With the exception of historical information, the matters discussed within this Item 2 and elsewhere in this Form 10-Q include forward-looking statements that involve risks and uncertainties, many of which are beyond our control. Readers should be cautioned that a number of important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2008, may affect actual results and may cause actual results to differ materially from those anticipated or expected in any forward-looking statement. Historical results of operations may not be indicative of future operating results. We assume no obligation to update any forward-looking statements.

We develop and manufacture small- and medium-class rockets and space systems for commercial, military and civil government customers. Our primary products and services include the following:

· Launch Vehicles. Rockets that are used as interceptor and target vehicles for missile defense systems, small- and medium-class space launch vehicles that place satellites into Earth orbit, and suborbital launch vehicles that place payloads into a variety of high-altitude trajectories.

· Satellites and Space Systems. Small- and medium-class spacecraft that are used to enable global and regional communications and broadcasting, to conduct space-related scientific research, to carry out interplanetary and other deep-space exploration missions, to enable national security applications, to collect imagery and other remotely-sensed data about the Earth and demonstrate new space technologies.

· Advanced Space Programs. Human-rated space systems for Earth-orbit and lunar exploration, advanced launch systems for medium-class satellites, and small satellites and satellite subsystems primarily used for national security space programs and to demonstrate new space technologies.

The following discussion should be read along with our 2008 Annual Report on 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 for the Quarters and Six Months Ended June 30, 2009 and 2008

Prior Period Adjustment For Adoption of New Accounting Standard - As discussed in Note 3 to the accompanying financial statements, our 2008 financial statements have been adjusted as required for the adoption of a new accounting standard pertaining to our convertible debt. As a result of the new accounting standard, we recorded additional non-cash interest expense of $1.2 million and $1.1 million in the second quarter of 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, we recorded additional non-cash interest expense of $2.4 million and $2.2 million, respectively.

Revenues - Our consolidated revenues were $270.1 million in the second quarter of 2009, a decrease of $31.1 million, or 10%, compared to the second quarter of 2008. The decrease in revenue was primarily due to a decrease in contract activity on the Orion human space flight program and communications satellite programs.

Our consolidated revenues were $565.9 million in the first half of 2009, a decrease of $18.9 million, or 3%, compared to the first half of 2008. The decrease in revenue was primarily due to decreased contract activity on the Orion program, partially offset by a significant increase in contract activity on missile defense programs in the launch vehicles segment.

Operating Income - Operating income decreased $13.7 million, or 52%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a $5.2 million increase in unrecovered Taurus II launch vehicle research and development expenses, and a $4.7 million decrease in advanced space programs operating income, both occurring in the second quarter of 2009, and a $4.0 million favorable profit adjustment recorded in the second quarter of 2008 in connection with the closure of a U.S. Government investigation. Our research and development expenses are generally recoverable under contracts with the U.S. Government. For competitive reasons, we have established a self-imposed ceiling on the amount of research and development costs that we would recover under our U.S. Government contracts, although we believe that such costs would otherwise be allowable and recoverable. In the second quarters of 2009 and 2008, our operating income was reduced by $6.9 million and $1.7 million, respectively, of unrecovered research and development expenses that exceeded our self-imposed ceiling on such costs.

Operating income decreased $22.5 million, or 48%, in the first half of 2009 compared to the first half of 2008 primarily due to a $9.1 million increase in unrecovered Taurus II launch vehicle research and development expenses and a $10.5 million decrease in advanced space programs operating income, both in the first half of 2009, and the $4.0 million favorable profit adjustment in 2008 mentioned above. In the first half of 2009 and 2008, our operating income was reduced by $13.1 million and $3.9 million, respectively, of unrecovered research and development expenses that exceeded our self-imposed ceiling on such costs.

Research and Development Expenses - Research and development expenses are comprised of our product research and development activities. Our research and development expenses were $30.7 million, or 11% of revenues, in the second quarter of 2009, a $20.5 million increase compared to $10.2 million, or 3% of revenues, in the second quarter of 2008. For the first half of

2009, research and development expenses totaled $49.7 million, or 9% of revenues, a $31.3 million increase compared to $18.4 million, or 3% of revenues, in the first half of 2008. In each period, these increases were primarily due to our Taurus II launch vehicle development program discussed below.

Our launch vehicles and our advanced space programs business units are jointly engaged in a major product development program of a medium-capacity rocket called Taurus II that could substantially increase the payload capacity of our space launch vehicle platforms. Approximately $20.3 million and $6.3 million of the research and development expenses in the second quarter of 2009 and 2008, respectively, and $34.8 million and $11.7 million in the first half of 2009 and 2008, respectively, were attributable to the Taurus II program. We believe that we will continue to incur significant research and development expenses on the Taurus II development effort in the remainder of 2009 and through 2010.

The majority of our revenues are attributable to contracts with the U.S. Government and we believe that a majority of our research and development expenses are recoverable and billable under such contracts. Charging practices relating to research and development and other costs that may be charged directly or indirectly to government contracts are subject to audit by U.S. Government agencies to determine if such costs are reasonable and allowable under government contracting regulations and accounting practices. We are currently engaged in discussions with U.S. Government agencies regarding the allowability of research and development costs incurred during 2009 in connection with our Taurus II development program. We believe that such costs are allowable, although the U.S. Government has not yet made a determination. During the second quarter and first half of 2009, we incurred $13.4 million and $21.8 million, respectively, of expenses that have been recorded as allowable costs. If such costs were determined to be unallowable, we could be required to record revenue and profit reductions in future periods.

In the first quarter of 2008, we entered into an agreement with the National Aeronautics and Space Administration ("NASA") to design, build and demonstrate a new space transportation system under a program called Commercial Orbital Transportation Services ("COTS") that has the capability to deliver cargo and supplies to the International Space Station. Under the agreement, NASA has agreed to pay us $170 million in cash milestone payments, partially funding our project costs which are currently estimated to be approximately $270 million.

The COTS agreement is being accounted for as a best-efforts research and development cost-sharing arrangement. As such, the amounts funded by NASA are recognized proportionally as an offset to our COTS project research and development expenses. In the quarter and first six months ended June 30, 2009, $22.8 million and $37.5 million, respectively, of costs were incurred on the COTS program, $14.4 million and $26.3 million, respectively, of which were proportionally offset by NASA funding, resulting in net research and development expenses of $8.4 million and $11.2 million, respectively, recorded by us. Through June 30, 2008, $3.3 million of research and development costs were incurred on the COTS program, $2.9 million of which were funded by NASA. The net research and development expenses in 2009 and 2008 have been recorded as allowable costs under U.S. Government contracts. As of June 30, 2009 and December 31, 2008, deferred revenue and customer advances on the accompanying balance sheet included $51.1 million and $37.4 million, respectively, of cash received from NASA that had not yet been recognized as an offset to research and development expenses.

Investment Impairment Charge - We recorded an other-than-temporary impairment charge of $0.6 million in the second quarter of 2009 and $1.3 million in the first half of 2009 to record the reduction in fair value of one of our investments.

Interest Income and Other - Interest income and other was $1.8 million in the second quarter of 2009, compared to $1.5 million in the second quarter of 2008. This increase was primarily due to a $1.1 million gain recognized on the sale of an investment in the second quarter of 2009 partially offset by a reduction in interest income resulting from lower interest rates on our short-term cash investments.

Interest income and other increased to $7.4 million in the first half of 2009, compared to $3.8 million in the first half of 2008. This increase is attributable to a $5.3 million insurance recovery recorded in connection with the launch failure of our Taurus XL rocket in February 2009 and the $1.1 million gain recognized on the sale of an investment in the second quarter of 2009. These increases were offset by a $2.6 million decrease in interest income which resulting from lower interest rates on our short-term cash investments.

Interest Expense - Interest expense was $2.2 million in the second quarter of 2009 and 2008, and was $4.4 million and $4.3 million in the first half of 2009 and 2008, respectively, attributable to our $143.8 million of long-term debt.

Income Taxes - We recorded an income tax provision of $3.1 million and $5.0 million in the second quarter of 2009 and 2008, respectively, and $7.7 million and $13.2 million in the first half of 2009 and 2008, respectively. The decrease in income tax expense was due to an increase in tax credits related to research and development programs.

Our annual effective income tax rate was 30.0% and 39.4% for the first half of 2009 and 2008, respectively. The decrease in the effective tax rate is primarily due to the increase in research and development tax credits mentioned above.

Income from Discontinued Operations - In June 2008 we sold our transportation management systems ("TMS") business unit and we recognized a $24.1 million pretax gain, or $14.8 million after-tax, reported in discontinued operations in 2008. The after-tax income from operations related to TMS was $0.2 and $1.1 million in the second quarter and first half of 2008, respectively.

Net Income - Our net income for the second quarter of 2009 was $8.7 million, or $0.15 diluted earnings per share, compared to income from continuing operations of $10.1 million, or $0.17 diluted earnings per share in the second quarter of 2008. Net income in the second quarter of 2008, including income from discontinued operations, was $25.1 million, or $0.41 diluted earnings per share.

Our net income for the first half of 2009 was $17.9 million, or $0.31 diluted earnings per share, compared to income from continuing operations of $22.2 million, or $0.36 diluted earnings per share in the first half of 2008. Net income in the first half of 2008, including income from discontinued operations, was $38.1 million, or $0.62 diluted earnings per share.

Segment Results for the Quarters and Six Months Ended June 30, 2009 and 2008

Our products and services are grouped into three reportable segments: (i) launch vehicles; (ii) satellites and space systems; and (iii) advanced space programs. Corporate office transactions that have not been attributed to a particular segment, as well as consolidating eliminations and adjustments, are reported in corporate and other.

The following tables of financial information and related discussion of the results of operations of our business segments are consistent with the presentation of segment information in Note 4 to the financial statements in this Form 10-Q.

Launch Vehicles

Launch vehicles segment operating results were as follows:

                                                   Second Quarter                            First Six Months
(in thousands, except percentages)       2009          2008         % Change        2009          2008         % Change
Revenues                               $ 117,072     $ 115,024             2%     $ 236,312     $ 220,281             7%
Operating income                           4,082        13,399          (70%)         8,368        21,014          (60%)
Operating margin                             3.5 %        11.6 %                        3.5 %         9.5 %

Segment Revenues - Launch vehicles segment revenues increased $2.0 million, or 2%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to increased activity on missile defense interceptor launch vehicles contracts partially offset by a decrease in suborbital program revenues in 2009 and a one-time revenue adjustment in 2008 discussed below. Revenues from interceptor launch vehicles contracts increased $7.7 million due to an increase in contract activity on our Ground-based Midcourse Defense ("GMD") and Kinetic Energy Interceptor ("KEI") missile defense interceptor launch vehicle programs in 2009. Our interceptor launch vehicle programs accounted for 53% and 47% of total launch vehicles segment revenues in 2009 and 2008, respectively. During the second quarter of 2009, we were notified that the KEI program was terminated for convenience by the Missile Defense Agency. Suborbital revenues decreased as a result of a decrease in activity on our Abort Test Booster and missile defense target systems programs during the second quarter of 2009. Launch vehicles segment revenues for the second quarter of 2008 included a one-time $4.0 million favorable revenue adjustment related to the closure of a U.S. Government investigation.

Launch vehicles segment revenues increased $16.0 million, or 7%, in the first half of 2009 compared to the first half of 2008 primarily due to increased activity on missile defense interceptor launch vehicle programs and space launch vehicle programs partially offset by a decrease in suborbital program revenues in 2009 and a one-time revenue adjustment in 2008. Revenues from interceptor launch vehicles contracts increased $18.7 million primarily due to an

increase in contract activity on GMD and KEI programs in 2009. Interceptor launch vehicle contracts accounted for 54% and 49% of total launch vehicles segment revenues in 2009 and 2008, respectively. Space launch vehicle program revenues increased primarily due to an increase in Minotaur space launch program activity during the second quarter of 2009. Suborbital revenues decreased primarily due to a decline in contract activity on target launch vehicle programs. Launch vehicles segment revenues for the first half of 2008 included a one-time $4.0 million favorable revenue adjustment related to the closure of a U.S. Government investigation.

Segment Operating Income - Launch vehicles segment operating income decreased $9.3 million, or 70%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a $5.2 million increase in unrecovered Taurus II launch vehicle research and development expenses and cost increases in 2009 associated with an anticipated launch delay of one of our space launch vehicle programs and the impact of a $4.0 million profit adjustment recorded in the second quarter of 2008 in connection with the closure of a U.S. Government investigation. Interceptor launch vehicle operating income increased primarily due to increased activity on the GMD and KEI programs. Operating income from interceptor launch vehicles contracts was $8.6 million and $6.5 million in the second quarter of 2009 and 2008, respectively.

Launch vehicles segment operating income declined $12.6 million, or 60%, in the first half of 2009 compared to the first half of 2008 primarily due to a $9.1 million increase in unrecovered Taurus II launch vehicle research and development expenses and cost increases in 2009 associated with an anticipated launch delay of one of our space launch vehicle programs and the impact of a $4.0 million profit adjustment recorded in the second quarter of 2008 in connection with the closure of a U.S. Government investigation. Interceptor launch vehicle operating income increased primarily due to increased activity on the GMD and KEI programs. Operating income from interceptor launch vehicles contracts was $16.7 million and $13.2 million in the first half of 2009 and 2008, respectively.

Segment operating margins were lower in the second quarter and first half of 2009 due to the increase in unrecovered research and development expenditures and cost increases on certain space launch vehicle programs in 2009 and the impact of the $4.0 million profit adjustment recorded in the second quarter of 2008 in connection with the closure of a U.S. Government investigation.

Satellites and Space Systems

Satellites and space systems segment operating results were as follows:

                                                  Second Quarter                            First Six Months
(in thousands, except percentages)       2009         2008         % Change        2009          2008         % Change
Revenues                               $ 94,121     $ 108,078          (13%)     $ 204,278     $ 214,480           (5%)
Operating income                          7,734         7,578             2%        15,534        15,447             1%
Operating margin                            8.2 %         7.0 %                        7.6 %         7.2 %

Segment Revenues - Satellites and space systems segment revenues decreased $14.0 million, or 13%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to decreased activity on communications satellite contracts as a result of the substantial completion of certain satellites. Communications satellite revenues accounted for 72% and 74% of total segment revenues in the second quarter of 2009 and 2008, respectively.

Satellites and space systems segment revenues decreased $10.2 million, or 5%, in the first half of 2009 compared to the first half of 2008 primarily due to decreased activity on communications satellite contracts as a result of the substantial completion of certain satellites. Communications satellite revenues accounted for 74% of total segment revenues in the first half of each of 2009 and 2008.

Segment Operating Income - Satellites and space systems segment operating income increased marginally in the second quarter of 2009 compared to the second quarter of 2008. The increase was due to cost reductions on certain communications satellite contracts in 2009, partially offset by the impact of $1.1 million of profit recorded in the second quarter of 2008 pertaining to the settlement of a technology satellite contract dispute. Communications satellite contracts accounted for 75% and 59% of total segment operating income in the second quarter of 2009 and 2008, respectively.

Satellites and space systems segment operating income increased marginally in the first half of 2009 compared to the first half of 2008 primarily due to improved profit performance on communications satellite programs partially offset by the impact of the favorable $1.1 million adjustment in 2008 pertaining to the settlement of a technology satellite contract dispute mentioned above. Communications satellite contracts accounted for 72% and 70% of total segment operating income in the first half of 2009 and 2008, respectively.

Segment operating margin increased in the second quarter and first six months of 2009 due to cost reductions and improved profit performance on certain communications satellite programs.

Advanced Space Programs

Advanced space programs segment operating results were as follows:

                                                  Second Quarter                           First Six Months
(in thousands, except percentages)         2009         2008      % Change           2009          2008      % Change
Revenues                               $ 62,053     $ 79,719          (22%)     $ 130,399     $ 152,328          (14%)
Operating income                          1,005        5,730          (82%)            83        10,572          (99%)
Operating margin                            1.6 %        7.2 %                        0.1 %         6.9 %

Segment Revenues - Advanced space programs segment revenues decreased $17.7 million, or 22%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a reduction in contract activity on the Orion human spacecraft program partly offset by an increase in national security satellite program activity related to recently awarded contracts. The Orion program accounted for 52% and 75% of total segment revenues in the second quarter of 2009 and 2008, respectively.

Advanced space programs segment revenues decreased $21.9 million, or 14%, during the first half of 2009 compared to the first half of 2008 primarily due to a reduction in contract activity on the Orion human spacecraft program partly offset by an increase in national security satellite program activity related to recently awarded contracts. The Orion program accounted for 51% and 79% of total segment revenues in the first half of 2009 and 2008, respectively.

Segment Operating Income - The advanced space programs segment operating income decreased $4.7 million, or 82%, in the second quarter of 2009 compared to the second quarter of 2008. This decrease resulted from a reduction in Orion program activity and cost increases on certain national security satellite programs.

Advanced space programs segment operating income decreased $10.5 million in the first half of 2009 compared to the first half of 2008 primarily as a result of a reduction in Orion program activity, cost increases on certain national security satellite programs and legal fees of approximately $1 million incurred in connection with a bid protest of the NASA Commercial Resupply Services contract awarded to us in late 2008. The protest was denied by the U.S. Government Accountability Office during the second quarter of 2009 and the award to Orbital was upheld. In July 2009, the same protestor filed a substantially similar bid protest with the U.S. Court of Federal Claims. We are continuing to perform work under this contract in accordance with its terms.

This segment's operating margin decreased significantly in the second quarter and first half of 2009 as a result of the decrease in segment operating income discussed above.

Corporate and Other

Corporate and other revenues were comprised solely of the elimination of intercompany revenues. There was no corporate and other operating income in 2009. Corporate and other operating income in 2008 consisted solely of corporate general and administrative expenses associated with a discontinued business unit that was sold in the second quarter of 2008.

Backlog

Firm backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in revenues, and including government contract orders not yet funded and our estimate of potential award fees. In the second quarter of 2009, the company was notified that the KEI program was terminated for convenience by the Missile Defense Agency, resulting in a $375 million reduction in firm backlog. Our firm backlog was approximately $1.6 billion and $2.1 billion at June 30, 2009 and December 31, 2008, respectively. While there can be no assurance, we expect to convert approximately $500 million of the June 30, 2009 firm backlog into revenue during the remainder of 2009.

Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections. The termination for convenience of the KEI program in the second quarter of 2009 resulted in a $695 million reduction in total backlog. Total backlog was approximately $4.9 billion at June 30, 2009 and $5.9 billion at December 31, 2008.

Liquidity and Capital Resources

Cash Flow from Operating Activities

Cash flow from operating activities in the first half of 2009 was $44.3 million as compared to $42.9 million in the first half of 2008. The increase in operating cash flows was principally due to an increase in deferred revenues and customer advances associated with our advanced space programs segment partially offset by a reduction in accounts payable and accrued expenses.

Cash Flow from Investing Activities

Cash flow used in investing activities in the first half of 2009 was $17.0 million as compared to $31.3 million of cash flow provided by investing activities in the first half of 2008. In the first half of 2009, we spent $18.4 million for capital expenditures, as compared to $11.9 million in the first half of 2008. In addition, during the second quarter of 2009 we received $1.1 million from the sale of an investment. In 2008, we received net proceeds of $39.9 million from the sale of our TMS business unit and $2.2 million from the sale of real estate.

Cash Flow from Financing Activities

During the first half of 2009 and 2008, we repurchased and retired 1.2 million and 0.6 million shares of our common stock at a cost of $16.7 million and $15.1 million, respectively. During the first half of 2009 and 2008, we received $1.3 million and $6.2 million, respectively, from the issuance of common stock in connection with stock option exercises and employee stock plan purchases.

Convertible Notes - In December 2006, we issued $143.8 million of 2.4375% convertible senior subordinated notes due 2027 with interest payable semi-annually each January 15 and July 15. The convertible notes are convertible into cash, or a combination of cash and common stock at our election, based on an initial conversion rate of 40.8513 shares of our common stock per $1,000 in principal amount of the convertible notes (equivalent to an initial conversion price of approximately $24.48 per share) under certain circumstances.

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