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 Nine Months Ended September 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 third quarter of 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, we recorded additional non-cash interest expense of $3.7 million and $3.3 million, respectively.

Revenues - Our consolidated revenues were $277.1 million in the third quarter of 2009, a decrease of $1.5 million, or 1%, compared to the third quarter of 2008. The decrease in revenue was primarily due to decreased contract activity on communications satellite programs and missile defense programs, substantially offset by increased contract activity on the Commercial Resupply Services ("CRS") program awarded by the National Aeronautics and Space Administration ("NASA") in December 2008.

Our consolidated revenues were $843.0 million in the first nine months of 2009, a decrease of $20.4 million, or 2%, compared to the first nine months of 2008. The decrease in revenue was largely due to decreased contract activity on communications satellite programs and the Orion human spaceflight program partially offset by increased contract activity on the CRS program and national security satellite programs.

Operating Income - Operating income decreased $7.4 million, or 35%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a $4.0 million increase in unrecovered Taurus II launch vehicle research and development expenses and a $2.4 million decrease in satellites and space systems segment operating income. 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 third quarters of 2009 and 2008, our operating income was reduced by $7.0 million and $3.0 million, respectively, of unrecovered research and development expenses that exceeded our self-imposed ceiling on such costs.

Operating income decreased $29.9 million, or 44%, in the first nine months of 2009 compared to the first nine months of 2008 primarily due to a $13.1 million increase in unrecovered Taurus II launch vehicle research and development expenses and a $10.4 million decrease in advanced space programs operating income, both in the first nine months 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. In the first nine months of 2009 and 2008, our operating income was reduced by $20.1 million and $7.0 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 $31.4 million, or 11% of revenues, in the third quarter of 2009, a $19.7 million increase compared to $11.7 million, or 4% of revenues, in the third quarter of 2008. For the first nine months of 2009, research and development expenses totaled $81.2 million, or 10% of revenues, a $51.1 million increase compared to $30.1 million, or 3% of revenues, in the first nine months of 2008. In each period, these increases were primarily due to our Taurus II launch vehicle development program and the Commercial Orbital Transportation Services ("COTS") demonstration mission 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 $17.3 million and $9.4 million of the research and development expenses in the third quarter of 2009 and 2008, respectively, and $52.1 million and $21.1 million in the first nine months 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 third quarter and first nine months of 2009, we incurred $10.3 million and $32.0 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 NASA to design, build and demonstrate the new COTS space transportation system that will have 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 $285 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 nine months ended September 30, 2009, $28.7 million and $66.2 million, respectively, of costs were incurred on the COTS program, $16.0 million and $42.3 million, respectively, of which were proportionally offset by NASA funding, resulting in net research and development expenses of $12.7 million and $23.9 million, respectively, recorded by us. Through September 30, 2008,

$10.0 million of research and development costs were incurred on the COTS program, $8.9 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 September 30, 2009 and December 31, 2008, deferred revenue and customer advances on the accompanying balance sheet included $54.3 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 $2.0 million in the third quarter of 2009 and $3.3 million in the first nine months of 2009 to record the reduction in fair value of our investments.

Interest Income and Other - Interest income and other was $0.6 million in the third quarter of 2009, compared to $1.8 million in the third quarter of 2008. This decrease was primarily due to a reduction in interest income resulting from lower interest rates on our short-term cash investments.

Interest income and other increased to $8.0 million in the first nine months of 2009, compared to $5.6 million in the first nine months 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 a $1.1 million gain recognized on the sale of an investment in the second quarter of 2009. These increases were partially offset by a decrease in interest income resulting from lower interest rates on our short-term cash investments.

Interest Expense - Interest expense was $2.3 million and $2.2 million in the third quarter of 2009 and 2008, respectively, and was $6.7 million and $6.6 million in the first nine months of 2009 and 2008, respectively, attributable to our $143.8 million of long-term debt.

Income Taxes - We recorded an income tax provision of $0.5 million and $8.1 million in the third quarter of 2009 and 2008, respectively, and $8.2 million and $21.3 million in the first nine months of 2009 and 2008, respectively. Our annual effective income tax rate was 23.1% and 38.8% for the first nine months of 2009 and 2008, respectively. The decrease in the effective income tax rate was due to an increase in research and development tax credits in 2009. Additionally, the tax provision in the third quarter of 2009 includes an approximately $3 million favorable adjustment as a result of an increase in estimated research and development tax credits.

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 $15.9 million in the first nine months of 2008.

Net Income - Our net income for the third quarter of 2009 was $9.4 million, or $0.16 diluted earnings per share, compared to $11.4 million, or $0.19 diluted earnings per share in the third quarter of 2008.

Our net income for the first nine months of 2009 was $27.3 million, or $0.47 diluted earnings per share, compared to income from continuing operations of $33.6 million, or $0.55 diluted earnings per share in the first nine months of 2008. Net income in the first nine months of 2008, including income from discontinued operations, was $49.5 million, or $0.81 diluted earnings per share.

Segment Results for the Quarters and Nine Months Ended September 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:

                                            Third Quarter                            First Nine Months
(in thousands, except percentages)       2009          2008         % Change        2009          2008         % Change
Revenues                               $ 109,978     $ 111,815           (2%)     $ 346,290     $ 332,096             4%
Operating income                           3,227         8,416          (62%)        11,595        29,430           (61% )
Operating margin                             2.9 %         7.5 %                        3.3 %         8.9 %

Segment Revenues - Launch vehicles segment revenues decreased $1.8 million, or 2%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to decreased activity on missile defense interceptor launch vehicles contracts, largely offset by an increase in space launch vehicle revenues that was driven by activity on the CRS contract awarded by NASA in December 2008. Interceptor launch vehicles revenues decreased primarily due to the termination of the Kinetic Energy Interceptor ("KEI") program in the second quarter of 2009. Our interceptor launch vehicle programs accounted for 44% and 54% of total launch vehicles segment revenues in the third quarter of 2009 and 2008, respectively.

Launch vehicles segment revenues increased $14.2 million, or 4%, in the first nine months of 2009 compared to the first nine months 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. Interceptor launch vehicles revenues increased $6.7 million primarily due to an increase in contract activity on our Ground-based Midcourse Defense ("GMD") program in 2009, partially offset by lower KEI program revenues due to the contract termination discussed above. Interceptor launch vehicle contracts accounted for 51% of total launch vehicles segment revenues in the first nine months of both 2009 and 2008. Space launch vehicle program revenues increased $9.2 million primarily due to increases in Minotaur space launch program and CRS

contract activity. Suborbital revenues decreased primarily due to a decline in contract activity on target launch vehicle programs. Launch vehicles segment revenues for the first nine months 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 $5.2 million, or 62%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a $4.0 million increase in unrecovered Taurus II launch vehicle research and development expenses and cost increases on space launch vehicle programs due to anticipated launch delays. Operating income from interceptor launch vehicles contracts was $7.4 million in the third quarter of 2009 compared to $7.2 million in the third quarter of 2008.

Launch vehicles segment operating income declined $17.8 million, or 61%, in the first nine months of 2009 compared to the first nine months of 2008 primarily due to (i) a $13.1 million increase in unrecovered Taurus II launch vehicle research and development expenses, (ii) a $4.0 million profit adjustment recorded in the second quarter of 2008 in connection with the closure of a U.S. Government investigation and (iii) lower space launch vehicles operating income. The reduction in space launch vehicles operating income was largely due to cost increases in 2009 associated with an anticipated launch delay in one of our programs and a Taurus XL launch failure that occurred in February 2009. Partially offsetting these decreases was an increase in interceptor launch vehicles operating income primarily attributable to increased activity on our GMD program and favorable profit adjustments in connection with the KEI contract termination discussed above. Operating income from interceptor launch vehicles contracts was $24.1 million and $20.4 million in the first nine months of 2009 and 2008, respectively.

Segment operating margins were lower in the third quarter and first nine months of 2009 due to the increase in unrecovered research and development expenditures and cost increases resulting in lower margins on 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:

                                           Third Quarter                            First Nine Months
(in thousands, except percentages)       2009         2008         % Change        2009          2008         % Change
Revenues                               $ 75,650     $ 100,006           (24% )   $ 279,928     $ 314,486           (11% )
Operating income                          5,709         8,060           (29% )      21,243        23,507           (10% )
Operating margin                            7.5 %         8.1 %                        7.6 %         7.5 %

Segment Revenues - Satellites and space systems segment revenues decreased $24.4 million, or 24%, in the third quarter of 2009 compared to the third 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 67% and 72% of total segment revenues in the third quarter of 2009 and 2008, respectively.

Satellites and space systems segment revenues decreased $34.6 million, or 11%, in the first nine months of 2009 compared to the first nine months 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 first nine months of 2009 and 2008, respectively.

Segment Operating Income - Satellites and space systems segment operating income decreased $2.4 million, or 29%, in the third quarter of 2009 compared to the third quarter of 2008. The decrease was primarily due to the reduction in revenues mentioned above. In addition, the third quarter of 2009 includes the effect of the delay of a science satellite as well as the substantial completion of a relatively high profit margin technical services program. Communications satellite contracts accounted for 78% and 66% of total segment operating income in the third quarter of 2009 and 2008, respectively.

Satellites and space systems segment operating income decreased $2.3 million, or 10%, in the first nine months of 2009 compared to the first nine months of 2008 primarily due to the decrease in contract activity on communications satellite programs, the effect of the science satellite delay and substantial completion of the technical services program mentioned above, and the impact of a favorable $1.1 million adjustment in 2008 pertaining to the settlement of a technology satellite contract dispute. Communications satellite contracts accounted for 74% and 69% of total segment operating income in the first nine months of 2009 and 2008, respectively.

Segment operating margin decreased in the third quarter of 2009 due to lower profit margins on certain science and technology satellite programs. Segment operating margin increased in the first nine months of 2009 due to margin improvements on our communications satellite contracts partially offset by the effect of the favorable $1.1 million adjustment in 2008 discussed above.

Advanced Space Programs

Advanced space programs segment operating results were as follows:

                                           Third Quarter                          First Nine Months
(in thousands, except percentages)       2009         2008       % Change        2009          2008         % Change
Revenues                               $ 94,448     $ 68,608           38%     $ 224,847     $ 220,936             2%
Operating income                          4,646        4,524            3%         4,729        15,096           (69% )
Operating margin                            4.9 %        6.6 %                       2.1 %         6.8 %

Segment Revenues - Advanced space programs segment revenues increased $25.8 million, or 38%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to an increase in activity on the CRS contract awarded by NASA in December 2008, partially offset by a decrease in activity on the Orion program. The Orion program accounted for 30% and 61% of total segment revenues in the third quarter of 2009 and 2008, respectively.

Advanced space programs segment revenues increased $3.9 million, or 2%, during the first nine months of 2009 compared to the first nine months of 2008 primarily due to an increase in activity on the CRS contract and national security satellite programs, substantially offset by a reduction in contract activity on the Orion program. The Orion program accounted for 42% and 73% of total segment revenues in the first nine months of 2009 and 2008, respectively.

Segment Operating Income - Advanced space programs segment operating income increased marginally in the third quarter of 2009 compared to the third quarter of 2008 primarily due to the increase in revenues on the CRS program mentioned above, partially offset by a reduction in Orion program activity.

Advanced space programs segment operating income decreased $10.4 million, or 69%, in the first nine months of 2009 compared to the first nine months of 2008 primarily due to the reduction in Orion program activity, cost increases on certain national security satellite programs in the first half of 2009, and legal fees of approximately $1 million incurred in connection with a bid protest of the CRS contract. 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 the third quarter of 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 third quarter and first nine months of 2009 primarily due to cost increases on certain national security satellite programs.

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. Our firm backlog was approximately $1.5 billion and $2.1 billion at September 30, 2009 and December 31, 2008, respectively. While there can be no assurance, we expect to convert approximately $250 million of the September 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 $4.8 billion at September 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 nine months of 2009 was $79.2 million as compared to $87.0 million in the first nine months of 2008. The decrease in operating cash flows reflects the effect of lower operating income in 2009 partially offset by an increase in the net effect of changes in working capital and certain other assets and liabilities. In the first nine months of 2009, deferred revenues and customer advances increased $38.0 million primarily due to cash proceeds received in advance of contract performance, primarily on the CRS and COTS programs.

Cash Flow from Investing Activities

Cash flow used in investing activities in the first nine months of 2009 was $27.6 million as compared to $24.9 million of cash flow provided by investing activities in the first nine months of 2008. In the first nine months of 2009, we spent $28.8 million for capital expenditures, as compared to $18.9 million in the first nine months of 2008. In 2008, we received net proceeds of $41.6 million from the sale of our TMS business unit.

Cash Flow from Financing Activities

During the first nine months of 2009, we repurchased and retired 1.2 million shares of our common stock at a cost of $16.7 million. During the first nine months of 2008, we repurchased and retired 0.9 million shares of our common stock at a cost of $21.5 million. Also during the first nine months of 2009 and 2008, we received $2.0 million and $10.5 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% . . .