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, including impacts of potential sequestration under the Budget Control Act of 2011, new product development programs, product performance and market acceptance of products and technologies, achievement of contractual milestones, government contract procurement and termination risks and income tax rates 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 this Quarterly Report on Form 10-Q and 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 and Six Months Ended June 30, 2012 and 2011

Revenues - Our consolidated revenues were $371.3 million in the second quarter of 2012, an increase of $20.7 million, or 6%, compared to the second quarter of 2011 due to higher revenues in our advanced space programs segment partially offset by a reduction in satellites and space systems segment revenues and launch vehicles segment revenues. Advanced space programs segment revenues increased $29.8 million, or 29%, due to increased activity on our International Space Station Commercial Resupply Services ("CRS") contract with the National Aeronautics and Space Administration ("NASA"). Launch vehicles segment revenues decreased $5.0 million, or 4%, due to decreased activity on space launch vehicles and missile defense interceptors partially offset by increased activity on target launch vehicles. Satellites and space systems segment revenues decreased $8.1 million, or 6%, 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 $4.0 million in intersegment revenue eliminations in the second quarter of 2012 compared to the second quarter of 2011, principally due to a lower level of activity on Antares launch vehicles for the Commercial Orbital Transportation Services ("COTS") research and development program with NASA. Intersegment revenues included $15.7 million and $20.3 million in the second quarter of 2012 and 2011, respectively, pertaining to Antares production work reported in our launch vehicles segment as part of the COTS program that is reported in our advanced space programs segment.

Our consolidated revenues were $709.3 million in the first half of 2012, an increase of $41.0 million, or 6%, compared to the first half of 2011 due to higher revenues in our advanced space programs segment and our launch vehicles segment partially offset by a reduction in the satellites and space systems segment. Advanced space programs segment revenues increased $52.0 million, or 27%, due to increased activity on national security satellite contracts and the CRS contract. Launch vehicles segment revenues increased $15.8 million, or 7%, due to increased activity on target launch vehicles partially offset by decreased activity on space launch vehicles and missile defense interceptors. Satellites and space systems segment revenues decreased $49.4 million, or 17%, 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.

Eliminations of intersegment revenues decreased to $32.5 million in the first six months of 2012 compared to $55.1 million in the first six months of 2011. Intersegment revenues included $27.5 million and $51.7 million in the first six months of 2012 and 2011, respectively, pertaining to Antares production work reported in our launch vehicles segment as part of the COTS program that is reported in our advanced space programs segment.

The CRS contract accounted for 25% and 18% of consolidated revenues in the second quarter of 2012 and 2011, respectively, and 24% and 20% of consolidated revenues in the first six months ended June 30, 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 $94.1 million in the second quarter of 2012, an increase of $29.4 million, or 45%, compared to the second quarter of 2011, due to a higher level of contract activity in the second quarter of 2012. CRS contract revenues totaled $168.6 million in the first six months of 2012, an increase of $36.1 million, or 27%, compared to the first six months of 2011, due to increased production activity. Under the terms of the CRS contract, approximately 25% of the contract value is billable to the customer and collectible only upon the completion of launch and delivery milestones for each of eight CRS contract missions. Since the inception of the CRS contract through June 30, 2012, a total of $797 million of revenues have been recognized on the contract, which has a total contract value of approximately $1.9 billion.

Cost of Revenues - Our cost of revenues was $290.1 million in the second quarter of 2012, an increase of $7.3 million, or 3%, compared to the second quarter of 2011. Cost of revenues includes the costs of personnel, materials, subcontractors and overhead. The increase in our cost of revenues was primarily attributable to the increase in contract activity in the advanced space programs segment partially offset by decreased contract activity in the space systems segment and the launch vehicles segment. Cost of revenues increased $22.9 million in the advanced space programs segment, decreased $11.3 million in the space systems segment and decreased $8.3 million in the launch vehicles segment. Eliminations of intersegment cost of revenues decreased $4.0 million consistent with the decrease in intersegment revenues discussed above.

Our cost of revenues was $549.1 million in the first half of 2012, a decrease of $4.7 million, or 1%, compared to the first half of 2011. Cost of revenues decreased $51.2 million in the satellites and space systems segment and decreased $7.6 million in the launch vehicles segment. These decreases were offset by a $31.5 million increase in cost of revenues in the advanced space programs segment. Eliminations of intersegment cost of revenues decreased $22.6 million consistent with the decrease in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $21.9 million, or 6% of revenues, in the second quarter of 2012, a $1.5 million decrease compared to $23.4 million, or 7% of revenues, in the second 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 decrease in research and development expenses was attributable to decreased level of activity related to the COTS program that is nearing completion.

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 June 30, 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 $480 million. We expect to substantially complete this program in the fourth quarter of 2012. The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

                                       Second Quarter              First Six Months          Inception
                                     2012          2011           2012          2011          To Date
Research and development costs
incurred (1)                      $     11.1     $    36.5     $     32.3     $    78.4     $     450.2
Less amounts funded by NASA             (4.5 )       (25.2 )        (15.5 )       (59.3 )        (275.8 )
Net research and development
expenses                          $      6.6     $    11.3     $     16.8     $    19.1     $     174.4


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Research and development expenses attributable to our Antares launch vehicle development program were $8.1 million and $8.2 million in the second quarter of 2012 and 2011, respectively, and were $19.7 million and $15.3 million in the first six months of 2012 and 2011, respectively. Since the inception of the Antares program through June 30, 2012, we have incurred $211.9 million of such costs.

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 $8.1 million and $8.2 million of such expenses that have been recorded as allowable costs for the quarters ended June 30, 2012 and 2011, respectively. Since the inception of the Antares program through June 30, 2012, we have incurred $173.1 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 $33.2 million and $21.6 million, or 9% and 6% of revenues, in the second 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 $11.6 million, or 54%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to bid, proposal and marketing costs pertaining to new business prospects in the advanced space programs segment. Selling, general and administrative expenses in the second quarter of 2012

also included $2.1 million of professional fees and other costs related to a potential acquisition that was not consummated.

Selling, general and administrative expenses were $60.5 million and $41.0 million, or 9% and 6% of revenues, in the first half of 2012 and 2011, respectively. Selling, general and administrative expenses increased $19.5 million, or 48%, in the first half of 2012 primarily due to bid, proposal and marketing costs pertaining to new business prospects in the advanced space programs segment and launch vehicles segment. In addition, selling, general and administrative expenses in the first half of 2012 included $2.1 million of professional fees and other costs related to a potential acquisition that was not consummated.

Operating Income - Operating income was $26.1 million in the second quarter of 2012, an increase of $3.3 million, or 14%, compared to the second quarter of 2011 due to operating income increases in each of our three segments. Satellites and space systems segment operating income increased $2.1 million principally due to profit improvements on certain communications satellite contracts partially offset by lower operating income from science and remote sensing satellite contracts. Advanced space programs segment operating income increased $2.1 million primarily due to increased activity on the CRS contract. Launch vehicles segment operating income increased $1.2 million due to increased contract activity on target launch vehicles and profit improvements on certain space and target launch vehicles partially offset by decreased activity on missile defense interceptors. The increase in operating income was partially offset by $2.1 million of professional fees and other costs recorded in corporate and other, related to a potential acquisition that was not consummated as discussed above.

Operating income was $49.9 million in the first half of 2012, an increase of $17.0 million, or 52%, compared to the first half 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 satellites and space systems segment. Launch vehicles segment operating income increased $15.2 million largely due to an adjustment in the first half of 2011 in connection with a March 2011 Taurus XL launch failure that reduced operating income by $11.3 million. Advanced space programs segment operating income increased $4.8 million primarily due to increased activity on national security satellite contracts and the CRS contract. Satellites and space systems segment operating income decreased $0.8 million principally due to lower operating income on science and remote sensing satellite contracts partially offset by higher operating income on communications satellite and space technical services contracts. The segment operating income increases were partially offset by $2.1 million of professional fees and other costs recorded in corporate and other, related to a potential acquisition that was not consummated as discussed above.

Total operating income from the CRS contract was $5.0 million and $3.3 million in the second quarter of 2012 and 2011, respectively. Total operating income from the CRS contract was $8.4 million and $6.7 million in the first half of 2012 and 2011, respectively. Since the inception of the CRS program through June 30, 2012, a total of $40 million of operating income has been recognized on the contract.

Interest Income and Other - Interest income and other was $0.4 million in the second quarter of 2012, compared to $0.7 million in the second quarter of 2011. Interest income and other was $0.6 million in the first half of 2012, compared to $12.2 million in the first half of 2011. Interest income and other in the first half 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 $3.0 million and $2.8 million in the second quarter of 2012 and 2011, respectively, and was $6.0 million and $5.3 million in the first half of 2012 and 2011, respectively, primarily attributable to interest on our long-term convertible debt.

Income Tax Provision - We recorded an income tax provision of $9.0 million in the second quarter of 2012, compared to an income tax benefit of $0.5 million in the second quarter of 2011. We recorded income tax provisions of $16.9 million and $6.2 million in the first half of 2012 and 2011, respectively. Our effective income tax rate for the first half of 2012 and 2011 was 38.0% and 15.7%, respectively. The increases in income taxes were largely due to a favorable income tax adjustment of $7.7 million in the second quarter of 2011 pertaining to our election to claim extraterritorial income exclusions related to export activities in prior years. In addition, income taxes 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 $14.6 million and $21.2 million, or $0.25 and $0.36 diluted earnings per share, in the second quarter of 2012 and 2011, respectively, and was $27.6 million and $33.6 million, or $0.46 and $0.56 diluted earnings per share, in the first half of 2012 and 2011, respectively.

Segment Results for the Quarters Ended June 30, 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:

                              Second Quarter                            First Six Months
($ in thousands)     2012          2011        % Change        2012          2011         % Change
Revenues           $ 126,340     $ 131,367           (4% )   $ 252,462     $ 236,640             7%
Operating income       8,072         6,870           17%        16,988         1,821             NM
Operating margin        6.4%          5.2%                        6.7%          0.8%

Segment Revenues - Launch vehicles segment revenues decreased $5.0 million, or 4%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to decreased activity on space launch vehicles and missile defense interceptors partially offset by increased activity on target launch vehicles. Space launch vehicle revenues declined $11.9 million, or 16%, largely due to lower activity on Antares launch vehicles for the COTS program and the CRS contract. Antares launch vehicle revenues were $44.4 million and $52.5 million in the second quarter of 2012 and 2011, respectively, which included $15.7 million and $20.3 million, respectively, related to the COTS program and $28.7 million and $32.2 million, respectively, related to the CRS contract. Antares launch vehicle revenues accounted for 35% and 40% of total launch vehicles segment revenues in the second quarter of 2012 and 2011, respectively. Missile defense interceptor revenues decreased $2.5 million, or 13%, due to decreased activity on our Ground-based Midcourse Defense contract. Target launch vehicle revenues increased $8.6 million, or 23%, largely due to activity on new contracts that were awarded in 2011.

Launch vehicles segment revenues increased $15.8 million, or 7%, in the first half of 2012 compared to the first half of 2011 primarily due to increased activity on target launch vehicles partially offset by decreased activity on space launch vehicles and missile defense interceptors. Target launch vehicle revenues increased $38.1 million, or 65%, largely due to activity on new contracts that were awarded in 2011. Space launch vehicle revenues decreased $15.1 million, or 11%, largely due to lower activity on Antares launch vehicles for the COTS program and the CRS contract. Antares launch vehicle revenues were $91.1 million and $102.0 million in the first half of 2012 and 2011, respectively, which included $27.5 million and $51.7 million, respectively, related to the COTS program and $63.6 million and $50.3 million, respectively, related to the CRS contract. Antares launch vehicle revenues accounted for 36% and 43% of total launch vehicles segment revenues in the first half of 2012 and 2011, respectively. Missile defense interceptor revenues decreased $8.7 million, or 20%, due to decreased activity on our Ground-based Midcourse Defense contract.

Segment Operating Income - Operating income in the launch vehicles segment increased $1.2 million, or 17%, in the second quarter of 2012 compared to the second quarter of 2011 despite the decline in segment revenues primarily due to higher target launch vehicles and space launch vehicles operating income partially offset by lower operating income from missile defense interceptor contracts. Operating income from target launch vehicle contracts increased $1.6 million primarily due to increased contract activity and a profit improvement on a contract with the U.S. Navy. Operating income from space launch vehicles increased $0.9 million primarily

due to profit improvements on certain launch vehicle contracts. This segment does not recognize any profit pertaining to the Antares rockets that are being built for the COTS program that is reported in our advanced space programs segment. Operating income from missile defense interceptors decreased $1.2 million in the second quarter of 2012, primarily due to decreased activity on our Ground-based Midcourse Defense contract as well as from a favorable profit adjustment which occurred in 2011 resulting from the settlement of a terminated contract.

Operating income in the launch vehicles segment increased $15.2 million in the first half of 2012 compared to the first half of 2011 primarily due to higher space launch vehicles and target launch vehicles operating income partially offset by lower operating income from missile defense interceptor contracts. Operating income from space launch vehicles increased $12.5 million primarily due to an adjustment in the first half of 2011 in connection with a March 2011 Taurus XL launch failure that reduced operating income 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 reported in our advanced space programs segment. Operating income from target launch vehicles increased $4.4 million, or 83%, in the first half of 2012, primarily due to activity on new contracts awarded in 2011. Operating income from missile defense interceptors decreased $1.7 million, or 29%, primarily due to decreased activity on our Ground-based Midcourse Defense contract as well as from a favorable profit adjustment which occurred in 2011 resulting from the settlement of a terminated contract.

Launch vehicles segment operating margins (as a percentage of revenues) increased to 6.4% in the second quarter of 2012 compared to 5.2% in the second quarter of 2011. The improvement in operating margin was principally attributable to the effect of profit improvements on certain launch vehicle contracts. Segment operating margin increased in the first half of 2012 primarily due 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:

                              Second Quarter                            First Six Months
($ in thousands)     2012          2011        % Change        2012          2011         % Change
Revenues           $ 130,114     $ 138,174           (6% )   $ 241,397     $ 290,833           (17% )
Operating income      10,572         8,474           25%        17,949        18,784            (4% )
Operating margin        8.1%          6.1%                        7.4%          6.5%

Segment Revenues - Satellites and space systems segment revenues decreased $8.1 million, or 6%, in the second quarter of 2012 compared to the second 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 $10.2 million, or 11%, largely attributable to a reduction in activity on contracts that are nearing completion. Communications satellite revenues accounted for 65% and 68% of total segment revenues in the second quarter of 2012 and 2011, respectively. Science and remote sensing satellite revenues decreased $3.2 million, or 16%, due to decreased contract

activity. Space technical services revenues increased $5.2 million, or 24%, primarily due to increased contract activity.

Satellites and space systems segment revenues decreased $49.4 million, or 17%, in the first half of 2012 compared to the first half 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 $48.8 million, or 25%, largely attributable to a reduction in activity on contracts that are nearing completion. Communications satellite revenues accounted for 61% and 67% of total segment revenues in the first half of 2012 and 2011, . . .