CONDITION AND RESULTS OF OPERATIONS

Financial Section Roadmap

Management's discussion and analysis (MD&A) can be found on pages 37 to 54, and
our unaudited condensed consolidated financial statements and related notes
contained in this quarterly report can be found on pages 1 to 36. The following
table is designed to assist in your review of MD&A.


 Topic                                                              Location

 Overview and Outlook:
 L-3's Business                                                     Pages 37 - 38
 Key Performance Measures                                           Pages 38 - 39
 Other Events                                                       Pages 39 - 40
 Business Acquisitions and Business and Product Line Dispositions   Page 40
 Critical Accounting Policies                                       Pages 40 - 43
 Results of Operations (includes business segments)                 Pages 43 - 49
 Liquidity and Capital Resources:
 Anticipated Sources of Cash Flow                                   Page 50
 Balance Sheet                                                      Pages 50 - 51
 Statement of Cash Flows                                            Pages 51 - 54
 Legal Proceedings and Contingencies                                Page 54

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 foreign 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 and the percent contributed by each end customer to our total 2008 sales. We currently do not anticipate significant changes to our end customer sales mix for the year ending December 31, 2009.

                                                               % of
                                         2008 Sales         2008 Sales
                                        (in millions)

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

               Total U.S. Government            12,126               81 %
               Foreign governments               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 with respect to each of 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, C3 systems, 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 and 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 a full range of engineering, technical, information technology (IT), advisory, training and support services to the DoD, DoS, DoJ, and U.S. Government intelligence agencies and allied foreign governments. AM&M provides modernization, upgrades and sustainment, maintenance and logistics support services for military and various government aircraft and other platforms. We sell these services primarily to the DoD, the Canadian Department of Defense (DND) and other allied foreign governments. 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, simulation & training, precision engagement, aviation products, security & detection, propulsion systems, displays, 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, contract vehicles 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. 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 September 25, 2009 (2009 Third Quarter) was 4.9%, comprised of organic sales growth of 4.1%, and sales growth from business acquisitions, net of divestitures, of 0.8%. Sales growth for the year-to-date period ended September 25, 2009 (2009 Year-to-Date Period) was 4.7%, comprised of organic sales growth of 3.4%, and sales growth from business acquisitions, net of divestitures, of 1.3%.

For the year ended December 31, 2008, our Special Operations Forces Support Activity (SOFSA) contract generated approximately $400 million, or 2.7% of our sales. On March 3, 2009, SOFSA announced that L-3 was not selected to perform on the follow-on contract. L-3 subsequently protested and, as a consequence, SOFSA has taken corrective action, which will include the issuance of a revised solicitation. Once a new solicitation is issued, proposals will be requested from all bidders. In the interim, L-3's incumbent contract has been extended until February 2010. We can provide no assurance as to the outcome of the competition for the next SOFSA contact.

As is the case with most other U.S. defense contractors, we 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 possibly flatten or decline. 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 several areas that match L-3's core competencies, such as communications and ISR, sensors, special operations support, helicopter crew training and maintenance and simulation & training.

The 2008 Year-to-Date Period results were impacted by three items that, in the aggregate, increased operating income for that period by $110 million. 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 Third Quarter compared to the 2008 Third Quarter reduced operating income by $21 million ($13 million after income taxes, or $0.11 per diluted share) and $56 million ($34 million after income taxes, or $0.29 per diluted share) for the 2009 Year-to-Date Period compared to the 2008 Year-to-Date Period. The Q2 2008 items increased the 2008 Year-to-Date Period operating margin by 110 basis points. The increase in pension expense reduced operating margin by 50 basis points for both the 2009 Third Quarter and 2009 Year-to-Date Period. 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. See segment results below for additional discussion of segment operating 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, while increasing or maintaining our operating income could also 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 newly issued accounting standards during the 2009 Year-to-Date Period, 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 ($0.03 per diluted share) for the 2009 Third Quarter and $9 million ($0.10 per diluted share) for the 2009 Year-to-Date Period. 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.

Debt Refinancing. On October 2, 2009, L-3 Communications successfully completed a $1 billion offering of 5.20% senior notes. The net cash proceeds from the offering, together with cash on hand, were used by L-3 Communications to repay its outstanding $650 million term loan on October 7, 2009 and to redeem its outstanding $750 million 75/8% senior subordinated notes on November 2, 2009. On October 23, 2009, L-3 Communications also replaced its $1 billion senior revolving credit facility, which was due to expire on March 9, 2010, with a new $1 billion three-year senior revolving credit facility that expires on October 23, 2012. See "Liquidity and Capital Resources - Debt" on page 52 for a further discussion.

2008 Year-to-Date Events. As discussed above, our 2008 Year-to-Date period results were affected by three matters, which 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, which are collectively referred to as the Q2 2008 Items:

• 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 related 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 Year-to-Date Period, we used $86 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.

Critical Accounting Policies - Goodwill and Identifiable Intangible Assets

The following paragraphs are an update to the discussion of our critical accounting policies included in Part II - Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2008. The update provides additional information about the assumptions and estimates used in connection with the 2008 annual goodwill impairment test. There were no changes to our critical accounting policies since December 31, 2008.

Goodwill and Identifiable Intangible Assets. We review goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and also review goodwill annually as of November 30 in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) for goodwill and other intangible assets (contained in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350, Intangibles-Goodwill and Other).

U.S. GAAP for goodwill and other intangible assets require that goodwill be tested, at a minimum, annually for each reporting unit using a two-step process. A reporting unit is an operating segment, as defined in U.S. GAAP for segment reporting (contained in FASB ASC Topic 280, Segment Reporting), or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics.

L-3 had 18 reporting units at December 31, 2008 and 2007. The composition of our reporting units and associated goodwill were substantially the same in 2008 as compared to 2007 except for changes in goodwill caused primarily by business acquisitions, a divestiture, the completion of Internal Revenue Service audits related to previously acquired businesses and foreign currency translation adjustments, in each case, as disclosed in Note 7 to our audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The table below presents the number of reporting units in each of our reportable segments and the associated goodwill, at December 31, 2008.

                                       Number of            Aggregate
             Reportable Segment     Reporting Units         Goodwill
                                                          (in millions)

             C3ISR                                 3     $           896
             Government Services                   1               2,296
             AM&M                                  1               1,104

The first step to identify any potential impairment in goodwill is to compare the carrying value of the reporting unit to its fair value. If a potential impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. Our methodology for determining the fair value of a reporting unit uses a discounted cash flow (DCF) valuation approach, and is dependent on estimates for future sales, operating income, depreciation and amortization, income tax payments, working capital changes, and capital expenditures, as well as, expected long-term growth rates for cash flows and interest rates. All of these factors are affected by economic conditions related to the industries in which we operate (predominantly the U.S. defense industry), and prevailing conditions in the U.S. capital markets.

The more significant assumptions used in our DCF valuations to determine the fair values of our reporting units in connection with goodwill impairment assessments at November 30, 2008, were: (1) detailed five-year cash flow projections for each of our reporting units, which are based primarily on our estimates of future sales and operating income, (2) the expected long-term growth rates for each of our reporting units, which approximate the expected long-term growth rate for the U.S. economy and the respective industries in which the reporting units operate, and (3) risk adjusted discount rates, including the estimated risk-free rate of return that are used to discount future cash flow projections to their present values. There were no changes to the underlying methods used in 2008 as compared to the prior year DCF valuations of our reporting units.

The risk adjusted discount rate represents the estimated Weighted Average Cost of Capital (WACC) for each reporting unit at the date of the annual impairment test. Each reporting unit WACC was comprised of: (1) an estimated required rate of return on equity, based on publicly traded companies with business characteristics comparable to each of L-3's reporting units, including a risk free rate of return (i.e., prevailing market yield of 3.5% on the 30 year U.S. Treasury Bond as of November 30, 2008) and an equity risk premium of 5%, and (2) the current after-tax market rate of return on L-3's debt (which was 4.3% as of November 30, 2008), each weighted by the relative market value percentages of L-3's equity and debt. The WACC assumptions for each reporting unit are based on a number of market inputs that are outside of our control and are updated annually to reflect changes to such market inputs as of the date of our annual goodwill impairment assessments, including: (1) changes to the estimated required rate of return on equity based on historical returns on common stock securities of publicly traded companies with business characteristics comparable to each of L-3's reporting units and the Standard & Poor's 500 Index over a two-year period, (2) changes to the risk free rate of return based on the prevailing market yield on the 30 year U.S. Treasury Bond on the date of our annual goodwill impairment assessments, and (3) changes to the market rate of return on L-3's debt based on the prevailing yields on L-3's publicly traded debt securities on the date of our annual goodwill impairment assessments. The 2008 equity risk premium of 5% used to determine our WACC was unchanged from the prior year.

The table below presents the weighted average risk adjusted discount rate assumptions used in our DCF valuation for each of our reportable segments in connection with the goodwill impairment assessments at November 30, 2008.

             Reportable Segment          2009 - 2018        After 2018

             C3ISR(1)                              7.9 %             8.6 %
             Government Services(2)                8.3 %             9.2 %
             AM&M(2)                               7.9 %             8.6 %
             Specialized Products(3)               8.2 %             9.0 %

(1) All reporting units within the C3ISR reportable segment used the same risk adjusted discount rate for both periods.
(2) The Government Services and AM&M reportable segments are each comprised of one reporting unit.
(3) The risk adjusted discount rates used for reporting units within the Specialized Products reportable segment range from 7.9% to 9.3% for 2009 to 2018, and 8.6% to 10.3% for the years after 2018.

As presented in the table below, L-3's historical three-year average annual cash flow growth rates for 2008, 2007 and 2006 for our reportable segments ranged from 3% to 62%. The annual cash flows generated by each of our reporting units varies from year to year and, therefore, the annual cash flow growth rates do not result in linear trends, due to a number of factors. The factors that affect the level of annual cash flows in each of our reporting units include, but are not limited to: (1) variability of annual sales volume and sales growth rates,
(2) increases and decreases in working capital, and customer advance payments and billings on multi-year contracts (revenue

arrangements) with long-term performance periods (exceeding one year), (3) the timing of invoicing and cash collections between fiscal years from receivables due from customers on multi-year contracts (revenue arrangements) that are affected by the financing terms of individual contracts, (4) the timing of increases and decreases of select inventories procured and produced in anticipation of future product sales, which frequently overlap the ending and beginning of fiscal years, (5) the timing of the receipt of award fee and incentive fee payments from customers on contracts (revenue arrangements),
(6) variability in annual cash outlays for research and development costs,
(7) changes in cash outlays for capital expenditures for property, plant and equipment, and (8) increases in annual sales and costs and expense volumes of a reporting unit resulting from business acquisitions. As a result of the factors discussed above and the varying sizes of our reporting units, the annual cash flow levels and growth rates at the reporting unit level tend to fluctuate significantly from year to year. The 2008 cash flow amount and the cash flow growth rate for each of the last three years for each of our reportable segments is also presented below.

    Reportable Segment       Cash Flow(1)                         Growth Rate
                             (in millions)
                                 2008           2008       2007       2006       3 Yr. Average

  C3ISR(2)                  $           169        17 %       (4 )%       1 %                 5 %
  Government Services(3)    $           440        22 %      (16 )%     180 %                62 %
  AM&M(4)                   $           226         9 %       (6 )%       6 %                 3 %
  Specialized Products(5)   $           488       (12 )%      30 %       32 %                17 %

(1) Reportable segment cash flow excludes interest payments on debt and other corporate cash flows.
(2) The increase in cash flow in 2008 for C3ISR was primarily due to sales and operating income growth and a smaller increase in working capital for ISR Systems as compared to 2007. In 2007, cash generated from higher sales and operating income, was offset by cash used for working capital attributable to increased billed receivables associated with 2007 sales growth, primarily for ISR Systems. In 2006, cash generated from higher sales volume for networked communications and new business awards for ISR Systems was substantially offset by higher development costs for new secure communications products.
(3) The increase in cash flows in 2008 for Government Services was primarily due to higher sales and operating income for business areas other than linguist services and collection of receivables on the Linguist Contract for which the period of performance ended June 9, 2008. The decrease in cash flow in 2007 was due to collections of receivables in 2006 and the timing of cash payments in 2006 that did not recur in 2007. These decreases in 2007 were partially offset by higher operating income due to higher sales volume and improved contract performance. The increase in cash flow in 2006 was primarily due to the Titan acquisition and improved collections and timing of payments.
(4) The increase in cash flows in 2008 for AM&M was primarily due to increases in accounts payable balances and receivable collections for aircraft and base support services due to the timing of payments and collections. The decrease in cash flows in 2007 was primarily due to increased purchases of spare parts inventory for aircraft and base support services to support future requirements, partially offset by higher sales volume and operating income primarily for aircraft and base support services and aircraft modernization for international customers. The increase in cash flow in 2006 was due to sales and operating income growth.
(5) The decrease in cash flows in 2008 for Specialized Products was primarily due to more cash used for working capital across several business areas. These decreases were partially offset by higher 2008 operating income. The increase in cash flows in 2007 and 2006 was primarily due to higher operating income for several business areas.

We consistently consider several factors to determine expected future annual cash flows for our reporting units, including, but not limited to historical multi-year average cash flow trends by reporting unit, as well as: (1) the DoD budget and spending priorities, (2) expansion into new markets, (3) changing conditions in existing markets for our products and services, (4) possible termination of certain government contracts, (5) expected success in new business competitions and re-competitions on existing business, and
(6) anticipated operating margins and working capital requirements, which vary significantly depending on the stage of completion (early, mature, ending) of . . .