Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information that management believes is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements appearing elsewhere in this report. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Fiscal 2003 Form 10-K.

Except for the historical information contained herein, the discussions in this report contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below under “Forward-Looking Statements and Factors that May Affect Future Results.”

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in “Note 1: Significant Accounting Policies” in our Notes to Financial Statements included in our Fiscal 2003 Form 10-K. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting estimates for us include: (i) revenue recognition on long-term contracts and contract estimates, (ii) provisions for excess and obsolete inventory losses, (iii) accounts and finance receivables allowance for doubtful accounts and credit losses, (iv) valuation of marketable securities and selected investments, (v) impairment testing of goodwill, and (vi) income taxes and tax valuation allowances. For additional discussion of our critical accounting estimates, see our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2003 Form 10-K.

RESULTS OF OPERATIONS

Comparative Statement of Income

Our comparative statement of income is as follows:

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General: Net income and revenue in the second quarter of fiscal 2004 increased 103.1 percent and 16.2 percent, respectively, compared to the prior-year comparable quarter. Net income and revenue in the two quarters ended January 2, 2004, increased 63.3 percent and 19.9 percent, respectively, compared to the prior-year comparable period. The increases for the quarter and two quarters ended January 2, 2004, were primarily as a result of continuing strong organic growth in our government businesses. Although the impact was overshadowed by the strength in our Government Communications Systems and RF Communications segments, the second quarter of fiscal 2004 included a non-operating loss of $6.0 million, compared to $3.1 million of non-operating income in the second quarter of fiscal 2003. For the first two quarters of fiscal 2004 the non-operating loss was again $6.0 million compared to $19.3 million of non-operating income in the first two quarters of fiscal 2003.

Results in the quarter and two quarters ended December 27, 2002 were reduced by $8.3 million related to cost-reduction actions in the company’s Microwave Communications segment.

Our government businesses continue to experience very strong demand across all major customer areas, including the Department of Defense, intelligence agencies and other U.S. government agencies, as well as the defense forces of allied nations worldwide. Long-term, strategic programs to modernize communications infrastructures have resulted in increased demand for our secure communications and information-processing systems and services. Our systems provide capabilities for communications, intelligence gathering, surveillance and reconnaissance that are helping U.S. and allied forces move to a new network-centric platform for warfare and security.

We have made great strides in reducing operating expenses in our three commercial businesses, and each of these businesses had sequential revenue growth in the quarter. And, while not satisfied with the absolute level of sales and operating income in our commercial businesses, we are encouraged by meaningful progress. We will continue to drive cost reductions and revenue creation programs aimed at improving operating performance in the remainder of the year and beyond.

In January, we won an important contract that we believe will significantly raise the visibility of the company’s total communications capabilities. We were awarded a $96 million contract to rebuild and enhance the Iraqi Media Network (“IMN”). IMN will bring modern radio and TV broadcast and newspaper infrastructure and media content to the people of Iraq. Our Government Communications Systems and Broadcast Communications businesses will work together to create a fully integrated, technically advanced media network that will provide a reliable, timely and relevant mass media capability. For this historic project, we have teamed with two media companies in the region that have invaluable experience in the broadcast and newspaper industry. We are uniquely positioned to develop this new network capability, and we believe the project positions us for additional commercial business in the region.

Revenue: Revenue for the second quarter of fiscal 2004 was $608.6 million, an increase of 16.2 percent compared to the second quarter of fiscal 2003. Revenue for the two quarters ended January 2, 2004, was $1,167.8 million, an increase of 19.9 percent compared to the first two quarters of fiscal 2003. The increases in revenue for both the second quarter and first two quarters resulted primarily from increased revenue in the RF Communications, Government Communications Systems, Network Support and Microwave Communications segments, which were partially offset by decreased revenue in the Broadcast Communications segment.

Gross Margin: Gross margin as a percent of revenue was 26.1 percent in the second quarter of fiscal 2004 compared to 25.8 percent in the second quarter of fiscal 2003. The gross margin in our Government Communications Systems segment improved as a result of better program execution, higher performance award fees and a contract resolution. In our RF Communications segment gross margin improved due to manufacturing efficiencies related to increased tactical product sales and program execution especially related to our Bowman Tactical Radio Programme in the United Kingdom. Our Network Support segment’s gross margin benefited from sales of its new EXP ^TM field technician test product in the second quarter of fiscal 2004. The EXP ^TM product was introduced in the fourth quarter of fiscal 2003. Gross margin improvement in our studio products and systems sales in the second quarter of fiscal 2004 led to improved gross margins in our Broadcast Communications segment when compared to the prior-year quarter. The gross margin in our Microwave Communications segment was negatively impacted by a higher-cost international product mix and by unfavorable foreign exchange rates in the second quarter of fiscal 2004.

The gross margin as a percent of revenue decreased from 25.7 percent in the first two quarters of fiscal 2003 to 25.6 percent in the first two quarters of fiscal 2004. For the two quarters ended January 2, 2004, improved gross margin as a percent of revenue was realized in our RF Communications, Network Support and Government Communications Systems segments, which was offset by lower gross margins in our Microwave Communications segment. Gross margin as a percentage of revenue in our Broadcast Communications segment was unchanged.

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Engineering, Selling and Administrative Expenses: Engineering, selling and administrative expenses decreased $4.0 million and as a percent of revenue decreased from 20.8 percent in the second quarter of fiscal 2003 to 17.2 percent in the second quarter of fiscal 2004. Engineering, selling and administrative expenses decreased $5.1 million to $200.6 million and as a percent of revenue from 21.1 percent in the first two quarters of fiscal 2003 to 17.2 percent in the first two quarters of fiscal 2004. The decrease was primarily due to the impact of cost reduction actions taken in fiscal 2003 at our corporate headquarters as well as separate cost-cutting actions taken in our Broadcast Communications, Microwave Communications and Network Support segments. Since most of the gross expenses incurred at our corporate headquarters are allocated to our operating segments, a large portion of the corporate headquarters cost savings is being recognized in the operating income of our commercial segments rather than in headquarters expense. The decreases in operating expenses in our commercial segments and at corporate headquarters were partially offset by increased engineering, selling and administrative expenses in our Government Communications Systems and RF Communications segments to support significant growth in these businesses and was primarily related to selling and marketing activities. The 16.2 percent and 19.9 percent growth in revenue in the second quarter and first half of fiscal 2004, respectively, when compared to the prior-year periods also contributed to the decrease in engineering, selling and administrative expenses as a percent of revenue.

Non-Operating Income (Loss): Non-operating income (loss) was a $6.0 million loss in the second quarter of fiscal 2004 compared to $3.1 million of income in the second quarter of fiscal 2003. The loss in fiscal 2004 included a $5.0 million pretax write-down of our interest in Teltronics, a $7.5 million pretax loss and a $6.4 million pretax gain, respectively, in two unrelated patent infringement cases. Also, non-operating income (loss) in the second quarter of fiscal 2003 included a $5.0 million gain from the sale of marketable securities available-for-sale compared to a gain of $1.3 million in the second quarter of fiscal 2004.

Non-operating income (loss) was a $6.0 million loss in the first two quarters of fiscal 2004 compared to $19.3 million of income in the first two quarters of fiscal 2003. The loss in the first two quarters of fiscal 2004 included a $5.0 million pretax write-down of our interest in Teltronics, a $7.5 million pretax loss and a $6.4 million pretax gain, respectively, in two unrelated patent infringement cases. Also, non-operating income (loss) in the first two quarters of fiscal 2003 included a $10.1 million gain from the sale of marketable securities available-for-sale compared to a gain of $2.1 million in the comparable period of fiscal 2004. Non-operating income (loss) in the first two quarters of fiscal 2003 also included an $18.8 million gain on the sale of our minority interest in our LiveTV, LLC venture.

Interest Income and Interest Expense: Interest income in the quarter and two quarters ended January 2, 2004, of $1.5 million and $2.8 million, respectively, decreased from interest income in the quarter and two quarters ended December 27, 2002, of $1.9 million and $3.5 million, respectively, primarily due to lower interest rates.

Interest expense decreased from $6.6 million in the second quarter of fiscal 2003 to $6.3 million in the second quarter of fiscal 2004 primarily due to a lower level of short-term debt in our foreign subsidiaries. Interest expense increased from $12.3 million in the first two quarters of fiscal 2003 to $12.6 million in the first two quarters of fiscal 2004 primarily due to interest on our $150 million 3.5% convertible debentures issued on August 26, 2002.

Income Taxes: The provision for income taxes as a percentage of pretax income decreased from 34.0 percent in the quarter and two quarters ended December 27, 2002, to 23.4 percent and 27.9 percent in the quarter and two quarters ended January 2, 2004. The decrease in the rate is primarily due to the settlement of a foreign tax audit in the second quarter of fiscal 2004 that resulted in an income tax benefit of $3.3 million. Both fiscal 2004 and fiscal 2003 tax rates were lower than the federal and state statutory rate and benefited from the impact of export sales. The fiscal 2004 rate includes a larger benefit from the use of state, local and foreign income tax loss carryforwards. We expect that the tax rate will be 32.0 percent for the remainder of fiscal 2004.

Return on Revenue: Our net income as a percentage of revenue was 5.4 percent in the second quarter of fiscal 2004 compared to 3.1 percent in the second quarter of fiscal 2003 and 5.1 percent in the first two quarters of fiscal 2004 compared to 3.7 percent in the first two quarters of fiscal 2003. These increases were primarily due to the reasons previously discussed.

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Discussion of Business Segments

Revenue from the Government Communications Systems segment in the second quarter of fiscal 2004 of $341.5 million increased 25.2 percent from the second quarter of fiscal 2003 and operating income of $36.3 million in the second quarter of fiscal 2004 increased 48.2 percent from the second quarter of fiscal 2003. Operating income improved in the second quarter primarily as a result of better program execution, higher performance award fees and a contract resolution. Revenue for the two quarters ended January 2, 2004, was $675.9 million, an increase of 28.8 percent compared to the first two quarters of fiscal 2003. Operating income of $68.2 million for the two quarters ended January 2, 2004, increased 41.5 percent from the first two quarters of fiscal 2003.

Revenue was driven by double-digit growth in each of the segment’s key markets. The segment is responding to the U.S. government’s growing requirements for improved communications infrastructure, intelligence gathering and information processing. The segment’s classified business remained very strong in the quarter and other major platform programs continued to ramp up, including the FAA Telecommunications Infrastructure, the Joint Strike Fighter, Space Based Radar, and the U.S. Census Bureau database program.

During the quarter, the segment won a 30-month, $85 million contract to develop four prototypes for the next-generation Advanced Extremely High Frequency Multi-band Terminals for the U.S. Navy. The satellite terminals will be installed on ship, shore and submarine platforms. Should we win the competition for the production contract, scheduled to be awarded in June 2006 and includes up to 300 terminal systems, the value could exceed $1.4 billion by 2014. Also during the quarter, we won a two-year, $24 million follow-on defense communications contract for production of Multi-functional Information Distribution System Low Volume Terminals. These terminals will provide U.S. military forces with secure, jam-resistant, voice and data transmission capabilities.

In December, this segment achieved a major milestone in the FAA Telecommunications Infrastructure (FTI) program. The FAA approved, ahead of schedule, deployment of the new FTI system to the first 27 sites. The 15-year, potential $3.5 billion program is designed to improve telecommunications and operations functions at more than 5,000 FAA facilities nationwide. This segment won the program in July 2002.

Revenue from the RF Communications segment increased 40.2 percent in the second quarter of fiscal 2004 when compared to the second quarter of fiscal 2003 and operating income of $29.5 million in the second quarter of fiscal 2004 increased 54.5 percent from the second quarter of fiscal 2003. Revenue for the two quarters ended January 2, 2004, was $194.8 million, an increase of 40.0 percent compared to the first two quarters of fiscal 2003. Operating income of $54.5 million for the two quarters ended January 2, 2004,

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increased 60.8 percent from the first two quarters of fiscal 2003. Operating income improved due to manufacturing efficiencies related to increased tactical product sales and program execution, especially related to our Bowman Tactical Radio Programme in the United Kingdom.

Strong sales continued for Harris’ Falcon® II tactical radios. This segment is successfully addressing heightened requirements for communications superiority by U.S. and allied military forces. Increased participation by coalition forces and troop rotations in Iraq and Afghanistan has amplified operator experience on, and preference for, our radios.

The U.K. Bowman Tactical Radio Programme and the U.S. Joint Tactical Radio System – two long-term, next-generation programs – provide solid support for future growth in the segment. International orders during the quarter included radios for defense forces in Armenia, Saudi Arabia, the Philippines, Norway, and the United Kingdom.

During the quarter, Harris received a $9.3 million follow-on order, as part of a $39 million contract, for HF strategic radio systems for the U.S. Navy. We are a premier supplier of shipboard HF radios and since 1992 have been awarded contracts valued at more than $180 million for Navy HF radio systems. Aso, during the quarter, the segment was awarded a $9.6 million contract to provide its Presidio encryption modules for communications security devices, which protect classified and sensitive digital data transmissions for the U.S. Government. Increasing market demand for data encryption is the result of the U.S. military’s expanding use of data in mission analysis and execution. Last year, our Sierra™ Encryption Module was selected for Cluster 1 of the U.S. Joint Tactical Radio System program.

Revenue from the Microwave Communications segment increased 5.3 percent in the second quarter of fiscal 2004 when compared to the second quarter of fiscal 2003. This segment had an operating loss of $1.6 million in the second quarter of fiscal 2004 compared to an operating loss of $8.2 million in the second quarter of fiscal 2003. Cost reductions have reduced operating expenses in the segment. However, in the second quarter of fiscal 2004 the gross margin in this segment was negatively impacted by international product mix and pricing and by unfavorable foreign exchange rates. Revenue for the two quarters ended January 2, 2004, was $145.2 million, an increase of 10.3 percent compared to the first two quarters of fiscal 2003. This segment had an operating loss of $3.8 million for the two quarters ended January 2, 2004, compared to an operating loss of $15.5 million in the first two quarters of fiscal 2003. Results in the second quarter of fiscal 2003 and the two quarters ended December 27, 2002, included $8.3 million of expenses related to cost-reduction actions.

Demand for this segment’s microwave radios in North America continues to be strong. Mobile network providers are continuing to expand capacity, reduce dependence on leased lines, and expand their footprint. Private network sales also increased for industrial, government, utility and transportation applications.

During the second quarter, this segment booked a $12 million order from MTN Nigeria Communications to provide MegaStar® radios for the cellular operator’s high-capacity backhaul GSM network. Following the close of the second quarter, we booked an additional $12 million order from MTN Nigeria. MTN Nigeria, a new customer for us, is part of the MTN Group, Africa’s leading mobil telephony company with more than five million subscribers.

Also, following the close of the quarter, we announced one of the first orders for this segment's new TRuepoint™ microwave radio system. Lannet Communications, a leading telecommunications services provider in Greece, will use the new microwave technology for the backbone of its new multi-service network. TRuepoint™ is our first microwave radio system that features programmable radio design, supporting a wide range of frequencies and capacities.

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Revenue from the Network Support segment increased 54.5 percent in the second quarter of fiscal 2004 when compared to the second quarter of fiscal 2003. This segment had operating income of $1.6 million in the second quarter of fiscal 2004 compared to an operating loss of $2.5 million in the second quarter of fiscal 2003. This segment’s operating income benefited from extensive cost-reduction actions implemented over the past two years as well as higher sales of its new EXP™ field technician test product. Revenue for the two quarters ended January 2, 2004, was $33.8 million, an increase of 33.6 percent compared to the first two quarters of fiscal 2003. This segment had operating income of $3.4 million for the two quarters ended January 2, 2004, compared to an operating loss of $5.2 million in the first two quarters of fiscal 2003.

During the quarter MTC-Vodafone, the first mobile telecommunications provider in Kuwait, selected this segment as the prime contractor for its new multi-million-dollar Integrated Network Management System project. The project is being developed around our NetBoss™ network management system.

Revenue from the Broadcast Communications segment decreased 29.5 percent in the second quarter of fiscal 2004 when compared to the second quarter of fiscal 2003. Operating income in the second quarter of fiscal 2004 was $2.6 million, compared to $6.0 million in the second quarter of fiscal 2003. Lower revenue and income in the quarter resulted primarily from the decline in sales of digital equipment and the comparison to a strong prior-year quarter, which benefited from a large order to construct radio broadcast infrastructure for S.N. Radiocomunicatii in Romania. The negative impact from the reduced sales volume in the quarter was partially offset by the impact of cost reduction actions taken in fiscal 2003 and higher gross margins that resulted from gross margin improvements in our studio products and systems sales. Revenue for the two quarters ended January 2, 2004, was $124.8 million, a decrease of 23.0 percent compared to the first two quarters of fiscal 2003. Operating income of $3.7 million for the two quarters ended January 2, 2004, decreased 53.2 percent from the first two quarters of fiscal 2003.

During the second quarter of fiscal 2004, this segment received four new orders for full-power upgrades on digital TV equipment, including orders from Tribune Broadcasting, Hearst-Argyle Broadcasting and Quincy Newspapers, Inc. In addition, sales increased for studio products and systems, an area that had been heavily impacted by the economic downturn in the broadcast industry. This segment also received additional orders for digital radio transmission equipment in the second quarter of fiscal 2004. We were further encouraged by the launch of several digital radio receivers at the recent Consumer Electronics Show.

In international markets, our radio transmitters and related equipment were selected for the Broadcasting Board of Governors (BBG) Radio SAWA, Radio Free Iraq, and Voice of America broadcast services. Our broadcast equipment also will be used to modernize the Iraqi Media Network, as discussed above.

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LIQUIDITY AND FINANCIAL POSITION

Cash Flows

Net cash provided by operating activities: Net cash provided by operating activities was $127.4 million for the first two quarters of fiscal 2004 compared to $63.5 million for the first two quarters of fiscal 2003. Net cash provided by operating activities improved in each of our segments, which all experienced positive net cash from operating activities during the first two quarters of fiscal 2004. The improvement was led by our RF Communications and Government Communications Systems segments, and was primarily due to increased profitability and strong program execution that resulted in a decrease in unbilled costs and accrued earnings on fixed price contracts. The net cash provided from operating activities in our Microwave Communications segment was the result of the reduction in the segment’s operating loss as well as increased collections of accounts and notes receivable from customers. The improved cash flows in our Broadcast Communications segment was primarily due to increased collections of advance payments from customers. The Network Support segment experienced higher net cash provided by operating activities as a result of improved profitability and advance payments collected from customers.

Net cash used in investing activities: Net cash used in investing activities was $25.8 million for the first two quarters of fiscal 2004 compared to $0.5 million for the first two quarters of fiscal 2003. Cash used in investing activities in the first two quarters of fiscal 2004 included $3.1 million in proceeds from the sale of securities available-for-sale. Cash used in investing activities in the first two quarters of fiscal 2003 included the receipt of proceeds from the sale of securities available-for-sale of $12.4 million and $19.0 million in proceeds from the sale of our minority interest in our LiveTV, LLC venture.

Additions of plant and equipment in the first two quarters of fiscal 2004 were $28.9 million compared to $29.6 million in the first two quarters of fiscal 2003. The expenditures are primarily due to additions made in our Government Communications Systems segment related to the FTI program’s network operating center and the expansion of facilities in 2003. Total additions of plant and equipment in fiscal 2004 are expected to be in the $75 million to $80 million range.

Net cash provided by (used in) financing activities: Net cash used in financing activities was $49.6 million for the first two quarters of fiscal 2004 compared to cash provided by financing activities of $89.9 million for the first two quarters of fiscal 2003. The decrease is attributable to the receipt of $146.3 million in net proceeds from the private placement of $150 million of our 3.5% Convertible Debentures due 2022 during the first quarter of fiscal 2003, which was offset by the repayment during the first quarter of fiscal 2003 of our $30.5 million 6.38% notes due 2002. Also, short-term debt was reduced by $23.6 million during the first two quarters of fiscal 2004.

In fiscal 2000, our Board of Directors approved a share repurchase program, which authorizes us to repurchase up to 15 million shares of our common stock periodically in the open market, in negotiated or block transactions or pursuant to tender offers. During the first two quarters of fiscal 2004, we repurchased 500,000 shares of our common stock at an average price per share of $38.22. During the first two quarters of fiscal 2003, we repurchased 100,000 shares of our common stock at an average price per share of $24.40. An authorization to repurchase an additional 1.0 million shares under this repurchase program still exists. We currently expect that we will repurchase shares of our common stock to offset the dilutive effect of shares issued under our stock incentive plans. Additionally, if warranted by market conditions, we will consider accelerating our purchases. Additional information regarding repurchases made during our second quarter of fiscal 2004 is set forth below under Part II, Item 2, “Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.”

Capital Structure and Resources

We have a committed Revolving Credit Agreement that provides for unsecured borrowings of up to $300 million. The facility expires in October 2007. Each bank’s obligation to make loans to us under this credit facility is subject to, among other things, our compliance with various representations, warranties and covenants. Interest rates on borrowings under this credit facility and related fees are determined by a pricing matrix based upon our long-term debt rating assigned by Standard and Poor’s Ratings Group and Moody’s Investors Service. The availability of borrowing under this credit facility is not contingent upon our debt rating. We are not required to maintain compensating balances in connection with this agreement. Availability of borrowings under this new revolving credit facility enables us to issue commercial paper. The financial covenants contained in this credit facility include, among others, maintenance of consolidated tangible net worth of not less than $805.7 million (which amount is subject to adjustment), maintenance of a total debt to adjusted earnings before interest, taxes, depreciation and amortization ratio of not more than 3.0 to 1 and maintenance of an adjusted earnings before interest, taxes, depreciation and amortization to interest charges ratio of not less than 3.0 to 1. This credit facility also includes negative covenants (i) limiting the creation of liens or other encumbrances, (ii) limiting certain sale and leaseback

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transactions, and (iii) limiting certain sales or other dispositions of assets other than in the ordinary course of business. In addition, this facility includes certain provisions for acceleration of maturity in the case of a (a) “cross default” with other indebtedness in an amount in excess of $50 million, (b) final uninsured judgment in excess of $50 million which remains unpaid or discharged, or (c) change of control, including if a person or group of persons acquires more than 25 percent of our voting stock.

During the first quarter of fiscal 2004, we filed a “universal” shelf registration statement with the SEC related to the potential future issuance of up to $500 million of securities including debt securities, preferred stock, common stock, fractional interests in preferred stock represented by depositary shares and warrants to purchase debt securities, preferred stock or common stock. This universal shelf registration statement was declared effective by the SEC during the first quarter and replaces our prior $500 million debt shelf registration.

In addition to the $150 million of 3.5% Convertible Debentures due 2022, we also have outstanding unsecured long-term debt of $250 million. The earliest scheduled maturity of any long-term debt is 2007.

Our debt is currently rated “BBB” by Standard and Poor’s Rating Group and “Baa2” by Moody’s Investors Service. We expect to maintain operating ratios, fixed-charge coverage ratios and balance sheet ratios sufficient for retention of these debt ratings. There are no assurances that our credit ratings will not be reduced in the future. If our credit rating is lowered below “investment grade,” then we may not be able to issue short-term commercial paper, but would instead need to borrow under our other credit facilities or pursue other alternatives. As of January 2, 2004, we had no commercial paper outstanding.

Management currently believes that existing cash, funds generated from operations, sales of marketable securities, our credit facilities and access to the public and private debt markets will be sufficient to provide for our anticipated requirements for working capital, capital expenditures and any stock repurchases under the current repurchase program for the next 12 months and the foreseeable future.

Comparative Financial Position

Our comparative financial position is as follows:

Cash and cash equivalents: Cash increased $51.3 million in the first two quarters of fiscal 2004 primarily due to cash provided by operating activities of $127.4 million as noted above. These increases were partially offset by $28.9 million in additions of plant and equipment, $19.1 million to repurchase common stock and $13.3 million in cash dividends paid.

Working capital: Working capital increase 4.8 percent from $862.2 million as of June 27, 2003 to $903.4 million as of January 2,

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2004. The $41.2 million increase was primarily due to increases in cash and cash equivalents as discussed above.

Goodwill: Goodwill increased from $228.1 million as of June 27, 2003 to $236.8 million as of January 2, 2004, due to a reclassification between identifiable intangible assets and goodwill and changes in foreign exchange rates.

Non-current deferred income taxes: The asset related to non-current deferred income taxes was $20.4 million as of June 27, 2003, compared to $15.4 million as of January 2, 2004. The decrease in the non-current deferred income tax asset was related to our use of state, local and foreign income tax loss carryforwards.

Off-Balance Sheet Arrangements and Contractual Obligations

We have contractual cash obligations to repay debt and to make payments under operating leases. We also have commitments related to contingent liabilities on outstanding letters of credit and surety bonds that are used to guarantee bids, down payments and performance and financial assurances. Guarantees are contingent commitments issued to guarantee the performance of a customer to a third party in borrowing arrangements, such as commercial paper issuances, bond financings and similar transactions. The term of the guarantee is equal to the remaining term of the related debt, which typically ranges from one to three years. The maximum potential amount of future payments we could be required to make under our third-party guarantees at January 2, 2004, is $1.5 million. At January 2, 2004, there are no guarantees accrued for as liabilities in our Condensed Consolidated Balance Sheet. We also hold insurance policies with third parties to mitigate the risk of loss on a portion of these guarantees.

The amounts disclosed in our Fiscal 2003 Form 10-K include all of our off-balance sheet arrangements and contractual obligations that we consider to have a more than remote potential future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

No material changes occurred in our contractual cash obligations to repay debt, to purchase goods and services and to make payments under operating leases or our commitments and contingent liabilities on outstanding letters of credit, guarantees and other arrangements as disclosed in our Fiscal 2003 Form 10-K.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

As described in Note B – Recent Accounting Pronouncements in our Notes to Condensed Consolidated Financial Statements, there are accounting pronouncements that have recently been issued but not yet implemented by us. Note B describes the potential impact that these pronouncements are expected to have on our financial position, cash flows and results of operations.

OUTLOOK

We have increased our earnings guidance for fiscal 2004 as a result of strong growth in our government businesses. That growth is now expected to continue in the third and fourth quarters of the year. Current earnings guidance for fiscal 2004 is a range of $1.85 to $1.95 per share. Previous earnings guidance was $1.50 to $1.65 per share.

Both our Government Communications Systems and RF Communications segments continue to deliver stronger than expected performance as a result of our participation in a number of ongoing programs involving advanced communication systems and tactical radios. In addition, the positive impact from previous expense-reduction actions taken in our commercial segments have put these businesses in a strong position for margin improvement and increased operating income as the economy shows consistent improvement and the commercial markets rebound.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of our plans, strategies and objectives for future operations; any statements concerning new products, services or developments; any statements regarding future economic conditions, performance or outlook including statements relating to earnings guidance for fiscal 2004; statements as to the outcome of contingencies; statements as to the value of our contract awards and programs; statements of expected cash flows; statements of belief or expectation; and any statements of assumptions underlying any of

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the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates” and similar words. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this report. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our consolidated results and the forward-looking statements could be affected by many factors, including:

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uncertain economic conditions, which make it difficult to estimate growth in our markets and, as a result, future income and expenditures;

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the severe telecommunications slow-down, which has had and may continue to have a negative effect on our telecom businesses;

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our dependence on the U.S. Government for a significant portion of our revenue, as the loss of this relationship or a shift in U.S. Government funding could have adverse consequences on our future business;

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financial and government and regulatory risks relating to international sales and operations, including fluctuations in foreign currency exchange rates and the effectiveness of our currency hedging program, and in certain regions, such as the Middle East, risks of instability, violence and armed conflict;

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the fair values of our portfolio of passive investments, which values are subject to significant price volatility or erosion;

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our ability to continue to develop new products that achieve market acceptance;

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the consequences of future geo-political events, which may affect adversely the markets in which we operate, our ability to insure against risks, our operations or our profitability;

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strategic acquisitions and the risks and uncertainties related thereto, including our ability to manage and integrate acquired businesses;

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potential changes in U.S. Government or customer priorities due to program reviews or revisions to strategic objectives, including termination of or potential failure to fund U.S. Government contracts;

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risks inherent in large long-term fixed price contracts, particularly the risk that we may not be able to contain cost overruns;

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the performance of critical subcontractors or suppliers;

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potential claims that we are infringing the intellectual property rights of third parties;

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the successful resolution of patent infringement claims and the ultimate outcome of other contingencies, litigation and legal matters;

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customer demand for financing and customer credit risk;

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cost reductions, which may not yield the benefits we expect and could have adverse effects on our future business;

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the impact of competitive products and pricing;

•

risks inherent in developing new technologies;

•

the ability to recruit and retain qualified personnel; and

•

general economic conditions in the markets in which we operate.

Additional details and discussions concerning some of the factors that could affect our forward-looking statements or results are set forth in Exhibit 99.1 of this report, entitled “Forward-Looking Statements and Factors that May Affect Future Results,” which Exhibit is incorporated herein by reference. The foregoing list is not exhaustive. Additional risks and uncertainties not known to us or that we

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currently believe not to be material also may adversely impact our operations and financial position. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition and results of operations.

The forward-looking statements contained in this report are made as of the date hereof and we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates, fluctuations in the market value of our equity securities available-for-sale and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.

Foreign Exchange and Currency: We use foreign exchange contracts and options to hedge both balance sheet and off-balance sheet foreign currency commitments. Generally, these foreign exchange contracts offset foreign currency denominated inventory and purchase commitments from suppliers, accounts receivable from and future committed sales to customers and intercompany loans. We believe the use of foreign currency financial instruments should reduce the risks that arise from doing business in international markets. At January 2, 2004, we had open foreign exchange contracts with a notional amount of $96.5 million, of which $40.8 million were classified as cash flow hedges and $55.7 million were classified as fair value hedges. This compares to total foreign exchange contracts with a notional amount of $95.7 million as of June 27, 2003, of which $18.1 million were classified as cash flow hedges and $77.6 million were classified as fair value hedges. At January 2, 2004, contract expiration dates range from less than one month to 24 months with a weighted average contract life of 0.4 years.

More specifically, the foreign exchange contracts classified as cash flow hedges are primarily being used to hedge currency exposures from cash flows anticipated from the United Kingdom Bowman Programme in our RF Communications segment. This contract for our tactical radio products was awarded in the second quarter of fiscal 2002. Under the contract, the customer pays in Pounds Sterling (“GBP”). We also have payments to local suppliers required to be made in GBP on this program. We have hedged the forecasted net cash flows related to sales and vendor payments denominated in GBP to maintain our anticipated profit margin on the program. As of January 2, 2004, we estimate that a pretax loss of $2.6 million would be reclassified into earnings from comprehensive income within the next 24 months related to the Bowman program transactions and an additional $0.5 million pretax loss would be reclassified into earnings from comprehensive income from the other transactions we are hedging with cash flow hedges. The net gain or loss included in our earnings for the first two quarters of fiscal 2004 and 2003 representing the amount of fair value and cash flow hedges’ ineffectiveness was not material. No amounts were recognized in our earnings for the first two quarters of fiscal 2004 and 2003 related to the component of the derivatives instruments’ gain or loss excluded from the assessment of hedge effectiveness. In addition, no amounts were recognized in our earnings for the first two quarters of fiscal 2004 and 2003 related to hedged firm commitments that no longer qualify as fair value hedges. No material reclassification of gains and losses into earnings from comprehensive income is expected to result from transactions or events related to commitments to customers or suppliers within the next twelve months. All of these derivatives were recorded at their fair value on the balance sheet in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“Statement 133”).

Factors that could impact the effectiveness of our hedging programs include accuracy of sales estimates, volatility of currency markets and the cost and availability of hedging instruments. A 10 percent adverse change in currency exchange rates for our foreign currency derivatives held at January 2, 2004, would have an impact of approximately $9.6 million on the fair value of such instruments. This quantification of exposure to the market risk associated with foreign exchange financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments.

Marketable Securities: We also currently have a portfolio of marketable equity securities available-for-sale. These investments result from the retained interest in sold or spun-off businesses and the investment into start-up companies that have technology or products that are of interest to us. The fair market value of these securities at January 2, 2004, was $21.6 million, compared to $23.1 million at June 27, 2003. This decrease was primarily due to the sale of some of these investments in the first two quarters of fiscal 2004. The corresponding unrealized gain is included as a component of shareholders’ equity. These investments historically have had higher volatility than most market indices. A 10 percent adverse change in the quoted market price of marketable equity securities would have an impact of approximately $2.2 million on the fair market value of these securities.

Interest Rates: We utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposures

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to changes in interest rates. We do not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2004, although there can be no assurances that interest rates will not change significantly.