UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2004

Commission file number 000-06072

EMS TECHNOLOGIES, INC.

660 Engineering Drive

(770) 263-9200

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

     The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 5, 2004:

AVAILABLE INFORMATION

EMS Technologies, Inc. makes available free of charge, on or through its website at www.ems-t.com, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

EMS Technologies, Inc. and Subsidiaries

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries

See accompanying notes to interim consolidated financial statements.

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EMS Technologies, Inc. and Subsidiaries

1. Basis of Presentation

The consolidated financial statements include the accounts of EMS Technologies, Inc. and its wholly-owned subsidiaries LXE Inc., EMS Holdings, Inc. and EMS Technologies Canada, Ltd. (collectively, “the Company”). In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company has classified the revenues, expenses and related assets and liabilities of its Space & Technology/Montreal division, which are currently held for sale, as discontinued operations for all periods presented in the accompanying consolidated financial statements.

— Stock Option Plans

Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, “Accounting for Stock-Based Compensation,” which permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.

The Company has adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” including the interim reporting requirements. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value method to measure stock-based compensation (in thousands, except net earnings (loss) per share):

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2. Discontinued Operations

In the third quarter of 2003, EMS announced that its Board of Directors had approved a formal plan to sell the Company’s commercial space operations located in Montreal. During the fourth quarter of 2003, the Company completed the sale of its healthcare product line. As a result, these business components have been accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value, less cost to sell. Based on recent discussions with potential purchasers concerning the probable market value of the Space & Technology/Montreal division, EMS recorded an additional $1.7 million valuation allowance in the third quarter of 2004 to reflect the revised estimate of the fair value, less cost to sell, of this division. .

The results of these discontinued operations for the third quarters and nine months ended of were as follows (in thousands):

The table below presents the components of the consolidated balance sheet accounts classified as current assets and liabilities related to assets held for sale as of October 2, 2004 and December 31, 2003 (in thousands):

3. Derivative Financial Instruments

The Company uses derivative financial instruments (forward exchange contracts) to hedge currency fluctuations in future cash flows denominated in foreign currencies, thereby limiting the Company’s risk that would otherwise result from changes in exchange rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into derivative financial instruments for trading or speculative purposes.

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Under SFAS No. 133, certain of the Company’s routine long-term contracts are considered to be derivative instruments, because these contracts create long-term obligations for non-U.S. customers to pay the Company’s Canadian subsidiary in U.S. dollars. Changes in the fair values of these embedded derivatives are included in net earnings (loss).

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For continuing operations, the derivative activity as reported in the Company’s consolidated financial statements during the third quarters and nine months ended was (in thousands):

For discontinued operations, the net asset for derivatives at October 2, 2004 was $93,000 compared to a net asset of $95,000 at September 27, 2003.

All of the foreign currency contracts currently in place will expire by the end of 2004.

4. Earnings (Loss) Per Share

Basic earnings (loss) per share is the per share allocation of income (loss) available to common stockholders based only on the weighted average number of common shares actually outstanding during the period. Diluted earnings (loss) per share represents the per share allocation of income (loss) attributable to common stockholders based on the weighted average number of common shares actually outstanding plus all dilutive potential common shares outstanding during the period.

The Company has granted stock options that are potentially dilutive to basic earnings (loss) per share, summarized as follows (shares in thousands):

For each earnings (loss) per share calculation reported for the third quarters of 2004 and 2003, the numerators were the same as reported in the consolidated statements of operations. Following is a reconciliation of the denominators for basic and diluted earnings (loss) per share calculations for the third quarters and nine months ended October 2, 2004 and September 27, 2003 (in thousands):

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5. Comprehensive Income (Loss)

Following is a summary of comprehensive income (loss) (in thousands):

6. Trade Accounts Receivable

Trade accounts receivable include the following (in thousands):

7. Inventories

Inventories include the following (in thousands):

8. Interim Segment Disclosures

The Company has five reportable segments: Space & Technology, LXE, EMS Wireless, SATCOM and SatNet. Each segment is separately managed and comprises a range of products and services that share distinct operating characteristics. The Company evaluates each segment primarily upon operating income.

The Space & Technology segment manufactures custom-designed, highly engineered hardware for use in advanced communication, radar, and electronic countermeasure systems, primarily for the defense market. Orders in this segment typically involve development and production schedules that can extend a year or more, and most revenues are recognized under percentage-of-completion long-term contract accounting. Hardware is sold to prime contractors or systems integrators rather than to end-users. As a result of the planned sale of the Space & Technology/Montreal division, the results of operations and all other financial information related to the Space & Technology/Montreal division are reported in discontinued operations. The Space & Technology segment, as reported in these interim-period financial statements, reflects the results of operations and all other financial information related to the Space & Technology/Atlanta business.

The LXE segment manufactures rugged mobile computers and wireless local area network (“WLAN”) products for use throughout the supply chain. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to end-users and to third parties that combine

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their products and services with the Company’s hardware for delivery to end-users.

The EMS Wireless segment manufactures antennas and repeaters for PCS/cellular communications systems. The manufacturing cycle for each order is generally just a few days, and revenues are generally recognized upon shipment of hardware. Hardware is marketed to wireless service providers and to original equipment manufacturers (“OEMs”) for mobile voice/paging services, as well as for other emerging high-speed wireless systems.

The SATCOM segment manufactures antennas and other hardware for satellite communications systems. The manufacturing cycle for most orders is generally just a few days, and revenues are recognized upon shipment of hardware. The SATCOM segment also has orders that involve development and production schedules that can extend a year or more, and these revenues are recognized under percentage-of-completion long-term contract accounting. Hardware is marketed primarily to third parties that combine their products and services with the Company’s hardware for delivery to end-users.

The SatNet segment manufactures ground segment equipment for the satellite broadband communications market. The manufacturing cycle for a hub is generally several weeks and terminals are manufactured on a shorter cycle. Revenues are recognized upon shipment of hardware. Hardware is marketed to operators of high-speed, two-way, multimedia access networks.

Following is a summary of the Company’s interim segment data (in thousands):

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9. Warranty Liability

The Company provides a limited warranty for each of its products. The basic warranty periods vary from one to five years, depending upon the type of product. For certain products, customers can purchase warranty coverage for specified additional periods.

The Company records a liability for the estimated costs to be incurred under warranties. The amount of this liability is based upon historical, as well as expected, rates of warranty claims. The warranty liability is periodically reviewed for adequacy and adjusted as necessary. Following is a reconciliation of the aggregate product warranty liability (in thousands):

10. Litigation

The Company is party to litigation styled Andrew Corporation (“Andrew”) v. EMS Technologies, Inc. initiated in the U.S. District Court for the Northern District of Illinois on May 25, 2004, alleging that EMS Wireless’s new remotely controlled electronic-downtilt base station antennas infringe on patent rights held by Andrew, and seeking an injunction against manufacture or sale of the allegedly infringing devices, and damages in an unspecified amount consisting of treble economic damages and attorneys’ fees. The Company has devoted substantial resources to studying the Andrew patents as they might apply to our products. The Company believes that its products do not infringe any valid or enforceable Andrew patent claims, and that in any event those patents are invalid and unenforceable. In response to Andrew’s complaint, the Company has filed a motion to dismiss and, in the

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alternative, to transfer venue to the U.S. District Court for the Northern District of Georgia. The parties are currently engaged in the briefing period related to the motion to transfer venue. If the patents were enforced against our products, we could be subject to payment of substantial damages and an injunction against further distribution of what we consider to be an important product for our future EMS Wireless sales. Although the Company is confident of its legal position it cannot currently determine the outcome of this proceeding or the ultimate amount of potential losses, and therefore has not made any provision for such matters.

Other Legal Matters

The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

ITEM 2. Management‘s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this quarterly report and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

Overview:

EMS Technologies, Inc. (the “Company” or “EMS”) designs, manufactures and markets products that are important in many kinds of wireless communications. The Company focuses on the needs of the mobile information user, with an increasing emphasis on broadband applications for high-data-rate, high-capacity wireless communications.

The Company is organized into five reportable business segments: Space & Technology, LXE, EMS Wireless, SATCOM and SatNet. Each segment is separately managed and comprises a range of products and services that share distinct operating characteristics. However, we believe that one of our competitive strengths is the technological and marketing synergy that can occur among the segments, as well as among our various product lines. We believe that this synergy creates a path to broader markets for highly advanced technologies that have been developed for niche markets in space and defense. EMS has its principal office in Atlanta, Georgia, and has approximately 1,600 employees worldwide. Over 70% of our employees are directly involved in engineering or manufacturing activities.

Following is a summary of significant factors affecting the Company in the third quarter and first nine months of 2004:

For continuing operations:

•		Results for the third quarter and first nine months reflect a lower-than-expected order rate at our EMS Wireless and SatNet segments. We believe this variance from expectation is the result of order timing decisions based on specific customer considerations and not long-term fundamental problems in these target markets. Further, we believe that the rates of orders for these segments will increase during the remainder of the year, subject to the uncertainties and risk factors discussed elsewhere in this report.
•		Non-operating income for the first nine months included $938,000 pre-tax gain for the sale of real estate in Montreal.
		For discontinued operations:
•		Results for the first nine months included contract losses at Space & Technology/Montreal totaling approximately $800,000, which related to additional costs caused mainly by supplier delays on a difficult legacy program that is expected to be completed during the first quarter of 2005.

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Discontinued Operations

In the third quarter of 2003, EMS announced that its Board of Directors had approved a formal plan to sell the Company’s commercial space operations located in Montreal. During the fourth quarter of 2003, the Company completed the sale of its healthcare product line. As a result, these business components have been accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value, less cost to sell, upon disposal. We continue to accommodate the due diligence efforts of potential purchasers of the Space & Technology/Montreal division. Based on recent discussions with potential purchasers concerning the probable market value of the Space & Technology/Montreal division, EMS recorded an additional $1.7 million valuation allowance in the third quarter of 2004 to reflect the revised estimate of the fair value, less cost to sell, of this division.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which often require the judgment of management in the selection and application of certain accounting principles and methods. We consider the following policies to be the most critical to understanding the judgments that are involved and the uncertainties that could affect our results of operations, financial condition and cash flows.

Revenue recognition on long-term contracts

Revenue recognition for certain fixed-price, long-term contracts in our Space & Technology/Atlanta and SATCOM segments, as well as the Space & Technology/Montreal division currently held for sale, is a critical accounting policy involving significant management estimates. We recognize revenue on certain long-term contracts based upon the ratio of cost-incurred to total-estimated-cost as the measure of performance that determines how much revenue should be recognized (percentage of completion accounting). The determination of total-estimated-cost relies on engineering estimates of the cost to complete the contract, with allowances for identifiable risks and uncertainties. These engineering estimates are frequently reviewed and updated. However, unforeseen problems can occur to substantially reduce the rate of future revenue recognition in relation to costs incurred. As of October 2, 2004, under percentage of completion accounting we had recognized a cumulative total of $25.3 million in revenues that were not yet billable under milestones specified in the customer contracts.

During 2003, two large contracts in discontinued operations that were accounted for under percentage of completion accounting experienced technical and supplier difficulties, resulting in increases to the estimated cost at completion totaling over $38 million. We have established allowances for identified risks, however these contracts are technically challenging and further unforeseen difficulties could cause increases to the cost at completion that exceed our allowances, resulting in further losses associated with these contracts.

Accounting for government research incentives

Our accrual of provincial research incentives is a critical accounting policy involving management estimates for our Montreal-based operations, including the Space & Technology/Montreal division currently held for sale. These incentives are in the form of a cash reimbursement for a portion of certain qualified research expenditures. Incentives are recorded as a reduction of cost of sales, because the underlying research efforts primarily apply to development of technological capabilities for specific business opportunities. For the nine months ended October 2, 2004, total incentives earned were approximately $2.7 million, compared with $1.1 million for the nine months ended September 27, 2003. We have established procedures to identify qualified costs and to submit appropriate claims for reimbursement; all such claims, however, are subject to financial and scientific audits by the Canadian government to determine whether such expenses qualified for incentive programs. Although there have historically been no significant disallowances of previously accrued incentives that resulted from these audits, such disallowances in the future could have an unfavorable effect on our consolidated statement of operations.

Evaluation of long-lived assets for impairment

All long-lived assets on the consolidated balance sheet are periodically reviewed for impairment. To test

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recoverability, we estimate the cash flows expected to result from the use of such long-lived assets under several different scenarios, including the potential sale of assets. No long-lived assets classified as held and used were determined to be impaired as of October 2, 2004.

In the third quarter of 2003, the assets of the Space & Technology/Montreal division and the healthcare product line were reclassified from “assets held and used” to “assets held for sale.” As a result, these business components were accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value, less cost to sell. As noted elsewhere in this document in our comments on discontinued operations, based on recent discussions with potential purchasers concerning the probable market value of the Space & Technology/Montreal division, EMS recorded an additional $1.7 million valuation allowance in the third quarter of 2004 to reflect the revised estimate of the fair value, less cost to sell, of this division.

Establishment of allowance for deferred income tax assets

Management currently expects that our Canadian operations will earn more than enough research-related tax benefits each year to offset any Canadian federal tax liability for any given year. As a result, we have established a valuation allowance for substantially all the net deferred tax assets associated with these research-related tax benefits (totaling approximately $33 million at October 2, 2004), because they are unlikely to be realized. However, this allowance may be reduced – resulting in an income tax benefit to a future consolidated statement of operations – if: (1) our profitability in Canada increases, which would increase both the tax liability incurred in future years and the rate at which these tax benefits are used, or (2) the level of our qualified research in Canada decreases, which would lower the tax benefits earned in future years.

Results of Operations

Net Sales

Consolidated net sales increased to $62.4 million in the third quarter of 2004, compared with $61.5 million in the third quarter of 2003. For the first nine months, sales increased to $191.0 million in 2004, compared with $183.3 million for the comparable period in 2003.

Net Sales and Operating Income (Loss) by Segment

Our segment net sales and operating income (loss) were as follows (in thousands):

** = Not Meaningful

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Space & Technology: This segment primarily serves defense markets, and revenues in these markets were flat in the third quarter of 2004 compared with 2003. The net sales growth for the first nine months of 2004 as compared with 2003 was due to increased activity and higher resulting revenues on a program to supply antennas for systems that provide live television on commercial aircraft.

LXE: Net sales increased for the third quarter and first nine months of 2004 compared with the same periods in 2003. For the quarter, the increase related to domestic revenues from increased hardware unit sales, as customers move from DOS to Windows® platforms. More than 60% of the growth for the first nine months was due to revenues from increased hardware unit sales and service revenues in our international markets, which we believe were strongly influenced by favorable exchange rates for the Euro and other foreign currencies versus the U.S. dollar. The remainder of the increase for the first nine months of 2004 was due to increased domestic hardware unit sales.

EMS Wireless: Net sales for the third quarter decreased in 2004 compared with 2003 due to lower capital spending by our customers – major U.S. wireless service providers – during a period of industry consolidation. As a result, , sales for the U.S. base station antenna product line dropped $4.3 million for the third quarter and $6.5 million for the first nine months of 2004 compared with the same interim periods in 2003. However, the overall decreases in net sales for all EMS Wireless product lines combined were much lower — only $2.6 million and $1.6 million for the third quarter and first nine months, respectively — due mainly to continued market acceptance of our repeater products and the resulting higher sales in this product line. In addition, sales of Brazilian-manufactured antennas were also higher for the first nine months of 2004 compared with 2003, reflecting a build-out of wireless networks in Latin American markets. We believe that our U.S. customers for base station antennas will begin to resume system rollouts and increase their order rate before the end of 2004.

SATCOM: Net sales were lower for the third quarter and first nine months of 2004 compared with the same periods in 2003. Management believes that 2003 was an exceptionally strong year, especially for sales of our products to the U.S. military, and also believes that 2004 sales are consistent with continued long-term growth trends for this division.

SatNet: Our venture to provide DVB-RCS standard hubs and terminals for broadband communications via satellite reported higher net sales for both the third quarter and first nine months of 2004, respectively, compared with the same periods in 2003. As is typical in a start-up situation, SatNet’s order stream is growing but uneven, which makes periodic sales volatile. For the third quarter, higher numbers of hubs and terminals were sold in 2004 versus 2003. For the first nine months, hub sales were relatively flat in 2004 compared with 2003, but there was a significant increase in the number of terminals sold in 2004 compared with 2003, as current systems customers expand their business base. We believe that the present rate of orders will continue to increase during the fourth quarter of 2004 and into 2005.

Cost of Sales

Cost of sales, as a percentage of consolidated net sales, increased – but not significantly – in 2004 compared with 2003. The cost of sales percentage was 65% in the third quarter and first nine months of 2004, as compared with 64% for the same periods in 2003. There was a moderately unfavorable effect on the consolidated cost-of-sales percentage caused by a combination of the following factors:

•		A less favorable mix of contracts at SatNet, with more net sales from terminals and funded R&D work, which generally have a higher cost of sales than net sales from hubs;
•		At EMS Wireless, lower sales volumes to absorb fixed costs; and
•		Additional costs at Space and Technology on certain programs as they near completion.

However, these factors were largely offset in the consolidated cost-of-sales percentage by the 2004 growth in LXE sales (which had a relatively lower cost-of-sales percentage), and to a lesser extent by the disposal of a small, previously unprofitable product line.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) increased for the third quarter and first nine months of 2004 compared with 2003, primarily due to LXE’s expanded sales efforts in Europe and the Middle East, where the headcount and cost structure for the sales and marketing organizations have increased with the record levels of

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revenues that LXE has received from these markets. A significant, but secondary, factor in SG&A growth related to stronger Canadian dollar and other foreign currencies versus the U.S. dollar, which increased the reported cost of our non-U.S. operations.

Research and Development Expenses

Research and development expenses (“R&D”) represent the cost of our internally funded efforts. Significant development efforts also occur under specific customer orders in the Space & Technology segment and under agreements with customers to fund specified R&D at SATCOM and SatNet; accordingly, the costs of these externally-funded efforts are reflected in cost of sales.

For the third quarter of 2004 compared with 2003, the small increase related to our Space & Technology segment, which incurred planned increases in R&D to advance new technology initiatives. Similarly for the first nine months of 2004 compared with 2003, Space & Technology and LXE incurred significant planned increases in R&D to advance new technology and product initiatives. These combined increases, which totaled approximately $1.5 million for the first nine months, were partially offset by R&D decreases at SATCOM and SatNet, which moved engineering resources in 2004 from internally funded projects to externally funded development projects, the cost of which are reported in cost of sales.

Non-Operating Income (Expense)

The most significant element of non-operating income for the first nine months of 2004 was a $938,000 pre-tax gain for the sale of unutilized real estate in Montreal.

Foreign Exchange Gain (Loss)

We accrue foreign exchange gains and losses related to a net asset or liability denominated in a foreign currency, and, if applicable, any embedded derivatives in contracts denominated in a foreign currency. We use foreign currency forward contracts to reduce our exposure to fluctuations in foreign currency exchange rates.

Most of our Canadian operations’ customer contracts are in U.S. dollars, and foreign exchange gains/losses result from a stronger/weaker U.S. dollar against the Canadian dollar. Our Canadian operations also do a significant amount of business in the United Kingdom, and foreign exchange gains/losses result from a stronger/weaker Canadian dollar against the British pound.

We also accrue net gains and losses from translation of the LXE European subsidiaries’ short-term intercompany liabilities, payable in U.S. dollars, from the purchase of hardware for resale in Europe. To the extent we have not used foreign currency forward contracts to reduce our exposure to fluctuations in the foreign currency exchange rates used, a weaker U.S. dollar against the Euro usually results in foreign exchange gains for LXE.

In 2004, the net foreign currency losses were $204,000 and $299,000 in the third quarter and the first nine months of 2004, respectively. The losses for the third quarter were mainly the result of a weaker U.S. dollar against the Canadian dollar and Brazilian Real. The losses for the first nine months of 2004 were mainly the result of a weaker U.S. dollar against the Canadian and Australian dollars. In 2003, there were net foreign currency losses of $10,000 and $422,000 because the U.S. dollar was then weaker against the Canadian dollar.

Interest Expense

Interest expense increased for the third quarter and first nine months of 2004 compared with the same periods in 2003 due to higher monthly bank fees for certain credit agreements in 2004, the effect of which was partially offset by lower average debt levels that resulted from positive cash flow.

Income Tax Expense

We recognized a 32% effective income tax rate in 2004 based upon management’s expected taxable income associated with various tax jurisdictions for the full year, and this rate was comparable to the 32% rate reported for

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the preceding fiscal year. Our U.S. and European operations have an effective rate of approximately 36%, and our Canadian operations have a much lower effective tax rate due to research-related tax benefits. The effective rate is subject to change during the remainder of the year, as management’s expectations may change for the taxable income associated with various tax jurisdictions.

Discontinued Operations

As a result of formal plans of sale that were approved in 2003, our Space & Technology/Montreal division and healthcare product line have been accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value, less cost to sell. In the fourth quarter of 2003, we completed the sale of our discontinued healthcare product line, and we continue to pursue a plan of sale for the Space & Technology/Montreal operations.

The 2004 pre-tax results from our discontinued operations were losses of approximately $2.3 million for the third quarter and $3.1 million for the first nine months, compared with a $25.0 million loss for the third quarter of 2003 and $43.8 million loss for the first nine months of 2003. These losses include a $1.7 million valuation adjustment taken in the third quarter of 2004 and a $19 million valuation adjustment taken in the third quarter of 2003. In addition, the 2003 losses are much larger than the 2004 levels because the 2003 results included a $14 million second quarter adjustment to write down net sales at the Space & Technology/Montreal division for the estimated financial effects of key-supplier delays and related technical problems on a difficult legacy satellite program. If the effect of the $14 million write down in the second quarter of 2003 is excluded, our pre-tax results from discontinued operations are still improved in 2004 compared with 2003, due to better contract performance and significant new contract awards (especially in late 2003) for which we have begun to recognize net sales in 2004 under percentage of completion accounting. The results for the first nine months of 2004 included contract losses totaling approximately $800,000, which related to further supplier delays on a legacy satellite program, which is expected to be completed during the first quarter of 2005.

Liquidity and Capital Resources

During the first nine months of 2004, net cash provided by continuing operating activities was approximately $9.2 million, with the most significant factors being LXE’s profitable operations and additional long-term service agreements. Another significant source of cash was proceeds from the exercise of employee stock options. In July 2004 we acquired, for approximately $1.3 million, the net assets directly related to the defense electronics business of Multitech Corporation; these assets will be utilized by our Space & Technology operations, and include hardware, software and intellectual property critical to radar, communication, remote sensing, optical tracking, and electronic countermeasure systems. Our discontinued operations used approximately $8.9 million.

At October 2, 2004, we had standby letters of credit outstanding of approximately $8.6 million. In addition, we had $6.1 million available for borrowing under our U.S. revolving credit agreement, and $892,000 available for borrowing under our Canadian revolving credit agreement. At October 2, 2004, we were either in compliance or had received a bank waiver of compliance, effective as of that date, relating to all credit agreement covenants.

We have agreed to apply the proceeds from the potential sale of our Space & Technology/Montreal division to reduce outstanding indebtedness under our Canadian credit agreement. During the first quarter of 2004, we also amended our Canadian credit agreement, including pricing, as a condition of obtaining a covenant waiver; at current borrowing levels, the annual cost of this facility increased by approximately $250,000 as a result of such amendments.

Our U.S. credit agreement expires at the end of November 2004, but based on the current status of negotiations and documentation, we expect — although there can be no complete assurance — that we will complete the process of establishing a proposed new credit facility prior to the current expiration date. The proposed new facility will replace both the current U.S. and Canadian credit agreements with a single coordinated revolving credit arrangement.

We expect that capital expenditures for continuing operations in 2004 will range from $9 million to $11 million. These expenditures will be used primarily to purchase equipment that enhances capacity and productivity.

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Our material contractual obligations and material other commercial commitments have not changed significantly from the levels disclosed in the previous report on Form 10-K for the year ended December 31, 2003, summarized as follows(in millions).

(1) Purchase commitments primarily represent existing commitments under purchase orders or contracts to purchase inventory and raw materials for our products. Most of these purchase orders and contracts can be terminated for a fee that is either fixed or based on when termination occurs. Purchase commitments have been updated to reflect actual commitments as of October 2, 2004.

Management believes that cash on hand, cash flows from operations and borrowings available under credit agreements will provide sufficient liquidity to meet our operating and capital expenditure needs for existing operations during the next twelve months. To fund long-term growth, the Company may consider such measures as public or private offerings of common stock or convertible securities.

Risk Factors and Forward-Looking Statements

The Company has included forward-looking statements in management’s discussion and analysis of financial condition and results of operations concerning the potential for various businesses and products. Actual results could differ materially from those suggested in any forward-looking statements as a result of a variety of factors. Such factors include, but are not limited to:

•		uncertainties related to identifying a purchaser of the Space & Technology/Montreal division, as well as external market conditions and internal priorities and constraints that could affect a purchaser’s willingness and ability to complete the transaction on terms and timing expected by the Company (in the event a suitable purchaser is not identified, the Space & Technology/Montreal division would be reclassified back into continuing operations, and prior-year financial statements would be restated to reflect that status);
•		economic conditions in the U.S. and abroad and their effect on capital spending in the Company’s principal markets;
•		difficulty predicting the timing of receipt of major customer orders, and the effect of customer timing decisions on our quarterly results;
•		U.S. defense budget pressures on near-term spending priorities;
•		uncertainties inherent in the process of converting contract awards into firm contractual orders in the future;• volatility of foreign exchange rates relative to the U.S. dollar and their effect on both the purchasing power by international customers and the cost structure of the Company’s non-U.S. operations, as well as the potential for realizing foreign exchange gains or losses associated with net non-U.S. assets held by the Company;

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•		successful resolution of technical problems, proposed scope changes, or proposed funding changes that may be encountered on contracts;
•		changes in the Company’s consolidated effective income tax rate caused by the extent to which actual taxable earnings in the U.S., Canada and other taxing jurisdictions may vary from expected taxable earnings;
•		successful completion of technological development programs by the Company and the effects of technology that may be developed by, and patent rights that may be held or obtained by, competitors;
•		successful transition of products from development stages to an efficient manufacturing environment;
•		customer response to new products and services, and general conditions in our target markets (such as logistics, PCS/cellular telephony and space-based communications);
•		the success of certain of our customers in marketing our line of high-speed commercial airline communications products as a complementary offering with their own lines of avionics products;
•		the availability of financing for satellite data communications systems and for expansion of terrestrial PCS/cellular phone systems;
•		the extent to which terrestrial systems succeed in providing extensive broadband Internet access on a dependable and economical basis;
•		the growth rate of demand for various mobile and high-speed data communications services;
•		the Company’s ability to attract and retain qualified personnel, particularly those with key technical skills; and
•		the availability of sufficient additional credit or other financing, on acceptable terms, to support the Company’s expected growth.

Additional information concerning these and other potential risk factors is included in Part II, Item 5 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended July 3, 2004.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As of October 2, 2004, the Company had the following market risk sensitive instruments (in thousands):

A 1% increase in the interest rates for our market-sensitive debt obligations would have increased interest expense by $91,000 for the quarter based on the average outstanding borrowings under these obligations.

As of October 2, 2004, the Company also had intercompany accounts that eliminate in consolidation but that are

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considered market risk sensitive instruments. Short-term due to/(from) the parent, payable/(receivable) by international subsidiaries arising from purchase of the parent’s products for sale and from cash advances to the parent, were as follows:

The Company has foreign currency risks associated with forward contracts as follows (in thousands, except average contract rate):

The Company enters into foreign currency forward contracts in order to mitigate the risks associated with currency fluctuations on future cash flows.

ITEM 4. Controls and Procedures

The Company has established and maintains disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15e). The objective of these controls and procedures is to ensure that information relating to the Company, including its consolidated subsidiaries, and required to be filed by it in reports under the Securities Exchange Act, as amended, is effectively communicated to the Company’s CEO and CFO, and is recorded, processed, summarized and reported on a timely basis.

The CEO and CFO have evaluated the Company’s disclosure controls and procedures as of the end of the period covered in this report. Based upon this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are adequate to accomplish their objective and are functioning effectively.

During the three months ended October 2, 2004, there was no change in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Subsequent to the most recent evaluations by the CEO and CFO, there have been no significant changes in the Company’s internal controls (including corrective actions for significant deficiencies or material weaknesses) or

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other factors that could significantly affect these internal controls.

During the third quarter of 2004, the Company continued the process of evaluating its compliance with Section 404 of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) and related rules. The Company has not completed this process, but as of the date of this report, the Company has not identified a significant deficiency or a material weakness in the Company’s systems of internal controls.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

We are party to litigation styled Andrew Corporation (“Andrew”) v. EMS Technologies, Inc. initiated in the U.S. District Court for the Northern District of Illinois on May 25, 2004, alleging that EMS Wireless’s new remotely controlled electronic-downtilt base station antennas infringe on patent rights held by Andrew, and seeking an injunction against manufacture or sale of the allegedly infringing devices, and damages in an unspecified amount consisting of treble economic damages and attorneys’ fees. We have devoted substantial resources to studying the Andrew patents as they might apply to our products. We believe that our products do not infringe any valid or enforceable Andrew patent claims, and that in any event those patents are invalid and unenforceable. In response to Andrew’s complaint, we have filed a motion to dismiss and, in the alternative, to transfer venue to the U.S. District Court for the Northern District of Georgia. The parties are currently engaged in the briefing process related to the motion to transfer venue. Although we are confident of our legal position, we cannot assure the outcome of this litigation. If the patents were enforced against our products, we could be subject to payment of substantial damages and an injunction against further distribution of what we consider to be an important product for our future EMS Wireless sales.

ITEM 6. Exhibits

     (a) Exhibits — The following exhibits are filed as part of this report:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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