Certain statements contained in this Item 2 and elsewhere in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, those related to our financial outlook, liquidity, goals, business strategy, projected plans and objectives of management for future operating results, and forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include the words "anticipate," "forecast," "expect," "believe," "should," "will," "intend," "plan" and words of similar substance. Such forward-looking statements are subject to risks, trends and uncertainties that could cause the actual results or performance of the company to be materially different from the forward-looking statement. Uncertainty surrounding factors such as continued government support and funding for key space and defense programs, new product development programs, product performance and market acceptance of products and technologies, achievement of contractual milestones, government contract procurement and termination risks, income tax rates and the outcome of our current discussions with the SEC regarding our financial reporting may materially impact Orbital's actual financial and operational results. Other risks, uncertainties and factors are discussed under the caption "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011. We are under no obligation to, and expressly disclaim any obligation or undertaking to update or alter any forward-looking statement, whether as a result of new information, subsequent events or otherwise, except as required by law.

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:

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

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

ท Advanced Space Programs - Human-rated space systems for Earth-orbit and deep-space exploration, and small- and medium-class satellites primarily used for national security space programs and to demonstrate new space technologies.

The following discussion should be read along with our 2011 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 Ended March 31, 2012 and 2011

Revenues - Our consolidated revenues were $338.0 million in the first quarter of 2012, an increase of $20.3 million, or 6%, compared to the first quarter of 2011 due to higher revenues in our launch vehicles segment and advanced space programs segment partially offset by a reduction in satellites and space systems segment revenues. Advanced space programs segment revenues increased $22.3 million, or 24%, due to increased activity on national security satellite contracts, partially offset by decreased activity on the International Space Station Commercial Resupply Services ("CRS") contract with NASA. Launch vehicles segment revenues increased $20.8 million, or 20%, due to increased activity on target launch vehicles partially offset by decreased activity on missile defense interceptors and space launch vehicles. Satellites and space systems segment revenues decreased $41.4 million, or 27%, due to decreased activity on communications satellite contracts and science and remote sensing satellite contracts partially offset by increased activity on space technical services contracts.

The growth in revenues also reflects a net decrease of $18.6 million in intersegment revenue eliminations in the first quarter of 2012 compared to the first quarter of 2011, due to a diminishing level of activity on Antares launch vehicles for the Commercial Orbital Transportation Services ("COTS") research and development program with NASA. Intersegment revenues included $11.8 million and $31.4 million in the first quarter of 2012 and 2011, respectively, pertaining to Antares production work performed in our launch vehicles segment as part of the COTS program that is being conducted in our advanced space programs segment.

The CRS contract accounted for 22% and 21% of consolidated revenues in the first quarter of 2012 and 2011, respectively. The launch vehicle portion of the CRS contract is reported in our launch vehicles segment and the remainder of the CRS contract is reported in our advanced space programs segment. CRS contract revenues totaled $74.4 million in the first quarter of 2012, an increase of $6.7 million, or 10%, due to a higher level of contract activity in the first quarter of 2012. Since the inception of the CRS program through March 31, 2012, a total of $703 million of revenues have been recognized on the contract.

Cost of Revenues - Our cost of revenues was $259.0 million in the first quarter of 2012, a decrease of $12.1 million, or 5%, compared to the first quarter of 2011. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. The decrease in our cost of revenues was primarily attributable to the decrease in contract activity in the satellites and space systems segment. Cost of revenues decreased $39.9 million in the satellites and space systems segment and increased $8.6 million in the advanced space programs segment and $0.6 million in the launch vehicles segment. Eliminations of intersegment cost of revenues decreased $18.6 million consistent with the decrease in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $27.9 million, or 8% of revenues, in the first quarter of 2012, a $10.7 million increase compared to $17.1 million, or 5% of revenues, in the first quarter of 2011. The majority of our research and development expenses in 2012 and 2011 were attributable to the COTS program and our Antares

launch vehicle development program. The increase in research and development expenses was attributable to activities related to the planned launch of the Antares rocket and completion of the COTS program in 2012.

The COTS program 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, including associated general and administrative expenses. Under the COTS agreement, as amended, as of March 31, 2012, NASA has agreed to pay us $288 million in cash milestone payments, partially funding our program costs which are currently estimated to be approximately $472 million. We expect to complete this program in the second half of 2012. The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

                                                 First Quarter         Inception
                                               2012        2011         To Date
Research and development costs incurred (1)   $  21.2     $  42.0     $     439.1
Less amounts funded by NASA                     (11.0 )     (34.1 )        (271.3 )
Net research and development expenses         $  10.2     $   7.9     $     167.8


ญญญญญญ__________________________________________

Research and development expenses attributable to our Antares launch vehicle development program were $11.6 million and $7.1 million in the first quarter of 2012 and 2011, respectively.

We believe that the majority of our research and development expenses are recoverable and billable under our contracts with the U.S. Government. 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 believe that the research and development costs incurred in connection with our Antares development program are allowable, although the U.S. Government has not yet made a final determination. We incurred $11.6 million and $7.1 million of such expenses that have been recorded as allowable costs for the quarter ended March 31, 2012 and 2011, respectively. Since the inception of the Antares program through March 31, 2012, we have incurred $165.0 million of such 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.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $27.3 million and $19.4 million, or 8% and 6% of revenues, in the first quarter of 2012 and 2011, respectively. Selling, general and administrative expenses include the costs of our finance, legal, administrative and general management functions, as well as bid, proposal and marketing costs. Selling, general and administrative expenses increased $7.9 million, or 41%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to bid, proposal and marketing costs pertaining to new business prospects in the advanced space programs segment.

Operating Income - Our consolidated operating income was $23.8 million in the first quarter of 2012, an increase of $13.7 million, or 136%, compared to the first quarter of 2011 due to operating income increases in the launch vehicles segment and the advanced space programs segment partially offset by lower operating income in the satellite and space systems segment. Launch vehicles segment operating income increased $14.0 million largely due to an adjustment in connection with a March 2011 Taurus XL launch failure that reduced operating income in the first quarter of 2011 by $11.3 million. Advanced space programs segment operating income increased $2.7 million primarily due to increased activity on national security satellite contracts. Satellites and space systems segment operating income decreased $2.9 million principally due to decreased activity on communications satellite contracts.

Total operating income from the CRS contract was $3.4 million and $3.3 million in the first quarter of 2012 and 2011, respectively. Since the inception of the CRS program through March 31, 2012, a total of $35 million of operating income has been recognized on the contract.

Interest Income and Other - Interest income and other was $0.2 million in the first quarter of 2012, compared to $11.5 million in the first quarter of 2011. Interest income and other in the first quarter of 2011 included the recognition of an $11.3 million insurance recovery pertaining to the Taurus XL launch failure discussed above.

Interest Expense - Interest expense was $3.1 million and $2.5 million in the first quarter of 2012 and 2011, respectively, primarily attributable to interest on our long-term convertible debt. Interest expense also includes interest expense associated with our five-year $300 million revolving secured credit facility which we entered into in June 2011.

Income Tax Provision - Our income tax provision was $8.0 million and $6.7 million in the first quarter of 2012 and 2011, respectively. Our effective income tax rate for the first quarter of 2012 and 2011 was 38.0% and 35.3%, respectively. The tax rate in 2011 included the effect of federal research and development tax credits that are not expected to be available to us in 2012.

Net Income - Our net income was $13.0 million and 12.3 million, or $0.22 and $0.21 diluted earnings per share, in the first quarter of 2012 and 2011, respectively.

Segment Results for the Quarters Ended March 31, 2012 and 2011

Our products and services are grouped into three reportable segments: launch vehicles, satellites and space systems and 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 2 to the accompanying financial statements in this Form 10-Q.

Launch Vehicles

Launch vehicles segment operating results were as follows:

                               First Quarter
($ in thousands)     2012          2011         % Change
Revenues           $ 126,122     $ 105,273             20 %
Operating income       8,916        (5,049 )           NM
Operating margin        7.1%         (4.8% )

Segment Revenues - Launch vehicles segment revenues increased $20.8 million, or 20%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to increased activity on target launch vehicles partially offset by decreased activity on missile defense interceptors and space launch vehicles. Target launch vehicle revenues increased $29.5 million, or 136%, largely due to activity on new contracts that were awarded in 2011. Missile defense interceptor revenues decreased $6.2 million, or 26%, due to decreased activity on our Ground-based Midcourse Defense contract. Space launch vehicle revenues declined $3.2 million, or 5%. Antares launch vehicle revenues were $46.7 million and $49.5 million in the first quarter of 2012 and 2011, respectively, which included $11.8 million and $31.4 million, respectively, related to the COTS program and $34.9 million and $18.1 million, respectively, related to the CRS contract. Antares launch vehicle revenues accounted for 37% and 47% of total launch vehicles segment revenues in the first quarter of 2012 and 2011, respectively.

Segment Operating Income - Operating income in the launch vehicles segment increased $14.0 million in the first quarter of 2012 compared to the first quarter of 2011 primarily due to higher space launch vehicles and target launch vehicles operating income partially offset by lower operating income on missile defense interceptor contracts. Operating income from space launch vehicles increased $11.6 million primarily due to an adjustment in connection with a March 2011 Taurus XL launch failure that reduced operating income in the first quarter of 2011 by $11.3 million. This segment does not recognize any profit pertaining to the Antares rockets that are being built for the COTS program that is being conducted in our advanced space programs segment. Operating income from target launch vehicles increased $2.8 million, or 129%, in the first quarter of 2012, primarily due to activity on new contracts awarded in 2011.

Launch vehicles segment operating margins (as a percentage of revenues) were 7.0% in the first quarter of 2012 compared to negative 4.8% in the first quarter of 2011. The improvement in operating margin was principally attributable to the effect of the March 2011 Taurus XL launch failure adjustment described above.

Satellites and Space Systems


Satellites and space systems segment operating results were as follows:

                               First Quarter
($ in thousands)     2012          2011         % Change
Revenues           $ 111,283     $ 152,659           (27% )
Operating income       7,376        10,310           (28% )
Operating margin        6.6%          6.8%

Segment Revenues - Satellites and space systems segment revenues decreased $41.4 million, or 27%, in the first quarter of 2012 compared to the first quarter of 2011 due to decreased activity on communications satellite contracts and science and remote sensing satellite contracts partially offset by increased activity on space technical services contracts. Communications satellite revenues decreased $38.7 million, or 38%, largely attributable to a reduction in activity on contracts that were awarded in 2010. Communications satellite revenues accounted for 56% and 66% of total segment revenues in the first quarter of 2012 and 2011, respectively. Science and remote sensing satellite revenues decreased $6.4 million, or 23%, due to decreased contract activity. Space technical services revenues increased $3.0 million, or 14%, primarily due to increased contract activity.

Segment Operating Income - Operating income in the satellites and space systems segment decreased $2.9 million, or 28%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to decreased activity on communications satellite contracts. Communications satellite operating income decreased $2.8 million, or 46%, primarily due to decreased contract activity. Communications satellite operating income accounted for 45% and 60% of total segment operating income in the first quarter of 2012 and 2011, respectively.

Satellites and space systems segment operating margins (as a percentage of revenues) were 6.6% in the first quarter of 2012 and 6.8% in the first quarter of 2011. The slight reduction in operating margin was principally due to lower profit margins on communications satellite contracts in 2012 compared to 2011.

Advanced Space Programs

Advanced space programs segment operating results were as follows:

                              First Quarter
($ in thousands)     2012          2011       % Change
Revenues           $ 114,963     $ 92,710           24%
Operating income       7,554        4,855           56%
Operating margin        6.6%         5.2%

Segment Revenues - Advanced space programs segment revenues increased $22.3 million, or 24%, in the first quarter of 2012 compared to the first quarter of 2011 due to increased revenues on national security satellite contracts partially offset by a reduction in activity on the CRS contract. National security satellite revenues increased $31.6 million, or 78%, attributable to

increased contract activity. Revenues from the CRS contract decreased $10.1 million, or 20%, attributable to decreased contract activity. The CRS program accounted for 34% and 53% of total segment revenues in the first quarter of 2012 and 2011, respectively.

Segment Operating Income - Operating income in the advanced space programs segment increased $2.7 million, or 56%, in the first quarter of 2012 compared to the first quarter of 2011 driven by increased activity on national security satellite contracts.

Advanced space programs segment operating margins (as a percentage of revenues) were 6.6% and 5.2% in the first quarter of 2012 and 2011, respectively. The increase in operating margin was largely due to profit margin improvements on national security satellite contracts.

Corporate and Other

Corporate and other revenues were comprised solely of the elimination of intersegment revenues of $14.3 million and $32.9 million in the first quarter of 2012 and 2011, respectively. Intersegment revenues were comprised primarily of Antares launch vehicle revenues recorded in the launch vehicles segment in connection with the COTS program that is conducted by and reported as a research and development program in our advanced space programs segment. Antares revenues for the COTS program were $11.8 million and $31.4 million in the first quarter of 2012 and 2011, respectively.

Backlog

Our firm backlog was approximately $2.1 billion and $2.4 billion at March 31, 2012 and December 31, 2011, respectively. While there can be no assurance, we expect to convert approximately $840 million of the March 31, 2012 firm backlog into revenue during the remainder of 2012. 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.

Total backlog was approximately $5.2 billion at March 31, 2012 and $5.3 billion at December 31, 2011. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections.

Liquidity and Capital Resources

Cash Flow from Operating Activities

Cash flow from operating activities in the first quarter of 2012 was negative $20.9 million, as compared to positive $28.1 million in the first quarter of 2011. The decrease in operating cash flow resulted primarily from unfavorable changes in working capital and certain other assets and liabilities. During the first quarter of 2012, changes in working capital and certain other assets and liabilities used $53.0 million of cash, compared to a $1.4 million use of cash in the first quarter of 2011. The changes in working capital in the first quarter of 2012 included an $86.9

million increase in receivables, primarily due to an increase in unbilled receivables pertaining to the CRS contract. Under the terms of the CRS contract, a substantial percentage of the customer cash receipts are billable and collectible only upon the satisfaction of certain key milestones, including the successful completion of each mission. The first CRS mission is scheduled to be completed in the first half of 2013. The increase in receivables in the first quarter of 2012 was offset by a $21.3 million increase in deferred revenue principally due to cash proceeds received on communications satellites contracts and an $11.0 million increase in accounts payable and accrued expenses due to the timing of certain cash disbursements.

Cash Flow from Investing Activities

Cash used in investing activities was $11.8 million and $17.3 million in the first quarter of 2012 and 2011, respectively, and was entirely attributable to capital expenditures. The decrease in capital expenditures in the first quarter of 2012 was largely due to decreased spending for equipment to support our Antares and COTS programs and our CRS contract.

Cash Flow from Financing Activities

Cash flow from financing activities in the first quarter of 2012 was $0.5 million, as compared to $1.4 million in the first quarter of 2011. During the first quarter of 2012 and 2011, we received $0.4 million and $0.8 million, respectively, from the issuance of common stock in connection with stock option exercises and employee stock option 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.

At any time on or after January 21, 2014, the convertible notes are subject to redemption at our option, in whole or in part, for cash equal to 100% of the principal amount of the convertible notes, plus unpaid interest, if any, accrued to the redemption date.

Holders of the convertible notes may require us to repurchase the convertible notes, in whole or in part, on January 15, 2014, January 15, 2017 or January 15, 2022, or, if a "fundamental change" (as such term is defined in the indenture governing the convertible notes) occurs, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date.

Credit Facility - In June 2011, we entered into a five-year $300 million revolving secured credit facility (the "Credit Facility"). The Credit Facility includes the option to increase the amount of the Credit Facility by up to $150 million to the extent that any one or more lenders commit to be a lender for such additional amount. Loans under the Credit Facility bear interest at LIBOR plus an applicable margin ranging from 1.75% to 2.50%, with the applicable margin

varying according to our total leverage ratio, or, at our election, at a prime base rate plus 0.75% to 1.50%. The Credit Facility expires in 2016 and is secured by substantially all of the company's assets except for real property. Up to $125 million of the Credit Facility may be reserved for letters of credit. As of March 31, 2012, there were no borrowings under the Credit Facility, although $15.4 million of letters of credit were issued under the Credit Facility. Accordingly, as of March 31, 2012, $284.6 million of the Credit Facility was available for borrowings.

Debt Covenants - Our Credit Facility contains covenants limiting our ability to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase company stock, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Credit Facility contains financial covenants with respect to leverage and interest coverage. As of March 31, 2012, we were in compliance with all of these covenants.

Available Cash and Future Funding

At March 31, 2012, we had $227.0 million of unrestricted cash and cash equivalents. Management believes that available cash, cash expected to be generated from operations and the borrowing capacity under our Credit Facility will be sufficient to fund our operating and capital expenditure requirements, including research and development expenditures, over the next 12 months and for the foreseeable future. However, there can be no assurance that this will be the case. We believe that we will continue to incur significant costs related to the Antares and COTS research and development programs during the remainder of 2012. Additionally, significant unforeseen events such as termination of major orders or late delivery or failure of launch vehicle or satellite products could adversely affect our liquidity and results of operations. If market opportunities exist, we may choose to undertake financing actions to further enhance our liquidity, which could include obtaining new bank debt or raising . . .