L-3 was one of the top-performing stocks among the large-cap aerospace and defense companies, as we continued building on the growth strategy that in just 10 years has taken us from a $700 million black box supplier to a prime contractor with annual sales of $14 billion.

Company-wide sales growth for the year was 12 percent, exceeding our target. Earnings per share grew from $4.22 to $5.98 (up 18 percent, excluding certain 2006 charges), and operating margins increased by 10 basis points to 10.4 percent (excluding certain 2006 charges).

In 2007, L-3 generated $1.3 billion of net cash from operating activities and free cash flow of $1.1 billion grew 22 percent from a year earlier, giving us continued flexibility to fund key initiatives. During the year, we repurchased $500 million of our common stock. Including our dividend, this represented a five-fold increase in cash returned to our shareholders compared to 2006.

L-3’s board of directors showed continued confidence in our financial performance by authorizing an additional $750 million to continue our share repurchase program. We also increased our dividend.

L-3 continued to focus on shareholder value and pursued select acquisitions that enhance our core businesses. During 2007, we acquired four businesses for $218 million, which added important new products, technologies, customers and programs.

In summary, we achieved our financial goals and completed the successful transition to a strong new leadership team.

In 2008, we believe demand for L-3’s products and services will keep growing with our customers’ long-term needs for modernization and transformation.

We began 2008 with a record funded backlog of $9.6 billion and significant follow-on business opportunities. Our Group presidents did an outstanding job winning new contracts to expand our business base.

With more than 2,000 contracts, our customers cover a global spectrum and include the military, intelligence agencies, homeland security and more. We remain committed to broadening the scope of our military business by offering high-end services, like our support of Afghanistan’s Ministry of Defense and Ministry of the Interior, where we are helping to develop leaders and build government capacity. We are also selectively pursuing more business in the commercial sector.

The agility to adapt our skills to many environments and deliver solutions quickly is L-3’s greatest strength. In times of conflict or peace, our products and services are sought after because they are critical to our customers’ successful operations. One example is our ROVER III communications device, which was originally developed to support the U.S. Air Force. Today, it is also being utilized to serve humanitarian and emergency purposes.

I am especially proud that L-3 won the role as prime systems integrator for the C-27J Joint Cargo Aircraft. This award marks a milestone for L-3 as a recognized expert in aircraft modernization and maintenance. We also won other important programs as a prime contractor in 2007.

In the United Kingdom, L-3 was awarded prime contracts on the HELIX and Integrated Broadcast Service programs, confirming our status as a leading prime contractor for state-of-the-art intelligence, surveillance and reconnaissance solutions.

In Canada, where we are a participant on several defense programs, we received contracts to continue our avionics support for the CP-140 Aurora surveillance aircraft and the CF-18.

In Australia, we won a subcontract to supply communications systems for the Royal Australian Navy’s new Landing Helicopter Dock amphibious ships. In addition, we opened a local office to support our growing business opportunities there. These wins reinforce that our successful performance over the past decade has earned us the credibility to pursue opportunities worldwide, not only as a supplier, but also as a prime contractor.

As we grow, L-3 is taking an increasingly integrated and collaborative approach with its businesses while preserving the entrepreneurial spirit that has contributed greatly to our success. This approach maintains our business units’ operating autonomy, which is vital to the character and success of L-3 and will not be compromised. Still, I think we can do more to bring together L-3 technologies and talents across our company. These efforts will also lead to more growth and efficiencies in our operations.

My sincere thanks to L-3’s employees for making 2007 another exceptional year for our company. By listening and responding to our customers, by having the broad range of capabilities to meet their needs, and by collaborating with imagination and efficiency, we will continue to build on our success.

Sincerely,

Michael T. Strianese
President and Chief Executive Officer