(In millions, except per share amounts, unless otherwise stated)

You should read the following discussion of our results of operations and financial condition together with the unaudited Condensed Consolidated and Combined Financial Statements and notes thereto included in this quarterly report on Form 10-Q, as well as the audited Consolidated and Combined Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which provides additional information regarding the Company, our products and services, industry outlook and forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward looking statements.

OVERVIEW

Exelis is a leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which it supplies to military, government and commercial customers in the United States and globally. Exelis provides mission-critical systems in the areas of integrated electronic warfare, sensing and surveillance, air traffic management, information and cyber-security, and networked communications. Exelis also has growing positions in composite aerostructures, logistics and technical services. The Company's customers include the United States (U.S.) Department of Defense (DoD), including the U.S. Army, Navy, Marines and Air Force, and its prime contractors, U.S. Government intelligence agencies, National Aeronautics and Space Administration (NASA), Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, Exelis participates in many high priority defense and non-defense programs in the United States. Exelis conducts most of its business with the U.S. Government, principally the DoD.

Our business is reported in two segments: C4ISR Electronics and Systems and Information and Technical Services. Our C4ISR Electronics and Systems segment provides engineered electronic systems and equipment, including force protection, electronic warfare systems, reconnaissance and surveillance systems, and integrated structures. Our Information and Technical Services segment is a provider of logistics, infrastructure, and sustainment support, while also providing a diverse set of technical services.

On October 31, 2011, ITT Corporation ("ITT") completed the spin-off (the "Spin-off") of Exelis and Exelis began operating as a stand-alone publicly traded corporation. Prior to the Spin-off, Exelis operated as the Defense and Information Solutions Segment of ITT.

Prior to the Spin-off, the financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, result of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented prior to October 31, 2011. We are incurring additional costs as an independent, publicly traded company, including additional costs related to corporate finance, governance and public reporting. We believe cash flows from operations will be sufficient to fund these additional costs going forward.

Unless the context otherwise requires, references in these notes to "Exelis", "we," "us," "our," "the Company" and "our Company" refer to Exelis Inc. and its subsidiaries. References in these notes to

"ITT" or "parent" refer to ITT Corporation, an Indiana corporation, and its subsidiaries (other than Exelis), unless the context otherwise requires.

Economic Opportunities, Challenges, and Risks

The United States continues to face significant economic and fiscal challenges, including slow GDP growth, high unemployment, and persistent U.S. federal government budget deficits. Concerns over fiscal deficits and the national debt continue to drive the political debate and no national consensus exists on the appropriate level of defense and other federal spending, making longer-term funding targets and priorities unclear. This uncertainty is not likely to abate prior to the U.S. Presidential election in November 2012. In the short term, Congress, in the 2012 Consolidated Appropriations Act, approved DoD spending for 2012 at $646 billion, a reduction of approximately $22 billion from the President's original request in February 2011. Consequently, continuing resolutions (CR) for fiscal year 2012 will not be needed to fund the Department of Defense, unlike in fiscal year 2011 when several CRs were passed. The August 2011 U.S. Budget Control Act (BCA) includes several complex mechanisms to reduce the national debt and control deficit spending, among other items. The President's 2013 budget request projects $487 billion in cuts over ten years, compared to the Congressional Budget Office's 2012 DoD base spending projection. The BCA also includes a provision known as "Sequestration," scheduled to take place in January 2013, which would impose significantly greater cuts to DoD budgets over the next ten years, unless a compromise solution to reduce budget deficits is reached by Congress and the President. The debate over how and when a compromise solution may be reached over the as-yet unresolved sequestration issue remains a significant issue for the defense industry.

We believe that spending on recapitalization, modernization and maintenance of defense and security assets will continue despite possible reductions to some defense programs in which we participate or for which we expect to compete. We expect ongoing DoD emphasis to be placed on our areas of strength, such as electronic warfare, intelligence, surveillance and reconnaissance (ISR), precision navigation instruments, cyber, and information processing, exploitation and dissemination. However, uncertainty related to potential changes in appropriations and priorities could materially impact our business.

The information provided above does not represent a complete list of known trends and uncertainties that could impact our business in either the near or long-term. It should, however, be considered along with the risk factors identified in Part 1, Item 1A under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and our disclosure under the caption "Forward-Looking and Cautionary Statements" at the end of this section.

Executive Summary

Exelis reported revenue of $1.4 billion for the quarter ended June 30, 2012, a decrease of 7% compared to the corresponding period in 2011. The decrease in revenue was driven by revenue declines of 9% in our C4ISR Electronics and Systems segment due to lower demand for surge-related products, including our Single Channel Ground and Airborne Radio Systems (SINCGARS), night vision products and Counter RCIED Electronic Warfare (CREW) 2.1 products. Revenue also declined 6% within our Information and Technical Services segment primarily due to lower activity on certain Middle Eastern Programs in the current quarter as compared with the same period in 2011.

Operating income for the three months ended June 30, 2012 was $145, reflecting an increase of $24 or 20% compared to the corresponding prior year period primarily due to lower research and development (R&D) and selling, general and administrative (SG&A) expenses. Overall, operating margin increased quarter-over-quarter to 10.5% from 8.1% primarily due to a decrease in the cost of service revenue as a percentage of service revenue and lower R&D expenses.

Further details related to the quarter are contained in the Discussion of Financial Results section.

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, segment operating income and margins, orders growth, and backlog, among others metrics on a regular basis. In addition, we consider certain additional measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, acquisitions and debt repayment. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for revenue, operating income, income from continuing operations, or net cash from continuing operations as determined in accordance with GAAP. We consider the following non-GAAP measure, which may not be comparable to similarly titled measures reported by other companies, to be a key performance indicator:

• "Adjusted net income" defined as net income, adjusted to exclude items that include, but are not limited to significant charges or credits that impact current results, but not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of adjusted net income is provided below.

                                       Three Months Ended June 30,              Six Months Ended June 30,
                                       2012                  2011                2012                2011
Net income                         $          86         $          79       $        156        $        161
Separation costs, net of tax                   1                     7                 15                   9
Separation related tax items                   -                     -                  4                   -
Adjusted net income                $          87         $          86       $        175        $        170

DISCUSSION OF FINANCIAL RESULTS

THREE AND SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2011

Selected financial highlights are presented in the table below:



                                    Three Months Ended June 30,                        Six Months Ended June 30,
                               2012            2011            Change            2012            2011           Change
Product and service
revenue                      $   1,379       $   1,485             (7.1 )%     $   2,800       $   2,829            (1.0 )%
Cost of product and
service revenue                  1,087           1,197             (9.2 )%         2,222           2,262            (1.8 )%
Operating expense                  147             167            (12.0 )%           295             332           (11.1 )%
Operating income                   145             121             19.8 %            283             235            20.4 %
Operating margin                  10.5 %           8.1 %                            10.1 %           8.3 %
Interest expense                    11               -                                20               -
Other expense (income),
net                                 (1 )            (4 )          (75.0 )%             7             (14 )          (150 %)
Income tax expense                  49              46              6.5 %            100              88            13.6 %
Effective tax rate                36.3 %          36.8 %                            39.1 %          35.3 %
Net income                   $      86       $      79              8.9 %      $     156       $     161            (3.1 )%

Revenue

Revenue for the three and six months ended June 30, 2012 decreased $106 or 7.1%
and $29 or 1.0%, respectively, as compared to the same prior year periods. The
following table illustrates revenue for our segments:



                                   Three Months Ended June 30,                    Six Months Ended June 30,
                                2012          2011           Change           2012          2011          Change
C4ISR Electronics &
Systems                      $      620     $     683            (9.2 )%    $   1,273     $   1,368         (6.9)%
Information & Technical
Services                            759           811            (6.4 )%        1,527         1,474          3.6%
Eliminations                          -            (9 )                             -           (13 )
Total Revenue                $    1,379     $   1,485            (7.1 )%    $   2,800     $   2,829         (1.0)%

Revenue from our C4ISR Electronics and Systems segment decreased $63 and $95 for the three and six months ended June 30, 2012, respectively, as compared with the same periods in 2011. The decrease in revenue for the three and six months ended June 30, 2012 was primarily due to volume declines in surge-related products, including SINCGARS products of approximately $39 and $61, respectively, Night Vision products of approximately $36 and $48, respectively, and CREW 2.1 and special purpose jammers products of approximately $15 and $25, respectively. The decrease in revenue for the three and six months ended June 30, 2012 as compared with the same prior year periods was partially offset by higher revenue from the sales of other counter-IED systems of approximately $24 and $30, respectively, and from the sales of our Band C Upgrade kits for legacy CREW products of approximately, $18 and $29, respectively.

Revenue from our Information and Technical Services segment decreased $52 for the three months ended June 30, 2012 as compared with the same period in 2011. The decrease in revenue was primarily due to lower revenue on one of our Middle Eastern Programs, the Kuwait based Army Prepositioned Stock-5 (APS-5 Kuwait) contract, of approximately $71, and our Technology and Systems Engineering Bridge program (TSE Bridge) of approximately $20. The APS-5 Kuwait contract had lower activity in the current quarter as compared to the same period in 2011. The decrease in revenue for the three months ended June 30, 2012 was partially offset by higher revenue on our Afghan National Security Forces (ANSF) Facilities Support programs of approximately $28 and our Space Communication and Networks Services (SCNS) contract with NASA, which provides most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, including the International Space Station, of approximately $18.

Revenue from our Information and Technical Services segment increased $53 for the six months ended June 30, 2012 as compared with the same period in 2011. The increase in revenue was primarily due to efforts to support NASA under our SCNS contract, which had a revenue increase of approximately $47, and efforts to support the U.S. Armed Services on our Afghan Programs, including the ANSF Facilities Support programs, which had revenue increases of approximately $36. The increase in revenue for the six months ended June 30, 2012 was partially offset by lower revenue on the TSE Bridge program of approximately $37. Revenue on our Middle East programs was flat period-over-period as increased revenue on our Kuwait Based Operations and Security Support Services (K-BOSSS) contact was offset by lower revenue on the APS-5 Kuwait contract.

Cost of Revenue and Operating Expenses

Cost of product and service revenue and other operating expenses are comprised
of the following:



                                          Three Months Ended June 30,                               Six Months Ended June 30,
                                  2012               2011              Change               2012              2011             Change
Cost of product revenue         $     433         $      470                (7.9 )%      $      894        $      954               (6.3 )%
% of product revenue                 69.8 %             69.2 %                                 70.2 %            70.0 %
Cost of service revenue               654                727               (10.0 )%           1,328             1,308                1.5 %
% of service revenue                 86.2 %             90.2 %                                 87.0 %            89.2 %
Selling, general and
administrative expenses               130                139                (6.5 )%             263               279               (5.7 )%
% of total revenue                    9.4 %              9.4 %                                  9.4 %             9.9 %
Research and development
expenses                               16                 27               (40.7 )%              30                48              (37.5 )%
% of total revenue                    1.2 %              1.8 %                                  1.1 %             1.7 %
Restructuring charges, net              1                  1                   -                  2                 5                (60 )%

The decrease in cost of product revenue of $37 or 7.9% and $60 or 6.3% the three months and six ended June, 2012, respectively, as compared to the same periods in 2011 was primarily due to lower revenue in our C4ISR Electronics and Systems segment. There was no significant change to cost of product revenue as a percentage of product revenue for the three and six months ended June 30, 2012 as compared to the corresponding periods in 2011.

The decrease in cost of service revenue of $73 or 10% for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily due to lower revenue and productivity improvements in our Information and Technical Services segment. The cost of service revenue as a percentage of service revenue decreased for the three months ended June 30, 2012 as compared to the corresponding period in 2011 due to productivity improvements and contract pricing adjustments on several contracts in our Air Traffic Management and Afghanistan Programs areas.

The increase in cost of service revenue of $20 or 1.5% and for the six months ended June 30, 2012 as compared to the same period in 2011 was primarily due to higher revenue in our Information and Technical Services segment. The cost of service revenue as a percentage of service revenue decreased for the six months ended June 30, 2012 as compared to the corresponding period in 2011 due to productivity improvements and contract pricing adjustments on several contracts in our Air Traffic Management and Afghanistan Programs areas.

Selling, General & Administrative Expenses (SG&A)

SG&A expenses as a percent of total revenue were 9.4% for both the three and six months ended June 30, 2012, compared to 9.4% and 9.9% in the same periods in 2011. The benefit from decreased SG&A expenses was offset by lower revenue in both periods, leaving SG&A expenses as a percent of total revenue relatively unchanged. For the three and six months ended June 30, 2012, SG&A expenses decreased primarily due to the absence of general corporate expense allocations from ITT of $31 and $59, respectively, partially offset by higher net periodic benefit costs of $9 and $19, respectively, and higher general corporate expenses necessary to operate as a stand-alone company. The Corporate expense allocations received from ITT during the three and six months ended June 30, 2011 included allocations for pension and other defined benefit postretirement plan costs of $21 and $42, respectively.

Research and Development Expenses (R&D)

The decrease in R&D expenses of $11 or 40.7% and $18 or 37.5% for the three and six months ended June 30, 2012, respectively, as compared to the same periods in 2011 primarily reflects the completion of certain R&D projects for integrated electronic warfare systems, other communication technologies and night vision technologies primarily within our C4ISR Electronics and Systems segment.

Restructuring Charges, Net

During the three and six months ended June 30, 2012, we recognized net restructuring charges of $1 and $2, respectively. Restructuring charges, net, for the three and six months ended June 30, 2011 were $1 and $5, respectively. The period-over-period changes in restructuring charges, net, were not significant.