CONDITION AND RESULTS OF OPERATIONS

Financial Section Roadmap

Management's discussion and analysis (MD&A) can be found on pages 32 to 46, and
our unaudited condensed financial statements and related notes can be found on
pages 1 to 31. The following table is designed to assist in your review of MD&A.


Topic                                                            Location

Overview and Outlook
L-3's Business                                                Pages 32 - 33
Key Performance Measures                                      Pages 33 - 34
Business Acquisitions and Business and Product Line
Dispositions                                                  Pages 34 - 35
Results of Operations (includes business segments)            Pages 35 - 41
Liquidity and Capital Resources:
Anticipated Sources of Cash Flow                              Page 42
Balance Sheet                                                 Pages 42 - 43
Statement of Cash Flows                                       Pages 44 - 46
Legal Proceedings and Contingencies                           Page 46

Overview and Outlook

L-3's Business

L-3 is a prime system contractor in aircraft modernization and maintenance, Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems, and government services. L-3 is also a leading provider of high technology products, subsystems and systems. Our customers include the U.S. Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), U.S. Department of State (DoS) and U.S. Department of Justice (DoJ), allied foreign governments, domestic and international commercial customers and select other U.S. federal, state and local government agencies.

For the year ended December 31, 2007, we generated sales of approximately $14 billion. The table below presents a summary of our 2007 sales by major category of end customer.

                                                              % of
                                        2007 Sales         Total Sales
                                       (in millions)

              DoD                     $        10,268                74 %
              International                     2,094                15
              Other U.S. Government               834                 6
              Commercial - domestic               765                 5

              Total sales             $        13,961               100 %

We have the following four reportable segments: (1) C3ISR, (2) Government Services, (3) Aircraft Modernization and Maintenance (AM&M), and (4) Specialized Products. Financial information for our reportable segments is included in Note 18 to our unaudited condensed consolidated financial statements. C3ISR provides products and services for the global ISR market, networked communication systems and secure communications products. We believe that these products and services are critical elements for a substantial number of major command, control, communication, intelligence gathering and space systems. These products and services are used to connect a variety of airborne, space, ground and sea-based

communication systems and are used in the transmission, processing, recording, monitoring, and dissemination functions of these communication systems. Government Services provides training and operational support services, information technology solutions, intelligence solutions and support, engineering solution services and other technical services. AM&M provides modernization, upgrades and sustainment, maintenance and logistics support services for military and various government aircraft and other platforms. Specialized Products provides a broad range of products across several business areas that include power & control systems, microwave, avionics & displays, training & simulation, electro-optic/infrared (EO/IR), precision engagement, security and detection systems, propulsion systems, undersea warfare and telemetry and advanced technology.

Key Performance Measures

The primary financial performance measures that L-3 uses to manage its businesses and monitor results of operations are sales growth and operating income growth. Management believes that these financial performance measures are the primary growth drivers for L-3's earnings per share and net cash from operating activities. L-3's business strategy is focused on increasing sales from organic growth and select business acquisitions that add new products, technologies, programs or customers in areas that complement L-3's existing businesses. We define organic sales growth as the increase or decrease in sales for the current period compared to the prior period, excluding sales in the
(1) current period from business and product line acquisitions that have been included in L-3's actual results of operations for less than twelve months and
(2) prior period from business and product line divestitures that have been included in L-3's actual results of operations for the twelve-month period prior to the divestiture date. The two main determinants of our operating income growth are sales growth and improvements in operating margin. We define operating margin as operating income as a percentage of sales.

Sales Growth. Our average annual sales growth for the five years ended December 31, 2007 was 29%, with average annual organic sales growth of approximately 10% and average annual sales growth from business acquisitions of approximately 19%. Sales growth for the quarter ended September 26, 2008 (2008 Third Quarter) was 6%, comprised of organic sales growth of 4%, and sales growth from business acquisitions, net of divestitures, of 2%. Sales growth for the year-to-date period ended September 26, 2008 (2008 Year-to-Date Period) was 7%, comprised of organic sales growth of 5%, and sales growth from business acquisitions, net of divestitures, of 2%.

Our largest contract (revenue arrangement) in terms of annual sales for the year ended December 31, 2007, which generated 5.3% of consolidated sales, was the World Wide Linguist Support Services contract (Linguist Contract). On February 15, 2008, the U.S. Army Intelligence and Security Command (INSCOM) announced that it did not select our proposal for the Translation and Interpretation Management Services (TIMS) contract, and on February 22, 2008, we filed a protest of INSCOM's selection with the U.S. Government Accountability Office (GAO). The TIMS contract is the successor contract to the portion of the Linguist Contract that provides translators and linguists in support of the U.S. military operations in Iraq. In March 2008, the U.S. Army extended L-3's period of performance on the Linguist Contract through June 9, 2008. Additionally, in March 2008, L-3 entered into a subcontract with Global Linguist Solutions (GLS) to supply translation and interpretation services in Iraq under the TIMS contract, and L-3 withdrew its previously filed protest with the GAO of GLS's selection for the TIMS contract. Total linguist-Iraq sales, including our subcontract, were $56 million for the 2008 Third Quarter and $356 million for the 2008 Year-to-Date Period.

Our current largest contract (revenue arrangement) in terms of estimated annual sales for the year ending December 31, 2008, is the U.S. Air Force (USAF) Contract Field Teams (CFT) contract, which currently generates almost 3% of our annual sales. CFT is a multi-sourced contract, which provides worldwide quick reaction maintenance of deployed aircraft and ground vehicles for the U.S. military. The USAF recently selected L-3 as one of the winning contractors for the next CFT indefinite delivery/indefinite quantity contract that began on October 1, 2008. There will be more contractors competing for task orders on the new CFT contract compared to the existing contract, and therefore, we can provide no assurance that we will be able to maintain our annual sales on the new contract.

We, as most U.S. defense contractors, have benefited from the upward trend in DoD budget authorization and spending outlays over recent years, including supplemental appropriations for military operations in Iraq, Afghanistan and the Global War on Terror (GWOT). We believe that our businesses should be able to generate organic sales growth for the foreseeable future because we anticipate the defense budget will continue its focus on areas that match certain of the core competencies of L-3: communications and persistent ISR, sensors, precision engagement, Special Operations Forces, wartime support services and simulation & training. The increased DoD spending during recent years has included supplemental appropriations for military operations in Iraq and Afghanistan. These appropriations have enabled the DoD to proceed with its recapitalization and reconstitution programs that are directly related to the U.S. military operations in Iraq and Afghanistan, which allows for the focus of base budget resources on transformational modernization programs.

Operating Income Growth. Our consolidated operating income was $400 million for the 2008 Third Quarter, an increase of 7.8% from $371 million for the quarter ended September 28, 2007 (2007 Third Quarter). Our consolidated operating margin was 10.9% for the 2008 Third Quarter, an increase of 10 basis points from 10.8% for the 2007 Third Quarter. For the 2008 Year-to-Date Period, our consolidated operating income was $1,269 million and our consolidated operating margin was 11.7%. Our operating income and operating margins for the 2008 Year-to-Date Period were impacted by certain items which occurred during the 2008 second quarter, as further discussed below, and increased operating income by $110 million and operating margin by 110 basis points. Excluding these same items, our consolidated operating income was $1,159 million for the 2008 Year-to-Date Period, an increase of 10.2% from $1,052 million for the year-to-date period ended September 28, 2007 (2007 Year-to-Date Period). Excluding these same items, our consolidated operating margin was 10.6% for the 2008 Year-to-Date Period, an increase of 20 basis points from 10.4% for the 2007 Year-to-Date Period.

Prospectively, we expect to continue to generate modest annual increases in operating margin as we expect to increase sales, grow sales at a faster rate than indirect costs and improve our overall contract performance. However, in the future, select business acquisitions and select new business could reduce our operating margins, if the margins are lower than L-3's existing operating margin. Our business objectives include growing earnings per share and cash flow. Improving operating margins is one method for achieving this growth, but it is not the only one.

Other 2008 Year-to-Date Events. Our 2008 Year-to-Date Period results were affected by three matters, which increased consolidated operating income by $110 million, income before income taxes by $117 million, net income by $71 million and diluted earnings per share (EPS) by $0.57, which are collectively referred to as the Q2 2008 Items:

• A gain of $133 million ($81 million after income taxes, or $0.65 per share) for the reversal of a $126 million current liability for pending and threatening litigation as a result of a June 27, 2008 decision by the U.S. Court of Appeals that vacated an adverse 2006 jury verdict and $7 million of related accrued interest, which is recorded in interest expense and other items (the "Litigation Gain").

• A gain of $12 million ($7 million after income taxes, or $0.06 per share) from the sale of a product line (the "Product Line Divestiture Gain").

• A non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per share) relating to a write-down of capitalized software development costs for a general aviation product (the "Impairment Charge").

Business Acquisitions and Business and Product Line Dispositions

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 summarizes the business acquisitions that we completed during the three years ended December 31, 2007. Also see Note 3 to our unaudited condensed consolidated financial statements contained in this quarterly report for a discussion of the business acquisitions and business and product line dispositions that we completed

during the 2008 Year-to-Date Period. During the 2008 Year-to-Date Period, we used $224 million of cash to acquire three businesses, increase our ownership interest in a subsidiary, and pay earnouts and remaining contractual purchase prices for certain business acquisitions completed prior to January 1, 2008. We also sold a product line within the Specialized Products segment and recognized a preliminary after-tax gain of approximately $7 million (pre-tax gain of $12 million). Additionally, on October 8, 2008, we sold our 85% ownership interest in our Medical Patients Simulator business, which is within the Specialized Products segment. The sale is expected to result in an after-tax gain of approximately $18 million (pre-tax gain of approximately $29 million). The gain will be recorded in the results of operations for the quarter ended December 31, 2008. The sales price and related estimated gain with respect to this transaction are subject to adjustment based on actual closing net working capital.

All of our business acquisitions are included in our consolidated results of operations from their dates of acquisition. We regularly evaluate potential business acquisitions.

Results of Operations

The following information should be read in conjunction with our unaudited condensed consolidated financial statements contained in this quarterly report. Our results of operations for the periods presented are affected by our business acquisitions. See Note 4 to our audited consolidated financial statements for the year ended December 31, 2007, included in our Annual Report on Form 10-K, for a discussion of our 2007 business acquisitions, and Note 3 to our unaudited condensed consolidated financial statements, included in this report, for a discussion of our business acquisitions and dispositions during the 2008 Year-to-Date Period.