existence, income taxes up to certain amounts,interest accrued on the CODES or to provide for operating costs of upto $1,000 annually. Under the covenant, L-3 Communications may also paypermitted dividends to L-3Holdings:

|              |                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------|
| •  | in an amount notto exceed $25,000 in any fiscal quarter, so long as no default or eventof default has occurred and is continuing; |

|              |                                                                                                                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | in an amount not to exceed$200,000 to permit L-3 Holdings to repurchase its common stock, so longas those dividends are paid with the net proceeds of additionalsubordinated indebtedness issued by L-3 Communications after January 1,2004. L-3 Holdings may repurchase its common |

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)

|        |                                                                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | stock in an amount not to exceed $200,000,whether from the proceeds of dividends from L-3 Communications or ofissuances of permitted convertible securities or capital stock of L-3Holdings; and |

|              |                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | in an amountnot to exceed $10,000 in any fiscal year to fund certain repurchases ofcommon stock of L-3 Holdings from beneficiaries of equity compensationplans of L-3 Communications, L-3 Holdings or their subsidiaries. L-3Holdings may make further payments of up to $2,000 from the proceeds ofissuances of its common stock to repurchase common stock held bymanagement. |

The Senior Credit Facilities contain cross defaultprovisions that are triggered when a payment default occurs or certainother defaults occur that would allow the acceleration of indebtedness,guarantee obligations or certain other agreements of L-3 Communicationsor its subsidiaries in an aggregate amount of at least $15,000 andthose defaults have not been cured after 10 days. The SeniorSubordinated Notes and CODES indentures contain cross accelerationprovisions that are triggered when holders of the indebtedness of L-3Holdings, L-3 Communications or their restricted subsidiaries (or thepayment of which is guaranteed by such entities) accelerate at least$10,000 in aggregate principal amount of those obligations.

Subordination and Guarantees

In connection with the SeniorCredit Facilities, the Company has granted the lenders a first prioritylien on the stock of L-3 Communications and substantially all of itsmaterial domestic subsidiaries. The Company is also required to grantthe lenders a first priority lien on up to 65% of the stock ofany material foreign subsidiary that is directly held by L-3Communications or its domestic subsidiaries. The borrowings under theSenior Credit Facilities are guaranteed by L-3 Holdings and bysubstantially all of the material domestic subsidiaries of L-3Communications on a senior basis. The payment of principal and premium,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 arejunior to the guarantees of the Senior Credit Facilities and rank paripassu with each other and the guarantees of the CODES. The CODES areunconditionally guaranteed, on an unsecured senior subordinated basis,jointly and severally, by L-3 Communications and substantially all ofits restricted subsidiaries other than its foreign subsidiaries. Theseguarantees rank junior to the guarantees of the Senior CreditFacilities and rank pari passu with each other and the guarantees ofthe Senior Subordinated Notes.

9.    FinancialInstruments

Fair Value of FinancialInstruments.    The Company's financial instruments consistprimarily of cash and cash equivalents, billed receivables, debtsecurities, 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 are stated at fairvalue, which is based on quoted market prices for investments which arereadily marketable securities, and estimated fair value for nonreadilymarketable securities which is generally equal to historical cost,except for those that have experienced other-than-temporaryimpairments. Adjustments to the fair value of investments, which areclassified as available-for-sale, are recorded, as an increase ordecrease in shareholders' equity and are included as a componentof accumulated other comprehensive income, except forother-than-temporary impairment losses, which are 

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)

included in income from continuingoperations. 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, 2003and 2002. 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 table below.

|                                                                      |  |                |           |                      |  |                |           |                      |  |        |           |         |  |        |           |         |  |  |
|----------------------------------------------------------------------|--|----------------|-----------|----------------------|--|----------------|-----------|----------------------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                 |  | December31,    |
|                                                                 |  | 2003           |           | 2002                 |
|                                                                 |  | CarryingAmount |           | Estimated Fair Value |  | CarryingAmount |           | Estimated Fair Value |
| Investmentsin equity securities accounted for using the equitymethod |  | $              | 15,780    |                 |  | $              | 15,780    |                 |  | $      | 8,481     |    |  | $      | 8,481     |    |
| Investmentsin equity securities accounted for using the costmethod   |  |           | 4,133     |                 |  |           | 4,133     |                 |  |   | 16,140    |    |  |   | 16,140    |    |
| Securitiesavailable-for-sale                                         |  |           | 100       |                 |  |           | 100       |                 |  |   | 100       |    |  |   | 100       |    |
| SeniorSubordinatedNotes                                              |  |           | 1,740,923 |                 |  |           | 1,775,375 |                 |  |   | 1,130,000 |    |  |   | 1,170,500 |    |
| ConvertibleNotes                                                     |  |           | 298,370   |                 |  |           | 375,946   |                 |  |   | 300,000   |    |  |   | 385,500   |    |
| CODES                                                                |  |           | 418,007   |                 |  |           | 460,950   |                 |  |   | 417,752   |    |  |   | 469,350   |    |
| Foreigncurrency forwardcontracts                                     |  |           | 1,153     |                 |  |           | 1,153     |                 |  |   | (454      | )  |  |   | (454      | )  |
| Embeddedderivatives                                                  |  |           | (2,666    | )               |  |           | (2,666    | )               |  |   | (3,087    | )  |  |   | (3,087    | )  |
|                                                                      |

InterestRate Risk Management.    The Company had previously entered intointerest rate swap agreements on certain of its Senior SubordinatedNotes to take advantage of variable interest rates, which were lowerthan the fixed rates on those notes. These swap agreements exchangedthe fixed interest rate for a variable interest rate on a notionalamount equal to either a portion or the entire principal amount of therelated notes, were denominated in U.S. dollars and had designatedmaturities which occurred on the interest payment dates of the relatedSenior Subordinated 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. Therewere no outstanding interest rate swap agreements at December 31, 2003and 2002.

Foreign Currency Exchange RiskManagement.    Some of the Company's U.S. and foreignoperations have contracts with customers which are denominated incurrencies other than the functional currencies of those operations. Tomitigate the risk associated with certain of these contractsdenominated in foreign currency, the Company has entered into foreigncurrency forward contracts. The Company's activities involvingforeign currency forward contracts are designed to hedge the foreigndenominated cash paid or received, primarily Euro, British Pound andU.S. dollar. The Company manages exposure to counterparty credit riskby entering into foreign currency forward contracts only with majorfinancial institutions that are expected to fully perform under theterms of such contracts. The notional amounts are used to measure thevolume of these contracts and do not represent exposure to foreigncurrency losses.

F-31

----

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

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

Information with respect to foreigncurrency forward contracts is presented in the table below.

|                                  |  |                |        |                |  |                |       |                   |  |   |       |        |  |   |      |         |  |  |
|----------------------------------|--|----------------|--------|----------------|--|----------------|-------|-------------------|--|---|-------|--------|--|---|------|---------|--|--|
|                             |  | December31,    |
|                             |  | 2003           |        | 2002           |
|                             |  | NotionalAmount |        | UnrealizedGain |  | NotionalAmount |       | Unrealized (Loss) |
| Foreigncurrency forwardcontracts |  | $              | 71,390 |           |  | $              | 1,153 |              |  | $ | 6,048 |   |  | $ | (454 | )  |
|                                  |

10.    L-3Holdings Common Stock

On January  26, 2004, L-3 Holdingsannounced that its Board of Directors had declared its first quarterlycash dividend of $0.10 per share, payable March  15, 2004, toshareholders of record at the close of business on February  17,2004. On February  17, 2004, L-3 Holdings had 105,227,879 sharesof common stock outstanding.

On June 28, 2002, L-3 Holdings sold14,000,000 shares of its common stock in a public offering for $56.60per share. Upon closing, L-3 Holdings received net proceeds afterdeducting discounts, commissions and other offering expenses of$766,780. The net proceeds from this sale, which were contributed toL-3 Communications, and the concurrent sale of senior subordinatednotes by L-3 Communications (See Note 8) were used to (i) repay$500,000 borrowed on March 8, 2002, under the Company's seniorsubordinated bridge loan facility, (ii) repay the indebtednessoutstanding under the Company's Senior Credit Facilities, (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 ESPP is not subject tothe Employment Retirement Income Security Act of 1974, as amended. TheCompany received $26,384, $17,478 and $4,861 of employee contributionsfor the ESPP in 2003, 2002 and 2001, respectively. These contributionswere recorded as a component of shareholders' equity in theconsolidated balance sheet. L-3 Holdings issued 603,599 shares in 2003and 352,054 shares in 2002 of its common stock to the trustee of theESPP. In January 2004, the Company issued 365,019 shares of L-3Holdings' common stock to the trustee of the ESPP relating tocontributions received during the period July 1, 2003 to December 31,2003.

On May 2, 2001, L-3 Holdings sold 13,800,000 shares ofcommon stock in a public offering for $40.00 per share. L-3 Holdingssold 9,150,000 shares and other selling stockholders, includingaffiliates of Lehman Brothers Inc., sold 4,650,000 secondary shares.Upon closing, L-3 Holdings received net proceeds after underwritingdiscounts and commissions and other offering expenses of $353,622. Thenet proceeds 

F-32

----

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

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

were contributed to L-3 Communications andwere used to repay borrowings under the Senior Credit Facilities, payfor the KDI and EER acquisitions and to increase cash and cashequivalents.

11.    Accumulated Other Comprehensive Loss

The changes in the Company's accumulated other comprehensivebalances for each of the three years ended December 31, 2003 arepresented in the tablebelow.

|                            |  |                                         |        |                                        |  |                                                |         |                                      |  |                                     |         |         |  |        |         |         |  |        |         |         |  |  |
|----------------------------|--|-----------------------------------------|--------|----------------------------------------|--|------------------------------------------------|---------|--------------------------------------|--|-------------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                       |  | Foreigncurrency translation adjustments |        | Unrealizedgains (losses) on securities |  | Unrealized gains(losses)on hedging instruments |         | Minimum pensionliability adjustments |  | Accumulated othercomprehensive loss |
| Balance at January 1,2001  |  | $                                       | (2,584 | )                                 |  | $                                              | (3,698  | )                               |  | $                                   | — |    |  | $      | (890    | )  |  | $      | (7,172  | )  |
| Periodchange               |  |                                    | (268   | )                                 |  |                                           | 3,452   |                                 |  |                                | (163    | )  |  |   | (19,519 | )  |  |   | (16,498 | )  |
| Balanceat December 31,2001 |  |                                    | (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 | )  |
|                            |

12.    L-3 Holdings Earnings Per Share

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

|                                                                                                                     |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                                |  | YearEnded December31, |
|                                                                                                                |  | 2003                  |         | 2002    |  | 2001   |
| Basic:                                                                                                              |  |
| Incomebefore cumulative effect of a change in accountingprinciple                                                   |  | $                     | 277,640 |    |  | $      | 202,467 |    |  | $      | 115,458 |    |
| Cumulativeeffect of a change in accounting principle, net of incometaxes                                            |  |                  | — |    |  |   | (24,370 | )  |  |   | — |    |
| Netincome                                                                                                           |  | $                     | 277,640 |    |  | $      | 178,097 |    |  | $      | 115,458 |    |
| Weightedaverage common sharesoutstanding                                                                            |  |                  | 96,022  |    |  |   | 86,943  |    |  |   | 74,880  |    |
| Basicearnings per share before cumulative effect of a change inaccountingprinciple                                  |  | $                     | 2.89    |    |  | $      | 2.33    |    |  | $      | 1.54    |    |
| Basicearnings pershare                                                                                              |  | $                     | 2.89    |    |  | $      | 2.05    |    |  | $      | 1.54    |    |
| Diluted:                                                                                                            |  |
| Incomebefore cumulative effect of a change in accountingprinciple                                                   |  | $                     | 277,640 |    |  | $      | 202,467 |    |  | $      | 115,458 |    |
| After-taxinterest expense savings on the assumed conversion of ConvertibleNotes                                     |  |                  | 9,549   |    |  |   | 10,316  |    |  |   | 10,502  |    |
| Incomebefore cumulative effect of a change in accounting principle, includingassumed conversion of ConvertibleNotes |  |                  | 287,189 |    |  |   | 212,783 |    |  |   | 125,960 |    |
| Cumulativeeffect of a change in accounting principle, net of incometaxes                                            |  |                  | — |    |  |   | (24,370 | )  |  |   | — |    |
| Net income, including assumedconversion of ConvertibleNotes                                                         |  | $                     | 287,189 |    |  | $      | 188,413 |    |  | $      | 125,960 |    |
| Commonand potential commonshares:                                                                                   |  |
| Weighted average commonsharesoutstanding                                                                            |  |                  | 96,022  |    |  |   | 86,943  |    |  |   | 74,880  |    |
| Assumedexercise of stockoptions                                                                                     |  |                  | 7,573   |    |  |   | 7,750   |    |  |   | 7,692   |    |
| Assumedpurchase of common shares fortreasury                                                                        |  |                  | (4,888  | )  |  |   | (4,642  | )  |  |   | (4,496  | )  |
|                                                                                                                     |

F-33

----

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

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

|                                                                                       |  |                       |         |        |  |        |        |        |  |        |        |        |  |  |
|---------------------------------------------------------------------------------------|--|-----------------------|---------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                                                                                  |  | YearEnded December31, |
|                                                                                  |  | 2003                  |         | 2002   |  | 2001   |
| Assumed conversion of ConvertibleNotes                                                |  |                  | 7,361   |   |  |   | 7,362  |   |  |   | 7,362  |   |
| Commonand potential commonshares                                                      |  |                  | 106,068 |   |  |   | 97,413 |   |  |   | 85,438 |   |
| Dilutedearnings per share before cumulative effect of a change in accountingprinciple |  | $                     | 2.71    |   |  | $      | 2.18   |   |  | $      | 1.47   |   |
| Dilutedearnings pershare                                                              |  | $                     | 2.71    |   |  | $      | 1.93   |   |  | $      | 1.47   |   |
|                                                                                       |

The7,804,878 shares of L-3 Holdings' common stock that are issuableupon conversion of the $420,000 of 4% Senior SubordinatedConvertible Contingent Debt Securities (CODES) were not included in thecomputation of diluted EPS for the years ended December 31, 2003 and2002 because the conditions required for them to become convertiblewere not satisfied.

F-34

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—

(Dollars in thousands, exceptper share data)

13.    Income Taxes

Income before income taxes and cumulative effect of a change inaccounting principle is summarized in the tablebelow.

|                                                                                   |  |                       |         |        |  |        |         |        |  |        |         |        |  |  |  |  |  |  |
|-----------------------------------------------------------------------------------|--|-----------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|--|--|--|--|
|                                                                              |  | YearEnded December31, |         |
|                                                                              |  | 2003                  |         | 2002   |  | 2001   |         |
| Domestic                                                                          |  | $                     | 404,340 |   |  | $      | 295,405 |   |  | $      | 179,498 |   |  |
| Foreign                                                                           |  |                  | 29,473  |   |  |   | 18,618  |   |  |   | 6,724   |   |  |
| Incomebefore income taxes and cumulative effect of a change inaccountingprinciple |  | $                     | 433,813 |   |  | $      | 314,023 |   |  | $      | 186,222 |   |  |
|                                                                                   |

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

|                                        |  |                       |         |         |  |        |         |        |  |        |        |        |  |  |
|----------------------------------------|--|-----------------------|---------|---------|--|--------|---------|--------|--|--------|--------|--------|--|--|
|                                   |  | Year EndedDecember31, |
|                                   |  | 2003                  |         | 2002    |  | 2001   |
| Currentincome taxprovision:            |  |                  |    |    |  |   |    |   |  |   |   |   |
| Federal                                |  | $                     | 36,251  |    |  | $      | 26,759  |   |  | $      | 14,727 |   |
| Stateandlocal                          |  |                  | 11,966  |    |  |   | 1,254   |   |  |   | 1,253  |   |
| Foreign                                |  |                  | 13,209  |    |  |   | 4,451   |   |  |   | 2,146  |   |
| Subtotal                               |  | $                     | 61,426  |    |  | $      | 32,464  |   |  | $      | 18,126 |   |
| Deferredincome tax provision(benefit): |  |                  |    |    |  |   |    |   |  |   |   |   |
| Federal                                |  |                  | 87,343  |    |  |   | 63,593  |   |  |   | 43,333 |   |
| Stateandlocal                          |  |                  | 9,301   |    |  |   | 11,568  |   |  |   | 8,673  |   |
| Foreign                                |  |                  | (1,897  | )  |  |   | 3,931   |   |  |   | 632    |   |
| Subtotal                               |  |                  | 94,747  |    |  |   | 79,092  |   |  |   | 52,638 |   |
| Totalprovision for incometaxes         |  | $                     | 156,173 |    |  | $      | 111,556 |   |  | $      | 70,764 |   |
|                                        |

Areconciliation of the statutory federal income tax rate to theeffective income tax rate of the Company is presented in the tablebelow.

|                                                                        |  |                        |         |         |  |        |         |         |  |        |      |         |  |  |
|------------------------------------------------------------------------|--|------------------------|---------|---------|--|--------|---------|---------|--|--------|------|---------|--|--|
|                                                                   |  | Year Ended December31, |
|                                                                   |  | 2003                   |         | 2002    |  | 2001   |
| Statutoryfederal income taxrate                                        |  |                   | 35.0    | %  |  |   | 35.0    | %  |  |   | 35.0 | %  |
| Stateand local income taxes, net of federal income taxbenefit          |  |                   | 3.4     |    |  |   | 3.8     |    |  |   | 5.3  |    |
| Foreignincometaxes                                                     |  |                   | 0.7     |    |  |   | 0.2     |    |  |   | 0.6  |    |
| Foreignsales corporation and extraterritorial income exclusionbenefits |  |                   | (1.5    | )  |  |   | (1.9    | )  |  |   | (3.6 | )  |
| Nondeductiblegoodwill amortization and otherexpenses                   |  |                   | — |    |  |   | — |    |  |   | 4.8  |    |
| Researchand experimentation and other taxcredits                       |  |                   | (1.9    | )  |  |   | (2.1    | )  |  |   | (5.0 | )  |
| Other,net                                                              |  |                   | 0.3     |    |  |   | 0.5     |    |  |   | 0.9  |    |
| Effectiveincome taxrate                                                |  |                   | 36.0    | %  |  |   | 35.5    | %  |  |   | 38.0 | %  |
|                                                                        |

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 

F-35

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

employees, which were credited directly toshareholders' equity of $8,457 for 2003, $13,303 for 2002, and$11,939 for 2001. These tax benefits reduced current income taxespayable.

The significant components of the Company's netdeferred tax assets and liabilities are presented in the tablebelow.

|                                          |  |             |         |        |  |        |         |        |  |  |
|------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                     |  | December31, |
|                                     |  | 2003        |         | 2002   |
| Deferredtaxassets:                       |  |        |    |   |  |   |    |   |
| Inventoriedcosts                         |  | $           | 29,036  |   |  | $      | 43,678  |   |
| Compensationand benefits                 |  |        | 36,173  |   |  |   | 15,796  |   |
| Pensionand postretirementbenefits        |  |        | 139,308 |   |  |   | 136,699 |   |
| Property,plant andequipment              |  |        | 6.347   |   |  |   | 33,669  |   |
| Incomerecognition on contracts inprocess |  |        | 48,621  |   |  |   | 59,663  |   |
| Losscarryforwards                        |  |        | 17,184  |   |  |   | 6,579   |   |
| Taxcreditcarryforwards                   |  |        | 36,066  |   |  |   | 38,385  |   |
| Other,net                                |  |        | 25,094  |   |  |   | 24,533  |   |
| Totaldeferred taxassets                  |  |        | 337,829 |   |  |   | 359,002 |   |
| Deferredtaxliabilities:                  |  |        |    |   |  |   |    |   |
| Goodwill                                 |  |        | 84,476  |   |  |   | 49,317  |   |
| Other,net                                |  |        | 86      |   |  |   | 18,861  |   |
| Totaldeferred taxliabilities             |  |        | 84,562  |   |  |   | 68,178  |   |
| Netdeferred taxassets                    |  | $           | 253,267 |   |  | $      | 290,824 |   |
|                                          |

Thefollowing table presents the classification of the Company's netdeferred taxassets.

|                             |  |        |         |        |  |        |         |        |  |  |
|-----------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
| Current deferred taxassets  |  | $      | 152,785 |   |  | $      | 143,634 |   |
| Long-termdeferred taxassets |  |   | 100,482 |   |  |   | 147,190 |   |
| Totalnet deferred taxassets |  | $      | 253,267 |   |  | $      | 290,824 |   |
|                             |

AtDecember 31, 2003, the Company's loss carryforwards included,$9,580 of federal net operating loss carryforwards, most of which aresubject to limitations, which will expire if unused between 2011 and2021, $18,086 of capital loss carryforwards that will expire, ifunused, in 2007 and $46,474 of state net operating losses that willexpire, if unused, between 2005 and 2021. The Company also has $36,066of tax credit carryforwards primarily related to U.S. state researchand experimentation 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 will not have amaterial effect on its financial position, results of operations orcash flows.

14.    Stock Options

In April 1999, theCompany adopted the 1999 Long Term Performance Plan (1999 Plan). Awardsunder the 1999 Plan may be granted to any employee or to any otherindividual who provides services to or on behalf of the Company or anyof its subsidiaries, subject to the discretion of the CompensationCommittee of the Board of Directors. Awards under the 1999 Plan may bein the form of non-qualified 

F-36

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

stock options, incentive stock options, stockappreciation rights (SARs), restricted stock and other incentiveawards, consistent with the 1999 Plan. In April 1997, the Companyadopted the 1997 Stock Option Plan (1997 Plan). The 1997 Planauthorizes the Compensation Committee of the Board of Directors togrant incentive stock options to key employees of the Company and itssubsidiaries. Awards under both plans are in the form of L-3 Holdingscommon stock. At December 31, 2003, the number of shares of L-3Holdings' common stock authorized for grant under the 1999 Planand 1997 Plan was 16,611,630, of which 954,914 shares were availablefor awards under these plans. The price at which non-qualified andincentive stock options may be granted shall not be less than100% of the fair market value of L-3 Holdings' commonstock on the date of grant. In general, options expire after 10 yearsand are exercisable ratably over a three year period.

AtDecember 31, 2003, the Company has granted restricted stock awards of371,181 shares, of which 55,637 shares have been forfeited. The Companyawarded 88,245 shares on January 1, 2003, 54,958 shares on January 1,2002, and 60,928 shares on January 1, 2001. The aggregate fair valuesof the restricted stock awards on their grant dates were $3,963 in2003, $2,473 in 2002 and $2,346 in 2001. The restricted stock awardsgranted on January 1, 2003, January 1, 2002 and January 1, 2001 vestover three years. Compensation expense charged against earnings forthese restricted stock awards was $2,975 in 2003, $2,134 in 2002 and$1,370 in 2001. Shareholders' Equity has been reduced by $3,622at December 31, 2003 for unearned compensation on these restrictedstock awards.

The table below presents the Company'snon-qualified and incentive stock option activity over the past threeyears under the 1999 Plan and 1997 Plan.

|                                                    |  |                  |        |                                |  |        |       |        |  |  |
|----------------------------------------------------|--|------------------|--------|--------------------------------|--|--------|-------|--------|--|--|
|                                               |  | Numberof Options |        | Weighted Average ExercisePrice |
|                                               |  | (inthousands)    |
| Outstandingat January 1, 2001 (3,858exercisable)   |  |             | 7,256  |                           |  | $      | 10.71 |   |
| Optionsgranted                                     |  |             | 2,214  |                           |  |   | 35.81 |   |
| Optionsexercised                                   |  |             | (1,128 | )                         |  |   | 14.57 |   |
| Optionscancelled                                   |  |             | (362   | )                         |  |   | 21.23 |   |
| Outstandingat January 1, 2002 (4,216exercisable)   |  |             | 7,980  |                           |  |   | 16.68 |   |
| Optionsgranted                                     |  |             | 2,169  |                           |  |   | 52.02 |   |
| Optionsexercised                                   |  |             | (970   | )                         |  |   | 17.99 |   |
| Optionscancelled                                   |  |             | (155   | )                         |  |   | 35.62 |   |
| Outstandingat January 1, 2003 (5,216exercisable)   |  |             | 9,024  |                           |  |   | 24.71 |   |
| Optionsgranted                                     |  |             | 2,301  |                           |  |   | 40.92 |   |
| Optionsexercised                                   |  |             | (835   | )                         |  |   | 17.24 |   |
| Optionscancelled                                   |  |             | (406   | )                         |  |   | 39.95 |   |
| Outstandingat December 31, 2003 (5,919exercisable) |  |             | 10,084 |                           |  | $      | 28.41 |   |
|                                                    |

F-37

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

The table below summarizes informationabout the Company's non-qualified and incentive stock optionsoutstanding at December 31, 2003.

|                         |  |                  |        |                                                    |  |                                |     |                   |  |                                                  |       |                                |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|-------------------------|--|------------------|--------|----------------------------------------------------|--|--------------------------------|-----|-------------------|--|--------------------------------------------------|-------|--------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                    |  | Outstanding      |        | Exercisable                                        |
| Rangeof Exercise Prices |  | Number ofOptions |        | Weighted Average Remaining ContractualLife (Years) |  | Weighted Average ExercisePrice |     | Number of Options |  | WeightedAverageRemaining Contractual Life(Years) |       | Weighted Average ExercisePrice |
| $3.24                   |  |             | 3,174  |                                               |  |                           | 3.5 |              |  | $                                                | 3.24  |                           |  |   | 3,174   |   |  |   | 3.5     |   |  | $      | 3.24    |   |
| $11.00                  |  |             | 89     |                                               |  |                           | 4.3 |              |  |                                             | 11.00 |                           |  |   | 89      |   |  |   | 4.3     |   |  |   | 11.00   |   |
| $16.38–$19.84     |  |             | 372    |                                               |  |                           | 5.7 |              |  |                                             | 18.76 |                           |  |   | 372     |   |  |   | 5.7     |   |  |   | 18.76   |   |
| $20.25–$23.13     |  |             | 376    |                                               |  |                           | 5.5 |              |  |                                             | 20.79 |                           |  |   | 376     |   |  |   | 5.5     |   |  |   | 20.79   |   |
| $29.00                  |  |             | 211    |                                               |  |                           | 6.6 |              |  |                                             | 29.00 |                           |  |   | 211     |   |  |   | 6.6     |   |  |   | 29.00   |   |
| $32.50–$35.00     |  |             | 918    |                                               |  |                           | 7.3 |              |  |                                             | 33.28 |                           |  |   | 547     |   |  |   | 7.3     |   |  |   | 33.28   |   |
| $35.60                  |  |             | 1,031  |                                               |  |                           | 9.2 |              |  |                                             | 35.60 |                           |  |   | — |   |  |   | — |   |  |   | — |   |
| $39.19–$39.70     |  |             | 755    |                                               |  |                           | 7.9 |              |  |                                             | 39.69 |                           |  |   | 481     |   |  |   | 7.9     |   |  |   | 39.70   |   |
| $45.11–$45.80     |  |             | 1,152  |                                               |  |                           | 9.7 |              |  |                                             | 45.48 |                           |  |   | — |   |  |   | — |   |  |   | — |   |
| $49.00–$53.75     |  |             | 1,976  |                                               |  |                           | 8.4 |              |  |                                             | 52.10 |                           |  |   | 659     |   |  |   | 8.4     |   |  |   | 52.10   |   |
| $60.83                  |  |             | 30     |                                               |  |                           | 8.3 |              |  |                                             | 60.83 |                           |  |   | 10      |   |  |   | 8.3     |   |  |   | 60.83   |   |
| Total                   |  |             | 10,084 |                                               |  |                           | 6.7 |              |  | $                                                | 28.41 |                           |  |   | 5,919   |   |  |   | 5.1     |   |  | $      | 17.64   |   |
|                         |

Theweighted average fair values of non-qualified and incentive stockoptions at their grant date during 2003, 2002 and 2001, where theexercise price equaled the market price (estimated fair value) on thegrant date were $13.22, $18.75 and $14.87, respectively. In accordancewith APB No. 25, no compensation expense was recognized.

Forpurposes of determining the impact of the fair value provisions of SFASNo. 123, the Company estimates the fair value of its stock options atthe date of grant using the Black-Scholes option-pricing valuationmodel. The weighted average assumptions used in the valuation modelsare presented in the table below.

|                                  |  |                       |      |         |  |        |         |         |  |        |         |         |  |  |
|----------------------------------|--|-----------------------|------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                             |  | YearEnded December31, |
|                             |  | 2003                  |      | 2002    |  | 2001   |
| Expectedholding period (inyears) |  |                  | 4.0  |    |  |   | 4.0     |    |  |   | 5.0     |    |
| Expectedvolatility               |  |                  | 38.3 | %  |  |   | 39.2    | %  |  |   | 39.5    | %  |
| Expecteddividendyield            |  |                  | 0.2  | %  |  |   | — |    |  |   | — |    |
| Risk-freeinterestrate            |  |                  | 2.5  | %  |  |   | 4.0     | %  |  |   | 4.5     | %  |
|                                  |

15.    Commitmentsand Contingencies

The Company leases certain facilities andequipment under agreements expiring at various dates through 2028. Thefollowing table presents future minimum payments under non-cancelableoperating leases with initial or remaining terms in excess of one yearat December 31, 2003.

|            |  |            |         |           |  |        |         |        |  |        |         |        |  |  |
|------------|--|------------|---------|-----------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|       |  | RealEstate |         | Equipment |  | Total  |
| 2004       |  | $          | 62,892  |      |  | $      | 19,713  |   |  | $      | 82,605  |   |
| 2005       |  |       | 79,897  |      |  |   | 15,927  |   |  |   | 95,824  |   |
| 2006       |  |       | 50,173  |      |  |   | 12,336  |   |  |   | 62,509  |   |
| 2007       |  |       | 44,606  |      |  |   | 9,070   |   |  |   | 53,676  |   |
| 2008       |  |       | 45,745  |      |  |   | 7,226   |   |  |   | 52,971  |   |
| Thereafter |  |       | 168,207 |      |  |   | 59,053  |   |  |   | 227,260 |   |
| Total      |  | $          | 451,520 |      |  | $      | 123,325 |   |  | $      | 574,845 |   |
|            |

Realestate lease commitments have been reduced by minimum sublease rentalincome of $1,613 due in the future under non-cancelable subleases.Leases covering major items of real estate and equipment 

F-38

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

contain renewal and/or purchase options. Rentexpense, net of sublease income was $71,779 for 2003, $65,277 for 2002and $41,370 for 2001.

On December 31, 2002, the Company enteredinto two real estate lease agreements, as lessee, with a third-partylessor, which expire on December 31, 2005 and are accounted for asoperating leases. On or before the lease expiration date, the Companycan exercise options under the lease agreements to either renew theleases, purchase both properties for $28,000, or sell both propertieson behalf of the lessor (the "Sale Option").If the Company elects the Sale Option, the Company must pay the lessora residual guarantee amount of $22,673 for both properties, on orbefore the lease expiration date, and at the time both properties aresold, the Company must pay the lessor a supplemental rent equal to thegross sales proceeds in excess of the residual guarantee amount not toexceed $5,327. For these real estate lease agreements, if the grosssales proceeds are less than the sum of the residual guarantee amountand the supplemental rent, the Company is required to pay asupplemental rent to the extent the reduction in the fair value of theproperties are demonstrated by an independent appraisal to have beencaused by the Company's failure to properly maintain theproperties. The aggregate residual guarantee amounts of $22,673 hasbeen included in the non-cancelable real estate operating leasepayments relating to the expiration of such leases.

The Companyhas a contract to provide and operate for the U.S. Air Force (USAF) afull-service training facility, including simulator systems near a USAFbase. The Company 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, the Company, as lessee, entered into an operatinglease agreement for a term of 15 years for one of the simulator systemswith the owner-lessor. At the end of the lease term, the Company mayelect to purchase the simulator system at fair market value, which canbe no less than $2,552 and no greater than $6,422. If the Company doesnot elect to purchase the simulator system then on the date ofexpiration, the Company shall pay to the lessor, as additional rent,$2,552 and return the simulator system to the lessor. The aggregatenon-cancelable rental payments under this operating lease are $32,480including 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 the simulator systems, then on the date ofexpiration, the Company shall return the simulator systems to thelessor. The aggregate non-cancelable rental payments under thisoperating lease are $53,254.

The Company is engaged in providingproducts and services under contracts with the U.S. Government and to alesser degree, under foreign government contracts, some of which arefunded by the U.S. Government. All such contracts are subject toextensive legal and regulatory requirements, and, from time to time,agencies of the U.S. Government investigate whether such contracts wereand are being conducted in accordance with these requirements. UnderU.S. Government procurement regulations, an indictment of the Companyby a federal grand jury could result in the Company being suspended fora period of time from eligibility for awards of new governmentcontracts. A conviction could result in debarment from contracting withthe federal government for a specified term. Additionally, in the eventthat U.S. Government expenditures for products and services of the typemanufactured and provided by the Company are reduced, and not offset bygreater commercial sales or other new programs or products, oracquisitions, there may be a reduction in the volume of contracts orsubcontracts awarded to the Company.

In connection with theacquisition on March 8, 2002 of the Aircraft Integration Systemsbusiness from Raytheon, the Company assumed responsibility forimplementing certain corrective actions, required under federal law toremediate the Greenville, Texas site location, and to pay a portion ofthose 

F-39

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

remediation costs. The hazardous substancesrequiring remediation have been substantially characterized, and theremediation system has been partially implemented. The Company hasestimated that its share of the remediation cost will not exceed$2,500, and will be incurred over a period of 25 years. The Company hasestablished adequate reserves for these costs in the purchase priceallocation for this acquisition.

The Company has beenperiodically subject to litigation, claims or assessments and variouscontingent liabilities incidental to its business. 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 thateven without considering potential insurance recoveries, if any, thereare no environmental loss contingencies that, individually or in theaggregate, would be material to the Company's consolidatedresults of operations. The Company accrues for these contingencies whenit is probable that a liability has been incurred and the amount of theloss can be reasonably estimated.

On August 6, 2002, AviationCommunications & Surveillance Systems, LLC (ACSS), a subsidiary ofL-3 Communications Corporation, was sued by Honeywell InternationalInc. and Honeywell Intellectual Properties, Inc. (collectively,"Honeywell") for alleged infringement ofpatents that relate to terrain awareness avionics. The lawsuit wasfiled in the United States District Court for the District of Delaware.In December of 2002, Honeywell withdrew without prejudice the lawsuitagainst ACSS and agreed to proceed with non-binding arbitration. We hadpreviously investigated the Honeywell patents and believe that ACSS hasvalid defenses against Honeywell's patent infringement suit. Inaddition, ACSS has been indemnified to a certain extent by ThalesAvionics, which provided ACSS with the alleged infringing technology.Thales Avionics owns 30% of ACSS. In the opinion of management,the ultimate disposition of Honeywell's pending claim will notresult in a material liability to us.

L-3 Integrated Systems andits predecessors have been involved in a litigation with Kalitta Air(Kalitta Air) arising from a contract to convert Boeing 747 aircraftfrom passenger configuration to cargo freighters. The lawsuit wasbrought in the northern district of California on January 31, 1997. Theaircraft were modified using Supplemental Type Certificates (STCs)issued in 1988 by the Federal Aviation Administration (FAA) to HayesInternational, Inc. (Hayes/Pemco) as a subcontractor to GATX/AirlogCompany (GATX). Between 1988 and 1990, Hayes/Pemco modified fiveaircraft as a subcontractor to GATX using the STCs. Between 1990 and1994, Chrysler Technologies Airborne Systems, Inc. (CTAS), apredecessor to L-3 Integrated Systems, performed as a subcontractor toGATX and modified an additional five aircraft using the STCs. Two ofthe aircraft modified by CTAS were owned by American InternationalAirways, the predecessor to Kalitta Air. In 1996, the FAA determinedthat the engineering data provided by Hayes/Pemco supporting the STCswas inadequate and issued an Airworthiness Directive that effectivelygrounded the ten modified aircraft. The Kalitta Air aircraft have notbeen in revenue service since that date. The matter was tried inJanuary 2001 against GATX and CTAS with the jury finding fault on thepart of GATX but rendering a unanimous defense verdict in favor ofCTAS. Certain co-defendants had settled prior to trial. The NinthCircuit Court of Appeals has 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. Based on thisruling, it appears likely that the matter will have to be retried. InAugust of 2003, Kalitta Air has recalculated its damages based onconsequential damage theories of lost revenues and income anddiminution in value of the business and is asserting damages in excessof $500,000. CTAS' insurance carrier has accepted defense of thematter with a reservation of rights. The Company continues to believethat it has meritorious defenses and intends to vigorously defend thismatter.

F-40

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

The Company and L-3 CommunicationsSecurity and Detection Systems (L-3 SDS) have been named, along withmany other defendants, including other security screening systemsmanufacturers, as defendants in a number of lawsuits brought in theSouthern District of New York by or on behalf of the victims of theterrorist attacks on September 11, 2001. Counsel for the plaintiffshave represented to the court that they intend to amend some or all oftheir complaints to delete certain of the defendants, including theCompany and L-3 SDS, and to date, approximately 60 of the complaintshave been amended to drop the Company and L-3 SDS as a defendant. Inaddition, the court has ruled that the plaintiffs who complete theirapplications for relief under a federal fund may not pursue judicialaction. The court has ordered that the plaintiffs file final amendedcomplaints by March 31, 2004, at which time the Company and L-3 SDSwill know how many, if any, actions will be pending against them. Thecomplaints allege various causes of action, including claims ofwrongful death, negligence, strict liability and breach of contract,and seek compensatory and punitive damages. The Company and L-3 SDSbelieve that they have meritorious defenses to these actions and intendto vigorously defend the lawsuits. The Company purchased L-3 SDS fromPerkinElmer, Inc. (PerkinElmer) on June 14, 2002. The actions have beentendered to the Company's and PerkinElmer's insurancecarriers, who have accepted the defense of the these matters.

OnNovember 18, 2002, we initiated a proceeding against OSI Systems, Inc.(OSI) in the United States District Court sitting in the SouthernDistrict of New York seeking, among other things, a declaratoryjudgment that we had fulfilled all of our obligations under a letter ofintent with OSI (the "OSI Letter of Intent").Under the OSI Letter of Intent, we were to negotiate definitiveagreements with OSI for the sale of certain businesses we acquired fromPerkinElmer, Inc. on June 14, 2002. On February 7, 2003, OSI filed ananswer and counterclaims in the New York action alleging, among otherthings, that we breached our obligations under the OSI Letter of Intentand seeking damages in excess of $100,000, not including punitivedamages. Under the OSI Letter of Intent, we proposed selling to OSI theconventional detection business and the ARGUS business that we acquiredfrom PerkinElmer, Inc. Negotiations with OSI lasted for almost one yearand ultimately broke down over issues regarding, among other things,intellectual property, product-line definitions, allocation ofemployees and due diligence. We believe that the claims asserted by OSIin its suit are without merit and intend to defend against the OSIclaims vigorously.

L-3 Communications Vertex Aerospace LLC(formerly known as Vertex Aerospace LLC and acquired by the Company onDecember 1, 2003) (L-3 Vertex) is named as a defendant in nine wrongfuldeath lawsuits in the District Court, 17th Judicial District, TarrantCounty, Texas; in the Circuit Court of the 17th Judicial Circuit,Broward County, Florida; and in the United States District Court,Western District of North Carolina arising from the crash of AirMidwest Flight 5481 at Charlotte-Douglas International Airport inCharlotte, North Carolina on January 8, 2003. The crash resulted in thedeaths of nineteen passengers and two crewmembers. Each of the lawsuitsalleges contributing factors including that the accident was caused bythe improper maintenance of the aircraft by L-3 Vertex, and seeks torecover compensatory and punitive damages. No discovery has taken placein the lawsuits at this time. Eight claims resulting from this incidenthave previously settled. The National Transportation Safety Board(NTSB) investigated the cause of the crash and has concluded that thecrash was caused by the incorrect rigging of the elevator controlsystem compounded by the airplane's center of gravity, which wassubstantially aft of the certified limit, with several othercontributing factors. L-3 Vertex believes that it has meritoriousdefenses to the pending lawsuits, and intends to defend the casesvigorously. The actions have been tendered to L-3 Vertex'sinsurance carrier, who has accepted the defense of each action servedupon L-3 Vertex to date. L-3 Vertex was also indemnified by Air Midwestfor losses L-3 Vertex incurred arising out of its provision ofmaintenance services to Air Midwest. Based on the availability ofinsurance and the indemnification from Air Midwest, we do not believewe will have a material liability in this matter.

F-41

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

With respect to those investigativeactions, items of litigation, claims or assessments of which it isaware, management of the Company is of the opinion that the probabilityis remote that, after taking into account certain provisions that havebeen made with respect to these matters, the ultimate resolution of anysuch investigative actions, items of litigation, claims or assessmentswill have a material adverse effect on the consolidated financialposition, results of operations or cash flows of the Company.

16. Pensions and Other Employee Benefits

The Companymaintains 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 and bonds and U.S. Government 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.

F-42

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

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 |  |
|                                                   |  | 2003         |          | 2002                        |  | 2003   |          | 2002    |  |
| **Changein benefitobligation:**                        |  |         |     |                        |  |   |     |    |  |   |     |    |  |   |     |    |  |
| Benefitobligation at beginning ofyear                  |  | $            | 713,925  |                        |  | $      | 533,451  |    |  | $      | 129,406  |    |  | $      | 87,143   |    |  |
| Servicecost                                            |  |         | 45,901   |                        |  |   | 35,825   |    |  |   | 3,803    |    |  |   | 3,777    |    |  |
| Interestcost                                           |  |         | 49,789   |                        |  |   | 43,108   |    |  |   | 7,781    |    |  |   | 7,779    |    |  |
| Participants'contributions                             |  |         | 246      |                        |  |   | 260      |    |  |   | 1,006    |    |  |   | 720      |    |  |
| Amendments                                             |  |         | 9,657    |                        |  |   | (2,554   | )  |  |   | (6,796   | )  |  |   | (10,032  | )  |  |
| Actuarialloss                                          |  |         | 76,863   |                        |  |   | 49,990   |    |  |   | 6,972    |    |  |   | 4,411    |    |  |
| Acquisitions                                           |  |         | 25,754   |                        |  |   | 77,066   |    |  |   | 2,272    |    |  |   | 41,639   |    |  |
| Settlement                                             |  |         | —  |                        |  |   | —  |    |  |   | (107     | )  |  |   | —  |    |  |
| Foreigncurrency exchange ratechanges                   |  |         | 8,452    |                        |  |   | —  |    |  |   | 2,965    |    |  |   | —  |    |  |
| Benefitspaid                                           |  |         | (28,455  | )                      |  |   | (23,221  | )  |  |   | (6,149   | )  |  |   | (6,031   | )  |  |
| Benefitobligation at end ofyear                        |  | $            | 902,132  |                        |  | $      | 713,925  |    |  | $      | 141,153  |    |  | $      | 129,406  |    |  |
| **Changein planassets:**                               |  |         |     |                        |  |   |     |    |  |   |     |    |  |   |     |    |  |
| Fairvalue of plan assets at beginning ofyear           |  | $            | 431,771  |                        |  | $      | 430,915  |    |  | $      | —  |    |  | $      | —  |    |  |
| Actualreturn on planassets                             |  |         | 64,043   |                        |  |   | (27,819  | )  |  |   | 121      |    |  |   | —  |    |  |
| Acquisitions                                           |  |         | 24,122   |                        |  |   | 4,250    |    |  |   | —  |    |  |   | —  |    |  |
| Employercontributions                                  |  |         | 60,846   |                        |  |   | 47,386   |    |  |   | 13,761   |    |  |   | 5,311    |    |  |
| Participants'contributions                             |  |         | 246      |                        |  |   | 260      |    |  |   | 1,006    |    |  |   | 720      |    |  |
| Foreigncurrency exchange ratechanges                   |  |         | 9,180    |                        |  |   | —  |    |  |   | —  |    |  |   | —  |    |  |
| Benefitspaid                                           |  |         | (28,455  | )                      |  |   | (23,221  | )  |  |   | (6,149   | )  |  |   | (6,031   | )  |  |
| Fairvalue of plan assets at end ofyear                 |  | $            | 561,753  |                        |  | $      | 431,771  |    |  | $      | 8,739    |    |  | $      | —  |    |  |
| **Fundedstatus of theplans**                           |  | $            | (340,379 | )                      |  | $      | (282,154 | )  |  | $      | (132,414 | )  |  | $      | (129,406 | )  |  |
| Unrecognizedactuarial loss(gain)                       |  |         | 224,641  |                        |  |   | 184,894  |    |  |   | 7,706    |    |  |   | (188     | )  |  |
| Unrecognizedprior servicecost                          |  |         | 9,631    |                        |  |   | 560      |    |  |   | (13,347  | )  |  |   | (8,877   | )  |  |
| Netamountrecognized                                    |  | $            | (106,107 | )                      |  | $      | (96,700  | )  |  | $      | (138,055 | )  |  | $      | (138,471 | )  |  |
| **Amountsrecognized in the balance sheets consistof:** |  |         |     |                        |  |   |     |    |  |   |     |    |  |   |     |    |  |
| Netamountrecognized                                    |  | $            | (106,107 | )                      |  | $      | (96,700  | )  |  | $      | (138,055 | )  |  | $      | (138,471 | )  |  |
| Additionalminimumliability                             |  |         | (114,858 | )                      |  |   | (108,356 | )  |  |   | —  |    |  |   | —  |    |  |
| Accruedbenefitliability                                |  | $            | (220,965 | )                      |  | $      | (205,056 | )  |  | $      | (138,055 | )  |  | $      | (138,471 | )  |  |
|                                                        |

Theaggregate accumulated benefit obligation (ABO) for all of theCompany's pension plans combined was $721,123 at year end 2003and $582,861 at year end 2002. The table below presents the aggregateABO and fair value of plan assets for those pension plans with ABO inexcess of the fair value of plan assets at year end 2003 and 2002.

|                               |  |        |         |        |  |        |         |        |  |  |
|-------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                          |  | 2003   |         | 2002   |
| Accumulated benefitobligation |  | $      | 701,855 |   |  | $      | 565,904 |   |
| Fairvalue of planassets       |  |   | 534,338 |   |  |   | 406,809 |   |
|                               |

F-43

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

The table below summarizes the weightedaverage assumptions used to determine the benefit obligations for theCompany's pension and postretirement plans recorded atDecember  31, 2003 and 2002.

|                             |  |              |      |                             |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|-----------------------------|--|--------------|------|-----------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                        |  | PensionPlans |      | Postretirement BenefitPlans |
|                        |  | 2003         |      | 2002                        |  | 2003   |      | 2002    |
| **Benefitobligations**      |  |
| Discountrate                |  |         | 6.25 | %                      |  |   | 6.75 | %  |  |   | 6.25 | %  |  |   | 6.75 | %  |
| 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 2003, 2002 and 2001.

|                                            |  |              |         |                             |  |        |         |         |  |        |         |         |  |        |        |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------|--|--------------|---------|-----------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                       |  | PensionPlans |         | Postretirement BenefitPlans |
|                                       |  | 2003         |         | 2002                        |  | 2001   |         | 2003    |  | 2002   |         | 2001    |
| **Componentsof net periodic benefitcost:** |  |         |    |                        |  |   |    |    |  |   |    |    |  |   |   |    |  |   |    |    |  |   |    |    |
| Servicecost                                |  | $            | 45,901  |                        |  | $      | 35,825  |    |  | $      | 18,516  |    |  | $      | 3,803  |    |  | $      | 3,777   |    |  | $      | 1,709   |    |
| Interestcost                               |  |         | 49,789  |                        |  |   | 43,108  |    |  |   | 31,428  |    |  |   | 7,781  |    |  |   | 7,779   |    |  |   | 4,746   |    |
| Amortizationof prior servicecost           |  |         | 625     |                        |  |   | 312     |    |  |   | 351     |    |  |   | (2,326 | )  |  |   | (1,701  | )  |  |   | (99     | )  |
| Expectedreturn on planassets               |  |         | (39,357 | )                      |  |   | (40,663 | )  |  |   | (37,716 | )  |  |   | (155   | )  |  |   | — |    |  |   | — |    |
| Recognizedactuarial (gain)loss             |  |         | 13,591  |                        |  |   | 3,246   |    |  |   | (424    | )  |  |   | (743   | )  |  |   | (530    | )  |  |   | (887    | )  |
| Recognitiondue tosettlement                |  |         | — |                        |  |   | 62      |    |  |   | — |    |  |   | (155   | )  |  |   | — |    |  |   | — |    |
| Netperiodic benefitcost                    |  | $            | 70,549  |                        |  | $      | 41,890  |    |  | $      | 12,155  |    |  | $      | 8,205  |    |  | $      | 9,325   |    |  | $      | 5,469   |    |
|                                            |

Thetable below summarizes the weighted average assumptions used todetermine the net periodic benefit cost for the years ended 2003, 2002and2001.

|                                        |  |              |      |                             |  |        |      |         |  |        |      |         |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|----------------------------------------|--|--------------|------|-----------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                   |  | PensionPlans |      | Postretirement BenefitPlans |
|                                   |  | 2003         |      | 2002                        |  | 2001   |      | 2003    |  | 2002   |      | 2001    |
| **Netperiodic benefit cost**           |  |
| Discountrate                           |  |         | 6.75 | %                      |  |   | 7.25 | %  |  |   | 7.50 | %  |  |   | 6.75 | %  |  |   | 7.25 | %  |  |   | 7.50 | %  |
| Expectedlong-term return on planassets |  |         | 9.00 | %                      |  |   | 9.50 | %  |  |   | 9.50 | %  |  |   | 9.00 | %  |  |   | n.a. |    |  |   | n.a. |    |
| Rateof compensationincrease            |  |         | 4.50 | %                      |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |  |   | 4.50 | %  |
|                                        |

Theexpected long-term return on plan asset assumption at year-end 2003 and2002 is 9.00%. This assumption represents the average rate thatthe Company expects to earn over the long-term on the assets of theCompany's benefit plans, including those from dividends, interestincome and capital appreciation. The assumption has been determinedbased on expectations regarding future rates of return for theplans' investment portfolio, with consideration given to theallocation of investments by asset class and historical rates of returnfor each individual asset class.

The annual increase in cost ofbenefits (health care cost trend rate) is assumed to be an average of11.50% in 2004 and is assumed to gradually decrease to a rate of5.0% thereafter. Assumed 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 $577 and the postretirement medicalobligations by $7,345. A one percentage point increase in the assumedhealth care cost trend rate would have the effect of increasing theaggregate service and interest cost by $711 and the postretirementmedical obligations by $8,977.

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 the

F-44

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

performance of investment managers; and (5)achieve, on average, a minimum total rate of return equal to theestablished benchmarks for each asset category.

The Committeeretains a professional investment consultant to advise and help ensurethat the above policies and strategies are met. The Committee does notinvolve itself with the day to day operations and selection process ofindividual securities and investments, and, accordingly, has retainedthe professional services of investment management organizations tofulfill those tasks. The investment management organizations haveinvestment discretion over the assets placed under their management.The Committee provides each investment manager with specific investmentguidelines relevant to its asset class.

The Committee hasestablished the allowable range that plans' assets may beinvested in for each major asset category and regularly monitors eachto make sure that the actual investment allocation remains withinguidelines. The table below presents the range for each major categoryof the plans' assets at December 31, 2003.

|                          |  |         |  |  |  |  |
|--------------------------|--|---------|--|--|--|--|
| AssetCategory            |  | Range   |
| Domesticequity           |  | 40%-60% |
| Internationalequity      |  | 5%-15%  |
| Fixedincome              |  | 25%-35% |
| Real estatesecurities    |  | 5%-15%  |
| Cash andcash equivalents |  | 0%-20%  |
|                          |

Thefollowing table presents the Company's pension plan andpostretirement benefit plan weighted-average asset allocations atyear-end 2003 and 2002, by assetcategory.

|                                          |  |        |     |         |  |        |     |         |  |  |
|------------------------------------------|--|--------|-----|---------|--|--------|-----|---------|--|--|
| AssetCategory                            |  | 2003   |     | 2002    |
| Domesticequity                           |  |   | 44  | %  |  |   | 38  | %  |
| Internationalequity                      |  |   | 7   |    |  |   | 7   |    |
| Fixedincome                              |  |   | 25  |    |  |   | 31  |    |
| Real estatesecurities                    |  |   | 7   |    |  |   | 7   |    |
| Other, primarily cashand cashequivalents |  |   | 17  |    |  |   | 17  |    |
| Total                                    |  |   | 100 | %  |  |   | 100 | %  |
|                                          |

Contributions.    During2002 and 2003, U.S. Congress had granted plan sponsors an interest ratereduction for calculating minimum pension plan contributions. For 2004,the Company expects to contribute approximately $55,000 to its pensionplans, assuming the extension of such interest rate reduction, or$75,000 if the interest rate reduction is not extended and $13,000 toits postretirement benefit plans.

In connection with theCompany's acquisition in 1997 of the ten business units fromLockheed Martin and the formation of the Company, the Company assumedcertain defined benefit pension plan liabilities for present and formeremployees and retirees of certain businesses, which were transferredfrom Lockheed Martin to the Company. Lockheed Martin also has providedthe Pension Benefit Guaranty 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 

F-45

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—**(continued)**

(Dollars in thousands, exceptper share data)

but the Company would be required toreimburse Lockheed Martin for these costs. To date, there has been noimpact on pension expense and funding requirements resulting from thisarrangement. However, should Lockheed Martin assume sponsorship of theSubject 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, 2003, the Companycontributed $4,808 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.

Employee SavingsPlans.    Under its various employee savings plans, the Companymatches the contributions of participating employees up to a designatedlevel. The extent of the match, vesting terms and the form of thematching contributions vary among the plans. Under these plans, theCompany's matching contributions in L-3 Holdings' commonstock and cash were $43,262 for 2003, $36,120 for 2002 and $21,462 for2001.

17.    Supplemental Cash Flow Information

|                                                                       |  |                        |         |        |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------------------------------------------|--|------------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                  |  | Year Ended December31, |
|                                                                  |  | 2003                   |         | 2002   |  | 2001   |
| Interestpaid                                                          |  | $                      | 119,940 |   |  | $      | 109,301 |   |  | $      | 81,552  |   |
| Incometax payments, net ofrefunds                                     |  |                   | 17,298  |   |  |   | 2,127   |   |  |   | 4,904   |   |
| Noncashtransactions:                                                  |  |                   |    |   |  |   |    |   |  |   |    |   |
| Commonstock issued for acquisitionconsideration                       |  |                   | 4,969   |   |  |   | 10,607  |   |  |   | 17,357  |   |
| Company'semployer contribution to savings plans paid in commonstock   |  |                   | 39,494  |   |  |   | 28,138  |   |  |   | 16,868  |   |
| Conversionof 51⁄4% convertible senior subordinated notestoequity |  |                   | 1,630   |   |  |   | — |   |  |   | — |   |
|                                                                       |

F-46

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

18.    SegmentInformation

The Company has four reportable segments: (1)Secure Communications & ISR, (2) Training, Simulation & SupportServices, (3) Aviation Products & Aircraft Modernization and (4)Specialized Products, which are described in Note 1. The Companyevaluates the performance of its operating segments and reportablesegments based on their sales and operating income. All corporateexpenses are allocated to the Company's divisions using anallocation methodology prescribed by U.S. Government regulations forgovernment contractors. Accordingly, all costs and expenses areincluded in the Company's measure of segmentprofitability.

|                             |  |                                |           |                                           |  |                                              |           |                     |  |           |           |                                  |  |                   |           |        |  |        |         |        |  |        |         |         |  |        |           |        |  |        |        |        |  |  |
|-----------------------------|--|--------------------------------|-----------|-------------------------------------------|--|----------------------------------------------|-----------|---------------------|--|-----------|-----------|----------------------------------|--|-------------------|-----------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|-----------|--------|--|--------|--------|--------|--|--|
|                        |  | SecureCommunications & ISR |           | Training Simulation& Support Services |  | Aviation Products& AircraftModernization |           | SpecializedProducts |  | Corporate |           | Eliminationof Intersegment Sales |  | ConsolidatedTotal |           |
| **2003**                    |  |                           |      |                                      |  |                                         |      |                |  |      |      |                             |  |              |      |   |  |   |    |   |  |   |    |    |  |   |      |   |  |   |   |   |
| Sales                       |  | $                              | 1,440,596 |                                      |  | $                                            | 1,008,596 |                |  | $         | 1,021,861 |                             |  | $                 | 1,663,596 |   |  | $      | — |   |  | $      | (73,055 | )  |  | $      | 5,061,594 |   |  |
| Operatingincome             |  |                           | 172,903   |                                      |  |                                         | 111,581   |                |  |      | 147,834   |                             |  |              | 148,703   |   |  |   | — |   |  |   | — |    |  |   | 581,021   |   |  |
| Totalassets                 |  |                           | 1,201,187 |                                      |  |                                         | 741,059   |                |  |      | 2,043,677 |                             |  |              | 2,001,881 |   |  |   | 505,086 |   |  |   | — |    |  |   | 6,492,890 |   |  |
| Capitalexpenditures         |  |                           | 25,982    |                                      |  |                                         | 2,920     |                |  |      | 10,281    |                             |  |              | 43,368    |   |  |   | 323     |   |  |   | — |    |  |   | 82,874    |   |  |
| Depreciationandamortization |  |                           | 29,169    |                                      |  |                                         | 7,892     |                |  |      | 18,720    |                             |  |              | 39,642    |   |  |   | — |   |  |   | — |    |  |   | 95,423    |   |  |
| **2002**                    |  |
| Sales                       |  | $                              | 1,054,297 |                                      |  | $                                            | 826,286   |                |  | $         | 677,846   |                             |  | $                 | 1,479,996 |   |  | $      | — |   |  | $      | (27,196 | )  |  | $      | 4,011,229 |   |  |
| Operatingincome             |  |                           | 103,449   |                                      |  |                                         | 96,513    |                |  |      | 105,680   |                             |  |              | 148,337   |   |  |   | — |   |  |   | — |    |  |   | 453,979   |   |  |
| Totalassets                 |  |                           | 1,149,016 |                                      |  |                                         | 648,554   |                |  |      | 965,038   |                             |  |              | 1,940,982 |   |  |   | 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    |   |  |
| **2001**                    |  |
| Sales                       |  | $                              | 452,152   |                                      |  | $                                            | 597,029   |                |  | $         | 263,450   |                             |  | $                 | 1,040,753 |   |  | $      | — |   |  | $      | (5,962  | )  |  | $      | 2,347,422 |   |  |
| Operatingincome             |  |                           | 31,975    |                                      |  |                                         | 65,715    |                |  |      | 85,602    |                             |  |              | 92,038    |   |  |   | — |   |  |   | — |    |  |   | 275,330   |   |  |
| Totalassets                 |  |                           | 366,482   |                                      |  |                                         | 497,368   |                |  |      | 545,517   |                             |  |              | 1,382,010 |   |  |   | 547,872 |   |  |   | — |    |  |   | 3,339,249 |   |  |
| Capitalexpenditures         |  |                           | 11,561    |                                      |  |                                         | 2,999     |                |  |      | 9,625     |                             |  |              | 23,657    |   |  |   | 279     |   |  |   | — |    |  |   | 48,121    |   |  |
| Depreciationandamortization |  |                           | 13,839    |                                      |  |                                         | 13,207    |                |  |      | 12,064    |                             |  |              | 47,841    |   |  |   | — |   |  |   | — |    |  |   | 86,951    |   |  |
|                             |

Corporateassets not allocated to the reportable segments primarily include cashand cash equivalents, corporate office fixed assets, deferred incometax assets and deferred debt issuance costs.

F-47

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

The Company's sales attributable toU.S. customers and foreign customers is summarized in the tablebelow.

|               |  |                       |           |        |  |        |           |        |  |        |           |        |  |  |
|---------------|--|-----------------------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|          |  | YearEnded December31, |
|          |  | 2003                  |           | 2002   |  | 2001   |
| U.S.          |  | $                     | 4,208,273 |   |  | $      | 3,436,219 |   |  | $      | 1,927,538 |   |
| Foreign:      |  |
| UnitedKindgom |  |                  | 158,836   |   |  |   | 115,910   |   |  |   | 49,244    |   |
| Canada        |  |                  | 127,936   |   |  |   | 63,447    |   |  |   | 26,020    |   |
| Germany       |  |                  | 60,763    |   |  |   | 61,024    |   |  |   | 50,089    |   |
| Australia     |  |                  | 51,949    |   |  |   | 62,103    |   |  |   | 2,392     |   |
| Japan         |  |                  | 46,868    |   |  |   | 60,074    |   |  |   | 42,541    |   |
| Other         |  |                  | 406,969   |   |  |   | 212,452   |   |  |   | 249,598   |   |
| Totalforeign  |  |                  | 853,321   |   |  |   | 575,010   |   |  |   | 419,884   |   |
| Consolidated  |  | $                     | 5,061,594 |   |  | $      | 4,011,229 |   |  | $      | 2,347,422 |   |
|               |

Salesto principal customers are summarized in the table below.

|                                   |  |                       |           |        |  |        |           |        |  |        |           |        |  |  |
|-----------------------------------|--|-----------------------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                              |  | YearEnded December31, |
|                              |  | 2003                  |           | 2002   |  | 2001   |
| U.S.Governmentagencies            |  | $                     | 3,843,025 |   |  | $      | 3,107,271 |   |  | $      | 1,614,858 |   |
| Foreigngovernments                |  |                  | 506,508   |   |  |   | 395,062   |   |  |   | 200,913   |   |
| Commercialexport                  |  |                  | 346,813   |   |  |   | 179,948   |   |  |   | 218,971   |   |
| Other(principally U.S.commercial) |  |                  | 365,248   |   |  |   | 328,948   |   |  |   | 312,680   |   |
| Consolidated                      |  | $                     | 5,061,594 |   |  | $      | 4,011,229 |   |  | $      | 2,347,422 |   |
|                                   |

F-48

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

The Company's sales by product andservices are summarized in the table below.

|                                                                                  |  |                       |           |         |  |        |           |         |  |        |           |         |  |  |
|----------------------------------------------------------------------------------|--|-----------------------|-----------|---------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                                             |  | YearEnded December31, |
|                                                                             |  | 2003                  |           | 2002    |  | 2001   |
| Intelligence,surveillance and reconnaissanceproducts                             |  | $                     | 817,909   |    |  | $      | 410,412   |    |  | $      | —   |    |
| Aircraft modification, maintenance andtechnicalservices                          |  |                  | 733,744   |    |  |   | 517,309   |    |  |   | 15,067    |    |
| Navalwarfareproducts                                                             |  |                  | 418,019   |    |  |   | 280,564   |    |  |   | 299,684   |    |
| Communicationsystems for intelligence collection and imageryprocessing           |  |                  | 396,383   |    |  |   | 306,650   |    |  |   | 231,895   |    |
| Avionicsproducts                                                                 |  |                  | 305,726   |    |  |   | 229,734   |    |  |   | 254,983   |    |
| Securityand detectionsystems                                                     |  |                  | 282,261   |    |  |   | 431,325   |    |  |   | 18,058    |    |
| Informationsecuritysystems                                                       |  |                  | 232,728   |    |  |   | 201,934   |    |  |   | 140,153   |    |
| Spaceand commercial communications, satellite control and tactical sensorsystems |  |                  | 210,701   |    |  |   | 155,578   |    |  |   | 136,023   |    |
| Telemetryandinstrumentation                                                      |  |                  | 181,631   |    |  |   | 193,926   |    |  |   | 206,866   |    |
| Microwavecomponents                                                              |  |                  | 164,952   |    |  |   | 93,365    |    |  |   | 112,896   |    |
| Trainingdevices and motionsimulators                                             |  |                  | 160,718   |    |  |   | 144,310   |    |  |   | 160,549   |    |
| Guidanceand navigationproducts                                                   |  |                  | 151,916   |    |  |   | 141,778   |    |  |   | 128,690   |    |
| Fuzingproducts                                                                   |  |                  | 111,719   |    |  |   | 142,135   |    |  |   | 62,973    |    |
| Subtotalproducts                                                                 |  |                  | 4,168,407 |    |  |   | 3,249,020 |    |  |   | 1,767,837 |    |
| Simulation,engineering and supportservices                                       |  |                  | 705,974   |    |  |   | 569,351   |    |  |   | 378,186   |    |
| Trainingservices                                                                 |  |                  | 302,622   |    |  |   | 256,935   |    |  |   | 218,843   |    |
| SubtotalServices                                                                 |  |                  | 1,008,596 |    |  |   | 826,286   |    |  |   | 597,029   |    |
| Intercompanyeliminations                                                         |  |                  | (115,409  | )  |  |   | (64,077   | )  |  |   | (17,444   | )  |
| Consolidated                                                                     |  | $                     | 5,061,594 |    |  | $      | 4,011,229 |    |  | $      | 2,347,422 |    |
|                                                                                  |

F-49

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

19.    Unaudited Quarterly FinancialData

Unaudited summarized financial data by quarter for theyears ended December 31, 2003 and 2002 is presented in the tablebelow.

|                                                                          |  |         |           |         |  |              |           |            |  |        |           |        |  |        |           |        |  |  |
|--------------------------------------------------------------------------|--|---------|-----------|---------|--|--------------|-----------|------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                                                                     |  | 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                                                               |  | $       | 0.50      |    |  | $            | 0.53      |       |  | $      | 0.74      |   |  | $      | 0.94      |   |
| **2002**                                                                 |  |
| Sales                                                                    |  | $       | 696,840   |    |  | $            | 955,189   |       |  | $      | 1,053,613 |   |  | $      | 1,305,587 |   |
| Operatingincome                                                          |  | $       | 71,307    |    |  | $            | 97,688    |       |  | $      | 127,387   |   |  | $      | 157,597   |   |
| Incomebefore cumulative effect of a change in accountingprinciple        |  | $       | 29,279    |    |  | $            | 31,640    |       |  | $      | 61,760    |   |  | $      | 79,788    |   |
| Cumulativeeffect of a change in accounting principle, net of incometaxes |  |    | (24,370   | )  |  |         | —   |       |  |   | —   |   |  |   | —   |   |
| Netincome                                                                |  | $       | 4,909     |    |  | $            | 31,640    |       |  | $      | 61,760    |   |  | $      | 79,788    |   |
| BasicEPS:                                                                |  |
| Income before cumulative effect of a change inaccountingprinciple        |  | $       | 0.37      |    |  | $            | 0.40      |       |  | $      | 0.66      |   |  | $      | 0.84      |   |
| Cumulativeeffect of a change in accountingprinciple                      |  |    | (0.31     | )  |  |         | —   |       |  |   | —   |   |  |   | —   |   |
| Netincome                                                                |  | $       | 0.06      |    |  | $            | 0.40      |       |  | $      | 0.66      |   |  | $      | 0.84      |   |
| DilutedEPS:                                                              |  |
| Income before cumulative effect of a change inaccountingprinciple        |  | $       | 0.36      |    |  | $            | 0.38      |       |  | $      | 0.62      |   |  | $      | 0.79      |   |
| Cumulativeeffect of a change in accountingprinciple                      |  |    | (0.30     | )  |  |         | —   |       |  |   | —   |   |  |   | —   |   |
| Netincome                                                                |  | $       | 0.06      |    |  | $            | 0.38      |       |  | $      | 0.62      |   |  | $      | 0.79      |   |
|                                                                          |

20.    FinancialInformation of L-3 Communications and Its Subsidiaries

Totalshareholders' equity for L-3 Communications equals that of L-3Holdings, but the components, common stock and additional paid-incapital, are different. The table below presents information regardingthe balances and changes in common stock and additional paid-in capitalof L-3 Communications for each of the three years ended December 31,2003.

F-50

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

|                               |  |                               |         |           |  |                           |                           |        |  |        |           |         |  |        |           |         |  |  |  |  |  |  |  |  |  |  |
|-------------------------------|--|-------------------------------|---------|-----------|--|---------------------------|---------------------------|--------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|--|--|--|--|--|--|--|--|
|                          |  | L-3Communications CommonStock |         |      |  |                      |                           |   |  |
|                          |  | SharesIssued                  |         | Par Value |  | Additional Paid-inCapital |                           | Total  |  |
| Balance at December 31,2000   |  |                          | 100     |      |  | $                         |    — |   |  | $      | 515,926   |    |  | $      | 515,926   |    |  |
| Contributionsfrom L-3Holdings |  |                          |    |      |  |                      |                      |   |  |   | 830,561   |    |  |   | 830,561   |    |  |
| Pushdown of CODES             |  |                          |    |      |  |                      |                      |   |  |   | (407,450  | )  |  |   | (407,450  | )  |  |
| 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 |    |  |
|                               |

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. The net proceeds from the sale ofthe Convertible Notes and CODES by L-3 Holdings were also contributedto L-3 Communications and are reflected as indebtedness of L-3Communications. See Notes 2 and 8.

The debt of L-3Communications, including the Senior Subordinated Notes and borrowingsunder amounts drawn against the Senior Credit Facilities areguaranteed, on a joint and several, full and unconditional basis, bycertain of its wholly-owned domestic subsidiaries (the"Guarantor Subsidiaries"). See Note 8. Theforeign subsidiaries and certain domestic subsidiaries of L-3Communications (the "Non-GuarantorSubsidiaries") do not guarantee the debt of L-3Communications. None of the debt of L-3 Communications has been issuedby its subsidiaries. There are no restrictions on the payment ofdividends from the Guarantor Subsidiaries to L-3 Communications.

In lieu of providing separate audited financial statements for theGuarantor Subsidiaries, the Company has included the accompanyingcondensed combining financial statements based on Rule 3-10 of SECRegulation S-X. The Company does not believe that separate financialstatements of the Guarantor Subsidiaries are material to users of thefinancial statements.

The following condensed combiningfinancial information present the results of operations, financialposition and cash flows of (i) L-3 Holdings excluding L-3Communications, (ii) L-3 Communications excluding its consolidatedsubsidiaries (the "Parent") (iii) theGuarantor Subsidiaries, (iv) the Non-Guarantor Subsidiaries and (v) theeliminations to arrive at the information for L-3 Communications on aconsolidated basis.

F-51

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

|                                                            |  |             |           |                           |  |                       |           |                           |  |              |           |                               |  |        |         |        |  |        |            |         |  |        |           |        |  |  |
|------------------------------------------------------------|--|-------------|-----------|---------------------------|--|-----------------------|-----------|---------------------------|--|--------------|-----------|-------------------------------|--|--------|---------|--------|--|--------|------------|---------|--|--------|-----------|--------|--|--|
|                                                       |  | L-3Holdings |           | L-3Communications(Parent) |  | GuarantorSubsidiaries |           | Non-GuarantorSubsidiaries |  | Eliminations |           | ConsolidatedL-3Communications |
| **CondensedCombining BalanceSheets:**                      |  |
| **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                                                |  |        | —   |                      |  |                  | 343,914   |                      |  |         | 446,403   |                          |  |   | 112,435 |   |  |   | —    |    |  |   | 902,752   |   |
| Investmentin and amounts due from consolidatedsubsidiaries |  |        | 3,290,873 |                      |  |                  | 3,708,989 |                      |  |         | 596,696   |                          |  |   | 21,052  |   |  |   | (7,617,610 | )  |  |   | —   |   |
| Totalassets                                                |  | $           | 3,290,873 |                      |  | $                     | 5,700,916 |                      |  | $            | 4,266,874 |                          |  | $      | 851,837 |   |  | $      | (7,617,610 | )  |  | $      | 6,492,890 |   |
| Currentliabilities                                         |  | $           | —   |                      |  | $                     | 396,868   |                      |  | $            | 370,468   |                          |  | $      | 156,876 |   |  | $      | —    |    |  | $      | 924,212   |   |
| Otherlong-termliabilities                                  |  |        | —   |                      |  |                  | 272,252   |                      |  |         | 167,275   |                          |  |   | 21,144  |   |  |   | —    |    |  |   | 460,671   |   |
| Long-termdebt                                              |  |        | 716,377   |                      |  |                  | 2,457,300 |                      |  |         | —   |                          |  |   | — |   |  |   | (716,377   | )  |  |   | 2,457,300 |   |
| Minorityinterest                                           |  |        | —   |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 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 |                      |  | $                     | 5,700,916 |                      |  | $            | 4,266,874 |                          |  | $      | 851,837 |   |  | $      | (7,617,610 | )  |  | $      | 6,492,890 |   |
| **AtDecember 31, 2002:**                                   |  |
| Currentassets:                                             |  |
| Cash and cashequivalents                                   |  | $           | —   |                      |  | $                     | 126,421   |                      |  | $            | (7,248    | )                        |  | $      | 15,683  |   |  | $      | —    |    |  | $      | 134,856   |   |
| Contracts inprocess                                        |  |        | —   |                      |  |                  | 524,500   |                      |  |         | 630,351   |                          |  |   | 163,142 |   |  |   | —    |    |  |   | 1,317,993 |   |
| Othercurrentassets                                         |  |        | —   |                      |  |                  | 155,387   |                      |  |         | 28,319    |                          |  |   | 2,819   |   |  |   | —    |    |  |   | 186,525   |   |
| Totalcurrentassets                                         |  |        | —   |                      |  |                  | 806,308   |                      |  |         | 651,422   |                          |  |   | 181,644 |   |  |   | —    |    |  |   | 1,639,374 |   |
| Goodwill                                                   |  |        | —   |                      |  |                  | 753,672   |                      |  |         | 1,702,384 |                          |  |   | 338,492 |   |  |   | —    |    |  |   | 2,794,548 |   |
| Otherassets                                                |  |        | —   |                      |  |                  | 372,207   |                      |  |         | 355,866   |                          |  |   | 80,313  |   |  |   | —    |    |  |   | 808,386   |   |
| Investmentin and amounts due from consolidatedsubsidiaries |  |        | 2,919,954 |                      |  |                  | 2,688,750 |                      |  |         | 398,282   |                          |  |   | 53,779  |   |  |   | (6,060,765 | )  |  |   | —   |   |
| Totalassets                                                |  | $           | 2,919,954 |                      |  | $                     | 4,620,937 |                      |  | $            | 3,107,954 |                          |  | $      | 654,228 |   |  | $      | (6,060,765 | )  |  | $      | 5,242,308 |   |
| Currentliabilities                                         |  | $           | —   |                      |  | $                     | 336,050   |                      |  | $            | 298,646   |                          |  | $      | 75,246  |   |  | $      | —    |    |  | $      | 709,942   |   |
| Otherlong-termliabilities                                  |  |        | —   |                      |  |                  | 234,933   |                      |  |         | 166,188   |                          |  |   | 8,050   |   |  |   | —    |    |  |   | 409,171   |   |
| Long-termdebt                                              |  |        | 717,752   |                      |  |                  | 1,847,752 |                      |  |         | —   |                          |  |   | — |   |  |   | (717,752   | )  |  |   | 1,847,752 |   |
| Minorityinterest                                           |  |        | —   |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 73,241  |   |  |   | —    |    |  |   | 73,241    |   |
| Shareholders'equity                                        |  |        | 2,202,202 |                      |  |                  | 2,202,202 |                      |  |         | 2,643,120 |                          |  |   | 497,691 |   |  |   | (5,343,013 | )  |  |   | 2,202,202 |   |
| Totalliabilities and shareholders'equity                   |  | $           | 2,919,954 |                      |  | $                     | 4,620,937 |                      |  | $            | 3,107,954 |                          |  | $      | 654,228 |   |  | $      | (6,060,765 | )  |  | $      | 5,242,308 |   |
|                                                            |

F-52

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

|                                                     |  |             |         |                           |  |                       |           |                           |  |              |           |                               |  |        |         |         |  |        |          |         |  |        |           |         |  |  |
|-----------------------------------------------------|--|-------------|---------|---------------------------|--|-----------------------|-----------|---------------------------|--|--------------|-----------|-------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--------|-----------|---------|--|--|
|                                                |  | L-3Holdings |         | L-3Communications(Parent) |  | GuarantorSubsidiaries |           | Non-GuarantorSubsidiaries |  | Eliminations |           | ConsolidatedL-3Communications |
| **CondensedCombining Statements ofOperations:**     |  |        |    |                      |  |                  |      |                      |  |         |      |                          |  |   |    |    |  |   |     |    |  |   |      |    |
| **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   |    |
| Interestand other income(expense)                   |  |        |    |                      |  |                  | 9,575     |                      |  |         | (92       | )                        |  |   | (784    | )  |  |   | (8,484   | )  |  |   | 215       |    |
| Interestexpense                                     |  |        | 34,058  |                      |  |                  | 131,734   |                      |  |         | 501       |                          |  |   | 8,932   |    |  |   | (42,542  | )  |  |   | 132,683   |    |
| Minorityinterest                                    |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 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   |    |
| Interestand other income(expense)                   |  |        | — |                      |  |                  | 11,202    |                      |  |         | (286      | )                        |  |   | 262     |    |  |   | (6,257   | )  |  |   | 4,921     |    |
| Interestexpense                                     |  |        | 35,499  |                      |  |                  | 120,774   |                      |  |         | 1,622     |                          |  |   | 6,353   |    |  |   | (41,756  | )  |  |   | 122,492   |    |
| Minorityinterest                                    |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 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   |    |
| **Forthe year ended December 31,2001:**             |  |
| Sales                                               |  | $           | — |                      |  | $                     | 1,328,702 |                      |  | $            | 854,094   |                          |  | $      | 168,558 |    |  | $      | (3,932   | )  |  | $      | 2,347,422 |    |
| Costsandexpenses                                    |  |        | — |                      |  |                  | 1,109,329 |                      |  |         | 823,857   |                          |  |   | 142,838 |    |  |   | (3,932   | )  |  |   | 2,072,092 |    |
| Operatingincome                                     |  |        | — |                      |  |                  | 219,373   |                      |  |         | 30,237    |                          |  |   | 25,720  |    |  |   | —  |    |  |   | 275,330   |    |
| Interestand other income(expense)                   |  |        | — |                      |  |                  | 8,335     |                      |  |         | (515      | )                        |  |   | (6,081  | )  |  |   | —  |    |  |   | 1,739     |    |
| Interestexpense                                     |  |        | 20,400  |                      |  |                  | 86,024    |                      |  |         | 51        |                          |  |   | 315     |    |  |   | (20,400  | )  |  |   | 86,390    |    |
| Minorityinterest                                    |  |        | — |                      |  |                  | —   |                      |  |         | —   |                          |  |   | 4,457   |    |  |   | —  |    |  |   | 4,457     |    |
| Provision(benefit) for incometaxes                  |  |        | (7,976  | )                    |  |                  | 53,840    |                      |  |         | 11,275    |                          |  |   | 5,649   |    |  |   | 7,976    |    |  |   | 70,764    |    |
| Equityin net income of consolidatedsubsidiaries     |  |        | 127,882 |                      |  |                  | 27,614    |                      |  |         | —   |                          |  |   | — |    |  |   | (155,496 | )  |  |   | —   |    |
| Netincome                                           |  | $           | 115,458 |                      |  | $                     | 115,458   |                      |  | $            | 18,396    |                          |  | $      | 9,218   |    |  | $      | (143,072 | )  |  | $      | 115,458   |    |
|                                                     |

F-53

----

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

|                                                     |  |             |          |                           |  |                       |            |                           |  |              |            |                               |  |        |          |         |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------|--|-------------|----------|---------------------------|--|-----------------------|------------|---------------------------|--|--------------|------------|-------------------------------|--|--------|----------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                |  | L-3Holdings |          | L-3Communications(Parent) |  | GuarantorSubsidiaries |            | Non-GuarantorSubsidiaries |  | Eliminations |            | ConsolidatedL-3Communications |
| **CondensedCombining Statements of CashFlows:**     |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |  |   |       |    |
| **Forthe year ended December 31,2003:**             |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |
| Operatingactivities:                                |  |
| Net cash from(used in) operating activities         |  | $           | —  |                      |  | $                     | 219,890    |                      |  | $            | 240,672    |                          |  | $      | (4,499   | )  |  | $      | —    |    |  | $      | 456,063    |    |
| **Investingactivities:**                            |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |  |   |       |    |
| Acquisitionof businesses, net of cashacquired       |  |        | —  |                      |  |                  | (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:**                            |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |  |   |       |    |
| Proceedsfrom sale of senior subordinatednotes       |  |        | —  |                      |  |                  | 790,788    |                      |  |         | —    |                          |  |   | —  |    |  |   | —    |    |  |   | 790,788    |    |
| Redemptionof senior subordinatednotes               |  |        | —  |                      |  |                  | (187,650   | )                    |  |         |       |                          |  |   | —  |    |  |   | —    |    |  |   | (187,650   | )  |
| Otherfinancing activitiesnet                        |  |        | 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 the period         |  | $           | —  |                      |  | $                     | 155,375    |                      |  | $            | (41,291    | )                        |  | $      | 20,792   |    |  | $      | —    |    |  | $      | 134,876    |    |
| **Forthe year ended December 31,2002:**             |  |
| Operatingactivities:                                |  |
| Net cash fromoperating activities                   |  | $           | —  |                      |  | $                     | 137,837    |                      |  | $            | 169,221    |                          |  | $      | 11,402   |    |  | $      | —    |    |  | $      | 318,460    |    |
| **Investingactivities:**                            |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |  |   |       |    |
| Acquisitionof businesses, net of cashacquired       |  |        | —  |                      |  |                  | (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:**                            |  |        |     |                      |  |                  |       |                      |  |         |       |                          |  |   |     |    |  |   |       |    |  |   |       |    |
| Proceedsfrom sale of senior subordinatednotes       |  |        | —  |                      |  |                  | 750,000    |                      |  |         | —    |                          |  |   | —  |    |  |   | —    |    |  |   | 750,000    |    |
| Redemptionof senior subordinatednotes               |  |        | —  |                      |  |                  | (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 the period         |  | $           | —  |                      |  | $                     | 126,421    |                      |  | $            | (7,248     | )                        |  | $      | 15,683   |    |  | $      | —    |    |  | $      | 134,856    |    |
|                                                     |

F-54

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

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—(continued)(Dollars in thousands, except pershare data)

|                                                              |  |             |          |                           |  |                       |          |                           |  |              |          |                               |  |        |          |         |  |        |            |         |  |        |          |         |  |  |
|--------------------------------------------------------------|--|-------------|----------|---------------------------|--|-----------------------|----------|---------------------------|--|--------------|----------|-------------------------------|--|--------|----------|---------|--|--------|------------|---------|--|--------|----------|---------|--|--|
|                                                         |  | L-3Holdings |          | L-3Communications(Parent) |  | GuarantorSubsidiaries |          | Non-GuarantorSubsidiaries |  | Eliminations |          | ConsolidatedL-3Communications |
| **Forthe year ended December 31,2001:**                      |  |        |     |                      |  |                  |     |                      |  |         |     |                          |  |   |     |    |  |
| Operatingactivities:                                         |  |
| Net cash fromoperating activities                            |  | $           | —  |                      |  | $                     | 104,169  |                      |  | $            | 30,014   |                          |  | $      | 38,785   |    |  | $      | —    |    |  | $      | 172,968  |    |
| **Investingactivities:**                                     |  |        |     |                      |  |                  |     |                      |  |         |     |                          |  |   |     |    |  |   |       |    |  |   |     |    |
| Acquisitionof businesses, net of cashacquired                |  |        | —  |                      |  |                  | (112,691 | )                    |  |         | (212,556 | )                        |  |   | (121,664 | )  |  |   | —    |    |  |   | (446,911 | )  |
| Otherinvestingactivities                                     |  |        | (830,561 | )                    |  |                  | (357,400 | )                    |  |         | (14,643  | )                        |  |   | 59,844   |    |  |   | 1,164,781  |    |  |   | 22,021   |    |
| Netcash used in investingactivities                          |  |        | (830,561 | )                    |  |                  | (470,091 | )                    |  |         | (227,199 | )                        |  |   | (61,820  | )  |  |   | 1,164,781  |    |  |   | (424,890 | )  |
| **Financingactivities:**                                     |  |        |     |                      |  |                  |     |                      |  |         |     |                          |  |   |     |    |  |   |       |    |  |   |     |    |
| Repaymentof borrowings under revolving credit facilities,net |  |        | —  |                      |  |                  | (190,000 | )                    |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | (190,000 | )  |
| Proceedsfrom sale of senior subordinatednotes                |  |        | 420,000  |                      |  |                  | —  |                      |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | 420,000  |    |
| Proceedsfrom sale of L-3 Holdings' common stock,net          |  |        | 353,622  |                      |  |                  | —  |                      |  |         | —  |                          |  |   | —  |    |  |   | —    |    |  |   | 353,622  |    |
| Otherfinancingactivities                                     |  |        | 56,939   |                      |  |                  | 857,424  |                      |  |         | 187,862  |                          |  |   | 59,198   |    |  |   | (1,164,781 | )  |  |   | (3,358   | )  |
| Netcash from financingactivities                             |  |        | 830,561  |                      |  |                  | 667,424  |                      |  |         | 187,862  |                          |  |   | 59,198   |    |  |   | (1,164,781 | )  |  |   | 580,264  |    |
| Netincrease (decrease) incash                                |  |        | —  |                      |  |                  | 301,502  |                      |  |         | (9,323   | )                        |  |   | 36,163   |    |  |   | —    |    |  |   | 328,342  |    |
| Cashand cash equivalents, beginning of theperiod             |  |        | —  |                      |  |                  | 18,708   |                      |  |         | 4,911    |                          |  |   | 9,061    |    |  |   | —    |    |  |   | 32,680   |    |
| Cashand cash equivalents, end of theperiod                   |  | $           | —  |                      |  | $                     | 320,210  |                      |  | $            | (4,412   | )                        |  | $      | 45,224   |    |  | $      | —    |    |  | $      | 361,022  |    |
|                                                              |

F-55

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