CONDITION AND RESULTS OF OPERATIONS

Financial Section Roadmap

Management's discussion and analysis (MD&A) can be found on pages 36 to 49, and
our unaudited condensed consolidated financial statements and related notes
contained in this quarterly report can be found on pages 1 to 35. The following
table is designed to assist in your review of MD&A.


 Topic                                                                Location

 Overview and Outlook:
 L-3's Business                                                     Pages 36 - 37
 Key Performance Measures                                           Pages 37 - 38
 Other Events                                                       Pages 38 - 39
 Business Acquisitions and Business and Product Line Dispositions   Page 39
 Results of Operations (includes business segments)                 Pages 39 - 45
 Liquidity and Capital Resources:
 Anticipated Sources of Cash Flow                                   Pages 45 - 46
 Balance Sheet                                                      Pages 46 - 47
 Statement of Cash Flows                                            Pages 47 - 49
 Legal Proceedings and Contingencies                                Page 49

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), 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, 2008, we generated sales of $14.9 billion. The table below presents a summary of our 2008 sales by major category of end customer. We currently do not anticipate significant changes to our end customer sales mix for the year ended December 31, 2009.

                                                              % of
                                        2008 Sales         Total Sales
                                       (in millions)

              DoD                     $        11,059                74 %
              Other U.S. Government             1,067                 7

              Total U.S. Government            12,126                81 %
              Foreign Government                1,099                 7
              Commercial - foreign                987                 7
              Commercial - domestic               689                 5

              Total sales             $        14,901               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 relating to our reportable segments is included in Note 20 to our unaudited condensed consolidated financial statements contained in this quarterly report. C3ISR provides products and services for the global ISR market, networked communications

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, enterprise information technology solutions, intelligence solutions and support, command & control systems and software services and global security & engineering solutions 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, including components, products, subsystems, systems, and related services to military and commercial customers in several niche markets across several business areas, including power & control systems, electro-optic/infrared (EO/IR), microwave, avionics & displays, simulation & training, precision engagement, security & detection, propulsion systems, telemetry & advanced technology, undersea warfare, and marine services. During the quarter ended March 27, 2009, we revised our reportable segment presentations to conform to certain re-alignments in our management and organization structure. Consequently, we made certain reclassifications between our C3ISR, Government Services and AM&M reportable segments. See Note 20 to our unaudited condensed consolidated financial statements contained in this quarterly report for the prior period amounts reclassified between reportable segments.

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 common 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 important new products, services, 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 are 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 are 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, 2008 was 25%, with average annual organic sales growth of approximately 10% and average annual sales growth from business acquisitions of approximately 15%. Sales growth for the year ended December 31, 2008 was 7%, comprised of organic sales growth of 5%, and sales growth from business acquisitions, net of divestitures, of 2%. Sales growth for the quarter ended June 26, 2009 (2009 Second Quarter) was 6%, comprised of organic sales growth of 5%, and sales growth from business acquisitions, net of divestitures, of 1%. Sales growth for the first half ended June 26, 2009 (2009 First Half) was 5%, comprised of organic sales growth of 3%, and sales growth from business acquisitions, net of divestitures, of 2%. We expect our sales growth rate going forward to be significantly less than our 25% average annual sales growth we experienced for the five years ended December 31, 2008.

For the year ended December 31, 2008, our Special Operations Forces Support Activity (SOFSA) contract with the U.S. Special Operations Command (SOCOM) generated approximately $400 million, or 2.7% of our sales. On March 3, 2009, SOCOM announced that it did not select our proposal for the next SOFSA contract. We protested SOCOM's selection with the U.S. Government Accountability Office (GAO). In response to our protest, SOCOM has taken corrective action and amended the solicitation. Revised proposals from bidders are required to be submitted on August 6, 2009. We continue to perform on the current SOFSA contract pending the outcome of the competition. The period of performance for our current SOFSA contract ends on October 24, 2009. We can provide no assurance as to the outcome of the competition for the next SOFSA 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 and Afghanistan. We expect future DoD budgets, including supplemental appropriations, to grow at a significantly slower pace than the past several years, and to also possibly flatten. However, we believe that our businesses should

be able to continue to generate modest organic sales growth because we anticipate the defense budget and spending priorities will continue to focus on areas that match several of L-3's core competencies, such as communications and ISR, sensors, special operations support, helicopter crew training and maintenance and simulation & training.

Operating Income Growth. Our consolidated operating income was $417 million for the 2009 Second Quarter, a decrease of 17% from $501 million for the quarter ended June 27, 2008 (2008 Second Quarter). For the 2009 First Half operating income was $793 million, a decrease of 9% from $869 million for the first half ended June 27, 2008 (2008 First Half). Our consolidated operating margin was 10.6% for the 2009 Second Quarter, a decrease of 290 basis points from 13.5% for the 2008 Second Quarter. Our consolidated operating margin was 10.5% for the 2009 First Half, a decrease of 150 basis points from 12.0% for the 2008 First Half. As discussed in the next paragraph, operating income and operating margin for 2008 included a net gain of $110 million from certain items and 2009 was impacted by higher pension expense.

The 2008 Second Quarter and 2008 First Half results were impacted by three items that, in the aggregate, increased operating income by $110 million during these periods. These three items are collectively referred to as the Q2 2008 Items and are further discussed below under the caption "Other Events." In addition, higher pension expense for the 2009 Second Quarter compared to the 2008 Second Quarter reduced operating income by $16 million ($10 million after income taxes, or $0.09 per diluted share) and $35 million ($22 million after income taxes, or $0.18 per diluted share) for the 2009 First Half compared to the 2008 First Half. The Q2 2008 items increased the 2008 Second Quarter operating margin by 300 basis points and the 2008 First Half by 150 basis points. The increase in pension expense reduced operating margin by 40 basis points for the 2009 Second Quarter and 50 basis points for the 2009 First Half. The pension expense increase is primarily due to the actuarial loss that we experienced in 2008 as a result of the decline in the fair value of our pension plan assets which is being amortized as a component of pension expense beginning in 2009. See segment results below for additional discussion of segment operating income and margin results.

Excluding the Q2 2008 Items and the increase in our 2009 pension expense, we expect to continue to generate modest annual increases in operating margin. We expect to increase sales, grow sales at a rate faster than the increase in our indirect costs, and improve our overall contract performance. However, we may not be able to continue to expand our operating margin at the rates we expect and our operating margin could also decrease. Additionally, in the future, select business acquisitions and select new business, including contract renewals and new contracts, could reduce our operating margin if their margins are lower than L-3's existing operating margin. Our business objectives include growing earnings per common share and net cash from operating activities.

Other Events

Accounting Standards Implemented. We adopted eight new accounting standards during the 2009 First Half, six of which were effective January 1, 2009. In accordance with the transition and disclosure provisions of three of these standards, we retrospectively applied those provisions and adjusted the prior period financial statements accordingly. The adoption of these standards reduced net income attributable to L-3 by $3 million ($0.04 per diluted share) for the 2009 Second Quarter and $6 million ($0.07 per diluted share) for the 2009 First Half. See Note 3 to our unaudited condensed consolidated financial statements contained in this quarterly report for the standards adopted and their impact to our financial position and results of operations.

Q2 2008 Items. The Q2 2008 Items increased consolidated operating income by $110 million, income before taxes by $117 million, net income by $71 million and diluted earnings per share (EPS) by $0.57. The Q2 2008 Items were:

• A gain of $133 million ($81 million after income taxes, or $0.65 per diluted share) relating to the reversal of a $126 million liability as a result of a June 27, 2008 decision by the U.S. Court of Appeals vacating an adverse 2006 jury verdict and the reversal of $7 million of accrued interest (the "Litigation Gain"),

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

• A non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per diluted share) relating to a write-down of capitalized software development costs associated with 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, 2008 summarizes the business acquisitions and business and product line dispositions that we completed during the three years ended December 31, 2008. Also, see Note 4 to our unaudited condensed consolidated financial statements contained in this quarterly report for a discussion of the acquisition of Chesapeake Sciences Corporation (CSC) acquired on January 30, 2009. During the 2009 First Half, we used $82 million of cash (net of cash received) primarily to acquire CSC.

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, 2008, included in our Annual Report on Form 10-K, for a discussion of our 2008 business acquisitions, and Note 4 to our unaudited condensed consolidated financial statements, included in this report, for a discussion of the CSC acquisition on January 30, 2009.