With the exception of historical information, the matters discussed within this Item 7 and elsewhere in this Form 10-K include 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, as amended, 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 above in "Item 1 - Special Note Regarding Forward-Looking Statements" and "Item 1A - Risk Factors," may affect actual results and may cause our actual results to differ materially from those anticipated or expected in any forward-looking statement. Our historical results of operations may not be indicative of our future operating results.

Overview

Introduction

Orbital Sciences Corporation develops and manufactures 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 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.

· 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.

· 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.

Our general strategy is to develop and expand a core integrated business of space and launch system technologies and products, focusing on the design and manufacture of affordable rockets, satellites and other space systems in order to establish and expand positions in niche markets that have not typically been emphasized by our larger competitors. Another part of our strategy is to seek customer contracts that will fund new product development and enhancements to our existing launch vehicle and space systems product lines. As a result of our capabilities and experience in designing, developing, manufacturing and operating a broad range of small- and medium-class rockets and space systems, we believe we are well positioned to capitalize on the demand for more affordable space-technology systems in commercial satellite communications, space-based military and intelligence operations and military defense programs, and to take

advantage of government-sponsored initiatives in human space exploration, space-based scientific research and interplanetary exploration.

Business and Industry Considerations

U.S. Government Business - During 2012, 2011 and 2010, approximately 79%, 71% and 74%, respectively, of our consolidated revenues were derived from contracts with the U.S. Government and its agencies or from subcontracts with other U.S. Government contractors. Most of our U.S. Government contracts are funded incrementally on a year-to-year basis. As a result, our operations and our financial results in any period could be impacted substantially by trends in U.S. Government spending, shifting priorities in DoD (including MDA), NASA and other agency budgets, the types of contracts and payment terms mandated by the U.S. Government and changes in the Executive Branch and Congress. These factors, which are largely beyond our control, could have a significant impact on our business.

The Budget Control Act of 2011 commits the U.S. Government to significantly reduce the federal deficit over ten years through caps on discretionary spending and other measures, including automatic across-the-board spending cuts through the sequestration process, if necessary. Although Congress has delayed sequestration temporarily, without further action, it will take effect on March 1, 2013. It remains uncertain whether the contemplated sequester will take place, or if it will be delayed, modified or averted. In general, we expect that our U.S. Government customers will experience reductions in their budgets compared to recent levels. Such reductions could occur even if a compromise is reached on U.S. Government spending and sequestration is averted.

NASA continues to prioritize funding for development of U.S. commercial cargo and crew services for the International Space Station. Accordingly, funding for our COTS demonstration mission, including an Antares test launch, and our CRS contract currently remains unaffected by budget cuts. Priorities with respect to Earth and space science investigations are less clear, but we believe the NASA budget for these programs could be reduced as a result of a focus on other programs, which could have a negative impact on certain of our current programs or potential future pursuits.

The majority of Orbital's missile defense interceptor and target launch vehicle revenues comes from programs sponsored by MDA. The Budget Control Act of 2011 provides for a significant reduction in defense budgets over a ten-year period, with further reductions possible in the event of sequestration. Consequently, we expect federal spending on space and missile defense programs to be lower compared to historical levels over the next couple of years. Due to uncertainties regarding funding and federal budgets, we believe certain MDA programs could be delayed or reduced in scope.

We believe that federal budget constraints may impact national security space programs, possibly resulting in program delays, cancellations or scope reductions. DoD and the intelligence community have for some missions historically relied on large multi-mission space systems that are very expensive and require a decade or longer to be built and deployed. We believe that DOD and the intelligence community are considering ways to address their

Commercial Satellites Business - Our largest commercial business is the design and manufacture of small-class GEO communications satellites. Commercial communications satellites accounted for 21%, 29% and 26% of our consolidated revenues in 2012, 2011 and 2010, respectively.

The commercial communications satellite market is driven by economic conditions that may affect satellite operators directly as well as their satellite replacement requirements. In 2012, the total number of commercial GEO satellite orders was similar to the number ordered in 2011, as the largest satellite operators continued their trend of reduced capital spending, following greater expenditures in prior years. We expect capital spending from the major satellite operators to remain at similarly low levels in the near future. As a result, we expect that the total number of commercial GEO satellite orders placed in 2013, including the number of satellite orders in our addressable market, will be comparable to those of 2011 and 2012.

Critical Accounting Policies and Significant Estimates

The preparation of consolidated financial statements requires management to make judgments based upon estimates and assumptions that are inherently uncertain.
Such judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
Management continuously evaluates its estimates and assumptions, including those related to long-term contracts and incentives, inventories, long-lived assets, income taxes, contingencies and litigation, and the carrying values of assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material.

The following is a summary of the most critical accounting policies used in the preparation of our consolidated financial statements.

Revenue Recognition - Our revenues are derived primarily from long-term contracts. Revenues on long-term contracts are recognized using the percentage-of-completion method of accounting. Such revenues are recorded based on the percentage that costs incurred to date bear to the most recent estimates of total costs to complete each contract. Estimating future revenues, costs and profit is a process requiring a high degree of management judgment, including management's assumptions regarding our future operational performance as well as general economic conditions. In the event of a change in total estimated contract revenue, cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and our profitability from a particular contract may be adversely affected to the extent that estimated costs to complete or incentive or award fee estimates are revised, delivery schedules are delayed, performance-based milestones are not achieved or

progress under a contract is otherwise impeded. Accordingly, our recorded revenues and operating profit from period to period can fluctuate significantly.
In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding general and administrative expense, is recorded in the period in which the loss is first estimated.

Many of our contracts include provisions that increase or decrease contract value based on performance in relation to established targets or customer evaluations. Mission success milestones and incentive and award fees are included in estimated contract revenue when we are able to make reasonable predictions about whether the performance targets will be achieved and make dependable estimates of such amounts based upon our historical experience with similar types of activities and other objective criteria. We include the estimated amount of mission success milestones and incentive and award fees in estimated contract revenue at the inception of each contract, with reassessments made each quarter throughout the period of contract performance. If performance under such contracts were to differ from previous assumptions, or if we were to revise our estimates or assumptions, current period revenues and profit would be adjusted and could fluctuate significantly. Our assessments are guided by the historical performance of our products and product families, the reliability record of the technology employed and assessments of technological considerations for each contract.

As part of our risk management strategy, we generally insure significant mission success milestone receipts. Insurance recoveries are recorded as other income in the consolidated financial statements.

Mission success milestones relating to the launch of our Antares rocket with its Cygnus payload and the successful delivery of cargo to the ISS comprise approximately 25% of total CRS contract value. If we do not achieve these mission success milestones, we may be required to record revenue and profit reductions. Since the inception of the CRS contract in December 2008 through December 31, 2012, we have recognized $974 million of revenues on the contract, which has a total contract value of approximately $1.9 billion.

As of December 31, 2012, unbilled receivables included approximately $9 million of incentive fees on certain completed satellite contracts that become due incrementally over periods of up to 15 years, subject to the achievement of performance criteria.

Certain satellite contracts require the company to refund a portion of the contract price to the customer if performance criteria, which cover periods of up to 15 years, are not satisfied. As of December 31, 2012, we could be required to refund up to approximately $12 million to customers if certain completed satellites were to fail to satisfy performance criteria. We generally procure insurance policies under which we believe we would recover satellite incentive fees that are not earned and potential performance refund obligations.

Research and Development - Expenditures for company-sponsored research and development projects are expensed as incurred. Research and development projects performed under contracts for customers are recorded as contract costs.
In 2008, we entered into the COTS agreement with NASA to design, build and demonstrate a new space transportation system for delivering cargo and supplies to the ISS. The COTS agreement is accounted for as a best-efforts

Income Taxes - We account for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. Changes in estimates of future taxable income can materially change the amount of such valuation allowances.

Consolidated Results of Operations for the Years Ended December 31, 2012, 2011 and 2010

Revenues - Our consolidated revenues were $1,436.8 million in 2012, an increase of $90.8 million, or 7%, compared to 2011 due to higher revenues in the launch vehicles segment and advanced space programs segment partially offset by lower revenues in the satellites and space systems segment. Launch vehicles segment revenues increased $44.1 million, or 9%, in 2012 primarily due to increased activity on target launch vehicle contracts, partially offset by decreased activity on missile defense interceptors and lower space launch vehicle revenues. In addition, 2011 revenues in the launch vehicles segment were reduced by an $11.3 million adjustment as a result of a Taurus XL launch failure in March 2011. Advanced space programs segment revenues increased $36.1 million, or 8%, in 2012 primarily due to increased activity on the CRS contract partially offset by decreased activity on national security satellite contracts.
Satellites and space systems segment revenues decreased $57.6 million, or 10%, in 2012 due to lower activity on communications satellite contracts that were completed or substantially completed in 2012, partially offset by higher activity on space technical services contracts and science and remote sensing satellite contracts.

Eliminations of intersegment revenues decreased to $56.8 million in 2012 compared to $125.1 million in 2011. Intersegment revenues included $47.6 million and $114.4 million in 2012 and 2011, respectively, pertaining to Antares launch vehicle production work reported in our launch vehicles segment as part of the COTS program that is reported in our advanced space programs segment.
Antares production work on the COTS program decreased significantly as the COTS program was nearing completion in late 2012.

The CRS contract accounted for 24% and 18% of consolidated revenues in 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 $345.9 million in 2012, an increase of $98.5 million, or 40%, compared to 2011, due to increased production activity. Since the inception of the CRS contract through December 31, 2012, a total of $974 million of revenues have been recognized on the contract, which has a total contract value of approximately $1.9 billion.

Our consolidated revenues were $1,345.9 million in 2011, an increase of $51.3 million, or 4%, compared to 2010 due to higher revenues in all business segments. Satellites and space systems segment revenues increased $56.8 million, or 11%, in 2011 due to increased activity on communications satellite contracts and space technical services contracts, partly offset by lower activity on science and remote sensing satellite contracts. Launch vehicles segment revenues increased $48.7 million, or 11%, in 2011 primarily due to increased activity on target launch vehicle and space launch vehicle contracts, partly offset by decreased activity on missile defense interceptor contracts.
Advanced space programs segment revenues increased $10.4 million, or 2%, in 2011 primarily due to increased activity on national security satellite contracts, partially offset by a decrease in activity on the Orion contract, which was terminated for convenience in the second quarter of 2010, and decreased activity on the CRS contract.

Eliminations of intersegment revenues increased to $125.1 million in 2011 compared to $60.6 million in 2010. Intersegment revenues included $114.4 million and $51.8 million in 2011 and 2010, respectively, pertaining to Antares launch vehicle production work in our launch vehicles segment for the COTS program that is reported in our advanced space programs segment.

Cost of Revenues - Our cost of revenues was $1,097.2 million in 2012, an increase of $22.8 million, or 2%, compared to 2011. Cost of revenues includes the cost of personnel, materials, subcontractors and overhead. Cost of revenues in the advanced space programs segment increased $27.4 million, or 8%, primarily due to higher contract costs on the CRS program. Cost of revenues in the launch vehicles segment increased $6.6 million, or 2%, which was lower than the revenue increase in this segment largely due to the effect of the 2011 revenue reduction resulting from the March 2011 launch failure mentioned above.
Cost of revenues in the satellites and space systems segment decreased $79.5 million, or 17%, primarily due to lower production activity and reduced materials and subcontract costs on communications satellite contracts.
Eliminations of intersegment cost of revenues decreased $68.3 million in 2012 attributable to the decrease in intersegment revenues discussed above.

Our cost of revenues was $1,074.4 million in 2011, an increase of $66.7 million, or 7%, compared to 2010. The increase in cost of revenues was principally due to an increased level of subcontract activity and materials purchases that were generally consistent with the consolidated revenue increase discussed above.
Cost of revenues in the launch vehicles segment increased $73.4 million, or 22%, in 2011 compared to 2010, which exceeded the revenue increase in this segment largely due to the 2011 revenue reduction resulting from the 2011 launch failure mentioned above. Cost of revenues in the satellites and space systems segment increased $48.5 million, or 11%, in 2011. Cost of revenues in the advanced space programs segment increased $9.3 million, or 3%, in 2011.
Eliminations of intersegment cost of revenues increased $64.5 million in 2011 attributable to the increase in intersegment revenues discussed above.

Research and Development Expenses - Our research and development expenses totaled $114.2 million, or 8% of revenues, in 2012, an $11.4 million increase compared to $102.8 million, or 8% of revenues, in 2011. The increase in research and development expenses was primarily attributable to product enhancements in the satellites and space systems segment and increased costs pertaining to the Antares launch vehicle development program. These factors

The COTS program is 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 the company's COTS program research and development expenses, including associated general and administrative expenses.
Under the COTS agreement, as amended, as of December 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 $513 million. We expect to complete this program in the first half of 2013. The following table summarizes the COTS program costs incurred and amounts funded by NASA recorded in research and development expenses (in millions):

                                                                                    Inception to
                                                                                    December 31,
                                         2012           2011           2010             2012
Research and development costs
incurred (1)                          $     62.6     $    158.8     $    136.5     $        480.5
Less amounts funded by NASA                (21.9 )       (108.0 )        (69.1 )           (282.2 )  (2)
Net research and development
expenses                              $     40.7     $     50.8     $     67.4     $        198.3


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(1) Includes associated general and administrative expenses.
(2) Through December 31,2012, the company has received $276 million in cash from NASA and as of December 31, 2012, the company recorded an approximately $6 million receivable due from NASA.

Research and development expenses attributable to our Antares launch vehicle development program were $42.6 million, $34.3 million and $48.3 million in 2012, 2011 and 2010, 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. During 2012, 2011 and 2010, we incurred $42.6 million, $34.3 million and $43.2 million, respectively, of such expenses that have been recorded as allowable costs. Since the inception of the Antares program through December 31, 2012, we have incurred $196.1 million of such costs. If such costs were determined to be unallowable, we could be required to record revenue and profit reductions in future periods.

In 2010, we established a self-imposed ceiling on the amount of research and development expenses that we would recover under our U.S. Government contracts.
Although we believe that such expenses would otherwise have been allowable and recoverable under government contracting regulations and accounting practices, in 2010, we incurred $5.1 million of research and development costs in excess of our self-imposed ceiling for which we did not seek recovery under our U.S. Government contracts.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $112.8 million, $89.0 million and $91.6 million in 2012, 2011 and 2010, respectively, or 8%, 7% and 7% of revenues, respectively.
Selling, general and administrative expenses include the cost of our finance, legal, administrative and general management functions, as well as bid, proposal and marketing costs.

Selling, general and administrative expenses increased $23.8 million, or 27%, in 2012 compared to 2011 primarily due to an increase in bid, proposal and marketing costs pertaining to new business pursuits in the advanced space programs segment and launch vehicles segment, and due to an increase in certain corporate-level professional fees and expenses. In addition, selling, general and administrative expenses in 2012 included $2.1 million of professional fees and other costs related to a potential acquisition that was not consummated.

Selling, general and administrative expenses decreased $2.6 million, or 3%, in 2011 compared to 2010 primarily due to a decrease in bid, proposal and marketing costs in all of our business segments and the absence of $1.6 million of transaction expenses incurred in 2010 in connection with a business acquisition.

Operating Income - Our consolidated operating income was $112.6 million in 2012, an increase of $32.8 million, or 41%, compared to 2011 due to higher operating income in all three operating business segments. Launch vehicles segment operating income increased $22.0 million, or 155%, largely due to an adjustment that reduced 2011 operating income by $11.3 million in connection with the March 2011 rocket launch failure mentioned above and increased operating income from the CRS and target launch vehicle contracts. Satellites and space systems segment operating income increased $8.6 million, or 23%, primarily due to profit improvements on certain communications satellite contracts that were substantially completed in 2012 and a $6.5 million contract settlement charge that reduced operating income in 2011. Advanced space programs segment operating income increased $4.3 million, or 15%, primarily due to a favorable contract closeout adjustment in 2012 in addition to increased activity on the CRS contract, partially offset by decreased activity on national security satellite contracts. Operating income in 2012 was reduced by $2.1 million of unallocated professional fees and other costs, recorded in corporate and other, related to a potential acquisition that was not consummated.

Total operating income from the CRS contract was $16.7 million in 2012, an increase of $4.2 million, or 34%. Since the inception of the CRS program through December 31, 2012, a total of $48 million of operating income has been recognized on the program.

Our consolidated operating income was $79.8 million in 2011, an increase of $6.8 million, or 9%, compared to 2010 due to higher operating income in the advanced space programs segment and the satellites and space systems segment partially offset by lower operating income in the launch vehicles segment. Advanced space programs segment operating income increased $7.0 million, or 33%, primarily due . . .