We principally research, design, develop, manufacture, integrate, operate and sustain advanced technology systems and products, and provide a broad range of management, engineering, technical, scientific, logistics and information services. We serve both domestic and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. Our sales to agencies of the U.S. Government, including those to the Department of Defense (DoD), represented 84% of our sales in 2007. Of the remaining 16% of sales, approximately 13% related to sales to international customers (including foreign military sales funded, in whole or in part, by the U.S. Government), with the remainder attributable to commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security, and government information technology.

We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS) and Space Systems. As a systems integrator, our products and services range from electronics and information systems, including integrated net-centric solutions, to missiles, aircraft and spacecraft.

The following discussion should be read along with our 2007 Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.

Consolidated Results of Operations

Since our operating cycle is long-term and involves many types of development and production contracts with varying production delivery schedules, the results of operations of a particular quarter, or quarter-to-quarter comparisons of recorded sales and profits, may not be indicative of our future operating results. The following discussions of comparative results among periods should be viewed in this context. All per share amounts cited in the following discussions are presented on a "per diluted share" basis.

The following discussion of Net sales and operating results provides an overview of our operations by focusing on key elements set forth in our Unaudited Condensed Consolidated Statement of Earnings. The "Discussion of Business Segments" section which follows describes the comparative results of operations of each of our business segments for the quarter and nine-month periods ended September 28, 2008 and September 30, 2007. We follow an integrated approach for managing the performance of our businesses and generally focus the discussion of our results of operations around major lines of business, versus distinguishing between products and services. Product sales are predominantly generated in the Aeronautics, Electronic Systems and Space Systems segments, while most of our services revenues are generated in our IS&GS segment.

Net sales for the third quarter of 2008 were $10.6 billion, a 5% decrease from the third quarter 2007 sales of $11.1 billion. Net sales for the nine months of 2008 were $31.6 billion, a 2% increase over the $31.0 billion recorded in the comparable 2007 period. For the three months ended September 28, 2008, the overall decrease in Net sales primarily was due to lower deliveries of combat aircraft in Aeronautics and commercial satellites in Space Systems. For the nine months ended September 28, 2008, net sales increases in IS&GS and Electronic Systems partially were offset by declines in Aeronautics and Space Systems. The net sales increase in Electronic Systems primarily was due to higher volume on Missiles & Fire Control programs. The increase in IS&GS' net sales was due to higher volume on Global Services activities. These

increases partially were offset by declines in combat aircraft deliveries in Aeronautics and commercial satellite deliveries in Space Systems.

Other income (expense), net was $120 million for the third quarter of 2008 compared to $17 million recorded in the comparable 2007 period. Other income (expense), net for the nine months ended September 28, 2008 and September 30, 2007 was $401 million and $202 million, respectively. In both periods, the increase was primarily due to higher equity earnings from ULA and the benefits from the impact of certain items included in Other income (expense), net (see Note 7 under the caption "Matters Included in Earnings").

Operating profit for the third quarter of 2008 was $1,242 million, an increase of 7% from the $1,163 million recorded in the comparable 2007 period. Operating profit for the nine months ended September 28, 2008 was $3,783 million, a 14% increase over the $3,312 million recorded in the comparable 2007 period. During the quarter and nine months ended September 28, 2008, Operating profit increased in every business unit except Aeronautics, which declined slightly due to the lower volume on F-16 programs. In both periods, Operating profit was favorably impacted by the decline in the FAS/CAS pension adjustment and by the benefits of certain items included in Other income (expense), net.

Other non-operating income (expense), net was an expense of $13 million in the third quarter of 2008 as compared to income of $35 million in the third quarter of 2007. For the nine months ended September 28, 2008, Other non-operating income (expense), net was income of $14 million compared to income of $139 million for the nine months ended September 30, 2007. In both periods, the decrease was primarily due to lower interest income on invested cash balances and unrealized losses on marketable securities held to fund certain employee benefit obligations.

Interest expense for the third quarter and nine months ended September 28, 2008 was $85 million and $264 million, respectively, as compared to $79 million and $265 million in the comparable 2007 periods. The increase for the three months ended September 28, 2008 was mainly driven by interest expense related to the new debt issued in the first quarter of 2008. For the nine months ended September 28, 2008, the slight decrease was caused by the August 2008 redemption of the contingent convertibles offset by interest expense on the new debt issued in the first quarter of 2008.

Our effective income tax rates were 31.6% and 32.2% for the quarter and nine months ended September 28, 2008 and 31.5% and 29.9% for the comparable 2007 periods. The effective rates for all periods were lower than the statutory rate of 35% due to tax deductions for U.S. manufacturing activities and dividends related to our employee stock ownership plan. The effective tax rate for the nine month period in 2008 is higher than the comparable period in 2007 primarily due to the expiration of the research tax credit at the end of 2007 and a benefit recorded in the first quarter of 2007 arising from the closure of the IRS examination of the 2003 and 2004 tax years.

The Emergency Economic Stabilization Act of 2008 signed by the President on October 3, 2008 retroactively extends the research and development tax credit for 2 years, from January 1, 2008 to December 31, 2009, and increases the alternative simplified R&D credit rate from 12% to 14% for calendar year 2009. As a result of these changes, we expect to record additional earnings of approximately $38 million in the fourth quarter of 2008.

Net earnings for the third quarter of 2008 were $782 million ($1.92 per share) compared to $766 million ($1.80 per share) reported in the third quarter of 2007. Net earnings for the nine months ended September 28, 2008 were $2,394 million ($5.82 per share) compared to $2,234 million ($5.21 per share) reported in the comparable 2007 period.

DISCUSSION OF BUSINESS SEGMENTS

The following tables of financial information and related discussions of the results of operations of our business segments are consistent with the presentation of segment information in Note 6. In our discussions of comparative results, changes in Net sales and Operating profit are generally expressed in terms of volume and/or performance. Volume refers to increases (or decreases) in sales resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes typically include a corresponding change in Operating profit based on the estimated profit rate at completion for a particular contract for design, development and production activities.

Changes in segment Operating profit are also expressed in terms of performance. Performance generally refers to changes in contract profit rates at completion. These changes on our contracts for products usually relate to profit recognition associated with revisions to total estimated costs at completion of the contract that reflect improved (or deteriorated) operating or award fee performance on a particular contract. Changes in estimates of Net sales and Operating profit on contracts for products are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods.

The Aeronautics segment generally includes fewer programs that have much larger sales and operating results than programs included in the other segments. Therefore, due to the larger number of comparatively smaller programs in the remaining segments, the discussions of the results of operations of these business segments generally focus on lines of business within the segments rather than on specific programs.

Aeronautics

Aeronautics' operating results included the following:



                              Quarter Ended                     Nine Months Ended
                     September 28,     September 30,     September 28,      September 30,
                         2008              2007              2008               2007
                                                (In millions)
 Net sales          $         2,917   $         3,342   $         8,608    $         9,299
 Operating profit   $           375   $           414   $         1,064    $         1,091

Net sales for Aeronautics decreased by 13% for the quarter and 7% during the nine months of 2008 from the comparable 2007 periods. In both periods, decreases in Combat Aircraft and Air Mobility sales more than offset increases in Other Aeronautics Programs. The decrease in Combat Aircraft for both the quarter and the nine months primarily was due to lower volume on F-16 and F-35 programs. The decrease in Air Mobility for the quarter and nine months primarily was due to lower volume on the C-130J program, including deliveries and support activities, and lower volume on other air mobility programs. There were three C-130J deliveries in the third quarter of 2008 and four in the comparable 2007 period. There were nine C-130J deliveries during the nine months in both 2008 and 2007. The increase in Other Aeronautics Programs for both periods mainly was due to higher volume in sustainment services activities.

Operating profit decreased by 9% for the quarter and 2% for the nine months of 2008 from the comparable 2007 periods. During the quarter, operating profit declined in Combat Aircraft, Air Mobility and Other Aeronautics Programs. In Combat Aircraft, the decline mainly was due to lower volume on F-16 programs. The decrease in operating profit in Air Mobility primarily was attributable to lower volume on C-130 programs. The decrease in Other Aeronautics Programs mainly was due to performance on a P-3 modification contract. During the nine month period,

operating profit declines in Combat Aircraft and Air Mobility partially were offset by an increase in Other Aeronautics Programs. In Combat Aircraft, the decline mainly was due to lower volume on F-16 programs. In Air Mobility, operating profit decreased mainly due to performance on C-5 programs and lower volume on C-130J support programs, which partially were offset by improved performance on the C-130J deliveries in 2008. The increase in Other Aeronautics Programs mainly was due to higher volume in sustainment services activities, which partially was offset by a decrease in operating profit due to performance on a P-3 modification contract.

Electronic Systems

Electronic Systems' operating results included the following:



                              Quarter Ended                     Nine Months Ended
                     September 28,     September 30,     September 28,      September 30,
                         2008              2007              2008               2007
                                                (In millions)
 Net sales          $         2,802   $         2,827   $         8,686    $         8,269
 Operating profit   $           364   $           346   $         1,139    $         1,050

Net sales for Electronic Systems decreased by 1% for the quarter and increased 5% for the nine months of 2008 from the comparable 2007 periods. During the quarter, lower sales volume on platform integration activities at Platform, Training & Energy (PT&E) and radar systems activities at Maritime Systems & Sensors (MS2) were offset by higher sales volume on tactical missile and fire control programs at Missiles & Fire Control (M&FC). For the nine month period, sales increases in M&FC and MS2 more than offset a decline in PT&E. The increase in M&FC mainly was due to higher volume on tactical missile and fire control programs. The increase in MS2 was attributable to higher volume on surface systems, radar systems and undersea systems activities. The decline in PT&E mainly was due to lower volume on platform integration activities.

Operating profit for Electronic Systems increased by 5% for the quarter and 8% for the nine months of 2008 from the comparable 2007 periods. In the quarter, operating profit increases in MS2 and PT&E more than offset a decline in M&FC. The increase in MS2 mainly was attributable to improved performance on surface systems programs. The increase at PT&E primarily was due to improved performance on distribution technology and platform integration activities. The decline in M&FC was attributable to fire control and tactical missile programs. During the nine month period, operating profit increases at M&FC and MS2 more than offset a decrease at PT&E. The increase in M&FC mainly was due to higher volume on tactical missile programs and improved performance on air defense programs. The increase in MS2 mainly was attributable to higher volume and improved performance on surface systems and radar systems programs. The decrease at PT&E primarily was due to performance on platform integration activities.

Information Systems & Global Services

Information Systems & Global Services' operating results included the following:



                              Quarter Ended                     Nine Months Ended
                     September 28,     September 30,     September 28,      September 30,
                         2008              2007              2008               2007
                                                (In millions)
 Net sales          $         2,950   $         2,713   $         8,312    $         7,378
 Operating profit   $           267   $           245   $           769    $           674

Net sales for IS&GS increased by 9% for the quarter and 13% for the nine months of 2008 from the comparable 2007 periods. Sales increased in all three lines of business for both the

quarter and the nine month periods. The increase in Global Services principally was due to global and mission services activities and Pacific Architect & Engineers (PAE) programs. The increase in Information Systems was due to higher volume on enterprise solutions & services activities. The increase in Mission Solutions primarily was driven by mission and combat support solutions activities as well as by transportation and security solutions.

Operating profit for IS&GS increased by 9% for the quarter and 14% for the nine months of 2008 from the comparable 2007 periods. In both the quarter and the nine month periods, the increase in operating profit was driven by Global Services and Mission Solutions. Mission Solutions operating profit increased due to higher volume and improved performance on secure enterprise solutions as well as mission and combat support solutions activities. The increase in Global Services operating profit primarily was attributable to improved performance on global services and PAE programs. In the quarter, Information Systems operating profit declines mainly were due to performance on mission service and enterprise solutions & services activities. During the nine month period, Information Systems operating profit increased due to higher volume on information technology programs and a benefit from a contract restructuring during the first quarter of 2008, which more than offset declines in mission services activities.

Space Systems

Space Systems' operating results included the following:



                              Quarter Ended                     Nine Months Ended
                     September 28,     September 30,     September 28,      September 30,
                         2008              2007              2008               2007
                                                (In millions)
 Net sales          $         1,908   $         2,213   $         5,993    $         6,075
 Operating profit   $           244   $           221   $           743    $           620

Net sales for Space Systems decreased by 14% for the quarter and 1% for the nine months of 2008 from the comparable 2007 periods. In both periods, a sales decline in Satellites partially was offset by growth in Space Transportation. In Satellites, sales declined due to lower volume in commercial and government satellite activities in both periods. No commercial satellites were delivered during the third quarter of 2008 as compared to two deliveries in the comparable 2007 period. There were two commercial satellite deliveries during the nine months of 2008 and three during the comparable 2007 period. The sales growth in Space Transportation primarily was due to higher volume on the Orion program.

Operating profit increased by 10% for the quarter and 20% for the nine months of 2008 from the comparable 2007 periods. In both periods, the increase in operating profit was due to Space Transportation, which partially was offset by a decline in Satellites. In Space Transportation, the increase mainly was attributable to higher equity earnings on the United Launch Alliance joint venture, volume on the Orion program and the results from successful negotiations of a terminated commercial launch service contract in the first quarter of 2008. The improvement in ULA's earnings also reflects the absence in 2008 of a charge recognized in the third quarter of 2007 for an asset impairment on the Delta II medium lift launch vehicles. In Satellites, operating profit declined in the quarter due to lower volume on commercial satellite activities and declined during the nine month period due to lower volume on government satellite programs.

Unallocated Corporate Income (Expense), Net

The following table shows the components of Unallocated Corporate income
(expense), net. For a discussion of the FAS/CAS pension adjustment and other
types of items included in Unallocated Corporate income (expense), net, see Note
6 to the financial statements in this Form 10-Q.



                                                Quarter Ended                                 Nine Months Ended
                                    September 28,            September 30,          September 28,            September 30,
                                         2008                    2007                    2008                    2007
                                                                        (In millions)
FAS/CAS pension adjustment         $             32         $           (18 )      $             96         $           (46 )
Items not considered in
segment operating performance                    44                      -                      145                      71
Stock compensation expense                      (40 )                   (34 )                  (115 )                  (116 )
Other, net                                      (44 )                   (11 )                   (58 )                   (32 )

                                   $             (8 )       $           (63 )      $             68         $          (123 )

The following table shows the CAS cost that is included as expense in the segments' operating results, the related FAS expense, and the resulting FAS/CAS pension adjustment:

                                              Quarter Ended                                 Nine Months Ended
                                   September 28,           September 30,          September 28,            September 30,
                                       2008                    2007                    2008                    2007
                                                                      (In millions)
FAS 87 expense                   $            (116 )      $          (175 )      $           (347 )       $          (518 )
Less: CAS cost                                (148 )                 (157 )                  (443 )                  (472 )

FAS/CAS pension adjustment
- income (expense)               $              32        $           (18 )      $             96         $           (46 )

The FAS/CAS pension adjustment resulted in income in the third quarter and first nine months of 2008 versus expense in the prior-year periods due to an increase in the discount rate and other factors such as our actual return on plan assets. This is consistent with the assumptions we used in computing the FAS 87 expense and CAS cost amounts as discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2007 Form 10-K under the caption "Critical Accounting Policies."

Certain items are excluded from segment results as part of senior management's evaluation of segment operating performance consistent with the management approach promulgated by FAS 131, Disclosures about Segments of an Enterprise and Related Information. For example, gains and losses related to the disposition of businesses or investments managed by Corporate, as well as other Corporate activities, are not considered by management in evaluating the operating performance of business segments. Therefore, for purposes of segment reporting, the following items were included in Unallocated Corporate income (expense), net for the respective quarters:

Third Quarter 2008 -

• A gain, net of state income taxes, of $44 million representing recognition of a portion of the deferred net gain recorded in connection with the transaction to sell our ownership interests in LKEI and ILS in 2006 (see Note 5).

First and Second Quarters of 2008 -

• Earnings, net of state income taxes, of $85 million from the elimination of reserves associated with various land sales that occurred in prior years (see Note 7); and

• A gain, net of state income taxes, of $16 million representing recognition of a portion of the deferred net gain recorded on the LKEI and ILS transaction in 2006.

On an aggregate basis, these items increased our Net earnings by $28 million ($0.07 per share) and $94 million ($0.23 per share) during the quarter and nine month periods ended September 28, 2008.

Third Quarter 2007 - None

First and Second Quarters of 2007 -

• A gain, net of state income taxes, of $25 million related to the sale of our remaining 20% interest in COMSAT International;

• A gain, net of state income taxes, of $25 million related to the sale of certain surplus land in California; and

• Earnings, net of state income taxes, of $21 million from the reversal of legal reserves following the settlement of certain litigation related to a waste remediation contract with the Department of Energy.

On an aggregate basis, these items increased our Net earnings by $46 million ($0.11 per share) during the nine months ended September 30, 2007. The first quarter of 2007 also was favorably affected by the closure of certain IRS examinations disclosed previously (see Note 7) which resulted in a reduction in our first quarter 2007 Income tax expense of $59 million ($0.14 per share). On a combined basis, these items increased Net earnings for the first six months of 2007 by $105 million ($0.25 per share).

LIQUIDITY AND CASH FLOWS

We have a balanced cash deployment and disciplined growth strategy to enhance shareholder value and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have invested in our business (e.g., capital expenditures, independent research and development), made selective acquisitions of businesses, repurchased shares, increased our dividends and opportunistically reduced and refinanced our debt.

Operating Activities

Net cash provided by operating activities for the nine months ended September 28, 2008 was $3,406 million, $415 million lower than the same period in 2007. The decrease primarily was attributable to a $584 million decline in cash provided by operating working capital as compared to 2007. This decline in operating working capital was primarily due to an increase in inventories on Combat Aircraft programs at Aeronautics and a decrease in customer advances and amounts in excess of costs incurred on government satellite programs at Space Systems and various programs in the Missiles & Fire Control line of business at Electronic Systems. The decrease in operating working capital partially was offset by an increase in cash between the nine month periods due to higher Net earnings. Operating working capital accounts consist of Receivables, . . .