OVERVIEW

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as the company's 2008 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, which provides a more thorough discussion of the company's products and services, industry outlook, and business trends. See discussion of consolidated results starting on page I-22 and discussion of results by segment starting on page I-25.

Northrop Grumman provides technologically advanced, innovative products, services, and integrated solutions in information and technical services, aerospace, electronics, and shipbuilding to its global customers. As a prime contractor, principal subcontractor, partner, or preferred supplier, Northrop Grumman participates in many high-priority defense and commercial technology programs in the U.S. and abroad. Northrop Grumman conducts most of its business with the U.S. Government, principally the Department of Defense (DoD). The company also conducts business with local, state, and foreign governments and has domestic and international commercial sales.

Business Outlook and Operational Trends - There have been no material changes to the company's products and services, industry outlook, or business trends from those disclosed in the company's 2008 Form 10-K. While the U.S. and global economies are still experiencing some level of economic uncertainty, the adverse equity market conditions that led to the declines in the company's stock price have eased somewhat and the company's market capitalization exceeded its book value by approximately 20% as of March 31, 2009.

Economic Opportunities, Challenges, and Risks - While the upward trend in overall defense spending may slow, the company does not expect the overall demand for defense products or services to change significantly in the foreseeable future. Given the current era of irregular warfare, the company expects an increase in investment in persistent awareness with intelligence, surveillance and reconnaissance (ISR) systems, cyber warfare, and expanding the information available for the warfighter to make timely decisions. Battlefield lessons from Iraq and Afghanistan should influence force structure and spending decisions as the DoD looks to enhance current readiness. Many allied countries are focusing their development and procurement efforts on advanced electronics and information systems capabilities to enhance their interoperability with U.S. forces. The size of future U.S. and international defense budgets is expected to remain responsive to the international security environment. The fiscal year 2010 budget informally submitted by the President of the United States requests $533.7 billion in discretionary authority for the DoD base budget, representing approximately a 4 percent increase over the projected enacted level for fiscal 2009. It is possible the new Administration's informal budget will include reductions in certain programs in which the company participates or for which the company expects to compete, however the company believes that spending on recapitalization and modernization of homeland security and defense assets will continue to be a national priority, with particular emphasis on areas involving intelligence, persistent surveillance, directed energy systems, cyber security, energy-saving technologies and non-conventional warfare capabilities.

Recent Developments in U.S. Cost Accounting Standards (CAS) Pension Recovery Rules - The CAS Board published an Advance Notice of Proposed Rulemaking (ANPRM) on September 2, 2008 and plans on issuing a second ANPRM prior to the issuance of the Notice of Proposed rulemaking. The first ANPRM has provided a framework to partially harmonize the CAS rules with the Pension Protection Act of 2006 (PPA) requirements. The proposed CAS rule includes provisions for a transition period from the existing CAS requirement to a partially harmonized CAS requirement. After the PPA effective date for "eligible government contractors" (including Northrop Grumman), which were granted a delay in their PPA effective date, the proposed rule would partially mitigate the near-term mismatch between PPA-amended ERISA minimum contribution requirements which would not yet be recoverable under CAS. However, unless the final rule is revised, government contractors maintaining defined benefit pension plans in general would still experience a timing

NORTHROP GRUMMAN CORPORATION

mismatch between required contributions and the CAS recoverable pension costs. It is anticipated that contractors will be entitled to seek an equitable adjustment to prices of previously negotiated contracts subject to CAS for increased contract costs which result from mandatory changes required by the final rule. The CAS Board is required to issue its final rule no later than January 1, 2010.

Certain notable events or activities during the three months ended March 31, 2009, included the following:

Financial highlights

† Sales increased 8 percent to $8.3 billion.

† Total backlog at $76.9 billion.

† Share repurchases totaled $165 million.

Notable events

† LHD-8 completion of U.S. Navy acceptance sea trials.

† Voluntary pension pre-funding contributions totaling $214 million.

† Streamlining of the company's organizational structure from seven to five operating segments.

† Realignment of certain logistics, services, and technical support programs and assets from Information Systems and Electronic Systems to Technical Services.

† Settlement in April 2009 of the Department of Justice microelectronics claim and the company's claim against the U.S. Government for the termination of the TSSAM program. See Note 9 to the condensed consolidated financial statements in Part I, Item 1.

CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS

Use of Estimates - The company's financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from those estimates.

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below.


                                                               Three Months Ended
                                                                    March 31
    $ in millions, except per share                             2009         2008
    Sales and service revenues                               $  8,320      $ 7,724
    Cost of sales and service revenues                          6,916        6,522
    General and administrative expenses                           749          738
    Operating income                                              655          464
    Interest expense                                              (73 )        (77 )
    Other, net                                                      8           22
    Federal and foreign income taxes                              201          146
    Diluted earnings per share from continuing operations        1.17         0.76
    Net cash (used in) provided by operating activities          (172 )        194

NORTHROP GRUMMAN CORPORATION



Sales and Service Revenues
Sales and service revenues consist of the following:


                                                 Three Months Ended
                                                      March 31
                 $ in millions                    2009         2008
                 Product sales                 $  4,570      $ 4,394
                 Service revenues                 3,750        3,330

                 Sales and service revenues    $  8,320      $ 7,724

Sales and service revenues for the three months ended March 31, 2009, increased $596 million, or 8 percent, as compared with the same period in 2008, reflecting higher sales in all operating segments. Sales and service revenues in the three months ended March 31, 2008, were impacted by a sales step back of $134 million on the LHD-8 program. See the Segment Operating Results section below for further information.

Cost of Sales and Service Revenues
Cost of sales and service revenues is comprised of the following:

                                                       Three Months Ended
                                                            March 31
            $ in millions                               2009         2008
            Cost of Sales and Service Revenues
            Cost of product sales                    $  3,635      $ 3,729
            % of product sales                           79.5 %       84.9 %
            Cost of service revenues                    3,281        2,793
            % of service revenues                        87.5 %       83.9 %
            General and administrative expenses           749          738
            % of total sales and service revenues         9.0 %        9.6 %

            Cost of sales and service revenues       $  7,665      $ 7,260

Cost of Product Sales and Service Revenues - Cost of product sales for the three months ended March 31, 2009 decreased $94 million, or 3 percent over the same period in 2008 and decreased 540 basis points as a percentage of products sales over the same period. During the first quarter of 2008, the company recorded a $326 million pre-tax charge at Shipbuilding for cost growth on the LHD-8 and other Shipbuilding programs. See Segment Operating Results section below for further information.

Cost of service revenues for the three months ended March 31, 2009 increased $488 million, or 17 percent over the same period in 2008 and increased 360 basis points as a percentage of service revenues over the same period principally due to an increase in net pension expense as a result of negative returns on plan assets in 2008.

General and Administrative Expenses - In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general corporate expenses incurred at both the segment and corporate locations are considered allowable and allocable costs on government contracts. For most components of the company, these costs are allocated to contracts in progress on a systematic basis and contract performance factors include this cost component as an element of cost. General and administrative expenses primarily relate to segment operations. General and administrative expenses as a percentage of total sales and service revenues decreased to 9.0 percent for the three months ended March 31, 2009 from 9.6 percent for the comparable 2008 period.

Operating Income
The company considers operating income to be an important measure for evaluating its operating performance and, as is typical in the industry, defines operating income as revenues less the related cost of producing the

NORTHROP GRUMMAN CORPORATION

revenues and general and administrative expenses. Operating income for the company is further evaluated for each of the business segments in which the company operates.

Management of the company internally manages its operations by reference to "segment operating income." Segment operating income is defined as operating income before unallocated expenses and net pension adjustment, neither of which affect the segments, and the reversal of royalty income, which is classified as other income for financial reporting purposes. Segment operating income is one of the key metrics management uses to evaluate operating performance. Segment operating income is not, however, a measure of financial performance under U.S. GAAP, and may not be defined and calculated by other companies in the same manner.

The table below reconciles segment operating income to total operating income:

                                                Three Months Ended
                                                     March 31
                 $ in millions                  2009           2008
                 Segment operating income     $   791        $   458
                 Unallocated expenses             (53 )          (32 )
                 Net pension adjustment           (76 )           59
                 Royalty income adjustment         (7 )          (21 )

                 Total operating income       $   655        $   464

Segment Operating Income - Segment operating income for the three months ended March 31, 2009, increased $333 million, or 73 percent, as compared to the same period in 2008. Segment operating income was 9.5 percent and 5.9 percent of sales and service revenues for the three months ended March 31, 2009, and 2008, respectively. The increase in operating income is primarily due to a $326 million pre-tax charge on the LHD-8 and other Shipbuilding programs recorded in the first quarter of 2008. See the Segment Operating Results section below and Note 6 to the condensed consolidated financial statements in Part I, Item 1 for further information.

Unallocated Expenses - Unallocated expenses include the portion of corporate expenses not considered allowable or allocable under applicable U.S. Government Cost Accounting Standards (CAS) regulations and the Federal Acquisition Regulation (FAR), and therefore not allocated to the segments, such as management and administration, legal, environmental, certain compensation and retiree benefits, and other expenses. Unallocated expenses for the three months ended March 31, 2009, increased $21 million, or 66 percent, as compared to the same period in 2008. The increase is primarily the result of higher post-retirement benefit plan costs and litigation expenses.

Net Pension Adjustment - Net pension adjustment reflects the difference between pension expense determined in accordance with U.S. GAAP and pension expense allocated to the operating segments determined in accordance with CAS. For the three months ended March 31, 2009, and 2008, pension expense determined in accordance with U.S. GAAP was $210 million and $56 million, respectively, and pension expense determined in accordance with CAS amounted to $134 million and $115 million, respectively. The increases in GAAP and CAS pension expense are primarily the result of negative returns on plan assets in 2008.

Royalty Income Adjustment - Royalty income is included in segment operating income and reclassified to other income for financial reporting purposes. See Other, net below.

Interest Expense
Interest expense for the three months ended March 31, 2009, decreased $4 million, as compared with the same period in 2008. The decrease is primarily due to the conversion of the majority of the mandatorily redeemable convertible preferred stock in the first quarter of 2008, which reduced the related dividends paid during the 2008

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period (recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive income). See Note 4 to the condensed consolidated financial statements in Part I, Item 1.

Other, net
Other, net for the three months ended March 31, 2009, decreased $14 million as compared with the same period in 2008. The first quarter of 2008 included $19 million in royalty income at Electronic Systems. Other, net includes interest income for all periods presented.

Federal and Foreign Income Taxes
The company's effective tax rate on earnings from continuing operations for the three months ended March 31, 2009, was 34.1 percent compared with 35.7 percent for the same period in 2008.

Discontinued Operations
Discontinued operations for the three months ended March 31, 2008, represents the net operating results of the Electro-Optical Systems business formerly reported in the Electronic Systems segment. See Note 5 to the condensed consolidated financial statements in Part I, Item 1.

Diluted Earnings Per Share
Diluted earnings per share from continuing operations for the three months ended March 31, 2009, were $1.17 per share, as compared with $.76 per share in the same period in 2008. Earnings per share are based on weighted average diluted shares outstanding of 332.1 million for the three months ended March 31, 2009, and 349.3 million for the same period in 2008. See Note 7 to the condensed consolidated financial statements in Part I, Item 1.

Net Cash (Used In) Provided by Operating Activities For the three months ended March 31, 2009, net cash used in operating activities was $172 million compared to $194 million net cash provided by operating activities for the same period in 2008. The decrease of $366 million was primarily due to $214 million discretionary pension pre-funding and higher trade working capital requirements during the first three months of 2009.

SEGMENT OPERATING RESULTS

Basis of Presentation
In January 2009, the company streamlined its organizational structure by reducing the number of operating segments from seven to five. The five segments are Information Systems, which combines the former Information Technology and Mission Systems segments; Aerospace Systems, which combines the former Integrated Systems and Space Technology segments; Electronic Systems; Shipbuilding; and Technical Services. Intersegment sales and intersegment operating (loss) income between the former Integrated Systems and Space Technology segments, and between the former Information Technology and Mission Systems segments have been eliminated as part of the realignment. The creation of the Information Systems and Aerospace Systems segments is intended to strengthen alignment with customers, improve the company's ability to execute on programs and win new business, and enhance cost competitiveness.

During the first quarter of 2009, the company realigned certain logistics, services, and technical support programs and assets from the Information Systems and Electronic Systems segments to the Technical Services segment. This realignment is intended to strengthen the company's core capability in aircraft and electronics maintenance, repair and overhaul, life cycle optimization, and training and simulation services.

The sales and segment operating income in the following tables have been revised to reflect the above realignments for all periods presented.

During the first quarter of 2009, the company transferred certain optics and laser programs from Information Systems to Aerospace Systems. As the operating results of this business were not considered material, the prior year sales and operating income were not reclassified to reflect this business transfer.

NORTHROP GRUMMAN CORPORATION




                                                    Three Months Ended
                                                         March 31
              $ in millions                          2009         2008
              Sales and Service Revenues
              Information Systems                 $  2,491      $ 2,298
              Aerospace Systems                      2,456        2,361
              Electronic Systems                     1,788        1,545
              Shipbuilding                           1,375        1,264
              Technical Services                       632          558
              Intersegment eliminations               (422 )       (302 )

              Total sales and service revenues    $  8,320      $ 7,724

              Segment Operating Income
              Information Systems                 $    223      $   212
              Aerospace Systems                        258          252
              Electronic Systems                       229          209
              Shipbuilding                              84         (218 )
              Technical Services                        37           29
              Intersegment eliminations                (40 )        (26 )

              Total segment operating income      $    791      $   458

Operating Performance Assessment and Reporting - The company manages and assesses the performance of its businesses based on its performance on individual contracts and programs obtained generally from government organizations using the financial measures referred to below, with consideration given to the company's critical accounting policies and estimation process. Based on this approach and the nature of the company's operations, the discussion of results of operations generally focuses around the company's five segments versus distinguishing between products and services. Product sales are predominantly generated in the Aerospace Systems, Electronic Systems and Shipbuilding segments, while the majority of the company's service revenues are generated by the Information Systems and Technical Services segments.

Sales and Service Revenues - Period-to-period sales reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues incurred due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the margin rate for a particular contract.

Segment Operating Income - Segment operating income reflects the aggregate performance results of contracts within a business area or segment. Excluded from this measure are certain costs not directly associated with contract performance, including the portion of corporate expenses such as management and administration, legal, environmental, certain compensation and other retiree benefits, and other expenses not considered allowable or allocable under applicable CAS regulations and the FAR, and therefore not allocated to the segments. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to total estimated costs at completion of the contract (EAC) that reflect improved (or deteriorated) operating performance on a particular contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded.

Operating income may also be affected by, among other things, the effects of workforce stoppages, the effects of natural disasters (such as hurricanes and earthquakes), the resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized (such as warranty reserves) could also impact

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contract earnings. Where such items have occurred, and the effects are material, a separate description is provided.

Contract Descriptions
For convenience, a brief description of certain programs discussed in this Form 10-Q is included in the "Glossary of Programs" beginning on page I-34.

INFORMATION SYSTEMS

Business Description
Information Systems is a leading global provider of advanced solutions for the DoD, national intelligence, federal, civilian, state and local agencies, and commercial customers. Products and services are focused on the fields of command, control, communications, computers and intelligence (C4I), missile and air defense, airborne reconnaissance, intelligence management and processing, decision support systems, information technology (IT) systems engineering and systems integration. The segment consists of six areas of business: Command, Control and Communications (C3); Intelligence, Surveillance, and Reconnaissance (ISR); Intelligence; Civilian Agencies; Commercial, State & Local (CS&L); and Defense.

                                                    Three Months Ended
                                                         March 31
              $ in millions                          2009         2008
              Sales and Service Revenues          $  2,491      $ 2,298
              Segment Operating Income                 223          212
              As a percentage of segment sales         9.0 %        9.2 %

Sales and Service Revenues
Information Systems revenue for the three months ended March 31, 2009, increased $193 million, or 8 percent, as compared with the same period in 2008. The increase is primarily due to $72 million in higher sales at C3, $62 million in higher sales at Intelligence, and $48 million in higher sales at ISR, partially offset by $39 million in lower sales at CS&L. The increase at C3 is due to ramp-up on the Trailer Mounted Support System program, higher orders on the Integrated Base Defense Security System program, and ramp-up on the Airborne and Maritime/Fixed Stations Joint Tactical Radio Systems program. The increases at ISR and Intelligence are due to new and increased activity on existing restricted programs as well as the acquisition of 3001 International, Inc. in the fourth quarter of 2008. The decrease at CS&L is due to decreased activity on the New York City Wireless (NYCWiN) program.

Segment Operating Income
Operating income at Information Systems for the three months ended March 31, 2009, increased $11 million, or 5 percent, as compared with the same period in 2008. The increase is primarily due to $17 million from the higher sales volume discussed above, partially offset by lower performance results at C3 and CS&L. The decrease in operating income as a percentage of sales reflects lower performance on CS&L programs.

AEROSPACE SYSTEMS

Business Description
Aerospace Systems is a premier developer, integrator, producer and supporter of manned and unmanned aircraft, spacecraft, high- energy laser systems, microelectronics and other systems and subsystems critical to maintaining the nation's security and leadership in science and technology. These systems are used, primarily by government customers, in many different mission areas including intelligence, surveillance and reconnaissance; communications; battle management; strike operations; electronic warfare; missile defense; earth observation; space science; and space exploration. The segment consists of four areas of business: Strike and Surveillance

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