**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number 001-13279**

**UNOVA, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                              | **95-4647021**       |
|-------------------------------------------|----------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer     |
| incorporation or  organization)           | Identification  No.) |
| **6001 36th Avenue West**                 | ** **           |
| **Everett,  Washington**                  | ** **           |
| **www.unova.com**                         | **98203-1264**       |
| (Address of  principal executive offices) | (Zip Code)           |

Registrant’s telephone number, including area code: **(425) 265-2400**

Securities registeredpursuant to Section 12(b) of the Act:

| ** **                                                              | **Title of each class** | ** **               | ** ** | ** ** | **Name of each exchange on  which registered** | ** ** | ** ** |
|-------------------------------------------------------------------------|-------------------------|--------------------------|------------|------------|------------------------------------------------|------------|------------|
| Common Stock, par value  $0.01 per share                                |                    | New  York Stock Exchange |       |
| Rights to Purchase  Series A Junior  Participating Preferred Stock |                    | New York Stock Exchange  |       |

Securities registered pursuant to Section 12(g) ofthe Act: **None**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  Noo

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934). Yes x  Noo

The aggregate market valueof the registrant’s common stock held by non-affiliates of the registrant as ofJune 30, 2004, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was approximately $1,231.7 million. On suchdate, the closing price of the registrant’s Common Stock, as quoted on the NewYork Stock Exchange, was $20.25.

On February 28, 2005,there were 61,264,143 shares of Common Stock outstanding, exclusive of treasuryshares.

DocumentsIncorporated by Reference

Certaininformation required to be reported in Part III of this Annual report onFrom 10-K is herein incorporated by reference from the registrant’sDefinitive Proxy Statement to be filed with the Securities and ExchangeCommission with respect to the registrant’s Annual Meeting of Shareholdersscheduled to be held on May 18, 2005.

 

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**UNOVA, INC.INDEX TO ANNUAL REPORTON FORM 10-K**
|                   | ** ** | ** **                                                                                       | ** ** | ** ** | **Page** | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| **PART I**   |       |                                                                                             |       |       |     |       |
| Item 1:           |       | Business                                                                                         |       |       | 3        |       |
| Item 2:           |       | Properties                                                                                       |       |       | 13       |       |
| Item 3:           |       | Legal  Proceedings                                                                               |       |       | 14       |       |
| Item 4:           |       | Submission  of Matters to a Vote of Security Holders                                             |       |       | 15       |       |
| **PART II**  |       |                                                                                             |       |       |     |       |
| Item 5:           |       | Market  for the Registrant’s Common Equity and Related Stockholder Matters                  |       |       | 16       |       |
| Item 6:           |       | Selected  Financial Data                                                                         |       |       | 17       |       |
| Item 7:           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       |       | 18       |       |
| Item  7A:         |       | Quantitative  and Qualitative Disclosures about Market Risk                                      |       |       | 36       |       |
| Item 8:           |       | Financial  Statements and Supplementary Data                                                     |       |       | 37       |       |
| Item 9:           |       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure            |       |       | 37       |       |
| Item 9A:          |       | Controls  and Procedures                                                                         |       |       | 37       |       |
| Item 9B:          |       | Other  Information                                                                               |       |       | 37       |       |
| **PART III** |       |                                                                                             |       |       |     |       |
| Item 10:          |       | Directors  and Executive Officers of the Registrant                                              |       |       | 38       |       |
| Item 11:          |       | Executive  Compensation                                                                          |       |       | 39       |       |
| Item 12:          |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |       |       | 39       |       |
| Item 13:          |       | Certain  Relationships and Related Transactions                                                  |       |       | 39       |       |
| Item 14:          |       | Principal  Accountant Fees and Services                                                          |       |       | 39       |       |
| **PART IV**  |       |                                                                                             |       |       |     |       |
| Item 15:          |       | Exhibits  and Financial Statement Schedule                                                       |       |       | 39       |       |
|              |       | Signatures                                                                                       |       |       | 40       |       |

 

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**PART I**

**SAFE HARBOR**

Forward-looking statementscontained in this filing are subject to the safe harbor created by the PrivateSecurities Litigation Reform Act of 1995 (alternatively: Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934) and are dependant upon a varietyof important factors which could cause actual results to differ materially fromthose reflected in such forward-looking statements. These factors include butare not limited to the Company’s ability to continue to improve theprofitability of its continuing operations, reduce expenses, improveefficiency, leverage its investment in research and development to drivesignificant future revenue, its ability to continue operational improvement andyear-over year-growth and complete its divestiture of its IAS businesses and theother factors described in Item 7 of this filing. Such forward-lookingstatements involve and are dependent upon certain risks and uncertainties. Whenused in this document and in documents it references, the words “anticipate,” “believe,”“will,” “intend,” “project” and “expect” and similar expressions as they relateto the Company or its management are intended to identify such forward-lookingstatements. Readers of this report are also encouraged to review the RiskFactors portion of Item 7 of this filing, which discusses additionalrisks. The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of this annualreport.

**ITEM 1.**                BUSINESS

**General**

UNOVA, Inc. and subsidiaries (“UNOVA” or the“Company”), through its Automated Data Systems (“ADS”) segment, which comprisesthe Company’s wholly-owned subsidiary Intermec Technologies Corporation(“Intermec”), is a leader in global supply chain solutions and in the design,development, manufacture and integration of wired and wireless automated datacollection, mobile computing systems, bar code printers, label media andIntellitag® RFID (radio frequency identification). The ADS segment’s productsand services are used by customers in many industries to improve productivity,quality and responsiveness of business operations, from supply chain managementand enterprise resource planning to field sales and service. Intermec’sproducts and services are sold globally to a diverse set of customers inmarkets such as manufacturing, warehousing, direct store delivery, retail,consumer goods, field services, government, security, healthcare, transportationand logistics.

The Company’s Industrial Automation Systems (“IAS”)businesses, which comprises the Cincinnati Lamb and Landis Grinding Systemsdivisions, has been classified effective the fourth quarter of 2004, asdiscontinued operations for accounting purposes in the Company’s consolidatedfinancial statements and related notes (see Note H to the consolidatedfinancial statements). Prior periods have been restated to reflect thispresentation. The IAS businesses are leading producers of value-addedmanufacturing products and services spanning the production cycle from processengineering and design to systems integration, including comprehensive lifecycle support. The IAS business includes integrated manufacturing systems,machining systems, stand-alone machine tools and precision grinding andabrasives operations primarily serving the global aerospace, automotive,off-road vehicle and diesel engine industries as well as the industrialcomponents, heavy equipment and general job shop markets.

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Infiscal year 2004, the Company served customers globally through the followingbusinesses:

**ContinuingOperations:**

·  The Automated Data Systems segment (“ADS”), whichcomprises Intermec Technologies, offers a broad product line and enterpriseintegration and implementation expertise within the AIDC (Automated Informationand Data Collection) marketplace.

**DiscontinuedOperations:**

·  The Industrial Automation Systems business (“IAS”),comprising Cincinnati Lamb and Landis Grinding Systems divisions, is a leadingproducer of value added manufacturing products and services. IAS serves theglobal aerospace, automotive, off-road vehicle and diesel engine industries aswell as the industrial components, heavy equipment and general job shopmarkets.

The Company has commenced a formal process to divestall of the IAS businesses and the Company’s excess assets (classified as assetsheld for sale) through a sale process that the Company expects will conclude infiscal year 2005. Therefore,  effectivethe fourth quarter of 2004, these businesses were classified as discontinuedoperations for financial statement purposes.

As part of this divestiture process, the Company hasreceived expressions of interest in both the group as a whole, and for theCincinnati Lamb and Landis Grinding businesses individually. The Company ispursuing a variety of sale alternatives that will strive to achieve separationand monetization, while allowing these leading businesses to operatesuccessfully independent of UNOVA.

For the years ended December 31, 2004, 2003 and2002, UNOVA reported revenues from continuing operations of $811.3 million,$706.6 million and $744.4 million, respectively. Intermec has three primary revenuesources: (1) revenue from the design, development, manufacture andintegration of wired and wireless automated data collection, mobile computingsystems, bar code printers,  label mediaand Intellitag® RFID (radio frequency identification), (“Product Revenue”);  (2)  revenue from servicing, customersupport and professional services related to these products and solutionsystems (“Services Revenue”); and (3) revenue from settlements related toenforcement of the Company’s Intellectual Property rights and sales of certainpatents in intellectual property portfolio (“Intellectual Property Sales andSettlement Revenue”).

See Note N to the consolidated financial statementsfor financial information by reportable segment and by geographical area.

The Company became an independent public company uponthe distribution of its common stock to the shareholders of Western Atlas Inc.(“WAI”) on October 31, 1997. The Company is a Delaware corporation and itsheadquarters are located in Everett, Washington.

Information on the Companymay be found at the Internet website *www.unova.com*. TheCompany’s annual report on Form 10-K and certain of its otherfilings with the Securities and Exchange Commission (“SEC”) are available inPDF format through its Investor Relations website at *www.unova.com/investorinfo.asp*.Its annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports are alsoavailable on the SEC website at *http://www.sec.gov*.The contents of these websites are not incorporated by reference into thisreport or in any other report or document the Company files, and its referencesto the addresses of these websites are intended to be inactive textualreference only.

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**Products and Services**

***Intermec Technologies***

Intermec products and services include automated dataidentification systems, rugged mobile computing solutions, wireless networks,including RFID, for untethered enablement of an enterprise, and barcode labeland printing solutions and related services. ADS’s rugged and robust systems,solutions and services enable Intermec’s customers to more efficiently andeffectively manage their supply chains and fulfillment activities and othercritical company resources.

Intermec is headquarteredin Everett, Washington, and its major offices and manufacturing facilities arelocated in the states of Washington, Iowa, and Ohio and internationally in theUnited Kingdom, the Netherlands, Sweden, France, Mexico and Singapore.

*Scanners and DataCollection Systems*

Intermec develops bar codescanning and data collection products used primarily by non-office workers suchas warehouse, delivery, manufacturing, field service and other employees whooperate outside the typical office environment. Product applications includework force automation; tracking of work in process and finished goods inventorythrough manufacturing, distribution and other commercial operations; and totalasset visibility and real-time monitoring of inventory levels and order statusto improve productivity, quality and responsiveness. The information collected,managed and exchanged by workers in these applications is susceptible to errorsor omissions due to inaccurate keystrokes, illegible handwriting or overlookedtransactions. The ability to efficiently capture and wirelessly transmitinformation in real time means more streamlined business processes. Automatingthese business processes is important to consistent customer service andfulfillment execution. In addition, Intermec’s products and services are increasinglyused for automating information exchange within supply chains and facilitatingshipment and fulfillment of orders. Intermec’s scanning and data collectionproducts include rugged wireless handheld computers and terminals, wandscanners, imagers, linear and area imagers incorporating active pixeltechnology, and badge and laser scanners. These products are able to read orcollect data and move that data directly into standard ERP (enterprise resourceplanning), WMS (warehouse management systems) and other business applications.The Company also manufactures a number of industrial handheld terminals for usein warehouses and industrial environments.

*Enterprise WirelessNetworks Products & Services*

Intermec develops wireless Local Area Network (“LAN”)software, systems and services. It was among the first companies to provide anetwork architecture that allows customers to use multiple radio technologieswithin one LAN system. Starting in the early 1980s, the Company installeddigital communication between mobile computers and host servers withinindustrial workspaces such as warehouses, distribution centers, factories andlarge outdoor facilities. In 1998, the Institute for Electronic and ElectricalEngineering (“IEEE”) promulgated a new standard for high-speed networkcommunication via wireless radio signal. The 802.11b standard allows customersto purchase interoperable digital radios for client computing devices. In theyears since the standard was established, several large network equipmentvendors have begun selling 802.11b and 802.11a/b and 802.11g wireless LANsystems, increasing penetration for this technology among office workers and inpublic spaces such as hotels, restaurants and airports. Intermec is a TechnologySolutions Integrator partner with Cisco Systems Inc. and has extended itssystems and devices to include Cisco technology and products. Intermec alsooffers device management software allowing centralized management services ofits devices on the network.

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Intermec’s corecustomers in industrial and warehousing markets purchase its wireless systemsprimarily because these systems are easier to implement and administer thancompetitive brands. Further, Intermec provides reliable and high qualitytechnical services and support. Finally, customers in these markets aremotivated in part by their belief that Intermec’s systems are extremely ruggedand reliable, and that reliability will prevent failures and downtime in thecustomer’s operation. Intermec supports all major radio technologies, includingsynthesized UHF, 900 MHz, 802.11b/g, 802.11a and Bluetooth. Radio independenceallows customers to choose the most efficient radio technology for their facilities.This freedom resolves data rate, transmission speed and range issues andcreates a reliable communications environment.

Intermec has also createdwireless LAN products that specifically address the security needs of itscustomers. Based on IEEE 802.11i and 802.1x security standards, MobileLANsecureTM is an integrated security solution for wireless LANs thatbuilds standards-based security capabilities into all components of thewireless LAN, including access points, authentication server software andnetwork interface cards. Intermec’s tiered wireless access point product linecost-effectively addresses diverse wireless applications found in an enterprise—bothin and out of the office. In 2002 Intermec extended its wireless solutions tosupport the Cisco wireless infrastructure, including Intermec’s innovative PocketPC line.

*Mobile ComputingSolutions*

Intermec delivers automated solutions comprisingruggedized hand-held and vehicle-mounted mobile computing systems andlocal-area and wide-area wireless and wired data communication systems.Intermec is a leader in integrating multiple wireless technologies (wide areaGPRs and CDMS, with 802.11 and Bluetooth) that can operate simultaneously intoa mobile computer. This is important for customers who desire a cost-effective,innovative and efficient way to communicate remotely with field employees.Intermec also develops and delivers handheld computer application software fordesignated markets and applications as well as communication and server systemsto integrate the information into customers’ enterprise management systems.Intermec has developed device management software that can interoperate withexisting system management software to allow centralized management and controlof remote devices. Data capture devices and specialized peripherals and printersolutions are a part of the provided solution. To assist with the automation ofbusiness processes, Intermec provides extensive professional services, such asinstallation, maintenance, site security and systems integration. Intermec’scomprehensive line of hand-held and vehicle-mounted computers combine MicrosoftWindows®, Windows® CE and Pocket PC®, and embedded Windows XP capability withscanning and IP (Internet Protocol) based data communication abilities.Intermec’s product family ranges from low-cost, hand-held batch and wirelessdata collection devices to sophisticated pen-based computers with extensivewired and wireless network capabilities and flexible vehicle mountcommunication systems.

Intermec’s “open systems”design philosophy delivers product flexibility to customers with diverseapplication requirements. In combination with wireless communications, thesemobile systems enable remote workers to have access to centralized computerapplications and databases, to automate business processes to the point oftransaction and to send and receive information on a real-time basis. Thisresults in improved productivity, efficiency and accuracy of information.Intermec and its partners offer mobile computing application software thatprovides work force automation, customer level sales ordering, pricing andforecasting, and account settlement. Other software products manage workforceautomation and order dispatching, total field asset visibility, real-time proofof delivery, and other critical customer information. Intermec and its partnershave over 20 years of experience in developing both hardware and software formobile computing in the direct-store-delivery (“DSD”) market. This experiencegives Intermec insight that is important in developing and producing successfulproduct offerings in other mobile computing markets such as field service andlogistics operators.

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*Bar Code Label andPrinting Solutions*

Intermec’s line of flexible “on demand” bar codeprinters which range from low-cost, light-duty models to heavy-duty, industrialmodels that accommodate a wide array of printing widths, materials and labelconfigurations. These printers attach directly to enterprise networks. Avariety of specialty printers provides custom capabilities, including colorprinting, a global language enabler and high resolution (400 DPI) printing thatensures sharp fonts and precise graphics, even on extremely small labels suchas those used by the electronics industry. Intermec’s printers can also supportRFID encoding and smart label printing, offering customers’ cost effectivesolutions and flexibility as they adopt RFID technology.

Intermec’s media productsinclude pressure-sensitive bar code labels and thermal transfer ribbons, whichare sold to customers worldwide. Intermec’s media products emphasize serviceand value-added technologies, such as the design and manufacture of specializedlabels to meet customer requirements for extreme environments such as cleanrooms, chemical baths and high humidity.

*Radio FrequencyIdentification—RFID*

Intermec is designing andproducing next generation item-tracking technology called RFID (radio frequencyidentification). Intermec’s market focus is on passive UHF technology,including RFID tags, readers, software and related equipment, and servicesunder the Intellitag trade name. Intermec products support International StandardsOrganization (“ISO”) standards and the new EPCglobal Generation-2 UHF standard(the “Gen-2 standard”), which are being adopted by customers worldwide. RFIDwirelessly communicates important product information between a trackingdevice, called an interrogator, and “tags” comprising a computer chip and itsantenna encased in a protective covering. RFID tags are programmed to containidentification, serial numbers, history and other attributes. Certain RFIDtags, such as Intermec’s Intellitag, contain read/write memory to allow updatesand tag reuse. Unlike laser scanned bar codes, Intermec’s RFID tags do notrequire “line of sight” to be read. Companies have expressed interest in usingRFID technology as a tool to track pallets, cartons, containers and individualitems through their entire supply chain or as an access security application.Intermec is working through alliances and directly with other companies tobroaden customer access, create standards support on a global basis andintegrate data from RFID collection systems into broader information systems.Intermec has a large RFID intellectual property portfolio with over 140 patentsissued largely around UHF technology.

**Services**

Intermec develops technology to solve complex globalsupply chain solution problems and provides expertise through a broad range ofglobal services. Intermec’s customer support services, professional servicesand installation services enable customers to implement and deploy systems andsolutions within their IT environments.

Intermec Project Management teams create strategicplans that clearly identify a customer’s operational goals. Strategic plansencompass technology solutions that will accomplish the business issues theyare expected to solve. Properly designed systems will typically support thedesired functionality without costly upgrades and / or retrofitting.

Project Management teams define the functionalrequirements for implementing wireless devices throughout the enterprise. Thisincludes why they are needed, how they will be used, and how they will impactcustomer business processes. Once a business case has been defined, the ProjectManagement teams design an implementation plan to improve processes, increaseproductivity, and maximize profitability.

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Intermec has forgedextensive relationships with many wireless system providers, thereforeproviding “one stop shopping” with the expertise, convenience, and assurance customersneed. In addition, Project Management offers its customers:

·  Asingle point of contact for all project communications

·  Projectplanning, including defining the scope of work, preparing a statement of work,developing project objectives, developing schedules, identifying acceptanceprocedures, and documenting a project plan

·  Projectimplementation, including proper site preparation; tracking, site evaluationsurveys and installation schedules; coordination of the activities of allresources involved in the implementation; project status reports; andimplementing project controls

·  Oversightand management of the overall installation process, including managingcommunications, tracking equipment shipment, managing change requests, andidentifying problems and resolving them

·  Projectcompletion and closeout to the customer’s requirements and expectations

Intermec Services’ customer-focused professionals workclosely with customers to integrate new wireless solutions with their existingsystems and applications to optimize performance over the short and long terms.Customers can assess a variety of wireless solutions and networkingapplications that can be tailored to their specific business needs.

Intermec believes that its on-site customer servicerepresentatives (“CSR”) are among the most experienced in the industry.Dispatched from over 60 U.S. locations, the Company’s technicians have thetraining, experience, test equipment, and parts to address numerous problems onthe first visit. These teams of professionals strive to deliver fast, highquality service with minimal impact on customer’s operations, and all repairsare performed with the goal of meeting the highest industry standards.

Intermec’s GlobalEducation Services provide a wide array of comprehensive training services andsolutions. These services and solutions include designing complete trainingpackages administering entire training programs and Train-the-Trainer sessions,in which it provides in-house personnel with guidance and assistance increating company-based training programs.

**Technologies/Trends**

Intermec offers an extensive line of data captureproducts, which includes linear imaging, area imaging, RFID and most recently alaser scanning engine based on micro electro mechanical system (“MEMS”) technology.This new scanning engine technology offers snappier scanning, improved aiming,compact form factor design and less moveable parts than competitive scanningengines. This expanded product suite means customers can select the right datacapture technology to meet their application requirements to increaseusability, productivity and cost effectiveness of their solution.

Intermec isbroadening the application of wireless networking, data capture and mobilecomputing by developing or integrating new technologies into its products.Recent examples include new high-speed wireless networking products such as:

·  secure802.11a wireless LAN technology

·  incorporationof GPRS and CDMA wide-area wireless technologies into Windows Mobile and PocketPC devices

·  newrugged high performance Windows CE and Windows Mobile based computers

·  shortrange radio system networks utilizing Bluetooth technology

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·  newMEMS-based laser scanning devices

·  low-costminiature linear image scan engines

·  newdevices that use the Internet to simplify the management of wireless networks

Intermec continues to invest in and develop ISO andEPC standards-based, low-cost RFID products for supply chain applications suchas source tagging, shipping labels and pallet tags with embedded electronicmemory chips that can be reprogrammed via low-power radio signals. Intermec hasalso developed a range of products based on its RFID technology, comprising scanners,printers and labels. Intermec RFID products comply with EPC global’s Gen-2standard. Intermec’s RFID products also meet domestic and international regulatoryrequirements such as FCC and ETSI regulations and ISO 1800 6b standards. Aprominent industry organization serving the automotive sector has adopted astandard based upon certain of Intermec’s communications protocols for RFID.The standard manages communications between a host computer and an RFID tag.This global standard is expected to be used in systems that will allow tiremanufacturers and auto companies to track individual tires as they aremanufactured, distributed and installed on new cars and trucks manufactured inNorth America. Intermec offers its RFID technology for integration with existingautomatic identification and data capture solutions such as bar code, mobilecomputing and other enterprise-wide information systems.

**Business Strategy**

Intermec’s strategyrevolves around investment in:

·  Technologyand innovation,

·  Intellectualproperty,

·  Researchand development,

·  Expandingand strengthening the product portfolio,

·  Providingintegrated solutions,

·  Partneringwith global industry leaders,

·  Deliveringvalue to customers,

·  Workingto profitably increase market share,

·  Scalingthe business to achieve cost reduction and improve operating leverage.

Intermec systemsare designed to create value for customers that desire to identify, track andmanage critical company resources and assets. The technology and innovation onwhich Intermec focuses its research and development efforts are related todeveloping products, processes and services that help improve productivity,efficiency, information and controls in various vertical markets, including:

·  Retail,

·  ConsumerGoods,

·  Manufacturing,

·  Transportationand logistics,

·  Governmentsupply chain applications.

Primary applicationfocus areas for Intermec include:

·  Warehousemanagement,

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·  Retailstore operations,

·  Retailstore management,

·  Pick-upand delivery and in transit visibility,

·  Fieldservice,

·  Manufacturingoperations,

·  Directstore delivery,

·  RFIDcompliance.

Customers seek to improve their control of inventory,equipment and other fixed assets, labor, sales and distribution costs to becomemore efficient within their markets. The integration of Internet e-commerce andreal-time information driven by the increasing demand for more efficient andeffective fulfillment systems has created increased opportunities and demandfor technologies such as wireless systems and RFID that improve levels ofservice and responsiveness.

Warehouses and logistics operations already rely onwireless networks and handheld and mobile computers to transmit inventory datato central host computers. When information is updated in real time, customershave greater visibility to their current business operations, helping avoidinventory shortages and improve customer service by providing more accurateshipping and delivery information. As competition places more pressure oncustomers for faster operational performance, they typically upgrade theirsupply chain “execution” technologies to improve working capital efficiency andcustomer satisfaction standards, such as delivery speed, in-stock availabilityand order accuracy.

Intermec plans to continueemphasizing and expanding its product development and market activities in theareas of wireless communications, mobile computers, bar code printers, mediaproducts, RFID and technologies for supply-chain execution to capitalize onexpected strong demand and long-term overall market growth.

**Markets and Customers**

Because automated data systems represent technologiesthat can be utilized by a company of any size, the market is extensive. Marketgrowth is driven by the global need for technologies and solutions that improvequality, productivity, and cost-efficiency in business and government,particularly through logistics automation, supply chain execution, enterpriseresource planning (“ERP”) and e-commerce solutions. Intermec covers the market througha globally coordinated dedicated sales and service organization in conjunctionwith two-tier distributors, resellers and independent software vendors. Thesepartners extend Intermec’s reach in application markets and allow Intermec tocost-effectively penetrate and grow the markets for small and mid-sizedbusinesses.

Intermec sells and services its products throughmultiple sales and distribution channels: a direct field sales force thatconcentrates on large or complex systems sales, premier value-added resellersknown as Honor’s Partners that offer application-specific solutions,alliances with major systems integrators and enterprise computing companies anddistributors who provide value added services to the smaller independentsoftware vendors and resellers. Intermec’s direct sales organization servescustomers from offices throughout the Americas, Europe, the Middle East, Africaand in selected Asia Pacific countries including China and Australia. Indirectsales channels include preferred and non-exclusive relationships with value-addeddistributors and master resellers. Sales of accessories, certain services andlow-cost transactional-based business can be transacted over the web. Intermechas a field-based business development function, which assists with the openingof new market and emerging technology opportunities.

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The mobile computing systems market comprises severalapplications, such as Direct-Store-Delivery, pick up and delivery for package /parcel delivery industries, sales merchandising, in-transit asset visibility,parts management and work force automation applications. These applications aregenerally used in the consumer products, food, beverage, wholesale, parceldelivery, freight, field service, and home service industries.

Manufacturing applications include the collection andcommunication of information related to receipt of materials, work in process,finished goods inventory and other functions throughout the manufacturingprocess. Warehousing and distribution center applications involve thecollection and communication of information related to receiving materials tobe stored, storage locations, materials retrieval and shipping. Retailapplications include the automation of shelf label maintenance, productshipping and receiving functions along with customer service and storemanagement.

Additional international sales opportunities exist incountries where mobile computing practices and other applications are similarto those in the U.S. The extent of wireless systems opportunities in anyparticular country is based on the level of industrialization, the status ofbar code implementation, and the regulatory environment for wirelesscommunication technologies. The major markets for printers and media aremanufacturing, distribution, warehousing, transportation, health care,government, and other services.

Intermec’s customer base consists of businesses ofmany sizes, government agencies and resellers. No single customer accounted for10% or more of revenues in fiscal 2004, 2003 or 2002.

Although the majority ofIntermec’s sales are made through indirect sales channels, no individual value-addeddistributor or reseller represents more than 10% of the Company’s consolidatedrevenues. Intermec also maintains direct contact with customers and prospectiveusers by having established user forums for automated data systems applicationsand technologies.

**Competition**

The market for AIDC / mobile computing systems islargely fragmented. Based on independent market surveys, management believesthat Intermec is one of the largest participants measured by revenues. Theother major participant is Symbol Technologies. Intermec also faces strongcompetition for single product lines from specialized suppliers, like Zebra forprinters or Hand Held Products for imagers.

The market for mobile computing and radio frequencyproducts is highly competitive and rapidly changing. Some firms, includingFujitsu and Casio, manufacture and market hand-held systems for fieldbased ordering and selling applications. In addition, a number of firmsmanufacture and market radio-linked data communication products,including LXE, Symbol and Psion /Teklogix. Consumer personal digital assistantsfrom suppliers such as Palm, Hewlett Packard and Dell are potential competitorsfor certain non-mission critical, light-duty enterprise computing applications.Companies such as Symbol and Entersys compete against Intermec and CiscoSystems Inc. in the wireless network business. On the printer side, Intermecfaces competition from Zebra, Datamax, SATO, Printronix and many others,depending on the geographic area.

Intermec competesprimarily on the basis of its technology and expertise in applications forfocused vertical markets, (integrated solutions, open-systems architecture,networking and communications expertise, applications software), customerrelationships and value added service. Other attributes, such as level of salesand support services, product functionality, performance, ruggedness andoverall quality, are important for market success.

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***Industrial Automation Systems (IAS)***

The Company has commenced a formal process to divest itsIAS business, comprising the Cincinnati Lamb and Landis Grinding Systemsdivisions. The Company’s IAS business is classified effective the fourthquarter of 2004 as discontinued operations for accounting purposes in the Company’sconsolidated financial statements and related notes. Prior periods have beenrestated to reflect this presentation (see Note H to the Company’s consolidatedfinancial statements).

The Company’s IAS business, headquartered in Warren,Michigan, is a leading producer of value-added manufacturing products andservices spanning the production cycle from process engineering and design tosystems integration, including comprehensive life cycle support. The IASbusiness includes integrated manufacturing systems, machining systems,stand-alone machine tools and precision grinding and abrasives operationsprimarily serving the global aerospace, automotive, off-road vehicle and dieselengine industries as well as the industrial components, heavy equipment andgeneral job shop markets.

In October, 2002 Cincinnati Lamb was formed throughthe combination of the business operations of Lamb Machining Systems, Lamb Body &Assembly and Cincinnati Machine to reduce costs, streamline decision making andmaximize efficiency. Cincinnati Machine’s high-tech aerospace machining andcomposites business and after-market Cincinnati PLUSTM service operations weremoved from Cincinnati, Ohio to a UNOVA-owned facility in Hebron, Kentucky tomaintain critical skills while reducing the high fixed costs associated withthe former facility.

On September 5, 2003,the Company sold substantially all of the assets and existing backlog of LambBody & Assembly Systems. The Lamb Body & Assembly businesswas primarily focused on metal forming and welding applications for the NorthAmerica transportation industry and was part of the IAS business.

**Research and Development**

Research and developmentexpenditures of the Company’s continuing operations amounted to $62.1 million,$48.8 million and $44.0 million, all of which was sponsored by the Company, inthe years ended December 31, 2004, 2003 and 2002, respectively.

**Patents and Trademarks**

Over a period of years,the Company has secured a large number of patents, trademarks and copyrightsrelating to its manufactured products. These patents, trademarks and copyrightshave been of value in the growth of the Company’s business and are expected tobe of value in the future. However, the Company’s business generally is notdependent upon the protection of any single patent, patent application orpatent license agreement, and would not be materially affected by theexpiration thereof. In December 2002 the Company assigned approximately150 patents of the Company’s portfolio, which is presently in excess of 570patents, to Broadcom, Inc. The contract of assignment contained a licensegrant back to UNOVA to continue using all patents in the sale, manufacture andproduction of the Company’s products. The Company believes this assignment toBroadcom will not have a material effect on the Company’s continuing business.

**Seasonality and Backlog**

The Company’s quarterly results reflect seasonality inthe sale of its products and services, as its revenues are typically highest inthe fourth fiscal quarter. See “Quarterly Financial Information” on page Q-1of this Form 10-K for a more complete description of the seasonalityof the Company’s 2003 and 2004 quarterly revenues and expenses.

12

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Sales backlog was $335 million, $327 million and $299million, including backlog of discontinued operations of $259 million, $266million and $235 million at December 31, 2004, 2003 and 2002,respectively. Most of the Company’s backlog is concentrated in the IASbusiness. The ADS business typically operates without a significant backlog offirm orders and does not consider backlog to be a relevant measure of futuresales.

**Employees**

At December 31, 2004,the Company had 4,456 full-time employees, of which 2,436 were engaged inthe ADS segment, 1,984 in the IAS segment, and 36 in corporate and sharedservices.

**Environmentaland Regulatory Matters**

During 2004, the amounts incurred to comply withfederal, state and local legislation pertaining to environmental standards didnot have a material effect upon the capital expenditures or earnings of theCompany.

Radio emissions are thesubject of governmental regulation in all countries in which the Companycurrently conducts business. In North America, both the Canadian and U.S.governments publish relevant regulations, and changes to these regulations aremade only after public discussion. In some countries regulatory changes can beintroduced with little or no grace period for implementation. Furthermore,there is little consistency among the regulations of various countries outsideNorth America, and future regulatory changes in North America are possible.These conditions introduce uncertainty into the product planning process andcould have an adverse effect on the ADS business.

**Raw Materials**

The Company uses a widevariety of raw materials in the manufacture of its products and obtains suchraw materials from a variety of suppliers. In general, raw materials used areavailable from numerous alternative sources. As is customary for its industry,the ADS business at various times enters into certain single-source componentpart supply agreements. Management believes these agreements will be renewed inthe ordinary course of business.

**ITEM 2.**                PROPERTIES

The Company’s executive offices are located at 6001 36thAvenue West, Everett, Washington. Its continuing operations and discontinuedoperations have an aggregate floor area of approximately 2,482,400 square feet,of which 1,861,744 square feet, or 75%, are located in the United States, and 620,656square feet, or 25% are located outside the United States, primarily in theUnited Kingdom, Germany and Canada.

Theseproperties are used by the Company as follows (in square feet):
| Automated Data Systems  |   | 511,171   |   |
|-------------------------|--------|-----------|--------|
| Corporate               |   | 10,000    |   |
| Discontinued Operations |   | 1,961,229 |   |
| Total                   |   | 2,482,400 |   |

 

Approximately 1,735,229 square feet, or 70%, of theprincipal plant, office and commercial floor area is owned by the Company, andthe balance is held under lease.

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TheU.S. plants and offices associated with the Company’s continuing operations anddiscontinued operations are situated in 9 locations in the following states (insquare feet):
| Pennsylvania |   | 495,662   |   |
|--------------|--------|-----------|--------|
| Illinois     |   | 396,811   |   |
| Washington   |   | 327,000   |   |
| Kentucky     |   | 200,000   |   |
| Ohio         |   | 177,483   |   |
| Other states |   | 264,788   |   |
| Total        |   | 1,861,744 |   |

 

The above-mentioned facilities are insatisfactory condition and suitable for the particular purposes for which theywere acquired, constructed or leased and are adequate for present operations.

The foregoing information excludes the followingproperties:

·  Plants or offices that when added to all otherof the Company’s plants and offices in the same city, have a total floor areaof less than 50,000 square feet.

·  Company-held properties leased toothers.

·  Variouscompany-owned properties totaling approximately 1.5 million square feet thatare idle as of December 31, 2004, due to the Company’s restructuringactions, including sale and closure of various underperforming businesses andconsolidation of facilities, during 2002, 2003 and 2004. These properties areclassified as assets held for sale on the Company’s consolidated balance sheetas of December 31, 2004. See Footnote D to the Company’s consolidatedfinancial statements.

**ITEM 3.**                LEGAL PROCEEDINGS

*Tower Automotive Products Co. v.Lamb Technicon Body and Assembly* is a lawsuit filed on March 11,2002, in the Kent County Circuit Court in Michigan, generally alleging a breachof contract involving a frame assembly production line. No specific claim fordamages was made in the Complaint by Tower Automotive Products Co. The Companyhas responded to the Complaint. A trial date has been scheduled for the secondquarter of 2005. Management believes the lawsuit is without merit and isvigorously contesting the case. Nevertheless, should there be an unfavorableresult, it is possible that cash flows or results from discontinued operationscould be materially affected in that period or subsequent periods.

On March 11, 2005,Symbol Technologies, Inc. (“Symbol”) announced that it had filed a lawsuitagainst Intermec for wireless patent infringement. The complaint does notcontain sufficient details for the Company to assess what Symbol will claimregarding the relationship between its cited patents and Intermec products. However,based on prior Company analysis of the cited Symbol patents, the Companybelieves it has substantial defenses to each of those patents and as such, theultimate resolution of this complaint would not have a material adverse effecton the Company’s consolidated financial position. As with all claims broughtagainst the Company, the Company intends to vigorously defend itself andcontest the claims made in the suit. Additionally, Symbol announced that itintends to terminate its original equipment manufacturing (“OEM”) agreementwith Intermec to supply laser scan engines. The Company believes that acancellation of the OEM agreement by Symbol would not have an adverse impact onits future operations.

14

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The Company iscurrently, and is from time to time, subject to claims and suits arising in theordinary course of its business. In the opinion of the Company’s GeneralCounsel, the ultimate resolution of currently pending proceedings, with thepotential exception of the Tower Automotive Products Co. case discussed above,should not have a material adverse effect on the Company’s financial conditionand results of operations.

**ITEM 4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders, through the solicitation of proxies or otherwise, during the fourthquarter of the fiscal year ended December 31, 2004.

15

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**PART II**

**ITEM 5.     MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

The high and low sales prices of the Company’s commonstock, by quarter, in the years ended December 31, 2004 and 2003 are asfollows:
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **     | ** ** | **High**                                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                                          | 26.63      |   | $ | 19.50 |   | $ | 6.68 |   | $ | 4.42 |   |
| Second Quarter |       | 22.43                                      |       | 15.25 |   | 11.95 |   | 5.26 |   |
| Third Quarter  |       | 20.24                                      |       | 13.59 |   | 16.50 |   | 11.05 |   |
| Fourth Quarter |       | 25.59                                      |       | 13.90 |   | 25.23 |   | 13.86 |   |
|                |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

The Company’s common stock is tradedon the New York Stock Exchange under the symbol UNA. As of February 28,2005, there were approximately 12,800 record holders and 31,300 beneficialowners of the Company’s common stock. No cash dividends were paid during 2003or 2004. The Company’s Revolving Facility places limits on the payment ofdividends. See discussion of the Revolving Facility under the heading “Liquidityand Capital Resources” in Item 7 of this annual report on Form 10-K.

See information with respect to securities authorizedfor issuance under the caption “Equity Compensation Plan Information” of theCompany’s 2005 Proxy Statement which is incorporated herein by reference.

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**ITEM 6.**                SELECTED FINANCIALDATA

**UNOVA, INC.(millions of dollars, except per share data)**
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000(C)** | ** ** |
| **Operating Results:(A)**                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues(B)                                          |       | $                                          | 811.3      |   | $ | 706.6 |   | $ | 744.4 |   | $ | 655.1 |   | $ | 725.4 |   |
| Earnings (Loss) from Continuing Operations           |       | $                                          | 52.2       |   | $ | 15.1 |   | $ | 37.6 |   | $ | (236.0 | ) | $ | (72.5 | ) |
| Earnings (Loss)  from Discontinued Operations        |       | (101.3                                     | )          | (34.4 | ) | (35.2 | ) | (56.2 | ) | 32.7 |   |
| Net Earnings  (Loss)                                 |       | $                                          | (49.1      | ) | $ | (19.3 | ) | $ | 2.4 |   | $ | (292.2 | ) | $ | (39.8 | ) |
| Basic Earnings  (Loss) per Share                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing Operations                                |       | $                                          | 0.86       |   | $ | 0.26 |   | $ | 0.65 |   | $ | (4.15 | ) | $ | (1.30 | ) |
| Discontinued Operations                              |       | (1.67                                      | )          | (0.59 | ) | (0.61 | ) | (0.99 | ) | 0.59 |   |
| Net earnings (loss) per share                        |       | $                                          | (0.81      | ) | $ | (0.33 | ) | $ | 0.04 |   | $ | (5.14 | ) | $ | (0.71 | ) |
| Diluted Earnings  (Loss) per Share                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing Operations                                |       | $                                          | 0.84       |   | $ | 0.25 |   | $ | 0.64 |   | $ | (4.15 | ) | $ | (1.30 | ) |
| Discontinued Operations                              |       | (1.63                                      | )          | (0.57 | ) | (0.60 | ) | (0.99 | ) | 0.59 |   |
| Net earnings (loss) per share                        |       | $                                          | (0.79      | ) | $ | (0.32 | ) | $ | 0.04 |   | $ | (5.14 | ) | $ | (0.71 | ) |
| Shares used for Basic Earnings (Loss) per Share      |       | 60,502                                     |       | 58,828 |   | 57,821 |   | 56,851 |   | 55,714 |   |
| Shares used for  Diluted Earnings (Loss) per Share   |       | 62,154                                     |       | 60,234 |   | 58,614 |   | 56,851 |   | 55,714 |   |
| **Financial  Position (at end of year):**            |       |                                       |       |   |   |   |   |   |   |   |   |
| Total Assets                                         |       | $                                          | 1,072.7    |   | $ | 1,090.8 |   | $ | 1,124.8 |   | $ | 1,207.0 |   | $ | 1,720.7 |   |
| Notes Payable and  Current Portion of                |       |                                       |       |   |   |   |   |   |   |   |   |
| Long-term Debt                                       |       | $                                          | 108.5      |   | $ | — |   | $ | — |   | $ | — |   | $ | 235.4 |   |
| Long-term Debt                                       |       | $                                          | 100.0      |   | $ | 208.5 |   | $ | 224.7 |   | $ | 281.5 |   | $ | 213.5 |   |
| Working Capital                                      |       | $                                          | 399.2      |   | $ | 440.4 |   | $ | 386.8 |   | $ | 350.1 |   | $ | 196.3 |   |
| Current Ratio                                        |       | 1.9                                        |       | 2.4 |   | 2.1 |   | 1.9 |   | 1.3 |   |
| Total Debt as a  Percentage of Total  Capitalization |       | 34                                         | %          | 33 | % | 35 | % | 41 | % | 39 | % |

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(A)               Prior periodsreflect the classification of IAS as discontinued operations.

(B)                Includesintellectual property sales and settlements of $19.7 million, $18.7 million,$112.4 million, and $30.0 million in 2004, 2003, 2002 and 2001, respectively.

(C)               Reflectsthe disposition of Amtech in June 2000.

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**ITEM7.**                MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Thefollowing discussion should be read in conjunction with the ConsolidatedFinancial Statements and the notes thereto that appear in Item 8 of this annualreport on Form 10-K.*

**Overview**

UNOVA, Inc. andsubsidiaries (“UNOVA” or the “Company”), through its Automated Data Systems (“ADS”)segment comprised of the Company’s wholly owned subsidiary IntermecTechnologies Corporation (“Intermec”), is a leader in global supply chainsolutions, the development, manufacture and integration of wired and wirelessautomated data collection, mobile computing systems, bar code printers andlabel media and Intellitag® RFID (radio frequency identification). The ADSsegment’s products and services are used by customers to improve productivity,quality and responsiveness of business operations, from supply chain managementand enterprise resource planning to field sales and service. ADS products andservices are sold globally to a diverse set of customers in markets such asmanufacturing, warehousing, direct store delivery, retail, consumer goods,field services, government, security, healthcare, transportation and logistics.

Effective the fourthquarter of 2004, the Company committed to a plan to sell its IndustrialAutomation Systems ("IAS") businesses, comprising the Cincinnati Lambdivision and the Landis Grinding Systems division after the Board of Directorsconcluded that the IAS segment no longer aligned with the Company's long-termstrategy.  The Company intends to sell IAS as a going concern as a wholeor through the sale of its divisions within the 2005 fiscal year.  TheCompany has classified the IAS business as a discontinued operation foraccounting purposes in the Company's consolidated financial statements andrelated notes (see Note H to the consolidated financial statements). Prior periodshave been restated to reflect this presentation. The IAS businesses are leadingproducers of value-added manufacturing products and services spanning theproduction cycle from process engineering and design to systems integrationincluding comprehensive life cycle support. The IAS businesses includeintegrated manufacturing systems, machining systems, stand-alone machine toolsand precision grinding and abrasives operations primarily serving the globalaerospace, automotive, off-road vehicle and diesel engine manufacturing industriesas well as the industrial components, heavy equipment and general job shopmarkets.

The Company’s strategy forits ADS segment revolves around continued investment in technology, intellectualproperty, research and development and innovation; expanding and strengtheningthe product portfolio; providing integrated solutions; partnering with globalindustry leaders; delivering value to customers and working to reduce costs andimprove profitability; and working to profitably increase market share and thescale of the business. The technology and innovation for which the Companyfocuses its research and development efforts are related to developingproducts, processes and services that help improve productivity, efficiency,information and controls in a variety of manufacturing, distribution, retail,field service and logistics supply chain applications.

The ADS results in 2003and 2004 appear to confirm management’s belief that ADS products tend to leadIT spending recoveries due to the high returns on investment and short paybackperiods associated with implementing the Company’s systems and solutions. TheCompany believes that there are future growth opportunities for ADS products asa result of increasing interest in RFID (radio frequency identification), thenext generation item-tracking technology; increasing interest in item-trackingtechnologies within the government market, such as Defense and HomelandSecurity; improved access for ADS to non-traditional markets as a result ofbroadening the product line to support these markets; and partneringarrangements with industry leaders to provide integrated solutions. The Company’sfinancial strength and ability to adapt to the current market and economicconditions are dependent in part on the generation of cash flow, effectivemanagement of working capital, funding commitments and other obligations, aswell as the growth of the business.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**Results ofOperations**

Thefollowing discussion compares the Company’s historical results of operationsfor the years ended December 31, 2004, 2003 and 2002. Results fromcontinuing operations in all years presented include the ADS segment andcorporate operations. The operating results of the IAS business are classifiedas discontinued operations. Results of operations and percentage of revenueswere as follows (millions of dollars): 
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                               | ** ** | ** **                                 | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                               | ** ** | **Amounts**                                | ** ** | **Revenues** | ** ** | ** Amounts ** | ** ** | **Revenues** | ** ** | **  Amounts  ** | ** ** | **Revenues** | ** ** |
| Revenues                                                 |       | $                                          | 811.3      |   |   |   |   |   |   | $ | 706.6 |   |   |   |   |   |   |   | $ | 744.4 |   |   |   |   |   |   |
| Costs and Expenses:                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                         |       | 465.4                                      |       |   | 57.3 | % |   |   | 416.6 |   |   |   | 59.0 | % |   |   | 408.5 |   |   |   | 54.9 | % |   |
| Selling, general  and administrative                     |       | 279.9                                      |       |   | 34.5 | % |   |   | 245.6 |   |   |   | 34.8 | % |   |   | 249.9 |   |   |   | 33.6 | % |   |
| Special charges                                          |       | 1.3                                        |       |   | 0.2 | % |   |   | 1.7 |   |   |   | 0.2 | % |   |   | 6.4 |   |   |   | 0.8 | % |   |
| Total Costs and  Expenses                                |       | 746.6                                      |       |   | 92.0 | % |   |   | 663.9 |   |   |   | 94.0 | % |   |   | 664.8 |   |   |   | 89.3 | % |   |
| Operating Profit from  Continuing Operations        |       | 64.7                                       |       |   | 8.0 | % |   |   | 42.7 |   |   |   | 6.0 | % |   |   | 79.6 |   |   |   | 10.7 | % |   |
| Interest, net                                            |       | (12.3                                      | )          |   | (1.6 | )% |   |   | (13.1 | ) |   |   | (1.9 | )% |   |   | (20.6 | ) |   |   | (2.8 | )% |   |
| Foreign currency  exchange, net                          |       | (1.7                                       | )          |   | (0.2 | )% |   |   | 1.2 |   |   |   | 0.2 | % |   |   | (1.1 | ) |   |   | (0.1 | )% |   |
| Earnings from Continuing  Operations before Income Taxes |       | 50.7                                       |       |   | 6.2 | % |   |   | 30.8 |   |   |   | 4.3 | % |   |   | 57.9 |   |   |   | 7.8 | % |   |
| Provision (Benefit) for  Income Taxes                    |       | (1.5                                       | )          |   | (0.2 | )% |   |   | 15.7 |   |   |   | 2.2 | % |   |   | 20.3 |   |   |   | 2.7 | % |   |
| Earnings from Continuing  Operations, net of tax         |       | 52.2                                       |       |   | 6.4 | % |   |   | 15.1 |   |   |   | 2.1 | % |   |   | 37.6 |   |   |   | 5.1 | % |   |
| Loss from Discontinued  Operations, net of tax           |       | (101.3                                     | )          |   | (12.5 | )% |   |   | (34.4 | ) |   |   | (4.8 | )% |   |   | (35.2 | ) |   |   | (4.8 | )% |   |
| Net Earnings (Loss)                                      |       | $                                          | (49.1      | ) |   | (6.1 | )% |   |   | $ | (19.3 | ) |   |   | (2.7 | )% |   |   | $ | 2.4 |   |   |   | 0.3 | % |   |

 

*Revenues*

Revenuesby category and as a percentage of total revenues from continuing operationsfor the years ended December 31, 2004, 2003 and 2002, as well as the year-over-yearproduct and service revenue growth were as follows (millions of dollars):
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **  Amount  **         | ** ** | **Percent of  Revenues** | ** ** | **  Amount  ** | ** ** | **Percent of  Revenues** | ** ** | **Amount** | ** ** | **Percent of  Revenues** | ** ** |
| Revenues:                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                           |       |                                       | $          | 654.9 |   |   |   | 80.7 | % |   |   | $ | 561.4 |   |   |   | 79.5 | % |   | $ | 519.1 |   |   | 69.7 | % |   |
| Service                                           |       |                                       | 136.8      |   |   |   | 16.9 | % |   |   | 126.5 |   |   |   | 17.9 | % |   | 112.9 |   |   | 15.2 | % |   |
| Intellectual  Property Sales and Settlements |       |                                       | 19.6       |   |   |   | 2.4 | % |   |   | 18.7 |   |   |   | 2.6 | % |   | 112.4 |   |   | 15.1 | % |   |
| Total Revenues                                    |       |                                       | $          | 811.3 |   |   |   | 100.0 | % |   |   | $ | 706.6 |   |   |   | 100.0 | % |   | $ | 744.4 |   |   | 100.0 | % |   |

 
| ** **                           | ** ** | **2004 v. 2003** | ** ** | **2003 v. 2002** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Amount**                 | ** ** | **Percent**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Product and Service  Revenue Growth: |       |                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Product                              |       | $                          | 93.5       |                       |       | 16.7 | % |   |   | $ | 42.3 |   |   |   | 8.1 | % |   |
| Service                              |       | 10.3                       |       |                       | 8.1        | % |   |   | 13.6 |   |   |   | 12.0 | % |   |
| Total Product and Service Revenues   |       | $                          | 103.8      |                       |       | 15.1 | % |   |   | $ | 55.9 |   |   |   | 8.8 | % |   |

** **

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

Product revenues in 2004 increased $93.5 million, or16.7%, compared to 2003. The growth was primarily driven by a 20.8% increasefrom Intermec’s core systems and solutions products. A significant amount ofthe growth acceleration in 2004 was attributable to agreements with a number ofnew large enterprise accounts across all regions, continuing to reflect high customerinterest in Intermec’s broad based solutions. These systems and solutionscomprise the popular Series 700 Mobile Computer, as well as the recentlyintroduced CK30 handheld, and the CV60 vehicle mount terminal. Geographically,systems and solutions revenue increased significantly in all regions during2004 with North America contributing 18.8% growth, Europe, Middle East andAfrica (“EMEA”) contributing 22.9% growth and the Rest of the World (“ROW”)contributing 24.7% growth. Revenue from printer/media products increased 5.8%in 2004 compared to 2003, primarily due to growth in EMEA printer revenue.Product revenues in 2003 increased $42.3 million, or 8.1% compared to 2002 dueto increases of 11.2% and 2.6% in systems and solutions and printer/media,respectively. The growth was primarily attributable to the EMEA region, whichbenefited from the reorganization of its sales department and strategy in thefourth quarter of 2002 and favorable foreign currency exchange rates.

Service revenues in 2004 increased $10.3 million, or8.1%, compared to 2003. The growth in service revenue reflects the benefit fromthe product revenue growth rates and the high service attachment ratesassociated with the new large enterprise accounts for systems and solutionsproducts referred to above. Geographically, in 2004 service revenue increased$2.8 million, $4.6 million and $2.9 million in North America, EMEA and ROW,respectively, compared to the prior year. The 2003 growth in service revenue of$13.6 million, or 12.0%, reflects increases of $4.5 million, $4.6 millionand $4.5 million in North America, EMEA and ROW, respectively.

The Intermec operatingresults include significant revenue and operating profit from compensationrelated to several settlements regarding certain of its intellectual property (“IPsettlements”). In aggregate, revenues from IP settlements were $19.6 million,$18.7 million and $88.4 million in 2004, 2003 and 2002, respectively. In 2002,the Company also sold a portfolio of wireless networking patents for $24million. The Company is currently the plaintiff in a patent infringementlawsuit regarding its battery power-management patents which may result infuture revenue and operating profit. Settlements relating to the batterypower-management patents have been reached to date with companies that in theaggregate represent approximately ninety percent of U.S. laptop sales. Inaddition, the Company is also the plaintiff in a patent infringement lawsuitregarding its IP related to RFID. Management cannot predict the outcome, timingor amount of future settlements or judgments.

*Gross Profit*

Grossprofit and gross margin by revenue category for the years ended December 31,2004, 2003 and 2002 were as follows (millions of dollars):
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **Gross  Profit**                          | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| Product                                      |       | $                                          | 274.3      |   |   | 41.9 | % |   | $ | 227.9 |   |   | 40.6 | % |   | $ | 206.9 |   |   | 39.9 | % |   |
| Service                                      |       | 56.0                                       |       |   | 40.9 | % |   | 49.6 |   |   | 39.2 | % |   | 38.8 |   |   | 34.4 | % |   |
| Intellectual  Property Sales and Settlements |       | 15.6                                       |       |   | 79.6 | % |   | 12.5 |   |   | 66.8 | % |   | 90.2 |   |   | 80.2 | % |   |
| Total Gross Profit and  Gross Margin         |       | $                                          | 345.9      |   |   | 42.6 | % |   | $ | 290.0 |   |   | 41.0 | % |   | $ | 335.9 |   |   | 45.1 | % |   |

 

20

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

Product and service gross profit increased $52.8million, or 19.0%, in 2004 compared to 2003, and $31.8 million, or 12.9%, in2003 compared to 2002 due to revenue growth and improved margins for bothcategories over the past two years. The improvement in product gross margin in2004 and 2003 was primarily due to higher capacity utilization related to therevenue growth; component cost reductions; and foreign exchange rate movementsand related pricing adjustments. The increase in service gross margin wasprimarily attributable to the operating leverage from the revenue increasesrealized in 2004 and 2003 compared to the respective prior year periods and achange in service mix from repair type to an increasing percentage ofprofessional services, primarily as a result of the new large enterpriseaccounts noted above.

The gross profit and grossmargins related to IP settlements vary each year based on the amount ofaggregate settlement revenue and related costs.

*Selling, Generaland Administrative expense*

Selling, general and administrative (“SG&A”)expenses were $279.9 million, $245.6 million and $249.9 million forthe years ended December 31, 2004, 2003 and 2002, respectively. IntermecSG&A expense of $256.2 million represents an increase of $32.0 millioncompared to 2003; however, SG&A decreased to 32.4% of product and servicerevenue in 2004 compared to 32.6% in 2003. The reduction in SG&A as apercentage of product and service revenue was achieved primarily as a result ofbetter operating leverage in other G&A and sales expense, partially offestby additional R&D expense. Intermec increased its R&D expense by morethan $16 million for specifically targeted investments, resulting in R&Dexpense representing 8.3% of product and service revenue in 2004 compared to7.2% of related revenue in 2003. Intermec SG&A expense in 2003 remainedconsistent compared with 2002 while product and service revenue increased by8.8% during the corresponding period.

Operating expenses forCorporate and Other were $23.7 million, $21.4 million, and $24.1 million in2004, 2003 and 2002, respectively. The increase of $2.3 million in 2004compared to 2003 was primarily due to approximately $6.6 million of incrementalspending on independent auditor and consulting fees relative to the Company’sSarbanes-Oxley section 404 compliance efforts partially offset by the costreductions achieved as a result of relocating the corporate headquarters toEverett, Washington. The decrease in expense of $2.7 million in 2003 comparedto 2002 was primarily due to headcount and other cost reductions related torelocating the Company’s corporate headquarters in 2003.

*Special Charges*

During the third quarter of 2002, the Companyinitiated a plan to relocate its corporate office to its existing IntermecTechnologies Corporation facility in Everett, Washington. This relocation wassubstantially complete by June 30, 2003. 

Special charges resultingfrom the corporate office relocation comprise the following (millions ofdollars):
| ** **              | ** ** | **Year Ended December 31,**   | ** ** |
|-------------------------|------------|----------------------------------------------|------------|
| ** **              | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** | **   2002   ** | ** ** |
| Severance               |       |                                         | $          | — |   |   |   | $ | — |   |   |   | $ | 2.0 |   |   |
| Facility  consolidation |       |                                         | 1.3        |   |   |   | 1.7 |   |   |   | 4.4 |   |   |
| Special charges         |       |                                         | $          | 1.3 |   |   |   | $ | 1.7 |   |   |   | $ | 6.4 |   |   |

 

21

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

As of December 31,2004, 22 employees had been terminated and $0.7 million in severance costshad been paid, of which 2 employee terminations and $0.3 million in severancepayments occurred during the year ended December 31, 2004. In the firstquarter of 2004, $1.4 million of the workforce reduction accrual, relating tocertain pension obligations for certain individuals affected by therestructuring plan, was reclassified to other long-term liabilities. Thecorporate restructuring accrual of $2.2 million as of December 31, 2004,relates to lease obligations for an idle facility. During the year ended December 31,2004, the Company paid $1.7 million in leased facility costs and recognized$1.3 million of expense related to the lease obligations.

*Interest, Net*

Net interest expensedecreased $0.8 million to $12.3 million for 2004 compared to the prior year asa result of lower average debt and higher cash and cash equivalent balancesduring 2004 compared with the prior year. Net interest expense of $20.6 millionfor 2002 reflects higher average debt compared to 2003.

*Provision forIncome Taxes*

The tax benefit for the year ended December 31,2004 reflects an effective tax rate for continuing operations of 3.0% comparedto a U.S. statutory provision rate of 35.0%. The reduction in the effective taxrate is primarily due to a $13.5 million tax benefit related to goodwill andintangible amortization of the Company’s Swedish operations. In the fourthquarter of 2004, through the implementation of a tax restructuring plan, theCompany ceased reinvesting permanently in its Swedish operations. Therestructuring resulted in the recognition of a deferred tax benefit related togoodwill and intangibles. In addition, as part of the Company’s overall reviewof its business operations in 2004 and its commitment to a plan to divest itsIAS business, the Company recognized additional deferred tax benefits relatedto its U.S. and foreign jurisdictions.

The provision for income taxes for the year ended December 31,2003 reflects an effective tax rate for continuing operations of 50.8%. Theincrease from the statutory rate of 35.0% is primarily attributable to theprovision for state taxes and the conversion of certain foreign tax credits tonet operating tax loss carryforwards due to the expected expiration of thesetax credits.

The effective tax rate forthe year ended December 31, 2002 for continuing operations was 35.0%. Thetax provision was primarily related to U.S. taxes.

*Loss fromDiscontinued Operations*

Effective the fourth quarter of 2004, the Companycommitted to a plan to divest of its IAS business, comprising the CincinnatiLamb and Landis Grinding Systems businesses, after it was determined that theIAS business is no longer aligned with the Company’s long-term strategy. TheCompany intends to sell IAS as a going concern as a whole or through the saleof its component businesses within the 2005 fiscal year. In accordance withSFAS 144, “Accounting for Disposal or Impairment of Long-Lived Assets,” the IASbusiness is classified as a discontinued operation in the Company’s consolidatedfinancial statements for all periods presented. See Note H to the Company’sconsolidated financial statements for additional information related todiscontinued operations.

22

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)

In conjunction withthe disposal plan, the Company analyzed the net assets of the IAS business forimpairment, resulting in a charge of $104.1 million to write down the netassets of Cincinnati Lamb to its estimated net realizable value. The charge issubject to adjustment pending the expected divesture. The charge includesimpairments of $63.3 million for goodwill, $30.2 million for property, plantand equipment and other long-lived assets and $10.6 million for current assets.In computing the impairment loss, the Company considered a $9.1 million creditbalance for the cumulative translation adjustment and a $9.1 million unrealizedminimum pension liability adjustment, net of tax, related to Cincinnati Lamb,which are included in the accumulated other comprehensive income component ofshareholders’ investment (“OCI”). These amounts are expected to be removed fromOCI when the disposition occurs. The Company did not record any impairmentpertaining to Landis Grinding Systems as its estimated net realizable value,including the $10.6 million credit balance for the cumulative translationadjustment related to Landis Grinding Systems included in OCI, exceeds netassets.

The following table setsforth the revenues and the components of the loss from discontinued operations,net of tax, for the years ended December 31, 2004, 2003 and 2002 (millionsof dollars):
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Product and service  revenues                 |       | $                                          | 471.1      |   | $ | 448.7 |   | $ | 568.8 |   |
| Loss from discontinued  operations before tax |       | (109.4                                     | )          | (42.1 | ) | (50.3 | ) |
| Benefit for income taxes                      |       | 8.1                                        |       | 7.7 |   | 15.1 |   |
| Loss from discontinued operations, net of tax |       | $                                          | (101.3     | ) | $ | (34.4 | ) | $ | (35.2 | ) |

 

Theloss from discontinued operations before tax includes non-cash impairmentcharges of $104.1 million, $4.1 million and $4.2 million, in 2004, 2003 and2002, respectively.  In addition, as aresult of merging the Cincinnati Machine, Lamb Machining Systems and Lamb Bodyand Assembly Systems (“Lamb B&A”) divisions, which was initiated in thefourth quarter of 2002, restructuring charges of $0.5 million, $3.5 million and$18.3 million were incurred in 2004, 2003 and 2002, respectively.  The loss from discontinued operations beforetax also includes a $3.1 million loss on the sale of Lamb B&A in 2003 andLamb B&A operating losses of $2.0 million, $9.2 million and $8.0 million,in 2004, 2003, and 2002, respectively. The 2002 loss from discontinuedoperations before tax also includes a $4.7 million loss on the sale of R&BPlastics.

 

The tax benefit for the year ended December 31, 2004 reflectsan effective tax rate of 7.4% compared to the U.S. statutory tax rate of 35%.The reduction in the effective tax rate is largely attributable to the $63.3million impairment charge related to non-deductible goodwill and additionalstate and foreign valuation allowances recorded against previously recognizeddeferred tax assets,  resulting from theCompany’s plan to divest IAS. The Company expects that certain of its state andforeign deferred tax assets of discontinued operations will not be realizableand, in 2004, recorded valuation allowances of $5.4 million and $31.3 million,respectively. The tax benefit for 2003 reflects an effective rate of 18.2 %primarily due to valuation allowances recorded for foreign deferred tax assets.

**Foreign CurrencyTransactions**

The Company is subject tothe effects of international currency fluctuations due to the global nature ofits operations. Foreign currency exposures are hedged as part of the Company’sglobal risk management program, which is designed to minimize short-termexposure to foreign currency fluctuations. Movements in exchange rates, net ofhedging activities, resulted in a netcurrency transaction gains (losses) of $(1.7) million, $1.2 million and $(1.1)million for the years ended December 31, 2004, 2003 and 2002,respectively.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

For fiscal year 2004, the Company’s continuingoperations derived approximately 45.3% of its revenues from non-U.S. customers.At December 31, 2004, long-lived assets attributable to foreign countriescomprised 7.8% of total long-lived assets. The largest components of theseforeign assets are attributable to European nations, primarily in theNetherlands, France and Italy.

**Liquidity andCapital Resources**

The Company’sfinancial condition remains strong. At December 31, 2004, cash and cashequivalents, including $50.0 million classified as restricted cash, was $267.9million, an increase of $29.5 million compared to the December 31, 2003 balanceof $238.4 million. Long-term debt at December 31, 2004 of $208.5 millionincludes $108.5 million classified as current portion of long-term debt. Totallong-term debt remained consistent with the December 31, 2003 balance.

Cash provided byoperating activities of continuing operations comprises net income adjusted forcertain non-cash items and changes in assets and liabilities. For 2004, cashprovided by operating activities of continuing operations was $44.9 million,compared to $41.1 million in 2003 and $68.5 million in 2002. In 2004, themajority of the increase in cash provided by operating activities of continuingoperations was due to higher net earnings and reductions in other currentassets and prepaid pension cost, partially offset by increases in net deferredtax assets and net working capital. The increase in net earnings includes $15.6million of net proceeds before tax from an IP settlement.

Investingactivities of continuing operations in 2004 and 2003 used net cash of $6.5million and $8.1 million, respectively, primarily for capital expenditures,partially offset by proceeds from the sale of property, plant andequipment.  Investing activities ofcontinuing operations in 2002 provided $10.7 million due to proceeds from thesale of property, plant and equipment, partially offset by capitalexpenditures.  Capital expenditures were$10.3 million, $11.9 million and $6.3 million for 2004, 2003 and 2002,respectively.  Proceeds from sales ofproperty, plant and equipment were $4.0 million, $3.4 million and $14.2 millionfor 2004, 2003 and 2002, respectively. 

Financingactivities of continuing operations in 2004 reflects $5.7 million in proceedsfrom stock option exercises offset by the $50.0 million of cash classified as restricted cash in preparation for therepayment of debt, reflecting a use of $44.1 million in cash. The Company plansto pay the current portion of long-term debt of $108.5 million, of which $100.0million matures in March 2005 and $8.5 million matures in July 2005, with cashand cash equivalents on hand. Financing activities of continuing operations in2003 and 2002 used net cash of $5.8 million and $55.2 million,respectively.  The Company made debtrepayments of $16.2 million and $56.8 million in 2003 and 2002, respectively.  In 2003, the Company received $12.9 millionin proceeds from stock option exercises.

In 2004,discontinued operations used net cash of $13.4 million and $1.4 million fromoperating and investing activities, respectively. The net cash used byoperating activities in 2004 was primarily due to an increase in accountsreceivable. Net cash provided by operating activities of discontinuedoperations was $24.6 million and $46.7 million in 2003 and 2002, respectively.The net cash provided was due primarily to reductions in net working capital,partially offset by restructuring costs. Net cash provided by investingactivities of discontinued operations was $8.4 million and $3.9 million in 2003and 2002, respectively, primarily from the sale of property, plant andequipment.

24

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

The Company maintains two secured long-term creditfacilities: a $100 million revolving credit facility (the “New RevolvingFacility”) and a £15.0 million ($28.7 million) revolving facility and relatedoverdraft facility (collectively, the “UK Facility”). On September 30,2004, the Company terminated and replaced its previously existing $100 millionrevolving credit facility (the “Old Revolving Facility”) and replaced it withthe $100 million, three-year New Revolving Facility.Net of outstanding lettersof credit and limitations on Minimum Availability, the Company had borrowingcapacity at December 31, 2004, of $29.3 million under the New RevolvingFacility and £8.4 million($16.1 million) under the UK Facility. The Company made no borrowings under theNew Revolving Facility, the UK Facility or the Old Revolving Facility during2004, and as of December 31, 2004, no borrowings were outstandingunder either the New Revolving Facility or the UK Facility. As of December 31,2004, the Company was in compliance with the financial covenants of each ofthese agreements.

The key terms of the New Revolving Facility are asfollows:

·       TheCompany’s obligations under the New Revolving Facility are secured bysubstantially all the U.S. assets of the Company and its U.S. subsidiaries anda pledge of 65% of the stock of certain of its foreign subsidiaries.

·       Borrowingsunder the New Revolving Facility bear interest at a variable rate equal to (atthe Company’s option) (i) LIBOR plus an applicable margin ranging from1.5% to 2.5% based on consolidated leverage, or (ii) the greater of thefederal funds rate plus 0.50% or the Bank’s prime rate, plus an applicablemargin ranging from 0.5% to 1.5% based on consolidated leverage.

·       Ifthe Company sells subsidiaries within its Industrial Automation Systemssegment, the net proceeds, or a portion thereof, as defined in the agreement,must be applied to repay borrowings outstanding under the New RevolvingFacility.

·       Untilit retires its 6.875% Notes due March 15, 2005, the Company must maintaina minimum balance of $50 million as restricted cash. This amount is classifiedas restricted cash on the Company’s consolidated balance sheet as of December 31,2004.

·       TheNew Revolving Facility places certain restrictions on the ability of theCompany and its subsidiaries to consolidate or merge, make acquisitions, createliens, incur additional indebtedness or dispose of assets.

·       Financial covenants includea Consolidated Leverage test, a Consolidated Interest Coverage test and aConsolidated Net Worth test, each as defined in the agreement.In March 1998,the Company sold $200.0 million principal amount of senior unsecured debt in anunderwritten offering. The debt comprised $100.0 million of 6.875% seven-yearnotes and $100.0 million of 7.00% ten-year notes. Interest payments are duesemi-annually in March and September. Including underwriting fees, discountsand other issuance costs, the effective interest rates on the seven-year andten-year notes are 7.125% and 7.175%, respectively. As of December 31,2004, the $100.0 million seven-year notes, maturing in March 2005, areclassified as current portion of long-term debt on the Company’s consolidatedbalance sheet.The Company additionally had outstanding an $8.5 millionindustrial revenue bond, bearing interest at 4.18%, maturing in July 2005,which is classified as current portion of long-term debt on the Company’sconsolidated balance sheet.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

Management believes that cash and cash equivalents onhand combined with projected cash flow from operations and the sale of certainassets will provide adequate funding to meet its expected working capital,capital expenditure and restructuring cost requirements for the next twelvemonths. Projected cash flows from operations are largely based on the Company’srevenue estimates, cost estimates, and the related timing of cash receipts andcash disbursements. If actual performance differs from estimated performance,cash flow from operations could be positively or negatively impacted.Additional sources of liquidity for the Company include the Revolving Facilityand the UK Facility.

**ContractualObligations**

The following tablesummarizes the Company’s significant contractual commitments for continuingoperations as of December 31, 2004 (millions of dollars). The table doesnot include amounts recorded on the Company’s consolidated balance sheet ascurrent liabilities. Long-term debt and operating leases are discussed in theindicated Notes to the Company’s consolidated financial statements.
| ** **                    | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                 | ** ** | **Less than 1  Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **After 5  Years** | ** ** |
| Long-term debt (Note B)       |       | $                                         | 208.5      |   |   | $ | 108.5 |   |   |   | $ | — |   |   |   | $ | 100.0 |   |   | $ | — |   |
| Interest on long-term  debt   |       | 23.9                                      |       |   | 8.5 |   |   |   | 14.0 |   |   |   | 1.4 |   |   | — |   |
| Purchase commitments          |       | 42.0                                      |       |   | 21.0 |   |   |   | 21.0 |   |   |   | — |   |   | — |   |
| Operating leases (Note  D)    |       | 47.9                                      |       |   | 9.6 |   |   |   | 12.5 |   |   |   | 8.2 |   |   | 17.6 |   |
| Total contractual obligations |       | $                                         | 322.3      |   |   | $ | 147.6 |   |   |   | $ | 47.5 |   |   |   | $ | 109.6 |   |   | $ | 17.6 |   |

 

Purchase orders or contracts for the purchase of rawmaterials and other goods and services are not included in the table above. TheCompany is not able to determine the aggregate amount of such purchase ordersthat represent contractual obligations, as purchase orders may representauthorizations to purchase rather than binding agreements. For the purposes ofthis table, contractual obligations for purchase of goods or services aredefined as agreements that are enforceable and legally binding on the Companyand that specify all significant terms, including: fixed or minimum quantitiesto be purchased; fixed, minimum or variable price provisions; and theapproximate timing of the transaction. The Company’s purchase orders are basedon current manufacturing needs and are fulfilled by vendors within short timehorizons. Within the IAS business, classified as discontinued operations, themajority of purchase orders are related to specific customer contracts. As of December 31,2004, the IAS business had a backlog for signed customer contract orders totaling$259.1 million. There were no unconditional purchase obligations other thanthose related to inventory, services, tooling and property, plant and equipmentpurchased in the ordinary course of business.

**Off-Balance SheetArrangements**

At December 31, 2004 the Company had aggregateoff-balance-sheet letter-of-credit reimbursement agreements of $53.6 millionthat relate to the Company’s performance on operating contracts with customersand generally expire within one year. Management does not believe that theseletter-of-credit reimbursement agreements have a material effect on the Company’sfinancial condition, changes in the financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

**Inflation**

In the opinion of management, inflation has not been asignificant factor in the markets in which the Company operates in 2004, 2003or 2002 and has not had a significant impact upon the results of its operationsduring these fiscal years.

**Critical AccountingPolicies and Estimates**

The Company’sconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported amounts ofrevenues and expenses. Actual amounts could differ from those estimates underdifferent assumptions or conditions. Significantestimates and assumptions were used to determine the provisions for uncollectibleaccounts receivable, excess and obsolete inventory, tax valuation allowances,recoverability of goodwill and other intangible assets, warranty costs,percentage-of-completion on long-term contracts, retiree medical and pensionobligations, estimated proceeds on businesses to be divested, estimated netrealizable value of assets held for sale and litigation loss contingencies.Despite these inherent limitations, management believes that Management’s Discussionand Analysis of Financial Condition and Results of Operations (“MD&A”) andthe financial statements and related footnotes provide a meaningful and fairperspective of the Company.

A summary of theCompany’s significant accounting policies is included in Note A to the consolidatedfinancial statements. Management believes that the application of thesepolicies on a consistent basis enables the Company to provide the users of thefinancial statements with useful and reliable information about the Company’soperating results and financial position. Management believes that thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

*Allowancefor Doubtful Accounts.**  *TheCompany maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments.Changes in the financial condition of the Company’s customers could result inupward or downward adjustments to the allowance for doubtful accounts.

*InventoryObsolescence.**  *TheCompany writes down its inventory for estimated obsolete or unsalable inventorybased on assumptions about future demand for its products and marketconditions. If future demand and market conditions are less favorable thanmanagement’s assumptions, additional inventory write-downs could be required.Likewise, favorable future demand and market conditions could positively impactfuture operating results if previously written-off inventory is sold.

*IncomeTaxes.**  *TheCompany considers future market growth, forecasted earnings, future taxableincome, the mix of earnings in the jurisdictions in which the Company operatesand prudent, feasible and permissable tax planning strategies in determiningthe realizability of deferred tax assets. If the Company were to determine thatit would not be able to realize a portion of its net deferred tax asset in thefuture for which there is currently no valuation allowance, an adjustment tothe valuation allowance would be charged to earnings in the period suchdetermination was made. Conversely, if the Company were to make a determinationthat it is more likely than not that the deferred tax assets for which there iscurrently a valuation allowance would be realized, the related valuationallowance would be reduced and a benefit to earnings would be recorded.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

The Companyconducts business in various countries throughout the world and is subject totax in numerous jurisdictions. As a result of its business activities, theCompany files a significant number of tax returns that are subject to audit byvarious tax authorities. Tax audits are often complex and may require severalyears to resolve. The Company recordsestimated tax liabilities to the extent the contingencies are probable and canbe reasonably estimated. Such estimated tax liabilities are based on management’sjudgment and best estimate as to the ultimate outcome of tax audits. However, the Company’s future results may include favorable or unfavorableadjustments to the Company’s estimated tax liabilities in the period the assessmentsare made or resolved or when statutes of limitation on potential assessmentsexpire. As a result, the Company’s effective tax rate may fluctuatesignificantly on a quarterly basis.

The Company’s effective tax rate includes the impact of certain undistributed foreignearnings for which no U.S. taxes have been provided because the Company intendsto reinvest such earnings permanently outside the United States. As describedin Note  I to the Consolidated Financial Statements, the Company’s fiscalyear 2004 results do not reflect the impact of the American Jobs Creation Actof 2004 (the “Jobs Act”). The Company has not fully evaluated the effects ofthe new repatriation provision contained in the Jobs Act. Material changes inthe Company’s plan to reinvest certain undistributed foreign earningspermanently outside the U.S could impact the Company’s future effective taxrate.

*Goodwilland Other Intangible Assets.  *Intangible assets withfinite useful lives are amortized generally ona straight-line basis over the periods benefited. All of the Company’s intangible assets pertain to thepatent portfolio of the ADS segment and have estimated useful lives of 18years. See Note E to the consolidated financialstatements for additional information.

The carrying valuesof goodwill and other intangible assets with indefinite useful lives are testedfor impairment at least annually during the Company’s fourth fiscal quarter orwhen events or circumstances indicate the carrying value of an asset may not berecoverable. If the carrying value of a reporting unit’s goodwill or anintangible asset exceeds its fair value, an impairment loss is recognized. TheCompany establishes the fair value of reporting unit goodwill based on adiscounted cash flow methodology. The discounted cash flow is based on theCompany’s strategic plans and long-range planning forecasts, which includerevenue and profit margin assumptions, based on management’s best estimate.Management considers historical experience and all available information at thetime the fair values of its businesses are estimated. However, actual fairvalues that could be realized in an actual transaction may differ from thoseused to evaluate the impairment of goodwill. See Note H to the Consolidated Financial Statements for additionalinformation.

*Impairmentof Long-lived Assets.**  *TheCompany assesses the recoverability of long-lived assets when events orcircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. If undiscounted expected cash flows to be generated by along-lived asset or asset group are less than its carrying amount, the Companyrecords an impairment to write down the long-lived asset or asset group to itsestimated fair value. Fair value is estimated based on discounted expectedfuture cash flows.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

*DiscontinuedOperations.**  *TheCompany adopted SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” effective January 1, 2002. This standardestablishes accounting and reporting requirements for the impairment ordisposal of long-lived assets. For those businesses where management hascommitted to a plan to divest, each business is valued at the lower of itscarrying amount or estimated fair value less cost to sell. If the carryingamount of the business exceeds its estimated fair value, a loss is recognized.The fair values are estimated using accepted valuation techniques such as a discountedcash flows model, earnings multiples, or indicative bids, when available. Anumber of significant estimates and assumptions are involved in the applicationof these techniques, including the forecasting of markets and market share,sales volumes and prices, costs and expenses, and multiple other factors.Management considers historical experience and all available information at thetime the estimates are made; however, the fair values that are ultimatelyrealized upon the sale of the businesses to be divested may differ from theestimated fair values reflected in the financial statements.Businesses to bedivested are classified in the consolidated financial statements asdiscontinued operations. For businesses classified as discontinued operations,the balance sheet amounts and income statement results and cash flows arereclassified from their historical presentation to assets and liabilities ofdiscontinued operations on the consolidated balance sheets, to loss fromdiscontinued operations in the consolidated statements of operations, and tocash flows from discontinued operations on the consolidated statements of cashflows for all periods presented. Additionally, segment information does notinclude the results of businesses classified as discontinued operations.Management does not expect any continuing involvement with these businessesfollowing their planned sales, and these businesses are expected to be disposedof within one year.

*Pension Benefits and Other Postretirement Benefits.**  *TheCompany has retirement and pension plans which cover most of its employees.Most of the Company’s U.S. employees as well as the employees of certainnon-U.S. subsidiaries are covered by contributory defined benefit plans, underwhich employees may contribute up to 4% of covered compensation annually. Annualemployer contributions are made to the extent such contributions areactuarially determined to adequately fund the plans. Retiree benefits are basedon the amount of participant contributions over the term of the participant’semployment.Assumptions used in determining projected benefit obligations andthe fair values of plan assets for the Company’s pension plans and otherpostretirement benefits are evaluated periodically by management inconsultation with an external actuary. Changes in assumptions are based onrelevant Company data, such as the rate of increase in compensation levels andthe expected long-term rate of return on plan assets. Critical assumptions suchas the discount rate used to measure the benefit obligations, the expectedlong-term rate of return on plan assets and health care cost projections areevaluated and updated annually. Note K to the consolidated financial statementsincludes disclosure of these rates for the Company’s domestic and foreignplans. The Company believes the assumptions are appropriate. However, theseassumptions could vary materially from actual results due to economic events ordifferent rates of retirement, mortality or withdrawal, positively ornegatively impacting future results of operations.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

The discount rate,used to discount future cash flows of benefit obligations back to themeasurement date, reflects the market rate for high-quality fixed-income debtinstruments. The discount rates for domestic and foreign plans as of December 31,2004 were 6.00% and 5.50%, respectively, compared to 6.00% and 5.75% as of December 31,2003. The decline in the discount rate used for foreign plans reflects lowerinterest rates in the current market. The effect of one-half percentage pointdecrease in the Company’s discount rate on pension cost would be an increase of$1.6 million. To determine the expected long-term rate of return, the Companyuses historic market trends combined with current market conditions. The weightedaverage expected long-term rate of return on its domestic and foreign plans was9.00% and 7.70% respectively. The effect on the Company’s pension cost of aone-half percentage point decrease in the expected long-term rate of returnwould be an increase of $0.5 million. The Company determines the expected rateof compensation increase based on historic trends and comparisons to externalrates. For domestic plans the Company concluded that no adjustment to theexpected rate of compensation increase was necessary and continued to use4.00%. The Company increased the rate used for foreign plans to 3.5% annually for2004 compared to 3.25% annually for 2003.Actuarial assumptions used to measurethe accumulated benefit obligation for other postretirement benefits include adiscount rate of 6.00%, 6.00%, and 6.75% at December 31, 2004, 2003 and2002, respectively. The effect on the Company’s postretirement benefit cost ofone-half percentage point decrease in the discount rate would be immaterial.The assumed health care cost trend rate for fiscal year 2004 was 10.33% and isprojected to decrease over 13 years to 6.00%, where it is expected to remainthereafter. The effect of a one-percentage-point increase ordecrease in the assumed health care cost trend rate on the service cost andinterest cost components of the net periodic postretirement benefit cost is notmaterial. A one-percentage-point increase in the assumed healthcare cost trend rate on the postretirement benefit obligation would result inan increase of approximately $2.9 million, while a one-percentage pointdecrease would result in a decrease of $2.5 million.

*Revenue Recognition.**  *Revenuesare generally recognized when products are shipped or services are rendered,the title and risk of loss has passed to the customer, the sales price is fixedor determinable and collectibility is reasonably assured. Royalty revenue isrecorded when the revenue is earned, the price is fixed or determinable andcollectibility is reasonably assured. Service and maintenance revenue is recognized as services are rendered, generallyover the contract term, and collectibility is reasonably assured.

When a saleinvolves multiple elements, such as sales of products that include services,the entire revenue from the arrangement is allocated to each respective elementbased on its relative fair value and is recognized when the revenue recognitioncriteria for each element are met. Fair value for each element is establishedbased on the sales price charged when the same element is sold separately. TheCompany reduces revenue for estimated customer returns, price protection,rebates and other offerings that occur under sales programs established by theCompany directly or with the Company’s distributors and resellers. The Companyaccrues the estimated cost of post-sale obligations, including basic productwarranties, based on historical experience at the time the Company recognizesrevenue.

Long-termcontracts, principally within the IAS business, classified as discontinuedoperations, are accounted for under the percentage-of-completion, cost-to-costmethod of accounting, which requires the Company to estimate total expectedcontract revenues and costs and record revenues and profits over the term ofthe contract. Estimated contract revenues and costs are based on contractspecifications, expected requirements, and achievement of contract milestones,including deliveries. The cumulative impact of changes in expected contractrevenues and costs and any anticipated losses are charged to operations as soonas they are determinable.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

*Contingencies.**  *The Companyassesses its exposure to loss contingencies, including environmental, legal andincome tax matters, and provides for an exposure if it is judged to be probableand estimable. If the actual loss from a contingency differs from management’sestimates, results of operations are adjusted upward or downward.

**New AccountingPronouncements**

In December 2004, the FASB issued SFAS No.  153, “Exchanges of Nonmonetary Assets—AnAmendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS153”). SFAS  153 eliminates the exception from fair value measurement fornonmonetary exchanges of similar productive assets in paragraph  21(b) ofAPB Opinion No.  29, “Accounting for Nonmonetary Transactions,” andreplaces it with an exception for exchanges that do not have commercialsubstance. SFAS  153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS  153 is effective for thefiscal periods beginning after June  15, 2005 and is required to beadopted by the Company in the first quarter of fiscal 2006. The Company iscurrently evaluating the effect that the adoption of SFAS  153 will haveon its consolidated results of operations and financial condition but does notexpect it to have a material impact.

On December 16,2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(revised 2004), *Share-Based Payment* (“SFAS 123R”).SFAS 123R eliminates the alternative of applying the intrinsic valuemeasurement provisions of APB Opinion 25 to stock compensation awards issued toemployees. Rather, the new standard requires enterprises to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. That cost will be recognized overthe period during which an employee is required to provide services in exchangefor the award, known as the requisite service period (usually the vesting period).Thepro forma effects on net income and earnings per share if the Company hadapplied the fair value recognition provisions of original SFAS 123 on stockcompensation awards (rather than applying the intrinsic value measurementprovisions of Opinion 25) are disclosed in Note K to the Company’s consolidatedfinancial statements. Although such pro forma effects of applying original SFAS123 may be indicative of the effects of adopting SFAS 123R, the provisions ofthese two statements differ in some important respects. The actual effects ofadopting SFAS 123R will be dependent on numerous factors including, but notlimited to, the valuation model chosen by the Company to value stock-basedawards; the assumed award forfeiture rate; the accounting policies adoptedconcerning the method of recognizing the fair value of awards over therequisite service period; and the transition method chosen for adopting SFAS123R. The Company is currently evaluating pricing models and the transitionprovisions of SFAS 123R will begin expensing stock-based compensation inaccordance with the standard in the third quarter of 2005.

FASB Staff Position (“FSP”) No.  109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (“FSP  109-2”), provides guidanceunder FASB Statement No.  109, “Accounting for Income Taxes,” with respectto recording the potential impact of the repatriation provisions of theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income taxexpense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the Jobs Acton its plan for reinvestment or repatriation of foreign earnings for purposesof applying FASB Statement No.  109. The Company has not yet completedevaluating the impact of the repatriation provisions of the Jobs Act.Accordingly, as provided for in FSP 109-2, the Company has not adjusted its taxexpense or deferred tax liability to reflect the repatriation provisions of theJobs Act.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (Continued)**

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—an Amendment of ARB No. 43, Chapter 4.” This standardprovides clarification that abnormal amounts of idle facility expense, freight,handling costs, and spoilage should be recognized as current-period charges.Additionally, this standard requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. The provisions of this standard are effective forinventory costs incurred during fiscal years beginning after June 15,2005. The Company does not expect theadoption of this standard to have a material impact on its consolidatedfinancial statements.

In May 2004, the FinancialAccounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-2,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (the “Act”). This FSPsupercedes FSP FAS No. 106-1, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003”and provides guidance on accounting for the effectsof the Act for employers that sponsor postretirement health care plans thatprovide drug benefits. The FSP also requires those employers to provide certaindisclosures regarding the effect of the federal subsidy provided by the Act.The disclosures required by FSP 106-2 are included in Note K to theCompany’s consolidated financial statements.

In March 2004, the EmergingIssues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” EITF 03-1 provides guidance on other-than-temporaryimpairment models for marketable debt and equity securities accounted for underSFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” and SFAS No. 124, “Accounting for Certain Investments Held byNot-for-Profit Organizations,” and non-marketable equity securities accountedfor under the cost method. The EITF developed a basic three-step model toevaluate whether an investment is other-than-temporarily impaired. FSPEITF 03-1-1 delayed the effective date of the accounting recognition provisionsof EITF 03-1. Quantitative and qualitativedisclosures for investments accounted for under SFAS No. 115 are effectivefor the Company’s year ending December 31, 2004. The adoption of EITF 03-1did not effect the consolidated financial statements.

In December 2003,the FASB issued SFAS No. 132 (revised 2003), “Employer’s Disclosures aboutPensions and Other Postretirement Benefits.” The revised statement retains thedisclosure requirements contained in SFAS No. 132, which it replaces, andrequires additional disclosures about the assets, obligations, cash flows andnet periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans. The statement’s disclosure requirements relatingto estimated future benefit payments and relating to foreign plans areeffective for the Company’s financial statements for the year ended December 31,2004 and are included in Note K to the Company’s consolidated financialstatements.

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**ITEM 7.       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)**

**Forward-LookingStatements and Risk Factors**

Forward-lookingstatements contained in this filing are subject to the safe harbor created bythe Private Securities Litigation Reform Act of 1995 (alternatively: Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934) and are highly dependant upon a variety of important factors whichcould cause actual results to differ materially from those reflected in suchforward-looking statements. These factors include but are not limited to theCompany’s ability to continue to improve profit of its business segment, reduceexpenses, improve efficiency, leverage its research and development investmentto drive significant future revenue, complete its divestiture of its IASbusinesses and realize the estimated market values. Such forward-lookingstatements involve and are dependent upon certain risks and uncertainties. Whenused in this document and documents referenced, the words “anticipate,”“believe,” “will,” “intend,” and “expect” and similar expressions as theyrelate to the Company or its management are intended to identify suchforward-looking statements. The Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events, changed circumstances or any other reason after thedate of this annual report.Forward-looking statements include, but are not limited to, statements aboutthe following:

·  TheCompany’s expected divestiture of its IAS business and assets held for sale andthe timing of those transactions;

·  Theestimated market value of the Company’s IAS business and assets held for sale;

·  Theestimated cash flow for the Company’s businesses and the timing of that cashflow;

·  TheCompany’s anticipated corporate and other expenses;

·  TheCompany’s expected effective tax rate;

·  TheCompany’s expected growth profile and growth range;

·  Theanticipated revenues and operating profit in the Company’s ADS business;

·  Theanticipated cost of goods sold or cost of services sold in the Company’s ADSbusiness;

·  TheCompany’s anticipated spending on research & development;

·  Theanticipated revenues from licensing the Company’s intellectual property and thetiming of such revenues;

·  TheCompany’s prospects for obtaining licenses under intellectual property owned orotherwise controlled by a third party;

·  Theanticipated costs associated with intellectual property owned or otherwisecontrolled by a third party and licensed by the Company and the timing of suchcosts;

·  TheCompany’s prospects for realizing of deferred tax assets;

·  Theanticipated demand for the Company’s ADS products and services;

·  TheCompany’s prospects for selling ADS products and services to major enterpriseaccounts and government agencies;

·  Theanticipated improvements in existing ADS products and services and thedevelopment of new ADS products and services;

·  Thetiming of the introduction of new ADS products and services and the phase-outof old ADS products and services;

·  TheCompany’s view of the short- and long-term outlook for and trends in themarkets for the Company’s ADS products and services;

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**ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (Continued)**

·  TheCompany’s anticipated contributions to its pension and other post-retirementbenefit plans;

·  TheCompany’s belief regarding the outcome of pending or threatened litigation;

·  TheCompany’s belief regarding the timing and outcome of national internationalstandards setting activities that could impact its ADS products and systems;

·  TheCompany’s ability to:

·   Meetits debt obligations, as well as working capital and capital expenditurerequirements;

·   Achieveits goals with respect to revenues and cost savings;

·   Successfullyobtain critical components for its products at reasonable prices;

·   Successfullycomplete large-scale mobile computing installations.

Forward-looking statements are not guarantees offuture performance. Several factors govern whether the Company will or canachieve any forward-looking statement made in this report. Any one of these factorscould cause the Company’s actual results to differ materially from thosediscussed in a forward-looking statement. The Company outlines these riskfactors in reports that it files with the SEC, in press releases and on itswebsite, www.unova.com. Such risk factors include, but are not limited to:

·  TheCompany’s inability to realize (within the next 12 months or thereafter) theestimated market value of its IAS business and the assets held for sale;

·  Weaknessin the automotive and aerospace markets could lead to reduced demand for theIAS business’ products and services and could reduce the Company’s netrealizable value from the planned divestiture of the IAS business;

·  TheCompany’s inability to generate anticipated cash flows from its businessesduring the anticipated time frame could adversely impact the Company’s abilityto meet debt obligations, working capital or capital expenditure requirements;

·  Unexpectedincreases in corporate and other expenses could adversely impact the Company’snet income;

·  TheCompany’s inability to achieve the expected effective tax rate could adverselyimpact the Company’s net income;

·  TheCompany’s inability to realize deferred tax assets could adversely impact theCompany’s net income;

·  Ifthe Company is unable to sell ADS products and services to major enterpriseaccounts and government agencies, that could adversely impact the Company’srevenues and operating profit;

·  Ifthe Company does not make the anticipated level of investment in research anddevelopment, that could adversely impact its future growth;

·  Ifthe Company’s research and development effort does not yield marketableimprovements in existing ADS products and services and new ADS products andservices that could adversely impact results of operations and the Company’sfuture growth;

·  Ifimprovements in existing ADS products and services or new ADS products andservices are not completed in a timely fashion, that could adversely impactresults of operations and the Company’s future growth;

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**ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (Continued)**

·  Othercompanies may infringe the Company’s intellectual property. If the Company isunable to enforce its intellectual property through appropriate licensingagreements, litigation or other means, demand for the Company’s products,royalty revenues and results of operations could be adversely affected;

·  Ifthe Company is unable to realize anticipated royalty revenue during theanticipated time frame could adversely impact results of operations;

·  Technologicalchanges and consequent shifts in the ADS market could adversely impact demandfor the Company’s ADS products and services and the Company’s revenues andoperating profit;

·  Ifthe Company is unable to obtain licenses under third party intellectualproperty at a reasonable cost or is enjoined from practicing an invention basedon third party intellectual property, the Company could be prevented from sellinga particular ADS product or family of products which could adversely impactresults of operations and the Company’s future growth;

·  Approvalof national and international standards applicable to the Company’s ADSproducts and systems could adversely impact demand for the Company’s productsand systems;

·  Changesin U.S. and foreign government regulations applicable to the Company’s ADSproducts and services could adversely impact demand for the Company’s productsand services or prevent the Company from selling some of its products andservices in some jurisdictions;

·  Unexpectedincreases in the Company’s cost of goods sold or cost of services sold in itsADS business or the Company’s inability to reduce those costs to expectedlevels could adversely impact the Company’s operating profit;

·  Someof the Company’s competitors have greater financial and other resources thanthe Company and, as a result, may be able to adapt more quickly to markettrends or price declines;

·  Ifthe Company is unable to obtain key components of its ADS products at areasonable cost and in a timely manner, the cost manufacturing those productscould increase, the Company might have to discontinue or re-engineer some ofthose products, and delivery of some of those products might be delayed, whichcould adversely impact results of operations and the Company’s future growth;

·  Ifpending or threatened litigation results in an unfavorable outcome, the Company’sfinancial position, results of operations, cash flows or future growth could beadversely affected;

·  Actsof terrorism within the U.S. could adversely affect the Company’s domesticoperations;

·  Actsof terrorism, political instability and hostility to U.S. companies in foreignjurisdictions could adversely affect the Company’s international operations.

Readers should consider the foregoing risk factors inevaluating the Company’s ability to achieve expected results or objectives setforth in any forward-looking statement. In addition, readers should not placeundue reliance on forward-looking statements in making investment decisionsregarding the Company. The Company disclaims any obligation to update publiclyany forward-looking statement, whether as a result of new information, futureevents or otherwise.

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**ITEM7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

The Company is exposed to interest rate risk primarilyfrom its short-term and long-term borrowings and to foreign exchange rate riskwith respect to its foreign operations and from foreign currency transactions.

*Interest Rates:**  *As of December 31,2004, the Company’s outstanding borrowings comprised $200.0 million in fixedrate debentures and an $8.5 million variable rate industrial revenue bond. In addition, the Company had variablerate facilities with no outstanding borrowings comprising the RevolvingFacility and the U.K. Facility. See discussions of the Company’s creditfacilities under the heading “Liquidity and Capital Resources” in Item 7 ofthis annual report and in Note B to the consolidated financial statements.

The table below presentsprincipal cash flows and interest rates by maturity dates and the fair valuesof the Company’s borrowings as of December 31, 2004. Fair values for fixedrate borrowings have been determined based on recent market trade values. Thefair values for variable rate borrowings approximate their carrying value.
| **Long-term Obligations** | ** ** | ** ** | ** ** | **2005** | ** ** | **2008** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|----------|------------|-----------|------------|---------------------|------------|
| Fixed Rate                     |       | $          | 100.0      |     | $          | 100.0    |       | $         | 200.0      |                |       | $ | 202.1 |   |   |
| Interest Rate                  |       | 6.88       | %          | 7.00     | %          |     |       |      |       |                |       |
| Variable Rate                  |       | $          | 8.5        |     |       |     | $          | 8.5       |       |                | $          | 8.5 |   |   |
| Interest Rate                  |       | 4.18       | %          |     |       |     |       |      |       |                |       |
|                                |            |            |            |          |            |          |            |           |            |                     |            |  |  |  |  |  |  |

 

*Foreign Exchange Rates:**  *Due to itsglobal operations, the Company’s cash flow and earnings are exposed to foreignexchange rate fluctuations. When appropriate, the Company may attempt to limitits exposure to changing foreign exchange rates by entering into short-termforeign currency exchange contracts. The Company does not enter into anyforeign currency contracts for speculative or trading purposes. Contracts thateffectively meet risk reduction and correlation criteria are accounted for ashedges and, accordingly, gains and losses from mark-to-market adjustments aredeferred in the cost basis of the underlying transaction. In thosecircumstances when it is not appropriate to account for contracts as hedges,gains and losses from mark-to-market adjustments are recorded currently inearnings. The Company performed a sensitivity analysis assuming a hypothetical10 percent movement in foreign currency exchange rates applied to the exposuredescribed above. As of December 31, 2004, the analysis indicated that suchmarket movements would not have a material impact on the Company’s business,financial condition or results of operations. Actual gains or losses in thefuture may differ significantly from that analysis, however, based on changesin the timing and amount of interest rate and foreign currency exchange ratemovements and the Company’s actual exposures.

During 2004, the Company’ssales comprised $489.9 million, or 60%, denominated in U.S. dollars, $159.3million, or 20%, denominated in euros, $55.3 million or 7%, denominated inBritish pounds, and $106.8 million, or 13% denominated in other foreigncurrencies. Fluctuations in foreign currency translation rates positivelyimpacted the Company’s sales by approximately $24.7 million, $31.5 millionand $6.5 million in 2004, 2003 and 2002, respectively.

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**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
|                                                                                                                                 | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------|----------|
| Management’s Responsibility  for Financial Reporting                                                                       | F-1      |   |
| Management’s Report on  Internal Control over Financial Reporting                                                          | F-1      |   |
| Management’s Certifications                                                                                                | F-2      |   |
| Reports of Independent  Registered Public Accounting Firm                                                                       | F-3      |   |
| Consolidated Statements of  Operations for the years ended December 31, 2004, 2003 and 2002                                | F-6      |   |
| Consolidated Balance Sheets as of  December 31, 2004 and 2003                                                              | F-7      |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2004, 2003 and 2002                                | F-8      |   |
| Consolidated Statements of  Changes in Shareholders’ Investment for the years ended  December 31, 2004, 2003 and 2002 | F-9      |   |
| Notes to Consolidated  Financial Statements                                                                                     | F-10     |   |
| Quarterly  Financial Information (unaudited)                                                                                    | Q-1      |   |

 

**ITEM 9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.   CONTROLS AND PROCEDURES**

(a) Evaluation of Disclosure Controls andProcedures

The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport and they have concluded that these controls and procedures areeffective.

(b) Management’s Annual Report on InternalControl over Financial Reporting

Management’s Reporton Internal Control over Financial Reporting is on page F-1 of this annualreport on Form 10-K and is incorporated by reference.

(c) Attestation Report of the Registered PublicAccounting Firm

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2004 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir report which is on page F-3 of this annual report on Form 10-Kand is incorporated by reference.

(d) Changes in Control over Financial Reporting

There have been nosignificant changes in internal control over financial reporting that occurredduring the fourth quarter 2004, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financial reporting.

**ITEM 9B.  OTHERINFORMATION**

None

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**PART III**

**ITEM10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company has adopted a code of business conduct andethics for all directors, officers and employees, known as the Standards ofConduct. The Standards of Conduct are available on the Company’s website underInvestor Information at *http:*//*www.unova.com*. The Company intends to disclose on itswebsite any amendment to, or waiver, of the Standards of Conduct related tosenior officers. Shareholders may request a free copy of the Standards ofConduct from:

UNOVA Inc.

**Attention:Investor Relations**

**6001 36**th Avenue West

**Everett, WA 98203-1264**

See the informationrelating to directors of the Company under “Election of Directors” in theCompany’s definitive Proxy Statement relating to the Annual Meeting ofShareholders to be held on May 18, 2005 (the “2005 Proxy Statement”),which is incorporated herein by reference.

The executive officers of the Company are elected eachyear by the Board of Directors at its first meeting following the AnnualMeeting of Shareholders to serve during the ensuing year and until theirrespective successors are elected and qualified or until their earlierresignation or removal. There are no family relationships between any of the executiveofficers of the Company. The following information indicates the positions andages of the Company’s executive officers at March 1, 2005, and theirbusiness experience during the prior five years.
| Name                            |   |   |   | ** **                                                                                                                                                                                                                                                                                                                                                                                    | **Age** | ** ** | ** ** | **Position with   the Company and Principal   Business Affiliations During Past Five Years** |
|---------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|------------|------------|----------------------------------------------------------------------------------------------|
| Larry D. Brady                  |   | 62     |   | Chairman of the  Board since August 2001. Chief Executive Officer since  September 2000. Director since September 1999, and President since  July 1999. Served as Chief Operating Officer from July 1999 to  September 2000. For prior business experience, see the description of  Directors in “Election of Directors” in the 2005 Proxy Statement. |
| Kenneth L. Cohen                |   | 61     |   | Vice President and  Treasurer since January 1, 2004 and Vice President, Taxes since  July 2000. Prior thereto, Staff Vice President, Taxes from  October 1997.                                                                                                                                                                                                                 |
| Michael E. Keane                |   | 49     |   | Senior Vice President  and Chief Financial Officer since October 1997. Group Executive, Advanced  Manufacturing Equipment, from February 2002 to December 2002.                                                                                                                                                                                                                |
| Thomas O. Miller                |   | 53     |   | Vice President of the  Company since February 1999 and President of its wholly owned subsidiary  Intermec Technologies Corporation since March 12, 2004. Prior thereto,  Executive Vice President of Intermec from July 2001 to March 2003  and Senior Vice President of Intermec from March 1997 to July 2001.                                                 |
|  

 

Robert T. Smith |   | 58     |   | Senior Vice President of  the Company since July 2003 and President of the Company’s Industrial  Automation Systems since June 2003. Prior thereto, group Vice President  of Valspar Corporation, a leading supplier of paint and coatings, from 1998  to 2001.                                                                                                                |
| Janis L. Harwell                |   | 50     |   | Senior Vice President  and General Counsel since September 2004. Prior thereto, Vice President,  General Counsel and Secretary of Renessen LLC, an agricultural biotechnology  joint venture formed by Cargill, Inc. and Monsanto Company, from  January 1999 to August 2004.                                                                                             |

 

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**ITEM 11.   EXECUTIVE COMPENSATION**

See the informationrelating to executive compensation under the caption “Executive Compensation” inthe Company’s 2005 Proxy Statement, which is incorporated herein by reference.

**ITEM12.     SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

See the information with respect to beneficialownership of the Company’s voting securities by each director, certainexecutive officers and all executive officers and directors as a group, and byany person known to beneficially own more than 5% of any class of votingsecurity of the Company, under the caption “Security Ownership of CertainBeneficial Owners and Management” of the Company’s 2005 Proxy Statement, whichis incorporated herein by reference.

See the informationrelating to the number of securities remaining to be issued under the Company’sequity compensation plans under the caption “Equity Compensation PlanInformation” of the Company’s 2005 Proxy Statement, which is incorporatedherein by reference.

**ITEM 13.   CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

See “Certain Relationshipsand Related Transactions” in the Company’s 2005 Proxy Statement.

**ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES**

See the informationrelating to principal accounting fees and services under the caption “PrincipalAccountant Fees and Services” in the Company’s 2005 Proxy Statement, which isincorporated herein by reference.

**PART IV**

**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTSCHEDULE**

(a)           (1)  Financial Statements

See listing of financial statements as set forth inItem 8 of this annual report on Form 10-K.

(2)   FinancialStatement Schedule

Schedule II. Valuation and Qualifying Accounts at page S-1of this annual report on Form 10-K.

All other schedules specified under Regulation S-X areomitted because they are either not applicable, not required or the informationcalled for therein appears in the consolidated financial statements or notesthereto.

(3)   ExecutiveCompensation Plans and Arrangements

Executive compensation plans and arrangements arelisted as exhibits 10.7 through 10.35 as set forth in the Index to Exhibits at page E-1of this annual report.

(b)   Index toExhibits at page E-1 of this annual report.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|          | UNOVA,  INC.                |
|----------|-----------------------------|
|     | /s/ MICHAEL E. KEANE        |
|     | Michael E. Keane            |
| * * | *Senior Vice President and* |
|     | *Chief Financial Officer*   |
|     | March 11, 2005         |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated:
| /s/ FREDRIC B. ANDERSON  |   | Director of  Accounting and Financial Reporting |   | March 11,  2005 |
|--------------------------|--------|-------------------------------------------------|--------|----------------------|
| Fredric B.  Anderson     |   | (Chief Accounting Officer)                      |   |                 |
| /s/  LARRY D. BRADY      |   | Director, Chairman of  the Board,               |   | March 11, 2005  |
| Larry D. Brady           |   | President and Chief Executive Officer           |   |                 |
| /s/  JOSEPH T. CASEY     |   | Director                                        |   | March 11, 2005  |
| Joseph T. Casey          |   |                                            |   |                 |
| /s/  STEPHEN E. FRANK    |   | Director                                        |   | March 11, 2005  |
| Stephen E. Frank         |   |                                            |   |                 |
| /s/  CLAIRE W. GARGALLI  |   | Director                                        |   | March 11, 2005  |
| Claire W.  Gargalli      |   |                                            |   |                 |
| /s/  GREGORY K. HINCKLEY |   | Director                                        |   | March 11, 2005  |
| Gregory K.  Hinckley     |   |                                            |   |                 |
| /s/  LYDIA H. KENNARD    |   | Director                                        |   | March 11, 2005  |
| Lydia H. Kennard         |   |                                            |   |                 |
| /s/  ALLEN J. LAUER      |   | Director                                        |   | March 11, 2005  |
| Allen J. Lauer           |   |                                            |   |                 |
| /s/  STEPHEN P. REYNOLDS |   | Director                                        |   | March 11, 2005  |
| Stephen P.  Reynolds     |   |                                            |   |                 |
| /s/  STEVEN B. SAMPLE    |   | Director                                        |   | March 11, 2005  |
| Steven B. Sample         |   |                                            |   |                 |
| /s/  WILLIAM D. WALSH    |   | Director                                        |   | March 11, 2005  |
| William D. Walsh         |   |                                            |   |                 |
| /s/  LARRY D. YOST       |   | Director                                        |   | March 11, 2005  |
| Larry D. Yost            |   |                                            |   |                 |

 

40

----

**UNOVA, INC.**

**Management’sResponsibility for Financial Reporting**

The consolidated financial statements of UNOVA, Inc.and subsidiaries and related financial information included in this annual report,have been prepared by the Company, whose management is responsible for theirintegrity. These statements, which necessarily reflect management’s bestestimates and judgments, have been prepared in conformity with accountingprinciples generally accepted in the United States of America. The otherfinancial information included in the annual report is consistent with that inthe financial statements.

Management also recognizes its responsibility forconducting the Company’s business with honesty and integrity in all its businessrelationships with its employees, customers and suppliers. The responsibilityis characterized and reflected in the Company’s Standards of Conduct, whichapply to all directors, officers and other employees of the Company. TheseStandards include the conduct of its business activities within the laws of thecountries in which the Company operates and potentially conflicting outsidebusiness interests of its directors, officers and other employees. The Companymaintains a systematic program to assess compliance with these policies.

The consolidated financial statements have beenaudited by Deloitte & Touche LLP, the Company’s independent registeredpublic accounting firm, whose report appears on page F-3.

The Audit and ComplianceCommittee of the Board of Directors, which consists solely of independentdirectors under the applicable standards of the New York Stock Exchange, meetsat least quarterly with management, the independent auditors and the Company’sinternal auditors to review the scope of their activities and reports relatingto internal controls and financial reporting matters. The independent andinternal auditors have full and free access to the Audit and ComplianceCommittee and meet with the Committee both in and out of the presence ofCompany management.

**Management’sReport on Internal Control over Financial Reporting**

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company. In order to evaluate the effectiveness of internal controlover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct, the Company’s management has conducted an assessment, including testing,using the criteria in *Internal Control—IntegratedFramework*, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”). The Company’s management has concluded that,as of December 31, 2004, its internal control over financial reporting iseffective based on these criteria. The Company’s independent registered publicaccounting firm, Deloitte & Touche LLP, have issued an audit report onthe Company’s assessment of its internal control over financial reporting,which is included herein.

There were no changes in the Company’s internalcontrols over financial reporting during the quarter ended December 31,2004 that have materially affected, or are reasonably likely to materiallyaffect, its internal controls over financial reporting.

The Company’s management,including its Chief Executive Officer and Chief Financial Officer, does notexpect that the Company’s disclosure controls and procedures or its internalcontrol will prevent all errors and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.

F-1

----

**Management’s Certifications**

Thecertifications of the Company’s Chief Executive Officer and Chief FinancialOfficer required by the Sarbanes-Oxley Act have been included as Exhibits 31and 32 in the Company’s Form 10-K. In addition, in 2004, the Company’sChief Executive Officer provided to the New York Stock Exchange the annual CEOcertification regarding the Company’s compliance with the New York StockExchange’s corporate governance listing standards.
| /s/ LARRY D. BRADY                                  |     |
|-----------------------------------------------------|----------|
| Larry D. Brady                                      |     |
| *Chief Executive Officer*                           | * * |
| March 11, 2005                                 |     |
| /s/ MICHAEL E. KEANE                                |     |
| Michael E. Keane                                    | * * |
| *Senior Vice President and Chief Financial Officer* | * * |
| March 11, 2005                                 | * * |

 

 

 

F-2

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
| To the Board of Directors and Shareholders of |
|-----------------------------------------------|
| UNOVA, Inc.                              |
| Everett, Washington                           |

 

We have audited the accompanying consolidated balancesheets of UNOVA, Inc. and subsidiaries (the “Company”) as of December 31,2004 and 2003, and the related consolidated statements of operations, changesin shareholders’ investment, and cash flows for each of the three years in theperiod ended December 31, 2004. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States)(“PCAOB”). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of UNOVA, Inc.and subsidiaries as of December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, thefinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

Wehave also audited, in accordance with the standards of the PCAOB, theeffectiveness of the Company’s internal control over financial reporting as of December 31,2004, based on the criteria established in *InternalControl—Integrated Framework,* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 11,2005 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
| Seattle, Washington                |   |
| March 11, 2005                |   |

 

F-3

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Tothe Board of Directors and Shareholders of

UNOVA, Inc.

Everett, Washington

We have audited management’s assessment, included inthe accompanying *Management’s Report on Internal Control overFinancial Reporting*, that UNOVA, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 31,2004, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States)(“PCAOB”). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2004, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

F-4

----

Wehave also audited, in accordance with the standards of the PCAOB, theconsolidated financial statements and financial statement schedule as of andfor the year ended December 31, 2004 of the Company and our report dated March 11,2005 expressed an unqualified opinion on those financial statements andfinancial statement schedule.
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
| Seattle, Washington                |   |
| March 11, 2005                |   |

 

F-5

----

** UNOVA, INC.CONSOLIDATED STATEMENTS OFOPERATIONS(thousands of dollars, except per share amounts)**
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                                |       |                                       |       |   |   |   |   |
| Product                                                  |       | $                                          | 654,867    |   | $ | 561,362 |   | $ | 519,089 |   |
| Service                                                  |       | 136,800                                    |       | 126,553 |   | 112,937 |   |
| Intellectual property sales and settlements              |       | 19,650                                     |       | 18,668 |   | 112,352 |   |
| Total Revenues                                           |       | 811,317                                    |       | 706,583 |   | 744,378 |   |
| Costs and  Expenses:                                     |       |                                       |       |   |   |   |   |
| Cost of product revenues                                 |       | 380,578                                    |       | 333,505 |   | 312,133 |   |
| Cost of service revenues                                 |       | 80,821                                     |       | 76,944 |   | 74,131 |   |
| Cost of intellectual property sales and settlements      |       | 4,031                                      |       | 6,174 |   | 22,191 |   |
| Selling, general and administrative                      |       | 279,868                                    |       | 245,633 |   | 249,891 |   |
| Special charges                                          |       | 1,306                                      |       | 1,662 |   | 6,393 |   |
| Total Costs and Expenses                                 |       | 746,604                                    |       | 663,918 |   | 664,739 |   |
| Operating Profit from Continuing Operations              |       | 64,713                                     |       | 42,665 |   | 79,639 |   |
| Interest, net                                            |       | (12,361                                    | )          | (13,085 | ) | (20,589 | ) |
| Foreign currency exchange, net                           |       | (1,675                                     | )          | 1,242 |   | (1,085 | ) |
| Earnings from Continuing Operations before Income  Taxes |       | 50,677                                     |       | 30,822 |   | 57,965 |   |
| Provision (Benefit) for Income Taxes                     |       | (1,504                                     | )          | 15,650 |   | 20,312 |   |
| Earnings from Continuing Operations                      |       | 52,181                                     |       | 15,172 |   | 37,653 |   |
| Loss from Discontinued Operations, net of tax            |       | (101,310                                   | )          | (34,439 | ) | (35,226 | ) |
| Net Earnings (Loss)                                      |       | $                                          | (49,129    | ) | $ | (19,267 | ) | $ | 2,427 |   |
| Basic Earnings  (Loss) per Share                         |       |                                       |       |   |   |   |   |
| Continuing Operations                                    |       | $                                          | 0.86       |   | $ | 0.26 |   | $ | 0.65 |   |
| Discontinued Operations                                  |       | (1.67                                      | )          | (0.59 | ) | (0.61 | ) |
| Net Earnings (Loss) per Share                            |       | $                                          | (0.81      | ) | $ | (0.33 | ) | $ | 0.04 |   |
| Diluted Earnings  (Loss) per Share                       |       |                                       |       |   |   |   |   |
| Continuing Operations                                    |       | $                                          | 0.84       |   | $ | 0.25 |   | $ | 0.64 |   |
| Discontinued Operations                                  |       | (1.63                                      | )          | (0.57 | ) | (0.60 | ) |
| Net Earnings  (Loss) per Share                           |       | $                                          | (0.79      | ) | $ | (0.32 | ) | $ | 0.04 |   |

 

See accompanying notes to consolidated financial statements.

F-6

----

**UNOVA, INC.CONSOLIDATED BALANCE SHEETS(thousands of dollars)**
|                                                                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current Assets:                                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                                       |       | $                     | 217,899    |   | $ | 238,447 |   |
| Restricted cash                                                                                  |       | 50,000                |       | –– |   |
| Accounts receivable, net  of allowance for doubtful accounts of $9,771 (2004) and $11,927 (2003) |       | 157,833               |       | 137,732 |   |
| Inventories                                                                                      |       | 80,854                |       | 73,171 |   |
| Net deferred tax assets                                                                          |       | 81,769                |       | 71,229 |   |
| Assets held for sale                                                                             |       | 19,748                |       | 23,840 |   |
| Current assets of  discontinued operations                                                       |       | 211,116               |       | 196,860 |   |
| Other current assets                                                                             |       | 8,831                 |       | 19,668 |   |
| Total Current Assets                                                                             |       | 828,050               |       | 760,947 |   |
| Property, Plant and  Equipment, Net                                                              |       | 30,375                |       | 30,231 |   |
| Intangibles, Net                                                                                 |       | 4,072                 |       | 4,336 |   |
| Net Deferred Tax Assets                                                                          |       | 134,978               |       | 111,820 |   |
| Long-Term Assets of  Discontinued Operations                                                     |       | 21,238                |       | 119,224 |   |
| Other Assets                                                                                     |       | 53,964                |       | 64,259 |   |
| Total Assets                                                                                     |       | $                     | 1,072,677  |   | $ | 1,090,817 |   |
| **LIABILITIES  AND SHAREHOLDERS’ INVESTMENT**                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current Liabilities:                                                                             |       |                  |       |   |   |
| Accounts payable and  accrued expenses                                                           |       | $                     | 160,001    |   | $ | 152,542 |   |
| Payroll and related  expenses                                                                    |       | 30,077                |       | 33,271 |   |
| Current portion of  long-term debt                                                               |       | 108,500               |       | –– |   |
| Current liabilities of  discontinued operations                                                  |       | 130,257               |       | 134,706 |   |
| Total Current  Liabilities                                                                       |       | 428,835               |       | 320,519 |   |
| Long-term Debt                                                                                   |       | 100,000               |       | 208,500 |   |
| Other Long-term  Liabilities                                                                     |       | 86,220                |       | 78,862 |   |
| Long-Term Liabilities of  Discontinued Operations                                                |       | 46,388                |       | 52,108 |   |
| Commitments and  Contingencies                                                                   |       | —                |       | — |   |
| Shareholders’ Investment                                                                    |       |                  |       |   |   |
| Preferred stock; no  shares outstanding                                                          |       | —                |       | — |   |
| Common stock; shares  outstanding:                                                               |       |                  |       |   |   |
| 61,148,274 (2004) and  60,265,615 (2003)                                                         |       | 611                   |       | 605 |   |
| Additional paid-in  capital                                                                      |       | 703,416               |       | 690,745 |   |
| Accumulated deficit                                                                              |       | (306,695              | )          | (257,566 | ) |
| Accumulated other  comprehensive income (loss)                                                   |       | 13,902                |       | (2,956 | ) |
| Total Shareholders’  Investment                                                             |       | 411,234               |       | 430,828 |   |
| Total Liabilities and Shareholders’ Investment                                              |       | $                     | 1,072,677  |   | $ | 1,090,817 |   |

 

See accompanying notes to consolidated financial statements.

F-7

----

**UNOVA, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS(thousands of dollars)**
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash and Cash Equivalents at Beginning of Year                                       |       | $                                          | 238,447    |   | $ | 178,269 |   | $ | 103,714 |   |
| Cash Flows from Operating  Activities:                                               |       |                                       |       |   |   |   |   |
| Net earnings from continuing operations                                              |       | 52,181                                     |       | 15,172 |   | 37,653 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 10,847                                     |       | 14,079 |   | 18,449 |   |
| Change in prepaid pension cost                                                       |       | 11,098                                     |       | 5,357 |   | 6,525 |   |
| Deferred taxes                                                                       |       | (33,698                                    | )          | (878 | ) | (3,522 | ) |
| Stock-based compensation and other                                                   |       | 1,665                                      |       | 5,408 |   | 4,567 |   |
| Changes  in operating assets and liabilities:                                        |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | (10,191                                    | )          | 17,127 |   | 3,540 |   |
| Inventories                                                                          |       | (6,599                                     | )          | (5,301 | ) | 8,793 |   |
| Other current assets                                                                 |       | 11,069                                     |       | (12,219 | ) | 3,340 |   |
| Accounts payable and accrued expenses                                                |       | 6,952                                      |       | 2,378 |   | (13,121 | ) |
| Payroll and related expenses                                                         |       | (2,628                                     | )          | (6,821 | ) | (2,881 | ) |
| Other long-term liabilities                                                          |       | 2,565                                      |       | 2,592 |   | (624 | ) |
| Other operating activities                                                           |       | 1,603                                      |       | 4,200 |   | 5,781 |   |
| Net Cash Provided by Operating Activities of Continuing Operations                   |       | 44,864                                     |       | 41,094 |   | 68,500 |   |
| Cash Flows from Investing  Activities:                                               |       |                                       |       |   |   |   |   |
| Capital expenditures                                                                 |       | (10,284                                    | )          | (11,903 | ) | (6,324 | ) |
| Proceeds from sale of property, plant and equipment                                  |       | 4,026                                      |       | 3,423 |   | 14,187 |   |
| Other investing activities                                                           |       | (225                                       | )          | 373 |   | 2,814 |   |
| Net Cash Provided by (Used in) Investing Activities of Continuing  Operations        |       | (6,483                                     | )          | (8,107 | ) | 10,677 |   |
| Cash Flows from Financing  Activities:                                               |       |                                       |       |   |   |   |   |
| Repayment of long-term obligations                                                   |       | ––                               |       | (16,200 | ) | (56,800 | ) |
| Cash restricted for repayment of debt                                                |       | (50,000                                    | )          | –– |   | –– |   |
| Stock options exercised                                                              |       | 5,683                                      |       | 12,912 |   | 158 |   |
| Other financing activities                                                           |       | 211                                        |       | (2,469 | ) | 1,487 |   |
| Net Cash Used in Financing Activities of Continuing Operations                       |       | (44,106                                    | )          | (5,757 | ) | (55,155 | ) |
| Net Cash Provided by (Used in) Continuing Operations                                 |       | (5,725                                     | )          | 27,230 |   | 24,022 |   |
| Net Cash Provided by (Used in) Operating Activities of Discontinued  Operations      |       | (13,382                                    | )          | 24,576 |   | 46,651 |   |
| Net Cash Provided by (Used in) Investing Activities of Discontinued Operations  |       | (1,441                                     | )          | 8,372 |   | 3,882 |   |
| Resulting Increase (Decrease) in Cash and Cash Equivalents                           |       | (20,548                                    | )          | 60,178 |   | 74,555 |   |
| Cash and Cash Equivalents at End of Year                                             |       | $                                          | 217,899    |   | $ | 238,447 |   | $ | 178,269 |   |
| **Supplemental Information**                                                         |       |                                       |       |   |   |   |   |
| Effect of exchange rates on cash and cash equivalents                                |       | $                                          | 6,677      |   | $ | 5,450 |   | $ | 1,328 |   |
| Cash  Payments:                                                                      |       |                                       |       |   |   |   |   |
| Interest on Long-Term Debt                                                           |       | (15,379                                    | )          | (15,592 | ) | (21,779 | ) |
| Income Taxes                                                                         |       | (4,338                                     | )          | (9,046 | ) | (1,175 | ) |
| Non-Cash  Transactions:                                                              |       |                                       |       |   |   |   |   |
| Impairment of assets                                                                 |       | 104,078                                    |       | 4,081 |   | 4,200 |   |

 

See accompanying notes to consolidated financial statements.

F-8

----

**UNOVA, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN**SHAREHOLDERS’ INVESTMENT

**(thousands ofdollars)**
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance, January 1, 2002                                      |       |       | $          | 581            |       |          | $          | 669,389                |       | $          | (240,726   | ) |   | $ | (31,270 | ) |   | $ | 397,974 |   |
| Comprehensive  Income:                                             |       |       |       |           |       |          |       |                   |       |       |       |   |   |   |   |
| Net earnings                                                       |       |       |       |           |       |          |       | 2,427                  |       |       |       |   |   | 2,427 |   |
| Currency translation adjustment                                    |       |       |       |           |       |          |       |                   |       |       | 19,768     |   |   | 19,768 |   |
| Minimum pension liability adjustment, net of tax  effect of $3,257 |       |       |       |           |       |          |       |                   |       |       | (7,602     | ) |   | (7,602 | ) |
| Comprehensive Income                                               |       |       |       |           |       |          |       |                   |       |       |       |   |   | 14,593 |   |
| Issuances of  common stock                                         |       |       | 5          |           |       | 5,326         |       |                   |       |       |       |   |   | 5,331 |   |
| Balance, December 31, 2002                                    |       |       | 586        |           |       | 674,715       |       | (238,299               | )          |       | (19,104    | ) |   | 417,898 |   |
| Comprehensive  Income:                                             |       |       |       |           |       |          |       |                   |       |       |       |   |   |   |   |
| Net loss                                                           |       |       |       |           |       |          |       | (19,267                | )          |       |       |   |   | (19,267 | ) |
| Currency translation adjustment                                    |       |       |       |           |       |          |       |                   |       |       | 19,029     |   |   | 19,029 |   |
| Minimum pension liability adjustment, net of tax  effect of $0     |       |       |       |           |       |          |       |                   |       |       | (2,881     | ) |   | (2,881 | ) |
| Comprehensive Loss                                                 |       |       |       |           |       |          |       |                   |       |       |       |   |   | (3,119 | ) |
| Issuances of  common stock                                         |       |       | 19         |           |       | 16,030        |       |                   |       |       |       |   |   | 16,049 |   |
| Balance, December 31, 2003                                    |       |       | 605        |           |       | 690,745       |       | (257,566               | )          |       | (2,956     | ) |   | 430,828 |   |
| Comprehensive  Income:                                             |       |       |       |           |       |          |       |                   |       |       |       |   |   |   |   |
| Net loss                                                           |       |       |       |           |       |          |       | (49,129                | )          |       |       |   |   | (49,129 | ) |
| Currency translation adjustment and other                          |       |       |       |           |       |          |       |                   |       |       | 15,519     |   |   | 15,519 |   |
| Minimum pension liability adjustment, net of tax  effect of $573   |       |       |       |           |       |          |       |                   |       |       | 1,339      |   |   | 1,339 |   |
| Comprehensive Loss                                                 |       |       |       |           |       |          |       |                   |       |       |       |   |   | (32,271 | ) |
| Issuances of  common stock                                         |       |       | 6          |           |       | 12,671        |       |                   |       |       |       |   |   | 12,677 |   |
| Balance,  December 31, 2004                                   |       |       | $          | 611            |       |          | $          | 703,416                |       | $          | (306,695   | ) |   | $ | 13,902 |   |   | $ | 411,234 |   |

 

See accompanying notes to consolidated financial statements.

F-9

----

**UNOVA, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note A:**   Significant AccountingPolicies  

*Natureof Operations.**  *UNOVA, Inc. and subsidiaries(“UNOVA” or the “Company”), through its Automated Data Systems (“ADS”) segmentcomprised of the Company’s wholly owned subsidiary Intermec TechnologiesCorporation (“Intermec”), is a leader in global supply chain solutions, thedevelopment, manufacture and integration of wired and wireless automated datacollection, Intellitag® RFID (radio frequency identification), mobile computingsystems, bar code printers and label media. The ADS segment’s products andservices are used by customers to improve productivity, quality andresponsiveness of business operations, from supply chain management and enterpriseresource planning to field sales and service. ADS products and services aresold globally to a diverse set of customers in markets such as manufacturing,warehousing, direct store delivery, retail, consumer goods, field services,government, security, healthcare, transportation and logistics.

TheCompany’s Industrial Automation Systems (“IAS”) business, comprising theCincinnati Lamb division and the Landis Grinding Systems division, isclassified as discontinued operations for accounting purposes in the Company’sconsolidated financial statements and related notes (see Note H). Prior periodshave been restated to reflect this presentation. The IAS businesses are leadingproducers of value-added manufacturing products and services spanning the productioncycle from process engineering and design to systems integration includingcomprehensive life cycle support. The IAS businesses includes integratedmanufacturing systems, machining systems, stand-alone machine tools andprecision grinding and abrasives operations primarily serving the global aerospace, automotive, off-roadvehicle and diesel engine industries as well as the industrial components,heavy equipment and general job shop markets.

*Principlesof Consolidation.**  *Theconsolidated financial statements include the accounts of UNOVA, Inc., itswholly owned subsidiaries and companies in which UNOVA has a controllinginterest. Investments in companies over which UNOVA has influence but not acontrolling interest are accounted for using the equity method. Equityinvestments of less than 20% ownership in other companies are carried at cost.All signficant intercompany transactions and balances have been eliminated inconsolidation. The Company has no unconsolidated subsidiaries.

*Use of Estimates in the Preparationof Financial Statements.**  *The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses for each reported period. Actual results could differfrom those estimates. Significant estimates and assumptions were used todetermine the provisions for uncollectible accounts receivable, excess andobsolete inventory, tax valuation allowances, recoverability of goodwill andother intangible assets, warranty costs, percentage-of-completion on long-termcontracts, retiree medical and pension obligations, estimated proceeds onbusinesses to be divested, estimated net realizable value of assets held forsale and litigation loss contingencies.

F-10

----

**Note A:**   SignificantAccounting Policies (Continued)

*StockBased Compensation.**  *Aspermitted by Statement of Financial Accounting Standards (“SFAS’) No. 123,the Company accounts for its stock-based compensation plans in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees”, under which no compensation cost has been recognized at thegrant of stock options. Had compensation cost for these plans been determinedconsistent with SFAS No. 123, “Accounting for Stock-Based Compensation”,the Company’s net earnings (loss) and basic and diluted loss per share for2004, 2003, and 2002 would have been reduced to the pro forma amounts indicatedas follows (thousands of dollars):
| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net earnings (loss) as reported                                                             |       | $                                           | (49,129    | ) | $ | (19,267 | ) | $ | 2,427 |   |
| Add stock  compensation expense recorded under the intrinsic value method, net of tax       |       | 1,492                                       |       | 726 |   | 1,472 |   |
| Less pro forma  stock compensation expense computed under the fair value method, net of tax |       | (4,213                                      | )          | (3,075 | ) | (4,844 | ) |
| Pro forma net loss                                                                          |       | $                                           | (51,850    | ) | $ | (21,616 | ) | $ | (945 | ) |
| Basic pro forma loss per share                                                              |       | $                                           | (0.86      | ) | $ | (0.37 | ) | $ | (0.02 | ) |
| Diluted pro forma  loss per share                                                           |       | $                                           | (0.83      | ) | $ | (0.36 | ) | $ | (0.02 | ) |

 

Todetermine the pro forma compensation expense, the Company used the BlackScholes option pricing model to determine the weighted average fair value ofoptions on the dates they were granted. The weighted average fair value ofoption grants made during 2004, 2003 and 2002 was $8.96, $3.82 and $3.81,respectively. There is no assurance that the assumptions used in determiningthe fair values of stock options will prove true in the future. The actualvalue of the options depends on several factors, including the actual marketprice of the common stock on the date of exercise. Changes in any of thesefactors, as well as fluctuations in the market price of the Company’s commonstock, will cause the actual value of these options to vary from thetheoretical value indicated above. The following weighted average assumptionswere applied in determining the pro forma compensation expense.
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate          |       | 3.81%    |       | 2.55%    |       | 4.52%    |       |
| Expected option  life            |       | 5 years  |       | 5 years  |       | 5 years  |       |
| Expected stock  price volatility |       | 56.33%   |       | 56.38%   |       | 55.66%   |       |
| Expected dividend yield          |       | 0.0%     |       | 0.0%     |       | 0.0%     |       |

* *

F-11

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**Note A:**   SignificantAccounting Policies (Continued)

*Revenue Recognition.**  *Revenues aregenerally recognized when products are shipped or services are rendered, thetitle and risk of loss has passed to the customer, the sales price is fixed ordeterminable and collectibility is reasonably assured. Royalty revenue isrecorded when the revenue is earned, the price is fixed or determinable andcollectibility is reasonably assured. Service and maintenance revenue isrecognized as services are rendered, generally over the contract term, andcollectibility is reasonably assured. When a sale involves multiple elements,such as sales of products that include services, the entire revenue from thearrangement is allocated to each respective element based on its relative fairvalue and is recognized when the revenue recognition criteria for each elementare met. Fair value for each element is established based on the sales pricecharged when the same element is sold separately. The Company reduces revenuefor estimated customer returns, price protection, rebates and other offeringsthat occur under sales programs establishedby the Company directly or with the Company’s distributors and resellers. TheCompany accrues the estimated cost of post-sale obligations, including basicproduct warranties, based on historical experience at the time the Companyrecognizes revenue.

Long-term contracts, principally within the IASbusiness, classified as discontinued operations, are accounted for under thepercentage-of-completion, cost-to-cost method of accounting, which requires theCompany to estimate total expected contract revenues and costs and record revenuesand profits over the term of the contract. Estimated contract revenues andcosts are based on contract specifications, expected requirements, andachievement of contract milestones, including deliveries. The cumulative impactof changes in expected contract revenues and costs and any anticipated lossesare charged to operations as soon as they are determinable.

*CashEquivalents.**  *TheCompany considers highly liquid investments purchased within three months oftheir date of maturity to be cash equivalents.

*AccountsReceivable.**  *TheCompany provides an allowance for doubtful accounts equal to the estimateduncollectible accounts receivable. That estimate is based on historicalcollection experience, the aging of the accounts receivable, currentinternational, political, economic and market conditions, and a review of thecurrent status of specific customer’s trade accounts receivable.

*Inventories.**  *Inventories arestated at the lower of cost or market. Cost is determined using the first-in,first-out method. Inventoried costs include material, labor and manufacturingoverhead. General and administrative costs are expensed as incurred. TheCompany “writes down” estimated obsolete or unsalable inventory based onassumptions about future demand for its products and market conditions.

*Property,Plant and Equipment.**  *Property, plant and equipment are stated at cost, netof accumulated depreciation. Depreciation, computed generally by the straight-linemethod, is provided over the estimated useful lives of the related assets.

*PensionBenefits and Other Postretirement Benefits.**  *The Company hasretirement and pension plans which cover most of its employees. Most of theCompany’s U.S. employees as well as the employees of certain non-U.S.subsidiaries are covered by contributory defined benefit plans, under whichemployees may contribute up to 4% of covered compensation annually. Annual employercontributions are made to the extent such contributions are actuariallydetermined to adequately fund the plans. Retiree benefits are based on theamount of participant contributions over the term of the participant’semployment.

F-12

----

**Note A:**   Significant Accounting Policies (Continued)

Assumptions used indetermining projected benefit obligations and the fair values of plan assetsfor the Company’s pension plans and other postretirement benefits are evaluatedat least annually by management in consultation with an external actuary.Changes in assumptions are based on relevant Company data, such as the rate ofincrease in compensation levels and the expected long-term rate of return onplan assets. Critical assumptions such as the discount rate used to measure thebenefit obligations, the expected long-term rate of return on plan assets andhealth care cost projections are evaluated and updated annually. Note K to theconsolidated financial statements includes disclosure of these assumptions forthe Company’s domestic and foreign plans. The company believes the assumptionsare appropriate. However these assumptions could vary materially from actual resultsdue to economic events or different rates of retirement, mortality orwithdrawal, positively or negatively impacting future results of operations.

*Income Taxes.**  *The Companyaccounts for income taxes using the asset and liability approach, whichrequires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the carryingamounts and the tax bases of assets and liabilities. This method also requiresthe recognition of future tax benefits such as net operating loss carryforwardsand other tax credits. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to reverse. Valuation allowances areprovided to reduce deferred tax assets to an amount that is more likely thannot to be realized. The Company evaluates the likelihood of realizing itsdeferred tax assets by estimating sources of future taxable income and theimpact of tax planning strategies. The Company also determines its taxcontingencies in accordance with SFAS No. 5, *Accountingfor Contingencies.*The Company records estimated tax liabilities tothe extent the contingencies are probable and can be reasonably estimated. TheCompany classifies its contingent tax liabilities based upon when expected cashwill ultimately be paid.

*Concentrationsof Credit Risk.  *Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable. The Companyplaces its cash and cash equivalents with high credit quality institutions. Concentrationsof credit risk with respect to trade receivables are limited because a largenumber of geographically diverse customers make up the Company’s customer base,thus spreading the credit risk. The Company evaluates the creditworthiness ofits customers and maintains an allowance for anticipated losses. No singlecustomer accounted for more than 10% of the Company’s revenues in 2004, 2003 or2002.

*ForeignCurrencies.**  *TheCompany’s consolidated financial statements are presented in U.S. dollars. Thefinancial statements of the Company’s foreign operations, whose functionalcurrencies are not the U.S. dollar, are translated into U.S. dollars at theexchange rates in effect at the balance sheet dates for assets and liabilitiesand at average rates for the period for revenues and expenses. The unrealizedtranslation gains and losses on the Company’s net investment in theseoperations, including long-term intercompany advances considered part of thenet investment, are accumulated as a component of other comprehensive income(loss). Currency transaction gains and losses are recorded on the consolidatedstatements of operations. Operating results include net currency transactiongains (losses) of ($1.7) million, $1.2 million and ($1.1) million for the yearsended December 31, 2004, 2003 and 2002.

F-13

----

**Note A:**   SignificantAccounting Policies (Continued)

*Derivative Instruments andHedging Activities.  *Due to its global operations, the Company’s cash flows and earnings areexposed to foreign exchange rate risk resulting principally from thesale of certain of its inventory in U.S. dollars to its foreign subsidiariesand other external foreign sales denominated in local currencies. The Company’suse of derivatives is limited to foreign currency exchange contracts enteredinto to limit this exposure to foreign currency exchange rate fluctuations. TheCompany enters into these contracts with major financial institutions tominimize its risk of foreign exchange loss. The Company’s policies do notpermit active trading of or speculation in derivative financial instruments.The Company’s policy is to hedge major foreign currency cash flow exposuresthrough foreign exchange forward contracts at amounts up to 100% of such cashflows. The translation gains and losses on the effective portion of the hedginginstruments that qualify for hedge accounting are recorded in OCI; othertranslation gains and losses are recorded in net earnings (loss). The fairvalues of derivative instruments are recorded on the consolidated balancesheets. The difference between the net fair values of foreign exchangecontracts and the underlying foreign currency based assets and liabilities asof December 31, 2004 and 2003 was not material.

*Goodwill and OtherIntangibles.**  *Intangible assets with finiteuseful lives are amortized generally on astraight-line basis over the periods benefited. All of the Company’s intangible assets pertain to thepatent portfolio of the ADS segment and have estimated useful lives of 18years. See Note E for additional information.

Thecarrying values of goodwill and other intangibles assets with indefinite usefullives are tested for impairment at least annually during its fourth fiscalquarter or when events or circumstances indicate the carrying value of an assetmay not be recoverable. If the carrying value of a reporting unit’s goodwill oran intangible asset exceeds its fair value, an impairment loss is recognized.The Company establishes the fair value of reporting unit goodwill based on adiscounted cash flow methodology. The discounted cash flow is based on theCompany’s strategic plans and long-range planning forecasts, which includerevenue and profit margin assumptions, based on management’s best estimate.Management considers historical experienceand all available information at the time the fair values of its businesses areestimated. However,actual fair values that could be realized in anactual transaction may differ from those used to evaluate the impairment ofgoodwill. See Note H for additional information.

*Impairment of Long-LivedAssets.*   TheCompany assesses the recoverability of long-lived assets when events orcircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. If undiscounted expected cash flows to be generated by along-lived asset or asset group are less than its carrying amount, the Companyrecords an impairment to write down the long-lived asset or asset group to itsestimated fair value. Fair value is estimated based on discounted expectedfuture cash flows.

*Discontinued Operations.**  *The Companyadopted SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” effective January 1, 2002. This standard establishesaccounting and reporting requirements for the impairment or disposal oflong-lived assets. For those businesses where management has committed to aplan to divest, each business is valued at the lower of its carrying amount orestimated fair value less cost to sell. If the carrying amount of the businessexceeds its estimated fair value, a loss is recognized. The fair values areestimated using accepted valuation techniques such as a discounted cash flowsmodel, earnings multiples, or indicative bids, when available. A number ofsignificant estimates and assumptions are involved in the application of thesetechniques, including the forecasting of markets and market share, salesvolumes and prices, costs and expenses, and multiple other factors. Managementconsiders historical experience and all available information at the time theestimates are made; however, the fair values that are ultimately realized uponthe sale of the businesses to be divested may differ from the estimated fairvalues reflected in the financial statements.

F-14

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**Note A:**   SignificantAccounting Policies (Continued)

Businesses to bedivested are classified in the consolidated financial statements asdiscontinued operations. For businesses classified as discontinued operations,the balance sheet amounts and income statement results and cash flows arereclassified from their historical presentation to assets and liabilities ofdiscontinued operations on the consolidated balance sheets. to loss fromdiscontinued operations in the consolidated statements of operations and to cashflows from discontinued operations on the consolidated statements of cash flowsfor all periods presented. Additionally, segment information does not includethe results of businesses classified as discontinued operations. Managementdoes not expect any continuing involvement with these businesses followingtheir planned sales, and these businesses are expected to be disposed of withinone year.

*EnvironmentalCosts.**  *Provisionsfor environmental costs are recorded when the Company determines itsresponsibility for remedial efforts and such amounts are reasonably estimable.Environmental costs were not material for all years presented.*Contingencies.**  *The Companyassesses its exposure to loss contingencies including environmental, legal andincome tax matters and provides for an exposure if it is judged to be probableand estimable. If the actual loss from a loss contingency differs frommanagement’s estimates, results of operations could be adjusted upward ordownward.

*Research and Development.  *Researchand development (“R&D”) costs are charged to selling, general andadministrative expense as incurred. Total expenditures of continuing operationson research and development activities amounted to $62.1 million, $48.8 millionand $44.0 million for the years ended December 31, 2004, 2003 and2002, respectively. These expenditures were for Company sponsored R&D andwere primarily for labor, materials and other administrative costs. The Companyincurred no costs associated with R&D sponsored by customers or otherexternal parties.

*Advertising.  *Advertisingcosts are expensed as incurred. Advertising expenses for the year endedDecember 31, 2004, 2003 and 2002 were $1.7 million, $2.2 million and $1.0million, respectively.

*New AccountingPronouncements.*

In December  2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS  153eliminates the exception from fair value measurement for nonmonetary exchangesof similar productive assets in paragraph  21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with anexception for exchanges that do not have commercial substance. SFAS  153specifies that a nonmonetary exchange has commercial substance if the future cashflows of the entity are expected to change significantly as a result of theexchange. SFAS  153 is effective for the fiscal periods beginning afterJune  15, 2005 and is required to be adopted by the Company in the firstquarter of fiscal 2006. The Company is currently evaluating the effect that theadoption of SFAS  153 will have on its consolidated results of operationsand financial condition but does not expect it to have a material impact. 

On December 16,2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(revised 2004), *Share-Based Payment* (“SFAS 123R”).SFAS 123R eliminates the alternative of applying the intrinsic valuemeasurement provisions of Opinion 25 to stock compensation awards issued toemployees. The new standard requires enterprises to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the fair value of the award on the grant-date. That cost will be recognizedover the period during which an employee is required to provide services inexchange for the award, known as the requisite service period (usually thevesting period).

F-15

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**Note A:**   SignificantAccounting Policies (Continued)

The pro forma effects onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of original SFAS 123 on stock compensation awards(rather than applying the intrinsic value measurement provisions of Opinion 25)are disclosed on page F-9. Although such pro forma effects of applyingSFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisionsof these two statements differ in some important respects. The actual effectsof adopting SFAS 123R will be dependent on numerous factors including, but notlimited to, the valuation model chosen by the Company to value stock-basedawards; the assumed award forfeiture rate; the accounting policies adoptedconcerning the method of recognizing the fair value of awards over therequisite service period; and the transition method chosen for adopting SFAS123R. The Company is currently evaluating pricing models and the transitionprovisions of SFAS 123R and will begin expensing stock-based compensation inaccordance with the standard in the third quarter of 2005.

FASB Staff Position (“FSP”) No.  109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (“FSP  109-2”), provides guidanceunder FASB Statement No.  109, “Accounting for Income Taxes,” with respectto recording the potential impact of the repatriation provisions of theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income taxexpense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the Jobs Acton its plan for reinvestment or repatriation of foreign earnings for purposes ofapplying FASB Statement No.  109. The Company has not yet completedevaluating the impact of the repatriation provisions of the Jobs Act.Accordingly, as provided for in FSP 109-2, the Company has not adjusted its taxexpense or deferred tax liability to reflect the repatriation provisions of theJobs Act. 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs—an Amendment of ARB No. 43,Chapter 4.” This standard provides clarification that abnormal amounts of idlefacility expense, freight, handling costs, and spoilage should be recognized ascurrent-period charges. Additionally, this standard requires that allocation offixed production overhead to the costs of conversion be based on the normalcapacity of the production facilities. The provisions of this standard areeffective for inventory costs incurred during fiscal years beginning after June 15,2005. The Company does not expect theadoption of this standard to have a material impact on its consolidatedfinancial statements.

In May 2004, the Financial Accounting StandardsBoard (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-2, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003” (the “Act”). This FSP supercedes FSP FAS No. 106-1,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” and provides guidance onaccounting for the effects of the Act for employers that sponsor postretirementhealth care plans that provide drug benefits. The FSP also requires thoseemployers to provide certain disclosures regarding the effect of the federalsubsidy provided by the Act. The disclosures required by FSP 106-2 are includedin Note K.

In March 2004, the Emerging Issues Task Force (“EITF”)reached a consensus on Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”EITF 03-1 provides guidance on other-than-temporary impairment models formarketable debt and equity securities accounted for under SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accountingfor Certain Investments Held by Not-for-Profit Organizations,” andnon-marketable equity securities accounted for under the cost method. The EITFdeveloped a basic three-step model to evaluate whether an investment isother-than-temporarily impaired.

F-16

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**Note A:**   SignificantAccounting Policies (Continued)

FSP EITF 03-1-1 delayedthe effective date of the accounting recognition provisions of EITF 03-1. Quantitative and qualitative disclosures forinvestments accounted for under SFAS No. 115 became effective for theCompany’s year ended December 31, 2004. The adoption of EITF 03-1 did noteffect the consolidated financial statements.

In December 2003, the FASBissued SFAS No. 132 (revised 2003), “Employer’s Disclosures about Pensionsand Other Postretirement Benefits.” The revised statement retains thedisclosure requirements contained in SFAS No. 132, which it replaces, andrequires additional disclosures about the assets, obligations, cash flows andnet periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans. The statement’s disclosure requirements relatingto estimated future benefit payments and relating to foreign plans are effectivefor the Company’s financial statements for the year ended December 31,2004 and are included in Note K.

***Reclassifications.  ******Certain prior-year amounts havebeen reclassified to conform to the current-year presentation.***

**Note B:**   Cash and Cash Equivalents, Long-term Debtand Interest

Cash and cashequivalents amounted to $217.9 million and $238.4 million at December 31,2004 and December 31, 2003, respectively, and consisted mainly of timedeposits. Cash and cash equivalents at December 31, 2004 and 2003 include$17.8 million and $23.3 million, respectively, of bank deposits required to bemaintained in support of letters of credit and foreign exchange contracts.Letters of credit are purchased guarantees to ensure our contract performanceto third parties in accordance with specified terms and conditions. Long-termdebt is as follows (thousands of dollars):
| ** **                                                                                     | ** ** | **Current Portion of  Long Term Debt**           | ** ** | **Non-Current Portion of  Long Term Debt**       | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **December 31,**                                                | ** ** | **December 31,**                                                | ** ** |
| ** **                                                                                     | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Debentures, with  interest at 6.875%, due March 2005                                      |       | $                                                                    | 100,000    |                                                                 |       | $ | — |   |   | $ | — |   | $ | 100,000 |   |
| Debentures, with  interest at 7.00%, due March 2008                                       |       | —                                                               |       |                                                                 | —     |   |   | $ | 100,000 |   | 100,000 |   |
| Industrial  revenue bonds, with interest at 4.18% (2004) and 3.21% (2003), due  July 2005 |       | 8,500                                                                |       |                                                                 | —     |   |   | — |   | 8,500 |   |
| Long-term  obligations                                                                         |       | $                                                                    | 108,500    |                                                                 |       | $ |   — |   |   | $ | 100,000 |   | $ | 208,500 |   |

 

The Companymaintains two secured long-term credit facilities: a $100 million revolvingcredit facility (the “New Revolving Facility”) and a £15.0million ($28.7 million) revolving facility and related overdraft facility(collectively, the “UK Facility”). On September 30, 2004, the Companyterminated and replaced its previously existing $100 million revolving creditfacility (the “Old Revolving Facility”) and replaced it with the $100 million,three-year New Revolving Facility.

Net of outstanding lettersof credit and limitations on minimum availability, the Company had borrowingcapacity at December 31, 2004, of $29.3 million under the New RevolvingFacility and £8.4million ($16.1 million) under the UK Facility. The Company made noborrowings under the New Revolving Facility, the UK Facility or the OldRevolving Facility during 2004, and as of December 31, 2004, noborrowings were outstanding under either the New Revolving Facility or the UKFacility. As of December 31, 2004, the Company was in compliance with thefinancial covenants of each of these agreements.

The key terms of the NewRevolving Facility are as follows:

·       TheCompany’s obligations under the New Revolving Facility are secured bysubstantially all the U.S. assets of the Company and its U.S. subsidiaries anda pledge of 65% of the stock of certain of its foreign subsidiaries.

F-17

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**Note B:**   Cash and CashEquivalents, Long-term Debt and Interest (Continued)

·       Borrowingsunder the New Revolving Facility bear interest at a variable rate equal to (atthe Company’s option) (i) LIBOR plus an applicable margin ranging from1.5% to 2.5% based on consolidated leverage, or (ii) the greater of thefederal funds rate plus 0.50% or the Bank’s prime rate, plus an applicablemargin ranging from 0.5% to 1.5% based on consolidated leverage.

·       Ifthe Company sells subsidiaries within its Industrial Automation Systemssegment, the net proceeds, or a portion thereof, as defined in the agreement,must be applied to repay borrowings outstanding under the New RevolvingFacility.

·       Untilit retires its 6.875% notes due March 15, 2005, the Company must maintaina minimum balance of $50 million as restricted cash. This amount is classifiedas restricted cash on the Company’s consolidated balance sheet as of December 31,2004.

·       TheNew Revolving Facility places certain restrictions on the ability of theCompany and its subsidiaries to consolidate or merge, make acquisitions, createliens, incur additional indebtedness or dispose of assets.

·       Financial covenants includea Consolidated Leverage test, a Consolidated Interest Coverage test and aConsolidated Net Worth test, each as defined in the agreement.In March 1998,the Company sold $200.0 million principal amount of senior unsecured debt in anunderwritten offering. The debt comprised $100.0 million of 6.875% seven-yearnotes and $100.0 million of 7.00% ten-year notes. Interest payments on theseven-year and ten-year notes are due semi-annually in March andSeptember. Including underwriting fees, discounts and other issuance costs, theeffective interest rates on the seven-year and ten-year notes are 7.125% and7.175%, respectively. As of December 31, 2004, the $100.0 million seven-yearnotes, maturing in March 2005, are classified as current portion oflong-term obligations on the Company’s consolidated balance sheet.

The Company additionallyhad outstanding an $8.5 million industrial revenue bond, with a variableinterest rate of 4.18%, maturing in July 2005, which is classified ascurrent portion of long-term obligations on the Company’s consolidated balancesheet. Interest, net is comprised of the following (thousands of dollars):
| ** **       | ** ** | **Year Ended December 31,** | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest expense |       | $                                          | 16,527     |   | $ | 16,829 |   | $ | 23,434 |   |
| Interest income  |       | (4,166                                     | )          | (3,744 | ) | (2,845 | ) |
| Interest, net    |       | $                                          | 12,361     |   | $ | 13,085 |   | $ | 20,589 |   |

 

At December 31, 2004and 2003, the Company’s fixed rate debentures had a carrying value of $200.0million and an estimated fair market value of $202.1 and $196.3 million,respectively, based on market trade values. The carrying values of the variablerate borrowings, including the industrial revenue bonds, approximate fair valuebecause they bear interest at market rates currently available to the Company.Fair values of the Company’s accounts receivable and accounts payableapproximate their carrying values due to their short-term nature.

The Company also has letter-of-creditreimbursement agreements primarily related to the Company’s performance oncontracts with customers totaling $53.6 million at December 31, 2004. TheCompany believes it is not practicable to estimate fair values of theseinstruments and considers the risk of non-performance on the contracts to beremote.

 

F-18

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**NoteC:**   Inventories

Inventoriesof continuing operations comprise the following (thousands of dollars):
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Raw materials   |       | $                     | 53,714     |   | $ | 49,304 |   |
| Work in process |       | 304                   |       | 1,675 |   |
| Finished goods  |       | 26,836                |       | 22,192 |   |
| Inventories     |       | $                     | 80,854     |   | $ | 73,171 |   |

 

**NoteD:**   Property,Plant and Equipment, Net and Assets Held for Sale

Property,plant and equipment of continuing operations comprise the following (thousandsof dollars):
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Property, plant and  equipment, at cost      |       |                  |       |   |   |
| Land                                         |       | $                     | 5,978      |   | $ | 5,919 |   |
| Buildings and improvements                   |       | 5,754                 |       | 4,105 |   |
| Machinery and equipment                      |       | 118,357               |       | 122,225 |   |
| Total property, plant and equipment, at cost |       | 130,089               |       | 132,249 |   |
| Less: accumulated  depreciation              |       | (99,714               | )          | (102,018 | ) |
| Property, plant and  equipment, net          |       | $                     | 30,375     |   | $ | 30,231 |   |

 

Depreciation expense from continuing operations was$10.5 million, $13.7 million and $17.4 million for the years ended December 31,2004, 2003 and 2002, respectively.

Therange of estimated useful lives of the major classes of assets are:
| Buildings               |   | 21-30 years |   |
|-------------------------|--------|-------------|--------|
| Building  improvements  |   | 2-10 years  |   |
| Machinery and equipment |   | 2-10 years  |   |

 

As of December 31,2004 and 2003, the Company deferred $4.5 million and $5.0 million,respectively, of gains related to sale-leaseback transactions. These deferredgains are being amortized over the terms of the related leases. Minimum rentalcommitments, net of deferred gain amortization, under noncancellable operatingleases of continuing operations were as follows at December 31, 2004(thousands of dollars):
| 2005       |   | $      | 9,605  |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 7,028  |   |
| 2007       |   | 5,457  |   |
| 2008       |   | 4,405  |   |
| 2009       |   | 3,743  |   |
| Thereafter |   | 17,626 |   |
| Total      |   | $      | 47,864 |   |

 

Rental expense for operating leases of continuingoperations, including amounts for short-term leases with nominal, if any,future rental commitments, was $12.6 million, $12.1 million and $14.0 million,for the years ended December 31, 2004, 2003 and 2002, respectively.

F-19

----

**Note D:**   Property, Plantand Equipment, Net and Assets Held for Sale (Continued)

Aggregate future minimum rental income to be receivedunder noncancelable subleases of continuing operations is $6.2 million at December 31,2004.

Proceeds totaling approximately $14.1 million werereceived in 2002 from the sale of operating facilities and land of continuingoperations, excluding assets classified as held for sale. Proceeds from thesale of operating facilities and land of continuing operations were notmaterial in 2004 and 2003.

*Assets Held for Sale:**  *During2003, in conjunction with restructuring activities related to the Company’s IASbusiness, the Company reclassified certain property, plant and equipment with anet book value of $30.9 million to assets held for sale. In accordance withSFAS No. 144, the carrying amount of these assets is the lower of bookvalue or net realizable value. An impairment charge of $4.1 million related tothese assets is classified as loss from discontinued operations on thestatement of operations for the year ended December 31, 2003. Assets heldfor sale with a carrying amount of approximately $3.0 million were sold during2003 for a price approximating their carrying value. During 2004 assets heldfor sale with a carrying amount of $3.5 million were sold for proceeds ofapproximately $4.0 million. An impairment charge of $0.6 million on assets heldfor sale is classified as loss from discontinued operations on the statement ofoperations for the year ended December 31, 2004. At December 31,2003, assets held for sale of $23.8 million comprise $18.8 million of land andbuildings and $5.0 million of machinery and equipment. At December 31,2004, assets held for sale of $19.7 million comprise $17.7 million of land andbuildings and $2.0 million of machinery and equipment.

**Note E:**   Intangibles, Net

Intangibles,net are comprised of a patent portfolio of the Company’s ADS segment. The grosscarrying amount and accumulated amortization of the Company’s amortizableintangibles are as follows (thousands of dollars):
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Gross carrying amount     |       | $                     | 10,067     |   | $ | 9,940 |   |
| Accumulated  amortization |       | (5,995                | )          | (5,604 | ) |
| Other intangibles, net    |       | $                     | 4,072      |   | $ | 4,336 |   |

 

Amortization expense on intangible assets for theyears ended December 31, 2004, 2003 and 2002 was $0.4 million, $0.4million and $1.1 million, respectively. During the year ended December 31,2002, the Company’s ADS segment sold to an unrelated party a portfolio ofpatents with a net carrying amount of $2.5 million for net proceeds of $20.0million. Additionally, the Company reclassified $6.2 million of intangibleassets related to the 1997 Norand acquisition to deferred tax assets.

Estimatedamortization expense for the succeeding five fiscal years are as follows(thousands of dollars):
| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                        |       | $          | 398        |       |
| 2006                                        |       | 398        |       |
| 2007                                        |       | 398        |       |
| 2008                                        |       | 398        |       |
| 2009                                        |       | 398        |       |
|                                             |            |            |            |            |            |  |

 

The Company analyzed itsother intangibles for impairment at the beginning of the fourth fiscal quartersof 2004 and 2003 and determined that no impairment exists.

F-20

----

**Note F:**   Shareholders’ Investment

**Capital Stock**

At December 31, 2004,there were authorized 250 million shares of common stock, par value $0.01, and50 million shares of preferred stock, par value $0.01.

**Shareholder RightsPlan**

In September 1997,the Company’s Board of Directors adopted a Share Purchase Rights Plan (the “Plan”)and, in accordance with such Plan, declared a dividend of one preferred sharepurchase right (the “Right”) for each outstanding share of Company commonstock, payable to shareholders of record on October 31, 1997. The Planwill cause substantial dilution to a party that attempts to acquire the Companyin a manner or on terms not approved by the Board of Directors. Each Rightentitles the holder to purchase from the Company one one-hundredth of a shareof Series A Preferred Stock at a price of seventy dollars. The Rightsbecome exercisable if a person other than a person which presently holds morethan 15 percent of the Company’s common stock acquires 15 percent or more, orannounces a tender offer for 15 percent or more, of the Company’s outstandingcommon stock. If a person acquires 15 percent or more of the Company’soutstanding common stock, each right will entitle the holder to purchase theCompany’s common stock having a market value of twice the exercise price of theRight. The Rights, which expire in September 2007, may be redeemed byUNOVA at a price of one cent per Right at any time prior to a person acquiring15 percent or more of the outstanding common stock.

**Earnings (Loss) PerShare**

Basic earnings (loss) per share is calculated usingthe weighted average number of common shares outstanding and issuable for theyear. Diluted earnings (loss) per share is computed using basic weightedaverage outstanding shares plus the dilutive effect on income from continuingoperations of unvested restricted stock and outstanding stock options using the“treasury stock” method.

Sharesused for basic and diluted earnings (loss) per share were computed as followsfor the years ended December 31:
| ** **                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Weighted average common shares—Basic                        |       | 60,501,931 | ** ** | 58,827,769 | ** ** | 57,820,978 | ** ** |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,651,905  |       | 1,406,279  |       | 793,290    |       |
| Weighted average  shares—Diluted                            |       | 62,153,836 |       | 60,234,048 |       | 58,614,268 |       |

 

At December 31, 2004,2003 and 2002, employees and directors held options to purchase 30,420, 16,420and 4,104,585 shares, respectively, of Company common stock that wereantidilutive to the computation of diluted earnings (loss) per share fromcontinuing operations due to the exercise price of these options exceeding theaverage fair value of the Company’s common stock for the respective periods.These options could become dilutive in future periods if the average marketprice of the Company’s common stock exceeds the exercise price of theoutstanding options and the Company reports net earnings.

F-21

----

**Note F:**   Shareholders’Investment

**Stock Awards**

The UNOVA, Inc.2001, 1999 and 1997 Stock Incentive Plans and the UNOVA Inc. 2004 OmnibusIncentive Compensation Plan (the “Stock Incentive Plans,” collectively) providefor the grant of incentive awards to officers and other key employees. Thenumbers of shares authorized for grant under the 2004, 2001 and 1999 plans are3,000,000, 1,000,000, and 4,500,000, respectively. No additional shares areauthorized for grant under the 1997 plan, which was frozen subsequent to theapproval of the 1999 Stock Incentive Plan. As of December 31, 2004, therewere 1,372,970 options outstanding that were granted under the 1997 Plan beforeit was frozen.

Incentive awards may be granted in the form of stockoptions with or without related stock appreciation rights, restricted stock,restricted stock units and performance units. Underthe Stock Incentive Plans, stock options may not be granted at an exerciseprice less than the market value of the Company’s common stock on the date ofgrant. The Stock Incentive Plans options generally vest in equal incrementsover five years and expire in ten years.

The 2002 DirectorStock Option and Fee Plan (“2002 DSOP”) and the 1997 Director Stock Option Plan(“1997 DSOP”) provide for the grant of stock options to the Company’snon-employee directors. The numbers of shares authorized for grant under the2002 DSOP is 745,000. No additional shares are authorized under the 1997 DSOP.Subsequent to the grant of 255,000 options under the 1997 DSOP, it was frozenupon the approval of the 2002 DSOP. Under the 2002 DSOP, stock options aregranted annually at an exercise price equal to the fair market value of theCompany’s common stock on the date of grant. The number of options grantedannually to each director is fixed by theDirector Plan. Such options become fully exercisable on the first anniversaryof their date of grant.

Asof December 31, 2004 there were 3,633,970 shares available for grant underthe Company’s Stock Incentive Plans. The following table summarizeschanges in options outstanding and exercisable under the Company’s stock awardplans:
| ** **              | ** ** | **Outstanding**            | ** ** | **Exercisable**                                             | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
| January 1, 2002    |       | 4,181,560                  |       |                                                        | $          | 12.41 |   |   | 2,292,346 |   |   | $ | 15.92 |   |   |
| Granted                 |       | 1,873,035                  |       |                                                        | 7.25       |   |   |   |   |   |   |   |   |
| Exercised               |       | (37,700                    | )          |                                                        | 4.18       |   |   |   |   |   |   |   |   |
| Canceled                |       | (479,330                   | )          |                                                        | 12.16      |   |   |   |   |   |   |   |   |
| December 31,  2002 |       | 5,537,565                  |       |                                                        | 10.74      |   |   | 3,556,061 |   |   | 12.99 |   |   |
| Granted                 |       | 535,835                    |       |                                                        | 7.57       |   |   |   |   |   |   |   |   |
| Exercised               |       | (1,182,350                 | )          |                                                        | 10.85      |   |   |   |   |   |   |   |   |
| Canceled                |       | (146,495                   | )          |                                                        | 6.12       |   |   |   |   |   |   |   |   |
| December 31,  2003 |       | 4,744,555                  |       |                                                        | 10.50      |   |   | 3,012,269 |   |   | 12.77 |   |   |
| Granted                 |       | 570,500                    |       |                                                        | 17.29      |   |   |   |   |   |   |   |   |
| Exercised               |       | (656,990                   | )          |                                                        | 8.78       |   |   |   |   |   |   |   |   |
| Canceled                |       | (242,799                   | )          |                                                        | 9.26       |   |   |   |   |   |   |   |   |
| December 31, 2004  |       | 4,415,266                  |       |                                                        | 11.70      |   |   | 2,876,822 |   |   | 12.37 |   |   |

 

F-22

----

**Note F:**   Shareholders’Investment

Outstanding stock optiondata as of December 31, 2004:
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Exercisable** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
| $3.52 to $5.26                          |       | 857,880                      |       |                         | 6.02       |   |   |   | $ | 4.23 |   |   | 640,340 |   |   | $ | 4.25 |   |   |
| $5.38 to $7.92                          |       | 1,421,214                    |       |                         | 6.67       |   |   |   | 7.41 |   |   | 640,610 |   |   | 7.31 |   |   |
| $12.38 to $17.56                        |       | 1,270,052                    |       |                         | 5.91       |   |   |   | 16.60 |   |   | 782,752 |   |   | 16.33 |   |   |
| $18.81 to $22.20                        |       | 866,120                      |       |                         | 3.28       |   |   |   | 18.97 |   |   | 813,120 |   |   | 18.94 |   |   |
|                                    |       | 4,415,266                    |       |                         |       |   |   |   |   |   |   | 2,876,822 |   |   |   |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In August 2001, the Company extended to itsemployees a tender offer to exchange on a four-for-one basis certainoutstanding stock options granted during the period June 1, 1999 through May 31,2000 for restricted shares of the Company’s common stock. On the exchange date,October 8, 2001, options to purchase 1,271,500 shares were tendered byemployees and canceled, and 317,884 shares of restricted stock were issuedunder the Company’s Stock Incentive Plans. The restricted shares vest over athree year period, with one third of the restricted shares vesting on each ofthe first three anniversaries of the exchange date. The tender offer resultedin variable accounting for all options subject to the offer until the optionsare cancelled, exercised or expired. As of December 31, 2004, 2003 and2002, the Company had outstanding 32,301, 42,302 and 58,100 options that aresubject to the variable method of accounting, which requires the Company torecord compensation expense when the market value of the Company’s common stockexceeds the exercise price of the option. Compensation expenses related tothese options were $0.3 million and $0.3 million for the years ended December 31,2004 and 2003, respectively. There was no compensation expense related to theseoptions during the year ended December 31, 2002 because the exercise priceof these options exceeded market value.In 2004, 2003 and 2002, the Companygranted 132,975, 294,752 and 1,590 shares of restricted stock, respectively,under the provisions of the 1999 and 2001 Stock Incentive Plans. For the yearsended December 31, 2004, 2003 and 2002, the restricted stock was issued atweighted average market values at the date of grant of $18.04, $8.24 and $7.38per share, respectively. The restricted shares vest in three equal installmentsat each of the first three anniversaries from the date of grant. The unearnedportion of these grants is being amortized as compensation expense on astraight-line basis over the vesting period. For the years ended December 31,2004, 2003 and 2002 deferred compensation was $1.8 million, $1.8 million and$0.6 million, respectively. For the years ended December 31, 2004, 2003and 2002, restricted stock-related compensation expense was $1.7 million, $1.1million and $1.5 million, respectively.

In 2004 the Companygranted 52,200 restricted stock units and 75,833 performance units under theprovision of the 2004 Omnibus Incentive Compensation Plan. The restricted stockunits are payable in common stock upon vesting and the performance units arepayable in cash or stock upon vesting. The restricted stock units andperformance units were issued at weighted average market prices of $16.33 and$17.04 , respectively. Of the restricted stock units, 47,500 units vest after 3years, 27,500 units vest after three years contingent upon the achievement ofspecific performance goals, and 4,700 units vest in three equal installments ateach of the first three anniversaries from the date of grant. The performanceunits are payable in cash or common stock at the discretion of the Company andvest after three years contingent upon the achievement of specific performancegoals. For the year ended December 31, 2004, compensation expense related torestricted stock units and performance units was $0.3 million and $0.4 million,respectively.

F-23

----

**Note F:**   Shareholders’Investment

The Company issued 785,535options during 2002 as a result of voluntary elections made in December 2001,by certain officers of the Company to receive a specific percentage of their2001 incentive bonus and 2002 base salary in the form of stock options in lieuof cash. These officers received one option per dollar of cash compensationforegone. Options were granted with an exercise price equal to the market valueon the date of grant, fully vested and have a term of five years.

**Employee Stock Purchase Plan**

In January 1998,UNOVA adopted an Employee Stock Purchase Plan under which the Company isauthorized to sell up to five million shares of common stock to its eligiblefull-time employees. The purchase price of the stock is 85% of the lower of themarket price on the first day or last day of the applicable offering period,which is normally six months in duration. In 2004, 2003 and 2002, employeespurchased 210,454, 438,572 and 556,619 shares, respectively. Theweighted-average fair value of purchase rights granted in 2004, 2003 and 2002was $6.13 per share, $2.21 per share and $1.70 per share, respectively. Thefair values of the stock purchase rights were determined using the followingweighted-average assumptions in 2004, 2003, and 2002, respectively; risk-freeinterest rate of 2.01%, 0.94%, and 1.76%; expected life equal to the applicableoffering periods for each year; and expected volatility of 56.33%, 56.38%, and55.66%. The actual value of purchase rights may vary from the theoretical valuedetermined using the Black-Scholes option pricing model. As of December 31,2004, there were 1,066,685 shares remaining available for sale to employeesunder the ESSP.

**Accumulated OtherComprehensive Income**

At December 31,2004, 2003 and 2002, accumulated other comprehensive income (loss) comprisedthe following, (thousands of dollars):
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cumulative translation adjustment and other    |       | $                     | 23,046     |   | $ | 7,527 |   | $ | (11,502 | ) |
| Minimum pension  liability adjustment          |       |   (9,144         | )          | (10,483 | ) | (7,602 | ) |
| Accumulated other  comprehensive income (loss) |       | $                     | 13,902     |   | $ | (2,956 | ) | $ | (19,104 | ) |

 

Currency translationadjustment as of December 31, 2004 includes $19.7 million relating todiscontinued operations. The minimum pension liability adjustment relates todicontinued operations. (See Note H.)

**Note G:**   Restructuring Activities and SpecialCharges

During the third quarter of 2002, the Companyinitiated a plan to relocate its corporate office to its existing IntermecTechnologies Corporation facility in Everett, Washington. This relocation wassubstantially complete by June 30, 2003. As of December 31, 2004, 22employees had been terminated and $0.7 million in severance costs had beenpaid, cumulatively, of which 2 employee terminations and $0.3 million inseverance payments occurred during the year ended December 31, 2004. Inthe first quarter of 2004, $1.4 million of the workforce reduction accrual,relating to certain pension obligations for certain individuals affected by therestructuring plan, was reclassified to other long-term liabilities. The corporaterestructuring accrual as of December 31, 2004, of $2.2 million relates toongoing leased facility obligations. During the year ended December 31,2004, the Company recorded an additional accrual of $1.3 million for ongoingleased facility obligations. The Company paid $1.7 million in leased facilitycosts in 2004.

F-24

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**Note G:**   RestructuringActivities and Special Charges

Special charges resultingfrom the corporate office relocation comprise the following (thousands ofdollars):
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Severance               |       | $                                          | —     |   | $ | — |   | $ | 2,000 |   |
| Facility  consolidation |       |   1,306                               |       |   1,662 |   | 4,393 |   |
| Special charges         |       | $                                          | 1,306      |   | $ | 1,662 |   | $ | 6,393 |   |

 

**Note H:**   DiscontinuedOperations

During the fourth quarter of 2004, the Companycommitted to a plan to dispose of its IAS business, comprising the CincinnatiLamb and Landis Grinding Systems businesses, after it was determined that theIAS business is no longer aligned with the Company’s long-term strategy. TheCompany intends to sell IAS as going concern as a whole or through the sale ofits component businesses within the 2005 fiscal year. In accordance with SFAS144, “Accounting for Disposal or Impairment of Long-Lived Assets,” the IASbusiness is classified as a discontinued operation in the Company’sconsolidated financial statements for all periods presented.

In conjunction withthe disposal plan, the Company analyzed the net assets of the IAS business forimpairment, resulting in a charge of $104.1 million to write down the netassets of Cincinnati Lamb to its estimated net realizable value. The charge issubject to adjustment pending the expected divesture. The charge includesimpairments of $63.3 million for goodwill, $30.2 million forproperty, plant and equipment and other long-lived assets and $10.6 millionfor current assets. In computing the impairment loss, the Company consideredthe $9.1 million credit balance for the cumulative translation adjustment andthe $9.1 million unrealized minimum pension liability adjustment, net oftax, related to Cincinnati Lamb, which are included in the accumulated othercomprehensive income component of shareholders’ investment (“OCI”). Theseamounts are expected to be removed from OCI when the disposition occurs. TheCompany did not record any impairment pertaining to Landis Grinding Systems asits estimated net realizable value, including the $10.6 million creditbalance for the cumulative translation adjustment related to Landis GrindingSystems included in OCI, exceeds net assets. The following table sets forth therevenue and the components of the loss from discontinued operations, net oftax, for the years ended December 31, 2004, 2003 and 2002 (thousands ofdollars):
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Product and service revenues                   |       | $                                          | 471,135    |   | $ | 448,730 |   | $ | 568,778 |   |
| Loss from  discontinued operations before tax  |       | (109,410                                   | )          | (42,089 | ) | (50,329 | ) |
| Benefit for  income taxes                      |       | 8,100                                      |       | 7,650 |   | 15,103 |   |
| Loss from discontinued  operations, net of tax |       | $                                          | (101,310   | ) | $ | (34,439 | ) | $ | (35,226 | ) |

 

The loss from discontinued operations before taxincludes non-cash impairment charges of $104.1 million, $4.1 million and $4.2million, in 2004, 2003 and 2002, respectively. In addition, as a result of merging the Cincinnati Machine, Lamb MachiningSystems and Lamb Body and Assembly Systems (“Lamb B&A”) divisions, whichwas initiated in the fourth quarter of 2002, restructuring charges of $0.5million, $3.5 million and $18.3 million were incurred in 2004, 2003 and 2002,respectively.  The loss from discontinuedoperations before tax also includes a $3.1 million loss on the sale of LambB&A in 2003 and Lamb B&A operating losses of $2.0 million, $9.2 millionand $8.0 million, in 2004, 2003, and 2002, respectively. The 2002 loss fromdiscontinued operations before tax also includes a $4.7 million loss on thesale of R&B Plastics.

F-25

----

**Note H:**   Discontinued Operations (Continued)

The tax benefit for the year ended December 31, 2004reflects an effective tax rate of 7.4% compared to the U.S. statutory tax rateof 35%. The reduction in the effective tax rate is largely attributable to the$63.3 million impairment charge related to non-deductible goodwill andadditional state and foreign valuation allowances recorded against previouslyrecognized deferred tax assets, resulting from the Company’s plan to divest IAS. The Company expectsthat certain of its state and foreign deferred tax assets of discontinuedoperations will not be realizable and, in 2004, recorded valuation allowancesof $5.4 million and $31.3 million, respectively. The tax benefit for 2003reflects an effective rate of 18.2 % primarily due to valuation allowancesrecorded for foreign deferred tax assets.

The table below sets forththe assets and liabilities of discontinued operations as of December 31,2004 and 2003, (thousands of dollars):
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Current assets of  discontinued operations:          |       |                  |       |   |   |
| Accounts receivable, net                             |       | $                     | 160,118    |   | $ | 134,796 |   |
| Inventories, net                                     |       | 55,926                |       | 59,153 |   |
| Other current assets                                 |       | 5,635                 |       | 2,911 |   |
| Impairment of current assets                         |       | (10,563               | )          | — |   |
| Total current assets of discontinued operations      |       | 211,116               |       | 196,860 |   |
| Long-term assets  of discontinued operations:        |       |                  |       |   |   |
| Property, plant and equipment, net                   |       | 13,356                |       | 47,061 |   |
| Goodwill and other intangibles, net                  |       | 7,796                 |       | 71,303 |   |
| Other Assets                                         |       | 86                    |       | 860 |   |
| Total long-term  assets of discontinued operations:  |       | 21,238                |       | 119,224 |   |
| Current  liabilities of discontinued operations:     |       |                  |       |   |   |
| Accounts payable and accrued expenses                |       | 117,026               |       | 113,084 |   |
| Accrued payroll                                      |       | 13,231                |       | 21,622 |   |
| Total current liabilities of discontinued operations |       | 130,257               |       | 134,706 |   |
| Long-term liabilities of discontinued operations     |       | 46,388                |       | 52,108 |   |
| Net assets of  discontinued operations               |       | $                     | 55,709     |   | $ | 129,270 |   |

 

All ofthe Company’s goodwill is recorded in its Industrial Automation Systems (“IAS”)group and is classified as long-term assets of discontinued operations on theCompany’s consolidated balance sheets as of December 31, 2004 and 2003.During the fourth quarter of 2004, the Company wrote off all the goodwillassociated with Cincinnati Lamb. The remaining balance at December 31,2004 of $7.8 million is related to Landis Grinding Systems. The changes in thecarrying amount of goodwill for the years ended December 31, 2003 and 2004were as follows (thousands of dollars):
| Balance as of  January 1, 2003      |   | $       | 69,546 |   |
|------------------------------------------|--------|---------|--------|--------|
| Foreign currency  translation adjustment |   | 846     |   |
| Balance as of  December 31, 2003    |   | 70,392  |   |
| Foreign currency  translation adjustment |   | 732     |   |
| Impairment                               |   | (63,328 | )      |
| Balance as of  December 31, 2004    |   | $       | 7,796  |   |

 

Long-term liabilities of discontinued operations comprisepension and postretirement obligations.

F-26

----

**Note H:**   DiscontinuedOperations (Continued)

Rental expense for operating leases of discontinuedoperations, including amounts for short-term leases with nominal, if any,future rental commitments, was $3.9 million, $6.4 million and $7.7 million, forthe years ended December 31, 2004, 2003 and 2002, respectively.

Proceeds totalingapproximately $3.5 million and $4.0 million were received in 2003 and 2002,respectively, from the sale of operating facilities and land of discontinuedoperations, excluding assets classified as held for sale. Proceeds from thesale of facilities of discontinued operations were not material in2004.Depreciation expense from discontinued operations was $6.7 million, $11.3million and $15.8 million for the years ended December 31, 2004, 2003 and2002, respectively. Due to the write off of the property, plant and equipmentof Cincinnati Lamb and the reclassification of the property, plant andequipment of Landis Grinding Systems to Long-Term Assets of DiscontinuedOperations, the Company has ceased recording depreciation on these assets forfuture periods.

**NoteI:**   Income Taxes 

Earningsfrom continuing operations before income taxes by geographic area are asfollows (thousands of dollars):
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| United States                                            |       | $                                          | 33,784     |   | $ | 21,567 |   | $ | 55,318 |   |
| International                                            |       | 16,893                                     |       | 9,255 |   | 2,647 |   |
| Earnings from continuing  operations before income taxes |       | $                                          | 50,677     |   | $ | 30,822 |   | $ | 57,965 |   |

 

Incometaxes consist of the following (benefit) provision (thousands of dollars):
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                    |       |                                       |       |   |   |   |   |
| United States taxes         |       | $                                          | 13,366     |   | $ | 7,697 |   | $ | 20,016 |   |
| International taxes         |       | 9,881                                      |       | 3,042 |   | 620 |   |
| Total Current               |       | 23,247                                     |       | 10,739 |   | 20,636 |   |
| Deferred:                   |       |                                       |       |   |   |   |   |
| United States taxes         |       | (23,442                                    | )          | 4,714 |   | (324 | ) |
| International taxes         |       | (1,309                                     | )          | 197 |   | — |   |
| Total Deferred              |       | (24,751                                    | )          | 4,911 |   | (324 | ) |
| Provision for Income  Taxes |       | $                                          | (1,504     | ) | $ | 15,650 |   | $ | 20,312 |   |

 

F-27

----

**Note I:**   Income Taxes(Continued)

The following is areconciliation of income taxes at the U.S. statutory rate to the (benefit)provision for income taxes:
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Tax at U.S. statutory rate                                    |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| State income  taxes net of federal benefit                    |       | (4.8                                       | )          | 3.6 |   | 1.8 |   |
| Deductible  goodwill & intangibles                   |       | (26.7                                      | )          | 0.0 |   | 0.0 |   |
| Tax credits                                                   |       | (5.7                                       | )          | 13.2 |   | (1.5 | ) |
| Extraterritorial  income exclusion                            |       | (1.6                                       | )          | (2.2 | ) | (0.5 | ) |
| Foreign net  earnings taxed at other than U.S. statutory rate |       | 7.3                                        |       | 0.0 |   | (0.9 | ) |
| Additional  deferred tax assets                               |       | (7.3                                       | )          | 0.0 |   | 0.0 |   |
| Other items                                                   |       | 0.8                                        |       | 1.2 |   | 1.1 |   |
|                                                          |       | (3.0                                       | )%         | 50.8 | % | 35.0 | % |

 

Deferred income taxesreflect the net tax effect of transactions which are recognized in differentperiods for financial and tax reporting purposes. The primary components of theCompany's deferred tax assets and liabilities are as follows (thousands ofdollars):
| ** **                                             | ** ** | **December 31** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Current  deferred tax assets:                          |       |                 |       |   |   |
| Accrued expenses                                       |       | $                    | 37,949     |   | $ | 44,635 |   |
| Receivables and  inventories                           |       | 19,077               |       | 18,653 |   |
| Net operating loss  carryforwards                      |       | 26,460               |       | 6,650 |   |
| Other items                                            |       | 715                  |       | 1,291 |   |
| Total current deferred  tax assets                     |       | 84,201               |       | 71,229 |   |
| Valuation allowance                                    |       | (2,432               | )          | — |   |
| Net current deferred tax  assets                       |       | 81,769               |       | 71,229 |   |
| Long-term deferred tax  assets:                        |       |                 |       |   |   |
| Retiree medical benefits                               |       | 18,381               |       | 17,438 |   |
| Intangibles                                            |       | 11,998               |       | (148 | ) |
| Tax credit carryforwards                               |       | 45,712               |       | 32,987 |   |
| Deferred income                                        |       | 2,860                |       | 1,726 |   |
| Fixed assets                                           |       | 10,052               |       | (3,565 | ) |
| Net operating and  capital loss carryforwards          |       | 124,970              |       | 109,140 |   |
| Other items                                            |       | (335                 | )          | — |   |
| Total long-term deferred  tax assets                   |       | 213,638              |       | 157,578 |   |
| Valuation allowance                                    |       | (74,964              | )          | (40,619 | ) |
| Net long-term deferred  tax assets                     |       | 138,674              |       | 116,959 |   |
| Total deferred tax  assets, net of valuation allowance |       | 220,443              |       | 188,188 |   |
| Deferred  tax liabilities:                             |       |                 |       |   |   |
| Pensions                                               |       | (3,696               | )          | (5,139 | ) |
| Net deferred tax assets                                |       | $                    | 216,747    |   | $ | 183,049 |   |

 

F-28

----

**Note I:**   Income Taxes(Continued)

The Company has consideredfuture market growth, forecasted earnings, future taxable income, the mix ofearnings in the jurisdictions in which the Company operates and prudent,feasible and permissable tax planning strategies in determining therealizability of deferred tax assets.  Ifthe Company were to determine that it would not be able to realize a portion ofits net deferred tax asset in the future for which there is currently novaluation allowance, an adjustment to the net deferred tax asset would be chargedto earnings in the period such determination was made. Conversely, if theCompany were to make a determination that it is more likely than not that thedeferred tax assets for which there is currently a valuation allowance would berealized, the related valuation allowance would be reduced and a benefit toearnings would be recorded.

The Company has available atDecember 31, 2004 net operating and capital tax loss carryforwards in theUnited States of approximately $216.6 million, which result in a deferred taxbenefit of $75.8 million.  These lossesare expected to expire from 2018 through 2024. In 2003, the Company determinedthat certain foreign tax credit carryforwards would not be realized prior totheir scheduled expiration dates ranging from 2004 through 2007. Therefore,these tax credits were converted to $5.2 million of net operating taxcarryforwards.

The Company has general businesscredit carryforwards and foreign tax credit carryforwards of $44.7 million and$1.0 million at December 31, 2004, respectively. The general business creditcarryforwards have expiration dates ranging from 2010 through 2024. Withrespect to foreign tax credit carryforwards, they are expected to expirebetween 2013 and 2014.The Company has provided a valuation allowance in theamount of $5.4 million for state deferred tax assets from discontinuedoperations of which $2.4 million relates to net operating tax losscarryforwards. The Company determined that other state deferred tax assets of$5.2 million, which includes net operating loss carryforwards of $2.3 million,is more likely than not to be realized.

AtDecember 31, 2004, the Company has foreign net operating tax loss carryforwardsof $180.0 million which result in a deferred tax benefit of $64.0 million.Valuation allowances of $60.4 million and $37.0 million, as of December 31,2004 and 2003, respectively, have been provided for deferred income taxbenefits related to the foreign loss carryforwards that may not be realized.Additional valuation allowances of $4.8 million and $3.6 million have beenprovided for other deferred income tax benefits that are related to the foreignoperations in 2004 and 2003, respectively. The Company also has foreign capitalloss carryforwards of $22.7 million as of December 31, 2004 and a fullvaluation allowance for the related deferred tax asset of $6.8 million has beenrecorded.  

TheCompany conducts business in various countries throughout the world and issubject to tax in numerous jurisdictions. As a result of its businessactivities, the Company files a significant number of tax returns that aresubject to audit by various tax authorities. Tax audits are often complex andmay require several years to resolve. The Company records estimated taxliabilities to the extent the contingencies are probable and can be reasonablyestimated. These liabilities for tax contingencies totaled $32.6 million and$25.5 million as of December 31, 2004 and 2003, respectively. Suchestimated tax liabilities are based on management’s judgment and best estimateas to the ultimate outcome of tax audits. However, the Company’s future resultsmay include favorable or unfavorable adjustments to the Company’s estimated taxliabilities in the period the assessments are made or resolved or when statutesof limitation on potential assessments expire. As a result, the Company’seffective tax rate may fluctuate significantly on a quarterly basis.

Inthe fourth quarter of 2004, the Company ceased reinvesting permanently in itsSwedish operations. The tax restructuring resulted in the recognition of adeferred tax benefit related to goodwill and intangibles of approximately $13.5million. In addition, as part of the Company’s overall review of its businessoperations in 2004 and its commitment to divest the IAS business, the Companyrecognized additional deferred tax benefits related to its U.S. and foreignjurisdictions.

F-29

----

**Note I:**   Income Taxes (Continued)

TheCompany has not fully evaluated the effects of the new repatriation provisionin the American Jobs Creation Act of 2004 (the “Jobs Act”) which was signedinto law on October 22, 2004. The Jobs Act creates a temporary opportunity forU.S. corporations to elect a dividend-received deduction which equals 85% ofcertain qualified dividends in excess of a base-period amount received fromcontrolled foreign corporations, providing the dividends are invested in theUnited States under a properly approved domestic reinvestment plan. Theelection is available for either the taxpayer’s last tax year that beginsbefore October 22, 2004, or the taxpayer’s first tax year that begins duringthe one-year period beginning on October 22, 2004.  

TheCompany is awaiting further guidance to thoroughly evaluate the effects of thenew provision. Thus, the Company is not in a position to decide on whether, andto what extent, it might repatriate undistributed earnings to the UnitedStates. However, based upon limited analysis to date, it is reasonably possiblethat the Company may repatriate between $0 million to $98 million in the nearfuture. The Company will complete its review by December 31, 2005 and willrecognize the income tax effect, if any, in the period when a decision whether ornot to repatriate is made.  

The Company has not provided deferred U.S. incometaxes on undistributed earnings of foreign subsidiaries that the Companyintends to reinvest permanently outside of the United States; the total amountof such earnings as of December 31, 2004, was $97.8 million. Should the Companydistribute earnings of foreign subsidiaries in the form of dividends orotherwise, the Company may be subject to U.S. income taxes. It is notpracticable, however, to estimate the amount of unrecognized deferred U.S.taxes on these earnings until the Company completes its analysis of the effectsof the Jobs Act discussed above.  

**NoteJ:**   Intellectual Property Settlements andSale

Duringthe year ended December 31, 2004, the Company received compensation inrelation to one settlement regarding certain of its intellectual property (“IPsettlements”). The Company received compensation in relation to three similarIP settlements during the year ended December 31, 2003 and four IPsettlements during the year ended December 31, 2002. The terms of thesesettlements are confidential.

F-30

----

**Note J:**   IntellectualProperty Settlements and Sale (Continued)

In aggregate, revenues and related gross profit fromintellectual property settlements, net of legal fees, were $19.7 million and$15.6 million in 2004, $18.7 million and $12.5 million in 2003 and $88.4million and $71.7 million in 2002 respectively. In 2002, the Company sold aportfolio of wireless networking patents for $24.0 million and recorded a grossprofit of $18.5 million.

**Note K:**   Pensionand Other Postretirement Benefit Plans

The Company has retirement and pension plans whichcover most of its employees. Most of the Company’s U.S. employees, as well asthe employees of certain non-U.S. subsidiaries, are covered by contributorydefined benefit plans under which employees may contribute up to 4% of coveredcompensation annually. Annual contributions are made to the extent suchcontributions are actuarially determined to adequately fund the plans. Retireebenefits are based on the amount of participant contributions over the term ofthe participant’s employment. There are also defined contribution voluntarysavings programs generally available for U.S. employees, which qualify underSections 401(a) and 401(k) of the Internal Revenue Code. Theseplans are designed to enhance the retirement programs of participatingemployees. Under these plans, the Company matches up to 50% of a certainportion of participants’ contributions.

TheCompany uses a measurement date of September 30 for the majority of its pensionand other postretirement benefit plans. The following table sets forth thechange in benefit obligations and plan assets of the Company’s pension plansand the amounts recognized in the Company’s balance sheets (thousands ofdollars):
| ** **                                         | ** ** | **2004** | ** ** | **2003**          | ** ** |
|----------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **                                         | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** |
| Change in benefit  obligations:                    |       |     |       |              |       |   |   |   |   |
| Benefit obligation at  beginning of year           |       | $        | 141,163    |              | $          | 169,680 |   | $ | 104,184 |   | $ | 138,934 |   |
| Service cost                                       |       | 9,670    |       | 5,148             |       | 8,571 |   | 5,205 |   |
| Interest cost                                      |       | 8,953    |       | 9,429             |       | 7,439 |   | 7,960 |   |
| Special termination  benefits                      |       | 2,430    |       | —            |       | 71 |   | — |   |
| Plan participants’  contributions             |       | 2,331    |       | 1,106             |       | 1,346 |   | 911 |   |
| Actuarial loss (gain)                              |       | (585     | )          | 983               |       | 23,975 |   | 8,428 |   |
| Benefits paid                                      |       | (3,881   | )          | (8,427            | )          | (4,423 | ) | (7,553 | ) |
| Foreign currency  translation adjustment           |       | —   |       | 14,540            |       | — |   | 15,795 |   |
| Benefit obligation at  end of year                 |       | 160,081  |       | 192,459           |       | 141,163 |   | 169,680 |   |
| Change in plan assets:                             |       |     |       |              |       |   |   |   |   |
| Fair value of plan  assets at beginning of year    |       | 92,568   |       | 120,787           |       | 80,720 |   | 99,694 |   |
| Actual return on plan  assets                      |       | 7,146    |       | 14,183            |       | 12,947 |   | 12,853 |   |
| Plan participants’  contributions             |       | 2,331    |       | 1,106             |       | 1,346 |   | 911 |   |
| Employer contributions                             |       | —   |       | 5,577             |       | — |   | 3,619 |   |
| Benefits paid                                      |       | (1,854   | )          | (8,427            | )          | (2,445 | ) | (7,553 | ) |
| Foreign currency  translation adjustment           |       | —   |       | 10,653            |       | — |   | 11,263 |   |
| Fair value of plan  assets at end of year          |       | 100,191  |       | 143,879           |       | 92,568 |   | 120,787 |   |
| Funded status                                      |       | (59,890  | )          | (48,580           | )          | (48,595 | ) | (48,893 | ) |
| Unrecognized net  actuarial loss                   |       | 54,694   |       | 48,867            |       | 55,779 |   | 50,338 |   |
| Unrecognized prior  service cost                   |       | 4,149    |       | —            |       | 4,866 |   | — |   |
| Unrecognized transition  asset                     |       | —   |       | (848              | )          | (42 | ) | (1,377 | ) |
| Adjustment to recognize minimum  pension liability |       | —   |       | (13,961           | )          | — |   | (14,649 | ) |
| Net pension asset  (accrued liability)             |       | $        | (1,047     | )                 | $          | (14,522 | ) | $ | 12,008 |   | $ | (14,581 | ) |

 

F-31

----

**Note K:**   Pension and Other Postretirement Benefit Plans(Continued)

The net pension asset(accrued liability) recognized on the Company’s consolidated balance sheets areclassified as follows (thousands of dollars):
| ** **                                        | ** ** | **2004** | ** ** | **2003**          | ** ** |
|---------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **                                        | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** |
| Prepaid benefit cost                              |       | $        | 44,011     |              | $          | — |   | $ | 50,748 |   | $ | — |   |
| Accrued benefit  cost                             |       | (45,058  | )          | (1,048            | )          | (38,740 | ) | (962 | ) |
| Long-term  liabilities of discontinued operations |       | —   |       | (13,474           | )          | — |   | (13,619 | ) |
| Net pension asset (accrued liability)             |       | $        | (1,047     | )                 | $          | (14,522 | ) | $ | 12,008 |   | $ | (14,581 | ) |

 

The accumulated benefit cost for the U.S. plans was$119.4 million and $102.5 million as of December 31, 2004 and 2003,respectively. The accumulated benefit cost for the U.K. plans was $158.4million and $133.3 million as of December 31, 2004 and 2003, respectively.The Company’s U.S. plans in the preceding table include prepaid pension cost offunded plans, presented net of pension liabilities for unfunded plans. Forthese unfunded plans, in aggregate, as of December 31, 2004 and 2003, theaccrued pension cost was $45.1 million and $38.7 million, the benefitobligation was $55.5 million and $51.9 million, and the accumulated benefitobligation was $48.9 million and $44.4 million, respectively.

The Company does not expect to contribute to its U.S.funded plans in 2005. For the U.K. plans, relating primarily to discontinuedoperations, expected employer contributions for 2005 are $5.3 million.

Due primarily to poor market returns and a reductionin the discount rate used to determine the aggregate accumulated benefitobligation in 2002, at December 31, 2002 the aggregate accumulated benefitobligation of the Non-U.S. plans exceeded the aggregate fair value of planassets. In 2002, the Company recorded $10.9 million to recognize thecorresponding minimum liability, resulting in an after tax charge toaccumulated other comprehensive loss of $7.6 million. In 2003, a furtherreduction in the discount rate resulted in the Company recording an additional$2.9 million increase to the minimum liability, which was charged toaccumulated other comprehensive loss. In 2003, the Company recorded valuationallowances for the tax benefits resulting from the 2002 and 2003 minimumpension liabilities recorded. The valuation allowance related to the 2003charge was recorded in other comprehensive income, resulting in a zero taxeffect on the charge. The valuation allowance of $3.3 million related to the2002 charge is included as a charge to the Company’s 2003 income tax provision.In 2004, positive market returns resulted in the Company recording $1.9 millionreduction to the minimum liability, $1.3 million net of tax.

Theweighted average actuarial assumptions used to determine benefit obligations atthe end of the 2004 and 2003 fiscal years are as follows:
| ** **                     | ** ** | **U.S**                          | ** ** | **Non. U.S.**               | ** ** |
|--------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
| Discount rate                  |       |                             | 6.00       | %                                |       |   | 6.00 | % |   |   | 5.50 | % |   |   | 5.75 | % |   |
| Rate of compensation  increase |       |                             | 4.00       | %                                |       |   | 4.00 | % |   |   | 3.50 | % |   |   | 3.25 | % |   |

 

F-32

----

**Note K:**   Pension andOther Postretirement Benefit Plans (Continued)

U.S. plan assets consistprimarily of equity securities, U.S. government securities, and corporate bondsand at December 31, 2004 and 2003, include 31,475 shares of UNOVA commonstock. The asset allocation for the Company’s U.S pension plans as of December 31,2004 and 2003 and the target allocation, by asset category, are as follows:
| ** **                       | ** ** | **Target** | ** ** | **Allocation of Plan Assets at  Measurement Date** | ** ** |
|----------------------------------|------------|------------|------------|-----------------------------------------------------------------------------|------------|
| **U.S. Pension Plans** | ** ** | ** ** | ** ** | **Allocation**                                                              | ** ** | **        2004        ** | ** ** | **        2003        ** | ** ** |
| Equity securities                |       |       | 65         | %                                                                           |       |   | 55 | % |   |   | 51 | % |   |
| Debt securities                  |       |       | 29         | %                                                                           |       |   | 31 | % |   |   | 28 | % |   |
| Other                            |       |       | 5          | %                                                                           |       |   | 12 | % |   |   | 18 | % |   |
| Cash and cash  equivalents       |       |       | 1          | %                                                                           |       |   | 2 | % |   |   | 3 | % |   |
| Total                            |       |       | 100        | %                                                                           |       |   | 100 | % |   |   | 100 | % |   |
|                                  |            |            |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

Due to a partial settlement of the Company’s USdefined benefit pension obligation in 2001, the majority of the Company’s USpension obligations are 30 to 50 years in the future. Consistent with thisobligation, the Company’s investment strategy for the plan assets is to investfor strong long-term returns. As a result of the 2001 reversion of surpluspension plan assets, the allocation of assets among asset categories isdifferent from the Company’s target allocation. The Company’s objective is toadjust the investment allocation to reflect the target allocation as certainalternative investments liquidate. Alternative investments, classified as otherin the above table, represent primarily private equity-type investments andprivate placements.

Non-U.S. plan assets consist primarily of equitysecurities, U.K. government securities, and corporate bonds. The Company’sinvestment strategy for the plan assets is to invest for strong long-termreturns. The asset allocation for the Company’s U.K. pension plans as of December 31,2004 and 2003 and the target allocation, by asset category, are as follows:
| ** **                           | ** ** | **Target** | ** ** | **Allocation of Plan Assets at  Measurement Date** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------|------------|
| **Non-U.S. Pension Plans** | ** ** | ** ** | ** ** | **Allocation**                                                              | ** ** | **        2004        ** | ** ** | **        2003        ** | ** ** |
| Equity securities                    |       |       | 66         | %                                                                           |       |   | 66 | % |   |   | 65 | % |   |
| Debt securities                      |       |       | 34         | %                                                                           |       |   | 34 | % |   |   | 34 | % |   |
| Cash and cash  equivalents and other |       |       | 0          | %                                                                           |       |   | 0 | % |   |   | 1 | % |   |
| Total                                |       |       | 100        | %                                                                           |       |   | 100 | % |   |   | 100 | % |   |
|                                      |            |            |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

F-33

----

**Note K:**   Pension andOther Postretirement Benefit Plans (Continued)

In 2004, 2003 and 2002 theCompany offered voluntary early retirement to certain U.S. employees resultingin special termination benefits charges of $2.4 million, $0.1 million and $4.7million, respectively. A summary of the components of net periodic pensionexpense (income) for the Company’s defined benefit plans and definedcontribution plans is as follows (thousands of dollars):
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                            | ** ** | **U.S.**                                   | ** ** | **Non-U.S.** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
| Components of net  periodic pension expense (income): |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                          |       | $                                          | 9,670      |   | $ | 5,148 |   | $ | 8,571 |   | $ | 5,205 |   | $ | 11,498 |   | $ | 3,770 |   |
| Interest cost                                         |       | 8,953                                      |       | 9,429 |   | 7,439 |   | 7,960 |   | 5,928 |   | 6,832 |   |
| Expected return on plan assets                        |       | (9,792                                     | )          | (9,694 | ) | (9,893 | ) | (9,655 | ) | (11,238 | ) | (9,650 | ) |
| Amortization of prior service cost                    |       | 717                                        |       | — |   | 719 |   | — |   | 724 |   | — |   |
| Recognized net actuarial loss (gain)                  |       | 3,146                                      |       | 1,917 |   | 610 |   | 224 |   | (74 | ) | (149 | ) |
| Amortization of transition asset                      |       | (42                                        | )          | (339 | ) | (257 | ) | (303 | ) | (314 | ) | (275 | ) |
| Special termination benefits                          |       | 2,430                                      |       | — |   | 71 |   | — |   | 4,746 |   | — |   |
|                                                  |       | 15,082                                     |       | 6,461 |   | 7,260 |   | 3,431 |   | 11,270 |   | 528 |   |
| Defined contribution plans                            |       | 2,794                                      |       | 1,386 |   | 2,877 |   | 1,199 |   | 3,428 |   | 1,162 |   |
| Net periodic pension expense                          |       | $                                          | 17,876     |   | $ | 7,847 |   | $ | 10,137 |   | $ | 4,630 |   | $ | 14,698 |   | $ | 1,690 |   |

 

Net periodicpension expense of $6.2 million, $3.3 million and $0.6 million, relating to theCompany’s non-U.S. plans is classified as loss from discontinued operations onthe Company’s consolidated statements of operations for the years ended December 31,2004, 2003 and 2002, respectively. The portion of U.S. plan net periodicpension expense classified as loss from discontinued operations is $5.1million, $3.0 million and $4.1 million for the years ended December 31,2004, 2003 and 2002, respectively.The weighted average actuarial assumptionsused to determine net cost are as follows:
| ** **                      | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
|---------------------------------|------------|----------|------------|--------------|------------|
| ** **                      | ** ** | **2004** | ** ** | **2003**     | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Discount rate                   |       | 6.00     | %          | 6.75         | %          | 7.25 | % | 5.50 | % | 5.75 | % | 6.25 | % |
| Expected return  on plan assets |       | 9.00     | %          | 9.00         | %          | 9.25 | % | 7.50 | % | 7.75 | % | 8.00 | % |
| Rate of compensation  increase  |       | 4.00     | %          | 4.25         | %          | 4.50 | % | 3.50 | % | 3.25 | % | 3.50 | % |

 

Management’s analysis of the asset rate of returnassumptions for the U.S. plans supports a long-term rate of approximately 9.0% forthe September 30, 2004 measurement date based on the long-term perspectiveof the investments and the historical results of investment funds.

Management’s analysis of the asset rate of returnassumptions for the U.K. plans supports a long term rate of return ofapproximately 7.5% to 8.0% based on the long-term perspective of theinvestments and the historical results of investments funds. Management has setthe Company’s weighted average rate of return assumption at 7.7% for the September 30,2004 measurement date.

F-34

----

**Note K:**   Pension andOther Postretirement Benefit Plans (Continued)

The table below sets forththe expected future pension benefit payments for the next five years and thefollowing five year period (millions of dollars):
| **Years**         | ** ** | ** ** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
|-------------------|------------|------------|------------|----------|------------|--------------|------------|
| 2005              |       | $          | 4.6        |     |       | $            | 6.8        |   |   |
| 2006              |       | 4.8        |       |     | 7.1        |         |       |
| 2007              |       | 5.0        |       |     | 7.2        |         |       |
| 2008              |       | 5.9        |       |     | 7.5        |         |       |
| 2009              |       | 6.6        |       |     | 7.6        |         |       |
| 2010 through 2014 |       | 47.0       |       |     | 41.3       |         |       |
|                   |            |            |            |          |            |              |            |  |  |  |  |

 

**OtherPostretirement Benefits**

Inaddition to pension benefits, certain of the Company’s U.S. employees arecovered by postretirement health care and life insurance benefit plans providedby UNOVA. These benefit plans are unfunded. The following table sets forth thechange in benefit obligation of the Company’s other postretirement benefits andamounts recognized in the Company’s balance sheets (thousands of dollars):
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Change in  postretirement benefit obligations: |       |                  |       |   |   |
| Benefit obligation at beginning of year        |       | $                     | 50,606     |   | $ | 64,955 |   |
| Service cost                                   |       | 156                   |       | 474 |   |
| Interest cost                                  |       | 2,758                 |       | 3,976 |   |
| Amendment                                      |       | —                |       | (15,669 | ) |
| Actuarial loss (gain)                          |       | (7,171                | )          | 1,432 |   |
| Benefits paid                                  |       | (4,380                | )          | (4,562 | ) |
| Benefit obligation at end of year              |       | 41,969                |       | 50,606 |   |
| Funded status                                  |       | (41,969               | )          | (50,606 | ) |
| Unrecognized net actuarial loss                |       | 13,430                |       | 21,516 |   |
| Unrecognized prior service cost                |       | (12,872               | )          | (14,068 | ) |
| Accrued postretirement benefit obligation      |       | $                     | (41,411    | ) | $ | (43,158 | ) |

 

Certain postretirement medical plans were modifiedduring 2003 to eliminate coverage for future retirees and to require retireesto contribute a portion of the plan cost, effective January 1, 2007. Theseplan changes reduced the benefit obligation by $15.7 million as of December 31,2003. This reduction was first used to reduce the remaining unrecognizedtransition obligation of $1.6 million to zero as of December 31, 2003. Theremainder of the reduction is deferred as a negative prior service cost andwill be amortized over the expected future service period.

F-35

----

**Note K:**   Pension and Other Postretirement Benefit Plans (Continued)

Asummary of the Company’s net periodic postretirement benefit cost is as follows(thousands of dollars):
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Components of net  periodic postretirement benefit cost: | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                             |       | $                                          | 156        |   | $ | 474 |   | $ | 847 |   |
| Interest cost                                            |       | 2,758                                      |       | 3,976 |   | 4,183 |   |
| Recognized actuarial loss and transition obligation      |       | 915                                        |       | 685 |   | 853 |   |
| Amortization of prior service cost                       |       | (1,196                                     | )          | — |   | — |   |
| Net periodic postretirement benefit cost                 |       | $                                          | 2,633      |   | $ | 5,135 |   | $ | 5,883 |   |

 

For years ended December 31, 2004, 2003 and 2002,$2.4 million, $4.8 million, and $5.6 respectively, of the net periodicpostretirement benefit cost is classified as loss from discontinued operationson the Company’s consolidated statements of operations.

Actuarialassumptions used to measure the postretirement benefit obligation include adiscount rate of 6.00%, 6.00% and 6.75% at December 31, 2004, 2003 and2002, respectively. The assumed health care cost trend rate for fiscal year2004 was 10.33% and is projected to decrease over 13 years to 6.00%, where itis expected to remain thereafter. The effect of a one-percentage-pointincrease or decrease in the assumed health care cost trend rate on the servicecost and interest cost components of the net periodic postretirement benefitcost is not material. A one-percentage-point increase in theassumed health care cost trend rate on the postretirement benefit obligationresults in an increase of approximately $2.9 million, while a one-percentagepoint decrease results in a decrease of $2.5 million.In December, 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was passed into law. The Act introduces a prescription drug benefit underMedicare Part D and a federal subsidy to sponsors of postretirement healthcare plans that provide a prescription drug benefit that is at leastactuarially equivalent to Medicare Part D. In May 2004, the FASBissued FSP 106-2 which provides guidance on the accounting for the effects ofthe Act. The Company adopted the provisions of FSP 106-2 in the third quarterof 2004, retroactive to December 31, 2003. For the year ended December 31,2004, the effect of the subsidy is a reduction in postretirement benefitexpense of $0.5 million comprising a decrease in interest cost of $0.2million and a decrease in the amortization of the actuarial experience gain of$0.3 million. The Company’s accumulated postretirement benefit obligation (APBO)was reduced by $4.9 million at December 31, 2003, for the subsidy relatedto benefits attributed to past service. The Act is expected to reducepostretirement benefit payments for the next five years and the subsequent fiveyear period as shown in the following table, (millions of dollars):
| **Years**         | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| 2005              |       | $          | (0.0       | )          |
| 2006              |       | (0.4       | )          |
| 2007              |       | (0.4       | )          |
| 2008              |       | (0.4       | )          |
| 2009              |       | (0.5       | )          |
| 2010 through 2014 |       | (2.4       | )          |
|                   |            |            |            |            |            |  |

 

F-36

----

**Note K:**   Pension andOther Postretirement Benefit Plans (Continued)

The following table setsforth the expected postretirement benefit payments, including the impact of theAct, for the next five years and the subsequent five year period (thousand of dollars):
| **Years**         | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| 2005              |       | $          | 4.2        |       |
| 2006              |       | 3.9        |       |
| 2007              |       | 3.8        |       |
| 2008              |       | 3.7        |       |
| 2009              |       | 3.5        |       |
| 2010 through 2014 |       | 16.6       |       |
|                   |            |            |            |            |            |  |

 

**Note L:**   Litigation, Commitments andContingencies

Provisionsfor estimated expenses related to product warranties are made at the timeproducts are sold. These estimates are established using historical informationon the nature, frequency, and average cost of warranty claims. Managementactively studies trends of warranty claims and takes action to improve productquality and minimize warranty claims. The following table indicates the changein the Company’s warranty liability from continuing operations during the yearsended December 31, 2004 and 2003 (thousands of dollars):
| ** **                                     | ** ** | **Year Ended December 31,**                           | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Beginning balance                              |       |                                                                 | $          | 6,179 |   |   |   | $ | 4,220 |   |   |
| Payments                                       |       |                                                                 | (5,892     | ) |   |   | (6,032 | ) |   |
| Increase in  liability (new warranties issued) |       |                                                                 | 4,823      |   |   |   | 7,877 |   |   |
| Adjustments  (pre-existing warranties)         |       |                                                                 | (236       | ) |   |   | — |   |   |
| Currency  translation adjustment               |       |                                                                 | 4          |   |   |   | 114 |   |   |
| Ending Balance                                 |       |                                                                 | $          | 4,878 |   |   |   | $ | 6,179 |   |   |

 

*Tower Automotive Products Co. v. Lamb Technicon Bodyand Assembly*is a lawsuit filed on March 11, 2002in the Kent County Circuit Court in Michigan, generally alleging a breach ofcontract involving a frame assembly production line. No specific claim fordamages was made in the Complaint by Tower Automotive Products Co. The Companyhas responded to the Complaint. A trial date has been scheduled for the secondquarter of 2005. Management believes the lawsuit is without merit and isvigorously contesting the case. Nevertheless, should there be an unfavorableresult, it is possible that cash flows or results of discontinued operationscould be materially affected in that period or subsequent periods.

On March 11, 2005, Symbol Technologies, Inc.(“Symbol”) announced that it had filed a lawsuit against Intermec for wirelesspatent infringement. The complaint does not contain sufficient details for theCompany to assess what Symbol will claim regarding the relationship between itscited patents and Intermec products. However, based on prior Company analysisof the cited Symbol patents, the Company believes it has substantial defensesto each of those patents and as such, the ultimate resolution of this complaintwould not have a material adverse effect on the Company’s consolidatedfinancial position. As with all claims brought against the Company, the Companyintends to vigorously defend itself and contest the claims made in the suit.Additionally, Symbol announced that it intends to terminate its originalequipment manufacturing (“OEM”) agreement with Intermec to supply laser scanengines. The Company believes that a cancellation of the OEM agreement bySymbol would not have an adverse impact on its future operations.

 

F-37

----

**Note L:**   Litigation, Commitments andContingencies (Continued)

The Company is currently,and is from time to time, subject to claims and suits arising in the ordinarycourse of its business. In the opinion of the Company’s General Counsel, theultimate resolution of currently pending proceedings, with the potentialexception of the Tower Automotive Products Co. case discussed above, will nothave a material adverse effect on the Company’s consolidated financialstatements.

**NoteM:**   RelatedParty Transactions

At December 31, 2004and 2003, other assets include a receivable due from a certain non-executiveCompany officer of $0.2 million.

During 2002 and 2003,Unitrin, Inc., a significant shareholder of the Company, owning approximately21% of the Company’s outstanding common shares, and various of its subsidiaries("Unitrin") participated as a lender in relation to the Company’slong term debt in the form of a term loan. In January 2003, the Company paidoff the remaining $16.2 million balance of the term loan. Interest expenseassociated with amounts funded by Unitrin was $0.2 million and $3.0 million forthe years ended December 31, 2003 and 2002, respectively.

In January 2005Unitrin’s Life and Health Insurance segment agreed to hire the Company’sIntermec subsidiary to develop the software for the next generation of Life andHealth Insurance’s handheld computers.

F-38

----

**NoteN:**   SegmentReporting

The Company’s, AutomatedData Systems segment (“ADS”), comprises the Company’s wholly-owned subsidiaryIntermec Technologies Corporation (“Intermec”). Corporate and other amountsinclude corporate operating costs and currency transaction gains and losses.Assets classified as corporate and other amounts consist of cash and cashequivalents, prepaid pension costs, deferred tax assets and other corporateassets. Intrasegment transactions have been eliminated and there are nomaterial intersegment transactions. The following table sets forth the Company’soperations and total assets by business segment (millions of dollars):
|                                        | ** ** | **Year Ended  December 31,** | ** ** | **Automated  Data  Systems** | ** ** | **Corporate  And other  Amounts** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|-----------|------------|
| Revenues                               |       |                                   | 2004       |                         |       |                                   | $          | 811.3     |       |   |   | $ | — |   |   | $ | 811.3 |   |
|                                        |       |                                   | 2003       |                         |       |                                   | 706.6      |      |       |   | — |   |   | 706.6 |   |
|                                        |       |                                   | 2002       |                         |       |                                   | 744.4      |      |       |   | — |   |   | 744.4 |   |
| Operating profit (loss)                |       |                                   | 2004       |                         |       |                                   | 89.7       |      |       |   | (25.0 | )(A) |   | 64.7 |   |
|                                   |       |                                   | 2003       |                         |       |                                   | 65.8       |      |       |   | (23.1 | )(B) |   | 42.7 |   |
|                                   |       |                                   | 2002       |                         |       |                                   | 110.1      |      |       |   | (30.5 | )(C) |   | 79.6 |   |
| Capital expenditures                   |       |                                   | 2004       |                         |       |                                   | 10.2       |      |       |   | 0.1 |   |   | 10.3 |   |
|                                        |       |                                   | 2003       |                         |       |                                   | 11.4       |      |       |   | 0.5 |   |   | 11.9 |   |
|                                        |       |                                   | 2002       |                         |       |                                   | 6.3        |      |       |   | — |   |   | 6.3 |   |
| Depreciation and  amortization expense |       |                                   | 2004       |                         |       |                                   | 10.7       |      |       |   | 0.1 |   |   | 10.8 |   |
|                                   |       |                                   | 2003       |                         |       |                                   | 13.8       |      |       |   | 0.3 |   |   | 14.1 |   |
|                                   |       |                                   | 2002       |                         |       |                                   | 17.8       |      |       |   | 0.6 |   |   | 18.4 |   |
| Total assets at year end               |       |                                   | 2004       |                         |       |                                   | 340.3      |      |       |   | 500.0 |   |   | 840.3 | (D) |
|                                        |       |                                   | 2003       |                         |       |                                   | 299.5      |      |       |   | 475.2 |   |   | 774.7 | (E) |
|                                        |       |                                   | 2002       |                         |       |                                   | 263.8      |      |       |   | 425.7 |   |   | 689.5 | (F) |
|                                        |            |                                        |            |                              |            |                                        |            |           |            |  |  |  |  |  |  |  |  |  |

----

(A)               Includesspecial charges of $1.3 million (See Note G)

(B)                Includesspecial charges of $1.7 million (See Note G)

(C)               Includesspecial charges of $6.4 million (See Note G)

(D)               Excludes$232.4 million of assets of discontinued operations

(E)               Excludes$316.1 million of assets of discontinued operations

(F)                Excludes$435.3 million of assets of discontinued operationsRevenues by geographicregion are determined based on the location of the customer. European revenuesand long-lived assets relate primarily to the United Kingdom, Germany andFrance. No individual country, other than the United States, exceeds 10% ofconsolidated revenues. The following table sets forth the Company’s revenues bygeographic region (millions of dollars):
| ** **    | ** ** | **Year Ending December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| United States |       | $                                           | 444.1      |   | $ | 395.7 |   | $ | 493.5 |   |
| Europe        |       | 237.2                                       |       | 210.7 |   | 159.5 |   |
| Other Regions |       | 130.0                                       |       | 100.2 |   | 91.4 |   |
| Total         |       | $                                           | 811.3      |   | $ | 706.6 |   | $ | 744.4 |   |

 

F-39

----

**Note N:**   SegmentReporting (Continued)

The following table setsforth the Company’s long-lived assets by geographic region (millions ofdollars):
| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2004**              | ** ** | **2003** | ** ** |
| United States |       | $                     | 81.5       |   | $ | 91.1 |   |
| Europe        |       | 6.1                   |       | 7.0 |   |
| Other Regions |       | 0.8                   |       | 0.7 |   |
| Total         |       | $                     | 88.4       |   | $ | 98.8 |   |

 

F-40

----

**UNOVA, INC.QUARTERLY FINANCIAL INFORMATION(unaudited)**
| ** **                           | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|
| ** **                           | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues (A)                         |       | $        | 193.0      |   | $ | 186.6 |   | $ | 194.8 |   | $ | 236.9 |   |
| Gross Profit                         |       | 89.1     |       | 77.6 |   | 78.7 |   | 98.0 |   |
| Earnings from Continuing Operations  |       | 15.7     |       | 3.2 |   | 6.8 |   | 26.5 |   |
| Net Earnings (Loss)  (B)             |       | 10.5     |       | 5.7 | (C) | 5.9 |   | (71.2 | ) |
| Basic Earnings  (Loss) per Share     |       | 0.17     |       | 0.09 |   | 0.10 |   | (1.17 | ) |
| Diluted Earnings  (Loss) per Share   |       | 0.17     |       | 0.09 |   | 0.10 |   | (1.14 | ) |
| Common  Stock Sales Price per Share: |       |     |       |   |   |   |   |   |   |
| High                                 |       | 26.63    |       | 22.43 |   | 20.24 |   | 25.59 |   |
| Low                                  |       | 19.50    |       | 15.25 |   | 13.59 |   | 13.90 |   |
|                                      |            |          |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|
| ** **                           | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues (A)                         |       | $        | 162.9      |   | $ | 179.0 |   | $ | 178.7 |   | $ | 186.0 |   |
| Gross Profit                         |       | 63.1     |       | 74.0 |   | 78.6 |   | 73.5 |   |
| Earnings from Continuing  Operations |       | (9.5     | )          | 5.4 |   | 8.4 |   | 10.8 |   |
| Net Loss (B)                         |       | (14.9    | )          | (0.8 | ) | (1.3 | ) | (2.3 | ) |
| Basic Earnings  (Loss) per Share     |       | (0.25    | )          | (0.01 | ) | (0.02 | ) | (0.04 | ) |
| Diluted Earnings  (Loss) per Share   |       | (0.25    | )          | (0.01 | ) | (0.02 | ) | (0.04 | ) |
| Common Stock Sales Price:            |       |     |       |   |   |   |   |   |   |
| High                                 |       | 6.68     |       | 11.95 |   | 16.50 |   | 25.23 |   |
| Low                                  |       | 4.42     |       | 5.26 |   | 11.05 |   | 13.86 |   |
|                                      |            |          |            |  |  |  |  |  |  |  |  |  |  |

----

(A)     Excludes revenue from discontinuedoperations as follows (millions of dollars):

** **
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  |       | $        | 104.7      |     | $          | 110.8 |   |
| Second Quarter |       | 118.5    |       | 113.1    |       |
| Third Quarter  |       | 121.9    |       | 110.1    |       |
| Fourth Quarter |       | 126.0    |       | 114.8    |       |
|                |            |          |            |          |            |  |  |

 

(B)     Includes special charges as follows (millions of dollars):

 
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  |       | $        | 0.0        |     | $          | 0.3 |   |
| Second Quarter |       | 0.4      |       | 0.4      |       |
| Third Quarter  |       | 0.7      |       | 0.2      |       |
| Fourth Quarter |       | 0.2      |       | 0.8      |       |
|                |            |          |            |          |            |  |  |

 

See Note G to the Company’s consolidated financialstatements.

(C)     The Company previously reported net incomeof $5.6 million for the quarter ended June 30, 2004. As a result ofadoption of the provisions of FSP 106-2 in the third quarter of 2004,retroactive to December 31, 2003, the Company’s net income increased by$0.1 million for the second quarter 2004.

Q-1

----

**SCHEDULE II**

**VALUATION ANDQUALIFYING ACCOUNTS(Thousands of Dollars)**
| ** **                                                 | ** ** | ** **                                   | ** ** | **Additions**                                | ** ** | ** **                           | ** ** | ** **        | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                                                 | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions**(A) | ** ** | **Balance at  End of Year** | ** ** |
| Accounts receivable—allowance for  doubtful accounts: |       |                                         |       |                                         |       |                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2004                         |       |                                         | $          | 11,927                                       |       |                                 |       | $                 | 744        |   |   |   |   |   | $ | (2,900 | ) |   |   | $ | 9,771 |   |   |
| Year ended  December 31, 2003                         |       |                                         | 9,062      |                                         |       |                                 | 4,549      |              |       |   |   |   | (1,684 | ) |   |   | 11,927 |   |   |
| Year ended  December 31, 2002                         |       |                                         | 11,578     |                                         |       |                                 | 3,225      |              |       |   |   |   | (5,741 | ) |   |   | 9,062 |   |   |
|                                                            |            |                                              |            |                                              |            |                                      |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(A)               Primarilyuncollectible accounts written off.

S-1

----

**UNOVA, INC. INDEX TO EXHIBITS**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Description of Exhibit** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 3.1              |       | Certificate of Incorporation of UNOVA, Inc.,  filed on October 22, 1997 as Exhibit 3A to Amendment No. 2 to  the Company’s registration statement on Form 10 No. 001-13279,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2              |       | By-laws of  UNOVA, Inc., as amended on February 5, 1999, filed as  Exhibit 3.2 to the Company’s 1998 annual report on Form 10-K,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1              |       | Credit Agreement among  UNOVA, Inc., UNOVA Industrial Automation Systems, Inc., Intermec  Technologies Corporation, Intermec International Inc., Intermec Technologies  Manufacturing, LLC, Intermec IP Corp. and UNOVA IP Corp. as Borrowers, the  lenders which are parties hereto and Keybank National Association as Administrative  agent, Lead Arranger and Book Manager and Keybank National Association as LC  Issuer, dated as of September 30, 2004, filed as Exhibit 4.1 to the  Company’s September 30, 2004 quarterly report on Form 10-Q,  and incorporated herein by reference. |
| 4.2              |       | Security Agreement among  UNOVA, Inc., UNOVA Industrial Automation Systems, Inc., Intermec  Technologies Corporation, Intermec Technologies Manufacturing, LLC, Intermec  IP Corp. and UNOVA IP Corp. and Keybank National Association as Administrative  agent, dated as of September 30, 2004, filed as Exhibit 4.1 to the  Company’s September 30, 2004 quarterly report on Form 10-Q,  and incorporated herein by reference.                                                                                                                                                               |
| 4.3              |       | Credit Agreement among  Barclays Bank PLC and UNOVA U.K. Limited, Cincinnati Machine U.K. Limited and  Intermec Technologies U.K. Limited, as Borrowers, filed as Exhibit 4.2  to the Company’s March 31, 2004 quarterly report on Form 10-Q,  dated as of February 9, 2004, and incorporated herein by reference.                                                                                                                                                                                                                                                                                       |
| 4.4              |       | Rights Agreement dated  September 24, 1997, between UNOVA, Inc. and The Chase Manhattan  Bank, as Rights Agent, to which is annexed the form of Right Certificate as  Exhibit A, filed on October 22, 1997, as Exhibit 3C to  Amendment No. 2 to the Company’s registration statement on Form 10  No. 001-13279, and incorporated herein by reference.                                                                                                                                                                                                                               |
| 4.5              |       | Indenture dated as of  March 11, 1998, between the Company and The First National Bank of  Chicago, Trustee, providing for the issuance of securities in series, filed  as Exhibit 4.5 to the Company’s 1997 annual report on Form 10-K,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                               |
| 4.6              |       | Resignation, Appointment  and Acceptance agreement dated March 16, 2001 among Bank One, N.A.,  as successor-in-interest to The First National Bank of Chicago, (the “Prior  Trustee”), National City Bank of Indiana, (the “Successor”), and  UNOVA, Inc. (the “Issuer”) in relation to the Indenture dated as of  March 11, 1998.                                                                                                                                                                                                                                              |
| 4.7              |       | Form of 6.875%  Notes due March 15, 2005, issued by the Company under such indenture,  filed as Exhibit 4.6 to the Company’s 1997 annual report on Form 10-K,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8              |       | Form of 7.00% Notes  due March 15, 2008, issued by the Company under such indenture, filed as  Exhibit 4.7 to the Company’s 1997 annual report on Form 10-K,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                      |
|             |       | From time to time  other instruments defining the rights of holders of other long-term debt of  the Company may not be filed as exhibits because the amount of debt  authorized under any such instrument does not exceed 10% of the total assets  of the Company and its consolidated subsidiaries. The Company hereby  undertakes to furnish a copy of any such instrument to the Commission upon  request.                                                                                                                                                                                                                     |

E-1

----

**INDEX TO EXHIBITS (Continued)**

 
| 10.1  |   | Distribution and  Indemnity Agreement dated October 31, 1997, between Western Atlas Inc.  and UNOVA, Inc., filed as Exhibit 10.1 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                    |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Tax Sharing  Agreement dated October 31, 1997, between Western Atlas Inc., and  UNOVA, Inc., filed as Exhibit 10.2 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                                  |
| 10.3  |   | UNOVA, Inc.  2002 Directors Stock Option and Fee Plan, as amended, effective  January 1, 2005.*                                                                                                                                                                                    |
| 10.4  |   | Intellectual  Property Agreement dated October 31, 1997, between Western Atlas Inc.,  and UNOVA, Inc., filed as Exhibit 10.4 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                        |
| 10.5  |   | UNOVA, Inc.  Director Stock Option and Fee Plan, filed as Exhibit 10.7 to the  Company’s September 30, 1997 quarterly report on Form 10-Q,  and incorporated herein by reference.                                                                                   |
| 10.6  |   | Amendment  No. 1 to the UNOVA, Inc. Director Stock Option and Fee Plan filed  as Exhibit 10.13 to the Company’s September 30, 1999 quarterly  report on Form 10-Q, and incorporated herein by reference.                                                       |
| 10.7  |   | Plan Document  Relating to Election to Receive Employee Stock Options in Lieu of Certain  Cash Compensation Payable to UNOVA Officers in fiscal year 2002, filed as  Exhibit 10.6 to the Company’s 2001 annual report on Form 10-K,  and incorporated herein by reference.    |
| 10.8  |   | Employee Benefits  Agreement dated October 31, 1997, between Western Atlas Inc., and  UNOVA, Inc., filed as Exhibit 10.3 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                            |
| 10.9  |   | Form of  Change of Control Employment Agreements with Larry D. Brady, Michael E. Keane  and certain other officers of the Company, filed as Exhibit 10.5 to the  Company’s September 30, 1997 quarterly report on Form 10-Q,  and incorporated herein by reference. |
| 10.10 |   | Amendment to the  Form of Change of Control Employment Agreements with Larry D. Brady,  Michael E. Keane and certain other officers of the Company, filed as  Exhibit 10.6 to the Company’s 1999 annual report on Form 10-K,  and incorporated herein by reference.      |
| 10.11 |   | Form of  Change of Control Employment Agreement with Thomas O. Miller, Ken Cohen and  certain other officers of the Company, filed as Exhibit 10.7 to the  Company’s 1999 annual report on Form 10-K, and incorporated herein  by reference.                             |
| 10.12 |   | Form of Change of  Control Employment Agreement with Robert T. Smith and certain other officers  of the company.*                                                                                                                                                                            |
| 10.13 |   | UNOVA, Inc.  Restoration Plan, filed on August 18, 1997 as Exhibit 10.I to the  Company’s registration statement on Form 10 No. 001-13279,  and incorporated herein by reference.                                                                              |
| 10.14 |   | UNOVA, Inc.  Supplemental Executive Retirement Plan, filed on October 1, 1997 as  Exhibit 10.H to Amendment No. 1 to the Company’s registration  statement on Form 10 No. 001-13279, and incorporated herein  by reference.                               |
| 10.15 |   | Amendment No. 1 to  UNOVA, Inc. Supplemental Executive Retirement Plan, dated  September 23, 1998, filed as Exhibit 10.22 to the Company’s  September 30, 1998 quarterly report on Form 10-Q, and  incorporated herein by reference.                      |

E-2

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**INDEX TO EXHIBITS (Continued)**

 
| 10.16 |   | Amendment  No. 2 to UNOVA, Inc. Supplemental Executive Retirement Plan, dated  March 11, 1999, filed as Exhibit 10.15 to the Company’s 1998 annual  report on Form 10-K, and incorporated herein by reference.                                                                                                |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17 |   | Amendment  No. 3 to UNOVA, Inc. Supplemental Executive Retirement Plan, dated  March 15, 2000, filed as Exhibit 10.20 to the Company’s 1999 annual  report on Form 10-K, and incorporated herein by reference.                                                                                                |
| 10.18 |   | Amendment  No. 4 to UNOVA, Inc. Supplemental Executive Retirement Plan, dated  July 11, 2000, filed as Exhibit 10.15 to the Company’s  June 30, 2000 quarterly report on Form 10-Q, and incorporated  herein by reference.                                                                               |
| 10.19 |   | Board resolution  dated July 25, 2000, amending the UNOVA, Inc. Executive Severance  Plan, filed as Exhibit 10.23 to the Company’s June 30, 2000  quarterly report on Form 10-Q, and incorporated herein by  reference.                                                                                       |
| 10.20 |   | UNOVA, Inc.  Executive Survivor Benefit Plan, filed as Exhibit 10.17 to the Company’s  1997 annual report on Form 10-K, and incorporated herein by  reference.                                                                                                                                                          |
| 10.21 |   | UNOVA, Inc.  1997 Stock Incentive Plan, filed as Exhibit 10.12 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                                                                                                                                          |
| 10.22 |   | UNOVA, Inc. 1999  Stock Incentive Plan, filed as Annex A to the Company’s definitive Proxy  Statement relating to the Annual Meeting of Shareholders held on May 7,  1999 (the “1999 Proxy Statement”), and incorporated herein by reference.                                                                      |
| 10.23 |   | UNOVA, Inc.  2001 Stock Incentive Plan, filed as Exhibit B to the Company’s  definitive Proxy Statement relating to the Annual Meeting of Shareholders  held on May 8, 2001, and incorporated herein by reference.                                                                                                      |
| 10.24 |   | Amendment of  Restricted Stock Agreements, dated as of September 12, 2002, filed as  Exhibit 10.30 to the Company’s September 30, 2002 quarterly report  on Form 10-Q, and incorporated herein by reference.                                                                                                       |
| 10.25 |   | Tender Offer to  exchange certain outstanding options under the UNOVA, Inc. 1999 Stock  Incentive Plan for restricted stock filed on Form SC TO-I/A dated  October 9, 2001, and incorporated herein by reference.                                                                                                            |
| 10.26 |   | UNOVA, Inc.  Management Incentive Compensation Plan, filed as Annex B to the Company’s  2002 Proxy Statement, and incorporated herein by reference.                                                                                                                                                                               |
| 10.27 |   | UNOVA, Inc.  2004 Omnibus Incentive Compensation Plan, filed as Appendix C to the  Company’s definitive Proxy Statement relating to the Annual Meeting of  Shareholder held on May 6, 2004, and incorporated herein by reference.                                                                                            |
| 10.28 |   | 2004 Long-Term Performance  Share Program (the “Long-Term Program”), a sub-plan under the  UNOVA, Inc. 2004 Omnibus Incentive Compensation Plan (the “2004 Plan”),  filed as exhibit 10.1 to the Company’s September 30, 2004 quarterly  report on Form 10-Q, and incorporated herein by reference. |
| 10.29 |   | Form of Incentive  Stock Option Agreement for awards under the UNOVA, Inc. 2001 Stock  Incentive Plan (the “2001 Plan”), filed as exhibit 10.2 to the Company’s  September 30, 2004 quarterly report on Form 10-Q, and  incorporated herein by reference.                                                |

E-3

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**INDEX TO EXHIBITS (Continued)**

 
| 10.30 |   | Form of  Non-Qualified Stock Option Agreement for awards under the 2001 Plan, filed as  exhibit 10.3 to the Company’s September 30, 2004 quarterly report on  Form 10-Q, and incorporated herein by reference.                          |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.31 |   | Form of  Restricted Stock Agreement for awards under the 2001 Plan and the 2004 Plan,  filed as exhibit 10.4 to the Company’s September 30, 2004 quarterly  report on Form 10-Q, and incorporated herein by reference.                  |
| 10.32 |   | Form of  Restricted Stock Unit Agreement for awards under the 2004 Plan, filed as  exhibit 10.5 to the Company’s September 30, 2004 quarterly report on  Form 10-Q, and incorporated herein by reference.                               |
| 10.33 |   | Restricted Stock  Unit Agreement with Thomas O. Miller, under the 2004 Plan, dated as of  May 6, 2004, filed as exhibit 10.6 to the Company’s September 30,  2004 quarterly report on Form 10-Q, and incorporated herein by  reference. |
| 10.34 |   | Form of  Performance Share Unit Agreement under the Long-Term Program, filed as  exhibit 10.7 to the Company’s September 30, 2004 quarterly report  on Form 10-Q, and incorporated herein by reference.                            |
| 10.35 |   | Arrangement for  Annual Incentives for 2004 and 2005, filed as exhibit 10.1 to the  Company’s current report on Form 8-K, dated February 23,  2005, and incorporated herein by reference.                                               |
| 21    |   | Subsidiaries of  the Registrant.*                                                                                                                                                                                                                           |
| 23    |   | Consent of  Independent Registered Public Accounting Firm.*                                                                                                                                                                                                 |
| 31.1  |   | Certification  pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (subsections  (a) and (b) of section 1350, chapter 63 of Title 18, United States  Code), dated March 12, 2005.*                                                     |
| 31.2  |   | Certification  pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (subsections  (a) and (b) of section 1350, chapter 63 of Title 18, United States  Code), dated March 12, 2005.*                                                     |
| 32.1  |   | Certification  pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections  (a) and (b) of section 1350, chapter 63 of Title 18, United States  Code), dated March 12, 2005.*                                                     |
| 32.2  |   | Certification  pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections  (a) and (b) of section 1350, chapter 63 of Title 18, United States  Code), dated March 12, 2005.*                                                     |

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*                    Copies ofthese exhibits are included in this Annual Report on Form 10-K filedwith the Securities Exchange Commission.

E-4

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